What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-05-05 compared with 2021-11-04 · 221 added, 287 removed, 316 unchanged (62% of the section changed)

2 unchanged sentences

This Quarterly Report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.

These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “objective,” “ongoing,” “plan,” “predict,” “project,” “potential,” “should,” “will,” “would” or the negative or plural of these words or similar expressions or variations and such forward-looking statements include, but are not limited to, statements with respect to the anticipated impact of the global economic uncertainty and financial market conditions caused by the COVID-19 pandemic on our business, results of operations and financial condition, including on our hardware sales and our Software-as-a-Service, or SaaS, and license revenue growth rate;

These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “objective,” “ongoing,” “plan,” “predict,” “project,” “potential,” “should,” “will,” “would” or the negative or plural of these words or similar expressions or variations and such forward-looking statements include, but are not limited to, statements with respect to the anticipated impact of the global economic uncertainty and financial market conditions caused by the COVID-19 pandemic and geopolitical tensions on our business, results of operations and financial condition, including on our hardware sales and our Software-as-a-Service, or SaaS, and license revenue growth rate;

our business strategy, plans and objectives for future operations;

7 unchanged sentences

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.

4 unchanged sentences

These service provider contracts typically have an initial term of one year, with subsequent renewal terms of one year.

Our service provider partners have indicated that they typically have three to five-year service contracts with residential and commercial property owners who use our solutions.

O ur service provider partners have indicated that they typically have three to five -year service contracts with residential and commercial property owners who use our solutions.

We also generate hardware and other revenue, primarily from our service provider partners and distributors.

Our hardware sales include connected devices that enable our services, such as video cameras, video recorders, gunshot detection sensors, gateway modules and smart thermostats.

We believe that the length of our service relationships with residential and commercial property owners, combined with our robust platforms and over 20 years of operating experience, contribute to a compelling business model.

We believe that our network of service providers and the length of our service relationships with residential and commercial property owners, combined with our robust SaaS platforms and over 20 years of operating experience, contribute to a compelling business model.

Our solutions are designed to make both residential and commercial properties safer, smarter and more efficient.

1 unchanged sentence

This market includes the residential and commercial property owners who subscribe to our services, the hardware partners who manufacture devices that integrate with our platforms and the service provider partners who install and maintain our solutions.

The Alarm.com platform enables our service provider partners to deploy our interactive security, video monitoring, intelligent automation, energy management and wellness solutions as stand-alone offerings or as combined solutions to address the needs of a broad range of customers.

Highlights of Third Quarter Results

The Alarm.com platform enables our service provider partners to deploy our interactive security, video monitoring, intelligent automation, access control, energy management and wellness solutions as stand-alone offerings or as combined solutions to address the needs of a broad range of customers.

Highlights of First Quarter Results

We primarily generate SaaS and license revenue, our largest source of revenue, through our service provider partners who resell our services and pay us monthly fees.

2 unchanged sentences

We derive a portion of our revenue from licensing our intellectual property to third parties on a per customer basis.

SaaS and license revenue represented 61% of our revenue during each of the three and nine months ended September 30, 2021, respectively, as compared to 63% and 64% in the same periods in the prior year.

SaaS and license revenue represented 60% of our revenue during the three months ended March 31, 2022, as compared to 62% in the same period in the prior year.

We also generate SaaS and license revenue from monthly fees charged to service providers on a per subscriber basis for access to our non-hosted software platform, or Software platform.

The non-hosted software for interactive security, automation and related solutions is typically deployed and operated by the service provider in its own network operations center.

Software license revenue represented 4% of our revenue during each of the three and nine months ended September 30, 2021, as compared to 6% for the same periods in the prior year.

Software license revenue represented 3% of our revenue during the three months ended March 31, 2022, as compared to 5% for the same period in the prior year.

We also generate revenue from the sale of many types of hardware, including video cameras, video recorders, cellular radio modules, thermostats, image sensors, gunshot detection sensors and other peripherals, that enable our solutions.

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 video surveillance software for an indefinite period of time in exchange for a one-time license fee.

Our hardware and other revenue also includes our revenue from the sale of licenses that provide our customers the right to use our gunshot detection solution in exchange for license fees.

Hardware and other revenue represented 39% of our revenue during the three and nine months ended September 30, 2021, respectively, as compared to 37% and 36% in the same periods in the prior year.

Additionally, our hardware and other revenue includes our revenue from the sale of licenses that provide our customers the right to use our gunshot detection solution in exchange for license fees.

Hardware and other revenue represented 40% of our revenue during the three months ended March 31, 2022, as compared to 38% in the same period in the prior year.

We typically expect hardware and other revenue to fluctuate as a percentage of total revenue.

Highlights of our financial performance for the periods covered in this Quarterly Report include:

• SaaS and license revenue increased 18% to $118.1 million in the three months ended September 30, 2021 from $100.1 million in the three months ended September 30, 2020.

SaaS and license revenue increased 18% to $338.6 million in the nine months ended September 30, 2021 from $287.8 million in the nine months ended September 30, 2020.

Included in SaaS and license revenue was software license revenue, which decreased to $7.9 million in the three months ended September 30, 2021 from $9.5 million in the three months ended September 30, 2020.

Software license revenue decreased to $24.9 million in the nine months ended September 30, 2021 from $29.0 million in the nine months ended September 30, 2020.

• Total revenue increased 21% to $192.3 million in the three months ended September 30, 2021 from $158.9 million in the three months ended September 30, 2020.

Total revenue increased 22% to $553.7 million in the nine months ended September 30, 2021 from $452.4 million in the nine months ended September 30, 2020.

• Net income decreased to $13.3 million in the three months ended September 30, 2021, as compared to $35.8 million in the three months ended September 30, 2020.

Net income decreased to $42.3 million in the nine months ended September 30, 2021, as compared to $61.0 million in the nine months ended September 30, 2020.

Net income attributable to common stockholders decreased to $13.5 million in the three months ended September 30, 2021, as compared to $36.1 million in the three months ended September 30, 2020.

Net income attributable to common stockholders decreased to $43.1 million in the nine months ended September 30, 2021, as compared to $61.9 million in the nine months ended September 30, 2020.

• Adjusted EBITDA, a non-GAAP measurement of operating performance, increased to $37.6 million in the three months ended September 30, 2021 from $34.5 million in the three months ended September 30, 2020.

Adjusted EBITDA increased to $111.2 million in the nine months ended September 30, 2021 from $92.9 million in the nine months ended September 30, 2020.

Please see Non-GAAP Measures below in this section of this Quarterly Report for a discussion of the limitations of Adjusted EBITDA (a non-GAAP measure) and a reconciliation of Adjusted EBITDA to net income, the most comparable measurement in accordance with accounting principles generally accepted in the United States, or GAAP, for the three and nine months ended September 30, 2021 and 2020.

• SaaS and license revenue increased 15% to $123.2 million during the three months ended March 31, 2022 from $107.4 million during the three months ended March 31, 2021.

Included in SaaS and license revenue was software license revenue, which decreased to $7.1 million during the three months ended March 31, 2022 from $8.7 million during the three months ended March 31, 2021.

• Total revenue increased 19% to $205.4 million during the three months ended March 31, 2022 from $172.5 million during the three months ended March 31, 2021.

• Net income decreased to $8.9 million during the three months ended March 31, 2022, as compared to $14.6 million during the three months ended March 31, 2021.

Net income attributable to common stockholders decreased to $9.1 million during the three months ended March 31, 2022, as compared to $14.8 million during the three months ended March 31, 2021.

• Adjusted EBITDA, a non-GAAP measurement of operating performance, decreased to $29.9 million during the three months ended March 31, 2022 from $35.6 million during the three months ended March 31, 2021.

Recent Developments

2 unchanged sentences

We have taken precautionary measures intended to help protect our employees, service providers and subscribers, as well as the communities in which we participate, including enabling substantially all of our employees to work remotely.

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, and vaccination efforts are 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.

The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the results that can be expected for our entire fiscal year ending December 31, 2021, which is increasingly true in periods of extreme uncertainty, such as the uncertainty caused by the COVID-19 pandemic.

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 in 2020 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.

In addition, the COVID-19 pandemic resulted in a global slowdown of economic activity, inflation, 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, and vaccination efforts have been and are 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.

The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results that can be expected for our entire fiscal year ending December 31, 2022, which is increasingly true in periods of extreme uncertainty, such as the uncertainty caused by the COVID-19 pandemic and geopolitical tensions, in particular Russia’s recent incursion into Ukraine.

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

Our business and those of our service providers showed some resiliency in 2020 and 2021, and recently we have seen some of these pandemic-related trends subside in certain areas of our business and continuing into 2022.

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.

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 in 2022 and remain flexible in our response to the challenges presented by the pandemic.

Other Business Metrics

2 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 2021 2020

SaaS and license revenue $ 123,225 $ 107,383

1 unchanged sentence

Twelve Months Ended

September 30,

SaaS and license revenue renewal rate 94 % 95 %

1 unchanged sentence

SaaS and license revenue is a GAAP measure that we use to measure our current performance and estimate our future performance.

We believe that SaaS and license revenue is an indicator of the productivity of our existing service provider partners and their ability to activate and maintain subscribers using our intelligently connected property solutions, our ability to add new service provider partners reselling our solutions, the demand for our intelligently connected property solutions and the pace at which the market for these solutions is growing.

We believe that SaaS and license revenue is an indicator of the productivity of our existing service provider partner s and their ability to activate and maintain subscribers using our intelligently connected property solutions, our ability to add new service provider partners reselling our solutions, the demand for our intelligently connected property solutions and the pace at which the market for these solutions is growing.

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP measure that represents our net income before interest expense, interest income, other income / (expense), net, provision for / (benefit from) income taxes, amortization and depreciation expense, stock-based compensation expense, secondary offering expense, acquisition-related (benefit) / 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 income / (expense), net, benefit from income taxes, amortization and depreciation expense, stock-based compensation 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, amortization of debt discount and debt issuance costs for the January 20, 2021 issuance of $500.0 million aggregate principal amount of 0% convertible senior notes due January 15, 2026, or the 2026 Notes, included in interest expense, and 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 January 20, 2021 issuance of $500.0 million aggregate principal amount of 0% convertible senior notes due January 15, 2026, or 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 income / (expense), 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 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.

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.

1 unchanged sentence

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 three and nine months ended September 30, 2021 and 2020.

SaaS and License Revenue Renewal Rate

1 unchanged sentence

We measure our SaaS and license revenue renewal rate on a trailing 12-month basis by dividing (a) the total SaaS and license revenue recognized during the trailing 12-month period from our subscribers on our Alarm.com platform who were subscribers on the first day of the period, by (b) total SaaS and license revenue we would have recognized during the period from those same subscribers assuming no terminations, or service level upgrades or downgrades.

The SaaS and license revenue renewal rate represents both residential and commercial

The SaaS and license revenue renewal rate represents both residential and commercial properties.

Our SaaS and license revenue renewal rate is expressed as an annualized percentage and it is calculated across our entire subscriber base on the Alarm.com platform excluding subscribers of service providers that may use one of our other platforms as a substitute for the Alarm.com platform.

Our service provider partners, who resell our services to our subscribers, have indicated that they typically have three to five-year service contracts with our subscribers.

Our SaaS and license revenue renewal rate is calculated across our entire subscriber base on the Alarm.com platform, including subscribers whose contract with their service provider reached the end of its contractual term during the measurement period, as well as subscribers whose contract with their service provider has not reached the end of its contractual term during the measurement period, and is not intended to estimate the rate at which our subscribers renew their contracts with our service provider partners.

O ur service provider partners have indicated that they typically have three to five -year service contracts with residential and commercial property owners who use our solutions.

Our SaaS and license revenue renewal rate includes subscribers whose contract with their service provider reached the end of its contractual term during the measurement period, as well as subscribers whose contract with their service provider has not reached the end of its contractual term during the measurement period, and is not intended to estimate the rate at which our subscribers renew their contracts with our service provider partners.

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.

Adoption of Recent Accounting Pronouncements

On August 5, 2020, the Financial Accounting Standards Board, or FASB, issued 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 ," or ASU 2020-06, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity.

The new guidance eliminates two of the three models in Subtopic 470-20 that require separating embedded conversion features from convertible instruments.

The guidance also addresses how convertible instruments are accounted for in the diluted earnings per share calculation.

The amendment in this update is effective for fiscal years beginning after December 15, 2021.

We adopted ASU 2020-06 effective January 1, 2022, using a modified retrospective adoption method, which required us to record the initial effect of this guidance as a cumulative-effect adjustment to retained earnings on January 1, 2022.

Upon adoption of ASU 2020-06 we recombined the liability and equity components of the convertible senior notes assuming that the instrument was accounted for as only a liability from inception to the date of adoption.

We also recombined the liability and equity components of the debt issuance costs.

The issuance costs are presented as a deduction from the outstanding principal balance

of the convertible senior notes and are amortized to interest expense using the effective interest method over the contractual term of the convertible senior notes.

We also removed the temporary difference between the book and tax treatment of the debt discount and adjusted the temporary difference between the book and tax treatment of the debt issuance costs of the 2026 Notes.

The adoption resulted in the recording of the following increases / (decreases) on our condensed consolidated balance sheets (in thousands):

Balance Sheet Caption As of January 1, 2022

Deferred tax assets $ 15,356

Additional paid-in capital (56,515)

Convertible senior notes, net 61,899

Retained earnings 9,972

Our net income attributable to common stockholders increased $2.0 million during the three months ended March 31, 2022 as a result of adopting ASU 2020-06 due to no longer recording non-cash interest expense related to the amortization of the debt discount associated with the previous equity component of the 2026 Notes.

Upon adoption of this guidance on January 1, 2022, we began using the if-converted method when calculating the dilutive impact of the 2026 Notes on net income per share, which required us to increase our diluted weighted average common shares outstanding by 3,396,950 shares for the three months ended March 31, 2022.

The impact of ASU 2020-06 on net income attributable to common stockholders and weighted average diluted shares resulted in an increase to basic net income attributable to common stockholders of $0.04 per share and an increase to diluted net income attributable to common stockholders of $0.04 per share, during the three months ended March 31, 2022.

See Note 15 for details on the components of basic and diluted earnings per share.

Components of Operating Results

22 unchanged sentences

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

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

Additionally, our hardware and other revenue 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.

2 unchanged sentences

These emergency measures remain in place to varying degrees.

We have seen and anticipate we may continue to see disruption to our hardware supply chain, including limited inventory availability, increased lead times, and shipping delays, due to

the impact of COVID-19 on manufacturing, production and global transportation, as well as to our sales channels due to restrictions on our service providers’ ability to meet with residential and commercial property owners who use our solutions, reluctance of service providers and property owners to meet even where such restrictions have been lifted and general economic conditions.

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 full 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 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.

We have seen and anticipate we may continue to see disruption to our hardware supply chain, including limited inventory availability, increased lead times, and shipping delays, due to the impact of COVID-19 on manufacturing, production and global transportation, as well as to our sales channels due to restrictions on our service providers’ ability to meet with residential and commercial property owners who use our solutions, reluctance of service providers and property owners to meet even where such restrictions have been lifted and general economic conditions.

In addition, the COVID-19 pandemic has resulted in a global slowdown of economic activity, inflation, 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.

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.

Our cost of hardware and other revenue primarily includes cost of raw materials, tooling and amounts paid to our third-party manufacturer for production and fulfillment of our cellular radio modules and image sensors, and procurement costs for our video cameras, video recorders and gunshot detection sensors, which we purchase from an original equipment manufacturer, and other devices.

Our cost of hardware and other revenue also includes royalty costs in connection with technology licensed from third-party providers.

Additionally, our cost of hardware and other revenue includes royalty costs in connection with technology licensed from third-party providers.

We record the cost of SaaS and license revenue as expenses are incurred, which corresponds to the delivery period of our services to our subscribers.

10 unchanged sentences

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 and first quarter of 2022 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

1 unchanged sentence

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, 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 1,361 employees as of September 30, 2020 to 1,482 employees as of September 30, 2021, and we expect to continue to hire new employees to support the projected future growth of our business.

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 1,414 employees as of March 31, 2021 to 1,565 employees as of March 31, 2022 and increased from 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.

Sales and Marketing Expense.

1 unchanged sentence

Our sales and marketing teams engage in sales, account management, service provider partner support, advertising, promotion of our products and services and marketing.

The number of employees in sales and marketing functions increased from 450 as of September 30, 2020 to 476 as of September 30, 2021 and increased from 456 as of June 30, 2021.

The number of employees in sales and marketing functions increased from 457 as of March 31, 2021 to 478 as of March 31, 2022 and increased from 476 as of December 31, 2021.

We expect to continue to invest in our sales and marketing activities to expand our business both domestically and internationally.

1 unchanged sentence

General and Administrative Expense.

General and administrative expense consists primarily of personnel and related expenses for our administrative, legal, human resources, finance and accounting personnel, including salaries, bonuses, stock-

based compensation, benefits and other personnel costs.

Additional expenses included in this category are legal costs, including those that are incurred to defend and license our intellectual property, as well as non-personnel costs, such as travel related expenses, rent, subcontracting and professional fees, audit fees, tax services, and insurance expenses.

Also included in general and administrative expenses are credit losses and acquisition-related expenses, which consist primarily of legal, accounting and professional service fees directly related to acquisitions and valuation gains or losses on acquisition-related contingent liabilities.

The number of employees in general and administrative functions increased from 161 as of September 30, 2020 to 187 as of September 30, 2021 and increased from 173 as of June 30, 2021.

The number of employees in general and administrative functions increased from 160 as of March 31, 2021 to 195 as of March 31, 2022 and increased from 187 as of December 31, 2021.

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.

2 unchanged sentences

Research and development expense consists primarily of personnel and related expenses for our employees working on our product development and software and device engineering teams, including salaries, bonuses, stock-based compensation, benefits and other personnel costs.

Also included are non-personnel costs such as consulting and professional fees paid to third-party development resources as well as acquisition costs of IPR&D with no alternative future use.

The number of employees in research and development functions increased from 750 as of September 30, 2020 to 819 as of September 30, 2021 and increased from 792 as of June 30, 2021.

Also included are non-personnel costs such as consulting and professional fees paid to third-party development resources.

The number of employees in research and development functions increased from 797 as of March 31, 2021 to 892 as of March 31, 2022 and increased from 837 as of December 31, 2021.

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.

6 unchanged sentences

Interest Expense

Interest expense consists of interest expense associated with our 2026 Notes and our 2017 Facility, which was terminated in January 2021.

Interest expense is expected to increase in 2021, as compared to 2020, due to the non-cash interest expense related to the 2026 Notes issued on January 20, 2021.

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 ASU 2020-06 as of January 1, 2022, which eliminated 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.

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

Interest Income

1 unchanged sentence

Other Income / (Expense), Net

Other income / (expense), net primarily consists of gains earned on the sale of our investments and non-operating and miscellaneous expense and income, including the $24.7 million gain on the sale of an investment in one of our platform partners during the three and nine months ended September 30, 2020, and the $0.2 million loss on the early extinguishment of the 2017 Facility during the nine months ended September 30, 2021.

Provision for / (Benefit from) Income Taxes

Other income / (expense), net primarily consists of non-operating and miscellaneous expense and income, including the $0.2 million loss on the early extinguishment of the 2017 Facility during the three months ended March 31, 2021.

Benefit from Income Taxes

We are subject to U.S.

2 unchanged sentences

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.

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.

Our effect ive tax rates were below the statuto ry 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, foreign withholding taxes 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 as well as the vesting and exercises of various forms of equity compensation under our equity incentive plans each period, including restricted stock units and stock options.

Results of Operations

1 unchanged sentence

Three Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 2021 2020

SaaS and license revenue $ 123,225 60 % $ 107,383 62 %

19 unchanged sentences

Income before income taxes 8,285 4 11,637 7

Provision for / (benefit from) income taxes 1,787 1 6,546 4 (2,864) (1) 5,471 2

Benefit from income taxes (618) — (2,913) (1)

Net income $ 8,903 4 % $ 14,550 8 %

3 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 2021 2020

Stock-based compensation expense data:

5 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 2021 2020

Components of cost of revenue as a percentage of revenue:

2 unchanged sentences

Total cost of revenue as a percentage of total revenue 44 % 38 %

Comparison of the Three and Nine Months Ended September 30, 2021 to September 30, 2020

Comparison of the Three Months Ended March 31, 2022 to March 31, 2021

The following tables in this section set forth our selected condensed consolidated statements of operations (in thousands), data for the percentage change and data as a percentage of revenue for the periods presented.

Three Months Ended

September 30, %

Change Nine Months Ended

September 30, %

2021 2020 2021 2020

SaaS and license revenue $ 123,225 $ 107,383 15 %

1 unchanged sentence

Total revenue $ 205,437 $ 172,498 19 %

The $33.5 million increase in total revenue for the three months ended September 30, 2021 as compared to the same period in the prior year was primarily the result of a $17.9 million, or 18%, increase in our SaaS and license revenue and a $15.6 million, or 26%, increase in our hardware and other revenue.

Our software license revenue included within SaaS and license revenue decreased $1.6 million to $7.9 million during the three months ended September 30, 2021 as compared to $9.5 million during the same period in the prior year, which decreased primarily due to the result of the continuing transition of customers from non-hosted software to our cloud based hosted platform.

The $16.3 million increase in our Alarm.com segment SaaS and license revenue for the three months ended September 30, 2021 as compared to the same period in the prior year was primarily due to growth in our subscriber base, including the revenue impact from subscribers we added in 2020.

The $1.6 million increase in SaaS and license revenue for our Other segment for the three months ended September 30, 2021 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.

The increase in hardware and other revenue for the three months ended September 30, 2021 as compared to the same period in the prior year was from the Alarm.com segment and was due to an increase in the volume of video cameras and video recorders sold as well as the increased revenue from our acquisition of Shooter Detection Systems, LLC, or SDS, on December 14, 2020.

Hardware and other revenue, net of intersegment eliminations, for the three months ended September 30, 2021 in our Other segment increased $0.2 million, or 16%, as compared to the same period in the prior year, primarily due to the timing of sales of our HVAC solution.

The $101.3 million increase in total revenue for the nine months ended September 30, 2021 as compared to the same period in the prior year was primarily the result of a $50.9 million, or 18%, increase in our SaaS and license revenue and a $50.4 million, or 31%, increase in our hardware and other revenue.

Our software license revenue included within SaaS and license revenue decreased $4.1 million to $24.9 million during the nine months ended September 30, 2021, as compared to $29.0 million during the same period in the prior year, which decreased primarily due to the result of the continuing transition of customers from non-hosted software to our cloud based hosted platform.

The $46.2 million increase in our Alarm.com segment SaaS and license revenue for the nine months ended September 30, 2021 as compared to the same period in the prior year was primarily due to growth in our subscriber base, including the revenue impact from subscribers we added in 2020.

The $4.7 million increase in SaaS and license revenue for our Other segment for the nine months ended September 30, 2021 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.

The increase in hardware and other revenue for the nine months ended September 30, 2021, as compared to the same period in the prior year was primarily from the Alarm.com segment and was 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, for the nine months ended September 30, 2021 in our Other segment decreased $1.6 million, or 23%, as compared to the same period in the prior year, primarily due to a decrease in sales related to our property management solution.

The $32.9 million increase in total revenue for the three months ended March 31, 2022 as compared to the same period in the prior year was primarily the result of a $17.1 million, or 26%, increase in our hardware and other revenue and a $15.8 million, or 15%, increase in our SaaS and license revenue.

Our software license revenue included within SaaS and license revenue decreased $1.6 million to $7.1 million during the three months ended March 31, 2022 as compared to $8.7 million during the same period in the prior year 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 $14.1 million for the three months ended March 31, 2022 as compared to the same period in the prior year primarily due to growth in our subscriber base, including the revenue impact from subscribers we added in 2021.

The SaaS and license revenue for our Other segment increased $1.8 million for the three months ended March 31, 2022 as compared to the same period in the prior year primarily due to an increase in sales of our energy management and demand response solutions.

The increase in hardware and other revenue for the three months ended March 31, 2022 as compared to the same period in the prior year was primarily from the $17.0 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.

Hardware and other revenue, net of intersegment eliminations, in our Other segment increased $0.1 million, or 8%, for the three months ended March 31, 2022 as compared to the same period in the prior year, primarily due to an increase in sales related to our property management solution.

Cost of Revenue

Three Months Ended

September 30, %

Change Nine Months Ended

September 30, %

2021 2020 2021 2020

Cost of revenue (1)

5 unchanged sentences

(1) Excludes amortization and depreciation shown in operating expenses.

The $19.2 million increase in cost of revenue for the three months ended September 30, 2021 as compared to the same period in the prior year was the result of a $16.1 million, or 34%, increase in cost of hardware and other revenue and a $3.1 million, or 21%, increase in cost of SaaS and license revenue.

Our cost of software license revenue included within cost of SaaS and license revenue was $0.3 million for each of the three months ended September 30, 2021 and 2020.

The increase in cost of Alarm.com segment hardware and other revenue related primarily to an increase in the number of hardware units shipped and an increase in costs for freight shipments during the three months ended September 30, 2021 as compared to the same period in the prior year.

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.

Cost of hardware and other revenue as a percentage of hardware and other revenue was 85% for the three months ended September 30, 2021 and 80% for the same period in the prior year.

Cost of SaaS and license revenue as a percentage of SaaS and license revenue was 15% for the three months ended September 30, 2021 and 14% for the same period in the prior year.

Cost of software license revenue as a percentage of software license revenue was 4% for the three months ended September 30, 2021 and 3% for the same period in the prior year.

The increase in cost of hardware and other revenue as a percentage of hardware and other revenue for the three months ended September 30, 2021 as compared to the same period in the prior year is a reflection of the mix of product sales during the periods as well as the increase in costs for freight shipments and inventory component costs.

The increase in cost of SaaS and license revenue as a percentage of SaaS and license revenue for the three months ended September 30, 2021 as compared to the same period in the prior year is a reflection of the mix of sales of services during the periods.

The $55.3 million increase in cost of revenue for the nine months ended September 30, 2021 as compared to the same period in the prior year was the result of a $45.2 million, or 35%, increase in cost of hardware and other revenue and a $10.1 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 was $1.0 million for each of the nine months ended September 30, 2021 and 2020.

The increase in cost of Alarm.com segment hardware and other revenue related primarily to an increase in the number of hardware units shipped and an increase in costs for freight shipments during the nine months ended September 30, 2021 as compared to the same period in the prior year.

Cost of hardware and other revenue as a percentage of hardware and other revenue was 81% for the nine months ended September 30, 2021 and 78% for the same period in the prior year.

Cost of SaaS and license revenue as a percentage of SaaS and license revenue was 15% for the nine months ended September 30, 2021 and 14% for the same period in the prior year.

Cost of software license revenue as a percentage of software license revenue was 4% for the nine months ended September 30, 2021 and 3% for the same period in the prior year.

The increase in cost of hardware and other revenue as a percentage of hardware and other revenue for the nine months ended September 30, 2021, as compared to the same period in the prior year, is a reflection of the mix of product sales during the periods as well as the increase in costs for freight shipments and inventory component costs.

The increase in cost of SaaS and license revenue as a percentage of SaaS and license revenue for the nine months ended September 30, 2021 as compared to the same period in the prior year is a reflection of the mix of sales of services during the periods.

The $24.3 million increase in cost of revenue for the three months ended March 31, 2022 as compared to the same period in the prior year was the result of a $22.6 million, or 45%, increase in cost of hardware and other revenue and a $1.7 million, or 11%, increase in cost of SaaS and license revenue.

Our cost of software license revenue included within cost of SaaS and license revenue was $0.2 million for the three months ended March 31, 2022 as compared to $0.4 million during the same period in the prior year.

The cost of hardware and other revenue for the Alarm.com segment increased $22.6 million during the three months ended March 31, 2022 as compared to the same period in the prior year 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 $1.4 million during the three months ended March 31, 2022 as compared to the same period in the prior year 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 $0.3 million during the three months ended March 31, 2022 as compared to the same period in the prior year 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 89% for the three months ended March 31, 2022 and 78% for the same period in the prior year.

The increase in cost of hardware and other revenue as a percentage of hardware and other revenue for the three months ended March 31, 2022 as compared to the same period in the

prior year 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 14% for each of the three months ended March 31, 2022 and 2021.

Cost of software license revenue as a percentage of software license revenue was 3% for the three months ended March 31, 2022 and 4% for the same period in the prior year.

Sales and Marketing Expense

Three Months Ended

September 30, %

Change Nine Months Ended

September 30, %

2021 2020 2021 2020

Sales and marketing $ 23,192 $ 18,999 22 %

% of total revenue 11 % 11 %

The $4.1 million increase in sales and marketing expense for the three months ended September 30, 2021 as compared to the same period in the prior year was primarily due to a $2.5 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 and our service provider partner support team to support our growth.

Additionally, the increase in sales and marketing expense for the three months ended September 30, 2021 as compared to the same period in the prior year was due to a $1.1 million increase in marketing conference costs for our Alarm.com segment.

Sales and marketing expense from our Other segment increased $0.3 million for the three months ended September 30, 2021 as compared to the same period in the prior year, primarily due to increases in personnel and related costs, attributable in part to increases in the headcount for our sales team.

The $9.7 million increase in sales and marketing expense for the nine months ended September 30, 2021 as compared to the same period in the prior year was primarily due to a $5.4 million increase in personnel and related costs for our Alarm.com segment, attributable in part to increases in the headcount for our sales team and our service provider partner support team to support our growth.

Additionally, the increase in sales and marketing expense for the nine months ended September 30, 2021 as compared to the same period in the prior year was due to a $0.9 million increase in advertising costs and a $1.1 million increase in marketing conference costs for our Alarm.com segment.

Sales and marketing expense from our Other segment increased $1.2 million for the nine months ended September 30, 2021, as compared to the same period in the prior year, primarily due to increases in personnel and related costs, attributable in part to increases in the headcount for our sales team.

The number of employees in sales and marketing functions increased from 450 as of September 30, 2020 to 476 as of September 30, 2021.

The $4.2 million increase in sales and marketing expense for the three months ended March 31, 2022 as compared to the same period in the prior year was primarily due to a $2.4 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.

Additionally, the increase in sales and marketing expense for the three months ended March 31, 2022 as compared to the same period in the prior year was due to a $1.1 million increase in marketing conference costs for our Alarm.com segment.

Sales and marketing expense from our Other segment increased $0.5 million for the three months ended March 31, 2022 as compared to the same period in the prior year, primarily due to increases in personnel and related costs, attributable in part to increases in the headcount for our sales team.

The number of employees in sales and marketing functions increased from 457 as of March 31, 2021 to 478 as of March 31, 2022.

General and Administrative Expense

Three Months Ended

September 30, %

Change Nine Months Ended

September 30, %

2021 2020 2021 2020

General and administrative $ 23,994 $ 22,882 5 %

% of total revenue 12 % 13 %

The $1.3 million increase in general and administrative expense for the three months ended September 30, 2021 as compared to the same period in the prior year was primarily due to a $0.9 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.

The increase in general and administrative expense was also due to $0.9 million decrease in the provision for credit losses for our Alarm.com segment for the three months ended September 30, 2020 as compared to a $0.4 million decrease in the provision for credit losses for our Alarm.com segment for the three months ended September 30, 2021.

Additionally, there was a $0.3 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 during the three months ended September 30, 2020 which did not occur during the three months ended September 30, 2021.

General and administrative expenses from our Other segment decreased by $0.5 million for the three months ended September 30, 2021 as compared to the same period in the prior year, primarily due to a decrease in personnel and related costs.

The $9.2 million increase in general and administrative expense for the nine months ended September 30, 2021 as compared to the same period in the prior year was primarily due to a $4.0 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 from our acquisition of 85% of the issued and outstanding capital stock of OpenEye on October 21, 2019 within our Alarm.com segment incurred during the nine months ended September 30, 2020 which did not occur during the nine months ended September 30, 2021.

Additionally, the increase in general and administrative expense for the nine months ended September 30, 2021 as compared to the same period in the prior year was due to a $2.4 million increase in legal expenses within our Alarm.com segment resulting from intellectual property litigation.

General and administrative expenses from our Other segment decreased $1.0 million for the nine months ended September 30, 2021 as compared to the same period in the prior year, primarily due to a decrease in personnel and related costs.

The number of employees in general and administrative functions increased from 161 as of September 30, 2020 to 187 as of September 30, 2021.

The $1.1 million increase in general and administrative expense for the three months ended March 31, 2022 as compared to the same period in the prior year was primarily due to a $2.0 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 and a $0.3 million increase in recruiting related costs.

The increase in general and administrative expense within the Alarm.com segment for the three months ended March 31, 2022 as compared to the same period in the prior year was partially offset by a $1.9 million decrease in legal costs related to intellectual property litigation.

General and administrative expenses from our Other segment increased by $0.7 million for the three months ended March 31, 2022 as compared to the same period in the prior year, primarily due to a $0.4 million increase in the provision for credit losses and a $0.3 million increase in personnel and related costs.

The number of employees in general and administrative functions increased from 160 as of March 31, 2021 to 195 as of March 31, 2022.

Research and Development Expense

Three Months Ended

September 30, %

Change Nine Months Ended

September 30, %

2021 2020 2021 2020

Research and development $ 51,490 $ 42,467 21 %

% of total revenue 25 % 25 %

The $7.2 million increase in research and development expense for the three months ended September 30, 2021 as compared to the same period in the prior year was primarily due to a $4.3 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 $0.5 million increase in our expenses for external consultants.

Research and development expense from our Other segment increased $2.0 million for the three months ended September 30, 2021 as compared to the same period in the prior year, primarily due to a $1.0 million increase in expenses for external consultants and an increase of $0.9 million in personnel and related costs, including salary, benefits and stock-based compensation.

The $16.8 million increase in research and development expense for the nine months ended September 30, 2021 as compared to the same period in the prior year was primarily due to a $14.6 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 $1.3 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 during the nine months ended September 30, 2020, which did not occur during the nine months ended September 30, 2021.

Research and development expense from our Other segment increased $5.2 million for the nine months ended September 30, 2021 as compared to the same period in the prior year, primarily due to a $2.9 million increase in our personnel and related costs, including salary, benefits and stock-based compensation and a $2.0 million increase in expense for external consultants.

The number of employees in research and development functions increased from 750 as of September 30, 2020 to 819 as of September 30, 2021.

The $9.0 million increase in research and development expense for the three months ended March 31, 2022 as compared to the same period in the prior year was primarily due to a $7.1 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 $0.5 million increase in our expenses for external consultants.

Research and development expense from our Other segment increased by $1.3 million for the three months ended March 31, 2022 as compared to the same period in the prior year, primarily due to a $1.0 million increase in personnel and related costs and a $0.3 million increase in expenses for external consultants.

The number of employees in research and development functions increased from 797 as of March 31, 2021 to 892 as of March 31, 2022.

Amortization and Depreciation

Three Months Ended

September 30, %

Change Nine Months Ended

September 30, %

2021 2020 2021 2020

Amortization and depreciation $ 7,761 $ 7,385 5 %

% of total revenue 4 % 4 %

Amortization and depreciation increased $0.6 million and $2.3 million for the three and nine months ended September 30, 2021, respectively, as compared to the same periods in the prior year, primarily due to the intangible assets that were acquired in connection with the purchase of SDS on December 14, 2020.

Amortization and depreciation increased $0.4 million for the three months ended March 31, 2022 as compared to the same period in the prior year, primarily due to the intangible assets that were acquired in connection with the purchase of certain assets of an unrelated third party by EnergyHub, Inc., one of our wholly-owned subsidiaries, on December 16, 2021.

Interest Expense

Three Months Ended

September 30, %

Change Nine Months Ended

September 30, %

2021 2020 2021 2020

Interest expense $ (784) $ (3,368) (77) %

% of total revenue — % (2) %

Interest expense increased $3.6 million and $9.6 million for the three and nine months ended September 30, 2021, respectively, as compared to the same periods in the prior year, primarily due to the amortization of the debt discount and debt issuance costs related to the 2026 Notes.

Interest expense decreased $2.6 million for the three months ended March 31, 2022 as compared to the same period in the prior year, primarily due to the adoption of ASU 2020-06, which eliminated 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.

Interest Income

Three Months Ended

September 30, %

Change Nine Months Ended

September 30, %

2021 2020 2021 2020

Interest income $ 143 $ 157 (9) %

% of total revenue — % — %

Interest income remained relatively consistent for the three months ended September 30, 2021 as compared to the same period in the prior year.

Interest income decreased $0.3 million for the nine months ended September 30, 2021, as compared to the same period in the prior year, primarily due to a decrease in interest rates, partially offset by interest income earned on the cash from the proceeds of the 2026 Notes.

Interest income decreased less than $0.1 million for the three months ended March 31, 2022 as compared to the same period in the prior year, primarily due to a decrease in our cash and cash equivalents during three months ended March 31, 2022.

Other Income / (Expense), Net

Three Months Ended

September 30, %

Change Nine Months Ended

September 30, %

2021 2020 2021 2020

Other income / (expense), net $ 13 $ (155) (108) %

% of total revenue — % — %

Other income, net decreased $24.7 million for the three months ended September 30, 2021 and other income / (expense), net changed by $25.0 million for the nine months ended September 30, 2021, as compared to the same periods in the prior year, 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 during the three and nine months ended September 30, 2020 which did not occur during the three and nine months ended September 30, 2021.

Provision for / (Benefit from) Income Taxes

Other income / (expense), net increased $0.2 million for the three months ended March 31, 2022 as compared to the same period in the prior year, primarily due to the $0.2 million loss on the early extinguishment of the 2017 Facility during the three months ended March 31, 2021, which did not occur during the three months ended March 31, 2022.

Benefit from Income Taxes

Three Months Ended

September 30, %

Change Nine Months Ended

September 30, %

2021 2020 2021 2020

Provision for / (benefit from) income taxes $ 1,787 $ 6,546 (73) % $ (2,864) $ 5,471 (152) %

Benefit from income taxes $ (618) $ (2,913) (79) %

% of total revenue — % (1) %

The provision for income taxes decreased by $4.8 million for the three months ended September 30, 2021 and the provision for / (benefit from) income taxes changed by $8.3 million for the nine months ended September 30, 2021, as compared to the same periods in the prior year.

Our effective tax rate was 11.8% and (7.3)% for the three and nine months ended September 30, 2021, respectively, as compared to 15.4% and 8.2% for the same periods in the prior year.

The change in the provision for / (benefit from) income taxes for the nine months ended September 30, 2021 was primarily due to increased tax windfall benefits from employee stock-based payment transactions during the nine months ended September 30, 2021, as compared to the same period in the prior year.

The change in the provision for / (benefit from) income taxes was also due to changes in estimated research and development tax credits and taxable income.

The benefit from income taxes decreased by $2.3 million for the three months ended March 31, 2022 as compared to the same period in the prior year.

Our effective tax rate was (7.5)% for the three months ended March 31, 2022, as compared to (25.0)% for the same period in the prior year.

The decrease in the benefit from income taxes for the three months ended March 31, 2022 was primarily due to decreased tax windfall benefits from employee stock-based payment transactions during the three months ended March 31, 2022, as compared to the same period in the prior year.

Segment Information

1 unchanged sentence

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% and 95% of our revenue, net of intersegment eliminations, for the three and nine months ended September 30, 2021, respectively, as compared to 94% for the same periods in the prior year .

Our Alarm.com segment represents our cloud-based and Software platforms for the intelligently connected property and related solutions that contributed 95% of our revenue, net of intersegment eliminations, for each of the three months ended March 31, 2022 and 2021.

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

The consolidated subsidiaries that make up our Other segment are in the investment stage and have incurred significant operating expenses relative to their revenue.

Our Alarm.com segment increased from 1,257 employees as of September 30, 2020 to 1,353 employees as of September 30, 2021.

Our Other segment increased from 104 employees as of September 30, 2020 to 129 employees as of September 30, 2021.

Our Alarm.com segment increased from 1,294 employees as of March 31, 2021 to 1,418 employees as of March 31, 2022 and increased from 1,363 employees as of December 31, 2021 .

Our Other segment increased from 120 employees as of March 31, 2021 to 147 employees as of March 31, 2022 and increased from 137 employees as of December 31, 2021 .

Inter-segment revenue includes sales of hardware between our segments.

1 unchanged sentence

Three Months Ended

September 30,

SaaS and license revenue Hardware and other revenue

6 unchanged sentences

Total $ 123,225 $ 82,212 $ 106,437 $ 107,383 $ 65,115 $ 91,733

Nine Months Ended

September 30,

SaaS and license revenue Hardware and other revenue

Operating expenses SaaS and license revenue Hardware and other revenue

Operating expenses

Alarm.com $ 315,329 $ 212,194 $ 257,070 $ 269,168 $ 159,800 $ 224,267

Other 23,299 7,368 22,580 18,612 13,030 17,075

Intersegment Alarm.com — (2,531) (296) — (2,118) —

Intersegment Other — (1,980) — — (6,065) —

Total $ 338,628 $ 215,051 $ 279,354 $ 287,780 $ 164,647 $ 241,342

Our SaaS and license revenue for the Alarm.com segment included software license revenue of $7.9 million and $24.9 million for the three and nine months ended September 30, 2021, respectively, as compared to $9.5 million and $29.0 million for

the same periods in the prior year.

There was no software license revenue recorded for the Other segment during the three and nine months ended September 30, 2021 and 2020.

Critical Accounting Policies and Significant Judgments and Estimates

Our SaaS and license revenue for the Alarm.com segment included software license revenue of $7.1 million for the three months ended March 31, 2022, as compared to $8.7 million for the same period in the prior year.

There was no software license revenue recorded for the Other segment during the three months ended March 31, 2022 and 2021.

Critical Accounting Estimates

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

3 unchanged sentences

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.

Except as disclosed in Note 2 of our notes to the condensed consolidated financial statement and as disclosed below, there were no other material changes to our use of estimates or other critical accounting policies from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed with the SEC on February 25, 2021, or Annual Report.

Except as disclosed in Note 2 of our notes to the condensed consolidated financial statements and as disclosed below, there were no other material changes to our use of estimates or other critical accounting policies from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on February 24, 2022, or Annual Report.

Convertible Senior Notes

In accounting for the issuance of our convertible senior 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 condensed 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 three and nine months ended September 30, 2021 and we do not expect any material changes in the near term to the underlying assumptions used to calculate the liability and equity components of our convertible senior notes for the three and nine months ended September 30, 2021.

However, if changes in these assumptions occur, and, should those changes be significant, they could have a material impact on the liability and equity balances related to the convertible senior notes as well as interest expense.

Recently Issued Accounting Standards

We adopted ASU 2020-06 on January 1, 2022, using the modified retrospective approach.

Prior to the adoption of this standard, the 2026 Notes were separated into liability and equity components.

Upon adoption of ASU 2020-06, we recombined the liability and equity components of the 2026 Notes assuming that the instrument was accounted for as only a liability from inception to the date of adoption.

We also recombined the liability and equity components of the debt issuance costs.

The issuance costs are presented as a deduction from the outstanding principal balance of the 2026 Notes and are amortized to interest expense using the effective interest method over the contractual term of the 2026 Notes.

We no longer consider estimates related to the 2026 Notes to be a critical accounting policy due to the adoption of ASU 2020-06 as this guidance removed any significant judgements involved with the initial accounting assessment of the 2026 Notes.

Recent Accounting Pronouncements

See Note 2 of our condensed consolidated financial statements for information related to recently issued accounting standards.

2 unchanged sentences

The following table summarizes our cash and cash equivalents, accounts receivable, net and working capital, for the periods indicated (in thousands):

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Cash and cash equivalents $ 671,753 $ 710,621

2 unchanged sentences

We define working capital as current assets minus current liabilities.

Our cash and cash equivalents as of September 30, 2021 are available for working capital purposes.

Our cash and cash equivalents as of March 31, 2022 are available for working capital purposes.

We do not enter into investments for trading purposes, and our investment policy is to invest any excess cash in short term, highly liquid investments that limit the risk of principal loss;

1 unchanged sentence

Liquidity and Capital Resources

As of September 30, 2021, we had $700.3 million in cash and cash equivalents.

As of March 31, 2022, we had $671.8 million in cash and cash equivalents.

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

To date, we have

principally financed our operations through cash generated by operating activities and, to a lesser extent, 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 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.

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.

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 f or at least the next 12 months.

Over the final three months of fiscal year 2021, we expect our capital expenditure requirements to be approximately $1.3 million, primarily related to the continued build out of our leased office space as well as purchases of computer software and equipment.

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

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

In February 2022, we entered into a purchase and sale agreement to purchase a parcel of land consisting of 2.4 acres within close proximity to our headquarters in Tysons, Virginia, which was non-binding pending our completion of due diligence.

Upon executing the purchase and sale agreement, we paid a deposit of $0.3 million during the three months ended March 31, 2022.

Upon completion of due diligence in April 2022, we paid an additional deposit of $0.1 million in order to close the land purchase during the second quarter of 2022 and expect to pay the remaining $21.4 million during the second quarter of 2022 for the land purchase.

Beginning in 2022, the Tax Cuts and Jobs Act of 2017, or TCJA, eliminated the option to immediately deduct research and development expenditures in the year incurred pursuant to Internal Revenue Code Section 174, or Section 174.

The amended provision under Section 174 requires taxpayers to capitalize and amortize these expenditures over five years for research performed in the U.S.

and over 15 years for research performed outside the U.S.

While it is possible that Congress may defer, modify or repeal this provision, potentially with retroactive effect, we have no assurance that this provision will be deferred, modified or repealed.

If this provision is not deferred, modified or repealed with retroactive effect to January 1, 2022, we estimate it would significantly increase our cash taxes payable and reduce our cash flow from operating activities in 2022.

We do not expect the amended provision under Section 174 to impact our tax rate, our results of operations or our Adjusted EBITDA.

The actual impact on 2022 cash flow from operating activities will depend on whether and when we make a payment and if this provision is deferred, modified or repealed by Congress, including if retroactively, and the amount of research and development expenses paid or incurred in 2022, among other factors.

While the largest impact will be to 2022 cash flow from operating activities, the impact would continue over the five year amortization period, but would decrease over the period and be immaterial in year six.

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 final nine months of fiscal year 2022, we expect our capital expenditures to be between $29.0 million and $32.0 million, primarily related to the remaining payment for the land purchase expected during the second quarter of 2022, the purchases of computer software and equipment as well as the continued build out of our leased and owned office space.

Maturities of lease liabilities for our various office, data center and equipment leases are as follows:

$8.8 million for the remainder of 2022, $11.7 million in 2023, $10.1 million in 2024, $8.8 million in 2025, $5.1 million in 2026 and $1.0 million in 2027 and thereafter.

1 unchanged sentence

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 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.

Sources of Liquidity

The 2017 Facility was a revolving credit facility with Silicon Valley Bank, or 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.

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

The 2017 Facility is di scussed in more detail below under “Debt Obligations.”

The convertible senior notes are di scussed in more detail below under “Debt Obligations.”

We did not declare or pay dividends during the three and nine months ended September 30, 2021 and 2020.

We cannot provide any assurance that we will declare or pay cash dividends on our common stock in the future.

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.

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 three months ended March 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 repurchased under this program during the three months ended September 30, 2020.

During the three and nine months ended September 30, 2021, we did not repurchase any shares of our common stock under the program that expires on December 3, 2023.

Additionally, no shares of our common stock were repurchased under this program from December 3, 2020 to December 31, 2020.

Historical Cash Flows

The following table sets forth our cash flows for the periods indicated (in thousands):

Nine Months Ended

September 30,

Cash flows from operating activities $ 83,194 $ 66,670

Cash flows (used in) / from investing activities (13,897) 12,236

Cash flows from financing activities 377,551 48,641

Operating Activities

Cash flows from operating activities have typically been generated from our net income and by changes in our operating assets and liabilities, particularly from accounts receivable and inventory, adjusted for non-cash expense items such as amortization and depreciation, deferred income taxes and stock-based compensation.

For the nine months ended September 30, 2021, cash flows from operating activities were $83.2 million, compared to $66.7 million for the same period in the prior year.

This $16.5 million increase in cash flows from operating activities was due to a $40.7 million increase in non-cash and other reconciling items, partially offset by a $18.7 million decrease in net income and a $5.5 million decrease in cash from operating assets and liabilities.

The $40.7 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 during the nine months ended September 30, 2020, which was reclassified from operating activities and presented as cash flows from investing activities, that did not occur during the nine months ended September 30, 2021.

Additionally, the increase in non-cash and other reconciling items was primarily due to $11.5 million increase in amortization of the debt discount and debt issuance costs related to the convertible senior notes during the nine months ended September 30, 2021 as well as a $6.5 million increase in stock-based compensation resulting from additional grants of stock options and restricted stock units during the nine months ended September 30, 2021.

These increases in non-cash and other reconciling items were partially offset by a $4.4 million change in deferred income taxes, primarily due to increased tax windfall benefits from employee stock-based payment transactions during the nine months ended September 30, 2021, as compared to the same period in the prior year.

The $5.5 million decrease in cash from operating assets and liabilities was primarily due to a $5.4 million change in inventory resulting from additional purchased inventory during the nine months ended September 30, 2021 as compared to the same period in the prior year, 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 during the nine months ended September 30, 2021, as compared to the same period in the prior year.

Investing Activities

Our investing activities typically include acquisitions, capital expenditures, investments in unconsolidated entities, notes receivable issued to companies with offerings complementary to ours and proceeds from the repayment of those notes receivable.

Our capital expenditures have primarily been for general business use, including leasehold improvements as we have expanded our office space to accommodate our growth in headcount, computer equipment used internally and expansion of our network operations centers.

For the nine months ended September 30, 2021, our cash flows used in investing activities was $13.9 million, as compared to cash flows from investing activities of $12.2 million for the same period in the prior year.

The $26.1 million decrease in cash flows from investing activities was primarily due to $25.7 million in proceeds received from the sale of an investment in one of our platform partners during the nine months ended September 30, 2020, which did not occur during the nine months ended

September 30, 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 during the nine months ended September 30, 2021.

Additionally, the decrease in cash flows from investing activities was due to a $2.0 million reduction in repayments of notes receivable during the nine months ended September 30, 2021, as compared to the same period in the prior year.

These decreases in cash flows from investing activities were partially offset by $3.3 million used to acquire in-process research and development during the nine months ended September 30, 2020 that did not occur during the nine months ended September 30, 2021.

Financing Activities

Cash generated by financing activities includes borrowings under the 2017 Facility, proceeds from convertible senior 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 the nine months ended September 30, 2021, cash flows from financing activities was $377.6 million, compared to $48.6 million for the same period in the prior year.

The $329.0 million increase in cash flows from financing activities was primarily due to $484.3 million in proceeds from the issuance of convertible senior 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 during the nine months ended September 30, 2021 that did not occur during the same period in the prior year as well as the borrowing of $50.0 million under the 2017 Facility during the nine months ended September 30, 2020 that did not occur during nine months ended September 30, 2021.

Contractual Obligations

As of September 30, 2021, there were no material changes in our contractual obligations and commitments from those disclosed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report, other than the $500.0 million issuance of the 2026 Notes in January 2021 and the $110.0 million repayment to terminate the 2017 Facility on January 20, 2021.

Debt Obligations

Material Cash Requirements

As of March 31, 2022, there were no material changes in our cash requirements from those disclosed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report.

Convertible Senior Notes

15 unchanged sentences

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.

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.

6 unchanged sentences

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.

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

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

4 unchanged sentences

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 income / (expense), net in our condensed consolidated statements of operations during the nine months ended September 30, 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.

We recognized an extinguishment loss of $0.2 million in other income / (expense), net in our condensed consolidated statements of operations during the three months ended March 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.

1 unchanged sentence

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

For the nine months ended September 30, 2020, the effective interest rate on the 2017 Facility was 2.92%.

The carrying value of the 2017 Facility was zero and $110.0 million as of September 30, 2021 and December 31, 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.

The carrying value of the 2017 Facility was zero as of March 31, 2022 and December 31, 2021.

Sources of Liquidity

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.

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

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 three months ended March 31, 2022 or 2021.

We cannot provide any assurance that we will declare or pay cash dividends on our common stock in the future.

Stock Repurchase Program

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

During the three months ended March 31, 2022, we repurchased 354,123 shares of our common stock under this program for $23.3 million, which includes applicable commissions and fees.

No shares of our common stock were repurchased under this program during the three months ended March 31, 2021.

Historical Cash Flows

The following table sets forth our cash flows for the periods indicated (in thousands):

Three Months Ended

Cash flows (used in) / from operating activities $ (13,961) $ 21,232

Cash flows used in investing activities (2,155) (9,067)

Cash flows (used in) / from financing activities (22,251) 376,548

Operating Activities

For the three months ended March 31, 2022, cash flows used in operating activities were $14.0 million, compared to cash flows from operating activities of $21.2 million for the same period in the prior year.

This $35.2 million decrease in cash flows from operating activities was due to a $24.4 million decrease in cash from operating assets and liabilities, a $5.6 million decrease in net income and a $5.2 million decrease in non-cash and other reconciling items.

The $24.4 million decrease in cash from operating assets and liabilities was primarily due to differences in the timing of disbursements and the collection of receipts as well as a $8.2 million change in inventory resulting from an increase in purchased inventory during the three months ended March 31, 2022 as compared to the same period in the prior year as we seek to reduce risks and uncertainties in our supply chain.

The $5.2 million decrease in non-cash and other reconciling items was primarily due to a $7.5 million change in deferred income taxes, resulting from an increase in estimated taxable income pursuant to the requirements under Section 174 of the Internal Revenue Code during the three months ended March 31, 2022, as compared to the same period in the prior year.

The decrease in non-cash and other reconciling items during the three months ended March 31, 2022 as compared to the same period in the prior year was also due to a $2.5 million decrease in amortization of the debt discount related to the adoption of ASU 2020-06 for the 2026 Notes.

These decreases in non-cash and other reconciling items were partially offset by a $4.2 million increase in stock-based compensation resulting from additional grants of restricted stock units during the three months ended March 31, 2022.

Investing Activities

For the three months ended March 31, 2022, our cash flows used in investing activities was $2.2 million, as compared to $9.1 million for the same period in the prior year.

The $6.9 million decrease in cash flows used in investing activities was primarily due to the $5.0 million used to purchase 1,000,000 shares of Series B-2 Preferred Stock from one of our technology partners during the three months ended March 31, 2021, which did not occur during the three months ended March 31, 2022.

Additionally, the decrease in cash flows used in investing activities was due to a $1.9 million reduction in purchases of property and equipment during the three months ended March 31, 2022, as compared to the same period in the prior year.

Financing Activities

Cash generated by financing activities includes 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 the three months ended March 31, 2022, cash flows used in financing activities was $22.3 million, compared to cash flows from financing activities of $376.5 million for the same period in the prior year.

The $398.8 million decrease in cash flows from financing activities was primarily due to $484.7 million in proceeds from the issuance of the 2026 Notes, net of issuance costs paid during the three months ended March 31, 2021 that did not occur during three months ended March 31, 2022.

The decrease in cash flows from financing activities was also due to the repurchase of 354,123 shares of our common stock for $23.3 million during the three months ended March 31, 2022 that did not occur during the same period in the prior year.

These decreases in cash flows from financing activities were partially offset by the repayment of $110.0 million to terminate the 2017 Facility during the three months ended March 31, 2021 that did not occur during three months ended March 31, 2022.

Non-GAAP Measures

We define Adjusted EBITDA as our net income before interest expense, interest income, other income / (expense), net, provision for / (benefit from) income taxes, amortization and depreciation expense, stock-based compensation expense, secondary offering expense, acquisition-related (benefit) / 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 income / (expense), net, benefit from income taxes, amortization and depreciation expense, stock-based compensation 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, amortization of debt discount and debt issuance costs for the 2026 Notes included in interest 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.

15 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 2021 2020

Adjusted EBITDA:

1 unchanged sentence

Interest expense, interest income and other income / (expense), net 628 3,366

Provision for / (benefit from) income taxes 1,787 6,546 (2,864) 5,471

Benefit from income taxes (618) (2,913)

Amortization and depreciation expense 7,761 7,385

Stock-based compensation expense 12,110 7,888

Secondary offering expense — — — 543

Acquisition-related (benefit) / expense — (304) 29 2,044

Acquisition-related expense — 29

Litigation expense 1,135 5,301

2 unchanged sentences

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-Q

Item 2. Management’s Discussion and Analysis