What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-09 compared with 2022-05-05 · 200 added, 122 removed, 415 unchanged (44% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with (1) our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q, or Quarterly Report, and (2) the audited consolidated financial statements and the related notes and management’s discussion and analysis of financial condition and results of operations for the fiscal year ended December 31, 2021 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed on February 24, 2022 with the Securities and Exchange Commission, or SEC.

You should read the following discussion and analysis of our financial condition and results of operations together with (1) our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q, or Quarterly Report, and (2) the audited consolidated financial statements and the related notes and management’s discussion and analysis of financial condition and results of operations for the fiscal year ended December 31, 2021 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed on February 24, 2022, or Annual Report, with the Securities and Exchange Commission, or SEC.

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 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;

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 significant worldwide events, including public health crises, such as the COVID-19 pandemic, and geopolitical upheaval, such as Russia’s incursion into Ukraine (collectively Macroeconomic Conditions) 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;

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We believe that this scale of subscribers, connected devices and data operations makes us the leader in the connected property market.

Our solutions are delivered through an established network of over 10,900 trusted service providers, who are experts at selling, installing and supporting our solutions.

Our solutions are delivered through an established network of trusted service providers, who are experts at selling, installing and supporting our solutions.

The number of our service provider partners exceeded 10,900 in 2021.

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

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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

Highlights of Second 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.

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

SaaS and license revenue represented 61% and 60% of our revenue during the three and six months ended June 30, 2022, respectively, as compared to 60% and 61% in the same periods 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 3% of our revenue during the three months ended March 31, 2022, as compared to 5% for the same period in the prior year.

Software license revenue represented 3% of our revenue during each of the three and six months ended June 30, 2022 as compared to 4% and 5% for the same periods 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.

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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.

Hardware and other revenue represented 39% and 40% of our revenue during the three and six months ended June 30, 2022, respectively, as compared to 40% and 39% in the same periods 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 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.

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 months ended March 31, 2022 and 2021.

• SaaS and license revenue increased 14% to $129.5 million during the three months ended June 30, 2022 from $113.2 million during the three months ended June 30, 2021.

SaaS and license revenue increased 15% to $252.7 million in the six months ended June 30, 2022 from $220.6 million in the six months ended June 30, 2021.

Included in SaaS and license revenue was software license revenue, which decreased to $6.8 million during the three months ended June 30, 2022 from $8.3 million during the three months ended June 30, 2021.

Software license revenue decreased to $14.0 million in the six months ended June 30, 2022 from $17.0 million in the six months ended June 30, 2021.

• Total revenue increased 13% to $212.8 million during the three months ended June 30, 2022 from $188.9 million during the three months ended June 30, 2021.

Total revenue increased 16% to $418.3 million in the six months ended June 30, 2022 from $361.4 million in the six months ended June 30, 2021.

• Net income decreased to $10.8 million during the three months ended June 30, 2022, as compared to $14.5 million during the three months ended June 30, 2021.

Net income decreased to $19.7 million in the six months ended June 30, 2022, as compared to $29.0 million in the six months ended June 30, 2021.

Net income attributable to common stockholders decreased to $10.8 million during the three months ended June 30, 2022, as compared to $14.7 million during the three months ended June 30, 2021.

Net income attributable to common stockholders decreased to $19.9 million in the six months ended June 30, 2022, as compared to $29.6 million in the six months ended June 30, 2021.

• Adjusted EBITDA, a non-GAAP measurement of operating performance, decreased to $37.1 million during the three months ended June 30, 2022 from $38.0 million during the three months ended June 30, 2021.

Adjusted EBITDA decreased to $67.1 million in the six months ended June 30, 2022 from $73.6 million in the six months ended June 30, 2021.

Recent Developments

The COVID-19 pandemic disrupted and may continue to disrupt our supply chain for an unknown period of time due to its impact on manufacturing, production and global transportation.

The COVID-19 pandemic also disrupted and may intermittently continue to disrupt our sales channels due to restrictions on our service providers’ ability to meet with residential and commercial property owners who use our solutions.

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, 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.

The global economy, credit markets and financial markets have and may continue to experience significant volatility as a result of significant worldwide events, including public health crises, such as the COVID-19 pandemic, and geopolitical upheaval, such as Russia’s incursion into Ukraine (collectively Macroeconomic Conditions).

These Macroeconomic Conditions have and may continue to create supply chain disruptions, inventory disruptions, and fluctuations in economic growth, including fluctuations in employment rates, inflation, energy prices and consumer sentiment.

In particular, the COVID-19 pandemic also disrupted and may intermittently continue to disrupt our sales channels due to restrictions on our service providers’ ability to meet with residential and commercial property owners who use our solutions.

It remains difficult to assess or predict the ultimate duration and economic impact of the Macroeconomic Conditions including, the path of the COVID-19 pandemic, the evolution of COVID-19 variants or the emergence of other public health crises.

In response to the COVID-19 pandemic, 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 partially work remotely.

After evaluating the public health situation in the United States regarding COVID-19, including revised guidance from public health authorities, the rise in vaccinated individuals, and decline of hospitalizations due to COVID-19 in the six months ended June 30, 2022, as compared to 2020 and 2021, we recently have implemented a hybrid return to office plan that includes voluntary remote workdays and mandatory in-office workdays.

The results of operations for the three and six months ended June 30, 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 Macroeconomic Conditions.

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

Other Business Metrics

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Three Months Ended

June 30, Six Months Ended

2022 2021 2022 2021

SaaS and license revenue $ 129,475 $ 113,186 $ 252,700 $ 220,569

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Adjusted EBITDA

Adjusted EBITDA is a non-GAAP measure that represents our net income before interest expense, interest income, other income / (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.

Adjusted EBITDA is a non-GAAP measure that represents our net income before interest expense, interest income, certain activity within other income / (expense), net, provision for / (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.

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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.

We exclude interest income as well as certain activity within other income / (expense), net including gains, losses or impairments on investments and other assets as well as losses on the early extinguishment of the debt, when applicable, from Adjusted EBITDA because we do not consider it part of our ongoing results of operations.

We exclude the impact related to our provision for / (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.

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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 months ended March 31, 2022 and 2021.

SaaS and License Revenue Renewal Rate

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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.

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.

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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.

Our net income attributable to common stockholders increased $2.0 million and $4.0 million during the three and six months ended June 30, 2022, respectively, as a result of adopting ASU 2020-06 due to no longer recording non-cash interest expense related to the amortization of the debt discount associated with the previous equity component of the 2026 Notes.

The impact of ASU 2020-06 on net income attributable to common stockholders and weighted average diluted shares resulted in an increase to basic net income attributable to common stockholders of $0.04 and $0.08 per share and an increase to diluted net income attributable to common stockholders of $0.04 and $0.07 per share, during the three and six months ended June 30, 2022, respectively.

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

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The decision whether to charge an activation fee is based in part on the expected number of subscribers to be added by our service provider partners and as a result, many of our largest service provider partners do not pay an activation fee.

As a result of the COVID-19 pandemic, governments, public institutions and other organizations in many countries and localities where COVID-19 has been detected have taken certain emergency measures, and may from time to time take additional emergency measures, to combat its spread, including imposing lockdowns, shelter-in-place orders, quarantines, restrictions on travel and gatherings and the extended shutdown non-essential businesses that cannot be conducted remotely.

As a result of the COVID-19 pandemic, governments, public institutions and other organizations in many countries and localities where COVID-19 has been detected have taken certain emergency measures, and may from time to time take additional emergency measures, to combat its spread, including imposing lockdowns, shelter-in-place orders, quarantines, restrictions on travel and gatherings and the extended shutdown of non-essential businesses that cannot be conducted remotely.

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, 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.

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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.

We grew from 1,421 employees as of June 30, 2021 to 1,606 employees as of June 30, 2022 and increased from 1,565 employees as of March 31, 2022, and we expect to continue to hire new employees to support the projected future growth of our business.

Sales and Marketing Expense.

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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 457 as of March 31, 2021 to 478 as of March 31, 2022 and increased from 476 as of December 31, 2021.

The number of employees in sales and marketing functions increased from 456 as of June 30, 2021 to 484 as of June 30, 2022 and increased from 478 as of March 31, 2022.

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

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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 160 as of March 31, 2021 to 195 as of March 31, 2022 and increased from 187 as of December 31, 2021.

The number of employees in general and administrative functions increased from 173 as of June 30, 2021 to 203 as of June 30, 2022 and increased from 195 as of March 31, 2022.

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

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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.

The number of employees in research and development functions increased from 792 as of June 30, 2021 to 919 as of June 30, 2022 and increased from 892 as of March 31, 2022.

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.

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Other Income / (Expense), Net

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

Other income / (expense), net primarily consists of non-operating and miscellaneous expense and income, including a $0.1 million gain related to proceeds received from our initial investment in an installation partner during the three months ended June 30, 2022 and a $0.2 million loss on the early extinguishment of the 2017 Facility during the six months ended June 30, 2021.

Provision for / (Benefit from) Income Taxes

We are subject to U.S.

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Three Months Ended

June 30, Six Months Ended

2022 2021 2022 2021

SaaS and license revenue $ 129,475 61 % $ 113,186 60 % $ 252,700 60 % $ 220,569 61 %

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Income before income taxes 11,672 5 12,752 7 19,957 5 24,389 7

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

Provision for / (benefit from) income taxes 844 — (1,738) (1) 226 — (4,651) (1)

Net income $ 10,828 5 % $ 14,490 8 % $ 19,731 5 % $ 29,040 8 %

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Three Months Ended

June 30, Six Months Ended

2022 2021 2022 2021

Stock-based compensation expense data:

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Three Months Ended

June 30, Six Months Ended

2022 2021 2022 2021

Components of cost of revenue as a percentage of revenue:

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Total cost of revenue as a percentage of total revenue 41 % 41 % 42 % 40 %

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

Comparison of the Three and Six Months Ended June 30, 2022 to June 30, 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

Change Six Months Ended

2022 2021 2022 2021

SaaS and license revenue $ 129,475 $ 113,186 14 % $ 252,700 $ 220,569 15 %

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Total revenue $ 212,845 $ 188,857 13 % $ 418,282 $ 361,355 16 %

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.

The $24.0 million increase in total revenue for the three months ended June 30, 2022 as compared to the same period in the prior year was primarily the result of a $16.3 million, or 14%, increase in our SaaS and license revenue and a $7.7 million, or 10%, increase in our hardware and other revenue.

Our software license revenue included within SaaS and license revenue decreased $1.5 million to $6.8 million during the three months ended June 30, 2022 as compared to $8.3 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 $14.2 million for the three months ended June 30, 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 $2.1 million for the three months ended June 30, 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 June 30, 2022 as compared to the same period in the prior year was primarily from the $7.0 million increase in hardware and other revenue, net of intersegment eliminations, for the Alarm.com segment due to price increases we have implemented on some of our products to cover some of our increases in costs.

Hardware and other revenue, net of intersegment eliminations, in our Other segment increased $0.7 million, or 39%, for the three months ended June 30, 2022 as compared to the same period in the prior year, primarily due to an increase in sales related to our property management and heating, ventilation and air conditioning solutions.

The $56.9 million increase in total revenue for the six months ended June 30, 2022 as compared to the same period in the prior year was primarily the result of a $32.1 million, or 15%, increase in our SaaS and license revenue and a $24.8 million, or 18%, increase in our hardware and other revenue.

Our software license revenue included within SaaS and license revenue decreased $3.0 million to $14.0 million during the six months ended June 30, 2022, as compared to $17.0 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 SaaS and license revenue for the Alarm.com segment increased $28.3 million for the six months ended June 30, 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 $3.8 million for the six months ended June 30, 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 six months ended June 30, 2022 as compared to the same period in the prior year was primarily from the $23.9 million increase in hardware and other revenue, net of intersegment eliminations, for the Alarm.com segment due to an increase in the volume of video cameras and video recorders sold as well as price increases we have implemented on some of our products to cover some of our increases in costs.

Hardware and other revenue, net of intersegment eliminations, in our Other segment increased $0.9 million, or 24%, for the six months ended June 30, 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

Change Six Months Ended

2022 2021 2022 2021

Cost of revenue (1)

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

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.

The $10.0 million increase in cost of revenue for the three months ended June 30, 2022 as compared to the same period in the prior year was the result of a $8.5 million, or 14%, increase in cost of hardware and other revenue and a $1.5 million, or 9%, increase in cost of SaaS and license revenue.

Our cost of software license revenue included within cost of SaaS and license revenue was $0.1 million for the three months ended June 30, 2022 as compared to $0.3 million during the same period in the prior year.

The cost of hardware and other revenue for the Alarm.com segment increased $7.8 million during the three months ended June 30, 2022 as compared to the same period in the prior year primarily due to an increase in costs for freight shipments and inventory component costs.

The cost of SaaS and license revenue for the Alarm.com segment increased $0.8 million during the three months ended June 30, 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 $0.7 million during the three months ended June 30, 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 82% for the three months ended June 30, 2022 and 80% 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 June 30, 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 the three months ended June 30, 2022 as compared to 15% during the same period in the prior year.

Cost of software license revenue as a percentage of software license revenue was 2% for the three months ended June 30, 2022 and 4% for the same period in the prior year.

The $34.3 million increase in cost of revenue for the six months ended June 30, 2022 as compared to the same period in the prior year was the result of a $31.1 million, or 28%, increase in cost of hardware and other revenue and a $3.2 million, or 10%, 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 the six months ended June 30, 2022 as compared to $0.7 million during the same period in the prior year.

The cost of hardware and other revenue for the Alarm.com segment increased $30.4 million during the six months ended June 30, 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 $2.1 million during the six months ended June 30, 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 $1.1 million during the six months ended June 30, 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 86% for the six months ended June 30, 2022 and 79% 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 six months ended June 30, 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 the six months ended June 30, 2022 and 15% for the same period in the prior year.

Cost of software license revenue as a percentage of software license revenue was 2% for the six months ended June 30, 2022 and 4% for the same period in the prior year.

Sales and Marketing Expense

Three Months Ended

Change Six Months Ended

2022 2021 2022 2021

Sales and marketing $ 22,933 $ 20,529 12 % $ 46,125 $ 39,528 17 %

% of total revenue 11 % 11 % 11 % 11 %

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.

The $2.4 million increase in sales and marketing expense for the three months ended June 30, 2022 as compared to the same period in the prior year was primarily due to a $1.4 million increase in personnel and related costs for our Other segment, including salary, benefits, stock-based compensation and travel expense.

The increase in personnel and related costs for our Other segment was due in part to increases in the headcount of our sales team to support our growth as well as an increase in stock-based compensation expense attributable to the termination of the subsidiary long-term incentive plan and concurrent grant of performance-based restricted stock units.

Additionally, there was a $0.8 million increase in personnel and related costs for our Alarm.com segment due in part to an increase in employee headcount of our sales team to support our growth.

The $6.6 million increase in sales and marketing expense for the six months ended June 30, 2022 as compared to the same period in the prior year was primarily due to a $3.2 million increase in personnel and related costs for our Alarm.com segment, 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 six months ended June 30, 2022 as compared to the same period in the prior year was due to a $1.5 million increase in marketing conference costs for our Alarm.com segment.

Sales and marketing expense from our Other segment increased $2.0 million for the six months ended June 30, 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 and the termination of the subsidiary long-term incentive plan and concurrent grant of performance-based restricted stock units.

The number of employees in sales and marketing functions increased from 456 as of June 30, 2021 to 484 as of June 30, 2022.

General and Administrative Expense

Three Months Ended

Change Six Months Ended

2022 2021 2022 2021

General and administrative $ 29,309 $ 23,268 26 % $ 53,303 $ 46,150 15 %

% of total revenue 14 % 12 % 13 % 12 %

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.

The $6.0 million increase in general and administrative expense for the three months ended June 30, 2022 as compared to the same period in the prior year was primarily due to a $2.2 million increase in legal costs related to intellectual property litigation.

Additionally, personnel and related costs for our Alarm.com segment increased $0.8 million due in part to an increase in employee headcount to support our operational growth.

Further, there was a $0.3 million increase in rent expense as well as a $0.3 million increase in the provision for credit losses for our Alarm.com segment for the three months ended June 30, 2022 as compared to a $0.1 million decrease in the provision for credit losses for our Alarm.com segment during the same period in the period year.

General and administrative expenses from our Other segment increased by $1.1 million for the three months ended June 30, 2022 as compared to the same period in the prior year, primarily due to a $1.0 million increase in personnel and related costs due in part to increases in employee headcount as well as an increase in stock-based compensation expense attributable to the termination of the subsidiary long-term incentive plan and concurrent grant of performance-based restricted stock units.

The $7.2 million increase in general and administrative expense for the six months ended June 30, 2022 as compared to the same period in the prior year was primarily due to a $2.8 million increase in personnel and related costs for our Alarm.com segment due in part to increases in the headcount to support our operational growth and a $0.6 million increase in recruiting related costs.

Additionally, legal costs related to intellectual property litigation increased $0.4 million and rent expense increased $0.3 million for the six months ended June 30, 2022 as compared to the same period in the prior year within our Alarm.com segment.

General and administrative expenses from our Other segment increased by $1.8 million for the six months ended June 30, 2022 as compared to the same period in the prior year, primarily due to a $1.3 million increase in personnel and related costs and a $0.4 million increase in the provision for credit losses.

The number of employees in general and administrative functions increased from 173 as of June 30, 2021 to 203 as of June 30, 2022.

Research and Development Expense

Three Months Ended

Change Six Months Ended

2022 2021 2022 2021

Research and development $ 54,156 $ 43,491 25 % $ 105,646 $ 85,958 23 %

% of total revenue 25 % 23 % 25 % 24 %

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.

The $10.7 million increase in research and development expense for the three months ended June 30, 2022 as compared to the same period in the prior year was primarily due to a $7.2 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 $0.8 million increase in our expenses for external consultants.

Research and development expense from our Other segment increased by $1.4 million for the three months ended June 30, 2022 as compared to the same period in the prior year, primarily due to a $1.7 million increase in personnel and related costs, partially offset by a $0.3 million decrease in expenses for external consultants.

The $19.7 million increase in research and development expense for the six months ended June 30, 2022 as compared to the same period in the prior year was primarily due to a $14.3 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 $1.3 million increase in our expenses for external consultants.

Research and development expense from our Other segment increased by $2.7 million for the six months ended June 30, 2022 as compared to the same period in the prior year due to an increase in personnel and related costs.

The number of employees in research and development functions increased from 792 as of June 30, 2021 to 919 as of June 30, 2022.

Amortization and Depreciation

Three Months Ended

Change Six Months Ended

2022 2021 2022 2021

Amortization and depreciation $ 7,775 $ 7,477 4 % $ 15,536 $ 14,862 5 %

% of total revenue 4 % 4 % 4 % 4 %

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.

Amortization and depreciation increased $0.3 million and $0.7 million for the three and six months ended June 30, 2022, 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 certain assets of an unrelated third party by EnergyHub, Inc., one of our wholly-owned subsidiaries, on December 16, 2021 as well as the intangible assets that were acquired in connection with our acquisition of Shooter Detection Systems, LLC on December 14, 2020.

Interest Expense

Three Months Ended

Change Six Months Ended

2022 2021 2022 2021

Interest expense $ (785) $ (4,154) (81) % $ (1,569) $ (7,522) (79) %

% of total revenue — % (2) % — % (2) %

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 expense decreased $3.4 million and $6.0 million for the three and six months ended June 30, 2022, respectively, as compared to the same periods 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

Change Six Months Ended

2022 2021 2022 2021

Interest income $ 1,016 $ 149 582 % $ 1,159 $ 306 279 %

% of total revenue — % — % — % — %

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.

Interest income increased $0.9 million for each of the three and six months ended June 30, 2022 as compared to the same periods in the prior year, primarily due to increases in interest rates during the three and six months ended June 30, 2022.

Other Income / (Expense), Net

Three Months Ended

Change Six Months Ended

2022 2021 2022 2021

Other income / (expense), net $ 105 $ 32 228 % $ 118 $ (123) (196) %

% of total revenue — % — % — % — %

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

Other income / (expense), net increased $0.1 million and $0.2 million for the three and six months ended June 30, 2022, respectively, as compared to the same periods in the prior year, primarily due to a $0.1 million gain related to proceeds received from our initial investment in an installation partner during the three months ended June 30, 2022, which did not occur during the three months ended June 30, 2021 as well as the $0.2 million loss on the early extinguishment of the 2017 Facility during the six months ended June 30, 2021, which did not occur during the six months ended June 30, 2022.

Provision for / (Benefit from) Income Taxes

Three Months Ended

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

Change Six Months Ended

2022 2021 2022 2021

Provision for / (benefit from) income taxes $ 844 $ (1,738) (149) % $ 226 $ (4,651) (105) %

% of total revenue — % (1) % — % (1) %

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.

The provision for / (benefit from) income taxes increased $2.6 million and $4.9 million for the three and six months ended June 30, 2022, respectively, as compared to the same periods in the prior year.

Our effective tax rate was 7.2% and 1.1% for the three and six months ended June 30, 2022, respectively, as compared to (13.6)% and (19.1)% for the same periods in the prior year.

The increase in the provision for / (benefit from) income taxes for the three and six months ended June 30, 2022 was primarily due to decreased tax windfall benefits from employee stock-based payment transactions during the three and six months ended June 30, 2022, as compared to the same periods in the prior year.

Segment Information

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Alarm.com and Other.

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

Our Alarm.com segment represents our cloud-based and Software platforms for the intelligently connected property and related solutions that c ontributed 94% and 95% of our revenue, net of intersegment eliminations, for the three and six months ended June 30, 2022, respectively, as compared to 95% for the same periods in the prior year.

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

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 1,294 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 .

Our Alarm.com segment increased from 1,297 employees as of June 30, 2021 to 1,447 employees as of June 30, 2022 and increased from 1,418 employees as of March 31, 2022 .

Our Other segment increased from 124 employees as of June 30, 2021 to 159 employees as of June 30, 2022 and increased from 147 employees as of March 31, 2022 .

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

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Total $ 129,475 $ 83,370 $ 114,173 $ 113,186 $ 75,671 $ 94,765

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.

Six Months Ended

SaaS and license revenue Hardware and other revenue

Operating expenses SaaS and license revenue Hardware and other revenue

Operating expenses

Alarm.com $ 234,476 $ 163,379 $ 198,734 $ 206,159 $ 138,884 $ 171,465

Other 18,224 4,958 22,116 14,410 4,923 15,209

Intersegment Alarm.com — (2,243) (240) — (1,684) (176)

Intersegment Other — (512) — — (1,337) —

Total $ 252,700 $ 165,582 $ 220,610 $ 220,569 $ 140,786 $ 186,498

Our SaaS and license revenue for the Alarm.com segment included software license revenue of $6.9 million and $14.0 million for the three and six months ended June 30, 2022, respectively, as compared to $8.3 million and $17.0 million for the

same periods in the prior year.

There was no software license revenue recorded for the Other segment during the three and six months ended June 30, 2022 and 2021.

Critical Accounting Estimates

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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 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

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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.

Stock-Based Compensation

We compensate our executive officers, board of directors, employees and consultants with stock-based compensation plans under our 2015 Equity Incentive Plan.

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

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

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

In prior years, we used the "simplified method" to calculate the expected term, which was presumed to be the mid-point between the vesting date and the end of the contractual term.

Beginning upon the first grant of options in 2022, the expected term for options granted is estimated using our historical experience, including information related to options we have granted.

Recent Accounting Pronouncements

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

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

Cash and cash equivalents $ 643,380 $ 710,621

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We define working capital as current assets minus current liabilities.

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

Our cash and cash equivalents as of June 30, 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;

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Liquidity and Capital Resources

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

As of June 30, 2022, we had $643.4 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 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.

In February 2022, we entered into a purchase and sale agreement to purchase developable land consisting of 2.4 acres in 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.

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

In May 2022, we entered into a loan agreement with a technology company, under which we agreed to loan the technology company $1.5 million, collateralized by the assets of the technology company.

Interest on the outstanding principal accrues at a rate per annum equal to 7.0% and interest and principal payments are due on the maturity date of the loan, which is expected to be during the third quarter of 2022.

In June 2022, we entered into a convertible promissory note with a technology partner, under which we agreed to loan the technology partner $1.5 million.

Interest on the outstanding principal accrues at a rate per annum equal to 6.5%, starting one year from the effective date of the loan.

Interest and principal payments are due on the maturity date of the loan, which is June 27, 2029, unless the loan is converted prior to the maturity date, which may occur upon a qualified financing event, as defined in the convertible promissory note, upon a sale of the technology partner or upon our election on the maturity date of the loan.

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.

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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.

While the largest impact will be to cash flow from operating activities, the impact would continue over the five-year amortization period, but would decrease over the period and is expected to 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.

Over the final six months of fiscal year 2022, we expect our capital expenditures to be between $4.0 million and $7.0 million, primarily related to 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:

$6.5 million for the remainder of 2022, $12.9 million in 2023, $11.6 million in 2024, $9.3 million in 2025, $5.1 million in 2026 and $1.0 million in 2027 and thereafter.

Our future working capital, capital expenditure and cash requirements will depend on many factors, including the impact of the COVID-19 pandemic on the economy and our operations, the rate of our revenue growth, the amount and timing of our investments in human resources and capital equipment, future acquisitions and investments, and the timing and extent of our introduction of new solutions and platform and solution enhancements.

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.

Our future working capital, capital expenditure and cash requirements will depend on many factors, including the impact of Macroeconomic Conditions and inflation, on the economy and our operations, the rate of our revenue growth, the amount and timing of our investments in human resources and capital equipment, future acquisitions and investments, and the timing and extent of our introduction of new solutions and platform and solution enhancements.

As the impact of Macroeconomic Conditions and inflation, 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.

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.

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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.

As of June 30, 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

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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.

Upon entry into the 2017 Facility, we borrowed $72.0 million, which was used to repay the previously outstanding

balance under our previous credit facility.

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

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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 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.

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

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.

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

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

The carrying value of the 2017 Facility was zero as of June 30, 2022 and December 31, 2021.

Sources of Liquidity

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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 did not declare or pay dividends during the three and six months ended June 30, 2022 or 2021.

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

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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.

During the three and six months ended June 30, 2022, we repurchased 480,531 and 834,654 shares of our common stock under this program for $28.2 million and $51.5 million, respectively, which includes applicable commissions and fees.

No shares of our common stock were repurchased under this program during the three and six months ended June 30, 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

Six Months Ended

Cash flows from operating activities $ 12,258 $ 45,308

Cash flows used in investing activities (29,130) (12,376)

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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 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.

For the six months ended June 30, 2022, cash flows from operating activities were $12.3 million, compared to $45.3 million for the same period in the prior year.

This $33.0 million decrease in cash flows from operating activities was due to a $12.7 million decrease in non-cash and other reconciling items, a $11.0 million decrease in cash from operating assets and liabilities and a $9.3 million decrease in net income.

The $12.7 million decrease in non-cash and other reconciling items was primarily due to a $15.6 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 six months ended June 30, 2022, as compared to the same period in the prior year.

The decrease in non-cash and other reconciling items during the six months ended June 30, 2022 as compared to the same period in the prior year was also due to a $5.8 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 $7.0 million increase in stock-based compensation resulting from additional grants of restricted stock units during the six months ended June 30, 2022.

The $11.0 million decrease in cash from operating assets and liabilities was primarily due to a $17.7 million change in inventory resulting from an increase in purchased inventory as we seek to reduce risks and uncertainties in our supply chain as well as differences in the timing of disbursements and the collection of receipts during the six months ended June 30, 2022 as compared to the same period in the prior year.

Investing Activities

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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 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.

For the six months ended June 30, 2022, our cash flows used in investing activities was $29.1 million, as compared to $12.4 million for the same period in the prior year.

The $16.7 million increase in cash flows used in investing activities was primarily due to the $21.8 million paid for the land purchase as well as the issuance of notes receivable totaling $3.0 million during the six months ended June 30, 2022, which did not occur during the six months ended June 30, 2021.

The increase in cash flows used in investing activities was partially offset by 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 six months ended June 30, 2021, which did not occur during the six months ended June 30, 2022.

Financing Activities

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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.

For the six months ended June 30, 2022, cash flows used in financing activities was $49.8 million, compared to cash flows from financing activities of $376.3 million for the same period in the prior year.

The $426.1 million decrease in cash flows from financing activities was primarily due to $484.3 million in proceeds from the issuance of the 2026 Notes, net of issuance costs paid during the six months ended June 30, 2021 that did not occur during six months ended June 30, 2022.

The decrease in cash flows from financing activities was also due to the repurchase of 834,654 shares of our common stock for $51.5 million during the six months ended June 30, 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 six months ended June 30, 2021 that did not occur during six months ended June 30, 2022.

Non-GAAP Measures

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 define Adjusted EBITDA as our net income before interest expense, interest income, certain activity within other income / (expense), net, provision for / (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.

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Three Months Ended

June 30, Six Months Ended

2022 2021 2022 2021

Adjusted EBITDA:

Net income $ 10,828 $ 14,490 $ 19,731 $ 29,040

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

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

Interest expense, interest income and certain activity within other income / (expense), net (371) 3,973 257 7,339

Provision for / (benefit from) income taxes 844 (1,738) 226 (4,651)

Amortization and depreciation expense 7,775 7,477 15,536 14,862

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis