Alarm.com Holdings, Inc. 10-K

ITEM 7. 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 our consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review Item 1A. "Risk Factors" and "Special Note Regarding Forward-Looking Statements" in this Annual Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Overview Alarm.com is the leading platform for the intelligently connected property. Our cloud-based platform offers an expansive suite of IoT solutions that address opportunities in the residential, multi-family, small business and enterprise commercial markets. Alarm.com’s solutions include security, video and video analytics, energy management, access control, electric utility grid management, indoor gunshot detection, water management, health and wellness and data-rich emergency response. As of December 31, 2022, 9.1 million homes and businesses around the world depend on our Alarm.com platform or our non-hosted software to intelligently and conveniently secure, automate and manage their properties. In the last year alone, our platforms processed more than 300 billion data points generated by over 100 million connected devices. 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 trusted service providers, who are experts at selling, installing and supporting our solutions. The number of our service provider partners exceeded 11,000 as of December 31, 2022. We primarily generate SaaS and license revenue through our service provider partners, who resell these services and pay us monthly fees. 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. 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 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. Our technology platforms support all participants in what we refer to as the connected property market. 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. 54 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. Executive Overview and Highlights of 2022 and 2021 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. Our service provider partners sell, install and support Alarm.com solutions that enable residential and commercial property owners to intelligently secure, connect, control and automate their properties. Our subscribers consist of all of the properties maintained by those residential and commercial property owners to which we are delivering at least one of our solutions. 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 62%, 61% and 64% of our revenue in 2022, 2021 and 2020, respectively. 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%, 4% and 6% of our revenue in 2022, 2021 and 2020, respectively. 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. 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 38%, 39% and 36% of our revenue in 2022, 2021 and 2020, respectively. 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 Annual Report include: • SaaS and license revenue increased 13% to $520.4 million in 2022 from $460.4 million in 2021. SaaS and license revenue increased 17% to $460.4 million in 2021 from $393.3 million in 2020. Software license revenue decreased to $26.8 million in 2022 from $32.3 million in 2021. • Total revenue increased 12% to $842.6 million in 2022 from $749.0 million in 2021. Total revenue increased 21% to $749.0 million in 2021 from $618.0 million in 2020. • Net income increased 9% to $55.6 million in 2022 from $51.2 million in 2021. Net income decreased 33% to $51.2 million in 2021 from $76.7 million in 2020. Net income attributable to common stockholders increased 8% to $56.3 million in 2022 from $52.3 million in 2021. Net income attributable to common stockholders decreased 33% to $52.3 million in 2021 from $77.9 million in 2020. • Adjusted EBITDA, a non-GAAP measurement of operating performance, increased to $146.8 million in 2022 from $142.5 million in 2021. Adjusted EBITDA increased to $142.5 million in 2021 from $125.3 million in 2020. Please see Non-GAAP Measures below in this section of this Annual Report for a discussion of the limitations of Adjusted EBITDA (a non-GAAP measure) and a reconciliation of Adjusted EBITDA from net income, the most directly comparable GAAP measure, for the years ended December 31, 2022, 2021 and 2020. Historical Trends within the Financial Results Information about current period and prior period acquisitions that may affect the comparability of our historical financial information is included in Item 1. Business – Governance – Corporate Information. Information about the 2026 Notes issued in January 2021 and the related interest expense, the adoption of 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 ," and the elimination of non-cash interest expense related to the amortization of the debt discount associated with the equity component for the 2026 Notes as well as increases in costs for freight shipments and inventory component costs, which may affect the comparability of historical financial information, is disclosed in the Comparison of Years Ended December 31, 2022 to December 31, 2021 section below within Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations." 55 Geographic Areas We believe there is significant opportunity to expand our international business, as 4% of our total revenue during the year ended December 31, 2022 originated from customers located outside of North America. Our products are currently localized and available in approximately 50 countries outside of North America. Recent Developments On October 27, 2022, we filed a demand for arbitration of a dispute arising under the Patent Cross License Agreement between Alarm.com and Vivint, Inc., or Vivint, executed in November 2013. Vivint has stopped paying license fees to Alarm.com under the agreement. Vivint has paid the required license fees to Alarm.com since the agreement was executed in November 2013. Alarm.com disputes Vivint's refusal of payment and is seeking continued payments of license fees in the arbitration, as well as interest and declaratory relief. As a result of Vivint’s refusal to pay license fees under the agreement, which began during the fourth quarter of 2022, SaaS and license revenue and total revenue will decrease by approximately $6.0 million on a quarterly basis. We also believe that quarterly earnings and cash flow will be impacted by the aforementioned $6.0 million estimate, plus additional legal fees. In December 2022, we paid $5.1 million in cash to a technology partner to purchase 4,231,717 shares of its Series A Preferred Stock. The $5.1 million equity investment, which is included in the Alarm.com segment, does not meet the criteria for consolidation and is accounted for using the measurement alternative. As of December 31, 2022, our investment in the technology partner supplier was $5.1 million. 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, the Macroeconomic Conditions). These Macroeconomic Conditions have and may continue to create supply chain disruptions, inventory disruptions, and fluctuations in economic growth, including fluctuations in employment rates, inflation, energy prices and consumer sentiment. 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 year ended December 31, 2022, as compared to 2020 and 2021, we continue to follow our previously implemented hybrid return to office plan that includes voluntary remote workdays and mandatory in-office workdays. 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 We regularly monitor a number of financial and operating metrics in order to measure our current performance and estimate our future performance. Our other business metrics may be calculated in a manner different from the way similar business metrics used by other companies are calculated and include the following (dollars in thousands): Year Ended December 31, 2022 2021 2020 SaaS and license revenue $ 520,377 $ 460,372 $ 393,257 Adjusted EBITDA 146,848 142,472 125,257 SaaS and license revenue renewal rate 94 % 94 % 94 % SaaS and License Revenue 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 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. 56 Adjusted EBITDA Adjusted EBITDA is a non-GAAP measure that represents our net income before interest expense, interest income, certain activity within other (expense) / income, 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. The non-cash items include amortization and depreciation expense, amortization of debt discount and debt issuance costs for the 2026 Notes included in interest expense and stock-based compensation expense related to restricted stock units and other forms of equity compensation, including, but not limited to, the sale of common stock. We do not adjust for ordinary course legal expenses resulting from maintaining and enforcing our intellectual property portfolio and license agreements. We record interest expense primarily related to our debt facility and the 2026 Notes. We exclude interest expense in calculating Adjusted EBITDA because we believe that the exclusion of interest expense will provide for more meaningful information about our financial performance. We exclude interest income and certain activity within other (expense) / income, net including gains, losses or impairments on investments and other assets as well as losses on the early extinguishment of 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. We exclude amortization of intangibles from Adjusted EBITDA because we do not consider amortization expense when we evaluate our ongoing business operations, nor do we factor amortization expense into our evaluation of potential acquisitions, or our measurement of the performance of those acquisitions. We believe that the exclusion of amortization expense enables the comparison of our performance to other companies in our industry as other companies may be more or less acquisitive than us and therefore, amortization expense may vary significantly by company based on their acquisition history. Although we exclude amortization of acquired intangible assets from Adjusted EBITDA, management believes that it is important for investors to understand that such intangible assets were recorded as part of purchase accounting and contribute to revenue generation. We record depreciation primarily for investments in property and equipment. We exclude depreciation in calculating Adjusted EBITDA because we do not consider depreciation when we evaluate our ongoing business operations. We exclude stock-based compensation expense, which relates to restricted stock units and other forms of equity incentives primarily awarded to employees of Alarm.com, because they are non-cash charges that we do not consider when assessing the operating performance of our business. Additionally, the determination of stock-based compensation expense can be calculated using various methodologies and is dependent upon subjective assumptions and other factors that vary on a company-by-company basis. Therefore, we believe that excluding stock-based compensation expense from Adjusted EBITDA improves the comparability of our results to the results of other companies in our industry. We exclude secondary offering expense because we do not consider costs associated with the secondary offering to be indicative of our core operating performance and we believe that the exclusion of this expense allows us to better provide meaningful information about our operating performance, facilitates comparisons to our historical operating results and improves the comparability of our results to the results of other companies in our industry. Included in operating expenses are incremental costs directly related to business and asset acquisitions as well as changes in the fair value of contingent consideration liabilities, when applicable. We exclude acquisition-related expense from Adjusted EBITDA because we believe that the exclusion of this expense allows us to better provide meaningful information about our operating performance, facilitates comparisons to our historical operating results, improves the comparability of our results to the results of other companies in our industry, and ultimately, we believe helps investors better understand the acquisition-related expense and the effects of the transaction on our results of operations. We exclude non-ordinary course litigation expense because we do not consider legal costs and settlement fees incurred in litigation and litigation-related matters of non-ordinary course lawsuits and other disputes, particularly costs incurred in ongoing intellectual property litigation, to be indicative of our core operating performance. We do not adjust for ordinary course legal expenses, including those expenses resulting from maintaining and enforcing our intellectual property portfolio and license agreements. Adjusted EBITDA is a key measure that our management uses to understand and evaluate our core operating performance and trends to generate future operating plans, to make strategic decisions regarding the allocation of capital, and to make investments in initiatives that are focused on cultivating new markets for our solutions. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA facilitates comparisons of our operating performance on a period-to-period basis and, in the case of exclusion of acquisition-related adjustments and certain historical legal expenses, excludes items that we do not 57 consider to be indicative of our core operating performance. Adjusted EBITDA is not a measure calculated in accordance with GAAP and should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Please see Non-GAAP Measures in this section for a discussion of the limitations of Adjusted EBITDA and a reconciliation of Adjusted EBITDA from net income, the most directly comparable GAAP measurement, for the years ended December 31, 2022, 2021 and 2020. SaaS and License Revenue Renewal Rate Our SaaS and license revenue renewal rate is an operating metric. 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 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. 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 FASB issued 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 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 and $8.1 million during the three and twelve months ended December 31, 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 convertible senior notes. Upon adoption of this guidance on January 1, 2022, we began using the if-converted method when calculating the dilutive impact of the convertible senior 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 and twelve months ended December 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 and $0.16 per share and an increase to diluted net income attributable to common stockholders of $0.03 and $0.13 per share during the three and twelve months ended December 31, 2022, respectively. See Note 16 to our consolidated financial statements for details on the components of basic and diluted earnings per share. 58 Components of Operating Results Our fiscal year ends on December 31. The key elements of our operating results include: Revenue We derive our revenue from three primary sources: the sale of cloud-based SaaS services on our integrated Alarm.com platform, the sale of licenses and services on the Software platform and the sale of hardware products. We sell our platform and hardware solutions to service provider partners that resell our solutions and hardware to residential and commercial property owners, who are the service provider partners’ customers. SaaS and License Revenue . We generate the majority of our SaaS and license revenue primarily from monthly fees charged to our service provider partners on a per subscriber basis for access to our cloud-based intelligently connected property platform and related solutions. Our fees per subscriber vary based upon the service plan and features utilized. We offer multiple service level packages for our platform solutions including a range of solutions and a range of a la carte add-ons for additional features. The fee paid by our service provider partners each month for the delivery of our solutions is based on the combination of packages and add-ons enabled for each subscriber. We utilize tiered pricing plans where our service provider partners may receive prospective pricing discounts driven by volume. We also generate SaaS and license revenue from the fees paid to us when we license our intellectual property to third parties for use of our patents. In addition, in certain markets, our EnergyHub subsidiary sells its demand response service for an annual service fee, with pricing based on the number of subscribers or amount of aggregate electricity demand made available for a utility’s or market’s control. On October 27, 2022, we filed a demand for arbitration of a dispute arising under the Patent Cross License Agreement between Alarm.com and Vivint executed in November 2013. Vivint has stopped paying license fees to Alarm.com under the agreement. Vivint has paid the required license fees to Alarm.com since the agreement was executed in November 2013. Alarm.com disputes Vivint's refusal of payment and is seeking continued payments of license fees in the arbitration, as well as interest and declaratory relief. As a result of Vivint’s refusal to pay license fees under the agreement, which began during the fourth quarter of 2022, SaaS and license revenue and total revenue will decrease by approximately $6.0 million on a quarterly basis. We also believe that quarterly earnings and cash flow will be impacted by the aforementioned $6.0 million estimate, plus additional legal fees. Software License Revenue . Our SaaS and license revenue also includes our software license revenue from monthly fees charged to service providers on a per subscriber basis for access to our 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. Our agreements for the Software platform solution typically include software and services, such as post-contract customer support, or PCS. Software license revenue included in SaaS and license revenue is expected to continue to decline over time as we transition subscribers to our cloud-based hosted platform. Hardware and Other Revenue. We generate hardware and other revenue primarily from the sale of video cameras, video recorders and cellular radio modules that provide access to our cloud-based platforms and, to a lesser extent, the sale of other devices, including image sensors, gunshot detection sensors and peripherals. We primarily transfer hardware to our customers upon delivery to the customer, which corresponds with the time at which the customer obtains control of the hardware. We record a reserve against revenue for hardware returns based on historical returns. Our hardware and other revenue also includes our revenue from the sale of perpetual licenses that provide our customers in the commercial market the right to use our OpenEye video surveillance software for an indefinite period of time in exchange for a one-time license fee, which is generally paid at contract inception. 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. 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 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 59 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. 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. 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 and amounts paid to distributed energy resource 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, freight shipments 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. 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. We record the cost of hardware and other revenue primarily when the hardware and other services are delivered to the service provider partner, which occurs when control of the hardware and other services transfers to the service provider partner. Our cost of revenue excludes amortization and depreciation shown in operating expenses. Since 2019, the U.S. government has implemented and imposed significant changes to U.S. trade policy with respect to China. Tariffs have subjected certain Alarm.com products manufactured overseas to additional import duties of up to 25%. The amount of the import tariff and the number of products subject to tariffs have changed numerous times based on action by the U.S. government. Approximately one-fifth to one-half of the hardware products that we sell to our service provider partners are imported from China and could be subject to increased tariffs. While the additional import duties have resulted in an increase to our cost of hardware revenue, these import duties had a modest impact on hardware revenue margins. If tariffs are increased or are expanded to apply to more of our products, such actions may increase our cost of hardware revenue and reduce our hardware revenue margins in the future. We continue to monitor the changes in tariffs. Our costs of hardware revenue increased during the second half of 2021 primarily due to an increase in costs for freight shipments, including expedited shipping costs, as well as an increase in inventory component costs. We currently expect our hardware revenue margins in 2023 to approximate the hardware revenue margins experienced during the third and fourth quarters of 2022 as opposed to the hardware revenue margins 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 during the first six months of 2022 to cover some of our increases in costs. Operating Expenses Our operating expenses consist of sales and marketing, general and administrative, research and development and amortization and depreciation expenses. 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 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 1,500 employees as of January 1, 2022 to 1,733 employees as of December 31, 2022, and we expect to continue to hire new employees to support the projected future growth of our business. Sales and Marketing Expense. Sales and marketing expense consists primarily of personnel and related expenses for our sales and marketing teams, including salaries, bonuses, stock-based compensation, benefits, travel, and commissions. Our sales and marketing teams engage in sales, account management, service provider partner support, advertising, promotion of our products and services and marketing. 60 The number of employees in sales and marketing functions increased from 476 as of January 1, 2022 to 511 as of December 31, 2022. We expect to continue to invest in our sales and marketing activities to expand our business both domestically and internationally. We intend to increase the size of our sales force and our service provider partner support team to provide additional support to our existing service provider partner base to drive their productivity in selling our solutions as well as to enroll new service provider partners in North America and in international markets. 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 187 as of January 1, 2022 to 218 as of December 31, 2022. 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 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 as well as additional legal fees related to the dispute arising under the Patent Cross License Agreement between Alarm.com and Vivint. See the section of this Annual Report titled "Legal Proceedings" for additional information regarding litigation matters. Research and Development Expense . 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 837 as of January 1, 2022 to 1,004 as of December 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. We will also continue to invest in efforts to extend our platforms to adjacent markets and internationally to maintain our leadership position in the development of intelligently connected property technology, and continued enhancement of our Partner Services Platform, a comprehensive suite of enterprise-grade business management solutions for our service provider partners. Amortization and Depreciation . Amortization and depreciation consists of amortization of intangible assets originating from our acquisitions as well as our internally-developed capitalized software. Our depreciation expense is related to investments in property and equipment. Acquired intangible assets include developed technology, customer related intangibles, trademarks and trade names. We expect in the near term that amortization and depreciation may fluctuate based on our acquisition activity, development of our platforms and capitalized expenditures. Interest Expense We record interest expense associated with our 2026 Notes and our 2017 Facility, which was terminated in January 2021. Interest expense in 2023 is expected to remain relatively consistent with the interest expense in 2022 and is expected to decrease 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 Interest income consists of interest income earned on our cash and cash equivalents, our notes receivable and our restricted cash. Interest income in 2023 will depend, in part, on our use of cash and fluctuations in interest rates. Other (Expense) / Income, Net Other (expense) / income, net primarily consists of non-operating and miscellaneous expense and income. 61 Provision for / (Benefit from) Income Taxes We are subject to U.S. federal, state and local income taxes as well as foreign income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. As a result, we recognize tax liabilities based on estimates of whether additional taxes will be due. Our effective tax rates were below the 21.0% statutory rate primarily due to research and development tax credits claimed, foreign derived intangible income deductions and tax windfall benefits from employee stock-based payment transactions, partially offset by the impact of nondeductible expenses, foreign withholding taxes and state taxes. 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 The following table sets forth our selected consolidated statements of operations (in thousands) and data as a percentage of revenue for the periods presented: Consolidated Statements of Operations Year Ended December 31, 2022 2021 2020 $ % $ % $ % Revenue: SaaS and license revenue $ 520,377 62 % $ 460,372 61 % $ 393,257 64 % Hardware and other revenue 322,182 38 288,597 39 224,746 36 Total revenue 842,559 100 748,969 100 618,003 100 Cost of revenue (1) : Cost of SaaS and license revenue 73,897 9 66,758 9 53,539 9 Cost of hardware and other revenue 268,684 32 239,141 32 173,889 28 Total cost of revenue 342,581 41 305,899 41 227,428 37 Operating expenses: Sales and marketing (2) 92,748 11 86,664 11 75,967 12 General and administrative (2) 106,688 13 87,406 12 78,643 13 Research and development (2) 218,635 26 177,713 24 152,147 25 Amortization and depreciation 30,870 3 29,715 4 27,520 4 Total operating expenses 448,941 53 381,498 51 334,277 54 Operating income 51,037 6 61,572 8 56,298 9 Interest expense (3,144) — (15,956) (2) (2,596) — Interest income 8,759 1 587 — 870 — Other (expense) / income, net (59) — (134) — 25,588 4 Income before income taxes 56,593 7 46,069 6 80,160 13 Provision for / (benefit from) income taxes 962 — (5,106) (1) 3,500 1 Net income $ 55,631 7 % $ 51,175 7 % $ 76,660 12 % _______________ (1) Excludes amortization and depreciation shown in operating expenses below. (2) Operating expenses include stock-based compensation expense as follows (in thousands): 62 Year Ended December 31, 2022 2021 2020 Stock-based compensation expense data: Sales and marketing $ 4,342 $ 4,432 $ 3,025 General and administrative 15,037 9,941 7,996 Research and development 33,275 24,321 18,155 Total stock-based compensation expense $ 52,654 $ 38,694 $ 29,176 The following table sets forth the components of cost of revenue as a percentage of revenue: Year Ended December 31, 2022 2021 2020 Components of cost of revenue as a percentage of revenue: Cost of SaaS and license revenue as a percentage of SaaS and license revenue 14% 15% 14% Cost of hardware and other revenue as a percentage of hardware and other revenue 83% 83% 77% Total cost of revenue as a percentage of total revenue 41% 41% 37% Comparison of Years Ended December 31, 2022 to December 31, 2021 The following tables in this section set forth our selected consolidated statements of operations (in thousands), data for the percentage change and data as a percentage of revenue for the years ended December 31, 2022 and 2021. Revenue Year Ended December 31, % Change Revenue: 2022 2021 2022 vs. 2021 SaaS and license revenue $ 520,377 $ 460,372 13 % Hardware and other revenue 322,182 288,597 12 Total revenue $ 842,559 $ 748,969 12 % The $93.6 million increase in total revenue in 2022 as compared to 2021 was the result of a $60.0 million, or 13%, increase in our SaaS and license revenue and a $33.6 million, or 12%, increase in our hardware and other revenue. Our software license revenue included within SaaS and license revenue decreased $5.5 million to $26.8 million in 2022 as compared to $32.3 million during 2021, 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 $51.3 million in 2022 as compared to 2021 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 $8.7 million in 2022 as compared to 2021 primarily due to an increase in sales of our energy management and demand response solutions. The increase in hardware and other revenue in 2022 as compared to 2021 was primarily from the $32.2 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 19%, or $1.4 million, in 2022 as compared to 2021 primarily due to an increase in sales related to our property management solution and our HVAC solution. Cost of Revenue Year Ended December 31, % Change 2022 2021 2022 vs. 2021 Cost of revenue (1) : Cost of SaaS and license revenue $ 73,897 $ 66,758 11 % Cost of hardware and other revenue 268,684 239,141 12 Total cost of revenue $ 342,581 $ 305,899 12 % % of total revenue 41 % 41 % _______________ (1) Excludes amortization and depreciation shown in operating expenses. 63 The $36.7 million increase in cost of revenue in 2022 as compared to 2021 was the result of a $29.6 million, or 12%, increase in cost of hardware and other revenue and a $7.1 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 decreased $0.6 million to $0.5 million during 2022 as compared to $1.1 million during 2021. The cost of hardware and other revenue for the Alarm.com segment increased $28.9 million in 2022 as compared to 2021 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 $3.9 million in 2022 as compared to 2021 primarily due to the growth in our subscriber base, which drove a corresponding increase in amounts paid to wireless network providers. The cost of SaaS and license revenue for the Other segment increased $3.2 million in 2022 as compared to 2021 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 remained relatively consistent at 83% in 2022 and 2021. The increase in costs for freight shipments and inventory component costs during part of 2022 was partially offset by price increases we implemented on some of our products during 2022. Cost of SaaS and license revenue as a percentage of SaaS and license revenue was 14% and 15% 2022 and 2021, respectively. The decrease in cost of SaaS and license revenue as a percentage of SaaS and license revenue in 2022 as compared to 2021 is a reflection of the mix of sales of services during the periods. Cost of software license revenue as a percentage of software license revenue was 2% and 4% in 2022 and 2021, respectively. Sales and Marketing Expense Year Ended December 31, % Change 2022 2021 2022 vs. 2021 Sales and marketing $ 92,748 $ 86,664 7 % % of total revenue 11 % 11 % The $6.1 million increase in sales and marketing expense in 2022 as compared to 2021 was primarily due to a $4.2 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, as well as a $0.6 million increase in our expenses for external consultants. Personnel and related costs includes salary, benefits, stock-based compensation and travel expenses. These increases in sales and marketing expense were partially offset by a $2.4 million decrease in marketing expense for our Alarm.com segment, including advertising costs. Sales and marketing expense from our Other segment increased $3.3 million in 2022 as compared to 2021, 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 overall number of employees in our sales and marketing teams increased from 476 as of December 31, 2021 to 511 as of December 31, 2022. General and Administrative Expense Year Ended December 31, % Change 2022 2021 2022 vs. 2021 General and administrative $ 106,688 $ 87,406 22 % % of total revenue 13 % 12 % The $19.3 million increase in general and administrative expense in 2022 as compared to 2021 was primarily due to a $7.7 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. Additionally, legal costs related to intellectual property litigation increased $1.5 million, the provision for credit losses increased $0.6 million, insurance-related costs increased $0.6 million, recruiting costs increased $0.5 million and rent expense increased $0.5 million for our Alarm.com segment in 2022 as compared to 2021. General and administrative expenses from our Other segment increased by $3.8 million during 2022 as compared to 2021, primarily due to a $2.4 million increase in personnel and related costs, attributable in part to increases in headcount and the termination of the subsidiary long-term incentive plan and concurrent grant of performance-based restricted stock units, as well as a $1.1 million increase in the provision for credit losses. The overall number of employees in general and administrative functions increased from 187 as of December 31, 2021 to 218 as of December 31, 2022. 64 Research and Development Expense Year Ended December 31, % Change 2022 2021 2022 vs. 2021 Research and development $ 218,635 $ 177,713 23 % % of total revenue 26 % 24 % The $40.9 million increase in research and development expense in 2022 as compared to 2021 was primarily due to a $31.5 million increase in personnel and related costs for our Alarm.com segment, attributable in part to an increase in headcount of employees in research and development functions as well as a $2.5 million increase in our expenses for external consultants. Research and development expense from our Other segment increased by $4.6 million in 2022 as compared to 2021 primarily due to an increase in our personnel and related costs, attributable in part to increases in headcount and the termination of the subsidiary long-term incentive plan and concurrent grant of performance-based restricted stock units. The overall number of employees in research and development functions increased from 837 as of December 31, 2021 to 1,004 as of December 31, 2022. Amortization and Depreciation Year Ended December 31, % Change 2022 2021 2022 vs. 2021 Amortization and depreciation $ 30,870 $ 29,715 4 % % of total revenue 3 % 4 % Amortization and depreciation increased $1.2 million in 2022 as compared to 2021, primarily due to the intangible assets that were acquired in connection with our acquisitions of Shooter Detection Systems, LLC on December 14, 2020 as well as 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 Year Ended December 31, % Change 2022 2021 2022 vs. 2021 Interest expense $ (3,144) $ (15,956) (80) % % of total revenue — % (2) % Interest expense decreased $12.8 million in 2022 as compared to 2021, 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 Year Ended December 31, % Change 2022 2021 2022 vs. 2021 Interest income $ 8,759 $ 587 1,392 % % of total revenue 1 % — % Interest income increased $8.2 million in 2022 as compared to 2021, primarily due to an increase in interest income earned on cash and cash equivalents during the year ended December 31, 2022. Other (Expense) / Income, Net Year Ended December 31, % Change 2022 2021 2022 vs. 2021 Other (expense) / income, net $ (59) $ (134) (56) % % of total revenue — % — % Other (expense) / income, net remained relatively consistent during 2022 as compared to 2021. 65 Provision for / (Benefit from) Income Taxes Year Ended December 31, % Change 2022 2021 2022 vs. 2021 Provision for / (benefit from) income taxes $ 962 $ (5,106) (119) % % of total revenue — % (1) % The provision for / (benefit from) income taxes increased $6.1 million in 2022 as compared to 2021. Our effective tax rate was 1.7% in 2022 as compared to (11.1)% in 2021. The increase in the provision for / (benefit from) income taxes was primarily due to decreased tax windfall benefits from employee stock-based payment transactions in 2022 as compared to 2021. Comparison of Years Ended December 31, 2021 to December 31, 2020 A comparison of the years ended December 31, 2021 and 2020 has been omitted from this Form 10-K, but may be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on February 24, 2022. Segment Information We have two reportable segments: 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%, 95% and 94% of our revenue, net of intersegment eliminations, for the years ended December 31, 2022, 2021 and 2020, respectively. Our Other segment is focused on researching, developing and offering residential and commercial automation solutions and energy management products and services in adjacent markets. 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 1,363 employees as of January 1, 2022 to 1,563 employees as of December 31, 2022. Our Other segment increased from 137 employees as of January 1, 2022 to 170 employees as of December 31, 2022. Inter-segment revenue includes sales of hardware between our segments. The following table presents our revenue, inter-segment revenue and operating expenses by segment (in thousands): Year Ended December 31, 2022 2021 2020 SaaS and License Revenue Hardware and Other Revenue Operating Expenses SaaS and License Revenue Hardware and Other Revenue Operating Expenses SaaS and License Revenue Hardware and Other Revenue Operating Expenses Alarm.com $ 478,134 $ 317,937 $ 403,774 $ 426,823 $ 284,721 $ 348,700 $ 366,815 $ 219,826 $ 310,960 Other 42,243 9,097 45,647 33,549 9,275 33,214 26,442 14,254 23,317 Intersegment Alarm.com — (4,067) (480) — (3,089) (416) — (3,093) — Intersegment Other — (785) — — (2,310) — — (6,241) — Total $ 520,377 $ 322,182 $ 448,941 $ 460,372 $ 288,597 $ 381,498 $ 393,257 $ 224,746 $ 334,277 Our SaaS and license revenue for the Alarm.com segment included software license revenue of $26.8 million, $32.3 million and $38.0 million for the years ended December 31, 2022, 2021 and 2020, respectively. There was no software license revenue recorded for the Other segment during the years ended December 31, 2022, 2021 and 2020. 66 Critical Accounting Estimates Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue, costs and expenses during the reported period. In accordance with GAAP, we base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Because of the use of estimates inherent in the financial reporting process in light of the continuing uncertainty arising from the COVID-19 pandemic, actual results could differ from those estimates and any such differences may be material. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. Our most critical accounting estimates are summarized below. See Note 2 to our consolidated financial statements for a description of the following critical accounting estimates and our other significant accounting estimates. Revenue We derive our revenue from three primary sources: the sale of cloud-based SaaS services on our integrated Alarm.com platform, the sale of licenses and services on the Software platform and the sale of hardware products. We sell our platform and hardware solutions to service provider partners that resell our solutions and hardware to residential and commercial property owners, who are the service provider partners’ customers. We have variable consideration in the form of retrospective volume discounts, rebate incentives and restocking fees, which contain uncertainties and require us to make estimates of the amount of consideration to which we will be entitled. The significant inputs related to our estimates of variable consideration include the volume and amount of products and services sold historically and expected to be sold in the future, the availability and performance of our services and the historical and expected number of returns. We record a reserve against revenue for hardware returns based on historical returns. For each of the years ended December 31, 2022, 2021 and 2020, our reserve against revenue for hardware returns was approximately 1% of hardware and other revenue. We evaluate our hardware reserve on a quarterly basis or if there is an indication of significant changes in return experience. Historically, our returns of hardware have not significantly differed from our estimated reserve. If we enter into contracts that contain multiple promised services, we evaluate which of the promised services represent separate performance obligations based on whether or not the promised services are distinct and whether or not the services are separable from other promises in the contract. If these criteria are met, then we allocate the transaction price to the performance obligations using the relative stand-alone selling price method at contract inception. In determining the relative estimated selling prices, we consider market conditions, entity-specific factors and information about the customer or class of customer. Any discount within the contract is allocated proportionately to all of the separate performance obligations in the contract unless the terms of discount relate specifically to the entity’s efforts to satisfy some but not all of the performance obligations. While variable consideration assumptions and assumptions regarding the relative stand-alone selling price are specific to each contract, we did not make any material changes to these assumptions for the year ended December 31, 2022. We do not expect any material changes in the near term to the underlying assumptions used to recognize revenue during the year ended December 31, 2022. However, if changes in these assumptions occur, and, should those changes be significant, they could have a material impact on our SaaS and license revenue as well as our hardware and other revenue. Fair Value Measurements The accounting standard for fair value measurements provides a framework for measuring fair value and requires disclosures regarding fair value measurements. Fair value is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The liability for the subsidiary long-term incentive plan consisted of the potential cash payment contingent upon meeting certain financial milestones related to the agreement established with certain employees of one of our subsidiaries. During 2021 and until the termination of the subsidiary long-term incentive plan in May of 2022, we estimated the fair value of the liability by using a Monte Carlo simulation model which involves several Level 3 unobservable inputs. Concurrent with the termination of the subsidiary long-term incentive plan, we granted performance-based restricted stock units to those employees who previously participated in the subsidiary long-term incentive plan. We accounted for the termination of the subsidiary long-term incentive plan and concurrent grant of performance-based restricted stock units as a modification of the original subsidiary long-term incentive plan. As a result, no further estimates related to the subsidiary long-term incentive plan were necessary as of December 31, 2022. See the Stock-Based Compensation section below for details on the judgement required in determining the probable outcome of performance conditions related to performance-based restricted stock units. 67 A separate liability for the contingent consideration contained uncertainties and consisted of the potential earn-out payment related to our acquisition of 85% of the issued and outstanding capital stock of OpenEye on October 21, 2019. The earn-out payment was contingent on the satisfaction of certain calendar 2020 revenue targets and had a maximum potential payment of up to $11.0 million. We accounted for the contingent consideration using fair value and established a liability for the future earn-out payment based on an estimation of revenue attributable to perpetual licenses and subscription licenses over the 2020 calendar year. We estimated the fair value of the liability by using a Monte Carlo simulation model for determining each of the projected measures by using an expected distribution of potential outcomes. The contingent consideration liability was valued with Level 3 significant unobservable inputs, including the revenue volatility and the discount rate. All contingencies related to the contingent consideration liability were resolved as of December 31, 2020 and no further estimates were necessary during 2021 and 2022. We did not make any material changes in the accounting methodology used to determine the fair value of the contingent consideration liability for the year ended December 31, 2022. We do not expect any material changes in the near term to the underlying assumptions used to determine the significant unobservable inputs used to calculate the fair value of the contingent consideration given that all contingencies have been resolved as of December 31, 2020. Business Combinations We are required to allocate the purchase price of acquired companies to the identifiable tangible and intangible assets acquired and liabilities assumed at the acquisition date based upon their estimated fair values. This valuation contains uncertainties and requires management to apply significant judgment in estimating the fair value of long-lived and intangible assets acquired, which involves the use of significant estimates and assumptions. Significant estimates and assumptions in valuing certain acquired customer relationship intangible assets include estimates about future expected cash flows and discount rates. Significant estimates and assumptions in valuing acquired developed technology intangible assets include estimates about future expected cash flows, obsolescence factors and discount rates. Significant estimates and assumptions in valuing acquired trade name intangible assets include estimates about future expected cash flows, royalty rates and discount rates. We did not make any material changes to the underlying assumptions used as of the acquisition date to calculate the purchase price of the acquisition of Noonlight during 2022. We do not expect any material changes in the near term to the underlying assumptions used to calculate purchase price of the acquisition of Noonlight during 2022. However, if changes in these assumptions occur, and, should those changes be significant, they could have a material impact on our purchase price allocation for the acquisition of Noonlight. Goodwill, Intangible Assets and Long-lived Assets Goodwill We perform our annual impairment review of goodwill on October 1 and when a triggering event occurs between annual impairment tests. We test our goodwill at the reporting unit level. We perform either a qualitative analysis or a quantitative analysis every year depending on the changes to our goodwill balance as well as changes in our business and the economy. Qualitative factors we consider include, but are not limited to, macroeconomic conditions, industry and market conditions, company specific events, changes in circumstances and market capitalization. For our 2022 annual impairment review, we performed a quantitative assessment for our Alarm.com reporting unit, our only reporting unit with a goodwill balance. Significant estimates and assumptions in the quantitative assessment include estimates about future expected cash flows and discount rates. There were no triggering events that occurred between our annual impairment test performed as of October 1, 2022 and December 31, 2022. If triggering events arise in the future that require changes in the underlying assumptions used in our assessment of our goodwill, and, should those changes be significant, they could have a material impact on our goodwill and potentially our other (expense) / income, net, if those significant changes result in an impairment. Intangible Assets and Long-lived Assets Intangible assets are initially valued at fair value using generally accepted valuation methods appropriate for the type of intangible asset. Intangible assets with definite lives are amortized over their estimated useful lives and are reviewed for impairment if indicators of impairment arise. We evaluate the recoverability of our long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of the assets may not be recoverable. Recoverability of long-lived assets are measured by comparison of the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. 68 For the year ended December 31, 2021, we determined there was an impairment of $0.1 million for an intangible asset acquired in 2014 related to customer relationships that no longer existed after December 31, 2021. There were no indicators of impairment of our intangible assets with definite lives or long-lived assets during the year ended December 31, 2022. If triggering events arise in the future, depending on the significance of the underlying assumptions in the impairment analysis, they could have a material impact on our intangible assets and long-lived assets and potentially our other (expense) / income, net, if those significant changes result in an impairment. Accounting for Income Taxes We account for income taxes under the asset and liability method as required by Accounting Standards Codification, or ASC 740, " Income Taxes ," which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that are included in the financial statements. We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies and results of recent operations. We are subject to income taxes in the United States and foreign jurisdictions based upon our business operations in those jurisdictions. Significant judgment is required in evaluating uncertain tax positions. We record uncertain tax positions in accordance with ASC 740-10 on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position, and (2) with respect to those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is greater than 50% likely to be realized upon ultimate settlement with the related tax authority. We did not make any material changes to the underlying assumptions used to calculate deferred tax assets and liabilities as well as uncertain tax positions for the year ended December 31, 2022 and we do not expect any material changes in the near term to the underlying assumptions used to calculate deferred tax assets and liabilities as well as uncertain tax positions for the year ended December 31, 2022. However, if changes in these assumptions occur, and, should those changes be significant, they could have a material impact on our deferred tax assets and liabilities as well as our provision for / (benefit from) income taxes. Convertible Senior Notes 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. In accounting for the issuance of our 2026 Notes, we separated the 2026 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that did 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 was determined by deducting the fair value of the liability component from the par value of the 2026 Notes as a whole. This difference between the aggregate principal amount and the liability component represented a debt discount that was amortized to interest expense using the effective interest method over the term of the 2026 Notes. Transaction costs attributable to the liability component were netted with the liability component and amortized to interest expense using the effective interest method over the term of the 2026 Notes. Transaction costs attributable to the equity component were netted with the equity component of the 2026 Notes in additional paid-in capital in the consolidated balance sheets. 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 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. We no longer consider estimates related to the 2026 Notes to contain critical accounting estimates 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 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 69 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 See Note 2 of our consolidated financial statements for information related to recently issued accounting standards. Liquidity and Capital Resources Working Capital The following table summarizes our cash and cash equivalents, accounts receivable, net and working capital, for the periods indicated (in thousands): As of December 31, 2022 2021 Cash and cash equivalents $ 622,165 $ 710,621 Accounts receivable, net 124,283 105,548 Working capital 726,152 788,281 We define working capital as current assets minus current liabilities. Our cash and cash equivalents as of December 31, 2022 are available for working capital purposes. Our investment policy defines allowable investments and establishes guidelines relating to credit quality, diversification and maturities of our investments to preserve capital, maintain liquidity and limit the amount of credit risk exposure. As of December 31, 2022, our cash and cash equivalents were held in demand deposit accounts that generated very low returns. Liquidity and Capital Resources As of December 31, 2022, we had $622.2 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. 70 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 first quarter of 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 and paid the remaining $21.4 million during the second quarter of 2022 for the land purchase. 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. On September 23, 2022, Alarm.com Incorporated acquired 85% of the issued and outstanding shares of capital stock of Noonlight. In consideration for the purchase of 85% of the issued and outstanding shares of capital stock of Noonlight, we paid $31.9 million in cash on September 23, 2022, after deducting $1.5 million related to the settlement of an outstanding loan issued to Noonlight during May of 2022 and $4.9 million related to agreed holdback provisions. Pursuant to the terms of the stock purchase agreement, following the preliminary determination of the working capital of Noonlight as of the closing date, the purchase price decreased by $0.1 million. The working capital adjustment is expected to be finalized by the first quarter of 2023 and $0.3 million of the holdback is expected to be paid to the stockholders of Noonlight at that time. The remaining amount of the holdback of $4.6 million is expected to be paid to the stockholders of Noonlight by the end of the first quarter of 2024, subject to offset for any indemnification obligations. On October 27, 2022, we filed a demand for arbitration of a dispute arising under the Patent Cross License Agreement between Alarm.com and Vivint executed in November 2013. Vivint has stopped paying license fees to Alarm.com under the agreement. Vivint has paid the required license fees to Alarm.com since the agreement was executed in November 2013. Alarm.com disputes Vivint's refusal of payment and is seeking continued payments of license fees in the arbitration, as well as interest and declaratory relief. As a result of Vivint’s refusal to pay license fees under the agreement, which began during the fourth quarter of 2022, cash flows from operating activities will decrease by approximately $6.0 million on a quarterly basis, plus additional legal fees. In December 2022, we paid $5.1 million in cash to a technology partner to purchase 4,231,717 shares of its Series A Preferred Stock. As of December 31, 2022, our investment in the technology partner supplier was $5.1 million. Beginning in 2022, the Tax Cuts and Jobs Act of 2017 amended Internal Revenue Code Section 174, or Section 174, to eliminate the option to immediately deduct research and development expenditures in the year incurred, requiring these expenditures to be capitalized and amortized. While we calculated the 2022 Federal and state cash tax increase from Section 174 to be $38.1 million, we did not pay this additional cash tax liability as part of our 2022 estimated tax payments due to the possible deferral, modification or repeal of Section 174. The additional 2022 Federal cash tax liability is included in current income taxes payable as of December 31, 2022, and was paid in February 2023. The increased 2022 state tax liability will be paid in April 2023. The Section 174 impact on 2023 cash flows from operating activities will depend on, among other factors, our 2023 operating results and the level of 2023 research and development activity. Based on information currently available to us, we estimate the increased 2023 Section 174 Federal and state cash tax payable for our 2023 taxable income to be in the range of $40.0 million to $45.0 million if the requirement to capitalize and amortize research and development expenditures is not deferred, modified or repealed. This estimate is based on the limited information that is currently available and is subject to change. We believe our existing cash and cash equivalents and our future cash flows from operating activities will be sufficient to meet our anticipated operating cash needs for at least the next 12 months. Over the next 12 months, we expect our capital expenditure requirements to be between $7.5 million and $9.5 million, primarily related to 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 leases are as follows: $13.4 million in 2023, $12.1 million in 2024, $9.9 million in 2025, $5.7 million in 2026, $0.8 million in 2027 and $0.3 million in 2028 and thereafter. 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. Any additional equity financing would be dilutive to our current stockholders. 71 The following discussion summarizes our current and long-term material cash requirements as of December 31, 2022, which we expect to fund primarily with operating cash flows: Material Cash Requirements (in thousands) 1 Year 2 to 3 Years 4 to 5 Years More Than 5 Years Total Convertible Notes: Principal payments $ — $ — $ 500,000 $ — $ 500,000 Special interest — — — — — Operating lease commitments 13,867 23,425 8,284 2,589 48,165 Other long-term liabilities 1 — 4,821 554 — 5,375 Other commitments 2 3,451 5,166 — — 8,617 Total $ 17,318 $ 33,412 $ 508,838 $ 2,589 $ 562,157 _______________ 1. See Note 12 to our consolidated financial statements for details on the components of other long-term liabilities. As of December 31, 2022, we recorded a liability for long-term accrued taxes and interest payable of $7.7 million. Due to the uncertainty in the timing of future payments, we have excluded the liability related to these uncertain tax positions from the table above. See Note 18 to our consolidated financial statements for additional information regarding income taxes. 2. Represents amounts due under multi-year, non-cancelable contracts with third-party vendors, as well as other commitments. The commitment amounts in the table above are associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the actions under the contracts. The table does not include obligations under agreements that we can cancel without a significant penalty. Future events could cause actual payments to differ from these estimates. Convertible Senior Notes On January 20, 2021, we issued $500.0 million aggregate principal amount of 0% convertible senior notes due January 15, 2026 in a private placement to qualified institutional buyers, or the 2026 Notes. The terms of the 2026 Notes are governed by an Indenture, or the Indenture, by and between Alarm.com Holdings, Inc. and U.S. Bank National Association, as trustee. The 2026 Notes are senior unsecured obligations that do not bear regular interest and the principal amount of the 2026 Notes will not accrete. The 2026 Notes may bear special interest under specified circumstances related to our failure to comply with our reporting obligations under the Indenture. Special interest, if any, will be payable semiannually in arrears on January 15 and July 15 of each year, beginning on July 15, 2021. We received proceeds from the issuance of the 2026 Notes of $484.3 million, net of $15.7 million of transaction fees and other debt issuance costs. We may not redeem the 2026 Notes prior to January 20, 2024. We may redeem for cash, all or any portion of the 2026 Notes, at our option, on or after January 20, 2024, at a redemption price equal to 100% of the principal amount of the 2026 Notes to be redeemed, plus accrued and unpaid special interest, if any, to, but excluding, the redemption date, if the last reported sale price of our common stock has been at least 130% of the conversion price for the 2026 Notes then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption. No sinking fund is provided for the 2026 Notes. The 2026 Notes will be convertible at the option of the holders at any time prior to the close of business on the business day immediately preceding August 15, 2025, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2021 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price for the 2026 Notes on each applicable trading day; (2) during the five business day period immediately after any 10 consecutive trading day period in which, for each trading day of that period, the trading price per $1,000 principal amount of 2026 Notes for such trading day was less than 98% of the product of the last reported sale price of our common stock and the conversion rate for the 2026 Notes on each such trading day; (3) if we call any or all of the 2026 Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date, but only with respect to the 2026 Notes called (or deemed called) for redemption; or (4) upon the occurrence of specified corporate events as set forth in the Indenture. On or after August 15, 2025, until the close of business on the second scheduled trading day immediately preceding the maturity date of the 2026 Notes, holders of the 2026 Notes may convert all or any portion of their 2026 Notes at any time, regardless of the foregoing conditions. Upon conversion, we may satisfy our conversion obligation by paying or delivering, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. It is 72 our current intent to settle the principal amount of the 2026 Notes with cash. The initial conversion rate for the 2026 Notes is 6.7939 shares of our common stock per $1,000 principal amount of 2026 Notes, which is equivalent to an initial conversion price of $147.19 per share of our common stock, subject to adjustment under certain circumstances in accordance with the terms of the Indenture. In addition, following certain corporate events that occur prior to the maturity date of the 2026 Notes or if we deliver a notice of redemption in respect of the 2026 Notes, we will, under certain circumstances, increase the conversion rate of the 2026 Notes for a holder who elects to convert its 2026 Notes (or any portion thereof) in connection with such a corporate event or convert its 2026 Notes called (or deemed called) for redemption during the related redemption period (as defined in the Indenture), as the case may be. If we undergo a fundamental change (as defined in the Indenture), subject to certain exceptions and except as described in the Indenture, holders may require us to repurchase for cash all or any portion of their 2026 Notes at a fundamental change repurchase price equal to 100% of the principal amount of the 2026 Notes to be repurchased, plus accrued and unpaid special interest, if any, to, but excluding, the fundamental change repurchase date. The Indenture includes customary covenants and sets forth certain events of default after which the 2026 Notes may be declared immediately due and payable and sets forth certain types of bankruptcy or insolvency events of default involving us after which the 2026 Notes become automatically due and payable. We used some of the proceeds to repay the $110.0 million outstanding principal balance under our credit facility and also used some of the proceeds to pay accrued interest, fees and expenses related to our credit facility (see the section titled "2017 Facility" below. 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. 2017 Facility On October 6, 2017, we entered into a $125.0 million senior secured revolving credit facility, or the 2017 Facility, with SVB as administrative agent, PNC Bank, National Association, as documentation agent, and a syndicate of lenders. Upon entry into the 2017 Facility, we borrowed $72.0 million, which was used to repay the previously outstanding balance under our previous credit facility. The 2017 Facility was set to mature in October 2022 and included an option to further increase the borrowing capacity to $175.0 million with the consent of the lenders. Costs incurred in connection with the 2017 Facility were capitalized and were being amortized as interest expense over the term of the 2017 Facility. The 2017 Facility was secured by substantially all of our assets, including our intellectual property. On March 25, 2020, we borrowed $50.0 million under the 2017 Facility as a precautionary measure in order to provide financial flexibility in light of current uncertainty in the financial markets resulting from the COVID-19 pandemic. On January 20, 2021, we repaid the entire outstanding principal balance of $110.0 million of the 2017 Facility with proceeds from the 2026 Notes and the 2017 Facility was terminated. We recognized an extinguishment loss of $0.2 million in other (expense) / income, net in our consolidated statements of operations during the year December 31, 2022 for previously capitalized debt issuance costs related to the 2017 Facility that were unamortized at the time of the termination of the 2017 Facility. The outstanding principal balance on the 2017 Facility accrued interest at a rate equal to, at our option, either (1) LIBOR, plus an applicable margin based on our consolidated leverage ratio, or (2) the highest of (a) the Wall Street Journal prime rate, (b) the Federal Funds rate plus 0.50%, or (c) LIBOR plus 1.00% plus an applicable margin based on our consolidated leverage ratio. During 2021 until the termination of the 2017 Facility on January 20, 2021, we elected for the outstanding principal balance to accrue interest at LIBOR plus 1.50%, LIBOR plus 1.75%, LIBOR plus 2.00%, and LIBOR plus 2.50% when our consolidated leverage ratio is less than 1.00:1.00, greater than or equal to 1.00:1.00 but less than 2.00:1.00, greater than or equal to 2.00:1.00 but less than 3.00:1.00 and greater than or equal to 3.00:1.00, respectively. The 2017 Facility also carried an unused line commitment fee of 0.20%. The carrying value of the 2017 Facility was zero as of December 31, 2022 and 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. 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 and the 2017 Facility was terminated. The 2017 Facility is discussed in more detail above under “2017 Facility.” 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. The 2026 Notes are discussed in more detail above under “Convertible Senior Notes.” 73 Dividends We did not declare or pay dividends during the years ended December 31, 2022, 2021 or 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 that ended on 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 years ended December 31, 2022, 2021 and 2020, we repurchased 1,385,592, zero, and 147,153 shares of our common stock under this program for $78.8 million, zero and $5.1 million, respectively, which includes applicable commissions and fees. Shares Withheld As permitted under the terms of the 2015 Equity Incentive Plan, or 2015 Plan, in 2021 the Compensation Committee authorized the withholding of shares of common stock in connection with the vesting of restricted stock unit awards issued to employees to satisfy applicable tax withholding requirements. These withheld shares are not issued or considered common stock repurchases under our stock repurchase program. We paid $4.5 million of tax withholdings related to vesting of restricted stock units during the year ended December 31, 2021. No tax withholdings related to the vesting of restricted stock units were paid during the years ended December 31, 2022 and 2020. Prior to using the withholding method to satisfy applicable tax withholding requirements for employees, we utilized the sell-to-cover method in which shares of our restricted stock unit awards were sold into the market on behalf of the employee upon vesting to cover tax withholding liabilities. We may utilize either the withholding method or sell-to-cover method in the future. Historical Cash Flows The following table sets forth our cash flows for the periods indicated (in thousands): Year Ended December 31, 2022 2021 2020 Cash flows from operating activities $ 56,901 $ 103,157 $ 102,080 Cash flows used in investing activities (68,319) (20,365) (20,274) Cash flows (used in) / from financing activities (76,324) 374,370 52,024 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 2022, cash flows from operating activities were $56.9 million, compared to $103.2 million for 2021. This $46.3 million decrease in cash flows from operating activities was due to a $38.3 million decrease in non-cash and other reconciling items and a $12.4 million decrease in cash from operating assets and liabilities, partially offset by a $4.4 million increase in net income. The $38.3 million decrease in non-cash and other reconciling items was primarily due to a $44.9 million change in deferred income taxes, which was driven by an increase in estimated taxable income during 2022 pursuant to the capitalization requirements under Section 174 of the Internal Revenue Code, as compared to 2021. The decrease in non-cash and other reconciling items during 2022 as compared to 2021 was also due to a $12.7 million decrease in amortization of the debt discount and debt issuance costs 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 $14.0 million increase in stock-based compensation resulting from additional grants of restricted stock units during 2022 as well as an increase in the changes to the provision for credit losses and reserve for product returns of $4.1 million during 2022 as compared to 2021. The $12.4 million decrease in cash from operating assets and liabilities 74 was primarily due to a $8.9 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 a $6.5 million change in accounts payable, accrued expenses and other liabilities primarily due to differences in the timing of disbursements during 2022 as compared to 2021. For 2021, cash flows from operating activities were $103.2 million, compared to $102.1 million for 2020. This $1.1 million increase in cash flows from operating activities was due to a $43.8 million increase in non-cash and other reconciling items, partially offset by a $25.5 million decrease in net income and a $17.2 million decrease in cash from operating assets and liabilities. The $43.8 million increase in non-cash and other reconciling items was primarily due to a $24.7 million gain on the sale of an investment in one of our platform partners in 2020 that did not occur in 2021, which was adjusted from net income within operating activities and presented as cash flows from investing activities. Additionally, the increase in non-cash and other reconciling items was primarily due to $15.7 million increase in amortization of the debt discount and debt issuance costs related to the 2026 Notes in 2021 as well as a $9.5 million increase in stock-based compensation resulting from additional grants of stock options and restricted stock units in 2021. These increases in non-cash and other reconciling items were partially offset by a $6.9 million change in deferred income taxes, primarily due to increased tax windfall benefits from employee stock-based payment transactions in 2021 as compared to 2020. The $17.2 million decrease in cash from operating assets and liabilities was primarily due to a $20.8 million change in inventory resulting from additional purchased inventory in 2021 as compared to 2020, which is due in part to the impacts of the COVID-19 pandemic and the related uncertainty surrounding the potential disruption to our supply chain. To a lesser extent, the decrease in cash from operating assets and liabilities was due to increases in prepayments for long lead-time parts related to inventory and other assets, partially offset by differences in timing of collection of receipts and payments of disbursements in 2021 as compared to 2020. 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 2022, our cash flows used in investing activities was $68.3 million, compared to $20.4 million in 2021. The $47.9 million increase in cash used in investing activities was primarily due to the $31.9 million paid to purchase 85% of the issued and outstanding shares of capital stock of Noonlight and the $21.8 million paid for developable land during 2022, which did not occur during 2021. These increases in cash used in investing activities were partially offset by $4.4 million paid for developed technology in 2021, which did not occur during 2022. For 2021, our cash flows used in investing activities was $20.4 million, compared to $20.3 million in 2020. The $0.1 million increase in cash used in investing activities was primarily due to our payment of $26.3 million, net of cash acquired, for 100% of the issued and outstanding ownership interest units of SDS in 2020 as well as $3.3 million used to acquire in-process research and development in 2020 that did not occur 2021. The increase in cash used in investing activities in 2021 as compared to 2020 was partially offset by $25.7 million in proceeds received from the sale of an investment in one of our platform partners in 2020, which did not occur in 2021 as well as $5.0 million used to purchase 1,000,000 shares of Series B-2 Preferred Stock from one of our technology partners in 2021, which did not occur in 2020. Financing Activities Cash generated by financing activities includes borrowings under the 2017 Facility, proceeds from the 2026 Notes and proceeds from the issuance of common stock from employee stock option exercises and from our employee stock purchase plan. Cash used in financing activities typically includes repurchases of common stock and repayments of debt. For 2022, cash flows used in financing activities was $76.3 million, compared to cash flows from financing activities of $374.4 million in 2021. The $450.7 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 2021 that did not occur during 2022. The decrease in cash flows from financing activities was also due to the repurchase of 1,385,592 shares of our common stock for $78.8 million during 2022 that did not occur during 2021. These decreases in cash flows from financing activities were partially offset by the repayment of $110.0 million to terminate the 2017 Facility in 2021 that did not occur in 2022. For 2021, cash flows from financing activities was $374.4 million compared to $52.0 million in 2020. The $322.4 million increase in cash flows from financing activities was primarily due to $484.3 million in proceeds from the issuance of the 2026 Notes, net of issuance costs paid. This increase in cash flows from financing activities was partially offset by the repayment of $110.0 million to terminate the 2017 Facility in 2021 that did not occur in 2020 as well as the borrowing of $50.0 million under the 2017 Facility in 2020 that did not occur in 2021. 75 Non-GAAP Measures We define Adjusted EBITDA as our net income before interest expense, interest income, certain activity within other (expense) / income, net, provision for / (benefit from) income taxes, amortization and depreciation expense, stock-based compensation expense, secondary offering expense, acquisition-related expense and legal costs and settlement fees incurred in connection with non-ordinary course litigation and other disputes, particularly costs involved in ongoing intellectual property litigation. We 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 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. Adjusted EBITDA is not a measure calculated in accordance with GAAP. See the table below for a reconciliation of Adjusted EBITDA from net income, the most directly comparable financial measure calculated and presented in accordance with GAAP. We have included Adjusted EBITDA in this report because it is a key measure that our management uses to understand and evaluate our core operating performance and trends, to generate future operating plans, to make strategic decisions regarding the allocation of capital and to make investments in initiatives that are focused on cultivating new markets for our solutions. We also use Adjusted EBITDA, a non-GAAP financial measure, as a performance measure under our executive bonus plan. Further, we believe the exclusion of certain expenses in calculating Adjusted EBITDA facilitates comparisons of our operating performance on a period-to-period basis and, in the case of exclusion of acquisition-related expense and certain historical legal expenses, excludes items that we do not consider to be indicative of our core operating performance. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under GAAP. Some of these limitations are: (a) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; (b) Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; (c) Adjusted EBITDA does not reflect the potentially dilutive impact of equity-based compensation; (d) Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and (e) other companies, including companies in our industry, may calculate Adjusted EBITDA or similarly titled measures differently, which reduces its usefulness as a comparative measure. Because of these and other limitations, you should consider Adjusted EBITDA alongside our other GAAP-based financial performance measures, net income and our other GAAP financial results. The following table presents a reconciliation of Adjusted EBITDA from net income, the most directly comparable GAAP measure, for each of the periods indicated (in thousands): Year Ended December 31, 2022 2021 2020 Adjusted EBITDA: Net income $ 55,631 $ 51,175 $ 76,660 Adjustments: Interest expense, interest income and certain activity within other (expense) / income, net (5,768) 15,503 (23,862) Provision for / (benefit from) income taxes 962 (5,106) 3,500 Amortization and depreciation expense 30,870 29,715 27,520 Stock-based compensation expense 52,654 38,694 29,176 Secondary offering expense — — 543 Acquisition-related expense 1,059 29 2,732 Litigation expense 11,440 12,462 8,988 Total adjustments 91,217 91,297 48,597 Adjusted EBITDA $ 146,848 $ 142,472 $ 125,257 76