What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-05-04 compared with 2020-11-05 · 217 added, 300 removed, 295 unchanged (64% of the section changed)

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our business strategy, plans and objectives for future operations;

continued enhan cement s of our platform and offerings;

continued enhancements of our platform and offerings;

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

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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 thermosta ts.

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, energy management and wellness solutions as stand-alone offerings or as combined solutions to address the needs of a broad range of customers.

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

Highlights of Third Quarter Results

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.

Highlights of First Quarter Results

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

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Our subscribers consist of all of the properties maintained by those residential and commercial property owners to which we are delivering at least one of our solutions.

We derive a portion of our revenue from licensing our intellectual property to third parties

on a per customer basis.

SaaS and license revenue represented 63% and 64% of our revenue during the three and nine months ended September 30, 2020, respectively, as compared to 66% and 68% in the same periods in the prior year.

We derive a portion of our revenue from licensing our intellectual property to third parties on a per customer basis.

SaaS and license revenue represented 62% of our revenue during the three months ended March 31, 2021, as compared to 61% in the same period in the prior year.

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

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

Software license revenue represented 6% of our revenue during each of the three and nine months ended September 30, 2020, as compared to 8% and 9% for the same periods in the prior year.

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

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

Software license revenue represented 5% of our revenue during the three months ended March 31, 2021, as compared to 6% for the same period in the prior year.

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

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 37% and 36% of our revenue during the three and nine months ended September 30, 2020, respectively, as compared to 34% and 32% in the same periods in the prior year.

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 38% of our revenue during the three months ended March 31, 2021, as compared to 39% in the same period in the prior year.

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

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

• SaaS and license revenue increased 18% to $100.1 million in the three months ended September 30, 2020 from $84.9 million in the three months ended September 30, 2019.

SaaS and license revenue increased 16% to $287.8 million in the nine months ended September 30, 2020 from $247.3 million in the nine months ended September 30, 2019.

Included in SaaS and license revenue was software license revenue, which decreased to $9.5 million in the three months ended September 30, 2020 from $10.8 million in the three months ended September 30, 2019.

Software license revenue decreased to $29.0 million in the nine months ended September 30, 2020 from $32.8 million in the nine months ended September 30, 2019.

• Total revenue increased 24% to $158.9 million in the three months ended September 30, 2020 from $127.9 million in the three months ended September 30, 2019.

Total revenue increased 25% to $452.4 million in the nine months ended September 30, 2020 from $361.9 million in the nine months ended September 30, 2019.

• Net income increased to $35.8 million in the three months ended September 30, 2020 as compared to $17.7 million in the three months ended September 30, 2019.

Net income increased to $61.0 million in the nine months ended September 30, 2020 as compared to $40.5 million in the nine months ended September 30, 2019.

Net income attributable to common stockholders increased to $36.1 million in the three months ended September 30, 2020 as compared to $17.7 million in the three months ended September 30, 2019.

Net income attributable to common stockholders increased to $61.9 million in the nine months ended September 30, 2020 as compared to $40.5 million in the nine months ended September 30, 2019.

• Adjusted EBITDA, a non-GAAP measurement of operating performance, increased to $34.5 million in the three months ended September 30, 2020 from $26.3 million in the three months ended September 30, 2019.

Adjusted EBITDA increased to $92.9 million in the nine months ended September 30, 2020 from $78.3 million in the nine months ended September 30, 2019.

Please see Non-GAAP Measures below in this section of this Quarterly Report for a discussion of the limitations of Adjusted EBITDA (a non-GAAP measure) and a reconciliation of Adjusted EBITDA to net income, the most comparable measurement in accordance with accounting principles generally accepted in the United States, or GAAP, for the three and nine months ended September 30, 2020 and 2019.

• SaaS and license revenue increased 17% to $107.4 million in the three months ended March 31, 2021 from $91.9 million in the three months ended March 31, 2020.

Included in SaaS and license revenue was software license revenue, which decreased to $8.7 million in the three months ended March 31, 2021 from $9.7 million in the three months ended March 31, 2020.

• Total revenue increased 14% to $172.5 million in the three months ended March 31, 2021 from $151.9 million in the three months ended March 31, 2020.

• Net income increased to $14.6 million in the three months ended March 31, 2021, as compared to $8.6 million in the three months ended March 31, 2020.

Net income attributable to common stockholders increased to $14.8 million in the three months ended March 31, 2021, as compared to $8.8 million in the three months ended March 31, 2020.

• Adjusted EBITDA, a non-GAAP measurement of operating performance, increased to $35.6 million in the three months ended March 31, 2021 from $29.2 million in the three months ended March 31, 2020.

Recent Developments

The COVID-19 pandemic disrupted and may intermittently 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 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.

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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.

The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results that can be expected for our entire fiscal year ending December 31, 2021, which is increasingly true in periods of extreme uncertainty, such as the uncertainty caused by 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 in the third quarter, if the economy fails to fully recover or there is another shutdown of non-essential businesses due to a resurgence of COVID-19, we anticipate that our SaaS and license revenue growth rate may be lower in future periods if some consumers or small businesses defer or cancel previously anticipated purchases, with a

corresponding reduction in hardware revenue.

While our business and those of our service providers showed some resiliency beginning in 2020 and continuing into 2021, if the economy fails to fully recover or there are additional shutdowns of non-essential businesses due to a resurgence of COVID-19, 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.

Secondary Public Offering

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

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

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

We incurred expenses of approximately $0.5 million related to legal, accounting and other fees in connection with the secondary public offering during the nine months ended September 30, 2020 , which are included in general and administrative expense in our condensed consolidated statements of operations and are adjusted for when determining Adjusted EBITDA.

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

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 $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.

We 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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Three Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

SaaS and license revenue $ 107,383 $ 91,950

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Twelve Months Ended

September 30,

SaaS and license revenue renewal rate 95 % 93 %

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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.

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

Adjusted EBITDA

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

Adjusted EBITDA is a non-GAAP measure that represents our net income before interest expense, interest income, other (expense) / income, net, (benefit from) / provision for income taxes, amortization and depreciation expense, stock-based compensation expense, 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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Adjusted EBITDA is not a measure calculated in accordance with GAAP and should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.

Please see Non-GAAP Measures in this section for a discussion of the limitations of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, the most comparable GAAP measurement, for the three and nine months ended September 30, 2020 and 2019.

SaaS and License Revenue Renewal Rate

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

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

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

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

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

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.

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 condensed consolidated balance sheets (in thousands):

Balance Sheet Caption As of January 1, 2020

Accumulated deficit $ 816

Accounts receivable, net (367)

Other current assets (83)

Other assets (366)

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

Components of Operating Results

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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 related to the sale of licenses that provide our customers the right to use our indoor gunshot detection solution in exchange for license fees, which are generally paid at contract inception.

Hardware and other revenue may also include activation fees charged to some of our service provider partners for activation of a new subscriber account on our platforms, as well as fees paid by service provider partners for our marketing services.

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

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

As a result of the COVID-19 pandemic, governments, public institutions and other organizations in many countries and localities where COVID-19 has been detected have taken certain emergency measures, and may from time to time take additional emergency measures, to combat its spread, including imposing lockdowns, shelter-in-place orders, quarantines,

restrictions on travel and gatherings and the extended shutdown non-essential businesses that cannot be conducted remotely.

These emergency measures remain in place to varying degrees.

We have seen and anticipate we may continue to see some disruption to our hardware supply chain due to the impact of COVID-19 on manufacturing, production and global transportation, as well as to our sales channels due to restrictions on our service providers’ ability to meet with residential and commercial property owners who use our solutions, reluc tance of service providers and property owners to meet even where such restrictions have been lifted and general economic condition s.

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 is another shutdown of non-essential businesses due to a resurgence of COVID-19, we anticipate that our SaaS and license revenue growth rate may be lower in future periods if some consumers or small businesses defer or cancel previously anticipated purchases, with a corresponding reduction in hardware revenue.

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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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 subje ct to tariffs have changed numerous times based on action by the U.S.

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 finis hed goods hardware products that we sell to our service provider partners are imported from China and c ould be subject to increased tariffs.

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

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

We continue to monitor the

changes in tariffs.

We continue to monitor the changes in tariffs.

If tariffs are increased or are expanded to apply to more of our products, such actions may increase our cost of hardware revenue and reduce our hardware revenue margins in the future.

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

We grew from 1,043 employees as of September 30, 2019 to 1,361 employees as of September 30, 2020, and we expect to continue to hire new employees to support the projected future growth of our business.

We grew from 1,227 employees as of March 31, 2020 to 1,414 employees as of March 31, 2021, and we expect to continue to hire new employees to support the projected future growth of our business.

Sales and Marketing Expense.

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

The number of employees in sales and marketing functions increased from 340 as of September 30, 2019 to 450 as of September 30, 2020.

The number of employees in sales and marketing functions increased from 422 as of March 31, 2020 to 457 as of March 31, 2021.

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

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

The number of employees in general and administrative functions increased from 121 as of September 30, 2019 to 161 as of September 30, 2020.

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

The number of employees in general and administrative functions increased from 155 as of March 31, 2020 to 160 as of March 31, 2021.

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

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

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

The number of employees in research and development functions increased from 582 as of September 30, 2019 to 750 as of September 30, 2020.

The number of employees in research and development functions increased from 650 as of March 31, 2020 to 797 as of March 31, 2021.

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

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Interest Expense

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 is available to us

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

Interest expense is expected to increase in 2020 as compared to 2019 due to the $50.0 million borrowed under the 2017 Facility as a precautionary measure in order to provide financial flexibility in light of current uncertainty in the financial markets resulting from the COVID-19 pandemic.

Interest expense consists of interest expense associated with our 2026 Notes and our 2017 Facility.

Interest expense is expected to increase in 2021, as compared to 2020 due to the non-cash interest expense related to the 2026 Notes issued on January 20, 2021.

Interest Income

Interest income consists of interest income earned on our cash and cash equivalents and our notes receivable.

Other Income, Net

Other income, net primaril y consists of gains earned on the sale 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 Income Taxes

Other (Expense) / Income, Net

Other (expense) / income, net primaril y cons ists of non-operating and miscellaneous expense and income, including the $0.2 million loss on the early extinguishment of the 2017 Facility during the three months ended March 31, 2021.

(Benefit from) / Provision for Income Taxes

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 research and development tax credits claimed, tax windfall benefits from employee stock-based payment transactions and foreign derived intangible income deductions, partially offset by the impact of state taxes and non-deductible meal and entertainment expenses.

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

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Three Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

SaaS and license revenue $ 107,383 62 % $ 91,950 61 %

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Interest income 157 — 459 —

Other income, net 24,753 16 6,380 5 24,910 6 6,468 2

Other (expense) / income, net (155) — 92 —

Income before income taxes 11,637 7 9,773 7

Provision for income taxes 6,546 4 2,873 2 5,471 2 3,428 1

(Benefit from) / provision for income taxes (2,913) (1) 1,202 1

Net income $ 14,550 8 % $ 8,571 6 %

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Three Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

Stock-based compensation expense data:

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Three Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

Components of cost of revenue as a percentage of revenue:

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Total cost of revenue as a percentage of total revenue 38 % 38 %

39 % 37 % 37 % 36 %

Comparison of the Three and Nine Months Ended September 30, 2020 to September 30, 2019

Comparison of the Three Months Ended March 31, 2021 to March 31, 2020

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

Three Months Ended

September 30, %

Change Nine Months Ended

September 30, %

2020 2019 2020 2019

SaaS and license revenue $ 107,383 $ 91,950 17 %

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Total revenue $ 172,498 $ 151,939 14 %

T h e $31.0 million increase in total revenue for the three months ended September 30, 2020 as compared to the same period in the prior year was primarily the result of a $15.8 million, or 37%, increase in our hardware and other revenue and a $15.2 million, or 18%, increase in our SaaS and license revenue.

Our software license revenue included within SaaS and license revenue decreased $1.3 million to $9.5 million during the three months ended September 30, 2020 as compared to $10.8 million during the same period in the prior year, which decreased primarily due to the result of the continuing transition of customers from non-hosted software to our cloud based hosted platform.

The $12.9 million increase in our Alarm.com segment SaaS and license revenue for the three months ended September 30, 2020 was primarily due to growth in our subscriber base, including the revenue impact from subscribers we added in 2019.

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

The $2.3 million increase in SaaS and license revenue for our Other segment for the three months ended September 30, 2020 as compared to the same period i n the prior year was due to an increase in sales of our energy management and demand response solutions and our property management and heating, ventilation and air conditioning, or HVAC, solutions.

Hardware and other revenue, net of in tersegment eliminat ions, for the three months ended September 30, 2020 in our Other segment decreased $1.7 million, or 52%, as compared to the same period in the prior year, primarily due to a decrease in sales related to our property management solution.

The $90.6 million increase in total revenue for the nine months ended September 30, 2020 as compared to the same period in the prior year was primarily the result of a $50.1 million, or 44%, increase in our hardware and other revenue and a $40.5 million, or 16%, increase in our SaaS and license revenue.

Our software license revenue included within SaaS and license revenue decreased $3.8 million to $29.0 million during the nine months ended September 30, 2020, as compared to $32.8 million during the same period in the prior year, which decreased primarily due to the result of the continuing transition of customers from non-hosted software to our cloud based hosted platform.

The $35.7 million increase in our Alarm.com segment SaaS and license revenue for the nine months ended September 30, 2020 was primarily due to growth in our subscriber base, including the revenue impact from subscribers we added in 2019.

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

The $4.8 million increase in SaaS and license revenue for our Other segment for the nine months ended September 30, 2020, as compared to the same period in the prior year was due to an increase in sales of our energy management and demand response solutions and our property management and HVAC solutions.

Hardware and other revenue, net of intersegment eliminations, for the nine months ended September 30, 2020 in our Other segment decreased $3.1 million, or 31%, as compared to the same period in the prior year, primarily due to a decrease in sales related to our property management solution.

The $20.6 million increase in total revenue for the three months ended March 31, 2021 as compared to the same period in the prior year was primarily the result of a $15.5 million, or 17%, increase in our SaaS and license revenue and a $5.1 million, or 9%, increase in our hardware and other revenue.

Our software license revenue included within SaaS and license revenue decreased $1.0 million to $8.7 million during the three months ended March 31, 2021 as compared to $9.7 million during the same period in the prior year, which decreased primarily due to the result of the continuing transition of customers from non-hosted software to our cloud based hosted platform.

The $13.9 million increase in our Alarm.com segment SaaS and license revenue for the three months ended March 31, 2021 was primarily due to growth in our subscriber base, including the revenue impact from subscribers we added in 2020.

The increase in hardware and other revenue for the three months ended March 31, 2021 as compared to the same period in the prior year was 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 Shooter Detection Systems, LLC, or SDS, on December 14, 2020.

The $1.6 million increase in SaaS and license revenue for our Other segment for the three months ended March 31, 2021 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.

Hardware and other revenue, net of intersegment eliminations, for the three months ended March 31, 2021 in our Other segment decreased $1.6 million, or 47%, 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

Three Months Ended

September 30, %

Change Nine Months Ended

September 30, %

2020 2019 2020 2019

Cost of revenue (1)

5 unchanged sentences

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

T he $13.7 million increase in cost of revenue for the three months ended September 30, 2020 as compared to the same period in the prior year was the result of a $11.8 million, or 34%, increase in cost of hardware and other revenue and a $1.9 million, or 15%, increase in cost of SaaS and license revenue.

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

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

Cost of hardware and other revenue as a percentage of hardware and other revenue was 80% for the three months ended September 30, 2020 and 82% for the same period in the prior year.

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

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

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

The $37.1 million increase in cost of revenue for the nine months ended September 30, 2020 as compared to the same period in the prior year was the result of a $34.9 million, or 37%, increase in cost of hardware and other revenue and a $2.2 million, or 6%, increase in cost of SaaS and license revenue.

Our cost of software license revenue included within cost of SaaS and license revenue was $1.0 million for each of the nine months ended September 30, 2020 and 2019.

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

Cost of hardware and other revenue as a percentage of hardware and other revenue was 78% for the nine months ended September 30, 2020 and 82% for the same period in the prior year.

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

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

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

The $7.8 million increase in cost of revenue for the three months ended March 31, 2021 as compared to the same period in the prior year was the result of a $5.0 million, or 11%, increase in cost of hardware and other revenue and a $2.8 million, or 23%, increase in cost of SaaS and license revenue.

Our cost of software license revenue included within cost of SaaS and license revenue was $0.4 million for each of the three months ended March 31, 2021 and 2020.

The increase in cost of Alarm.com segment hardware and other revenue related primarily to an increase in the number of hardware units shipped during the three months ended March 31, 2021 as compared to the same period in the prior year.

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.

Cost of hardware and other revenue as a percentage of hardware and other revenue was 78% for the three months ended March 31, 2021 and 76% for the same period in the prior year.

Cost of SaaS and license revenue as a percentage of SaaS and license revenue was 14% for the three months ended March 31, 2021 and 13% for the same period in the prior year.

Cost of software license revenue as a percentage of software license revenue was 4% for each of the three months ended March 31, 2021 and 2020.

The increase in cost of hardware and other revenue as a percentage of hardware and other revenue for the three months ended March 31, 2021 as compared to the same period in the prior year is a reflection of the mix of product sales during the periods.

Sales and Marketing Expense

Three Months Ended

September 30, %

Change Nine Months Ended

September 30, %

2020 2019 2020 2019

Sales and marketing $ 18,999 $ 17,075 11 %

% of total revenue 11 % 11 %

The $3.9 million increase in sales and marketing expense for the three months ended September 30, 2020 as compared to the same period in the prior year was primarily due to increases in headcount for our sales team and our service provider partner support team to support our growth.

As a result, our personnel and related costs for our Alarm.com segment, including salary, benefits, stock-based compensation and travel expenses, increased by $2.2 million for the three months ended September 30, 2020, net of decreased travel expenses of $1.2 million due to the COVID-19 pandemic.

Additionally, marketing costs increased by $1.2 million for the three months ended September 30, 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 $0.4 million for the three months ended September 30, 2020 as compared to the same period in the prior year, primarily due to increases in headcount for our sales team.

The $9.0 million increase in sales and marketing expense for the nine months ended September 30, 2020 as compared to the same period in the prior year was primarily due to increases in headcount for our sales team and our service provider partner support team to support our growth.

As a result, our personnel and related costs for our Alarm.com segment, including salary, benefits, stock-based compensation and travel expenses, increased by $7.8 million for the nine months ended September 30, 2020, net of decreased travel expenses of $2.6 million due to the COVID-19 pandemic.

Additionally, costs for external consultants increased by $0.4 million for the nine months ended September 30, 2020 for our Alarm.com segment as compared to the same period in the prior year.

Sales and marketing expense from our Other segment increased $0.8 million for the nine months ended September 30, 2020, as compared to the same period in the prior year, primarily due to increases in headcount for our sales team.

The number of employees in sales and marketing functions increased from 340 as of September 30, 2019 to 450 as of September 30, 2020.

The $1.9 million increase in sales and marketing expense for the three months ended March 31, 2021 as compared to the same period in the prior year was primarily due to a $0.8 million increase in marketing costs for our Alarm.com segment due to an increase in advertising.

Additionally, the increase in sales and marketing expense for the three months ended March 31, 2021 as compared to the same period in the prior year was due to increases in headcount for our sales team and our service provider partner support team to support our growth.

As a result, our personnel and related costs for our Alarm.com segment, including salary, benefits, stock-based compensation and travel expenses, increased by $0.5 million for the three months ended March 31, 2021, net of decreased travel expenses of $0.9 million due to the COVID-19 pandemic.

Sales and marketing expense from our Other segment increased $0.5 million for the three months ended March 31, 2021 as compared to the same period in the prior year, primarily due to increases in headcount for our sales team.

The number of employees in sales and marketing functions increased from 422 as of March 31, 2020 to 457 as of March 31, 2021.

General and Administrative Expense

Three Months Ended

September 30, %

Change Nine Months Ended

September 30, %

2020 2019 2020 2019

General and administrative $ 22,882 $ 20,865 10 %

% of total revenue 13 % 14 %

The $1.3 million decrease in general and administrative expense for the three months ended September 30, 2020 as compared to the same period in the prior year was primarily due to a $2.2 million decrease in costs related to an offsite internal strategy and product roadmap conference in 2019 that did not take place in 2020 and a $1.1 million decrease in the provision for credit losses for our Alarm.com segment.

These decreases were partially offset by a $1.2 million increase in personnel and related costs and an $0.8 million increase in legal expenses within our Alarm.com segment resulting from intellectual property litigation during the three months ended September 30, 2020 which did not occur during the three months ended September 30, 2019.

Additionally, recruiting costs and costs for external consultants increased by $0.3 million for the three months ended September 30, 2020 for our Alarm.com segment as compared to the same period in the prior year.

General and administrative expenses from our Other segment decreased $0.4 million for the three months ended September 30, 2020 as compared to the same period in the prior year primarily due to an decrease in the provision for credit losses.

T he $3.8 million increase in general and administrative expense for the nine months ended September 30, 2020 as compared to the same period in the prior year was primarily due to a $3.9 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 the reversal of a $3.3 million reserve for a promissory note with one of our hardware suppliers within our Alarm.com segment during the nine months ended September 30, 2019 which did not occur during the nine months ended September 30, 2020.

Additionally, costs for external consultants increased by $1.3 million for the nine months ended September 30, 2020 for our Alarm.com segment as compared to the same period in the prior year.

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 the nine months ended September 30, 2019 which did not occur during the nine months ended September 30, 2020.

General and administrative expenses from our Other segment increased $0.3 million for the nine months ended September 30, 2020 as compared to the same period in the prior year primarily due to an increase in rent expense.

The number of employees in general and administrative functions increased from 121 as of September 30, 2019 to 161 as of September 30, 2020.

The $2.0 million increase in general and administrative expense for the three months ended March 31, 2021 as compared to the same period in the prior year was primarily due to a $2.4 million increase in legal expenses within our Alarm.com segment resulting from intellectual property litigation during the three months ended March 31, 2021 as compared to the three months ended March 31, 2020.

Additionally, the increase in general and administrative expense for the three months ended March 31, 2021 as compared to the same period in the prior year was due to a $0.8 million increase in personnel and related costs for our Alarm.com segment due to an increase in employee headcount to support our operational growth.

These increases were offset by a $1.3 million decrease in the provision for credit losses for our Alarm.com segment during the three months ended March 31, 2021 as compared to the same period in the prior year.

General and administrative expenses from our Other segment decreased by $0.1 million for the three months ended March 31, 2021 as compared to the same period in the prior year, primarily due to a decrease in the provision for credit losses.

The number of employees in general and administrative functions increased from 155 as of March 31, 2020 to 160 as of March 31, 2021.

Research and Development Expense

Three Months Ended

September 30, %

Change Nine Months Ended

September 30, %

2020 2019 2020 2019

Research and development $ 42,467 $ 39,730 7 %

% of total revenue 25 % 26 %

The $7.5 million increase in research and development expense for the three months ended September 30, 2020 as compared to the same period in the prior year was primarily due to an increase in headcount of employees in research and development functions.

Our personnel and related costs for our Alarm.com segment increased by $7.1 million for the three months ended September 30, 2020 as compared to the same period in the prior year.

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

These increases for our Alarm.com segment were partially offset by a $1.0 million decrease in research and development expense due to in-process research and development we acquired during the three months ended September 30, 2019 that did not occur during the three months ended September 30, 2020.

Research and development expense from our Other segment increased $0.7 million for the three months ended

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

The $28.9 million increase in research and development expense for the nine months ended September 30, 2020 as compared to the same period in the prior year was primarily due to an increase in headcount of employees in research and development functions.

Our personnel and related costs for our Alarm.com segment increased by $21.7 million for the nine months ended September 30, 2020, as compared to the same period in the prior year and our expenses for external consultants increased by $1.5 million.

Additionally, the increase in research and development expense is due to $4.4 million of in-process research and development we acquired during the nine months ended September 30, 2020, partially offset by the $1.0 million of in-process research and development we acquired during the nine months ended September 30, 2019.

Research and development expense from our Other segment increased $1.6 million for the nine months ended September 30, 2020 as compared to the same period in the prior year, primarily due to personnel and related costs, including salary, benefits and stock-based compensation.

The number of employees in research and development functions increased from 582 as of September 30, 2019 to 750 as of September 30, 2020.

The $2.7 million increase in research and development expense for the three months ended March 31, 2021 as compared to the same period in the prior year was primarily due to an increase in headcount of employees in research and development functions.

Our personnel and related costs for our Alarm.com segment increased by $5.1 million for the three months ended March 31, 2021 as compared to the same period in the prior year.

Additionally, the increase in research and development expense is due to a $0.5 million increase in expenses for external consultants for the three months ended March 31, 2021, as compared to the same period in the prior year.

These increases for our Alarm.com segment were partially offset by a $4.4 million decrease in research and development expense due to in-process research and development we acquired during the three months ended March 31, 2020 that did not occur during the three months ended March 31, 2021.

Research and development expense from our Other segment increased $1.4 million for the three months ended March 31, 2021 as compared to the same period in the prior year, primarily due to personnel and related costs, including salary, benefits and stock-based compensation.

The number of employees in research and development functions increased from 650 as of March 31, 2020 to 797 as of March 31, 2021.

Amortization and Depreciation

Three Months Ended

September 30, %

Change Nine Months Ended

September 30, %

2020 2019 2020 2019

Amortization and depreciation $ 7,385 $ 6,422 15 %

% of total revenue 4 % 4 %

Amortization and depreciation increased $1.4 million and $4.2 million for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in the prior year, primarily due to the intangible assets that were acquired in connection with the purchase of 85% of the issued and outstanding capital stock of OpenEye on October 21, 2019.

Amortization and depreciation increased $1.0 million for the three months ended March 31, 2021, as compared to the same period in the prior year, primarily due to the intangible assets that were acquired in connection with the purchase of SDS on December 14, 2020.

Interest Expense

Three Months Ended

September 30, %

Change Nine Months Ended

September 30, %

2020 2019 2020 2019

Interest expense $ (3,368) $ (645) 422 %

% of total revenue (2) % — %

Interest expense decreased $0.2 million and $0.3 million for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in the prior ye ar pri marily 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 expense increased $2.7 million for the three months ended March 31, 2021, as compared to the same period in the prior ye ar primarily due to the amortization of the debt discount and debt issuance costs related to the 2026 Notes.

Interest Income

Three Months Ended

September 30, %

Change Nine Months Ended

September 30, %

2020 2019 2020 2019

Interest income $ 157 $ 459 (66) %

% of total revenue — % — %

Interest incom e decreased $2.6 million and $3.6 million for the three and nine months ended September 30, 2020, respectively, as compa red to the same periods in the prior year, 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

Interest income decreased $0.3 million for the three months ended March 31, 2021, as compared to the same period in the prior year, primarily due to a decrease in interest rates, partially offset by interest income earned on the cash from the proceeds of the 2026 Notes.

Other (Expense) / Income, Net

Three Months Ended

September 30, %

Change Nine Months Ended

September 30, %

2020 2019 2020 2019

Other income, net $ 24,753 $ 6,380 288 % $ 24,910 $ 6,468 285 %

Other (expense) / income, net $ (155) $ 92 (268) %

% of total revenue — % — %

Other income , net increased $18.4 million for each of the three and nine months ended September 30, 2020 as compared to the same periods in the prior year.

The increase in other income, net is 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 during the three and nine months ended September 30, 2020 which did not occur during the same periods in the prior year as well a $0.6 million impairment of one of our investments recorded during the three and nine months ended September 30, 2019 which did not occur during the three and nine months ended September 30, 2020.

These increases in other income, net, were partially offset by the $6.9 million gain recorded during the three and nine months ended September 30, 2019 related to a promissory note with one of our hardware suppliers within our Alarm.com segment which did not occur during the three and nine months ended September 30, 2020.

Provision for Income Taxes

Other (expense) / income, net changed $0.2 million for the three months ended March 31, 2021, as compared to the same period in the prior year.

The change in other (expense) / income, net is primarily due to the $0.2 million loss on the early extinguishment of the 2017 Facility during the three months ended March 31, 2021 which did not occur during the same period in the prior year.

(Benefit From) / Provision for Income Taxes

Three Months Ended

September 30, %

Change Nine Months Ended

September 30, %

2020 2019 2020 2019

Provision for income taxes $ 6,546 $ 2,873 128 % $ 5,471 $ 3,428 60 %

(Benefit from) / provision for income taxes $ (2,913) $ 1,202 (342) %

% of total revenue (1) % 1 %

The provision for income taxes increased $3.7 million and $2.0 million for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in the prior year.

Our effective tax rates were 15.4% and 8.2% for the three and nine months ended September 30, 2020, respectively, as compared to 14.0% and 7.8% for the same periods in the prior year.

The increase in the provision for income taxes was primarily du e to higher income before income taxes during the three and nine months ended September 30, 2020 as compared to the same periods in the prior year.

The (benefit from) / provision for income taxes changed $4.1 million for the three months ended March 31, 2021, as compared to the same period in the prior year.

Our effective tax rate was (25.0)% for the three months ended March 31, 2021, as compared to 12.3% for the same period in the prior year.

The change in the (benefit from) / provision for income taxes was

primarily due to increased tax windfall benefits from employee stock-based payment transactions during the three months ended March 31, 2021, as compared to the same period in the prior year.

The change in the (benefit from) / provision for income taxes was also due to changes in estimated research and development tax credits and taxable income.

Segment Information

1 unchanged sentence

Alarm.com and Other.

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

Our Alarm.com segment represents our cloud-based and Software platforms for the intelligently connected property and related solutions that contributed 95% of our revenue for each of the three months ended March 31, 2021 and 2020 .

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

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

Our Alarm.com segment increased from 959 employees as of September 30, 2019 to 1,257 employees as of September 30, 2020.

Our Other segment increased from 84 employees as of September 30, 2019 to 104 employees as of September 30, 2020.

Our Alarm.com segment increased from 1,137 employees as of March 31, 2020 to 1,294 employees as of March 31, 2021.

Our Other segment increased from 90 employees as of March 31, 2020 to 120 employees as of March 31, 2021.

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

1 unchanged sentence

Three Months Ended

September 30,

SaaS and license revenue Hardware and other revenue

6 unchanged sentences

Total $ 107,383 $ 65,115 $ 91,733 $ 91,950 $ 59,989 $ 84,092

Nine Months Ended

September 30,

SaaS and license revenue Hardware and other revenue

Operating expenses SaaS and license revenue Hardware and other revenue

Operating expenses

Alarm.com $ 269,168 $ 159,800 $ 224,267 $ 233,459 $ 107,884 $ 181,209

Other 18,612 13,030 17,075 13,854 15,810 14,176

Intersegment Alarm.com — (2,118) — — (3,364) —

Intersegment Other — (6,065) — — (5,768) —

Total $ 287,780 $ 164,647 $ 241,342 $ 247,313 $ 114,562 $ 195,385

Our SaaS and license revenue for the Alarm.com segment included software license revenue of $9.5 million and $29.0 million for the three and nine months ended September 30, 2020, respectively, as compared to $10.8 million and $32.8 million for the same periods in the prior year.

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

Our SaaS and license revenue for the Alarm.com segment included software license revenue of $8.7 million for the three months ended March 31, 2021, as compared to $9.7 million for the same period in the prior year.

There was no software license revenue recorded for the Other segment during the three months ended March 31, 2021 and 2020.

Critical Accounting Policies and Significant Judgments and Estimates

2 unchanged sentences

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

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

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 Topic 326.

See Note 2 to our condensed consolidated financial statements for more information.

Except as disclosed in Note 2, there were no other material changes to our use of estimates or other critical accounting policies from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the SEC on February 26, 2020, or Annual Report.

Except as disclosed in Note 2 of our notes to the condensed consolidated financial statement and as disclosed below, there were no other material changes to our use of estimates or other critical accounting policies from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed with the SEC on February 25, 2021, or Annual Report.

Convertible Senior Notes

In accounting for the issuance of our convertible senior notes, we separate the notes into liability and equity components.

The carrying amount of the liability component is calculated by measuring the fair value of a similar liability that does not have an associated convertible feature, using a discounted cash flow model with a risk adjusted yield.

The carrying amount of the equity component representing the conversion option is determined by deducting the fair value of the liability component from the par value of the notes as a whole.

This difference represents a debt discount that is amortized to interest expense using the effective interest method over the term of the notes.

Transaction costs attributable to the liability component are netted with the liability component and amortized to interest expense using the effective interest method over the term of the notes.

Transaction costs attributable to the equity component are netted with the equity component of the notes in additional paid-in capital in the condensed consolidated balance sheets.

We did not make any material changes to the underlying assumptions used to separate the notes into liability and equity components for the three months ended March 31, 2021 and we do not expect any material changes in the near term to the underlying assumptions used to calculate the liability and equity components of our convertible senior notes for the three months ended March 31, 2021.

However, if changes in these assumptions occur, and, should those changes be significant, they could have a material impact on the liability and equity balances related to the convertible senior notes as well as interest expense.

Recently Issued Accounting Standards

3 unchanged sentences

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

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

Cash and cash equivalents $ 642,172 $ 253,459

Accounts receivable, net of allowance for credit losses of $2,400 and $2,584, respectively, and net of allowance for product returns of $1,341 and $1,075, respectively 81,883 76,373

Accounts receivable, net 88,406 83,326

Working capital 704,705 307,170

We define working capital as current assets minus current liabilities.

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

Our cash and cash equivalents as of March 31, 2021 are available for working capital purposes.

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

1 unchanged sentence

Liquidity and Capital Resources

As of September 30, 2020, we had $247.2 million in cash and cash equivalents.

As of March 31, 2021, we had $642.2 million in cash and cash equivalents.

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

To date, we have principally financed our operations through cash generated by operating activities and, 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 f or at least the next 12 months.

Over the final three months of fiscal year 2020, we expect our capital expenditure requirements to be approximately $3.0 million, primarily related to the continued build out of our leased office space as well as purchases of computer software and equipment.

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

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

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

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

On July 31, 2020, the platform partner was acquired by an unrelated third party and, as a result of the sale, we received proceeds of $25.7 million in exchange for our shares of common stock.

Our future working capital and capital expenditure 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.

On January 20, 2021, we issued $500.0 million aggregate principal amount of 0% convertible senior notes due January 15, 2026 in a private placement to qualified institutional buyers and received proceeds of $484.3 million, net of $15.7 million of transaction fees and other debt issuance costs.

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.

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.

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 f or at least the next 12 months.

Over the final nine months of fiscal year 2021, we expect our capital expenditure requirements to be approximately $7.4 million, primarily related to the continued build out of our leased office space as well as purchases of computer software and equipment.

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

$8.7 million for the remainder of 2021, $10.5 million in 2022, $9.7 million in 2023, $8.5 million in 2024, $7.5 million in 2025 and $4.8 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, 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.

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

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

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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.

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 unc ertainty in the financial markets resulting from the COVID-19 pandemic.

As of September 30, 2020, $111.0 million was outstanding under the 2017 Facility, no letters of credit were outstanding and $14.0 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 inc luding dividends, and enter into other transactions without approval of the lenders.

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

September 30, 2020 , we were in compliance with all covenants under the 2017 Facility.

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

The 2017 Facility was a revolving credit facility with SVB, as administrative agent, and a syndicate of lenders to finance working capital and certain permitted acquisitions and investments.

The 2017 Facility was available to us to refinance existing debt and for general corporate and working capital purposes including acquisitions, and prior to its termination on January 20, 2021, had a borrowing capacity of $125.0 million.

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

During the three months ended March 31, 2021, we repaid the entire outstanding balance of $110.0 million of the 2017 Facility with proceeds from the 2026 Notes.

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

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

The convertible senior notes are di scussed in more detail below under “Debt Obligations.”

We did not declare or pay dividends during the three months ended March 31, 2021 and 2020.

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

We currently anticipate that we will retain all of our future earnings, if any, for use in the operation and expansion of our business and we do not anticipate paying cash dividends in the foreseeable future.

Additionally, our ability to pay dividends on our common stock is 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 three months ended March 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.

During the three months ended March 31, 2021, we did not repurchase any shares of our common stock under the program that expires on December 3, 2023.

Historical Cash Flows

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

Nine Months Ended

September 30,

Three Months Ended

Cash flows from operating activities $ 21,232 $ 12,900

Cash flows from / (used in) investing activities 12,236 (5,889)

Cash flows used in investing activities (9,067) (7,013)

Cash flows from financing activities 376,548 46,216

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

For the nine months ended September 30, 2020, cash flows from operating activities were $66.7 million, compared to $23.8 million for the same period in the prior year.

This $42.9 million increase in cash flows from operating activities was due to a $27.6 million increase in cash from operating assets and liabilities and a $20.5 million increase in net income, partially offset by a $5.2 million decrease in non-cash and other reconciling items.

The $27.6 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 $37.2 million, due in part to the $28.0 million payment made during the nine months ended September 30, 2019 for the agreement reached to settle the legal matter alleging violations of the Telephone Consumer Protection Act that did not occur during the nine months ended September 30, 2020.

This increase in cash from operating assets and liabilities was partially offset by a $9.2 million change in inventory resulting from additional purchased inventory during the nine months ended September 30, 2020 that did not occur during the same period in the prior year, which is due in part to the impacts of the COVID-19 pandemic and the uncertainty surrounding the potential disruption to our supply chain.

The $5.2 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 during the nine months ended September 30, 2020 that did not occur during the same period in the prior year, which was reclassified and presented as cash flows from investing activities.

This decrease in non-cash and other reconciling items was partially offset by a gain of $6.9 million related to a promissory note with one of our hardware suppliers recorded during the nine months ended September 30, 2019 that did not occur during the nine months ended September 30, 2020.

Additionally, the decrease in non-cash and other reconciling items was also partially offset by a $6.2 million increase in stock-based compensation resulting from additional grants of stock options and restricted stock units during the nine months ended September 30, 2020 and a $4.2 million increase in amortization and depreciation expense primarily from intangible assets that were acquired in connection with the purchase of 85% of the issued and outstanding capital stock of OpenEye on October 21, 2019.

For the three months ended March 31, 2021, cash flows from operating activities were $21.2 million, compared to $12.9 million for the same period in the prior year.

This $8.3 million increase in cash flows from operating activities was due to a $6.0 million increase in net income and a $4.5 million increase in cash from operating assets and liabilities, partially offset by a $2.2 million decrease in non-cash and other reconciling items.

The $4.5 million increase in cash from operating assets and liabilities was primarily due to prepayment of $4.7 million for long lead-time parts related to inventory during the three months ended March 31, 2020 that did not occur during the three months ended March 31, 2021.

The $2.2 million decrease in non-cash and other reconciling items was primarily due to a $4.5 million change in deferred income taxes, primarily due to increased tax windfall benefits from employee stock-based payment transactions during the three months ended March 31, 2021, as compared to the same period in the prior year.

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

These decreases in non-cash and other

reconciling items were partially offset by a $3.2 million increase in amortization of the debt discount and debt issuance costs related to the convertible senior notes during the three months ended March 31, 2021 as well as a $1.5 million increase in stock-based compensation resulting from additional grants of stock options and restricted stock units during the three months ended March 31, 2021.

Investing Activities

Our investing activities typically include acquisitions, capital expenditures, investments, 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 the nine months ended September 30, 2020, our cash flows from investing activities was $12.2 million, as compared to cash flows used in investing activities $5.9 million for the same period in the prior year.

The $18.1 million change in cash flows from investing activities was primarily due to $25.7 million in proceeds received from the sale of an investment in one of our platform partners during the nine months ended September 30, 2020, which did not occur during the nine months ended September 30, 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 during the nine months ended September 30, 2020.

These increases in cash flows from investing activities were partially offset by $30.7 million received from one of our hardware suppliers for the amounts due under various promissory notes during the nine months ended September 30, 2019 that did not occur during the nine months ended September 30, 2020.

For the three months ended March 31, 2021, our cash flows used in investing activities was $9.1 million, as compared to $7.0 million for the same period in the prior year.

The $2.1 million increase in cash flows used in investing activities was primarily due to the $5.0 million used to purchase 1,000,000 shares of Series B-2 Preferred Stock from one of our technology partners during the three months ended March 31, 2021, which was partially offset by $3.3 million used to acquire in-process research and development during the three months ended March 31, 2020 that did not occur during the three months ended March 31, 2021.

Financing Activities

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 generated by financing activities includes borrowings under the 2017 Facility, proceeds from convertible senior notes and proceeds from the issuance of common stock from employee stock option exercises and from our employee stock purchase plan.

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

For the nine months ended September 30, 2020, cash flows from financing activities was $48.6 million, compared to $0.3 million for the same period in the prior year.

The $48.3 million increase in cash flows from financing activities was primarily due to the borrowing of $50.0 million under our 2017 Facility during the nine months ended September 30, 2020 which was partially offset by our use of $5.1 million to purchase shares of treasury stock during the nine months ended September 30, 2020 that did not occur during the same period in the prior year.

For the three months ended March 31, 2021, cash flows from financing activities was $376.5 million, compared to $46.2 million for the same period in the prior year.

The $330.3 million increase in cash flows from financing activities was primarily due to $484.7 million in proceeds from the issuance of convertible senior notes, net of issuance costs paid.

This increase in cash flows from financing activities was partially offset by the repayment of $110.0 million to terminate the 2017 Facility during the three months ended March 31, 2021 that did not occur during the same period in the prior year as well as the borrowing of $50.0 million under the 2017 Facility during the three months ended March 31, 2020 that did not occur during three months ended March 31, 2021.

Contractual Obligations

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

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

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.

As of March 31, 2021, there were no material changes in our contractual obligations and commitments from those disclosed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report, other than the $500.0 million issuance of the 2026 Notes in January 2021 and the $110.0 million repayment to terminate the 2017 Facility on January 20, 2021.

Debt Obligations

Convertible Senior 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 used some of the proceeds to repay the $110.0 million outstanding principal balance under our credit facility and also used some of the proceeds to pay accrued interest, fees and expenses related to our credit facility (see the section titled "2017 Facility" below).

2017 Facility

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

Upon entry into the 2017 Facility, we borrowed $72.0 million, which was used to repay the previously outstanding balance under our previous credit facility.

The 2017 Facility 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.

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

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

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

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

During the three and nine months ended September 30, 2020, we repaid $1.0 million and $2.0 million of the outstanding balance of the 2017 Facility, respectively.

During the three and nine months ended September 30, 2019, we repaid $1.0 million and $3.0 million of the outstanding balance of the 2017 Facility, respectively.

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

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

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

For the nine months ended September 30, 2020, the effective interest rate on the 2017 Facility was 2.92%, as compared to 4.61% for the same period in the prior year.

The carrying value of the 2017 Facility was $111.0 million and $63.0 million as of September 30, 2020 and December 31, 2019, respectively.

The 2017 Facility includes a variable interest rate that approximates market rates and, as such, we classified the liability as Level 2 within the fair value hierarchy and determined that the carrying amount of the 2017 Facility approximated its fair value as of September 30, 2020 and December 31, 2019.

The 2017 Facility contains various financial and other covenants that require us to maintain a maximum consolidated leverage ratio not to exceed 3.25:1.00 and a consolidated fixed

charge coverage ratio of at least 1.25:1.00.

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

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

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.

During the three months ended March 31, 2021, we repaid the entire outstanding principal balance of $110.0 million of the 2017 Facility with proceeds from the 2026 Notes.

The 2017 Facility was terminated on January 20, 2021 and we recognized an extinguishment loss of $0.2 million in other (expense) / income, net in our condensed consolidated statements of operations during the three months ended March 31, 2021 for previously capitalized debt issuance costs related to the 2017 Facility that were unamortized at the time of the termination of the 2017 Facility.

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

During 2021 until the termination of the 2017 Facility on January 20, 2021, we elected for the outstanding principal balance to accrue interest at LIBOR plus 1.50%, LIBOR plus 1.75%, LIBOR plus 2.00%, and LIBOR plus 2.50% when our consolidated leverage ratio is less than 1.00:1.00, greater than or equal to 1.00:1.00 but less than 2.00:1.00, greater than or equal to 2.00:1.00 but less than 3.00:1.00 and greater than or equal to 3.00:1.00, respectively.

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

For the three months ended March 31, 2020, the effective interest rate on the 2017 Facility was 3.79%.

The carrying value of the 2017 Facility was zero and $110.0 million as of March 31, 2021 and December 31, 2020, respectively.

The 2017 Facility included 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, 2020.

Non-GAAP Measures

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

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

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

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We also use certain non-GAAP financial measures, including Adjusted EBITDA, as performance measures under our executive bonus plan.

Further, we believe the exclusion of certain expenses in calculating Adjusted EBITDA facilitates comparisons of our operating performance on a period-to-period basis and, in the case of exclusion of acquisition-related (benefit) / expense and certain historical legal expenses, excludes items that we do not consider to be indicative of our core operating performance.

Further, we believe the exclusion of certain expenses in calculating Adjusted EBITDA facilitates comparisons of our operating performance on a period-to-period basis and, in the case of exclusion of acquisition-related expense and certain historical legal expenses, excludes items that we do not consider to be indicative of our core operating performance.

Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

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Three Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

Adjusted EBITDA:

Net income $ 14,550 $ 8,571

Interest expense, interest income and other income, net (24,315) (8,368) (23,575) (8,463)

Provision for income taxes 6,546 2,873 5,471 3,428

Interest expense, interest income and other (expense) / income, net 3,366 94

(Benefit from) / provision for income taxes (2,913) 1,202

Amortization and depreciation expense 7,385 6,422

Stock-based compensation expense 7,888 6,358

Secondary offering expense — — 543 —

Acquisition-related (benefit) / expense (304) 1,590 2,044 1,590

Acquisition-related expense 29 4,056

Litigation expense 5,301 2,486

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis