What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-24 compared with 2021-02-25 · 254 added, 257 removed, 430 unchanged (54% of the section changed)

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Alarm.com is the leading platform for the intelligently connected property.

We offer a comprehensive suite of cloud-based solutions for smart residential and commercial properties, including interactive security, video monitoring, intelligent automation, energy management and wellness solutions.

Millions of property owners depend on our technology to intelligently secure, automate and manage their residential and commercial properties.

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Total revenue increased 23% to $618.0 million in 2020 from $502.4 million in 2019.

• Net income increased 44% to $76.7 million in 2020 from $53.3 million in 2019.

• Net income decreased 33% to $51.2 million in 2021 from $76.7 million in 2020.

Net income increased 44% to $76.7 million in 2020 from $53.3 million in 2019.

Net income attributable to common stockholders increased 45% to $77.9 million in 2020 from $53.5 million in 2019.

Net income attributable to common stockholders decreased 33% to $52.3 million in 2021 from $77.9 million in 2020.

Net income attributable to common stockholders increased 45% to $77.9 million in 2020 from $53.5 million in 2019.

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Information about current period and prior period acquisitions that may affect the comparability of our historical financial information is included in Item 1.

In 2018, we recorded an expense of $28.0 million in general and administrative expense, which relates to the agreement reached to settle the legal matter alleging violations of the Telephone Consumer Protection Act, or TCPA, which may affect the comparability of our historical financial information.

Information about the $1.7 million of interest recorded within interest income and the $6.9 million of gain recorded within other income, net, in 2019, which relates to promissory note proceeds received from one of our hardware suppliers and proceeds from an acquired promissory note, and may affect the comparability of our historical financial information, is disclosed in the Comparison of Years Ended December 31, 2020 to December 31, 2019 section below within Item 7.

"Management’s Discussion and Analysis of Financial Condition and Results of Operations." Information about the $24.7 million gain on the sale of an investment recorded in other income, net, in 2020, which relates to the sale of an investment in one of our platform partners, and may affect the comparability of historical financial information, is disclosed in the Comparison of Years Ended December 31, 2020 to December 31, 2019 section below within Item 7.

Information about the 2026 Notes issued in January 2021 and the related interest expense, which may affect the comparability of historical financial information, is disclosed in the Comparison of Years Ended December 31, 2021 to December 31, 2020 section below within Item 7.

"Management’s Discussion and Analysis of Financial Condition and Results of Operations." Information about the $24.7 million gain on the sale of an investment recorded in other (expense) / income, net, in 2020, which relates to the sale of an investment in one of our platform partners, and may affect the comparability of historical financial information, is disclosed in the Comparison of Years Ended December 31, 2021 to December 31, 2020 section below within Item 7.

"Management’s Discussion and Analysis of Financial Condition and Results of Operations."

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We believe there is significant opportunity to expand our international business, as 3% of our total revenue during the year ended December 31, 2021 originated from customers located outside of North America.

Our products are currently localized and available in over 40 countries outside of North America.

Our products are currently localized and available in approximately 40 countries outside of North America.

Recent Developments

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In addition, the COVID-19 pandemic resulted in a global slowdown of economic activity and a recession in the United States and the economic situation remains fluid as parts of the economy appear to be recovering while others continue to struggle.

While vaccines have been approved for use in the United States and in many other countries, supplies of the vaccine remain limited and it remains difficult to assess or predict the ultimate duration and economic impact of the COVID-19 pandemic.

While vaccines have been approved for use in the United States and in many other countries, and vaccination efforts are well underway, it remains difficult to assess or predict the ultimate duration and economic impact of the COVID-19 pandemic due to a resurgence of COVID-19 and the emergence and severity of COVID-19 variants.

Prolonged uncertainty with respect to COVID-19 could cause further economic slowdown or cause other unpredictable events, each of which could adversely affect our business, results of operations or financial condition.

While our business and those of our service providers showed some resiliency beginning towards the end of the second quarter of 2020 and continuing through much of the remainder of 2020, if the economy fails to fully recover or there are additional shutdowns of non-essential businesses due to a resurgence of COVID-19, our SaaS and license revenue growth rate may be lower in future periods, with a corresponding reduction in hardware revenue, if some consumers or small businesses defer or cancel previously anticipated purchases.

While our business and those of our service providers showed some resiliency beginning in 2020, with the start of the pandemic, and continuing into 2021, if the economy fails to fully recover or there are additional shutdowns of non-essential businesses due to a resurgence of COVID-19 and the emergence and severity of COVID-19 variants, our SaaS and license revenue growth rate may be lower in future periods, with a corresponding reduction in hardware revenue, if some consumers or small businesses defer or cancel previously anticipated purchases.

The challenges posed by COVID-19 on our business continue to evolve rapidly and we will continue to evaluate our business and operations in light of future developments.

On December 14, 2020, Alarm.com Incorporated, one of our wholly-owned subsidiaries, acquired 100% of the issued and outstanding ownership interest units of Shooter Detection Systems, LLC, or SDS.

SDS provides an indoor gunshot detection solution through the Guardian Indoor Active Shooter Detection System, which uses a combination of acoustic and infrared sensors and proprietary algorithms to detect gunshots and communicate shooting incident details to building occupants and security teams.

The acquisition of SDS expands our commercial solutions and helps our partners outfit commercial and enterprise customers with the gunshot detection solution.

In consideration for the purchase of 100% of the issued and outstanding ownership interest units of SDS, we paid $26.6 million in cash on December 14, 2020.

Pursuant to the terms of the unit purchase agreement, following the preliminary determination of the working capital of SDS as of the closing date, the purchase price decreased by $0.1 million.

The working capital adjustment is expected to be finalized and paid to the equity holders of SDS in the first half of 2021.

The purchase price allocation, which is pending the final determination of the working capital, was not finalized as of the filing date of this Annual Report on Form 10-K.

Subsequent to December 31, 2020, 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.

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 used some of the proceeds to repay the $110.0 million outstanding principal balance under our 2017 Facility and also used some of the proceeds to pay accrued interest, fees and expenses related to the 2017 Facility.

We terminated the 2017 Facility effective January 20, 2021.

On December 16, 2021, EnergyHub, Inc., one of our wholly-owned subsidiaries, acquired certain assets of an unrelated third party.

Substantially all of the acquired assets consisted of developed technology.

We believe the acquisition of the developed technology will continue to advance our load-shaping energy management solution allowing additional devices to participate in utility programs that reduce or shift power consumption during peak demand periods.

In consideration for the purchase of the developed technology, we paid $4.2 million in cash in December 2021, with the remaining $0.9 million expected to be paid 18 months following the acquisition date, subject to offset for any indemnification obligations.

Additionally, we incurred $0.2 million in direct transaction costs related to legal fees during 2021 that were capitalized as a component of the consideration transferred.

The combined $5.3 million consideration related to developed technology was recorded as an intangible asset at the time of the asset acquisition and will be amortized on a straight-line basis over an estimated useful life of seven years.

Other Business Metrics

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Adjusted EBITDA 142,472 125,257 108,307

Twelve Months Ended December 31,

2020 2019 2018

SaaS and license revenue renewal rate 94 % 94 % 94 %

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Adjusted EBITDA

Adjusted EBITDA is a non-GAAP measure that represents our net income before interest expense, interest income, other income, net, provision for / (benefit from) income taxes, amortization and depreciation expense, stock-based compensation expense, secondary offering expense, acquisition-related expense and legal costs and settlement fees incurred in connection with non-ordinary course litigation and other disputes, particularly costs involved in ongoing intellectual property litigation.

Adjusted EBITDA is a non-GAAP measure that represents our net income before interest expense, interest income, other (expense) / income, net, (benefit from) / provision for income taxes, amortization and depreciation expense, stock-based compensation expense, secondary offering expense, acquisition-related expense and legal costs and settlement fees incurred in connection with non-ordinary course litigation and other disputes, particularly costs involved in ongoing intellectual property litigation.

We do not consider these items to be indicative of our core operating performance.

The non-cash items include amortization and depreciation expense and stock-based compensation expense.

The non-cash items include amortization and depreciation expense, amortization of debt discount and debt issuance costs for the 2026 Notes included in interest expense and stock-based compensation expense related to restricted stock units and other forms of equity compensation, including, but not limited to, the sale of common stock.

We do not adjust for ordinary course legal expenses resulting from maintaining and enforcing our intellectual property portfolio and license agreements.

We record interest expense primarily related to our debt facility and the 2026 Notes.

We exclude interest expense in calculating Adjusted EBITDA because we believe that the exclusion of interest expense will provide for more meaningful information about our financial performance.

We exclude interest income and other (expense) / income, net from Adjusted EBITDA because we do not consider it part of our ongoing results of operations.

We exclude the impact related to our (benefit from) / provision for income taxes from Adjusted EBITDA because we do not consider this tax adjustment to be part of our ongoing results of operations.

GAAP requires that operating expenses include the amortization of acquired intangible assets, which principally include acquired customer relationships, developed technology and trade names.

We exclude amortization of intangibles from Adjusted EBITDA because we do not consider amortization expense when we evaluate our ongoing business operations, nor do we factor amortization expense into our evaluation of potential acquisitions, or our measurement of the performance of those acquisitions.

We believe that the exclusion of amortization expense enables the comparison of our performance to other companies in our industry as other companies may be more or less acquisitive than us and therefore, amortization expense may vary significantly by company based on their acquisition history.

Although we exclude amortization of acquired intangible assets from Adjusted EBITDA, management believes that it is important for investors to understand that such intangible assets were recorded as part of purchase accounting and contribute to revenue generation.

We record depreciation primarily for investments in property and equipment.

We exclude depreciation in calculating Adjusted EBITDA because we do not consider depreciation when we evaluate our ongoing business operations.

We exclude stock-based compensation expense, which relates to restricted stock units and other forms of equity incentives primarily awarded to employees of Alarm.com, because they are non-cash charges that we do not consider when assessing the operating performance of our business.

Additionally, the determination of stock-based compensation expense can be calculated using various methodologies and is dependent upon subjective assumptions and other factors that vary on a company-by-company basis.

Therefore, we believe that excluding stock-based compensation expense from Adjusted EBITDA improves the comparability of our results to the results of other companies in our industry.

We exclude secondary offering expense because we do not consider costs associated with the secondary offering to be indicative of our core operating performance and we believe that the exclusion of this expense allows us to better provide meaningful information about our operating performance, facilitates comparisons to our historical operating results and improves the comparability of our results to the results of other companies in our industry.

Included in operating expenses are incremental costs directly related to business and asset acquisitions as well as changes in the fair value of contingent consideration liabilities, when applicable.

We exclude acquisition-related expense from Adjusted EBITDA because we believe that the exclusion of this expense allows us to better provide meaningful information about our operating performance, facilitates comparisons to our historical operating results, improves the comparability of our results to the results of other companies in our industry, and ultimately, we believe helps investors better understand the acquisition-related expense and the effects of the transaction on our results of operations.

We exclude non-ordinary course litigation expense because we do not consider legal costs and settlement fees incurred in litigation and litigation-related matters of non-ordinary course lawsuits and other disputes, particularly costs incurred in ongoing intellectual property litigation, to be indicative of our core operating performance.

We do not adjust for ordinary course legal expenses, including those expenses resulting from maintaining and enforcing our intellectual property portfolio and license agreements.

Adjusted EBITDA is a key measure that our management uses to understand and evaluate our core operating performance and trends to generate future operating plans, to make strategic decisions regarding the allocation of capital, and to make investments in initiatives that are focused on cultivating new markets for our solutions.

In particular, the exclusion of certain expenses in calculating Adjusted EBITDA facilitates comparisons of our operating performance on a period-to-period basis and, in the case of exclusion of acquisition-related adjustments and certain historical legal expenses, excludes items that we do not consider to be indicative of our core operating performance.

Adjusted EBITDA is not a measure calculated in accordance with GAAP and should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.

Adjusted EBITDA is not a measure calculated in accordance with

GAAP and should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.

Please see Non-GAAP Measures in this section for a discussion of the limitations of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, the most comparable GAAP measurement, for the years ended December 31, 2021, 2020 and 2019.

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We believe that our SaaS and license revenue renewal rate allows us to measure our ability to retain and grow our SaaS and license revenue and serves as an indicator of the lifetime value of our subscriber base.

Credit Losses (Topic 326)

On June 16, 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2016-13, " Financial Instruments - Credit Losses (Topic 326)," or Topic 326, which provides guidance designed to provide

financial statement users with more information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date.

From November 2018 to February 2020, amendments to Topic 326 were issued to clarify numerous accounting topics.

When determining such expected credit losses, the guidance requires companies to apply a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

The amendment was effective for us beginning on January 1, 2020.

On January 1, 2020, we adopted Topic 326 by applying the modified retrospective approach to our trade receivables and our notes receivable that were outstanding as of that date, which required us to record the initial effect of Topic 326 as a cumulative-effect adjustment to retained earnings on January 1, 2020.

The adoption of Topic 326 resulted in the recording of the following amounts on our consolidated balance sheets (in thousands):

Balance Sheet Caption As of January 1, 2020

Accumulated deficit $ 816

Accounts receivable, net (367)

Other current assets (83)

Other assets (366)

The adoption of Topic 326 did not materially impact our consolidated statements of operations, consolidated statement of equity or our consolidated statements of cash flows.

Components of Operating Results

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We record a reserve against revenue for hardware returns based on historical returns.

Our hardware and other revenue also includes our revenue from the sale of perpetual licenses that provide our customers in the commercial market the right to use our OpenEye video surveillance software for an indefinite period of time in exchange for a one-time license fee, which is generally paid at contract inception.

Our hardware and other revenue also includes our revenue from Shooter Detection Systems from the sale of licenses that provide our customers the right to use our indoor gunshot detection solution in exchange for license fees, which are generally paid at contract inception.

one-time license fee, which is generally paid at contract inception.

Our hardware and other revenue also includes our revenue from Shooter Detection Systems related to the sale of licenses that provide our customers the right to use our indoor gunshot detection solution in exchange for license fees, which are generally paid at contract inception.

Hardware and other revenue may also include activation fees charged to some of our service provider partners for activation of a new subscriber account on our platforms, as well as fees paid by service provider partners for our marketing services.

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In addition, the COVID-19 pandemic has resulted in a global slowdown of economic activity and a recession in the United States and the economic situation remains fluid as parts of the economy appear to be recovering while others continue to struggle.

As the future impact on global supply chains from COVID-19 is difficult to predict, the extent to which COVID-19 may negatively affect our hardware revenue is uncertain;

however, if the economy fails to fully recover or there are additional shutdowns of non-essential businesses due to a resurgence of COVID-19, our SaaS and license revenue growth rate may be lower in future periods, with a corresponding reduction in hardware revenue, if some consumers or small businesses defer or cancel previously anticipated purchases.

however, if the economy fails to fully recover or there are additional shutdowns of non-essential businesses due to a resurgence of COVID-19 and the emergence and severity of COVID-19 variants, our SaaS and license revenue growth rate may be lower in future periods, with a corresponding reduction in hardware revenue, if some consumers or small businesses defer or cancel previously anticipated purchases.

Cost of Revenue

Our cost of SaaS and license revenue primarily includes the amounts paid to wireless network providers and, to a lesser extent, the costs of running our network operations centers which are expensed as incurred, as well as patent and royalty costs in connection with technology licensed from third-party providers.

Our cost of SaaS and license revenue also includes our cost of software license revenue, which primarily includes the payroll and payroll-related costs of the department dedicated to providing service exclusively to those service providers that host the Software platform.

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Our cost of revenue excludes amortization and depreciation shown in operating expenses.

In 2019, the U.S.

administration imposed significant changes to U.S.

Since 2019, the U.S.

government has implemented and imposed significant changes to U.S.

trade policy with respect to China.

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The amount of the import tariff and the number of products subject to tariffs have changed numerous times based on action by the U.S.

administration.

Approximately one-fifth to one-half of the finished goods hardware products that we sell to our service provider partners are imported from China and could be subject to increased tariffs.

While the additional import duties resulted in an increase to our cost of hardware revenue, these import duties had a modest impact on hardware revenue margins.

We continue to monitor the changes in tariffs.

Approximately one-fifth to one-half of the hardware products that we sell to our service provider partners are imported from China and could be subject to increased tariffs.

While the additional import duties have resulted in an increase to our cost of hardware revenue, these import duties had a modest impact on hardware revenue margins.

If tariffs are increased or are expanded to apply to more of our products, such actions may increase our cost of hardware revenue and reduce our hardware revenue margins in the future.

We continue to monitor the changes in tariffs.

Our costs of hardware revenue increased during the second half of 2021 primarily due to an increase in costs for freight shipments, including expedited shipping costs, as well as an increase in inventory component costs.

We currently expect our hardware revenue margins to increase in 2022 as compared to the hardware revenue margins we experienced during the fourth quarter of 2021 as a result of price increases we have implemented on some of our products in 2022 to cover some of our increases in costs.

Operating Expenses

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Salaries, bonuses, stock-based compensation, benefits and other personnel related costs are the most significant components of each of these expense categories, excluding amortization and depreciation.

We include stock-based compensation expense in connection with the grant of stock options and other forms of equity compensation in the applicable operating expense category based on the respective equity award recipient’s function (sales and marketing, general and administrative or research and development).

We include stock-based compensation expense in connection with the grant of restricted stock units and other forms of equity compensation, including equity compensation with performance conditions, in the applicable operating expense category based on the respective equity award recipient’s function (sales and marketing, general and administrative or research and development).

We grew from 1,404 employees as of January 1, 2021 to 1,500 employees as of December 31, 2021, and we expect to continue to hire new employees to support the projected future growth of our business.

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Excluding intellectual property litigation and acquisition-related expense, we expect general and administrative costs to increase prospectively as our business grows.

This includes cost increases related to accounting, finance, and legal personnel, additional external legal, audit fees and other expenses associated with regulations governing public companies.

This includes cost increases related to human resources, accounting, finance, and legal personnel, additional external legal, audit fees and other expenses associated with regulations governing public companies.

While somewhat unpredictable, we also expect to continue to incur costs related to litigation involving intellectual property.

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Our research and development efforts are focused on innovating new features and enhancing the functionality of our platforms and the solutions we offer to our service provider partners and subscribers.

We will also continue to invest in efforts to extend our platforms to adjacent markets and internationally to maintain our leadership position in the development of intelligently connected property technology, and continued enhancement of our Enterprise Tools platform for our service provider partners.

We will also continue to invest in efforts to extend our platforms to adjacent markets and internationally to maintain our leadership position in the development of intelligently connected property technology, and continued enhancement of our Partner Services Platform, a comprehensive suite of enterprise-grade business management solutions for our service provider partners.

Amortization and Depreciation .

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Interest Expense

Interest expense consists of interest expense associated with our credit facility.

On October 6, 2017, we entered into a $125.0 million senior secured revolving credit facility, or the 2017 Facility, with Silicon Valley Bank, or SVB, as administrative agent, PNC Bank, National Association, as documentation agent, and a syndicate of lenders.

The 2017 Facility was available to us to refinance existing debt and for general corporate and working capital purposes as permitted under the terms of the 2017 Facility.

Interest expense is expected to increase in 2021 as compared to 2020 due to the issuance of the 2026 Notes.

We record interest expense associated with our 2026 Notes and our 2017 Facility, which was terminated in January 2021.

Interest expense is expected to decrease in 2022, as compared to 2021, due to the adoption of Accounting Standards Update, or ASU, 2020-06, " Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40):

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity " as of

January 1, 2022, which will eliminate the non-cash interest expense related to the amortization of the debt discount associated with the equity component for 2026 Notes issued on January 20, 2021.

However, there will be no impact to our liquidity or cash flows as a result of the adopting this guidance.

Interest Income

Interest income consists of interest income earned on our cash and cash equivalents and our notes receivable.

Other Income, Net

Other income, net primarily consists of gains earned on the sale of our investments, changes in the fair value of our investments and gains earned on our notes receivable and conversion of our outstanding notes receivable balance into an equity investment, partially offset by an impairment of one of our investments.

Provision for / (benefit from) income taxes

Other (Expense) / Income, Net

Other (expense) / income, net primarily consists of gains earned on the sale of our investments, changes in the fair value of our investments and gains earned on our notes receivable and conversion of our outstanding notes receivable balance into an equity investment, partially offset by an impairment of one of our investments and one of our intangible assets.

(Benefit from) / Provision for Income Taxes

We are subject to U.S.

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As a result, we recognize tax liabilities based on estimates of whether additional taxes will be due.

Our effective tax rates were below the statutory rate primarily due to research and development tax credits claimed, tax windfall benefits from employee stock-based payment transactions and foreign derived intangible income deductions, partially offset by the impact of state taxes and valuation allowances recorded against state research and development tax credit carryforwards.

Our effect ive tax rates were below the statuto ry rate primarily due to tax windfall benefits from employee stock-based payment transactions, research and development tax credits claimed and foreign derived intangible income deductions, partially offset by the impact of foreign withholding taxes, nondeductible compensation and other nondeductible expenses.

We recognize excess tax windfall benefits on a discrete basis during the quarter in which they occur, and we anticipate that our effective tax rate will vary from quarter to quarter depending on our stock price and exercises of stock options under our equity incentive plans each period.

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The following table sets forth our selected consolidated statements of operations and data as a percentage of revenue for the periods presented (in thousands):

Certain previously reported amounts in the consolidated statements of operations for the year ended December 31, 2018 have been reclassified to conform to our current presentation to reflect interest income as a separate line item, which was previously included in other income, net.

Consolidated Statements of Operations

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Interest income 587 — 870 — 4,922 1

Other income, net 25,588 4 6,535 2 143 —

Other (expense) / income, net (134) — 25,588 4 6,535 2

Income before income taxes 46,069 6 80,160 13 58,896 12

Provision for / (benefit from) income taxes 3,500 1 5,566 1 (9,825) (2)

(Benefit from) / provision for income taxes (5,106) (1) 3,500 1 5,566 1

Net income $ 51,175 7 % $ 76,660 12 % $ 53,330 11 %

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Total revenue $ 748,969 $ 618,003 21 %

The $115.6 million increase in total revenue in 2020 as compared to 2019 was the result of a $59.7 million, or 36%, increase in our hardware and other revenue and a $55.9 million, or 17%, increase in our SaaS and license revenue.

Our software license revenue included within SaaS and license revenue decreased $5.4 million to $38.0 million in 2020 as compared to $43.4 million during 2019, which decreased primarily due to the result of the continuing transition of customers from non-hosted software to our cloud based hosted platform.

The $49.2 million increase in our Alarm.com segment SaaS and license revenue in 2020 was primarily due to growth in our subscriber base, including the revenue impact from subscribers we added in 2019.

The increase in hardware and other revenue in 2020 compared to 2019 was primarily from the Alarm.com segment and was due to an increase in the volume of video cameras sold, as well as the increased revenue from our acquisition of 85% of the issued and outstanding capital stock of OpenEye, on October 21, 2019.

The $6.6 million increase in SaaS and license revenue for our Other segment in 2020, as compared to the same period in the prior year was due to an increase in sales of our energy management and demand response solutions and our property management and HVAC solutions.

Hardware and other revenue, net of intersegment eliminations, in 2020 in our Other segment decreased 38%, or $5.0 million, as compared to the same period in the prior year, primarily due to a decrease in sales related to our property management solution.

The $131.0 million increase in total revenue in 2021 as compared to 2020 was the result of a $67.1 million, or 17%, increase in our SaaS and license revenue and a $63.9 million, or 28%, increase in our hardware and other revenue.

Our software license revenue included within SaaS and license revenue decreased $5.7 million to $32.3 million in 2021 as compared to $38.0 million during 2020, primarily due to the result of the continuing transition of customers from non-hosted software to our cloud based hosted platform.

The SaaS and license revenue for the Alarm.com segment increased $60.0 million in 2021 as compared to 2020 primarily due to growth in our subscriber base, including the revenue impact from subscribers we added in 2020.

The SaaS and license revenue for our Other segment increased $7.1 million in 2021 as compared to 2020 primarily due to an increase in sales of our energy management and demand response solutions.

The increase in hardware and other revenue in 2021 as compared to 2020 was primarily from the $64.9 million increase in hardware and other revenue, net of intersegment eliminations, for the Alarm.com segment due to an increase in the volume of video cameras and video recorders sold, as well as the increased revenue from our acquisition of SDS on December 14, 2020.

Hardware and other revenue, net of intersegment eliminations, in our Other segment decreased 13%, or $1.0 million, in 2021 as compared to 2020 primarily due to a decrease in sales related to our property management solution.

Cost of Revenue

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The $78.5 million increase in cost of revenue in 2021 as compared to 2020 was the result of a $65.3 million, or 38%, increase in cost of hardware and other revenue and a $13.2 million, or 25%, increase in cost of SaaS and license revenue.

Our cost of software license revenue included within cost of SaaS and license revenue remained relatively consistent at $1.3 million during 2020 as compared to 2019.

The increase in cost of hardware and other revenue was due to the Alarm.com segment and related primarily to an increase in the number of hardware units shipped in 2020 as compared to 2019 as well as the increased cost of revenue from our acquisition of 85% of the issued and outstanding capital stock of OpenEye on October 21, 2019.

The increase in cost of Alarm.com segment SaaS and license revenue related primarily to the growth in our subscriber

base, which drove a corresponding increase in amounts paid to wireless network providers.

The increase in cost of Other segment SaaS and license revenue related primarily to an increase in sales of our energy management and demand response solutions, which drove a corresponding increase in amounts paid to distributed energy resource providers.

Our cost of software license revenue included within cost of SaaS and license revenue decreased $0.2 million to $1.1 million during 2021 as compared to $1.3 million during 2020.

The cost of hardware and other revenue for the Alarm.com segment increased $66.1 million in 2021 as compared to 2020 primarily due to an increase in the number of hardware units shipped and an increase in costs for freight shipments and inventory component costs.

The cost of SaaS and license revenue for the Alarm.com segment increased $9.7 million in 2021 as compared to 2020 primarily due to the growth in our subscriber base, which drove a corresponding increase in amounts paid to wireless network providers.

The cost of SaaS and license revenue for the Other

segment increased $3.5 million in 2021 as compared to 2020 primarily due to an increase in sales of our energy management and demand response solutions, which drove a corresponding increase in amounts paid to distributed energy resource providers.

Cost of hardware and other revenue as a percentage of hardware and other revenue was 83% and 77% for the years ended December 31, 2021 and 2020, respectively.

The increase in cost of hardware and other revenue as a percentage of hardware and other revenue in 2021 as compared to 2020 is primarily due to the increase in costs for freight shipments and inventory component costs as well as a reflection of the mix of product sales during the periods.

Cost of SaaS and license revenue as a percentage of SaaS and license revenue was 15% and 14% for the years ended December 31, 2021 and 2020, respectively.

Cost of software license revenue as a percentage of software license revenue was 3% for each of the years ended December 31, 2020 and 2019.

The decrease in cost of hardware and other revenue as a percentage of hardware and other revenue in 2020 as compared to 2019 is a reflection of the mix of product sales during the periods.

The increase in cost of SaaS and license revenue as a percentage of SaaS and license revenue in 2021 as compared to 2020 is a reflection of the mix of sales of services during the periods.

Cost of software license revenue as a percentage of software license revenue was 4% and 3% for the years ended December 31, 2021 and 2020, respectively.

Sales and Marketing Expense

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% of total revenue 11 % 12 %

The $14.2 million increase in sales and marketing expense in 2020 as compared to 2019 was primarily due to increases in headcount for our sales team and service provider partner support team to support our growth.

As a result, our personnel and related costs for our Alarm.com segment, including salary, benefits, stock-based compensation and travel expenses, increased by $9.7 million in 2020 as compared to 2019, net of decreased travel expenses of $3.2 million due to the COVID-19 pandemic.

Additionally, marketing costs increased by $3.1 million in 2020 for our Alarm.com segment as compared to the same period in the prior year due to an increase in advertising.

Sales and marketing expense from our Other segment increased $0.9 million in 2020 as compared to 2019, primarily due to increases in headcount for our sales team.

The $10.7 million increase in sales and marketing expense in 2021 as compared to 2020 was primarily due to a $7.9 million increase in personnel and related costs for our Alarm.com segment, including salary, benefits, stock-based compensation and travel expenses, attributable in part to increases in the headcount for our sales team to support our growth.

Sales and marketing expense from our Other segment increased $2.4 million in 2021 as compared to 2020, primarily due to increases in personnel and related costs, attributable in part to increases in the expected payout of the subsidiary long-term incentive plan as well as increases in the headcount for our sales team.

The overall number of employees in our sales and marketing teams increased from 461 as of December 31, 2020 to 476 as of December 31, 2021.

Sales and marketing expense as a percentage of total revenue was 12% for each of the years ended December 31, 2020 and 2019.

General and Administrative Expense

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% of total revenue 12 % 13 %

The $8.7 million increase in general and administrative expense in 2020 as compared to 2019 was primarily due to a $4.8 million increase in personnel and related costs for our Alarm.com segment due to an increase in employee headcount to support our operational growth as well as the reversal of a $3.3 million reserve for a promissory note with one of our hardware suppliers within our Alarm.com segment during 2019 which did not occur during 2020.

Additionally, costs for external consultants increased by $2.3 million in 2020 for our Alarm.com segment as compared to the same period in the prior year and legal expenses increased $1.1 million within our Alarm.com segment in 2020 as compared to the same period year resulting from intellectual property litigation.

These increases were partially offset by a $2.4 million decrease to the contingent consideration liability from our acquisition of 85% of the issued and outstanding capital stock of OpenEye on October 21, 2019 within our Alarm.com segment as well as a $2.2 million decrease in costs related to an offsite internal strategy and product roadmap conference incurred during 2019 which did not occur during 2020.

General and administrative expenses from our Other segment increased by $0.2 million in 2020 as compared to 2019, primarily due to an increase in rent expense.

The $8.8 million increase in general and administrative expense in 2021 as compared to 2020 was primarily due to a $5.5 million increase in personnel and related costs for our Alarm.com segment due in part to an increase in employee headcount to support our operational growth as well as a $2.6 million decrease to the contingent consideration liability that occurred in 2020 which did not occur in 2021.

See Note 10 to our consolidated financial statements for details regarding the changes to the contingent consideration liability.

Additionally, the increase in general and administrative expense in 2021 as compared to 2020 was due to a $1.8 million increase in legal expenses within our Alarm.com segment resulting from intellectual property litigation.

These increases were partially offset by a $1.0 million decrease in the provision for credit losses for our Alarm.com segment in 2021 as compared to a $1.5 million increase in the provision for credit losses for our Alarm.com segment in 2020.

General and administrative expenses from our Other segment remained relatively consistent during 2021 as compared to 2020.

The overall number of employees in general and administrative functions increased from 163 as of December 31, 2020 to 187 as of December 31, 2021.

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% of total revenue 24 % 25 %

The $37.7 million increase in research and development expense in 2020 as compared to 2019 was primarily due to an increase in headcount of employees in research and development functions.

Our personnel and related costs for our Alarm.com segment increased by $28.9 million in 2020 as compared to 2019 and our expenses for external consultants increased by $2.1 million.

Additionally, the increase in research and development expense is due to $4.4 million of in-process research and development we acquired in 2020, partially offset by the $1.0 million of in-process research and development we acquired 2019.

Research and development expense from our Other segment increased by $2.7 million primarily due to an increase in personnel and related costs, including salary, benefits and stock-based compensation in 2020 as compared to 2019.

The $25.6 million increase in research and development expense in 2021 as compared to 2020 was primarily due to a $19.1 million increase in personnel and related costs for our Alarm.com segment, attributable in part to an increase in headcount of employees in research and development functions as well as a $2.0 million increase in our expenses for external consultants.

These increases were partially offset by $4.4 million of in-process research and development we acquired in 2020 which did not occur in 2021.

Research and development expense from our Other segment increased by $7.2 million in 2021 as compared to 2020 primarily due to a $4.2 million increase in our personnel and related costs, including salary, benefits and stock-based compensation and a $2.7 million increase in expense for external consultants.

The overall number of employees in research and development functions increased from 780 as of December 31, 2020 to 837 as of December 31, 2021.

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% of total revenue 4 % 4 %

Amortization and depreciation increased $5.4 million in 2020 as compared to 2019, primarily due to the intangible assets that were acquired in connection with the purchase of 85% of the issued and outstanding capital stock of OpenEye on October 21, 2019.

Amortization and depreciation increased $2.2 million in 2021 as compared to 2020, primarily due to the intangible assets that were acquired in connection with the purchase of SDS on December 14, 2020.

Interest Expense

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% of total revenue (2) % — %

Interest expense decreased $0.4 million in 2020 as compared to 2019, primarily due to the decrease in the effective interest rate on the 2017 Facility resulting from decreases in the Eurodollar Base Rate, or LIBOR.

These decreases were partially offset by an increase in the carrying value of the 2017 Facility due to the $50.0 million borrowed on March 25, 2020.

Interest expense increased $13.4 million in 2021 as compared to 2020, primarily due to the amortization of the debt discount and debt issuance costs related to the 2026 Notes.

Interest Income

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% of total revenue — % — %

Interest income decreased $4.1 million in 2020 as compared to 2019, primarily due to a decrease in interest income earned on our notes receivable with one of our hardware suppliers as well as a decrease in interest income earned on our cash balance due to a decrease in interest rates.

Other Income, Net

Interest income decreased $0.3 million in 2021 as compared to 2020, primarily due to a decrease in interest rates, partially offset by interest income earned on the cash from the proceeds of the 2026 Notes.

Other (Expense) / Income, Net

Year Ended December 31, % Change

2021 2020 2021 vs.

Other income, net $ 25,588 $ 6,535 292 %

Other (expense) / income, net $ (134) $ 25,588 (101) %

% of total revenue — % 4 %

Other income, net increased $19.1 million during 2020 as compared to 2019, primarily due to recording a gain on the sale of an investment in one of our platform partners of $24.7 million within our Alarm.com segment in 2020 which did not occur in 2019, recording a gain on the investment in one of our technology partners of $0.7 million within our Alarm.com segment in 2020 which did not occur in 2019 as well a $0.6 million impairment of one of our investments recorded in 2019 which did not occur in 2020.

These increases in other income, net, were partially offset by the $6.9 million gain recorded in 2019 related to a promissory note with one of our hardware suppliers within our Alarm.com segment which did not occur in 2020.

Provision for Income Taxes

Other (expense) / income, net changed by $25.7 million during 2021 as compared to 2020, primarily due to recording a gain on the sale of an investment in one of our platform partners of $24.7 million within our Alarm.com segment in 2020 which did not occur in 2021 as well as recording a gain on the investment in one of our technology partners of $0.7 million within our Alarm.com segment in 2020 which did not occur in 2021.

(Benefit from) / Provision for Income Taxes

Year Ended December 31, % Change

2021 2020 2021 vs.

Provision for income taxes $ 3,500 $ 5,566 (37) %

(Benefit from) / provision for income taxes $ (5,106) $ 3,500 (246) %

% of total revenue (1) % 1 %

The provision for income taxes decreased $2.1 million in 2020 as compared to 2019.

The (benefit from) / provision for income taxes changed by $8.6 million in 2021 as compared to 2020.

Our effective tax rate was (11.1)% in 2021 as compared to 4.4% in 2020.

The decrease in the provision for income taxes and our effective tax rate was primarily due to increased tax windfall benefits and research and development tax credits in 2020 as compared to 2019.

The change in the (benefit from) / provision for income taxes was primarily due to increased tax windfall benefits from employee stock-based payment transactions, changes in estimated research and development tax credits and a decrease in income before income taxes in 2021 as compared to 2020.

Comparison of Years Ended December 31, 2020 to December 31, 2019

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Alarm.com and Other.

Our Alarm.com segment represents our cloud-based and Software platforms for the intelligently connected property and related solutions that contributed 94%, 93% and 93% of our revenue for the years ended December 31, 2020, 2019 and 2018, respectively.

Our Alarm.com segment represents our cloud-based and Software platforms for the intelligently connected property and related solutions that contributed 95%, 94% and 93% of our revenue, net of intersegment eliminations, for the years ended December 31, 2021, 2020 and 2019, respectively.

Our Other segment is focused on researching, developing and offering residential and commercial automation solutions and energy management products and services in adjacent markets.

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There was no software license revenue recorded for the Other segment during the years ended December 31, 2021, 2020 and 2019.

Critical Accounting Policies and Significant Judgments and Estimates

Critical Accounting Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP.

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Because of the use of estimates inherent in the financial reporting process in light of the continuing uncertainty arising from the COVID-19 pandemic, actual results could differ from those estimates and any such differences may be material.

To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.

During the first quarter of 2020, we adopted the guidance regarding accounting for expected credit losses in

FASB Topic 326.

Our most critical accounting policies are summarized below.

See Note 2 to our consolidated financial statements for a description of our other significant accounting policies.

To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows

will be affected.

Our most critical accounting estimates are summarized below.

See Note 2 to our consolidated financial statements for a description of the following critical accounting estimates and our other significant accounting estimates.

We derive our revenue from three primary sources:

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We sell our platform and hardware solutions to service provider partners that resell our solutions and hardware to residential and commercial property owners, who are the service provider partners’ customers.

We have variable consideration in the form of retrospective volume discounts, rebate incentives, restocking fees and assurance-type warranties.

The significant inputs related to variable consideration include the volume and amount of products and services sold historically and expected to be sold in the future, the availability and performance of our services and the historical and expected number of returns.

We have variable consideration in the form of retrospective volume discounts, rebate incentives, restocking fees and assurance-type warranties, which contain uncertainties and require us to make estimates of the amount of consideration to which we will be entitled.

The significant inputs related to our estimates of variable consideration include the volume and amount of products and services sold historically and expected to be sold in the future, the availability and performance of our services and the historical and expected number of returns.

We record a reserve against revenue for hardware returns based on historical returns.

For the years ended December 31, 2020, 2019 and 2018, our reserve against revenue for hardware returns was 1%, 1% and 2% of hardware and other revenue, respectively.

For each of the years ended December 31, 2021, 2020 and 2019, our reserve against revenue for hardware returns was approximately 1% of hardware and other revenue.

We evaluate our hardware reserve on a quarterly basis or if there is an indication of significant changes in return experience.

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Fair value is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date.

The liability for the contingent consideration consisted of the potential earn-out payment related to our acquisition of 85% of the issued and outstanding capital stock of OpenEye on October 21, 2019.

The liability for the subsidiary long-term incentive plan consists of the potential cash payment contingent upon meeting certain financial milestones related to the agreement established with certain employees of one of our subsidiaries.

During 2020 and 2021, 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 as of December 31, 2021 included a weighted average revenue volatility of 7.5% and a revenue risk adjustment of 2.4%.

We do not expect any significant changes to the underlying assumptions used to determine the unobservable inputs used to calculate the fair value of the liability related to the subsidiary long-term incentive plan as of December 31, 2021.

However, if changes in these assumptions occur, and, should those changes be significant, we may be exposed to increases or decreases in operating expenses.

The liability for the contingent consideration contains uncertainties and consisted of the potential earn-out payment related to our acquisition of 85% of the issued and outstanding capital stock of OpenEye on October 21, 2019.

The earn-out payment was contingent on the satisfaction of certain calendar 2020 revenue targets and had a maximum potential payment of up to $11.0 million.

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The contingent consideration liability was valued with Level 3 significant unobservable inputs, including the revenue volatility and the discount rate.

All contingencies related to the contingent consideration liability were resolved as of December 31, 2020 and no further estimates were necessary at December 31, 2020.

All contingencies related to the contingent consideration liability were resolved as of December 31, 2020 and no further estimates were necessary as of December 31, 2021.

We did not make any material changes in the accounting methodology used to determine the fair value of the contingent consideration liability for the year ended December 31, 2021.

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We record stock-based compensation expense related to time-based restricted stock units based upon the award’s grant date fair value and use an accelerated attribution method, net of actual forfeitures, in which compensation cost for each vesting tranche in an award is recognized ratably from the service inception date to the vesting date for that tranche.

We record stock-based compensation expense related to performance-based restricted stock

units based on management’s determination of the probable outcome of the performance conditions, which requires considerable judgment.

We estimate the fair value of each option granted on the date of grant using the Black-Scholes option-pricing model, which requires us to estimate the risk-free interest rate, expected term, expected stock price volatility and dividend yield.

We record stock-based compensation expense related to performance-based restricted stock units based on management’s determination of the probable outcome of the performance conditions, which requires considerable judgment.

We estimate the fair value of each option granted on the date of grant using the Black-Scholes option-pricing model, which contains uncertainties and requires us to estimate the risk-free interest rate, expected term, expected stock price volatility and dividend yield.

The risk-free interest rate assumption is based upon observed interest rates for constant maturity U.S.

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We are required to allocate the purchase price of acquired companies to the identifiable tangible and intangible assets acquired and liabilities assumed at the acquisition date based upon their estimated fair values.

Acquisition-related costs are expensed as incurred.

Goodwill as of the acquisition date represents the excess of the purchase consideration of an acquired business over the fair value of the underlying net tangible and intangible assets acquired net of liabilities assumed.

This valuation requires management to apply significant judgment in estimating the fair value of long-lived and intangible assets acquired, which involves the use of significant estimates and assumptions.

This valuation contains uncertainties and requires management to apply significant judgment in estimating the fair value of long-lived and intangible assets acquired, which involves the use of significant estimates and assumptions.

Significant estimates and assumptions in valuing intangible assets include estimates about future expected cash flows, discount rates, attrition rates related to acquired customer relationships, royalty rates and obsolescence factors related to acquired developed technology and royalty rates relate to acquired trade names.

We did not make any material changes to the underlying assumptions used as of the acquisition date to calculate the purchase price of the acquisition of SDS, during the year ended December 31, 2020.

We do not expect any material changes in the near term to the underlying assumptions used to calculate purchase price of the acquisition of SDS for the year ended December 31, 2020.

However, if changes in these assumptions occur, and, should those changes be significant, they could have a material impact on our purchase price allocation for the acquisition of SDS.

We did not make any material changes to the underlying assumptions used as of the acquisition date to calculate the purchase price of the acquisition of SDS.

We do not expect any material changes in the near term to the underlying assumptions used to calculate purchase price of the acquisition of SDS for the year ended December 31, 2021 given that the purchase price allocation was finalized during 2021.

Goodwill, Intangible Assets and Long-lived Assets

Goodwill represents the excess of (1) the aggregate of the fair value of consideration transferred in a business combination, over (2) the fair value of assets acquired, net of liabilities assumed.

Goodwill is not amortized, but is subject to annual impairment tests.

We perform our annual impairment review of goodwill on October 1 and when a triggering event occurs between annual impairment tests.

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For our 2021 annual impairment review, we performed a qualitative assessment for our Alarm.com reporting unit, our only reporting unit with a goodwill balance.

Based on the results of our qualitative assessment, we determined that it was not more likely than not that the fair value of our reporting unit was less than its carrying amount, including goodwill.

Therefore, we concluded that there was no goodwill impairment as of October 1, 2020.

Our assessment was performed as of October 1, 2020, and we have determined there have been no triggering events from our assessment date through December 31, 2020.

We did not make any material changes to the underlying assumptions used in our qualitative assessment of our goodwill as of October 1, 2021 and we do not expect any material changes in the near term to the underlying assumptions used in our qualitative assessment of our goodwill as of October 1, 2021.

However, if changes in these assumptions occur, and, should those changes be significant, they could have a material impact on our goodwill and potentially our other income, net, if those significant changes result in an impairment.

However, if changes in these assumptions occur, including as a result of performing a quantitative assessment instead of a qualitative assessment, and, should those changes be significant, they could have a material impact on our goodwill and potentially our other (expense) / income, net, if those significant changes result in an impairment.

Intangible Assets and Long-lived Assets

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If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.

For the year ended December 31, 2020, we determined there were no indicators of impairment of our intangible assets with definite lives or long-lived assets.

For the year ended December 31, 2021, we determined there was an impairment of $0.1 million for an intangible asset acquired in 2014 related to customer relationships that no longer existed after December 31, 2021.

There were no other indicators of impairment of our intangible assets with definite lives or long-lived assets.

We did not make any material changes to the underlying assumptions used in our assessment of intangible assets and long-lived assets for the year ended December 31, 2021 and we do not expect any material changes in the near term to the underlying assumptions used in our assessment of intangible assets and long-lived assets for the year ended December 31, 2021.

However, if changes in these assumptions occur, and, should those changes be significant, they could have a material impact on our intangible assets and long-lived assets and potentially our other income, net, if those significant changes result in an impairment.

However, if changes in these assumptions occur, and, should those changes be significant, they could have a material impact on our intangible assets and long-lived assets and potentially our other (expense) / income, net, if those significant changes result in an impairment.

Accounting for Income Taxes

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In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations.

Due to the uncertainty of realization of certain deferred tax assets related to our Canadian net operating losses and research and development tax credits, we established a valuation allowance of $0.3 million during the second quarter of 2019, which remained at $0.3 million as of December 31, 2020 and 2019.

During 2020, we established a valuation allowance on state research and development tax credits of $1.3 million.

As of December 31, 2018, based on our historical and expected future taxable earnings, we believed it was more likely than not that we would realize all of the benefit of the existing deferred tax assets.

Accordingly, we did not record a valuation allowance as of December 31, 2018.

We are subject to income taxes in the United States and foreign jurisdictions based upon our business operations in those jurisdictions.

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We did not make any material changes to the underlying assumptions used to calculate deferred tax assets and liabilities as well as uncertain tax positions for the year ended December 31, 2021 and we do not expect any material changes in the near term to the underlying assumptions used to calculate deferred tax assets and liabilities as well as uncertain tax positions for the year ended December 31, 2021.

However, if changes in these assumptions occur, and, should those changes be significant, they could have a material impact on our deferred tax assets and liabilities as well as our provision for income taxes.

Convertible Senior Notes

In accounting for the issuance of our 2026 Notes, we separate the notes into liability and equity components.

The carrying amount of the liability component is calculated by measuring the fair value of a similar liability that does not have an associated convertible feature, using a discounted cash flow model with a risk adjusted yield.

The carrying amount of the equity component representing the conversion option is determined by deducting the fair value of the liability component from the par value of the notes as a whole.

This difference between the aggregate principal amount and the liability component represents a debt discount that is amortized to interest expense using the effective interest method over the term of the notes.

Transaction costs attributable to the liability component are netted with the liability component and amortized to interest expense using the effective interest method over the term of the notes.

Transaction costs attributable to the equity component are netted with the equity component of the notes in additional paid-in capital in the consolidated balance sheets.

We did not make any material changes to the underlying assumptions used to separate the notes into liability and equity components for the year ended December 31, 2021.

We will adopt ASU 2020-06, " Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40):

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity " on January 1, 2022, using the modified retrospective approach.

We will record a reclassification from equity to debt through an adjustment upon adoption that will decrease additional paid-in capital by $56.5 million, net of tax;

decrease deferred tax liabilities and deferred tax assets by $15.8 million and $0.4 million, respectively;

increase convertible senior notes, net by $61.9 million;

and increase retained earnings by $10.0 million, net of tax.

Specific to the 2026 Notes, we will also record less interest expense in 2022 and beyond 2022 as compared to 2021, due to eliminating the amortization of the debt discount on the equity component, which represented the embedded conversion feature.

Additionally, this guidance requires that we adopt the if-converted method for computing diluted earnings per share, which will increase our diluted weighted average common shares outstanding and impact our earnings per share upon adoption.

There will be no impact to our liquidity or cash flows as a result of adopting this guidance.

Recent Accounting Pronouncements

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As of December 31,

2020 2019 2018

Cash and cash equivalents $ 710,621 $ 253,459

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We consider all highly liquid instruments purchased with an original maturity from the date of purchase of three months or less to be cash equivalents.

To date, we have principally financed our operations through cash generated by operating activities and, to a lesser extent, through private and public equity financings.

The terms of the 2026 Notes are governed by an Indenture, or the Indenture, by and between Alarm.com Holdings, Inc.

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.

To date, we have principally financed our operations through cash generated by operating activities and through private and public equity and debt financings.

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 and received proceeds of $484.3 million, net of $15.7 million of transaction fees and other debt issuance costs.

We terminated the 2017 Facility effective January 20, 2021.

We intend to use 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.

Subsequent to December 31, 2020, in February 2021, we paid $5.0 million in cash to purchase 1,000,000 shares of Series B-2 Preferred Stock from one of our technology partners as part of a financing round that included other investors.

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.

In February 2021, we paid $5.0 million in cash to purchase 1,000,000 shares of Series B-2 Preferred Stock from one of our technology partners as part of a financing round that included other investors.

On December 16, 2021, EnergyHub, Inc., acquired certain assets of an unrelated third party.

Substantially all of the acquired assets consisted of developed technology.

Additionally, we incurred $0.2 million in direct transaction costs related to legal fees during 2021 that were capitalized as a component of the consideration transferred.

We believe our existing cash and cash equivalents and our future cash flows from operating activities will be sufficient to meet our anticipated operating cash needs for at least the next 12 months.

Over the next 12 months, we expect our capital expenditure requirements to be approximately $11.3 million, primarily related to the continued build out of our leased and owned office space, as well as purchases of computer software and equipment.

Over the next 12 months, we expect our capital expenditure requirements to be between $10.0 million and $12.0 million, primarily related to purchases of computer software and equipment as well as the continued build out of our leased and owned office space.

The estimated capital expenditure requirements exclude land and real estate purchases, if we decide to make such purchases.

Maturities of lease liabilities for our various office leases are as follows:

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As the impact of the COVID-19 pandemic on the economy and our operations evolves, we will continue to assess our liquidity needs.

To the extent our cash and cash equivalents and cash flows from operating activities are insufficient to fund our future activities, we may need to borrow additional funds through our bank credit arrangements or raise funds from public or private equity or debt financings.

To the extent our cash and cash equivalents and cash flows from operating activities are insufficient to fund our future activities, we may need to borrow additional funds or raise funds from public or private equity or debt financings.

If we raise additional funds through the incurrence of indebtedness, such indebtedness would likely have rights that are senior to holders of our equity securities and could contain covenants that restrict our operations.

Any additional equity financing would be dilutive to our current stockholders.

The following discussion summarizes our current and long-term material cash requirements as of December 31, 2021, which we expect to fund primarily with operating cash flows.

Material Cash Requirements (in thousands)

1 Year 2 to 3 Years 4 to 5 Years More Than

5 Years Total

Convertible Notes:

Principal payments $ — $ — $ 500,000 $ — $ 500,000

Special interest — — — — —

Operating lease commitments 11,804 21,325 13,393 737 47,259

Other long-term liabilities 1

184 3,595 1,516 — 5,295

Other commitments 2

656 379 1 — 1,036

Total $ 12,644 $ 25,299 $ 514,910 $ 737 $ 553,590

_______________

(1) See Note 12 to our consolidated financial statements for details on the components of other long-term liabilities.

As of December 31, 2021, we recorded a liability for long-term accrued taxes and interest payable of $4.2 million.

Due to the uncertainty in the timing of future payments, we have excluded the liability related to these uncertain tax positions from the table above.

See Note 18 to our consolidated financial statements for additional information regarding income taxes.

(2) Represents amounts due under multi-year, non-cancelable contracts with third-party vendors, as well as other commitments.

The commitment amounts in the table above are associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the actions under the contracts.

The table does not include obligations under agreements that we can cancel without a significant penalty.

Future events could cause actual payments to differ from these estimates.

Convertible Senior Notes

The terms of the 2026 Notes are governed by an Indenture, or the Indenture, by and between Alarm.com Holdings, Inc.

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 ten 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 (see the section titled "2017 Facility" below.

2017 Facility

On October 6, 2017, we entered into a $125.0 million senior secured revolving credit facility, or the 2017 Facility, with SVB as administrative agent, PNC Bank, National Association, as documentation agent, and a syndicate of lenders.

Upon entry into the 2017 Facility, we borrowed $72.0 million, which was used to repay the previously outstanding balance under our previous credit facility.

The 2017 Facility was set to mature in October 2022 and included an option to further increase the borrowing capacity to $175.0 million with the consent of the lenders.

Costs incurred in connection with the 2017 Facility were capitalized and were being amortized as interest expense over the term of the 2017 Facility.

The 2017 Facility was secured by substantially all of our assets, including our intellectual property.

On March 25, 2020, we borrowed $50.0 million under the 2017 Facility as a precautionary measure in order to provide financial flexibility in light of current uncertainty in the financial markets resulting from the COVID-19 pandemic.

On January 20, 2021, we repaid the entire outstanding principal balance of $110.0 million of the 2017 Facility with proceeds from the 2026 Notes and the 2017 Facility was terminated.

We recognized an extinguishment loss of $0.2 million in other (expense) / income, net in our consolidated statements of operations during the year December 31, 2021 for previously capitalized debt issuance costs related to the 2017 Facility that were unamortized at the time of the termination of the 2017 Facility.

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

During 2021 until the termination of the 2017 Facility on January 20, 2021, we elected for the outstanding principal balance to accrue interest at LIBOR plus 1.50%, LIBOR plus 1.75%, LIBOR plus 2.00%, and LIBOR plus 2.50% when our consolidated leverage ratio is less than 1.00:1.00, greater than or equal to 1.00:1.00 but less than 2.00:1.00, greater than or equal to 2.00:1.00 but less than 3.00:1.00 and greater than or equal to 3.00:1.00, respectively.

The 2017 Facility also carried an unused line commitment fee of 0.20%.

For the years ended December 31, 2020 and 2019, the effective interest rate on the 2017 Facility was 2.65% and 4.45%, respectively.

The carrying value of the 2017 Facility was zero and $110.0 million as of December 31, 2021 and 2020, respectively.

The 2017 Facility included a variable interest rate that approximated market rates and, as such, we classified the liability as Level 2 within the fair value hierarchy and determined that the carrying amount of the 2017 Facility approximated its fair value as of December 31, 2020.

Sources of Liquidity

Our 2017 Facility was a revolving credit facility with SVB, as administrative agent, and a syndicate of lenders to finance working capital and certain permitted acquisitions and investments.

The 2017 Facility was available to us to refinance existing debt and for general corporate and working capital purposes including acquisitions, and prior to its termination, had a borrowing capacity of $125.0 million.

The 2017 Facility was a revolving credit facility with SVB as administrative agent, and a syndicate of lenders to finance working capital and certain permitted acquisitions and investments.

The 2017 Facility was available to us to refinance existing debt and for general corporate and working capital purposes including acquisitions, and prior to its termination on January 20, 2021, had a borrowing capacity of $125.0 million.

We had the option to increase the borrowing capacity of the 2017 Facility to $175.0 million with the consent of the lenders.

As of December 31, 2020, $110.0 million was outstanding under the 2017 Facility, no letters of credit were outstanding and $15.0 million remained available for borrowing under the 2017 Facility.

The 2017 Facility contained various financial and other covenants that required us to maintain a maximum consolidated leverage ratio and a fixed charge coverage ratio, and limited our capacity to incur other indebtedness, liens, make certain payments including dividends, and enter into other transactions without approval of the lenders.

The 2017 Facility was secured by substantially all of our assets, including our intellectual property.

As of December 31, 2020, we were in compliance with all covenants under the 2017 Facility.

The 2017 Facility is discussed in more detail below under "Debt Obligations."

On January 20, 2021, we repaid the entire outstanding balance of $110.0 million of the 2017 Facility with proceeds from the 2026 Notes and the 2017 Facility was terminated.

The 2017 Facility is discussed in more detail above under “2017 Facility.”

The 2026 Notes are discussed in more detail above under “Convertible Senior Notes.”

We did not declare or pay dividends during the years ended December 31, 2021, 2020 or 2019.

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We currently anticipate that we will retain all of our future earnings, if any, for use in the operation and expansion of our business and we do not anticipate paying cash dividends in the foreseeable future.

Additionally, our ability to pay dividends on our common stock was limited by restrictions under the terms of the agreements governing the 2017 Facility.

Additionally, our ability to pay dividends on our common stock was limited during a portion of 2021 by restrictions under the terms of the agreements governing the 2017 Facility.

Payment of future cash dividends, if any, will be at the discretion of the board of directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs, the requirements of current or then-existing debt instruments and other factors the board of directors deems relevant.

Stock Repurchase Programs

On November 29, 2018, our board of directors authorized a stock repurchase program, under which we were authorized to purchase up to an aggregate of $75.0 million of our outstanding common stock during the two-year period ended November 29, 2020.

On December 3, 2020, our board of directors authorized another stock repurchase program, under which we are authorized to purchase up to an aggregate of $100.0 million of our outstanding common stock during the three-year period ending December 3, 2023.

During the year ended December 31, 2020, we repurchased 147,153 shares of our common stock under the program that expired on November 29, 2020 in open market purchases for a total consideration of $5.1 million.

No shares were purchased under these programs during the years ended December 31, 2021 and 2019.

Shares Withheld

As permitted under the terms of the 2015 Plan, in 2021 the Compensation Committee authorized the withholding of shares of common stock in connection with the vesting of restricted stock unit awards issued to employees to satisfy applicable tax withholding requirements.

These withheld shares are not issued or considered common stock repurchases under our stock repurchase program.

We paid $4.5 million of tax withholdings related to vesting of restricted stock units during the year ended December 31, 2021.

Prior to using the withholding method to satisfy applicable tax withholding requirements for employees, we utilized the sell-to-cover method in which shares of our restricted stock unit awards were sold into the market on behalf of the employee upon vesting to cover tax withholding liabilities.

We may utilize either the withholding method or sell-to-cover method in the future.

Historical Cash Flows

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For 2021, cash flows from operating activities were $103.2 million, compared to $102.1 million for 2020.

This $1.1 million increase in cash flows from operating activities was due to a $43.8 million increase in non-cash and other reconciling items, partially offset by a $25.5 million decrease in net income and a $17.2 million decrease in cash from operating assets and liabilities.

The $43.8 million increase in non-cash and other reconciling items was primarily due to a $24.7 million gain on the sale of an investment in one of our platform partners in 2020 that did not occur in 2021, which was adjusted from net income within operating activities and presented as cash flows from investing activities.

Additionally, the increase in non-cash and other reconciling items was primarily due to $15.7 million increase in amortization of the debt discount and debt issuance costs related to the 2026 Notes in 2021 as well as a $9.5 million increase in stock-based compensation resulting from additional grants of stock options and restricted stock units in 2021.

These increases in non-cash and other reconciling items were partially offset by a $6.9 million change in deferred income taxes, primarily due to increased tax windfall benefits from employee stock-based payment transactions in 2021 as compared to 2020.

The $17.2 million decrease in cash from operating assets and liabilities was primarily due to a $20.8 million change in inventory resulting from additional purchased inventory in 2021 as compared to 2020, which is due in part to the impacts of the COVID-19 pandemic and the related uncertainty surrounding the potential disruption to our supply chain.

To a lesser extent, the decrease in cash from operating assets and liabilities was due to increases in prepayments for long lead-time parts related to inventory and other assets, partially offset by differences in timing of collection of receipts and payments of disbursements in 2021 as compared to 2020.

For 2020, cash flows from operating activities were $102.1 million, compared to $47.1 million for 2019.

This $55.0 million increase in cash flows from operating activities was due to a $34.3 million increase in cash from operating assets and liabilities as well as a $23.3 million increase in net income, partially offset by a $2.6 million decrease in non-cash items.

The $34.3 million increase in cash from operating assets and liabilities was primarily due to differences in timing of payments of disbursements and collection of receipts totaling $36.9 million, due in part to the $28.0 million payment made during the year ended December 31, 2019 for the agreement reached to settle the legal matter alleging violations of the Telephone Consumer Protection Act ,or TPCA, that did not occur during the year ended December 31, 2020.

This increase in cash from

operating assets and liabilities was partially offset by a $3.7 million change in inventory resulting from additional purchased inventory in 2020 that did not occur in 2019, which is due in part to the impacts of the COVID-19 pandemic and the uncertainty surrounding the potential disruption to our supply chain.

The $2.6 million decrease in non-cash and other reconciling items was primarily due to a $24.7 million gain on the sale of an investment in one of our platform partners in 2020 that did not occur in 2019, which was reclassified and presented as cash flows from investing activities.

The $34.3 million increase in cash from operating assets and liabilities was primarily due to differences in timing of payments of disbursements and collection of receipts totaling $36.9 million, due in part to the $28.0 million payment made in 2019 for the agreement reached to settle the legal matter alleging violations of the Telephone Consumer Protection Act ,or TPCA, that did not occur in 2020.

This increase in cash from operating assets and liabilities was partially offset by a $3.7 million change in inventory resulting from additional purchased inventory in 2020 that did not occur in 2019, which is due in part to the impacts of the COVID-19 pandemic and the uncertainty surrounding the potential disruption to our supply chain.

The $2.6 million decrease in non-cash and other reconciling items was primarily due to a $24.7 million gain on the sale of an investment in one of our platform partners in 2020 that did not occur in 2019, which was adjusted from net income within operating activities and presented as cash flows from investing activities.

This decrease in noncash and other reconciling items was partially offset by an $8.6 million increase in stock-based compensation resulting from additional grants of stock options and restricted stock units in 2020 and a gain of $6.9 million related to a promissory note with one of our hardware suppliers recorded in 2019 that did not occur in 2020.

Additionally, the decrease in non-cash and other reconciling items was also partially offset by a $5.4 million increase in amortization and depreciation primarily from intangible assets that were acquired in connection with the purchase of 85% of the issued and outstanding capital stock of OpenEye on October 21, 2019.

For 2019, cash flows from operating activities were $47.1 million, compared to $60.7 million for 2018.

This $13.6 million decrease in cash flows from operating activities was due to a $61.4 million decrease in cash from operating assets and liabilities, partially offset by a $31.8 million increase in net income and a $16.0 million increase in non-cash items.

The $61.4 million decrease in cash from operating assets and liabilities was primarily due to the $28.0 million expense recorded during 2018 for the agreement reached to settle the legal matter alleging violations of the TCPA, and such settlement amount was subsequently paid during 2019.

The decrease in cash from operating assets and liabilities was also due to differences in timing of collection of receipts and payments of disbursements.

The $16.0 million increase in non-cash items was primarily due to a $14.1 million change in deferred income taxes, primarily due to the increase in deferred income taxes resulting from the $28.0 million expense recorded during 2018 for the agreement reached to settle the legal matter alleging violations of the TCPA.

Additionally, the increase in non-cash items was due to a $7.2 million increase in stock-based compensation resulting from additional grants of stock options and restricted stock units during 2019, partially offset by a gain of $6.9 million recorded during 2019 related to the proceeds from promissory notes and an acquired promissory note received from one of our hardware suppliers.

Investing Activities

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For 2021, our cash flows used in investing activities was $20.4 million as compared to $20.3 million in 2020.

The $53.1 million decrease in cash used in investing activities was primarily due to our payment of $58.8 million, net of cash acquired, for 85% of the issued and outstanding capital stock of OpenEye in 2019, partially offset by our payment of $26.3 million, net of cash acquired, for 100% of the issued and outstanding ownership interest units of SDS in 2020.

The $0.1 million increase in cash used in investing activities was primarily due to our payment of $26.3 million, net of cash acquired, for 100% of the issued and outstanding ownership interest units of SDS in 2020 as well as $3.3 million used to acquire in-process research and development in 2020 that did not occur 2021.

The increase in cash used in investing activities in 2021 as compared to 2020 was partially offset by $25.7 million in proceeds received from the sale of an investment in one of our platform partners in 2020, which did not occur in 2021 as well as $5.0 million used to purchase 1,000,000 shares of Series B-2 Preferred Stock from one of our technology partners in 2021, which did not occur in 2020.

For 2020, our cash flows used in investing activities was $20.3 million as compared to $73.4 million in 2019.

acquired, for 100% of the issued and outstanding ownership interest units of SDS in 2020.

Additionally, the decrease in cash used in investing activities was due to $25.7 million in proceeds received from the sale of an investment in one of our platform partners in 2020, which did not occur in 2019, a payment of $22.4 million in 2019 to acquire a promissory note as well as $3.7 million of funding provided to one of our hardware suppliers that did not occur in 2020.

The decrease in cash used in investing activities in 2020 as compared to 2019 was partially offset by $30.7 million received from one of our hardware suppliers for the amounts due under various promissory notes in 2019 that did not occur in 2020.

For 2019, our cash flows used in investing activities was $73.4 million as compared to $13.4 million in 2018.

The $60.0 million increase in cash used in investing activities was primarily due to our payment of $58.8 million, net of cash acquired, for 85% of the issued and outstanding capital stock of OpenEye.

The increase in cash used in investing activities was also due to $22.4 million paid in 2019 for an acquired promissory note related to one of our hardware suppliers, $3.7 million of additional funding provided to the hardware supplier under the Promissory Notes in 2019 and $5.1 million paid for the purchase of land and a commercial building in 2019.

The increases in cash used in investing activities were partially offset by $30.7 million received from one of our hardware suppliers for the amounts due under several promissory notes and an acquired promissory note.

Financing Activities

Cash generated by financing activities includes borrowings under the 2017 Facility and proceeds from the issuance of common stock from employee stock option exercises and from our employee stock purchase plan.

Cash generated by financing activities includes borrowings under the 2017 Facility, proceeds from the 2026 Notes and proceeds from the issuance of common stock from employee stock option exercises and from our employee stock purchase plan.

Cash used in financing activities typically includes repurchases of common stock and repayments of debt.

For 2021, cash flows from financing activities was $374.4 million compared to $52.0 million in 2020.

The $322.4 million increase in cash flows from financing activities was primarily due to $484.3 million in proceeds from the issuance of the 2026 Notes, net of issuance costs paid.

This increase in cash flows from financing activities was partially offset by the repayment of $110.0 million to terminate the 2017 Facility in 2021 that did not occur in 2020 as well as the borrowing of $50.0 million under the 2017 Facility in 2020 that did not occur in 2021.

For 2020, cash flows from financing activities was $52.0 million compared to cash flows used in financing activities of $0.1 million in 2019.

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The increase in cash flows from financing activities in 2020 as compared to 2019 was partially offset by our use of $5.1 million to purchase shares of treasury stock in 2020 that did not occur in 2019.

For 2019, cash flows used in financing activities was $0.1 million compared to cash flows from financing activities of $2.4 million in 2018.

The $2.5 million change in cash flows used in financing activities was primarily due to a decrease of $2.5 million in the issuance of common stock under equity-based plans.

Contractual Obligations

Presented below is information about our material contractual obligations and the periods in which those future payments are due as of December 31, 2020.

Future events could cause actual payments to differ from these estimates.

As of December 31, 2020, the following table summarizes our contractual obligations and the effect such obligations are expected to have on our liquidity and cash flow in future periods (in thousands):

Contractual Obligations 1 Year 2 to 3 Years 4 to 5 Years More Than

5 Years Total

Principal payments $ — $ 110,000 $ — $ — $ 110,000

Interest payments 1

1,956 1,490 — — 3,446

Unused line fee payments 30 24 — — 54

Operating lease commitments 11,499 20,136 16,060 4,450 52,145

Other long-term liabilities 444 4,459 1,082 826 6,811

Other commitments 2

775 308 — — 1,083

Total contractual obligations $ 14,704 $ 136,417 $ 17,142 $ 5,276 $ 173,539

_______________

(1) The 2017 Facility incurs interest at a variable rate.

The projected variable interest payments assume no change in the Eurodollar Base Rate, or LIBOR, from December 31, 2020.

(2) Represents amounts due under multi-year, non-cancelable contracts with third-party vendors, as well as other commitments.

The table does not include obligations under agreements that we can cancel without a significant penalty.

As of December 31, 2020, we had no outstanding letters of credit under our 2017 Facility.

Debt Obligations

On October 6, 2017, we entered into a $125.0 million senior secured revolving credit facility, or the 2017 Facility, with SVB, as administrative agent, PNC Bank, National Association, as documentation agent, and a syndicate of lenders.

Upon entry into the 2017 Facility, we borrowed $72.0 million, which was used to repay the previously outstanding balance under our previous credit facility.

The 2017 Facility was set to mature in October 2022 and included an option to further increase the borrowing capacity to $175.0 million with the consent of the lenders.

Costs incurred in connection with the 2017 Facility were capitalized and were being amortized as interest expense over the term of the 2017 Facility.

The 2017 Facility was secured by substantially all of our assets, including our intellectual property.

During the years ended December 31, 2020 and 2019, we repaid $3.0 million and $4.0 million of the outstanding balance of the 2017 Facility, respectively.

See Convertible Senior Notes below in this section of this Annual Report for further details on the repayment of all outstanding borrowings under, and the termination of, the 2017 Facility subsequent to December 31, 2020.

For the year ended December 31, 2020, we elected for the outstanding principal balance to accrue interest at LIBOR plus 1.50, LIBOR plus 1.75, LIBOR plus 2.00, and LIBOR plus 2.50 when our consolidated leverage ratio is less than 1.00:1.00, greater than or equal to 1.00:1.00 but less than 2.00:1.00, greater than or equal to 2.00:1.00 but less than 3.00:1.00 and greater than or equal to 3.00:1.00, respectively.

The 2017 Facility also carried an unused line commitment fee of 0.20%.

For the years ended December 31, 2020, 2019 and 2018, the effective interest rate on the credit facilities was 2.65%, 4.45% and 4.13%, respectively.

The carrying value of the 2017 Facility was $110.0 million and $63.0 million as of December 31, 2020 and 2019, respectively.

The 2017 Facility contained various financial and other covenants that required us to maintain a maximum consolidated leverage ratio not to exceed 3.25:1.00 and a consolidated fixed charge coverage ratio of at least 1.25:1.00.

As of December 31, 2020, we were in compliance with all financial and non-financial covenants and there were no events of default.

The 2017 Facility also contained customary conditions to borrowings and events of default and contains various negative covenants, including covenants that restrict our ability to dispose of assets, merge with or acquire other entities, incur indebtedness, incur encumbrances, make certain payments including dividends, make investments or engage in transactions with affiliates without approval of the lenders.

On November 30, 2018, we amended the 2017 Facility to incorporate the parameters that were required to be met for us to repurchase our outstanding common stock under the stock repurchase program authorized by our board of directors on November 29, 2018.

Convertible Senior Notes

The terms of the 2026 Notes are governed by an Indenture, or the Indenture, by and between Alarm.com Holdings, Inc.

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.

No sinking fund is provided for the 2026 Notes.

or (4) upon the occurrence of specified corporate events as set forth in the Indenture.

It is our current intent to settle the principal amount of the 2026 Notes with cash.

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.

We terminated the 2017 Facility effective January 20, 2021.

Since we expect to settle the principal amount on our outstanding 2026 Notes in cash and any excess in cash or shares of our common stock, we will use the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable.

The conversion spread will have a dilutive impact on diluted net income per share of common stock when the average market price of our common stock for a given period exceeds the conversion price of $147.19 per share for the 2026 Notes.

Non-GAAP Measures

We define Adjusted EBITDA as our net income before interest expense, interest income, other income, net, provision for / (benefit from) income taxes, amortization and depreciation expense, stock-based compensation expense, secondary offering expense, acquisition-related expense and legal costs and settlement fees incurred in connection with non-ordinary course litigation and other disputes, particularly costs involved in ongoing intellectual property litigation.

We define Adjusted EBITDA as our net income before interest expense, interest income, other (expense) / income, net, (benefit from) / provision for income taxes, amortization and depreciation expense, stock-based compensation expense, secondary offering expense, acquisition-related expense and legal costs and settlement fees incurred in connection with non-ordinary course litigation and other disputes, particularly costs involved in ongoing intellectual property litigation.

We do not consider these items to be indicative of our core operating performance.

The non-cash items include amortization and depreciation expense, stock-based compensation expense related to stock options and other forms of equity compensation, including, but not limited to, the sale of common stock.

The non-cash items include amortization and depreciation expense, amortization of debt discount and debt issuance costs for the 2026 Notes included in interest expense, stock-based compensation expense related to restricted stock units and other forms of equity compensation, including, but not limited to, the sale of common stock.

We do not adjust for ordinary course legal expenses resulting from maintaining and enforcing our intellectual property portfolio and license agreements.

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We have included Adjusted EBITDA in this report because it is a key measure that our management uses to understand and evaluate our core operating performance and trends, to generate future operating plans, to make strategic decisions regarding the allocation of capital and to make investments in initiatives that are focused on cultivating new markets for our solutions.

We also use certain non-GAAP financial measures, including Adjusted EBITDA, as performance measures under our executive bonus plan.

We also use Adjusted EBITDA, a non-GAAP financial measure, as a performance measure under our executive bonus plan.

Further, we believe the exclusion of certain expenses in calculating Adjusted EBITDA facilitates comparisons of our operating performance on a period-to-period basis and, in the case of exclusion of acquisition-related expense and certain historical legal expenses, excludes items that we do not consider to be indicative of our core operating performance.

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Net income $ 51,175 $ 76,660 $ 53,330

Interest expense, interest income and other income, net (23,862) (8,483) 503

Provision for / (benefit from) income taxes 3,500 5,566 (9,825)

Interest expense, interest income and other (expense) / income, net 15,503 (23,862) (8,483)

(Benefit from) / provision for income taxes (5,106) 3,500 5,566

Amortization and depreciation expense 29,715 27,520 22,134

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis