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. We offer a comprehensive suite of cloud-based solutions for smart residential and commercial properties, including interactive security, video monitoring, intelligent automation, access control, energy management and wellness solutions. Millions of property owners depend on our technology to intelligently secure, automate and manage their residential and commercial properties. In the last year alone, our platforms processed more than 200 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 over 10,900 trusted service providers, who are experts at selling, installing and supporting our solutions. We primarily generate Software-as-a-Service, or 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 the length of our service relationships with residential and commercial property owners, combined with our robust platforms and over 20 years of operating experience, contribute to a compelling business model. 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
Executive overview and highlights of 2021 and 2020 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 supportAlarm.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 61%, 64% and 67% of our revenue in 2021, 2020 and 2019, 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 4%, 6% and 9% of our revenue in 2021, 2020 and 2019, 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. Our hardware and other revenue also includes our revenue from the sale of licenses that provide our customers the right to use our gunshot detection solution in exchange for license fees. Hardware and other revenue represented 39%, 36% and 33% of our revenue in 2021, 2020 and 2019, 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 17% to$460.4 million in 2021 from$393.3 million in 2020. SaaS and license revenue increased 17% to$393.3 million in 2020 from$337.4 million in 2019. •Total revenue increased 21% to$749.0 million in 2021 from$618.0 million in 2020. Total revenue increased 23% to$618.0 million in 2020 from$502.4 million in 2019. •Net income decreased 33% to$51.2 million in 2021 from$76.7 million in 2020. Net income increased 44% to$76.7 million in 2020 from$53.3 million in 2019. Net income attributable to common stockholders decreased 33% to$52.3 million in 2021 from$77.9 million in 2020. Net income attributable to common stockholders increased 45% to$77.9 million in 2020 from$53.5 million in 2019. •Adjusted EBITDA, a non-GAAP measurement of operating performance, increased to$142.5 million in 2021 from$125.3 million in 2020. Adjusted EBITDA increased to$125.3 million in 2020 from$108.3 million in 2019.
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 and net income, the most comparable GAAP measure, for the years ended
Historical trends in 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. Information about the 2026 Notes issued inJanuary 2021 and the related interest expense, which may affect the comparability of historical financial information, is disclosed in the Comparison of Years EndedDecember 31, 2021 toDecember 31, 2020 section below within Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." Information about the$24.7 million gain on the sale of an investment recorded in other (expense) / income, net, in 2020, which relates to the sale of an investment in one of our platform partners, and may affect the comparability of historical financial information, is disclosed in the Comparison of Years EndedDecember 31, 2021 toDecember 31, 2020 section below within Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." 55 --------------------------------------------------------------------------------
Geographical areas
We believe there is significant opportunity to expand our international business, as 3% of our total revenue during the year endedDecember 31, 2021 originated from customers located outside ofNorth America . Our products are currently localized and available in approximately 40 countries outside ofNorth America . Recent Developments The COVID-19 pandemic disrupted and may continue to disrupt our supply chain for an unknown period of time due to its impact on manufacturing, production and global transportation. The COVID-19 pandemic also disrupted and may intermittently continue to disrupt our sales channels due to restrictions on our service providers' ability to meet with residential and commercial property owners who use our solutions. We have taken precautionary measures intended to help protect our employees, service providers and subscribers, as well as the communities in which we participate, including enabling substantially all of our employees to work remotely. In addition, the COVID-19 pandemic resulted in a global slowdown of economic activity and a recession inthe United States and the economic situation remains fluid as parts of the economy appear to be recovering while others continue to struggle. While vaccines have been approved for use inthe United States and in many other countries, and vaccination efforts are well underway, it remains difficult to assess or predict the ultimate duration and economic impact of the COVID-19 pandemic due to a resurgence of COVID-19 and the emergence and severity of COVID-19 variants. Prolonged uncertainty with respect to COVID-19 could cause further economic slowdown or cause other unpredictable events, each of which could adversely affect our business, results of operations or financial condition. While our business and those of our service providers showed some resiliency beginning in 2020, with the start of the pandemic, and continuing into 2021, if the economy fails to fully recover or there are additional shutdowns of non-essential businesses due to a resurgence of COVID-19 and the emergence and severity of COVID-19 variants, our SaaS and license revenue growth rate may be lower in future periods, with a corresponding reduction in hardware revenue, if some consumers or small businesses defer or cancel previously anticipated purchases. The challenges posed by COVID-19 on our business continue to evolve rapidly and we will continue to evaluate our business and operations in light of future developments. OnDecember 16, 2021 ,EnergyHub, Inc. , one of our wholly-owned subsidiaries, acquired certain assets of an unrelated third party. Substantially all of the acquired assets consisted of developed technology. We believe the acquisition of the developed technology will continue to advance our load-shaping energy management solution allowing additional devices to participate in utility programs that reduce or shift power consumption during peak demand periods. In consideration for the purchase of the developed technology, we paid$4.2 million in cash inDecember 2021 , with the remaining$0.9 million expected to be paid 18 months following the acquisition date, subject to offset for any indemnification obligations. Additionally, we incurred$0.2 million in direct transaction costs related to legal fees during 2021 that were capitalized as a component of the consideration transferred. The combined$5.3 million consideration related to developed technology was recorded as an intangible asset at the time of the asset acquisition and will be amortized on a straight-line basis over an estimated useful life of seven years.
Other trade measures
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,
2021 2020 2019
SaaS and license revenue $ 460,372 $ 393,257 $ 337,375
Adjusted EBITDA 142,472 125,257 108,307
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 partners and their ability to activate and maintain subscribers using
our intelligently connected property solutions, our ability to add new service
provider partners reselling our solutions, the demand for our intelligently
connected property solutions and the pace at which the market for these
solutions is growing.
56
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Adjusted EBITDA
Adjusted EBITDA is a non-GAAP measure that represents our net income before interest expense, interest income, other (expense) / income, net, (benefit from) / provision for income taxes, amortization and depreciation expense, stock-based compensation expense, secondary offering expense, acquisition-related expense and legal costs and settlement fees incurred in connection with non-ordinary course litigation and other disputes, particularly costs involved in ongoing intellectual property litigation. We do not consider these items to be indicative of our core operating performance. The non-cash items include amortization and depreciation expense, amortization of debt discount and debt issuance costs for the 2026 Notes included in interest expense and stock-based compensation expense related to restricted stock units and other forms of equity compensation, including, but not limited to, the sale of common stock. We do not adjust for ordinary course legal expenses resulting from maintaining and enforcing our intellectual property portfolio and license agreements. We record interest expense primarily related to our debt facility and the 2026 Notes. We exclude interest expense in calculating Adjusted EBITDA because we believe that the exclusion of interest expense will provide for more meaningful information about our financial performance. We exclude interest income and other (expense) / income, net from Adjusted EBITDA because we do not consider it part of our ongoing results of operations. We exclude the impact related to our (benefit from) / provision for income taxes from Adjusted EBITDA because we do not consider this tax adjustment to be part of our ongoing results of operations. GAAP requires that operating expenses include the amortization of acquired intangible assets, which principally include acquired customer relationships, developed technology and trade names. We exclude amortization of intangibles from Adjusted EBITDA because we do not consider amortization expense when we evaluate our ongoing business operations, nor do we factor amortization expense into our evaluation of potential acquisitions, or our measurement of the performance of those acquisitions. We believe that the exclusion of amortization expense enables the comparison of our performance to other companies in our industry as other companies may be more or less acquisitive than us and therefore, amortization expense may vary significantly by company based on their acquisition history. Although we exclude amortization of acquired intangible assets from Adjusted EBITDA, management believes that it is important for investors to understand that such intangible assets were recorded as part of purchase accounting and contribute to revenue generation. We record depreciation primarily for investments in property and equipment. We exclude depreciation in calculating Adjusted EBITDA because we do not consider depreciation when we evaluate our ongoing business operations. We exclude stock-based compensation expense, which relates to restricted stock units and other forms of equity incentives primarily awarded to employees ofAlarm.com , because they are non-cash charges that we do not consider when assessing the operating performance of our business. Additionally, the determination of stock-based compensation expense can be calculated using various methodologies and is dependent upon subjective assumptions and other factors that vary on a company-by-company basis. Therefore, we believe that excluding stock-based compensation expense from Adjusted EBITDA improves the comparability of our results to the results of other companies in our industry. We exclude secondary offering expense because we do not consider costs associated with the secondary offering to be indicative of our core operating performance and we believe that the exclusion of this expense allows us to better provide meaningful information about our operating performance, facilitates comparisons to our historical operating results and improves the comparability of our results to the results of other companies in our industry. Included in operating expenses are incremental costs directly related to business and asset acquisitions as well as changes in the fair value of contingent consideration liabilities, when applicable. We exclude acquisition-related expense from Adjusted EBITDA because we believe that the exclusion of this expense allows us to better provide meaningful information about our operating performance, facilitates comparisons to our historical operating results, improves the comparability of our results to the results of other companies in our industry, and ultimately, we believe helps investors better understand the acquisition-related expense and the effects of the transaction on our results of operations. We exclude non-ordinary course litigation expense because we do not consider legal costs and settlement fees incurred in litigation and litigation-related matters of non-ordinary course lawsuits and other disputes, particularly costs incurred in ongoing intellectual property litigation, to be indicative of our core operating performance. We do not adjust for ordinary course legal expenses, including those expenses resulting from maintaining and enforcing our intellectual property portfolio and license agreements. Adjusted EBITDA is a key measure that our management uses to understand and evaluate our core operating performance and trends to generate future operating plans, to make strategic decisions regarding the allocation of capital, and to make investments in initiatives that are focused on cultivating new markets for our solutions. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA facilitates comparisons of our operating performance on a period-to-period basis and, in the case of exclusion of acquisition-related adjustments and certain historical legal expenses, excludes items that we do not consider to be indicative of our core operating performance. Adjusted EBITDA is not a measure calculated in accordance with 57 -------------------------------------------------------------------------------- GAAP and should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Please see Non-GAAP Measures in this section for a discussion of the limitations of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, the most comparable GAAP measurement, for the years endedDecember 31, 2021 , 2020 and 2019.
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 ourAlarm.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 theAlarm.com platform excluding subscribers of service providers that may use one of our other platforms as a substitute for theAlarm.com platform. Our service provider partners, who resell our services to our subscribers, have indicated that they typically have three to five-year service contracts with our subscribers. Our SaaS and license revenue renewal rate is calculated across our entire subscriber base on theAlarm.com platform, including subscribers whose contract with their service provider reached the end of its contractual term during the measurement period, as well as subscribers whose contract with their service provider has not reached the end of its contractual term during the measurement period, and is not intended to estimate the rate at which our subscribers renew their contracts with our service provider partners. 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.
Components of operating results
Our fiscal year ends on
Revenue We derive our revenue from three primary sources: the sale of cloud-based SaaS services on our integratedAlarm.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. 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 58 -------------------------------------------------------------------------------- one-time license fee, which is generally paid at contract inception. Our hardware and other revenue also includes our revenue from Shooter Detection Systems related to the sale of licenses that provide our customers the right to use our indoor gunshot detection solution in exchange for license fees, which are generally paid at contract inception. Hardware and other revenue may also include activation fees charged to some of our service provider partners for activation of a new subscriber account on our platforms, as well as fees paid by service provider partners for our marketing services. The decision whether to charge an activation fee is based in part on the expected number of subscribers to be added by our service provider partners and as a result, many of our largest service provider partners do not pay an activation fee. As a result of the COVID-19 pandemic, governments, public institutions and other organizations in many countries and localities where COVID-19 has been detected have taken certain emergency measures, and may from time to time take additional emergency measures, to combat its spread, including imposing lockdowns, shelter-in-place orders, quarantines, restrictions on travel and gatherings and the extended shutdown non-essential businesses that cannot be conducted remotely. These emergency measures remain in place to varying degrees. We have seen and anticipate we may continue to see disruption to our hardware supply chain, including limited inventory availability, increased lead times, and shipping delays, due to the impact of COVID-19 on manufacturing, production and global transportation, as well as to our sales channels due to restrictions on our service providers' ability to meet with residential and commercial property owners who use our solutions, reluctance of service providers and property owners to meet even where such restrictions have been lifted and general economic conditions. In addition, the COVID-19 pandemic has resulted in a global slowdown of economic activity and a recession inthe United States and the economic situation remains fluid as parts of the economy appear to be recovering while others continue to struggle. While vaccines have been approved for use inthe United States and in many other countries, and vaccination efforts are well underway, it remains difficult to assess or predict the ultimate duration and economic impact of the COVID-19 pandemic due to a resurgence of COVID-19 and the emergence and severity of COVID-19 variants. As the future impact on global supply chains from COVID-19 is difficult to predict, the extent to which COVID-19 may negatively affect our hardware revenue is uncertain; however, if the economy fails to fully recover or there are additional shutdowns of non-essential businesses due to a resurgence of COVID-19 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.
Revenue cost
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 and amounts paid to our third-party manufacturer for production and fulfillment of our cellular radio modules and image sensors, and procurement costs for our video cameras, video recorders and gunshot detection sensors, which we purchase from an original equipment manufacturer, and other devices. Our cost of hardware and other revenue also includes royalty costs in connection with technology licensed from third-party providers. 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, theU.S. government has implemented and imposed significant changes toU.S. trade policy with respect toChina . Tariffs have subjected certainAlarm.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 theU.S. government. Approximately one-fifth to one-half of the hardware products that we sell to our service provider partners are imported fromChina and could be subject to increased tariffs. While the additional import duties have resulted in an increase to our cost of hardware revenue, these import duties had a modest impact on hardware revenue margins. If tariffs are increased or are expanded to apply to more of our products, such actions may increase our cost of hardware revenue and reduce our hardware revenue margins in the future. We continue to monitor the changes in tariffs. Our costs of hardware revenue increased during the second half of 2021 primarily due to an increase in costs for freight shipments, including expedited shipping costs, as well as an increase in inventory component costs. We currently expect our hardware revenue margins to increase in 2022 as compared to the hardware revenue margins we experienced during the fourth quarter of 2021 as a result of price increases we have implemented on some of our products in 2022 to cover some of our increases in costs. 59 --------------------------------------------------------------------------------
Functionnary costs
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 1,404 employees as ofJanuary 1, 2021 to 1,500 employees as ofDecember 31, 2021 , 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. The number of employees in sales and marketing functions increased from 461 as ofJanuary 1, 2021 to 476 as ofDecember 31, 2021 . 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 inNorth 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 163 as ofJanuary 1, 2021 to 187 as ofDecember 31, 2021 . Excluding intellectual property litigation and acquisition-related expense, we expect general and administrative costs to increase prospectively as our business grows. This includes cost increases related to 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. 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 grew from 780 as ofJanuary 1, 2021 to 837 as ofDecember 31, 2021 . Our research and development efforts are focused on innovating new features and enhancing the functionality of our platforms and the solutions we offer to our service provider partners and subscribers. 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 inJanuary 2021 . Interest expense is expected to decrease in 2022, as compared to 2021, due to the adoption of Accounting Standards Update, or ASU, 2020-06, "Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity" as of 60 --------------------------------------------------------------------------------January 1, 2022 , which will eliminate the non-cash interest expense related to the amortization of the debt discount associated with the equity component for 2026 Notes issued onJanuary 20, 2021 . However, there will be no impact to our liquidity or cash flows as a result of the adopting this guidance.
interest income
Interest income consists of interest income earned on our cash and cash equivalents and on our notes receivable.
Other (expenses) / income, net
Other (expense) / income, net primarily consists of gains earned on the sale of our investments, changes in the fair value of our investments and gains earned on our notes receivable and conversion of our outstanding notes receivable balance into an equity investment, partially offset by an impairment of one of our investments and one of our intangible assets.
(Benefit of) / Provision for Income Taxes
We are subject toU.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 statutory rate primarily due to tax windfall benefits from employee stock-based payment transactions, research and development tax credits claimed and foreign derived intangible income deductions, partially offset by the impact of foreign withholding taxes, nondeductible compensation and other nondeductible expenses. We recognize excess tax windfall benefits on a discrete basis during the quarter in which they occur, and we anticipate that our effective tax rate will vary from quarter to quarter depending on our stock price and exercises of stock options under our equity incentive plans each period. 61 --------------------------------------------------------------------------------
Operating results
The following table sets forth our selected consolidated statements of
operations and data as a percentage of revenue for the periods presented (in
thousands):
Consolidated Statements of Operations
Year Ended December 31,
2021 2020 2019
$ % $ % $ %
Revenue:
SaaS and license revenue $ 460,372 61 % $ 393,257 64 % $ 337,375 67 %
Hardware and other revenue 288,597 39 224,746 36 164,988 33
Total revenue 748,969 100 618,003 100 502,363 100
Cost of revenue(1):
Cost of SaaS and license revenue 66,758 9 53,539 9 50,066 10
Cost of hardware and other revenue 239,141 32 173,889 28 133,533 27
Total cost of revenue 305,899 41 227,428 37 183,599 37
Operating expenses:
Sales and marketing (2) 86,664 11 75,967 12 61,815 12
General and administrative (2) 87,406 12 78,643 13 69,959 14
Research and development (2) 177,713 24 152,147 25 114,443 23
Amortization and depreciation 29,715 4 27,520 4 22,134 4
Total operating expenses 381,498 51 334,277 54 268,351 53
Operating income 61,572 8 56,298 9 50,413 10
Interest expense (15,956) (2) (2,596) - (2,974) (1)
Interest income 587 - 870 - 4,922 1
Other (expense) / income, net (134) - 25,588 4 6,535 2
Income before income taxes 46,069 6 80,160 13 58,896 12
(Benefit from) / provision for income taxes (5,106) (1) 3,500 1 5,566 1
Net income $ 51,175 7 % $ 76,660 12 % $ 53,330 11 %
_______________
(1)Excludes amortization and depreciation shown in operating expenses below.
(2)Operating expenses include stock-based compensation expense as follows (in
thousands):
Year Ended December 31,
2021 2020 2019
Stock-based compensation expense data:
Sales and marketing $ 4,432 $ 3,025 $ 2,075
General and administrative 9,941 7,996 6,474
Research and development 24,321 18,155 12,054
Total stock-based compensation expense
62 --------------------------------------------------------------------------------
The following table shows the components of cost of revenue as a percentage of revenue:
Year ended
2021 2020 2019
Components of cost of revenue as a percentage of revenue: cost of SaaS and license revenue as a percentage of SaaS and
15% 14% 15%
license revenue Cost of hardware and other revenue as a percentage of hardware and 83%
77% 81% other revenue Total cost of revenue as a percentage of total revenue 41% 37% 37%
Comparison of completed exercises
The following tables in this section show our selected consolidated income statements (in thousands), percentage change data and revenue percentage data for the years ended
Revenue
Year Ended December 31, % Change
Revenue: 2021 2020 2021 vs. 2020
SaaS and license revenue $ 460,372 $ 393,257 17 %
Hardware and other revenue 288,597 224,746 28
Total revenue $ 748,969 $ 618,003 21 %
The $131.0 million increase in total revenue in 2021 as compared to 2020 was the
result of a $67.1 million , or 17%, increase in our SaaS and license revenue and
a $63.9 million , or 28%, increase in our hardware and other revenue. Our
software license revenue included within SaaS and license revenue decreased $5.7
million to $32.3 million in 2021 as compared to $38.0 million during 2020,
primarily due to the result of the continuing transition of customers from
non-hosted software to our cloud based hosted platform. The SaaS and license
revenue for the Alarm.com segment increased $60.0 million in 2021 as compared to
2020 primarily due to growth in our subscriber base, including the revenue
impact from subscribers we added in 2020. The SaaS and license revenue for our
Other segment increased $7.1 million in 2021 as compared to 2020 primarily due
to an increase in sales of our energy management and demand response solutions.
The increase in hardware and other revenue in 2021 as compared to 2020 was
primarily from the $64.9 million increase in hardware and other revenue, net of
intersegment eliminations, for the Alarm.com segment due to an increase in the
volume of video cameras and video recorders sold, as well as the increased
revenue from our acquisition of SDS on December 14, 2020 . Hardware and other
revenue, net of intersegment eliminations, in our Other segment decreased 13%,
or $1.0 million , in 2021 as compared to 2020 primarily due to a decrease in
sales related to our property management solution.
Cost of Revenue
Year Ended December 31, % Change
2021 2020 2021 vs. 2020
Cost of revenue(1):
Cost of SaaS and license revenue $ 66,758 $ 53,539 25 %
Cost of materials and other income 239,141 173,889
38 Total cost of revenue$ 305,899 $ 227,428 35 % % of total revenue 41 % 37 % _______________
(1) Excludes amortization and depreciation presented in operating expenses.
The$78.5 million increase in cost of revenue in 2021 as compared to 2020 was the result of a$65.3 million , or 38%, increase in cost of hardware and other revenue and a$13.2 million , or 25%, increase in cost of SaaS and license revenue. Our cost of software license revenue included within cost of SaaS and license revenue decreased$0.2 million to$1.1 million during 2021 as compared to$1.3 million during 2020. The cost of hardware and other revenue for theAlarm.com segment increased$66.1 million in 2021 as compared to 2020 primarily due to an increase in the number of hardware units shipped and an increase in costs for freight shipments and inventory component costs. The cost of SaaS and license revenue for theAlarm.com segment increased$9.7 million in 2021 as compared to 2020 primarily due to the growth in our subscriber base, which drove a corresponding increase in amounts paid to wireless network providers. The cost of SaaS and license revenue for the Other 63 -------------------------------------------------------------------------------- segment increased$3.5 million in 2021 as compared to 2020 primarily due to an increase in sales of our energy management and demand response solutions, which drove a corresponding increase in amounts paid to distributed energy resource providers. Cost of hardware and other revenue as a percentage of hardware and other revenue was 83% and 77% for the years endedDecember 31, 2021 and 2020, respectively. The increase in cost of hardware and other revenue as a percentage of hardware and other revenue in 2021 as compared to 2020 is primarily due to the increase in costs for freight shipments and inventory component costs as well as a reflection of the mix of product sales during the periods. Cost of SaaS and license revenue as a percentage of SaaS and license revenue was 15% and 14% for the years endedDecember 31, 2021 and 2020, respectively. The increase in cost of SaaS and license revenue as a percentage of SaaS and license revenue in 2021 as compared to 2020 is a reflection of the mix of sales of services during the periods. Cost of software license revenue as a percentage of software license revenue was 4% and 3% for the years endedDecember 31, 2021 and 2020, respectively.
Sales and marketing expenses
Year Ended December 31, % Change
2021 2020 2021 vs. 2020
Sales and marketing $ 86,664 $ 75,967 14 %
% of total revenue 11 % 12 %
The $10.7 million increase in sales and marketing expense in 2021 as compared to
2020 was primarily due to a $7.9 million increase in personnel and related costs
for our Alarm.com segment, including salary, benefits, stock-based compensation
and travel expenses, attributable in part to increases in the headcount for our
sales team to support our growth. Sales and marketing expense from our Other
segment increased $2.4 million in 2021 as compared to 2020, primarily due to
increases in personnel and related costs, attributable in part to increases in
the expected payout of the subsidiary long-term incentive plan as well as
increases in the headcount for our sales team. The overall number of employees
in our sales and marketing teams increased from 461 as of December 31, 2020 to
476 as of December 31, 2021 .
General and administrative costs
Year EndedDecember 31 ,
% Change
2021 2020 2021 vs. 2020 General and administrative$ 87,406 $ 78,643 11 % % of total revenue 12 % 13 % The$8.8 million increase in general and administrative expense in 2021 as compared to 2020 was primarily due to a$5.5 million increase in personnel and related costs for ourAlarm.com segment due in part to an increase in employee headcount to support our operational growth as well as a$2.6 million decrease to the contingent consideration liability that occurred in 2020 which did not occur in 2021. See Note 10 to our consolidated financial statements for details regarding the changes to the contingent consideration liability. Additionally, the increase in general and administrative expense in 2021 as compared to 2020 was due to a$1.8 million increase in legal expenses within ourAlarm.com segment resulting from intellectual property litigation. These increases were partially offset by a$1.0 million decrease in the provision for credit losses for ourAlarm.com segment in 2021 as compared to a$1.5 million increase in the provision for credit losses for ourAlarm.com segment in 2020. General and administrative expenses from our Other segment remained relatively consistent during 2021 as compared to 2020. The overall number of employees in general and administrative functions increased from 163 as ofDecember 31, 2020 to 187 as ofDecember 31, 2021 .
Research and development costs
Year Ended December 31, % Change
2021 2020 2021 vs. 2020
Research and development $ 177,713 $ 152,147 17 %
% of total revenue 24 % 25 %
64
-------------------------------------------------------------------------------- The$25.6 million increase in research and development expense in 2021 as compared to 2020 was primarily due to a$19.1 million increase in personnel and related costs for ourAlarm.com segment, attributable in part to an increase in headcount of employees in research and development functions as well as a$2.0 million increase in our expenses for external consultants. These increases were partially offset by$4.4 million of in-process research and development we acquired in 2020 which did not occur in 2021. Research and development expense from our Other segment increased by$7.2 million in 2021 as compared to 2020 primarily due to a$4.2 million increase in our personnel and related costs, including salary, benefits and stock-based compensation and a$2.7 million increase in expense for external consultants. The overall number of employees in research and development functions increased from 780 as ofDecember 31, 2020 to 837 as ofDecember 31, 2021 . Amortization and Depreciation Year Ended December 31, % Change 2021 2020 2021 vs. 2020 Amortization and depreciation$ 29,715 $ 27,520 8 % % of total revenue 4 % 4 %
Depreciation and amortization increased
Interest Expense
Year Ended December 31, % Change
2021 2020 2021 vs. 2020
Interest expense $ (15,956) $ (2,596) 515 %
% of total revenue (2) % - %
Interest expense increased $13.4 million in 2021 as compared to 2020, primarily
due to the amortization of the debt discount and debt issuance costs related to
the 2026 Notes.
Interest Income
Year Ended December 31, % Change
2021 2020 2021 vs. 2020
Interest income $ 587 $ 870 (33) %
% of total revenue - % - %
Interest income decreased $0.3 million in 2021 as compared to 2020, primarily
due to a decrease in interest rates, partially offset by interest income earned
on the cash from the proceeds of the 2026 Notes.
Other (expenses) / income, net
Year Ended December 31, % Change
2021 2020 2021 vs. 2020
Other (expense) / income, net $ (134) $ 25,588 (101) %
% of total revenue - % 4 %
Other (expense) / income, net changed by $25.7 million during 2021 as compared
to 2020, primarily due to recording a gain on the sale of an investment in one
of our platform partners of $24.7 million within our Alarm.com segment in 2020
which did not occur in 2021 as well as recording a gain on the investment in one
of our technology partners of $0.7 million within our Alarm.com segment in 2020
which did not occur in 2021.
65
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(Benefit of) / Provision for Income Taxes
Year Ended December 31, % Change
2021 2020 2021 vs. 2020
(Benefit from) / provision for income taxes $ (5,106) $ 3,500 (246) %
% of total revenue (1) % 1 %
The (benefit from) / provision for income taxes changed by $8.6 million in 2021
as compared to 2020. Our effective tax rate was (11.1)% in 2021 as compared to
4.4% in 2020. The change in the (benefit from) / provision for income taxes was
primarily due to increased tax windfall benefits from employee stock-based
payment transactions, changes in estimated research and development tax credits
and a decrease in income before income taxes in 2021 as compared to 2020.
Comparison of completed exercises
A comparison of the years endedDecember 31, 2020 and 2019 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 endedDecember 31, 2020 , filed with theSEC onFebruary 25, 2021 .
Segment information
We have two reportable segments:Alarm.com and Other. OurAlarm.com segment represents our cloud-based and Software platforms for the intelligently connected property and related solutions that contributed 95%, 94% and 93% of our revenue, net of intersegment eliminations, for the years endedDecember 31, 2021 , 2020 and 2019, respectively. Our Other segment is focused on researching, developing and offering residential and commercial automation solutions and energy management products and services in adjacent markets. The consolidated subsidiaries that make up our Other segment are in the investment stage and have incurred significant operating expenses relative to their revenue. OurAlarm.com segment increased from 1,290 employees as ofJanuary 1, 2021 to 1,363 employees as ofDecember 31, 2021 . Our Other segment increased from 114 employees as ofJanuary 1, 2021 to 137 employees as ofDecember 31, 2021 . Inter-segment revenue includes sales of hardware between our segments.
The following table shows our revenues, our intersegment revenues and our operating expenses by segment (in thousands):
Year Ended December 31,
2021 2020 2019
SaaS and SaaS and SaaS and
License Hardware and Operating License Hardware and Operating License Hardware and Operating
Revenue Other Revenue Expenses Revenue Other Revenue Expenses Revenue Other Revenue Expenses
Alarm.com $ 426,823 $ 284,721 $ 348,700 $ 366,815 $ 219,826 $ 310,960 $ 317,580 $ 156,265 $ 249,097
Other 33,549 9,275 33,214 26,442 14,254 23,317 19,795 20,919 19,254
Intersegment Alarm.com - (3,089) (416) - (3,093) - - (4,301) -
Intersegment Other - (2,310) - - (6,241) - - (7,895) -
Total $ 460,372 $ 288,597 $ 381,498 $ 393,257 $ 224,746 $ 334,277 $ 337,375 $ 164,988 $ 268,351
Our SaaS and license revenue for the Alarm.com segment included software license
revenue of $32.3 million , $38.0 million and $43.4 million for the years ended
December 31, 2021 , 2020 and 2019, respectively. There was no software license
revenue recorded for the Other segment during the years ended December 31, 2021 ,
2020 and 2019.
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
66
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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, restocking fees and assurance-type warranties, which contain
uncertainties and require us to make estimates of the amount of consideration to
which we will be entitled. The significant inputs related to our estimates of
variable consideration include the volume and amount of products and services
sold historically and expected to be sold in the future, the availability and
performance of our services and the historical and expected number of returns.
We record a reserve against revenue for hardware returns based on historical
returns. For each of the years ended December 31, 2021 , 2020 and 2019, our
reserve against revenue for hardware returns was approximately 1% of hardware
and other revenue. We evaluate our hardware reserve on a quarterly basis or if
there is an indication of significant changes in return experience.
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, 2021 . 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,
2021 . 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 consists of the potential cash payment contingent upon meeting certain financial milestones related to the agreement established with certain employees of one of our subsidiaries. During 2020 and 2021, we estimated the fair value of the liability by using a Monte Carlo simulation model which involves several Level 3 unobservable inputs. The significant unobservable inputs used in the valuation as ofDecember 31, 2021 included a weighted average revenue volatility of 7.5% and a revenue risk adjustment of 2.4%. We do not expect any significant changes to the underlying assumptions used to determine the unobservable inputs used to calculate the fair value of the liability related to the subsidiary long-term incentive plan as ofDecember 31, 2021 . However, if changes in these assumptions occur, and, should those changes be significant, we may be exposed to increases or decreases in operating expenses. The liability for the contingent consideration contains uncertainties and consisted of the potential earn-out payment related to our acquisition of 85% of the issued and outstanding capital stock of OpenEye onOctober 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 . During parts of 2019 and 2020, 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 ofDecember 31, 2020 and no further estimates were necessary as ofDecember 31, 2021 . 67 -------------------------------------------------------------------------------- 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 endedDecember 31, 2021 . 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 ofDecember 31, 2020 .
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, or 2015 Plan. We record stock-based compensation expense related to time-based restricted stock units based upon the award's grant date fair value and use an accelerated attribution method, net of actual forfeitures, in which compensation cost for each vesting tranche in an award is recognized ratably from the service inception date to the vesting date for that tranche. We record stock-based compensation expense related to performance-based restricted stock units based on management's determination of the probable outcome of the performance conditions, which requires considerable judgment. We estimate the fair value of each option granted on the date of grant using the Black-Scholes option-pricing model, which contains uncertainties and requires us to estimate the risk-free interest rate, expected term, expected stock price volatility and dividend yield. The risk-free interest rate assumption is based upon observed interest rates for constant maturityU.S. Treasury securities consistent with the expected term of our stock options. We use the "simplified method" to calculate the expected term, which is presumed to be the mid-point between the vesting date and the end of the contractual term. Beginning inNovember 2019 , the expected volatility for options granted is based on historical volatilities of our stock over the estimated expected term of the stock options. The expected volatility for options granted prior toNovember 2019 was based on historical volatilities of our stock and publicly traded stock of comparable companies over the estimated expected term of the stock options. We did not make any material changes to the underlying assumptions used to calculate stock-based compensation expense for the year endedDecember 31, 2021 and we do not expect any material changes in the near term to the underlying assumptions used to calculate stock-based compensation expense for the year endedDecember 31, 2021 . However, if changes in these assumptions occur, and, should those changes be significant, they could have a material impact on our stock-based compensation expense.
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 the valuation of intangible assets include estimates of expected future cash flows, discount rates, attrition rates related to acquired customer relationships, royalty rates and obsolescence factors related the acquired developed technology and the royalty rates associated with the acquired trade names.
We did not make any material changes to the underlying assumptions used as of the acquisition date to calculate the purchase price of the acquisition of SDS. We do not expect any material changes in the near term to the underlying assumptions used to calculate purchase price of the acquisition of SDS for the year endedDecember 31, 2021 given that the purchase price allocation was finalized during 2021.
We perform our annual impairment review of goodwill onOctober 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 2021 annual impairment review, we performed a qualitative assessment for ourAlarm.com reporting unit, our only reporting unit with a goodwill balance. We did not make any material changes to the underlying assumptions used in our qualitative assessment of our goodwill as ofOctober 1, 2021 and we do not expect any material changes in the near term to the underlying assumptions used in our qualitative assessment of our goodwill as ofOctober 1, 2021 . However, if changes in these assumptions occur, including as a result of performing a quantitative assessment instead of a qualitative assessment, and, should those changes be significant, they could have a material impact on our goodwill and potentially our other (expense) / income, net, if those significant changes result in an impairment. 68 --------------------------------------------------------------------------------
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. For the year endedDecember 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 afterDecember 31, 2021 . There were no other indicators of impairment of our intangible assets with definite lives or long-lived assets. We did not make any material changes to the underlying assumptions used in our assessment of intangible assets and long-lived assets for the year endedDecember 31, 2021 and we do not expect any material changes in the near term to the underlying assumptions used in our assessment of intangible assets and long-lived assets for the year endedDecember 31, 2021 . However, if changes in these assumptions occur, and, should those changes be significant, they could have a material impact on our intangible assets and long-lived assets and potentially our other (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 inthe 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 endedDecember 31, 2021 and we do not expect any material changes in the near term to the underlying assumptions used to calculate deferred tax assets and liabilities as well as uncertain tax positions for the year endedDecember 31, 2021 . However, if changes in these assumptions occur, and, should those changes be significant, they could have a material impact on our deferred tax assets and liabilities as well as our (benefit from) / provision for income taxes. Convertible Senior Notes In accounting for the issuance of our 2026 Notes, we separate the notes into liability and equity components. The carrying amount of the liability component is calculated by measuring the fair value of a similar liability that does not have an associated convertible feature, using a discounted cash flow model with a risk adjusted yield. The carrying amount of the equity component representing the conversion option is determined by deducting the fair value of the liability component from the par value of the notes as a whole. This difference between the aggregate principal amount and the liability component represents a debt discount that is amortized to interest expense using the effective interest method over the term of the notes. Transaction costs attributable to the liability component are netted with the liability component and amortized to interest expense using the effective interest method over the term of the notes. Transaction costs attributable to the equity component are netted with the equity component of the notes in additional paid-in capital in the consolidated balance sheets. We did not make any material changes to the underlying assumptions used to separate the notes into liability and equity components for the year endedDecember 31, 2021 . We will adopt ASU 2020-06, "Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity" onJanuary 1, 2022 , using the modified retrospective approach. We will record a reclassification from equity to debt through an adjustment upon adoption that will decrease additional paid-in capital by$56.5 million , net of tax; decrease deferred tax liabilities and deferred tax assets by$15.8 million and$0.4 million , respectively; increase convertible senior notes, net by$61.9 million ; and increase retained earnings by$10.0 million , net of tax. 69 -------------------------------------------------------------------------------- Specific to the 2026 Notes, we will also record less interest expense in 2022 and beyond 2022 as compared to 2021, due to eliminating the amortization of the debt discount on the equity component, which represented the embedded conversion feature. Additionally, this guidance requires that we adopt the if-converted method for computing diluted earnings per share, which will increase our diluted weighted average common shares outstanding and impact our earnings per share upon adoption. There will be no impact to our liquidity or cash flows as a result of adopting this guidance.
Recent accounting pronouncements
See note 2 to our consolidated financial statements for information on recently issued accounting standards.
Cash and capital resources
Working capital
The following table summarizes our cash and cash equivalents, accounts receivable, net working capital and working capital for the periods indicated (in thousands):
As ofDecember 31, 2021 2020
Cash and cash equivalents
Accounts receivable, net 105,548 83,326 Working capital
788,281 307,170 We define working capital as current assets minus current liabilities. Our cash and cash equivalents as ofDecember 31, 2021 are available for working capital purposes. We do not enter into investments for trading purposes, and our investment policy is to invest any excess cash in short term, highly liquid investments that limit the risk of principal loss; therefore, our cash and cash equivalents are held in demand deposit accounts that generate very low returns.
Cash and capital resources
As ofDecember 31, 2021 , we had$710.6 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. OnJanuary 20, 2021 , we issued$500.0 million aggregate principal amount of 0% convertible senior notes dueJanuary 15, 2026 in a private placement to qualified institutional buyers and received proceeds of$484.3 million , net of$15.7 million of transaction fees and other debt issuance costs. We used some of the proceeds to repay the$110.0 million outstanding principal balance under our 2017 Facility and also used some of the proceeds to pay accrued interest, fees and expenses related to the 2017 Facility. We terminated the 2017 Facility effectiveJanuary 20, 2021 . We are using the remaining net proceeds from the issuance of the 2026 Notes for working capital and other general corporate purposes, which may include acquisitions or strategic investments in complementary businesses or technologies.
In
OnDecember 16, 2021 ,EnergyHub, Inc. , acquired certain assets of an unrelated third party. Substantially all of the acquired assets consisted of developed technology. In consideration for the purchase of the developed technology, we paid$4.2 million in cash inDecember 2021 , with the remaining$0.9 million expected to be paid 18 months following the acquisition date, subject to offset for any indemnification obligations. Additionally, we incurred$0.2 million in direct transaction costs related to legal fees during 2021 that were capitalized as a component of the consideration transferred. The combined$5.3 million consideration related to developed technology was recorded as an intangible asset at the time of the asset acquisition and will be amortized on a straight-line basis over an estimated useful life of seven years. 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$10.0 million and$12.0 million , primarily related to purchases of computer software and equipment as well as the continued build out of our leased and owned office space. The estimated capital expenditure requirements exclude land and real estate purchases, if we decide to make such purchases. Maturities of lease liabilities for our various office leases are as follows:$11.7 million in 2022,$11.3 million in 2023,$9.7 million in 2024,$8.3 million in 2025,$4.7 million in 2026 and$0.7 million in 2027 and thereafter. 70 -------------------------------------------------------------------------------- Our future working capital, capital expenditure and cash requirements will depend on many factors, including the impact of the COVID-19 pandemic on the economy and our operations, the rate of our revenue growth, the amount and timing of our investments in human resources and capital equipment, future acquisitions and investments, and the timing and extent of our introduction of new solutions and platform and solution enhancements. As the impact of the COVID-19 pandemic on the economy and our operations evolves, we will continue to assess our liquidity needs. To the extent our cash and cash equivalents and cash flows from operating activities are insufficient to fund our future activities, we may need to borrow additional funds or raise funds from public or private equity or debt financings. If we raise additional funds through the incurrence of indebtedness, such indebtedness would likely have rights that are senior to holders of our equity securities and could contain covenants that restrict our operations. Any additional equity financing would be dilutive to our current stockholders.
The following discussion summarizes our current and long-term significant cash requirements at
Material Cash Requirements (in thousands)
More Than
1 Year 2 to 3 Years 4 to 5 Years 5 Years Total
Convertible Notes:
Principal payments $ - $ - $ 500,000 $ - $ 500,000
Special interest - - - - -
Operating lease commitments 11,804 21,325 13,393 737 47,259
Other long-term liabilities1 184 3,595 1,516 - 5,295
Other commitments2 656 379 1 - 1,036
Total $ 12,644 $ 25,299 $ 514,910 $ 737 $ 553,590
_______________
(1)See Note 12 to our consolidated financial statements for details on the
components of other long-term liabilities. As of December 31, 2021 , we recorded
a liability for long-term accrued taxes and interest payable of $4.2 million .
Due to the uncertainty in the timing of future payments, we have excluded the
liability related to these uncertain tax positions from the table above. See
Note 18 to our consolidated financial statements for additional information
regarding income taxes.
(2)Represents amounts due under multi-year, non-cancelable contracts with
third-party vendors, as well as other commitments.
The commitment amounts in the table above are associated with contracts that are
enforceable and legally binding and that specify all significant terms,
including fixed or minimum services to be used, fixed, minimum or variable price
provisions, and the approximate timing of the actions under the contracts. The
table does not include obligations under agreements that we can cancel without a
significant penalty. Future events could cause actual payments to differ from
these estimates.
Convertible Senior Notes
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
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conversion price for the 2026 Notes on each applicable trading day; (2) during
the five business day period immediately after any ten consecutive trading day
period in which, for each trading day of that period, the trading price per
$1,000 principal amount of 2026 Notes for such trading day was less than 98% of
the product of the last reported sale price of our common stock and the
conversion rate for the 2026 Notes on each such trading day; (3) if we call any
or all of the 2026 Notes for redemption, at any time prior to the close of
business on the scheduled trading day immediately preceding the redemption date,
but only with respect to the 2026 Notes called (or deemed called) for
redemption; or (4) upon the occurrence of specified corporate events as set
forth in the Indenture.
On or after August 15, 2025 , until the close of business on the second scheduled
trading day immediately preceding the maturity date of the 2026 Notes, holders
of the 2026 Notes may convert all or any portion of their 2026 Notes at any
time, regardless of the foregoing conditions. Upon conversion, we may satisfy
our conversion obligation by paying or delivering, as the case may be, cash,
shares of our common stock or a combination of cash and shares of our common
stock, at our election. It is our current intent to settle the principal amount
of the 2026 Notes with cash. The initial conversion rate for the 2026 Notes is
6.7939 shares of our common stock per $1,000 principal amount of 2026 Notes,
which is equivalent to an initial conversion price of $147.19 per share of our
common stock, subject to adjustment under certain circumstances in accordance
with the terms of the Indenture. In addition, following certain corporate events
that occur prior to the maturity date of the 2026 Notes or if we deliver a
notice of redemption in respect of the 2026 Notes, we will, under certain
circumstances, increase the conversion rate of the 2026 Notes for a holder who
elects to convert its 2026 Notes (or any portion thereof) in connection with
such a corporate event or convert its 2026 Notes called (or deemed called) for
redemption during the related redemption period (as defined in the Indenture),
as the case may be.
If we undergo a fundamental change (as defined in the Indenture), subject to
certain exceptions and except as described in the Indenture, holders may require
us to repurchase for cash all or any portion of their 2026 Notes at a
fundamental change repurchase price equal to 100% of the principal amount of the
2026 Notes to be repurchased, plus accrued and unpaid special interest, if any,
to, but excluding, the fundamental change repurchase date.
The Indenture includes customary covenants and sets forth certain events of default after which the 2026 Notes may be declared immediately due and payable and sets forth certain types of events of bankruptcy or insolvency involving us, after which the 2026 Notes become automatically due and payable. 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.
Installation 2017
OnOctober 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 inOctober 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. OnMarch 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. OnJanuary 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 yearDecember 31, 2021 for previously capitalized debt issuance costs related to the 2017 Facility that were unamortized at the time of the termination of the 2017 Facility. The outstanding principal balance on the 2017 Facility accrued interest at a rate equal to, at our option, either (1) LIBOR, plus an applicable margin based on our consolidated leverage ratio, or (2) the highest of (a) theWall 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 onJanuary 20, 2021 , we elected for the outstanding principal balance to accrue interest at LIBOR plus 1.50%, LIBOR plus 1.75%, LIBOR plus 2.00%, and LIBOR plus 2.50% when our consolidated leverage ratio is less than 1.00:1.00, greater than or equal to 1.00:1.00 but less than 2.00:1.00, greater than or equal to 2.00:1.00 but less than 3.00:1.00 and greater than or equal to 3.00:1.00, respectively. The 2017 Facility also carried an unused line commitment fee of 0.20%. For the years endedDecember 31, 2020 and 2019, the effective interest rate on the 2017 Facility was 2.65% and 4.45%, respectively. 72 -------------------------------------------------------------------------------- The carrying value of the 2017 Facility was zero and$110.0 million as ofDecember 31, 2021 and 2020, respectively. The 2017 Facility included a variable interest rate that approximated market rates and, as such, we classified the liability as Level 2 within the fair value hierarchy and determined that the carrying amount of the 2017 Facility approximated its fair value as ofDecember 31, 2020 .
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 onJanuary 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. OnJanuary 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." OnJanuary 20, 2021 , we issued$500.0 million aggregate principal amount of 0% convertible senior notes dueJanuary 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."
Dividends
We did not declare or pay dividends during the years endedDecember 31, 2021 , 2020 or 2019. 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. Additionally, our ability to pay dividends on our common stock was limited during a portion of 2021 by restrictions under the terms of the agreements governing the 2017 Facility. Payment of future cash dividends, if any, will be at the discretion of the board of directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs, the requirements of current or then-existing debt instruments and other factors the board of directors deems relevant.
Share buyback programs
OnNovember 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 onNovember 29, 2020 . OnDecember 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 endingDecember 3, 2023 . During the year endedDecember 31, 2020 , we repurchased 147,153 shares of our common stock under the program that expired onNovember 29, 2020 in open market purchases for a total consideration of$5.1 million . No shares were purchased under these programs during the years endedDecember 31, 2021 and 2019.
Actions retained
As permitted under the terms of the 2015 Plan, in 2021 the Compensation Committee authorized the withholding of shares of common stock in connection with the vesting of restricted stock unit awards issued to employees to satisfy applicable tax withholding requirements. These withheld shares are not issued or considered common stock repurchases under our stock repurchase program. We paid$4.5 million of tax withholdings related to vesting of restricted stock units during the year endedDecember 31, 2021 . Prior to using the withholding method to satisfy applicable tax withholding requirements for employees, we utilized the sell-to-cover method in which shares of our restricted stock unit awards were sold into the market on behalf of the employee upon vesting to cover tax withholding liabilities. We may utilize either the withholding method or sell-to-cover method in the future.
Historical cash flows
The following table sets forth our cash flows for the periods indicated (in
thousands):
Year Ended December 31,
2021 2020 2019
Cash flows from operating activities $ 103,157 $ 102,080 $ 47,112
Cash flows used in investing activities (20,365) (20,274) (73,414)
Cash flows from / (used in) financing activities 374,370 52,024
(130)
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Operational 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 2021, cash flows from operating activities were$103.2 million , compared to$102.1 million for 2020. This$1.1 million increase in cash flows from operating activities was due to a$43.8 million increase in non-cash and other reconciling items, partially offset by a$25.5 million decrease in net income and a$17.2 million decrease in cash from operating assets and liabilities. The$43.8 million increase in non-cash and other reconciling items was primarily due to a$24.7 million gain on the sale of an investment in one of our platform partners in 2020 that did not occur in 2021, which was adjusted from net income within operating activities and presented as cash flows from investing activities. Additionally, the increase in non-cash and other reconciling items was primarily due to$15.7 million increase in amortization of the debt discount and debt issuance costs related to the 2026 Notes in 2021 as well as a$9.5 million increase in stock-based compensation resulting from additional grants of stock options and restricted stock units in 2021. These increases in non-cash and other reconciling items were partially offset by a$6.9 million change in deferred income taxes, primarily due to increased tax windfall benefits from employee stock-based payment transactions in 2021 as compared to 2020. The$17.2 million decrease in cash from operating assets and liabilities was primarily due to a$20.8 million change in inventory resulting from additional purchased inventory in 2021 as compared to 2020, which is due in part to the impacts of the COVID-19 pandemic and the related uncertainty surrounding the potential disruption to our supply chain. To a lesser extent, the decrease in cash from operating assets and liabilities was due to increases in prepayments for long lead-time parts related to inventory and other assets, partially offset by differences in timing of collection of receipts and payments of disbursements in 2021 as compared to 2020. For 2020, cash flows from operating activities were$102.1 million , compared to$47.1 million for 2019. This$55.0 million increase in cash flows from operating activities was due to a$34.3 million increase in cash from operating assets and liabilities as well as a$23.3 million increase in net income, partially offset by a$2.6 million decrease in non-cash items. The$34.3 million increase in cash from operating assets and liabilities was primarily due to differences in timing of payments of disbursements and collection of receipts totaling$36.9 million , due in part to the$28.0 million payment made in 2019 for the agreement reached to settle the legal matter alleging violations of the Telephone Consumer Protection Act ,or TPCA, that did not occur in 2020. This increase in cash from operating assets and liabilities was partially offset by a$3.7 million change in inventory resulting from additional purchased inventory in 2020 that did not occur in 2019, which is due in part to the impacts of the COVID-19 pandemic and the uncertainty surrounding the potential disruption to our supply chain. The$2.6 million decrease in non-cash and other reconciling items was primarily due to a$24.7 million gain on the sale of an investment in one of our platform partners in 2020 that did not occur in 2019, which was adjusted from net income within operating activities and presented as cash flows from investing activities. This decrease in noncash and other reconciling items was partially offset by an$8.6 million increase in stock-based compensation resulting from additional grants of stock options and restricted stock units in 2020 and a gain of$6.9 million related to a promissory note with one of our hardware suppliers recorded in 2019 that did not occur in 2020. Additionally, the decrease in non-cash and other reconciling items was also partially offset by a$5.4 million increase in amortization and depreciation primarily from intangible assets that were acquired in connection with the purchase of 85% of the issued and outstanding capital stock of OpenEye onOctober 21, 2019 .
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 2021, our cash flows used in investing activities was$20.4 million as 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. For 2020, our cash flows used in investing activities was$20.3 million as compared to$73.4 million in 2019. The$53.1 million decrease in cash used in investing activities was primarily due to our payment of$58.8 million , net of cash acquired, for 85% of the issued and outstanding capital stock of OpenEye in 2019, partially offset by our payment of$26.3 million , net of cash 74 -------------------------------------------------------------------------------- acquired, for 100% of the issued and outstanding ownership interest units of SDS in 2020. Additionally, the decrease in cash used in investing activities was due to$25.7 million in proceeds received from the sale of an investment in one of our platform partners in 2020, which did not occur in 2019, a payment of$22.4 million in 2019 to acquire a promissory note as well as$3.7 million of funding provided to one of our hardware suppliers that did not occur in 2020. The decrease in cash used in investing activities in 2020 as compared to 2019 was partially offset by$30.7 million received from one of our hardware suppliers for the amounts due under various promissory notes in 2019 that did not occur in 2020. 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 2021, cash flows from financing activities was$374.4 million compared to$52.0 million in 2020. The$322.4 million increase in cash flows from financing activities was primarily due to$484.3 million in proceeds from the issuance of the 2026 Notes, net of issuance costs paid. This increase in cash flows from financing activities was partially offset by the repayment of$110.0 million to terminate the 2017 Facility in 2021 that did not occur in 2020 as well as the borrowing of$50.0 million under the 2017 Facility in 2020 that did not occur in 2021. For 2020, cash flows from financing activities was$52.0 million compared to cash flows used in financing activities of$0.1 million in 2019. The$52.1 million increase in cash flows used in financing activities was primarily due to the borrowing of$50.0 million under our 2017 Facility in 2020 as well as a$7.8 million increase in cash flows from the issuance of common stock from equity based plans. The increase in cash flows from financing activities in 2020 as compared to 2019 was partially offset by our use of$5.1 million to purchase shares of treasury stock in 2020 that did not occur in 2019.
Non-GAAP Measures
We define Adjusted EBITDA as our net income before interest expense, interest
income, other (expense) / income, net, (benefit from) / provision for income
taxes, amortization and depreciation expense, stock-based compensation expense,
secondary offering expense, acquisition-related expense and legal costs and
settlement fees incurred in connection with non-ordinary course litigation and
other disputes, particularly costs involved in ongoing intellectual property
litigation. We do not consider these items to be indicative of our core
operating performance. The non-cash items include amortization and depreciation
expense, 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 to 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.
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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 to net income, the most directly comparable GAAP measure, for
each of the periods indicated (in thousands):
Year ended
2021 2020 2019 Adjusted EBITDA: Net income$ 51,175 $ 76,660 $ 53,330 Adjustments: Interest expense, interest income and other (expense) / income, net 15,503 (23,862) (8,483) (Benefit from) / provision for income taxes (5,106) 3,500 5,566 Amortization and depreciation expense 29,715 27,520 22,134 Stock-based compensation expense 38,694 29,176 20,603 Secondary offering expense - 543 - Acquisition-related expense 29 2,732 2,403 Litigation expense 12,462 8,988 12,754 Total adjustments 91,297 48,597 54,977 Adjusted EBITDA$ 142,472 $ 125,257 $ 108,307
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