What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-08-05 compared with 2020-05-07 · 237 added, 146 removed, 335 unchanged (53% of the section changed)

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our business strategy, plans and objectives for future operations;

continued enhancements of our platform and offerings;

continued enhancement s of our platform and offerings;

our future financial and business performance and the potential impact of trade policies and related tariffs on our cost of hardware revenue and hardware revenue margins.

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Our subscribers can seamlessly connect to their property through our family of mobile apps, websites and engagement platforms like voice control through Amazon Echo and Google Home, wearable devices like the Apple Watch and TV applications such as Apple TV and Amazon Fire TV.

Highlights of First Quarter Results

Highlights of Second Quarter Results

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

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on a per customer basis.

SaaS and license revenue represented 61% of our revenue during the three months ended March 31, 2020 , as compared to 71% in the same period in the prior year.

SaaS and license revenue represented 68% and 64% of our revenue during the three and six months ended June 30, 2020, respectively, as compared to 68% and 69% in the same periods in the prior year.

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

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

Software license revenue represented 6% of our revenue during the three months ended March 31, 2020 , as compared to 10% for the same period in the prior year.

Software license revenue represented 7% of our revenue during each of the three and six months ended June 30, 2020, as compared to 9% for the same periods in the prior year.

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

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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.

Hardware and other revenue represented 39% of our revenue during the three months ended March 31, 2020 , as compared to 29% in the same period in the prior year.

Hardware and other revenue represented 32% and 36% of our revenue during the three and six months ended June 30, 2020, respectively, as compared to 32% and 31% in the same periods in the prior year.

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

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

SaaS and license revenue increase d 15% to $91.9 million in the three months ended March 31, 2020 from $80.1 million in the three months ended March 31, 2019 .

Included in SaaS and license revenue was software license revenue, which decreased to $9.7 million in the three months ended March 31, 2020 from $11.0 million in the three months ended March 31, 2019 .

Total revenue increase d 35% to $151.9 million in the three months ended March 31, 2020 from $112.3 million in the three months ended March 31, 2019 .

Net income decrease d to $8.6 million in the three months ended March 31, 2020 as compared to $9.0 million in the three months ended March 31, 2019 .

Net income attributable to common stockholders decrease d to $8.8 million in the three months ended March 31, 2020 as compared to $9.0 million in the three months ended March 31, 2019 .

Adjusted EBITDA, a non-GAAP measurement of operating performance, increase d to $29.2 million in the three months ended March 31, 2020 from $24.3 million in the three months ended March 31, 2019 .

Please see Non-GAAP Measures below in this section of this Quarterly Report for a discussion of the limitations of Adjusted EBITDA (a non-GAAP measure) and a reconciliation of Adjusted EBITDA to net income, the most comparable measurement in accordance with accounting principles generally accepted in the United States, or GAAP, for the three months ended March 31, 2020 and 2019 .

• SaaS and license revenue increased 16% to $95.7 million in the three months ended June 30, 2020 from $82.3 million in the three months ended June 30, 2019.

SaaS and license revenue increased 16% to $187.7 million in the six months ended June 30, 2020 from $162.4 million in the six months ended June 30, 2019.

Included in SaaS and license revenue was software license revenue, which decreased to $9.8 million in the three months ended June 30, 2020 from $11.0 million in the three months ended June 30, 2019.

Software license revenue decreased to $19.5 million in the six months ended June 30, 2020 from $22.0 million in the six months ended June 30, 2019.

• Total revenue increased 16% to $141.6 million in the three months ended June 30, 2020 from $121.7 million in the three months ended June 30, 2019.

Total revenue increased 25% to $293.6 million in the six months ended June 30, 2020 from $234.0 million in the six months ended June 30, 2019.

• Net income increased to $16.6 million in the three months ended June 30, 2020 as compared to $13.8 million in the three months ended June 30, 2019.

Net income increased to $25.2 million in the six months ended June 30, 2020 as compared to $22.8 million in the six months ended June 30, 2019.

Net income attributable to common stockholders increased to $17.0 million in the three months ended June 30, 2020 as compared to $13.8 million in the three months ended June 30, 2019.

Net income attributable to common stockholders increased to $25.8 million in the six months ended June 30, 2020 as compared to $22.8 million in the six months ended June 30, 2019.

• Adjusted EBITDA, a non-GAAP measurement of operating performance, increased to $29.2 million in the three months ended June 30, 2020 from $27.7 million in the three months ended June 30, 2019.

Adjusted EBITDA increased to $58.4 million in the six months ended June 30, 2020 from $52.0 million in the six months ended June 30, 2019.

Recent Developments

Since December 2019, a novel strain of coronavirus, SARS-CoV-2, causing a disease referred to as COVID-19, has spread globally, including to the United States.

In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic.

The COVID-19 pandemic has been disrupting 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 has also been disrupting and may 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.

However, the COVID-19 pandemic has been disrupting and will continue to disrupt our supply chain and sales channels for an unknown period of time 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.

To date, the COVID-19 pandemic has resulted in a global slowdown of economic activity and it is possible that the continued spread of COVID-19 and prolonged uncertainty with respect to COVID-19 could cause further economic slowdown or recession or cause other unpredictable events, each of which could adversely affect our business, results of operations or financial condition.

We expect these events to have a negative impact on our sales and our results of operations, the size and duration of which we are currently unable to predict;

however, we do anticipate that for the remainder of 2020 our hardware revenue will be lower in future periods as compared to the first quarter of 2020.

We also anticipate that our SaaS and license revenue growth rate may be lower in future periods due to the COVID-19 pandemic as some consumers or small businesses defer or cancel previously anticipated purchases.

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

On March 12, 2020 , Alarm.com Incorporated, one of our wholly-owned subsidiaries, acquired certain assets of an unrelated third party.

Substantially all of the acquired assets consisted of in-process research and development, or IPR&D.

We believe the acquisition of the IPR&D will strengthen our smart intercom capability, including building access security and convenience within the multiple dwelling unit market for residents, guests and deliveries.

In consideration for the purchase of the IPR&D, we paid approximately $1.2 million in cash on March 12, 2020 , with the remaining $0.3 million expected to be paid 18 months following the acquisition date, subject to offset for any indemnification obligations.

The $1.5 million consideration related to IPR&D was expensed at the time of the asset acquisition, as the IPR&D had no alternative future use.

On March 31, 2020 , Alarm.com Incorporated, one of our wholly-owned subsidiaries, acquired certain assets of an unrelated third party.

Substantially all of the acquired assets consisted of IPR&D.

We believe the acquisition of the IPR&D will further our commitment to make significant investments in innovative research and development in the intelligently connected property market to broaden our suite of solutions.

In consideration for the purchase of the IPR&D, we paid approximately $2.1 million in cash on March 31, 2020 and $0.1 million in December 2019, with the remaining $0.7 million expected to be paid the later of approximately 12 months following the acquisition date or upon resolution of any pending indemnifications, subject to offset for any indemnification obligations.

The $2.9 million consideration related to IPR&D was expensed at the time of the asset acquisition, as the IPR&D had no alternative future use.

To date, the COVID-19 pandemic has resulted in a global slowdown of economic activity and a recession in the United States and the continued spread of COVID-19 and 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 towards the end of the second quarter of 2020, we expect these events to have a negative impact on our sales and our results of operations, the size and duration of which we are currently unable to predict;

however, we do anticipate that for the remainder of 2020 our hardware revenue will be lower as compared to the first half of 2020.

If there continues to be a slowdown of economic activity in the future, we anticipate that our SaaS and license revenue growth rate may also be lower in future periods 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.

Secondary Public Offering

In May 2020, we completed an underwritten secondary public offering of 5,616,451 shares of common stock at a price of $47.50 per share.

All of the shares sold in the secondary public offering were sold by selling stockholders, which are entities affiliated with Technology Crossover Ventures.

We did not receive any proceeds from the sale of shares of common stock by the selling stockholders.

We incurred expenses of approximately $0.5 million related to legal, accounting and other fees in connection with the secondary public offering, which are included in general and administrative expense in our condensed consolidated statements of operations and is adjusted for when determining Adjusted EBITDA.

Please see Non-GAAP Measures below in this section of this Quarterly Report for a discussion of the limitations of Adjusted EBITDA (a n on-GAAP measure) and a reconciliation of Adjusted EBITDA to net income, the most comparable measurement in accordance with GAAP, for the three and six months ended June 30, 2020 and 2019.

Other Business Metrics

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Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

SaaS and license revenue $ 95,704 $ 82,334 $ 187,654 $ 162,389

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Adjusted EBITDA

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

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

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

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

Please see Non-GAAP Measures in this section for a discussion of the limitations of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, the most comparable GAAP measurement, for the three months ended March 31, 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 our Alarm.com platform who were subscribers on the first day of the period, by (b) total SaaS and license revenue we would have recognized during the period from those same subscribers assuming no terminations, or service

level upgrades or downgrades.

We measure our SaaS and license revenue renewal rate on a trailing 12-month basis by dividing (a) the total SaaS and license revenue recognized during the trailing 12-month period

from our subscribers on our Alarm.com platform who were subscribers on the first day of the period, by (b) total SaaS and license revenue we would have recognized during the period from those same subscribers assuming no terminations, or service level upgrades or downgrades.

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

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On June 16, 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2016-13, " Financial Instruments - Credit Losses (Topic 326)," or Topic 326, which provides guidance designed to provide financial statement users with more information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date.

From November 2018 to May 2019, amendments to Topic 326 were issued to clarify numerous accounting topics.

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

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

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

Balance Sheet Caption

As of January 1, 2020

Balance Sheet Caption As of January 1, 2020

Accumulated deficit $ 816

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Other current assets (83)

Other assets (366)

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

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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.

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 .

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

As a result of the global COVID-19 pandemic, governments, public institutions and other organizations in many countries and localities where COVID-19 has been detected are taking certain 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.

We have seen and anticipate we will continue to see some disruption to our hardware supply chain 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.

In addition, the COVID-19 pandemic has resulted in a global slowdown of economic activity that has and for an unknown period of time will likely continue to decrease demand for a broad variety of goods and services.

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

In addition, the COVID-19 pandemic has resulted in a global slowdown of economic activity and a recession in the United States that has and for an unknown period of time will likely continue to decrease demand for a broad variety of goods and services.

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, we do anticipate that for the remainder of 2020 our hardware revenue will be lower in future periods as compared to the first quarter of 2020.

however, we do anticipate that for the remainder of 2020 our hardware revenue will be lower as compared to the first half of 2020.

If there continues to be a slowdown of economic activity in the future, we anticipate that our SaaS and license revenue growth rate may also be lower in future periods if some consumers or sm all businesses defer or cancel previously anticipated purchases.

Cost of Revenue

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administration.

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

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

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

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

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

We grew from 938 employees as of March 31, 2019 to 1,227 employees as of March 31, 2020 , and we expect to continue to hire new employees to support the projected future growth of our business.

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

We grew from 1,005 employees as of June 30, 2019 to 1,317 employees as of June 30, 2020, and we expect to continue to hire new employees to support the projected future growth of our business.

Sales and Marketing Expense.

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

The number of employees in sales and marketing functions increased from 313 as of March 31, 2019 to 422 as of March 31, 2020 .

The number of employees in sales and marketing functions increased from 337 as of June 30, 2019 to 441 as of June 30, 2020.

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

We intend to increase the size of our sales force and our service provider partner support team to provide additional support to our existing service provider partner base to drive their productivity in selling our solutions as well as to enroll new service provider partners in North America and in international markets.

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 partne r base to drive their productivity in selling our solutions as well as to enroll new service provider partners in North America and in international markets.

General and Administrative Expense.

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

The number of employees in general and administrative functions increased from 106 as of March 31, 2019 to 155 as of March 31, 2020 .

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

The number of employees in general and administrative functions increased from 114 as of June 30, 2019 to 155 as of June 30, 2020.

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

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

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

The number of employees in research and development functions increased from 519 as of March 31, 2019 to 650 as of March 31, 2020 .

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

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

The number of employees in research and development functions increased from 554 as of June 30, 2019 to 721 as of June 30, 2020.

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 enhance ment of our Enterprise Tools platform for our service provider partners.

Amortization and Depreciation .

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

Interest expense is expected to increase in 2020 as compared to 2019 due to the $50.0 million borrowed 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 global COVID-19 pandemic.

Interest expense is expected to increase in 2020 as compared to 2019 due to the $50.0 million borrowed 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.

Interest Income

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Other Income, Net

Other income, net primarily consists of non-operating and miscellaneous income and expense.

Provision for Income Taxes

Other income, net primaril y consists of non-operating and miscellaneous income and expense.

(Benefit From) / Provision for Income Taxes

We are subject to U.S.

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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.

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

Our effective tax rates were different from the statutory rate primarily due to research and development tax credits claimed, tax windfall benefits from employee stock-based payment transactions and foreign derived intangible income deductions, partially offset by the impact of state taxes and non-deductible meal and entertainment expenses.

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

Certain previously reported amounts in the condensed consolidated statements of operations for the three months ended March 31, 2019 have been reclassified to conform to our current presentation to reflect interest income as a separate line item, which was previously included in other income, net .

Certain previously reported amounts in the condensed consolidated statements of operations for the three and six months ended June 30, 2019 have been reclassified to conform to our current presentation to reflect interest income as a separate line item, which was previously included in other income, net.

Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

SaaS and license revenue $ 95,704 68 % $ 82,334 68 % $ 187,654 64 % $ 162,389 69 %

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Sales and marketing (2)

16,920 12 15,631 13 33,995 12 28,859 12

General and administrative (2)

17,359 12 13,872 12 38,224 13 33,084 14

Research and development (2)

36,636 26 28,418 23 76,366 26 54,914 24

Amortization and depreciation 6,723 5 5,138 4 13,145 4 10,366 4

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Income before income taxes 14,348 10 14,109 11 24,121 8 23,361 10

Provision for income taxes

(Benefit from) / provision for income taxes (2,277) (2) 313 — (1,075) (1) 555 —

Net income $ 16,625 12 % $ 13,796 11 % $ 25,196 9 % $ 22,806 10 %

_______________

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Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

Stock-based compensation expense data:

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Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

Components of cost of revenue as a percentage of revenue:

Cost of SaaS and license revenue as a percentage of SaaS and license revenue

14 % 15 % 13 % 15 %

Cost of hardware and other revenue as a percentage of hardware and other revenue

78 % 81 % 77 % 82 %

Total cost of revenue as a percentage of total revenue

Comparison of the Three Months Ended March 31, 2020 to March 31, 2019

34 % 37 % 36 % 36 %

Comparison of the Three and Six Months Ended June 30, 2020 to June 30, 2019

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

Three Months Ended

Change Six Months Ended

2020 2019 2020 2019

SaaS and license revenue $ 95,704 $ 82,334 16 % $ 187,654 $ 162,389 16 %

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Total revenue $ 141,637 $ 121,660 16 % $ 293,576 $ 233,995 25 %

The $39.6 million increase in total revenue for the three months ended March 31, 2020 as compared to the same period in the prior year was primarily the result of a $27.7 million , or 86% , increase in our hardware and other revenue and a $11.9 million , or 15% , increase in our SaaS and license revenue.

Our software license revenue included within SaaS and license revenue decreased $1.3 million to $9.7 million during the three months ended March 31, 2020 as compared to $11.0 million during the same period in the prior year, which decrease was primarily the result of the continuing transition of customers from non-hosted software to our cloud based hosted platform.

The $12.0 million increase in our Alarm.com segment SaaS and license revenue for the three months ended March 31, 2020 was primarily due to growth in our subscriber base, including the revenue impact from subscribers we added in 2019.

The increase in hardware and other revenue for the three months ended March 31, 2020 as compared to the same period in the prior year was primarily from the Alarm.com segment and was due to an increase in the volume of video cameras sold as well as the increased revenue from our acquisition of 85% of the issued and outstanding capital stock of PC Open Incorporated, a Washington corporation, doing business as OpenEye, on October 21, 2019 .

The $0.1 million decrease in SaaS and license revenue for our Other segment for the three months ended March 31, 2020 as compared to the same period in the prior year was due to a decrease in sales of our energy management and demand response solutions partially offset by an increase in sales of our property management and heating, ventilation and air conditioning, or HVAC, solutions.

T he $20.0 million increase in total revenue for the three months ended June 30, 2020 as compared to the same period in the prior year was primarily the result of a $13.4 million, or 16%, increase in our SaaS and license revenue and a $6.6 million, or 17%, increase in our hardware and other revenue.

Our software license revenue included within SaaS and license revenue decreased $1.2 million to $9.8 million during the three months ended June 30, 2020 as compared to $11.0 million during the same period in the prior year, which decrease was primarily the result of the continuing transition of customers from non-hosted software to our cloud based hosted platform.

Th e $10.8 million increase in our Alarm.com segment SaaS and license revenue for the three months ended June 30, 2020 was primarily due to growth in our subscriber base, including the revenue impact from subscribers we added in 2019.

The increase in hardwa re and other reven ue for the three months ended June 30, 2020 as compared to the same period in the prior year was from the Alarm.com segment and was due to the increased revenue from our acquisition of 85% of the issued and outstanding capital stock of PC Open Incorporated, a Washington corporation, doing business as OpenEye, on October 21, 2019, as well as an increase in the volume of video cameras sold.

The $2.6 million increase in SaaS and license revenue for our Other segment for the three months ended June 30, 2020 as compared to the same period in the prior year was due to an increase in sales of our energy management and demand response solutions and our property management and heating, ventilation and air conditioning, or HVAC, solutions.

Hardware and other revenue, net of intersegment eliminations, for the three months ended June 30, 2020 in our Other segment decreased 46%, as compared to the same period in the prior year, primarily due to the timing of sales related to our property management solution.

The $59.6 million increase in total revenue for the six months ended June 30, 2020 as compared to the same period in the prior year was primarily the result of a $34.3 million, or 48%, increase in our hardware and other revenue and a $25.3 million, or 16%, increase in our SaaS and license revenue.

Our software license revenue included within SaaS and license revenue decreased $2.5 million to $19.5 million during the six months ended June 30, 2020, as compared to $22.0 million during the same period in the prior year, which decrease was primarily the result of the continuing transition of customers from non-hosted software to our cloud based hosted platform.

The $22.8 million increase in our Alarm.com segment SaaS and license revenue for the six months ended June 30, 2020 was primarily due to growth in our subscriber base, including the revenue impact from subscribers we added in 2019.

The increase in hardware and other revenue for the six months ended June 30, 2020, as compared to the same period in the prior year was primarily from the Alarm.com segment and was due to an increase in the volume of video cameras sold as the increased revenue from our acquisition of 85% of the issued and outstanding capital stock of OpenEye, on October 21, 2019.

The $2.4 million increase in SaaS and license revenue for our Other segment for the six months ended June 30, 2020, as compared to the same period in the prior year was due to an increase in sales of our energy management and demand response solutions and our property management and heating, ventilation and air conditioning, or HVAC, solutions.

Hardware and other revenue, net of intersegment eliminations, for the six months ended June 30, 2020 in our

Other segment decreased 21%, as compared to the same period in the prior year, primarily due to the timing of sales related to our property management solution.

Cost of Revenue

Three Months Ended

Change Six Months Ended

2020 2019 2020 2019

Cost of revenue (1)

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

The $19.0 million increase in cost of revenue for the three months ended March 31, 2020 as compared to the same period in the prior year was the result of a $19.0 million , or 71% , increase in cost of hardware and other revenue.

Our cost of SaaS and license revenue and our cost of software license revenue included within cost of SaaS and license revenue remained relatively consistent for the three months ended March 31, 2020 as compared to the same period in the prior year.

The increase in cost of Alarm.com segment hardware and other revenue related primarily to an increase in the number of hardware units shipped during the three months ended March 31, 2020 as compared to the same period in the prior year as well as the increased cost of revenue from our acquisition of 85% of the issued and outstanding capital stock of OpenEye on October 21, 2019 .

Cost of hardware and other revenue as a percentage of hardware and other revenue was 76% for the three months ended March 31, 2020 and 82% for the same period in the prior year.

Cost of SaaS and license revenue as a percentage of SaaS and license revenue was 13% for the three months ended March 31, 2020 and 15% for the same period in the prior year.

Cost of software license revenue as a percentage of software license revenue was 4% and 3% for the three months ended March 31, 2020 and 2019 , respectively.

The decrease in cost of hardware and other revenue as a percentage of hardware and other revenue for the three months ended March 31, 2020 as compared to the same period in the prior year is a reflection of the mix of product sales during the periods.

T he $4.4 million increase in cost of revenue for the three months ended June 30, 2020 as compared to the same period in the prior year was the result of a $4.1 million, or 13%, increase in cost of hardware and other revenue and a $0.3 million, or 3%, increase in cost of SaaS and license revenue.

Our cost of software license revenue included within cost of SaaS and license revenue was $0.3 million for each of the three months ended June 30, 2020 and 2019.

The increase in cost of Alarm.com segment hardware and other revenue related primarily to the increased cost of revenue from our acquisition of 85% of the issued and outstanding capital stock of OpenEye on October 21, 2019 as well as an increase in the number of hardware units shipped during the three months ended June 30, 2020 as compared to the same period in the prior year.

Cost of hardware and other revenue as a percentage of hardware and other revenue was 78% for the three months ended June 30, 2020 and 81% for the same period in the prior year.

Cost of SaaS and license revenue as a percentage of SaaS and license revenue was 14% for the three months ended June 30, 2020 and 15% for the same period in the prior year.

Cost of software license revenue as a percentage of software license revenue was 3% for each of the three months ended June 30, 2020 and 2019.

The decrease in cost of hardware and other revenue as a percentage of hardware and other revenue for the three months ended June 30, 2020 as compared to the same period in the prior year is a reflection of the mix of product sales during the periods.

The $23.5 million increase in cost of revenue for the six months ended June 30, 2020 as compared to the same period in the prior year was the result of a $23.1 million, or 40%, increase in cost of hardware and other revenue and a $0.3 million, or 1%, increase in cost of SaaS and license revenue.

Our cost of software license revenue included within cost of SaaS and license revenue was $0.7 million for each of the six months ended June 30, 2020 and 2019.

The increase in cost of Alarm.com segment hardware and other revenue related primarily to an increase in the number of hardware units shipped during the six months ended June 30, 2020 as compared to the same period in the prior year as well as the increased cost of revenue from our acquisition of 85% of the issued and outstanding capital stock of OpenEye on October 21, 2019.

Cost of hardware and other revenue as a percentage of hardware and other revenue was 77% for the six months ended June 30, 2020 and 82% for the same period in the prior year.

Cost of SaaS and license revenue as a percentage of SaaS and license revenue was 13% for the six months ended June 30, 2020 and 15% for the same period in the prior year.

Cost of software license revenue as a percentage of software license revenue was 4% and 3% for the six months ended June 30, 2020 and 2019, respectively.

The decrease in cost of hardware and other revenue as a percentage of hardware and other revenue for the six months ended June 30, 2020, as compared to the same period in the prior year is a reflection of the mix of product sales during the periods.

Sales and Marketing Expense

Three Months Ended

Change Six Months Ended

2020 2019 2020 2019

Sales and marketing $ 16,920 $ 15,631 8 % $ 33,995 $ 28,859 18 %

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

The $3.8 million increase in sales and marketing expense for the three months ended March 31, 2020 as compared to the same period in the prior year was primarily due to increases in headcount for our sales team and our service provider partner support team to support our growth.

As a result, our personnel and related costs for our Alarm.com segment, including salary, benefits, stock-based compensation and travel expenses, increased by $3.6 million for the three months ended March 31, 2020 .

Additionally, recruiting costs and costs for external consultants increased by $0.1 million for the three months ended March 31, 2020 for our Alarm.com segment as compared to the same period in the prior year.

These increases were partially offset by a $0.2 million decrease in our marketing expense for our Alarm.com segment for the three months ended March 31, 2020 as compared to the same period in the prior year.

Sales and marketing expense from our Other segment increased $0.3 million for the three months ended March 31, 2020 as compared to the same period in the prior year, primarily due to increases in headcount for our sales team.

The number of employees in sales and marketing functions increased from 313 as of March 31, 2019 to 422 as of March 31, 2020 .

Th e $1.3 million increase in sales and marketing expense for the three months ended June 30, 2020 as compared to the same period in the prior year was primarily due to increases in headcount for our sales team and our service provider partner support team to support our growth.

As a result, our personnel and related costs for our Alarm.com segment, including salary, benefits, stock-based compensation and travel expenses, increased by $1.9 million for the three months ended June 30, 2020.

Additionally, recruiting costs and costs for external consultants increased by $0.1 million for the three months ended June 30, 2020 for our Alarm.com segment as compared to the same period in the prior year.

These increases were partially offset by a $0.8 million decrease in our marketing expense for our Alarm.com segment for the three months ended June 30, 2020 as compared to the same period in the prior year.

Sales and marketing expense from our Other segment increased $0.1 million for

the three months ended June 30, 2020 as compared to the same period in the prior year, primarily due to increases in headcount for our sales team.

Th e $5.1 million increase in sales and marketing expense for the six months ended June 30, 2020 as compared to the same period in the prior year was primarily due to increases in headcount for our sales team and our service provider partner support team to support our growth.

As a result, our personnel and related costs for our Alarm.com segment, including salary, benefits, stock-based compensation and travel expenses, increased by $5.5 million for the six months ended June 30, 2020.

Additionally, recruiting costs and costs for external consultants increased by $0.2 million for the six months ended June 30, 2020 for our Alarm.com segment as compared to the same period in the prior year.

These increases were partially offset by a $1.0 million decrease in our marketing expense for our Alarm.com segment for the six months ended June 30, 2020, as compared to the same period in the prior year.

Sales and marketing expense from our Other segment increased $0.4 million for the six months ended June 30, 2020, as compared to the same period in the prior year, primarily due to increases in headcount for our sales team.

The number of employees in sales and marketing functions increased from 337 as of June 30, 2019 to 441 as of June 30, 2020.

General and Administrative Expense

Three Months Ended

Change Six Months Ended

2020 2019 2020 2019

General and administrative $ 17,359 $ 13,872 25 % $ 38,224 $ 33,084 16 %

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

The $1.7 million increase in general and administrative expense for the three months ended March 31, 2020 as compared to the same period in the prior year was primarily due to a $1.6 million increase in personnel and related costs for our Alarm.com segment due to an increase in employee headcount to support our operational growth and a $1.1 million increase in the provision for credit losses primarily due to increases in the accounts receivable balance.

Additionally, expense for external consultants increased $0.7 million for the three months ended March 31, 2020 for our Alarm.com segment as compared to the same period in the prior year.

These increases were partially offset by a $1.9 million decrease in legal expenses within our Alarm.com segment resulting from intellectual property litigation during the three months ended March 31, 2019 which did not occur during the three months ended March 31, 2020 .

General and administrative expenses from our Other segment remained relatively consistent for the three months ended March 31, 2020 as compared to the same period in the prior year.

The number of employees in general and administrative functions increased from 106 as of March 31, 2019 to 155 as of March 31, 2020 .

Th e $3.5 million increase in general and administrative expense for the three months ended June 30, 2020 as compared to the same period in the prior year was primarily due to the reversal of a $3.3 million reserve during the three months ended June 30, 2019 which did not occur during the three months ended June 30, 2020, for a promissory note with one of our hardware suppliers within our Alarm.com segment.

Additionally, the increase in general and administrative expense was due to the $1.0 million increase in personnel and related costs for our Alarm.com segment due to an increase in employee headcount to support our operational growth and a $0.9 million increase in legal expenses within our Alarm.com segment resulting from intellectual property litigation during the three months ended June 30, 2020 which did not occur during the three months ended June 30, 2019.

T he $5.1 million increase in general and administrative expense for the six months ended June 30, 2020 as compared to the same period in the prior year was primarily due to the reversal of a $3.3 million reserve during the six months ended June 30, 2019 which did not occur during the three months ended June 30, 2020, for a promissory note with one of our hardware suppliers within our Alarm.com segment.

Additionally, the increase in general and administrative expense was due to the $1.1 million increase in expense for external consultants for our Alarm.com segment and the $2.7 million increase in personnel and related costs for our Alarm.com segment due to an increase in employee headcount to support our operational growth.

These increases were partially offset by a $1.7 million decrease to the contingent consideration liability from our acquisition of 85% of the issued and outstanding capital stock of OpenEye on October 21, 2019 and a $1.1 million decrease in legal expenses within our Alarm.com segment resulting from intellectual property litigation during the six months ended June 30, 2019 which did not occur during the six months ended June 30, 2020.

General and administrative expenses from our Other segment increased $0.7 million for the six months ended June 30, 2020 as compared to the same period in the prior year primarily due to an increase in the provision for credit losses.

The number of employees in general and administrative functions increased from 114 as of June 30, 2019 to 155 as of June 30, 2020.

Research and Development Expense

Three Months Ended

Change Six Months Ended

2020 2019 2020 2019

Research and development $ 36,636 $ 28,418 29 % $ 76,366 $ 54,914 39 %

% of total revenue 26 % 23 % 26 % 24 %

The $13.2 million increase in research and development expense for the three months ended March 31, 2020 as compared to the same period in the prior year was primarily due to an increase in headcount of employees in research and development functions.

Our personnel and related costs for our Alarm.com segment increased by $7.6 million for the three months ended March 31, 2020 as compared to the same period in the prior year.

Additionally, the increase in research and development expense is due to $4.4 million of in-process research and development we acquired in March 2020 as well as a $0.4 million increase in expenses for external consultants for the three months ended March 31, 2020 , as compared to the same period in the prior year.

Research and development expense from our Other segment increased $0.4 million for the three months ended March 31, 2020 as compared to the same period in the prior year, primarily due to personnel and related costs, including salary, benefits and stock-based compensation.

The number of employees in research and development functions increased from 519 as of March 31, 2019 to 650 as of March 31, 2020 .

T he $8.2 million increase in research and development expense for the three months ended June 30, 2020 as compared to the same period in the prior year was primarily due to an increase in headcount of employees in research and development functions.

Our personnel and related costs for our Alarm.com segment increased by $7.0 million for the three months ended June 30, 2020 as compared to the same period in the prior year.

Additionally, the increase in research and development expense is due to a $0.5 million increase in expenses for external consultants for the three months ended June 30, 2020, as compared to the same period in the prior year.

Research and development expense from our Other segment increased $0.5 million for

the three months ended June 30, 2020 as compared to the same period in the prior year, primarily due to personnel and related costs, including salary, benefits and stock-based compensation.

The $21.5 million increase in research and development expense for the six months ended June 30, 2020 as compared to the same period in the prior year was primarily due to an increase in headcount of employees in research and development functions.

Our personnel and related costs for our Alarm.com segment increased by $14.6 million for the six months ended June 30, 2020, as compared to the same period in the prior year and our expenses for external consultants increased by $1.0 million.

Additionally, the increase in research and development expense is due to $4.4 million of in-process research and development we acquired in March 2020, which did not occur during the six months ended June 30, 2019.

Research and development expense from our Other segment increased $0.9 million for the six months ended June 30, 2020 as compared to the same period in the prior year, primarily due to personnel and related costs, including salary, benefits and stock-based compensation.

The number of employees in research and development functions increased from 554 as of June 30, 2019 to 721 as of June 30, 2020.

Amortization and Depreciation

Three Months Ended

Change Six Months Ended

2020 2019 2020 2019

Amortization and depreciation $ 6,723 $ 5,138 31 % $ 13,145 $ 10,366 27 %

% of total revenue 5 % 4 % 4 % 4 %

Amortization and depreciation increased $1.2 million for the three months ended March 31, 2020 , as compared to the same period in the prior year, primarily due to the intangible assets that were acquired in connection with the purchase of 85% of the issued and outstanding capital stock of OpenEye on October 21, 2019 .

Amortization and d epreciation increased $1.6 million and $2.8 million for the three and six months ended June 30, 2020, respectively, as compared to the same periods in the prior year, primarily due to the intangible assets that were acquired in connection with the purchase of 85% of the issued and outstanding capital stock of OpenEye on October 21, 2019.

Interest Expense

Three Months Ended

Change Six Months Ended

2020 2019 2020 2019

Interest expense $ (868) $ (786) 10 % $ (1,513) $ (1,607) (6) %

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

Interest expense decrease d $0.2 million for the three months ended March 31, 2020 as compared to the same period in the prior year, primarily due to a decrease in the effective interest rate on the 2017 Facility resulting from decreases in the Eurodollar Base Rate, or LIBOR, and the decrease in carrying value of the 2017 Facility throughout most of the three months ended March 31, 2020 as compared to the same period in the prior year.

Interest expense remained relatively consistent for the three and six months ended June 30, 2020, respectively, as compared to the same periods in the prior ye ar.

The impact to interest expense for the decrease in the effective interest rate on the 2017 Facility resulting from decreases in the Eurodollar Base Rate, or LIBOR, was partially offset by an increase in the carrying value of the 2017 Facility due to the $50.0 million borrowed on March 25, 2020.

Interest Income

Three Months Ended

Change Six Months Ended

2020 2019 2020 2019

Interest income $ 157 $ 806 (81) % $ 616 $ 1,614 (62) %

% of total revenue — % 1 % — % 1 %

Interest income decrease d $0.3 million for the three months ended March 31, 2020 as compared to the same period in the prior year, primarily due to a decrease in interest income earned on our cash balance and interest income earned on notes receivable.

Interest incom e decreased $0.6 million and $1.0 million for the three and six months ended June 30, 2020, respectively, as compared to the same periods in the prior year, primarily due to a decrease in interest income earned on our cash balance due to a decrease in interest rates as well as decrease in interest income earned on notes receivable .

Other Income, Net

Three Months Ended

Change Six Months Ended

2020 2019 2020 2019

Other income, net $ 65 $ 44 48 % $ 157 $ 88 78 %

% of total revenue — % — % — % — %

Other income, net remained relatively consistent for the three months ended March 31, 2020 as compared to the same period in the prior year.

Provision for Income Taxes

Other income , net remained relatively consistent for the three and six months ended June 30, 2020 as compared to the same periods in the prior year.

(Benefit From) / Provision for Income Taxes

Three Months Ended

Provision for income taxes

Change Six Months Ended

2020 2019 2020 2019

(Benefit from) / provision for income taxes $ (2,277) $ 313 (827) % $ (1,075) $ 555 (294) %

% of total revenue (2) % — % (1) % — %

The provision for incomes taxes increase d $1.0 million for the three months ended March 31, 2020 as compared to the same period in the prior year.

Our effective tax rates were 12.3% and 2.6% for the three months ended March 31, 2020 and 2019 , respectively.

The increase in the provision for income taxes was primarily related to decreases in tax windfall benefits from employee stock-based payment transactions for the three months ended March 31, 2020 as compared to the same period in the prior year.

The provision for income taxe s decreased $2.6 million and $1.6 million for the three and six months ended June 30, 2020, respectively, as compared to the same periods in the prior year.

Our effective tax rates were (15.9)% and (4.5)% for the three and six months ended June 30, 2020, respectively, as compared to 2.2% and 2.4% for the same periods in the prior year.

The decrease in the provision for income taxes was primarily related to increases in research and development tax credits claimed for the three and six months ended June 30, 2020 as compared to the same periods in the prior year.

Segment Information

We have two reportable segments:

We have two reportable segm ents:

Alarm.com and Other.

Our Alarm.com segment represents our cloud-based and Software platforms for the intelligently connected property and related solutions that contributed 95% of our revenue for the three months ended March 31, 2020 as compared to 93% for the same period in the prior year.

Our Alarm.com segment represents our cloud-based and Software platforms for the intelligently connected property and related solutions that contributed 94% of our revenue for each of the three and six months ended June 30, 2020, respectively, as compared to 93% for the same periods in the prior year.

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

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

Our Alarm.com segment increased from 865 employees as of March 31, 2019 to 1,137 employees as of March 31, 2020 .

Our Other segment increased from 73 employees as of March 31, 2019 to 90 employees as of March 31, 2020 .

Our Alarm.com segment increased from 925 employees as of June 30, 2019 to 1,218 employees as of June 30, 2020.

Our Other segment increased from 80 employees as of June 30, 2019 to 99 employees as of June 30, 2020.

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

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Three Months Ended

SaaS and license revenue

Hardware and other revenue

SaaS and license revenue Hardware and other revenue

Operating expenses SaaS and license revenue Hardware and other revenue

Operating expenses

SaaS and license revenue

Hardware and other revenue

Alarm.com $ 88,922 $ 44,547 $ 71,533 $ 78,104 $ 36,521 $ 58,332

Other 6,782 4,926 6,105 4,230 5,914 4,727

Intersegment Alarm.com — (703) — — (1,078) —

Intersegment Other — (2,837) — — (2,031) —

Total $ 95,704 $ 45,933 $ 77,638 $ 82,334 $ 39,326 $ 63,059

Six Months Ended

SaaS and license revenue Hardware and other revenue

Operating expenses SaaS and license revenue Hardware and other revenue

Operating expenses

Alarm.com $ 176,334 $ 102,075 $ 150,294 $ 153,506 $ 66,868 $ 117,948

Other 11,320 10,484 11,436 8,883 10,325 9,275

Intersegment Alarm.com — (1,564) — — (2,077) —

Intersegment Other — (5,073) — — (3,510) —

Our SaaS and license revenue for the Alarm.com segment included software license revenue of $9.7 million for the three months ended March 31, 2020 , as compared to $11.0 million for the same period in the prior year.

There was no software license revenue recorded for the Other segment during the three months ended March 31, 2020 and 2019 .

Total $ 187,654 $ 105,922 $ 161,730 $ 162,389 $ 71,606 $ 127,223

Our SaaS and license revenue for the Alarm.com segment included software license revenue of $9.8 million and $19.5 million for the three and six months ended June 30, 2020, respectively, as compared to $11.0 million and $22.0 million for the same periods in the prior year.

There was no software license revenue recorded for the Other segment during the three and six months ended June 30, 2020 and 2019.

Critical Accounting Policies and Significant Judgments and Estimates

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In accordance with GAAP, we base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances.

Actual results may differ from these estimates under different assumptions or conditions, and to the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.

Because of the use of estimates inherent in the financial reporting process and given the additional unknowable duration and effects of the COVID-19 pandemic, actual results could differ from those estimates and any such differences may be material.

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

During the first quarter of 2020, we adopted Topic 326.

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

March 31, 2020

December 31, 2019

June 30, 2020 December 31, 2019

Cash and cash equivalents $ 205,827 $ 119,629

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We define working capital as current assets minus current liabilities.

Our cash and cash equivalents as of March 31, 2020 are available for working capital purposes.

Our cash and cash equivalents as of June 30, 2020 are available for working capital purposes.

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

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Liquidity and Capital Resources

As of March 31, 2020 , we had $171.7 million in cash and cash equivalents.

As of June 30, 2020, we had $205.8 million in cash and cash equivalents.

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

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

We believe our existing cash and cash equivalents, together with our 2017 Facility, and our future cash flows from operating activities will be sufficient to meet our anticipated operating cash needs for at least the next 12 months.

Over the final nine months of fiscal year 2020 , we expect our capital expenditure requirements to be approximately $15.0 million, primarily related to the continued build out of our leased office space as well as purchases of computer software and equipment.

Our future working capital and capital expenditure requirements will depend on many factors, including the impact of the global 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.

Over the final six months of fiscal year 2020, we expect our capital expenditure requirements to be approximately $6.5 million, primarily related to the continued build out of our leased office space as well as purchases of computer software and equipment.

In 2013, we paid $3.5 million in cash to purchase 3,548,820 Series A convertible preferred shares from one of our platform partners.

In 2014, we entered into a Series 1 Preferred Stock purchase agreement with the platform partner and another investor.

The other investor purchased shares of the platform partner’s Series 1 Preferred Stock.

As a result of the purchase, our 3,548,820 shares of Series A convertible preferred shares converted into 3,548,820 shares of common stock.

On July 31, 2020, the platform partner was sold to an unrelated third party and, as a result of the sale, we are entitled to receive total proceeds of $25.7 million in exchange for our shares of common stock, subject to a holdback of approximately $1.8 million and other adjustments as set forth in t he purchase agreement.

Our future working capital and capital expenditure requirements will depe nd 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.

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

During the three months ended March 31, 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 global COVID-19 pandemic.

As of March 31, 2020 , $113.0 million was outstanding under the 2017 Facility, no letters of credit were outstanding and $12.0 million remained available for borrowing under the 2017 Facility.

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

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

As of June 30, 2020, $112.0 million was outstanding under the 2017 Facility, no letters of credit were outstanding and $13.0 million remained available for borrowing under the 2017 Facility.

The 2017 Facility contains various financial and other covenants that require us to maintain a maxi mum consolidated leverage ratio and a fixed charge coverage ratio, and limit our capacity to incur other indebtedness, liens, make certain payments inc luding dividends, and enter into other transactions without approval of the lenders.

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

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

As of June 30, 2020, we were in compliance with all covenants under the 2017 Facility.

Our outstanding amounts under the 2017 Facility are due at maturity in October 2022.

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

We did not declare or pay dividends during the three months ended March 31, 2020 and 2019 .

We did not declare or pay dividends during the three and six months ended June 30, 2020 and 2019.

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

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

Three Months Ended

Cash flows from / (used in) operating activities

Six Months Ended

Cash flows from operating activities $ 48,048 $ 22,867

Cash flows used in investing activities (9,306) (18,369)

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

For the three months ended March 31, 2020 , cash flows from operating activities were $12.9 million , compared to $1.2 million cash flows used in operating activities for the same period in the prior year.

This $14.1 million increase in cash flows from operating activities was due to a $9.2 million increase in non-cash and other reconciling items and a $5.3 million increase in cash from operating assets and liabilities, partially offset by a $0.4 million decrease in net income.

The $9.2 million increase in non-cash and other reconciling items was primarily due to $3.3 million cash paid to acquire in-process research and development in March 2020 that was reclassified and presented as cash flows used in investing activities.

Additionally, the increase in non-cash and other reconciling items was due to a $2.1 million increase in stock-based compensation resulting from additional grants of stock options and restricted stock units during the three months ended March 31, 2020 and a $1.2 million increase in amortization expense from intangible assets that were acquired in connection with the purchase of 85% of the issued and outstanding capital stock of OpenEye on October 21, 2019 .

The $5.3 million increase in cash from operating assets and liabilities was primarily due to differences in timing of payments of disbursements, partially offset by the prepayment of $4.7 million for long lead-time parts related to inventory during the three months ended March 31, 2020 that did not occur during the same period in the prior year.

For the six months ended June 30, 2020, cash flows from operating activities were $48.0 million, compared to $22.9 million for the same period in the prior year.

This $25.1 million increase in cash flows from operating activities was due to a $12.0 million increase in cash from operating assets and liabilities, $10.7 million increase in non-cash and other reconciling items and a $2.4 million increase in net income.

T he $12.0 million increase in cash from operating assets and liabilities was primarily due to differences in timing of payments of disbursements and collection of receipts, partially offset by a $15.3 million increase in the change in inventory resulting from additional purchased inventory during the six months ended June 30, 2020 that did not occur during the same period in the prior year, 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 $10.7 million increase in non-cash and other reconciling items was primarily due to a

$3.8 million increase in stock-based compensation resulting from additional grants of stock options and restricted stock units during the six months ended June 30, 2020, $3.3 million cash paid to acquire in-process research and development in March 2020 that was reclassified and presented as cash flows used in investing activities and a $3.4 million increase in the provision for credit losses on accounts receivable and notes receivable.

Additionally, the increase in non-cash and other reconciling items was due to a $2.8 million increase in amortization and depreciation expense primarily from intangible assets that were acquired in connection with the purchase of 85% of the issued and outstanding capital stock of OpenEye on October 21, 2019.

Investing Activities

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

For the three months ended March 31, 2020 , our cash flows used in investing activities was $7.0 million , as compared to cash flows used in investing activities of $23.0 million for the same period in the prior year.

The $16.0 million decrease in cash flows used in investing activities was primarily due to the $16.4 million paid in March 2019 to a acquire a secured promissory note as well additional funding provided to one of our hardware suppliers under convertible promissory notes during the three months ended March 31, 2019 that did not occur during the three months ended March 31, 2020 .

This decrease was partially offset by a $3.3 million increase in cash flows used in investing activities to acquire in-process research and development in March 2020.

For the six months ended June 30, 2020, our cash flows used in investing activities was $9.3 million, as compared to $18.4 million for the same period in the prior year.

The $9.1 million decrease in cash flows used in investing activities was primarily due to the $16.4 million paid in March 2019 to a acquire a secured promissory note as well additional funding provided to one of our hardware suppliers under convertible promissory notes during the six months ended June 30, 2019 that did not occur during the six months ended June 30, 2020.

This decrease was partially offset by a $3.3 million increase in cash flows used in investing activities to acquire in-process research and development in March 2020 as well as a $5.4 million reduction in repayments of notes receivable during the six months ended June 30, 2020 as compared to the same period in the prior year.

Financing Activities

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

For the three months ended March 31, 2020 , cash flows from financing activities was $46.2 million , compared to $0.6 million for the same period in the prior year.

The $45.6 million increase in cash flows from financing activities was primarily due to the borrowing of $50.0 million under our 2017 Facility during the three months ended March 31, 2020 which was partially offset by our use of $5.1 million to purchase shares of treasury stock, as compared to the $1.0 million repayment of the outstanding balance of the 2017 Facility during three months ended March 31, 2019 .

For the six month s ended June 30, 2020, cash flows from financing activities was $47.5 million, compared to $0.3 million for the same period in the prior year.

The $47.2 million increase in cash flows from financing activities was primarily due to the borrowing of $50.0 million under our 2017 Facility during the six months ended June 30, 2020 which was partially offset by our use of $5.1 million to purchase shares of treasury stock during the six months ended June 30, 2020 that did not occur during the same period in the prior year.

Contractual Obligations

As of March 31, 2020 , there were no material changes in our contractual obligations and commitments from those disclosed in the “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” included in our Annual Report, other than the $50.0 million borrowed under our 2017 Facility in March 2020 and the amendment to the lease for our corporate headquarters executed in March 2020, which includes maturities of lease liabilities as follows:

As of June 30, 2020, there were no material changes in our contractual obligations and commitments from those disclosed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report, other than the $50.0 million borrowed under our 2017 Facility in March 2020 and the amendment to the lease for our corporate headquarters executed in March 2020, which includes maturities of lease liabilities as follows:

$0.1 million in 2020, $0.6 million in 2021, $0.8 million in 2022, $0.7 million in 2023, $0.5 million in 2024 and $0.8 million in 2025 and beyond.

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

During the three months ended March 31, 2019 , we repaid $1.0 million of the outstanding balance of the 2017 Facility.

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

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

D uring the three and six months ended June 30, 2020, we repaid $1.0 million of the outstanding balance of the 2017 Facility.

D uring the three and six months ended June 30, 2019, we repaid $1.0 million and $2.0 million of the outstanding balance of the 2017 Facility, respectively.

(b) the Federal Funds rate plus 0.50%, or (c) LIBOR plus 1.00% plus an applicable margin based on our consolidated leverage ratio.

For each of the three and six months ended June 30, 2020, we elected for the outstanding principal balance to accrue interest at LIBOR plus 1.50%, LIBOR plus 1.75%, LIBOR plus 2.00%, and LIBOR plus 2.50% when our consolidated leverage ratio is less than 1.00:1.00, greater than or equal to 1.00:1.00 but less than 2.00:1.00, greater than or equal to 2.00:1.00 but less than 3.00:1.00 and greater than or equal to 3.00:1.00, respectively.

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

For the three months ended March 31, 2020 , the effective interest rate on the 2017 Facility was 3.79% , as compared to 4.88% for the same period in the prior year.

The carrying value of the 2017 Facility was $113.0 million and $63.0 million as of March 31, 2020 and December 31, 2019 , respectively.

The 2017 Facility includes a variable interest rate that approximates market rates and, as such, we classified the liability as Level 2 within the fair value hierarchy and determined that the carrying amount of the 2017 Facility approximated its fair value as of March 31, 2020 and December 31, 2019 .

For the six months ended June 30, 2020, the effective interest rate on the 2017 Facility was 3.42%, as compared to 4.78% for the same period in the prior year.

The carrying value of the 2017 Facility was $112.0 million and $63.0 million as of June 30, 2020 and December 31, 2019, respectively.

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

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

As of June 30, 2020, we were in compliance with all financial and non-financial covenants and there were no events of default.

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

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Non-GAAP Measures

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

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

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

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We also use certain non-GAAP financial measures, including Adjusted EBITDA, as performance measures 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.

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 (benefit) / 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.

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Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

Adjusted EBITDA:

Net income $ 16,625 $ 13,796 $ 25,196 $ 22,806

Interest expense, interest income and other income, net 646 (64) 740 (95)

Provision for income taxes

(Benefit from) / provision for income taxes (2,277) 313 (1,075) 555

Amortization and depreciation expense 6,723 5,138 13,145 10,366

Stock-based compensation expense 7,095 5,420 13,453 9,686

Acquisition-related expense

Secondary offering expense 543 — 543 —

Acquisition-related (benefit) / expense (1,708) — 2,348 —

Litigation expense 1,563 3,112 4,049 8,649

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis