What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-02-25 compared with 2020-02-26 · 306 added, 348 removed, 381 unchanged (63% of the section changed)

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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, 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 approximately 20 years of operating experience, contribute to a compelling business model.

Our technology platforms are designed to make connected properties safer, smarter and more efficient.

Our solutions are used in both smart residential and commercial properties, which we refer to as the connected property market and we have designed our technology platforms for all market participants.

This includes not only the residential and commercial property owners who subscribe to our services, but also the hardware partners who manufacture devices that integrate with our platforms and the service provider partners who install and maintain our solutions.

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

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

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.

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

Executive Overview and Highlights of 2020 and 2019 Results

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Our service provider partners sell, install and support Alarm.com solutions that enable residential and commercial property owners to intelligently secure, connect, control and automate their properties.

Our service provider partners have indicated that they typically have three to five -year service contracts with residential or commercial property owners.

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.

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Software license revenue represented 6%, 9% and 10% of our revenue in 2020, 2019 and 2018, respectively.

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.

We have a rich history of innovation in cellular technology that enables our robust SaaS offering.

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.

Hardware and other revenue represented 33% , 31% and 30% of

our revenue in 2019 , 2018 and 2017 , respectively.

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 36%, 33% and 31% of our revenue in 2020, 2019 and 2018, 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 increase d 16% to $337.4 million in 2019 from $291.1 million in 2018 .

SaaS and license revenue increase d 23% to $291.1 million in 2018 from $236.3 million in 2017 .

Total revenue increase d 19% to $502.4 million in 2019 from $420.5 million in 2018 .

Total revenue increase d 24% to $420.5 million in 2018 from $338.9 million in 2017 .

Net income attributable to common stockholders was $53.5 million in 2019 , $21.5 million in 2018 and $29.2 million in 2017 .

Adjusted EBITDA, a non-GAAP measurement of operating performance, increase d to $108.3 million in 2019 from $93.1 million in 2018 .

Adjusted EBITDA increase d to $93.1 million in 2018 from $71.6 million in 2017 .

• SaaS and license revenue increased 17% to $393.3 million in 2020 from $337.4 million in 2019.

SaaS and license revenue increased 16% to $337.4 million in 2019 from $291.1 million in 2018.

• Total revenue increased 23% to $618.0 million in 2020 from $502.4 million in 2019.

Total revenue increased 19% to $502.4 million in 2019 from $420.5 million in 2018.

• Net income increased 44% to $76.7 million in 2020 from $53.3 million in 2019.

Net income increased 148% to $53.3 million in 2019 from $21.5 million in 2018.

Net income attributable to common stockholders increased 45% to $77.9 million in 2020 from $53.5 million in 2019.

Net income attributable to common stockholders increased 149% to $53.5 million in 2019 from $21.5 million in 2018.

• Adjusted EBITDA, a non-GAAP measurement of operating performance, increased to $125.3 million in 2020 from $108.3 million in 2019.

Adjusted EBITDA increased to $108.3 million in 2019 from $93.1 million in 2018.

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 to net income, the most comparable GAAP measure, for the years ended December 31, 2020, 2019 and 2018.

Historical Trends within the Financial Results

Information about current period and prior period acquisitions that may affect the comparability of our historical financial information is included in Item 1.

In 2018, we recorded an expense of $28.0 million in general and administrative expense, which relates to the agreement reached to settle the legal matter alleging violations of the Telephone Consumer Protection Act, or TCPA, which may affect the comparability of our historical financial information.

Information about the $1.7 million of interest recorded within interest income and the $6.9 million of gain recorded within other income, net, in 2019, which relates to promissory note proceeds received from one of our hardware suppliers and proceeds from an acquired promissory note, and may affect the comparability of our historical financial information, is disclosed in the Comparison of Years Ended December 31, 2020 to December 31, 2019 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 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 Ended December 31, 2020 to December 31, 2019 section below within Item 7.

"Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Geographic Areas

We believe there is significant opportunity to expand our international business, as 3% of our total revenue during the year ended December 31, 2020 originated from customers located outside of North America.

Our products are currently localized and available in approximately 40 countries outside of North America.

Our products are currently localized and available in over 40 countries outside of North America.

Recent Developments

On October 21, 2019 , Alarm.com Incorporated, one of our wholly-owned subsidiaries, acquired 85% of the issued and outstanding capital stock of PC Open Incorporated, a Washington corporation, doing business as OpenEye.

OpenEye provides cloud-managed video surveillance solutions for the enterprise commercial market.

We believe the acquisition of OpenEye will provide a key element to our comprehensive suite of interactive cloud-based services spanning video, access control, intrusion and automation for domestic and international commercial enterprises.

In consideration for the purchase of 85% of the issued and outstanding capital stock of OpenEye, we paid $61.2 million in cash on October 21, 2019 , after deducting $2.8 million related to an agreed holdback.

Pursuant to the terms of the stock purchase agreement, following the preliminary determination of the working capital of OpenEye as of the closing date, the purchase price increased by $0.2 million .

An earn-out of up to an additional $11.0 million is payable if certain calendar 2020 revenue targets are met.

The purchase price allocation, which is pending until the final determination of the working capital and tax adjustments, was not finalized as of the filing date of this Annual Report on Form 10-K.

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 in the United States and the economic situation remains fluid as parts of the economy appear to be recovering while others continue to struggle.

While vaccines have been approved for use in the United States and in many other countries, supplies of the vaccine remain limited and it remains difficult to assess or predict the ultimate duration and economic impact of the COVID-19 pandemic.

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

While our business and those of our service providers showed some resiliency beginning towards the end of the second quarter of 2020 and continuing through much of the remainder of 2020, if the economy fails to fully recover or there are additional shutdowns of non-essential businesses due to a resurgence of COVID-19, 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.

On December 14, 2020, Alarm.com Incorporated, one of our wholly-owned subsidiaries, acquired 100% of the issued and outstanding ownership interest units of Shooter Detection Systems, LLC, or SDS.

SDS provides an indoor gunshot detection solution through the Guardian Indoor Active Shooter Detection System, which uses a combination of acoustic and infrared sensors and proprietary algorithms to detect gunshots and communicate shooting incident details to building occupants and security teams.

The acquisition of SDS expands our commercial solutions and helps our partners outfit commercial and enterprise customers with the gunshot detection solution.

In consideration for the purchase of 100% of the issued and outstanding ownership interest units of SDS, we paid $26.6 million in cash on December 14, 2020.

Pursuant to the terms of the unit purchase agreement, following the preliminary determination of the working capital of SDS as of the closing date, the purchase price decreased by $0.1 million.

The working capital adjustment is expected to be finalized and paid to the equity holders of SDS in the first half of 2021.

The purchase price allocation, which is pending the final determination of the working capital, was not finalized as of the filing date of this Annual Report on Form 10-K.

Subsequent to December 31, 2020, 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.

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 used some of the proceeds to repay the $110.0 million outstanding principal balance under our 2017 Facility and also used some of the proceeds to pay accrued interest, fees and expenses related to the 2017 Facility.

We terminated the 2017 Facility effective January 20, 2021.

Other Business Metrics

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Year Ended December 31,

2020 2019 2018

SaaS and license revenue $ 393,257 $ 337,375 $ 291,072

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Twelve Months Ended December 31,

2020 2019 2018

SaaS and license revenue renewal rate 94 % 94 % 93 %

SaaS and License Revenue

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

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

Adjusted EBITDA

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

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

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

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SaaS and License Revenue Renewal Rate

Our SaaS and license revenue renewal rate is an operating metric.

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

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

Our SaaS and license revenue renewal rate is expressed as an annualized percentage.

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

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

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

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

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.

Leases (Topic 842)

On February 25, 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2016-02, “ Leases (Topic 842) ” or Topic 842, which requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use, or ROU, assets on the balance sheet.

The update also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases.

In July 2018, the FASB amended the update to allow entities to apply the transition requirements of Topic 842 at the adoption date rather than at the beginning of the earliest comparative period presented.

Accordingly, the amendments in Topic 842 were effective for us beginning January 1, 2019.

On January 1, 2019, we adopted Topic 842 by applying the modified retrospective approach to all of our leases in effect as of that date.

We used the optional transition method, which required us to record the initial effect of Topic 842 as a cumulative-effect adjustment to retained earnings on January 1, 2019.

Additionally, we elected to use the package of practical expedients for the adoption of Topic 842, which allowed us not to reassess:

(i) whether any expired or existing contracts are or contain leases, (ii) lease classification for any expired or existing leases and (iii) whether initial direct costs for any existing leases qualify for capitalization under Topic 842.

We also used the hindsight practical expedient when determining the lease term and assessing impairment of ROU assets.

Credit Losses (Topic 326)

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 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.

The amendment was effective for us beginning on January 1, 2020.

On January 1, 2020, we adopted Topic 326 by applying the modified retrospective approach to our trade receivables and our notes receivable that were outstanding as of that date, which required us to record the initial effect of Topic 326 as a cumulative-effect adjustment to retained earnings on January 1, 2020.

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

Balance Sheet Caption

As of January 1, 2019

Property and equipment, net

Operating lease right-of-use assets

Operating lease liabilities (current)

Operating lease liabilities (noncurrent)

Accounts payable, accrued expenses and other current liabilities

Other liabilities

Balance Sheet Caption As of January 1, 2020

Accumulated deficit $ 816

The adoption of Topic 842 did not materially impact our consolidated statements of operations, consolidated statement of equity and consolidated statements of cash flows.

Accounts receivable, net (367)

Other current assets (83)

Other assets (366)

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

Components of Operating Results

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SaaS and License Revenue .

We generate the majority of our SaaS and license revenue primarily from monthly fees charged to our service provider partners sold on a per subscriber basis for access to our cloud-based intelligently connected property platform and related solutions.

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.

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Software License Revenue .

Our SaaS and license revenue also includes our software license revenue from monthly fees charged to service providers sold on a per subscriber basis for access to our Software platform.

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 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.

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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 OpenEye video surveillance software for an indefinite period of time in exchange for a one-time license fee, which is generally paid at contract inception.

Our hardware and other revenue also includes our revenue from Shooter Detection Systems from 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.

In December 2019, a novel strain of coronavirus surfaced in Wuhan, China, which has resulted in the temporary closure of many corporate offices, retail stores, and manufacturing facilities and factories across China.

We anticipate there could be some disruption to our hardware supply chain due to the impact of the coronavirus on manufacturing and production in China.

However, as the potential impact on global supply chains from the coronavirus is difficult to predict, the extent to which the coronavirus may negatively affect our hardware revenue is uncertain.

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 in the United States and the economic situation remains fluid as parts of the economy appear to be recovering while others continue to struggle.

As the future impact on global supply chains from COVID-19 is difficult to predict, the extent to which COVID-19 may negatively affect our hardware revenue is uncertain;

however, if the economy fails to fully recover or there are additional shutdowns of non-essential businesses due to a resurgence of COVID-19, our SaaS and license revenue growth rate may be lower in future periods, with a corresponding reduction in hardware revenue, if some consumers or small businesses defer or cancel previously anticipated purchases.

Cost of Revenue

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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 and video recorders, which we purchase from an original equipment manufacturer, and other devices.

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.

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In 2019, the U.S.

administration has called for significant changes to U.S.

administration imposed significant changes to U.S.

trade policy with respect to China.

Beginning in May 2019, certain of our video camera products became subject to a 25% import duty.

Additionally, beginning in September 2019, certain of our video cameras and sensors became subject to a 15% import duty.

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.

Tariffs have subjected certain Alarm.com products manufactured overseas to additional import duties of up to 25%.

The amount of the import tariff and the number of products subject to tariffs have changed numerous times based on action by the U.S.

administration.

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 could 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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The number of employees in sales and marketing functions increased from 391 as of January 1, 2020 to 461 as of December 31, 2020.

We expect to continue to invest in our sales and marketing activities to expand our business both domestically and internationally and, as a result, expect our sales and marketing expense to increase on an absolute dollar basis.

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.

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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 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.

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 148 as of January 1, 2020 to 163 as of December 31, 2020.

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

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

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

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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.

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 621 as of January 1, 2020 to 780 as of December 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.

We expect research and development expenses to increase on an absolute dollar basis and as a percentage of revenue in the short term 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.

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.

Amortization and Depreciation .

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Interest Expense

Interest expense consists of interest expense associated with our credit facilities.

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

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 remain relatively consistent in 2019 as compared to 2018.

Interest expense consists of interest expense associated with our credit facility.

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

The 2017 Facility was 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 2021 as compared to 2020 due to the issuance of the 2026 Notes.

Interest Income

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Other Income, Net

Other income, net primarily consists of 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.

Other 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.

Provision for / (benefit from) income taxes

The Tax Cuts and Jobs Act was signed into law on December 22, 2017.

This legislation made significant changes in U.S.

tax law, including a reduction in the corporate tax rate, changes to net operating loss carryforwards and carrybacks and a repeal of the corporate alternative minimum tax.

The legislation reduced the U.S.

corporate income tax rate from 35% to 21%.

We are subject to U.S.

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

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

We recognize excess tax windfall benefits on a discrete basis in the quarter in which it occurs, and we anticipate that our effective tax rate will vary from quarter to quarter depending on our stock price and exercises of stock options under our equity incentive plans each period.

Our effective tax rates were below the statutory rate primarily due to research and development tax credits claimed, tax windfall benefits from employee stock-based payment transactions and foreign derived intangible income deductions, partially offset by the impact of state taxes and valuation allowances recorded against state research and development tax credit carryforwards.

We recognize excess tax windfall benefits on a discrete basis during the quarter in which they occur, and we anticipate that our effective tax rate will vary from quarter to quarter depending on our stock price and exercises of stock options under our equity incentive plans each period.

Results of Operations

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

Certain previously reported amounts in the consolidated statements of operations for the years ended December 31, 2018 and 2017 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 consolidated statements of operations for the year ended December 31, 2018 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.

Consolidated Statements of Operations

Year Ended December 31,

2020 2019 2018

SaaS and license revenue $ 393,257 64 % $ 337,375 67 % $ 291,072 69 %

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Sales and marketing (2)

75,967 12 61,815 12 55,902 13

General and administrative (2)

78,643 13 69,959 14 95,750 23

Research and development (2)

152,147 25 114,443 23 89,204 21

Amortization and depreciation 27,520 4 22,134 4 21,721 5

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Income before income taxes 80,160 13 58,896 12 11,699 3

Provision for / (benefit f rom) income taxes

Provision for / (benefit from) income taxes 3,500 1 5,566 1 (9,825) (2)

Net income $ 76,660 12 % $ 53,330 11 % $ 21,524 5 %

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Year Ended December 31,

2020 2019 2018

Stock-based compensation expense data:

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Year Ended December 31,

2020 2019 2018

Components of cost of revenue as a percentage of revenue:

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The following tables in this section set forth our selected consolidated statements of operations (in thousands), data for the percentage change and data as a percentage of revenue for the years ended December 31, 2020 and 2019.

Year Ended December 31,

Year Ended December 31, % Change

2020 2019 2020 vs.

SaaS and license revenue $ 393,257 $ 337,375 17 %

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Total revenue $ 618,003 $ 502,363 23 %

The $81.9 million increase in total revenue in 2019 as compared to 2018 was the result of a $46.3 million , or 16% , increase in our SaaS and license revenue and a $35.6 million , or 27% , increase in our hardware and other revenue.

Our software license revenue included within SaaS and license revenue increase d $2.1 million to $43.4 million in 2019 as compared to $41.3 million during 2018 .

The increase in our Alarm.com segment SaaS and license revenue in 2019 was primarily due to growth in our subscriber base, including the revenue impact from subscribers we added in 2018.

To a lesser extent, SaaS and license revenue increased in the period due to an increase in license fees.

The increase in hardware and other revenue in 2019 compared to 2018 was due to an increase in the volume of video cameras sold.

Our Other segment contributed 15% of the increase in SaaS and license revenue in 2019 as compared to 2018 .

The increase in SaaS and license revenue for our Other segment in 2019 as compared to 2018 was due to an increase in sales of our energy management and demand response solutions and our property management and HVAC solutions.

Hardware and other revenue in our Other segment decreased 13% in 2019 as compared to 2018 , primarily due to the timing of sales related to our remote access management solution.

The $115.6 million increase in total revenue in 2020 as compared to 2019 was the result of a $59.7 million, or 36%, increase in our hardware and other revenue and a $55.9 million, or 17%, increase in our SaaS and license revenue.

Our software license revenue included within SaaS and license revenue decreased $5.4 million to $38.0 million in 2020 as compared to $43.4 million during 2019, which decreased primarily due to the result of the continuing transition of customers from non-hosted software to our cloud based hosted platform.

The $49.2 million increase in our Alarm.com segment SaaS and license revenue in 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 in 2020 compared to 2019 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 OpenEye, on October 21, 2019.

The $6.6 million increase in SaaS and license revenue for our Other segment in 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 HVAC solutions.

Hardware and other revenue, net of intersegment eliminations, in 2020 in our Other segment decreased 38%, or $5.0 million, as compared to the same period in the prior year, primarily due to a decrease in sales related to our property management solution.

Cost of Revenue

Year Ended December 31,

Year Ended December 31, % Change

2020 2019 2020 vs.

Cost of revenue (1) :

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The $43.8 million increase in cost of revenue in 2020 as compared to 2019 was the result of a $40.3 million, or 30%, increase in cost of hardware and other revenue and a $3.5 million, or 7%, increase in cost of SaaS and license revenue.

Our cost of software license revenue included within cost of SaaS and license revenue decrease d $0.4 million to $1.3 million during 2019 as compared to $1.7 million during 2018 .

The increase in cost of Alarm.com segment hardware and other revenue related primarily to an increase in the number of hardware units shipped in 2019 as compared to 2018 .

The increase in cost of

Alarm.com segment SaaS and license revenue related primarily to the growth in our subscriber base, which drove a corresponding increase in amounts paid to wireless network providers.

Our cost of software license revenue included within cost of SaaS and license revenue remained relatively consistent at $1.3 million during 2020 as compared to 2019.

The increase in cost of hardware and other revenue was due to the Alarm.com segment and related primarily to an increase in the number of hardware units shipped in 2020 as compared to 2019 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.

The increase in cost of Alarm.com segment SaaS and license revenue related primarily to the growth in our subscriber

base, which drove a corresponding increase in amounts paid to wireless network providers.

The increase in cost of Other segment SaaS and license revenue related primarily 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 77% and 81% for the years ended December 31, 2020 and 2019, respectively.

Cost of SaaS and license revenue as a percentage of SaaS and license revenue was 15% for each of the years ended December 31, 2019 and 2018 .

Cost of software license revenue as a percentage of software license revenue was 3% and 4% for the years ended December 31, 2019 and 2018 , respectively.

The increase in cost of hardware and other revenue as a percentage of hardware and other revenue in 2019 as compared to 2018 is a reflection of the mix of product sales during the periods.

Cost of SaaS and license revenue as a percentage of SaaS and license revenue was 14% and 15% for the years ended December 31, 2020 and 2019, respectively.

Cost of software license revenue as a percentage of software license revenue was 3% for each of the years ended December 31, 2020 and 2019.

The decrease in cost of hardware and other revenue as a percentage of hardware and other revenue in 2020 as compared to 2019 is a reflection of the mix of product sales during the periods.

Sales and Marketing Expense

Year Ended December 31,

Year Ended December 31, % Change

2020 2019 2020 vs.

Sales and marketing $ 75,967 $ 61,815 23 %

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The $14.2 million increase in sales and marketing expense in 2020 as compared to 2019 was primarily due to increases in headcount for our sales team and 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 $8.1 million in 2019 as compared to 2018 .

Additionally, recruiting costs and costs for external consultants increased by $0.3 million in 2019 for our Alarm.com segment as compared to 2018 .

These increases were partially offset by a $4.2 million decrease in our marketing expense for our Alarm.com segment in 2019 as compared to 2018 .

As a result, our personnel and related costs for our Alarm.com segment, including salary, benefits, stock-based compensation and travel expenses, increased by $9.7 million in 2020 as compared to 2019, net of decreased travel expenses of $3.2 million due to the COVID-19 pandemic.

Additionally, marketing costs increased by $3.1 million in 2020 for our Alarm.com segment as compared to the same period in the prior year due to an increase in advertising.

Sales and marketing expense from our Other segment increased $0.9 million in 2020 as compared to 2019, primarily due to increases in headcount for our sales team.

The overall number of employees in our sales and marketing teams increased from 391 as of December 31, 2019 to 461 as of December 31, 2020.

Sales and marketing expense as a percentage of total revenue was 12% and 13% for the years ended December 31, 2019 and 2018 , respectively.

Sales and marketing expense as a percentage of total revenue was 12% for each of the years ended December 31, 2020 and 2019.

General and Administrative Expense

Year Ended December 31,

Year Ended December 31, % Change

2020 2019 2020 vs.

General and administrative $ 78,643 $ 69,959 12 %

% of total revenue 13 % 14 %

The $25.8 million decrease in general and administrative expense in 2019 as compared to 2018 was primarily due to a $31.6 million decrease in legal expenses within our Alarm.com segment resulting from a $28.0 million expense recorded during 2018 for the agreement reached to settle the legal matter alleging violations of the TCPA within our Alarm.com segment.

Additionally, the decrease in general and administrative expense was due to the 2019 reversal of the $3.3 million reserve previously recorded in 2018, relating to a promissory note provided to one of our hardware suppliers within our Alarm.com segment.

These decreases were partially offset by a $7.2 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 $2.7 million increase in rent expense within the Alarm.com segment due in part to additional office space obtained for our corporate headquarters.

General and administrative expenses from our Other segment decreased by $0.5 million in 2019 as compared to 2018 , primarily due to a decrease in expense for external consultants.

The $8.7 million increase in general and administrative expense in 2020 as compared to 2019 was primarily due to a $4.8 million increase in personnel and related costs for our Alarm.com segment due to an increase in employee headcount to support our operational growth as well as the reversal of a $3.3 million reserve for a promissory note with one of our hardware suppliers within our Alarm.com segment during 2019 which did not occur during 2020.

Additionally, costs for external consultants increased by $2.3 million in 2020 for our Alarm.com segment as compared to the same period in the prior year and legal expenses increased $1.1 million within our Alarm.com segment in 2020 as compared to the same period year resulting from intellectual property litigation.

These increases were partially offset by a $2.4 million decrease to the contingent consideration liability from our acquisition of 85% of the issued and outstanding capital stock of OpenEye on October 21, 2019 within our Alarm.com segment as well as a $2.2 million decrease in costs related to an offsite internal strategy and product roadmap conference incurred during 2019 which did not occur during 2020.

General and administrative expenses from our Other segment increased by $0.2 million in 2020 as compared to 2019, primarily due to an increase in rent expense.

The overall number of employees in general and administrative functions increased from 148 as of December 31, 2019 to 163 as of December 31, 2020.

Research and Development Expense

Year Ended December 31,

Year Ended December 31, % Change

2020 2019 2020 vs.

Research and development $ 152,147 $ 114,443 33 %

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Our personnel and related costs for our Alarm.com segment increased by $28.9 million in 2020 as compared to 2019 and our expenses for external consultants increased by $2.1 million.

Additionally, the increase in research and development expense is due to $1.0 million of in-process research and development we acquired on September 18, 2019.

Research and development expense from our Other segment decreased by $0.2 million due to a decrease in our expenses for external consultants in 2019 as compared to 2018 .

Additionally, the increase in research and development expense is due to $4.4 million of in-process research and development we acquired in 2020, partially offset by the $1.0 million of in-process research and development we acquired 2019.

Research and development expense from our Other segment increased by $2.7 million primarily due to an increase in personnel and related costs, including salary, benefits and stock-based compensation in 2020 as compared to 2019.

The overall number of employees in research and development functions increased from 621 as of December 31, 2019 to 780 as of December 31, 2020.

Amortization and Depreciation

Year Ended December 31,

Year Ended December 31, % Change

2020 2019 2020 vs.

Amortization and depreciation $ 27,520 $ 22,134 24 %

% of total revenue 4 % 4 %

Amortization and depreciation increase d $0.4 million in 2019 as compared to 2018 , due to customer relationships, developed technology and trade name intangibles acquired in connection with our March 2017 acquisition of certain assets and assumption of certain liabilities of the Connect line of business and all of the outstanding equity interests of the two subsidiaries through which Icontrol Networks, Inc.

conducted its Piper line of business, as well as the customer relationships, developed technology and trade name intangibles acquired in connection with our October 2019 acquisition of 85% of the issued and outstanding capital stock of OpenEye.

These increases are partially offset by certain intangible assets being fully amortized prior to December 31, 2019 .

Amortization and depreciation increased $5.4 million in 2020 as compared to 2019, 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

Year Ended December 31,

Year Ended December 31, % Change

2020 2019 2020 vs.

Interest expense $ (2,596) $ (2,974) (13) %

% of total revenue — % (1) %

Interest expense increase d $0.1 million in 2019 as compared to 2018 , primarily due to an increase in the effective interest rate on the 2017 Facility resulting from the increase in the Eurodollar Base Rate, or LIBOR.

Interest expense decreased $0.4 million in 2020 as compared to 2019, primarily due to the decrease in the effective interest rate on the 2017 Facility resulting from decreases in the Eurodollar Base Rate, or LIBOR.

These decreases were 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

Year Ended December 31,

Year Ended December 31, % Change

2020 2019 2020 vs.

Interest income $ 870 $ 4,922 (82) %

% of total revenue — % 1 %

Interest income increase d $2.7 million in 2019 as compared to 2018 , primarily due to recording interest income of $1.7 million related to promissory note proceeds received from one of our hardware suppliers and proceeds from an acquired promissory note within our Alarm.com segment.

Interest income decreased $4.1 million in 2020 as compared to 2019, primarily due to a decrease in interest income earned on our notes receivable with one of our hardware suppliers as well as a decrease in interest income earned on our cash balance due to a decrease in interest rates.

Other Income, Net

Year Ended December 31,

Year Ended December 31, % Change

2020 2019 2020 vs.

Other income, net $ 25,588 $ 6,535 292 %

% of total revenue 4 % 2 %

Other income, net increase d $6.4 million during 2019 as compared to 2018 , primarily due to recording a gain of $6.9 million related to promissory note proceeds received from one of our hardware suppliers and proceeds from an acquired promissory note within our Alarm.com segment, partially offset by a $0.6 million impairment of one of our investments.

Provision for / (benefit from) income taxes

Year Ended December 31,

Provision for / (benefit f rom) income taxes

Other income, net increased $19.1 million during 2020 as compared to 2019, 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 2019, 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 2019 as well a $0.6 million impairment of one of our investments recorded in 2019 which did not occur in 2020.

These increases in other income, net, were partially offset by the $6.9 million gain recorded in 2019 related to a promissory note with one of our hardware suppliers within our Alarm.com segment which did not occur in 2020.

Provision for Income Taxes

Year Ended December 31, % Change

2020 2019 2020 vs.

Provision for income taxes $ 3,500 $ 5,566 (37) %

% of total revenue 1 % 1 %

The provision for income taxes increase d $15.4 million in 2019 as compared to 2018 .

The provision for income taxes decreased $2.1 million in 2020 as compared to 2019.

Our effective tax rate was 4.4% in 2020 as compared to 9.5% in 2019.

The increase in the provision for income taxes was primarily related to decreases in tax windfall benefits and research and development tax credits claimed, partially offset by increased foreign derived intangible income deductions claimed in 2019 as compared to 2018 .

The decrease in the provision for income taxes and our effective tax rate was primarily due to increased tax windfall benefits and research and development tax credits in 2020 as compared to 2019.

Comparison of Years Ended December 31, 2019 to December 31, 2018

A comparison of the years ended December 31, 2019 and 2018 has been omitted from this Form 10-K, but may be found in “Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on March 1, 2019.

Quarterly Results of Operations (Unaudited)

The following table shows selected unaudited quarterly consolidated statement of operations data for each of our eight most recently completed quarters, as well as the percentage of revenue for each line item.

In the opinion of management, the information for each of these quarters has been prepared on the same basis as our audited financial statements and include all adjustments, consisting of normal recurring adjustments and accruals, necessary for the fair statement of financial information in accordance with generally accepted accounting principles.

This information should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this report.

Historical results are not necessarily indicative of results that may be achieved in future periods, and operating results for quarterly periods are not necessarily indicative of operating results for a full year.

The selected consolidated statements of operation data in amounts and as a percentage of total revenue are presented below (amounts in thousands):

SaaS and license revenue

Hardware and other revenue

Total revenue

Cost of revenue:

Cost of SaaS and license revenue

Cost of hardware and other revenue

Total cost of revenue

Total operating expenses

Net income / (loss)

Net income / (loss) attributable to common stockholders

Net income / (loss) per share attributable to common stockholders

As a percent of total revenue:

SaaS and license revenue

Hardware and other revenue

Total revenue

Cost of revenue:

Cost of SaaS and license revenue

Cost of hardware and other revenue

Total cost of revenue

Total operating expenses

Net income / (loss)

Net income / (loss) attributable to common stockholders

Quarterly Trends

Our quarterly SaaS and license revenue has increased sequentially for all periods presented due to growth in our subscriber base driven by the effectiveness of our service provider partners’ ability to resell our services and due to service providers and their subscribers on our Software platform.

Hardware and other revenue fluctuates from quarter to quarter based on the timing of hardware orders from our service providers and hardware distributors.

The cost of revenue, in absolute dollars, has increased over time corresponding to the increase in revenue.

The cost of revenue as a percent of revenue is lower in quarters when SaaS and license revenue represents a greater percentage of total revenue.

Our cost of SaaS and license revenue as a percentage of SaaS and license revenue has been between 14% and 16% for all periods presented.

Operating expenses have generally increased over time.

Our most significant operating expenses are employee-related costs, including salaries, benefits and stock-based compensation.

Research and development personnel have attributed to approximately 46% of our headcount increase over the eight quarters presented.

We continue to invest in research and development to enhance our SaaS solution capabilities for both our residential and commercial subscribers and to enhance our suite of enterprise tools that enable our service provider partners to expand their business.

During the three months ended September 30, 2018, we recorded a $28.0 million expense related to an agreement reached in 2018 to settle the legal matter alleging violations of the TCPA.

During the three months ended September 30, 2019, we recorded interest of $1.7 million within interest income and recorded a $6.9 million gain within other income, net , which relates to promissory note proceeds received from one of our hardware suppliers and proceeds from an acquired promissory note.

Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on February 26, 2020.

Segment Information

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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 increase d from 803 employees as of January 1, 2019 to 1,076 employees as of December 31, 2019 .

Our Other segment increase d from 81 employees as of January 1, 2019 to 84 employees as of December 31, 2019 .

Our Alarm.com segment increased from 1,076 employees as of January 1, 2020 to 1,290 employees as of December 31, 2020.

Our Other segment increased from 84 employees as of January 1, 2020 to 114 employees as of December 31, 2020.

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

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Year Ended December 31,

SaaS and License Revenue

Hardware and Other Revenue

Operating Expenses

SaaS and License Revenue

Hardware and Other Revenue

Operating Expenses

SaaS and License Revenue

Hardware and Other Revenue

Operating Expenses

2020 2019 2018

SaaS and License Revenue Hardware and Other Revenue Operating Expenses SaaS and License Revenue Hardware and Other Revenue Operating Expenses SaaS and License Revenue Hardware and Other Revenue Operating Expenses

Alarm.com $ 366,815 $ 219,826 $ 310,960 $ 317,580 $ 156,265 $ 249,097 $ 278,013 $ 119,221 $ 243,835

Other 26,442 14,254 23,317 19,795 20,919 19,254 13,059 20,316 18,742

Intersegment Alarm.com — (3,093) — — (4,301) — — (4,749) —

Intersegment Other — (6,241) — — (7,895) — — (5,366) —

Total $ 393,257 $ 224,746 $ 334,277 $ 337,375 $ 164,988 $ 268,351 $ 291,072 $ 129,422 $ 262,577

Our SaaS and license revenue for the Alarm.com segment included software license revenue of $38.0 million, $43.4 million and $41.3 million for the years ended December 31, 2020, 2019 and 2018, respectively.

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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 in light of the continuing uncertainty arising from the COVID-19 pandemic, actual results could differ from those estimates and any such differences may be material.

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

During the first quarter of 2020, we adopted the guidance regarding accounting for expected credit losses in

FASB Topic 326.

Our most critical accounting policies are summarized below.

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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.

To determine the transaction price, we analyze all of the performance obligations included in the contract.

We consider the terms of the contract and our customary business practices, which typically do not include financing components or non-cash consideration.

We have variable consideration in the form of retrospective volume discounts, rebate incentives, restocking fees and assurance-type warranties.

The significant inputs related to 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.

Depending on the type of variable consideration and its predictability, we may apply an “expected value” approach or a “most likely amount” approach.

We estimate the variable consideration at the onset of a contract and include the variable consideration within the transaction price if it is probable that a significant reversal of the variable consideration would not occur in the future.

When determining whether the amount of variable consideration included in the transaction price should be constrained, we look at the history of hardware purchased and subscribers added by our service provider partners to estimate the likelihood of those service provider partners obtaining the retrospective volume discounts and rebates.

At times, our contracts include consideration payable to a customer in the form of fixed discounts or rebates.

We record the consideration payable to a customer as a reduction to the transaction price resulting in a reduction to revenue over the service period.

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.

SaaS and License Revenue .

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.

We recognize revenue from SaaS services on a monthly basis as we satisfy our performance obligations.

Software License Revenue .

Our SaaS and license revenue also includes our software license revenue from monthly fees charged to service providers sold on a per subscriber basis for access to our Software platform.

Under the usage-based royalty exception, we recognize revenue on a monthly basis over the period during which the services are expected to be performed.

Hardware and Other Revenue.

We recognize hardware and other revenue as we satisfy our performance obligations, which primarily occurs when the hardware is received by our service provider partner or distributor, net of a reserve for estimated returns.

When determining the amount of consideration we expect to be entitled to for the sale of our hardware, we estimate the variable consideration associated with customer returns.

We record a reserve against revenue for hardware returns based on historical returns.

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Historically, our returns of hardware have not significantly differed from our estimated reserve.

Additionally, we provide assurance-type warranties related to the intended functionality of the products and services provided and those warranties typically allow for the return of hardware up to one year past the date of sale.

These warranties were not identified as separate performance obligations.

Our perpetual licenses provide a right to use intellectual property that is functional in nature and has significant stand-alone functionality.

Accordingly, for perpetual licenses of functional intellectual property, revenue is recognized at the point-in-time when control has been transferred to the customer, which occurs once the software has been made available to the customer.

We record activation fees initially as deferred revenue and we recognize these fees ratably over the expected term of the subscribers’ account which we estimate is ten years based on our annual attrition rate.

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.

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, 2020.

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, 2020.

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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.

This accounting standard established a fair value hierarchy, which requires an entity to maximize the use of observable inputs, where available.

The following summarizes the three levels of inputs:

Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date;

Level 2 - Inputs other than quoted prices included within Level 1 that are observable for similar assets and liabilities, either directly or indirectly;

quoted prices in markets that are not active;

Level 3 - Unobservable inputs supported by little or no market activity.

The liability for the subsidiary unit awards relates to agreements established with employees of our subsidiaries for cash awards contingent upon the subsidiary companies meeting certain financial milestones such as revenue, working capital, EBITDA and EBITDA margin and was valued with Level 3 unobservable inputs.

We account for these subsidiary awards using fair value and establish liabilities for the future payment for the repurchase of subsidiary units under the terms of the agreements based on estimating revenue, working capital, EBITDA and EBITDA margin of the subsidiary units over the periods of the awards through the anticipated repurchase dates.

We estimated the fair value of each liability by using a Monte Carlo simulation model for determining each of the projected measures by using an expected distribution of potential outcomes.

The fair value of each liability is calculated with thousands of projected outcomes, the results of which are averaged and then discounted to estimate the present value.

At each reporting date until the respective payment dates, we will remeasure the liability, using the same valuation approach based on the applicable subsidiary's revenue and future collection of financed customer receivables, the unobservable inputs, and we will record any changes in the employee's compensation expense.

Some of the awards are subject to the employees' continued employment and therefore recorded on a straight-line basis over the remaining service period.

The liability for the subsidiary unit awards was $0.2 million as of December 31, 2019 .

The liability for the contingent consideration consists of the potential earn-out payment related to our acquisition of 85% of the issued and outstanding capital stock of OpenEye on October 21, 2019 .

The earn-out payment is contingent on the satisfaction of certain calendar 2020 revenue targets and has a maximum potential payment of up to $11.0 million .

We account for the contingent consideration using fair value and establish 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.

The liability for the contingent consideration consisted of the potential earn-out payment related to our acquisition of 85% of the issued and outstanding capital stock of OpenEye on October 21, 2019.

The earn-out payment was contingent on the satisfaction of certain calendar 2020 revenue targets and had a maximum potential payment of up to $11.0 million.

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 unobservable inputs, including the revenue volatility and the discount rate.

The liability for the contingent consideration was $2.6 million as of December 31, 2019 .

Based on these assessments of fair value, we remeasured the liabilities valued with Level 3 unobservable inputs and recorded a reduction of $0.2 million in operating expenses within the consolidated statement of operations for the year ended December 31, 2019 .

We have not made any material changes in the accounting methodology used to determine the fair value of the subsidiary unit awards or the contingent consideration.

We do not expect any material changes in the near term to the underlying assumptions used to determine the unobservable inputs used to calculate the fair value of the subsidiary unit awards or the contingent consideration as of December 31, 2019 .

However, if changes in these assumptions occur, and, should those changes be significant, we may be exposed to additional operating expenses.

The contingent consideration liability was valued with Level 3 significant unobservable inputs, including the revenue volatility and the discount rate.

All contingencies related to the contingent consideration liability were resolved as of December 31, 2020 and no further estimates were necessary at December 31, 2020.

We did not make any material changes in the accounting methodology used to determine the fair value of the contingent consideration liability for the year ended December 31, 2020.

We do not expect any material changes in the near term to the underlying assumptions used to determine the significant unobservable inputs used to calculate the fair value of the contingent consideration given that all contingencies have been resolved as of December 31, 2020.

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 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 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 requires us to estimate the risk-free interest rate, expected term, expected stock price volatility and dividend yield.

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Treasury securities consistent with the expected term of our stock options.

The expected term represents the period of time the stock options are expected to be

outstanding and is based on the "simplified method." Under the "simplified method," the expected term of an option is presumed to be the mid-point between the vesting date and the end of the contractual term.

We use the "simplified method" due to the lack of sufficient historical exercise data to provide a reasonable basis upon which to otherwise estimate the expected term of the 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 in November 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 to November 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 do not expect any material changes in the near term to the underlying assumptions used to calculate stock-based compensation expense for the year ended December 31, 2019 .

We did not make any material changes to the underlying assumptions used to calculate stock-based compensation expense for the year ended December 31, 2020 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 ended December 31, 2020.

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.

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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.

The net assets and results of operations of an acquired entity are included in our consolidated financial statements from the acquisition date.

Acquisition-related costs are expensed as incurred.

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Significant estimates and assumptions in valuing intangible assets include estimates about future expected cash flows, discount rates, attrition rates related to acquired customer relationships, royalty rates and obsolescence factors related to acquired developed technology and royalty rates relate to acquired trade names.

During the measurement period, we may record adjustments to the assets acquired and liabilities assumed.

Any adjustments to provisional amounts that are identified during the measurement period are recorded in the reporting period in which the adjustment amounts are determined.

Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.

Some acquisitions may include contingent consideration, which is an obligation to make future payments to the seller contingent upon the achievement of future operational or financial targets.

We estimated the fair value of the contingent consideration liability by using a Monte Carlo simulation model for determining each of the projected measures by using an expected distribution of potential outcomes.

Significant estimates and assumptions in valuing contingent consideration include estimates about future financial results, revenue volatility and the discount rate.

The fair value of the contingent consideration is estimated on a quarterly basis and changes in the fair value of the contingent consideration resulting from information that existed subsequent to the acquisition date are recorded in the consolidated statements of operations.

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, during the year ended December 31, 2020.

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 ended December 31, 2020.

However, if changes in these assumptions occur, and, should those changes be significant, they could have a material impact on our purchase price allocation for the acquisition of SDS.

Goodwill, Intangible Assets and Long-lived Assets

Goodwill represents the excess of (1) the aggregate of the fair value of consideration transferred in a business combination, over (2) the fair value of assets acquired, net of liabilities assumed.

Goodwill is allocated to our reporting units, which are our operating segments or one level below our operating segments.

Goodwill is not amortized, but is subject to annual impairment tests.

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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.

The amount of goodwill impairment is calculated as the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.

For our 2020 annual impairment review, we performed a qualitative assessment for our Alarm.com reporting unit, our only reporting unit with a goodwill balance.

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Our assessment was performed as of October 1, 2020, and we have determined there have been no triggering events from our assessment date through December 31, 2020.

We did not make any material changes to the underlying assumptions used in our qualitative assessment of our goodwill as of October 1, 2020 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 of October 1, 2020.

However, if changes in these assumptions occur, and, should those changes be significant, they could have a material impact on our goodwill and potentially our other income, net, if those significant changes result in an impairment.

Intangible Assets and Long-lived Assets

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Intangible assets with definite lives are amortized over their estimated useful lives and are reviewed for impairment if indicators of impairment arise.

The fair value of the intangible assets is compared with their carrying value and an impairment loss would be recognized for the amount by which the carrying amount exceeds the fair value.

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.

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For the year ended December 31, 2020, we determined there were no 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 ended December 31, 2020 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 ended December 31, 2020.

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 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.

Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

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.

Due to the uncertainty of realization of certain deferred tax assets related to our Canadian net operating losses and research and development tax credits, we established a valuation allowance of $0.3 million during the second quarter of 2019, which remained at $0.3 million as of December 31, 2019 .

During 2020, we established a valuation allowance on state research and development tax credits of $1.3 million.

As of December 31, 2018, based on our historical and expected future taxable earnings, we believed it was more likely than not that we would realize all of the benefit of the existing deferred tax assets.

Accordingly, we did no t record a valuation allowance as of December 31, 2018 .

Accordingly, we did not record a valuation allowance as of December 31, 2018.

We are subject to income taxes in the United States and foreign jurisdictions based upon our business operations in those jurisdictions.

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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 record interest and penalties as a component of our income tax provision.

Impairment of Notes Receivable

Notes receivable are presented net of an allowance for uncollectibility, if any.

We accrue interest on notes receivable based on the contractual terms of the note.

Outstanding notes receivable that are aged 30 days or more from the contractual payment date are considered past due.

Notes receivable are evaluated for impairment at least quarterly.

Impairment occurs when it is deemed probable that we will not be able to collect all amounts due according to the contractual terms of the loan.

We periodically assess our notes receivable for collectibility and impairment by considering internal factors such as payment status, collateral value, the probability of collecting payments when due and credit quality as well as external factors such as economic conditions.

We do not accrue interest on notes receivable that are considered impaired or are greater than 90 days past due based on their contractual payment terms.

Notes receivable may be placed on nonaccrual status earlier if, in management’s opinion, a timely collection of the full principal and interest becomes uncertain.

After a note receivable has been placed in nonaccrual status, interest will be recognized when cash is received.

A note receivable may be returned to accrual status after all of the customer’s delinquent balances of principal and interest have been settled, and collection of all remaining contractual amounts due is reasonably assured.

Based on our assessment of the collectibility of a promissory note provided to one of our hardware suppliers, we recorded an impairment of $3.3 million during the year ended December 31, 2018, which was subsequently reversed during the year ended December 31, 2019 upon receiving a payment from our hardware supplier.

If changes in the assumptions used to assess the collectibility and impairment of our notes receivable occur, and, should those changes be significant, they could have a material impact on our consolidated statements of operations.

We did not make any material changes to the underlying assumptions used to calculate deferred tax assets and liabilities as well as uncertain tax positions for the year ended December 31, 2020 and we do not expect any material changes in the near term to the underlying assumptions used to calculate deferred tax assets and liabilities as well as uncertain tax positions for the year ended December 31, 2020.

However, if changes in these assumptions occur, and, should those changes be significant, they could have a material impact on our deferred tax assets and liabilities as well as our provision for income taxes.

Recent Accounting Pronouncements

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As of December 31,

2020 2019 2018

Cash and cash equivalents $ 253,459 $ 119,629 $ 146,061

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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.

The terms of the 2026 Notes are governed by an Indenture, or the Indenture, by and between Alarm.com Holdings, Inc.

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 terminated the 2017 Facility effective January 20, 2021.

We intend to use 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.

Subsequent to December 31, 2020, in February 2021, we paid $5.0 million in cash to purchase 1,000,000 shares of Series B-2 Preferred Stock from one of our technology partners as part of a financing round that included other investors.

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

Over the next 12 months, we expect our capital expenditure requirements to be approximately $11.3 million, primarily related to the continued build out of our leased and owned office space, as well as purchases of computer software and equipment.

In February 2020, we made a prepayment of $4.7 million for long lead-time parts related to our inventory.

On August 30, 2018, we reached an agreement in principle to settle a putative class action lawsuit filed against us and Alarm.com Incorporated in the U.S.

District Court for the Northern District of California.

The tentative settlement was subject to the negotiation and execution of a definitive settlement agreement and Court approval.

On October 25, 2018, we entered into a definitive settlement agreement, or the Settlement Agreement, with the plaintiffs.

An initial payment of $5.0 million was made by us to the settlement administrator on January 2, 2019 and the remaining payment of $23.0 million was made on September 30, 2019.

In October 2018, we entered into a subordinate convertible promissory note with one of our hardware suppliers, or the October 2018 Promissory Note, which was amended in November 2018, January 2019 and February 2019 as a result of the hardware supplier's financial restructuring.

In March 2019, we entered into a separate secured promissory note with the same hardware supplier, which, together with the October 2018 Promissory Note, we refer to as the Promissory Notes.

Under the Promissory Notes, we agreed to provide the hardware supplier loans of up to $7.4 million , collateralized by all assets owned by the supplier.

In March 2019, we paid $16.4 million to acquire a secured promissory note, or the Acquired Promissory Note, that was originally executed between our hardware supplier and another third-party secured creditor.

The Acquired Promissory Note had an outstanding balance of $26.6 million as of December 31, 2018, including interest.

In addition to the $16.4 million paid in March 2019 for the Acquired Promissory Note, we agreed to pay the third-party secured creditor an additional $6.0 million , subject to certain contingencies measured as of May 4, 2019.

Based on the outcome of those contingencies, we recorded a $6.0 million liability in March 2019 related to the Acquired Promissory Note and paid the $6.0 million contingent liability during the three months ended September 30, 2019.

On May 6, 2019, we entered into a forbearance agreement with the hardware supplier, or the Forbearance Agreement.

Under the Forbearance Agreement, the hardware supplier agreed to pay us the outstanding balance of principal and interest under the Promissory Notes and the Acquired Promissory Note before June 30, 2019.

In consideration for the full and timely payments under the Forbearance Agreement, we agreed to temporarily forbear from exercising the remedies available to us with respect to the collateral securing the Promissory Notes and the Acquired Promissory Note.

On June 24, 2019, we entered into a Forbearance Extension Agreement with the hardware supplier, under which the hardware supplier agreed to pay us $7.4 million on or before June 24, 2019.

In consideration for the $7.4 million payment under the Forbearance Extension Agreement, we

agreed to temporarily forbear from exercising the remedies available to us with respect to the collateral securing the Promissory Notes and the Acquired Promissory Note until July 10, 2019.

On June 24, 2019, we received a payment of $7.4 million from the hardware supplier for the partial satisfaction of amounts due under the Promissory Notes and the Acquired Promissory Note.

On July 15, 2019, we received an additional payment of $25.0 million from the supplier and converted the remaining outstanding notes receivable balance into an equity investment in the hardware supplier.

As of December 31, 2019 , there was no remaining outstanding balance on the Promissory Notes and the Acquired Promissory Note.

As of December 31, 2018 , the outstanding balance of the Promissory Notes excluding interest was $3.3 million and was included in other assets in our consolidated balance sheets prior to any adjustments for impairment.

On September 18, 2019 , 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.

In consideration for the purchase of the IPR&D, we paid $0.9 million in cash on September 18, 2019 , with the remaining $0.1 million expected to be paid 18 months following the acquisition date, subject to offset for any indemnification obligations.

On October 21, 2019 , Alarm.com Incorporated acquired 85% of the issued and outstanding capital stock of OpenEye for $61.2 million in cash after deducting $2.8 million related to an agreed holdback.

Pursuant to the terms of the stock purchase agreement, following the preliminary determination of the working capital of OpenEye as of the closing date, the purchase price increased by $0.2 million .

The working capital adjustment is expected to be finalized and paid to the stockholders of OpenEye in the first half of 2020 along with a portion of the holdback.

The remaining amount of the holdback is expected to be paid to the stockholders of OpenEye by the fourth quarter of 2022, subject to offset for any indemnification obligations.

An earn-out of up to an additional $11.0 million is payable if certain calendar 2020 revenue targets are met.

We recorded a redeemable noncontrolling interest of $11.4 million on October 21, 2019 related to the remaining 15% equity interest owned by the minority OpenEye stockholders.

The purchase price allocation, which is pending until the final determination of the working capital and tax adjustments, was not finalized as of the filing date of this Annual Report on Form 10-K.

In December 2019, we purchased land and a commercial building located in Liberty Lake, Washington for $5.1 million .

Once renovations are complete, this building will be used by OpenEye for sales and training, research and development, warehousing and administrative purposes.

Our future working capital and capital expenditure requirements will depend on many factors, including 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.

To the extent our cash and cash equivalents, together with our 2017 Facility, and cash flows from operating activities are insufficient to fund our future activities, we may need to borrow additional funds through our bank credit arrangements or raise funds from public or private equity or debt financings.

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

$11.5 million in 2021, $10.5 million in 2022, $9.6 million in 2023, $8.5 million in 2024, $7.5 million in 2025 and $4.4 million in 2026 and thereafter.

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

As the impact of the COVID-19 pandemic on the economy and our operations evolves, we will continue to assess our liquidity needs.

To the extent our cash and cash equivalents and cash flows from operating activities are insufficient to fund our future activities, we may need to borrow additional funds through our bank credit arrangements or raise funds from public or private equity or debt financings.

If we raise additional funds through the incurrence of indebtedness, such indebtedness would likely have rights that are senior to holders of our equity securities and could contain covenants that restrict our operations.

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Sources of Liquidity

Our 2017 Facility is 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 is available to us to refinance existing debt and for general corporate and working capital purposes including acquisitions, and has a current borrowing capacity of $125.0 million .

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

Our 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, had a borrowing capacity of $125.0 million.

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

On 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 December 31, 2020, $110.0 million was outstanding under the 2017 Facility, no letters of credit were outstanding and $15.0 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.

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

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

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

As of December 31, 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."

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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 is limited by restrictions

under the terms of the agreements governing the 2017 Facility.

Additionally, our ability to pay dividends on our common stock was limited 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.

Stock Repurchase Programs

On November 29, 2018, our board of directors authorized a stock repurchase program, under which we were authorized to purchase up to an aggregate of $75.0 million of our outstanding common stock during the two-year period ended November 29, 2020.

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

During the year ended December 31, 2020, we repurchased 147,153 shares of our common stock under the program that expired on November 29, 2020 in open market purchases for a total consideration of $5.1 million.

Historical Cash Flows

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Year Ended December 31,

2020 2019 2018

Cash flows from operating activities $ 102,080 $ 47,112 $ 60,710

Cash flows used in investing activities (20,274) (73,414) (13,377)

Cash flows (used in) / from financing activities

Cash flows from / (used in) financing activities 52,024 (130) 2,399

Operating Activities

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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 during the year ended December 31, 2019 for the agreement reached to settle the legal matter alleging violations of the Telephone Consumer Protection Act ,or TPCA, that did not occur during the year ended December 31, 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 reclassified 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 on October 21, 2019.

For 2019, cash flows from operating activities were $47.1 million, compared to $60.7 million for 2018.

This $13.6 million decrease in cash flows from operating activities was due to a $61.4 million decrease in cash from operating assets and liabilities, partially offset by a $31.8 million increase in net income and a $16.0 million increase in non-cash items.

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The $16.0 million increase in non-cash items was primarily due to a $14.1 million change in deferred income taxes, primarily due to the increase in deferred income taxes resulting from the $28.0 million expense recorded during 2018 for the agreement reached to settle the legal matter alleging violations of the TCPA.

Additionally, the increase in non-cash items was due to a $7.2 million increase in stock-based compensation resulting from additional grants of stock options and restricted stock units during 2019 , partially offset by a gain of $6.9 million recorded during 2019 related to the proceeds from the Promissory Notes and the Acquired Promissory Note received from one of our hardware suppliers.

For 2018, cash flows from operating activities were $60.7 million, an increase of $3.5 million from 2017, as the result of a $13.5 million increase in cash from operating assets and liabilities partially offset by a $7.7 million decrease in net income and a $2.3 million decrease in non-cash items.

The $13.5 million increase in cash from operating assets and liabilities was primarily due to the $28.0 million expense recorded during 2018 for the agreement reached to settle the legal matter alleging violations of the TCPA, which was not paid as of December 31, 2018.

This increase in cash from operating assets and liabilities was partially offset by a $5.5 million increase in the change in inventory related to the purchase of long lead-time parts, a $2.8 million settlement of the liability related to the subsidiary unit awards during 2018 and differences in timing of collection of receipts and payments of disbursements.

The $2.3 million decrease in non-cash items was primarily due to a $14.0 million increase in the change in deferred income taxes, primarily due to the increase in deferred income taxes resulting from the $28.0 million expense recorded during 2018 for the agreement reached to settle the legal matter alleging violations of the TCPA.

This decrease in non-cash items was partially offset by a $6.0 million increase in stock-based compensation resulting from additional grants of stock options and restricted stock units during 2018.

Additionally, there was a $4.0 million increase in amortization and depreciation primarily due to the additional amortization of customer relationships, developed technology and trade name intangibles acquired from the Acquisition in the first quarter of 2017.

Additionally, the increase in non-cash items was due to a $7.2 million increase in stock-based compensation resulting from additional grants of stock options and restricted stock units during 2019, partially offset by a gain of $6.9 million recorded during 2019 related to the proceeds from promissory notes and an acquired promissory note received from one of our hardware suppliers.

Investing Activities

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

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 2020, our cash flows used in investing activities was $20.3 million as compared to $73.4 million in 2019.

The $60.0 million increase 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.

The increase in cash used in investing activities was also due to $22.4 million paid in 2019 for the Acquired Promissory Note, $3.7 million of additional funding provided to the hardware supplier under the Promissory Notes in 2019 and $5.1 million paid for the purchase of land and a commercial building in 2019.

The increases in cash used in investing activities were partially offset by $30.7 million received from one of our hardware suppliers for the amounts due under the Promissory Notes and the Acquired Promissory Note.

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 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.

For 2019, our cash flows used in investing activities was $73.4 million as compared to $13.4 million in 2018.

The $155.4 million decrease in cash used in investing activities was primarily due to our payment of $154.3 million, net of cash acquired, for our acquisitions in the first quarter of 2017.

The $60.0 million increase 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.

The increase in cash used in investing activities was also due to $22.4 million paid in 2019 for an acquired promissory note related to one of our hardware suppliers, $3.7 million of additional funding provided to the hardware supplier under the Promissory Notes in 2019 and $5.1 million paid for the purchase of land and a commercial building in 2019.

The increases in cash used in investing activities were partially offset by $30.7 million received from one of our hardware suppliers for the amounts due under several promissory notes and an acquired promissory note.

Financing Activities

Cash generated by financing activities includes borrowings under credit facilities and proceeds from the issuance of common stock from employee stock option exercises and from our employee stock purchase plan.

Cash generated by financing activities includes borrowings under the 2017 Facility 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 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.

For 2019, cash flows used in financing activities was $0.1 million compared to cash flows from financing activities of $2.4 million in 2018.

The $2.5 million change in cash flows used in financing activities was primarily due to a decrease of $2.5 million in the issuance of common stock under equity-based plans.

For 2018, cash flows from financing activities was $2.4 million compared to $67.3 million in 2017.

The $64.9 million decrease in cash flows from financing activities was primarily due to the $64.3 million of net proceeds borrowed under the credit facilities during 2017 related to the Acquisition in March 2017.

Contractual Obligations

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As of December 31, 2020, the following table summarizes our contractual obligations and the effect such obligations are expected to have on our liquidity and cash flow in future periods (in thousands):

Contractual Obligations

Contractual Obligations 1 Year 2 to 3 Years 4 to 5 Years More Than

5 Years Total

Principal payments $ — $ 110,000 $ — $ — $ 110,000

Interest payments 1

1,956 1,490 — — 3,446

Unused line fee payments 30 24 — — 54

Operating lease commitments 11,499 20,136 16,060 4,450 52,145

Subsidiary unit award liabilities 2

Other long-term liabilities 444 4,459 1,082 826 6,811

Other commitments 2

775 308 — — 1,083

Total contractual obligations $ 14,704 $ 136,417 $ 17,142 $ 5,276 $ 173,539

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The projected variable interest payments assume no change in the Eurodollar Base Rate, or LIBOR, from December 31, 2020.

Represents the current portion of our expected cash payments for our liability to repurchase subsidiary unit awards for our professional residential property management and vacation rental management subsidiary.

(2) Represents amounts due under multi-year, non-cancelable contracts with third-party vendors, as well as other commitments.

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As of December 31, 2020, we had no outstanding letters of credit under our 2017 Facility.

Off-Balance Sheet Arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

We do not engage in off-balance sheet financing arrangements.

In addition, we do not engage in trading activities involving non-exchange traded contracts.

Debt Obligations

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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 matures in October 2022 and includes 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 are being amortized as interest expense over the term of the 2017 Facility.

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

During each of the years ended December 31, 2019 and 2018 , we repaid $4.0 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.

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

Costs incurred in connection with the 2017 Facility were capitalized and were being amortized as interest expense over the term of the 2017 Facility.

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

During the years ended December 31, 2020 and 2019, we repaid $3.0 million and $4.0 million of the outstanding balance of the 2017 Facility, respectively.

See Convertible Senior Notes below in this section of this Annual Report for further details on the repayment of all outstanding borrowings under, and the termination of, the 2017 Facility subsequent to December 31, 2020.

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

For the year ended December 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.

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

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

For the years ended December 31, 2020, 2019 and 2018, the effective interest rate on the credit facilities was 2.65%, 4.45% and 4.13%, respectively.

The carrying value of the 2017 Facility was $110.0 million and $63.0 million as of December 31, 2020 and 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 December 31, 2019 and 2018 .

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.

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

The 2017 Facility contained various financial and other covenants that required 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 December 31, 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.

On November 30, 2018, we amended the 2017 Facility to incorporate the parameters that must be met for us to repurchase our outstanding common stock under the stock repurchase program authorized by our board of directors on November 29, 2018 .

The 2017 Facility also contained 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.

On November 30, 2018, we amended the 2017 Facility to incorporate the parameters that were required to be met for us to repurchase our outstanding common stock under the stock repurchase program authorized by our board of directors on November 29, 2018.

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.

Bank National Association, as trustee.

The 2026 Notes are senior unsecured obligations that do not bear regular interest and the principal amount of the 2026 Notes will not accrete.

The 2026 Notes may bear special interest under specified circumstances related to our failure to comply with our reporting obligations under the Indenture.

Special interest, if any, will be payable semiannually in arrears on January 15 and July 15 of each year, beginning on July 15, 2021 .

We received proceeds from the issuance of the 2026 Notes of $484.3 million, net of $15.7 million of transaction fees and other debt issuance costs.

We may not redeem the 2026 Notes prior to January 20, 2024.

We may redeem for cash, all or any portion of the 2026 Notes, at our option, on or after January 20, 2024, at a redemption price equal to 100% of the principal amount of the 2026 Notes to be redeemed, plus accrued and unpaid special interest, if any, to, but excluding, the redemption date, if the last reported sale price of our common stock has been at least 130% of the conversion price for the 2026 Notes then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption.

No sinking fund is provided for the 2026 Notes.

The 2026 Notes will be convertible at the option of the holders at any time prior to the close of business on the business day immediately preceding August 15, 2025, only under the following circumstances:

(1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2021 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price for the 2026 Notes on each applicable trading day;

(2) during the five business day period immediately after any 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 bankruptcy or insolvency events of default involving us after which the 2026 Notes become automatically due and payable.

We terminated the 2017 Facility effective January 20, 2021.

Since we expect to settle the principal amount on our outstanding 2026 Notes in cash and any excess in cash or shares of our common stock, we will use the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable.

The conversion spread will have a dilutive impact on diluted net income per share of common stock when the average market price of our common stock for a given period exceeds the conversion price of $147.19 per share for the 2026 Notes.

Non-GAAP Measures

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

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

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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.

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.

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.

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Year Ended December 31,

2020 2019 2018

Adjusted EBITDA:

Net income $ 76,660 $ 53,330 $ 21,524

Interest expense, interest income and other income, net (23,862) (8,483) 503

Provision for / (benefit f rom) income taxes

Provision for / (benefit from) income taxes 3,500 5,566 (9,825)

Amortization and depreciation expense 27,520 22,134 21,721

Stock-based compensation expense 29,176 20,603 13,429

Secondary offering expense 543 — —

Acquisition-related expense 2,732 2,403 —

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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-K

Item 7. Management’s Discussion and Analysis