What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-05 compared with 2021-05-04 · 205 added, 147 removed, 365 unchanged (49% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with (1) our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and (2) the audited consolidated financial statements and the related notes and management’s discussion and analysis of financial condition and results of operations for the fiscal year ended December 31, 2020 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed on February 25, 2021 with the Securities and Exchange Commission, or SEC.

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act.

These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “objective,” “ongoing,” “plan,” “predict,” “project,” “potential,” “should,” “will,” “would” or the negative or plural of these words or similar expressions or variations and such forward-looking statements include, but are not limited to, s tatements with respect to the anticipated impact of the global economic uncertainty and financial market conditions caused by the COVID-19 pandemic on our business, results of operations and financial condition, including on our hardware sales and our SaaS and license revenue growth rate;

You should read the following discussion and analysis of our financial condition and results of operations together with (1) our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q, or Quarterly Report and (2) the audited consolidated financial statements and the related notes and management’s discussion and analysis of financial condition and results of operations for the fiscal year ended December 31, 2020 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed on February 25, 2021 with the Securities and Exchange Commission, or SEC.

This Quarterly Report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.

These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “objective,” “ongoing,” “plan,” “predict,” “project,” “potential,” “should,” “will,” “would” or the negative or plural of these words or similar expressions or variations and such forward-looking statements include, but are not limited to, statements with respect to the anticipated impact of the global economic uncertainty and financial market conditions caused by the COVID-19 pandemic on our business, results of operations and financial condition, including on our hardware sales and our Software-as-a-Service, or SaaS, and license revenue growth rate;

our business strategy, plans and objectives for future operations;

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The events described in these forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements.

Factors that could cause or contribute to such differences include, but are not limited to, those identified in the section titled “Risk Factors” set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q and elsewhere in this and in our other SEC filings.

Factors that could cause or contribute to such differences include, but are not limited to, those identified in the section titled “Risk Factors” set forth in Part II, Item 1A of this Quarterly Report and elsewhere in this and in our other SEC filings.

You should not rely upon forward-looking statements as predictions of future events.

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Our solutions are delivered through an established network of over 10,000 trusted service providers, who are experts at selling, installing and supporting our solutions.

We primarily generate Software-as-a-Service, or SaaS, and license revenue through our service provider partners, who resell these services and pay us monthly fees.

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

These service provider contracts typically have an initial term of one year, with subsequent renewal terms of one year.

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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

Highlights of Second Quarter Results

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

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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.

SaaS and license revenue represented 60% and 61% of our revenue during the three and six months ended June 30, 2021, respectively, as compared to 68% and 64% in the same periods in the prior year.

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

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

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

Software license revenue represented 4% and 5% of our revenue during the three and six months ended June 30, 2021, respectively, as compared to 7% for the same periods 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.

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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.

Hardware and other revenue represented 40% and 39% of our revenue during the three and six months ended June 30, 2021, respectively, as compared to 32% and 36% in the same periods in the prior year.

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

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

• SaaS and license revenue 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.

Please see Non-GAAP Measures below in this section of this Quarterly Report for a discussion of the limitations of Adjusted EBITDA (a non-GAAP measure) and a reconciliation of Adjusted EBITDA to net income, the most comparable measurement in accordance with accounting principles generally accepted in the United States, or GAAP, for the three months ended March 31, 2021 and 2020.

• SaaS and license revenue increased 18% to $113.2 million in the three months ended June 30, 2021 from $95.7 million in the three months ended June 30, 2020.

SaaS and license revenue increased 18% to $220.6 million in the six months ended June 30, 2021 from $187.7 million in the six months ended June 30, 2020.

Included in SaaS and license revenue was software license revenue, which decreased to $8.3 million in the three months ended June 30, 2021 from $9.8 million in the three months ended June 30, 2020.

Included in SaaS and license revenue was software license revenue, which decreased to $17.0 million in the six months ended June 30, 2021 from $19.5 million in the six months ended June 30, 2020.

• Total revenue increased 33% to $188.9 million in the three months ended June 30, 2021 from $141.6 million in the three months ended June 30, 2020.

Total revenue increased 23% to $361.4 million in the six months ended June 30, 2021 from $293.6 million in the six months ended June 30, 2020.

• Net income decreased to $14.5 million in the three months ended June 30, 2021, as compared to $16.6 million in the three months ended June 30, 2020.

Net income increased to $29.0 million in the six months ended June 30, 2021, as compared to $25.2 million in the six months ended June 30, 2020.

Net income attributable to common stockholders decreased to $14.7 million in the three months ended June 30, 2021, as compared to $17.0 million in the three months ended June 30, 2020.

Net income attributable to common stockholders increased to $29.6 million in the six months ended June 30, 2021, as compared to $25.8 million in the six months ended June 30, 2020.

• Adjusted EBITDA, a non-GAAP measurement of operating performance, increased to $38.0 million in the three months ended June 30, 2021 from $29.2 million in the three months ended June 30, 2020.

Adjusted EBITDA increased to $73.6 million in the six months ended June 30, 2021 from $58.4 million in the six months ended June 30, 2020.

Recent Developments

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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.

While vaccines have been approved for use in the United States and in many other countries, and vaccination efforts are underway, 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 and six months ended June 30, 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 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.

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 and the emergence and severity of COVID-19 variants, our SaaS and license revenue growth rate may be lower in future periods, with a corresponding reduction in hardware revenue, if some consumers or small businesses defer or cancel

previously anticipated purchases.

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

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

June 30, Six Months Ended

2021 2020 2021 2020

SaaS and license revenue $ 113,186 $ 95,704 $ 220,569 $ 187,654

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Adjusted EBITDA

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

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

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

The non-cash items include amortization and depreciation expense and stock-based compensation expense.

The non-cash items include amortization and depreciation expense, amortization of debt discount and debt issuance costs for the January 20, 2021 issuance of $500.0 million aggregate principal amount of 0% convertible senior notes due January 15, 2026, or the 2026 Notes, included in interest expense, and stock-based compensation expense related to stock options and other forms of equity compensation, including, but not limited to, the sale of common stock.

We do not adjust for ordinary course legal expenses resulting from maintaining and enforcing our intellectual property portfolio and license agreements.

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

Please see Non-GAAP Measures in this section for a discussion of the limitations of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, the most comparable GAAP measurement, for the three months ended March 31, 2021 and 2020.

SaaS and License Revenue Renewal Rate

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

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

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

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

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

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

Our SaaS and license revenue renewal rate is calculated across our entire subscriber base on 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 partners.

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 partners.

We believe that our SaaS and license revenue renewal rate allows us to measure our ability to retain and grow our SaaS and license revenue and serves as an indicator of the lifetime value of our subscriber base.

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

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

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

These emergency measures remain in place to varying degrees.

We have seen and anticipate we may continue to see disruption to our hardware supply chain, including limited inventory availability, increased lead times, and shipping delays, due to the impact of COVID-19 on manufacturing, production and global transportation, as well as to our sales channels due to restrictions on our service providers’ ability to meet with residential and commercial property owners who use our solutions, reluctance of service providers and property owners to meet even where such restrictions have been lifted and general economic conditions.

In addition, the COVID-19 pandemic has resulted in a global slowdown of economic activity and a recession in the United States and the economic situation remains fluid as parts of the economy appear to be recovering while others continue to struggle.

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

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

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 full extent to which COVID-19 may negatively affect our hardware revenue is uncertain;

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

Cost of Revenue

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Our cost of revenue excludes amortization and depreciation shown in operating expenses.

In 2019, the U.S.

administration imposed significant changes to U.S.

Since 2019, the U.S.

government has implemented and imposed significant changes to U.S.

trade policy with respect to China.

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

administration.

Approximately one-fifth to one-half of the finished goods hardware products that we sell to our service provider partners are imported from China 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.

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

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

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

We continue to monitor the changes in tariffs.

Operating Expenses

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

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

We grew from 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.

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

We grew from 1,317 employees as of June 30, 2020 to 1,421 employees as of June 30, 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 422 as of March 31, 2020 to 457 as of March 31, 2021.

The number of employees in sales and marketing functions increased from 441 as of June 30, 2020 to 456 as of June 30, 2021 and slightly decreased from 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 155 as of March 31, 2020 to 160 as of March 31, 2021.

The number of employees in general and administrative functions increased from 155 as of June 30, 2020 to 173 as of June 30, 2021 and increased from 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.

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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 650 as of March 31, 2020 to 797 as of March 31, 2021.

The number of employees in research and development functions increased from 721 as of June 30, 2020 to 792 as of June 30, 2021 and slightly decreased from 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 2026 Notes and our 2017 Facility.

Interest expense consists of interest expense associated with our 2026 Notes and our 2017 Facility, which was terminated in January 2021.

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.

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

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

Other Income / (Expense), Net

Other income / (expense), 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 Income Taxes

We are subject to U.S.

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Three Months Ended

June 30, Six Months Ended

2021 2020 2021 2020

SaaS and license revenue $ 113,186 60 % $ 95,704 68 % $ 220,569 61 % $ 187,654 64 %

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Interest income 149 — 157 — 306 — 616 —

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

Other income / (expense), net 32 — 65 — (123) — 157 —

Income before income taxes 12,752 7 14,348 10 24,389 7 24,121 8

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

Benefit from income taxes (1,738) (1) (2,277) (2) (4,651) (1) (1,075) (1)

Net income $ 14,490 8 % $ 16,625 12 % $ 29,040 8 % $ 25,196 9 %

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Three Months Ended

June 30, Six Months Ended

2021 2020 2021 2020

Stock-based compensation expense data:

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Three Months Ended

June 30, Six Months Ended

2021 2020 2021 2020

Components of cost of revenue as a percentage of revenue:

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Total cost of revenue as a percentage of total revenue 41 34 40 36

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

Comparison of the Three and Six Months Ended June 30, 2021 to June 30, 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

Change Six Months Ended

2021 2020 2021 2020

SaaS and license revenue $ 113,186 $ 95,704 18 % $ 220,569 $ 187,654 18 %

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Total revenue $ 188,857 $ 141,637 33 % $ 361,355 $ 293,576 23 %

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.

The $47.2 million increase in total revenue for the three months ended June 30, 2021 as compared to the same period in the prior year was primarily the result of a $29.7 million, or 65%, increase in our hardware and other revenue and a $17.5 million, or 18%, increase in our SaaS and license revenue.

Our software license revenue included within SaaS and license revenue decreased $1.5 million to $8.3 million during the three months ended June 30, 2021 as compared to $9.8 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 $16.0 million increase in our Alarm.com segment SaaS and license revenue for the three months ended June 30, 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 June 30, 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 and video recorders sold as well as the increased revenue from our acquisition of Shooter Detection Systems, LLC, or SDS, on December 14, 2020.

The $1.5 million increase in SaaS and license revenue for our Other segment for the three months ended June 30, 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 June 30, 2021 in our Other segment decreased $0.3 million, or 12%, as compared to the same period in the prior year, primarily due to a decrease in sales related to our property management solution.

The $67.8 million increase in total revenue for the six months ended June 30, 2021 as compared to the same period in the prior year was primarily the result of a $34.9 million, or 33%, increase in our hardware and other revenue and a $32.9 million, or 18%, increase in our SaaS and license revenue.

Our software license revenue included within SaaS and license revenue decreased $2.5 million to $17.0 million during the six months ended June 30, 2021, as compared to $19.5 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 $29.8 million increase in our Alarm.com segment SaaS and license revenue for the six months ended June 30, 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 six months ended June 30, 2021, 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 and video recorders sold, as well as the increased revenue from our acquisition of SDS on December 14, 2020.

The $3.1 million increase in SaaS and license revenue for our Other segment for the six months ended June 30, 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 six months ended June 30, 2021 in our Other segment decreased $1.8 million, or 34%, 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

Change Six Months Ended

2021 2020 2021 2020

Cost of revenue (1)

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

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 $28.4 million increase in cost of revenue for the three months ended June 30, 2021 as compared to the same period in the prior year was the result of a $24.2 million, or 67%, increase in cost of hardware and other revenue and a $4.2 million, or 32%, increase in cost of SaaS and license revenue.

Our cost of software license revenue included within cost of SaaS and license revenue was $0.3 million for each of the three months ended June 30, 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 and an increase in costs for freight shipments during the three months ended June 30, 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.

Cost of hardware and other revenue as a percentage of hardware and other revenue was 80% for the three months ended June 30, 2021 and 78% for the same period in the prior year.

Cost of SaaS and license revenue as a percentage of SaaS and license revenue was 15% for the three months ended June 30, 2021 and 14% for the same period in the prior year.

Cost of software license revenue as a percentage of software license revenue was 4% for the three months ended June 30, 2021 and 3% for the same period in the prior year.

The increase in cost of hardware and other revenue as a percentage of hardware and other revenue for the three months ended June 30, 2021 as compared to the same period in the prior year is a reflection of the mix of product sales during the periods as well as the increase in costs for freight shipments.

The increase in cost of SaaS and license revenue as a percentage of SaaS and license revenue for the three months ended June 30, 2021 as compared to the same period in the prior year is a reflection of the mix of sales of services during the periods.

The $36.1 million increase in cost of revenue for the six months ended June 30, 2021 as compared to the same period in the prior year was the result of a $29.1 million, or 36%, increase in cost of hardware and other revenue and a $7.0 million, or 28%, increase in cost of SaaS and license revenue.

Our cost of software license revenue included within cost of SaaS and license revenue was $0.7 million for each of the six months ended June 30, 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 and an increase in costs for freight shipments during the six months ended June 30, 2021 as compared to the same period in the prior year.

Cost of hardware and other revenue as a percentage of hardware and other revenue was 79% for the six months ended June 30, 2021 and 77% for the same period in the prior year.

Cost of SaaS and license revenue as a percentage of SaaS and license revenue was 15% for the six months ended June 30, 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 six months ended June 30, 2021 and 2020.

The increase in cost of hardware and other revenue as a percentage of hardware and other revenue for the six months ended June 30, 2021, as compared to the same period in the prior year, is a reflection of the mix of product sales during the periods as well as the increase in costs for freight shipments.

The increase in cost of SaaS and license revenue as a percentage of SaaS and license revenue for the six months ended June 30, 2021 as compared to the same period in the prior year is a reflection of the mix of sales of services during the periods.

Sales and Marketing Expense

Three Months Ended

Change Six Months Ended

2021 2020 2021 2020

Sales and marketing $ 20,529 $ 16,920 21 % $ 39,528 $ 33,995 16 %

% of total revenue 11 % 12 % 11 % 12 %

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.

The $3.6 million increase in sales and marketing expense for the three months ended June 30, 2021 as compared to the same period in the prior year was primarily due to a $2.5 million increase in personnel and related costs for our Alarm.com segment, including salary, benefits, stock-based compensation and travel expenses, attributable in part to increases in the headcount for our sales team and our service provider partner support team to support our growth.

Additionally, the increase in sales and marketing expense for the three months ended June 30, 2021 as compared to the same period in the prior year was due to a $0.4 million increase in marketing costs for our Alarm.com segment due to an increase in advertising.

Sales and marketing expense from our Other segment increased $0.4 million for the three months ended June 30, 2021 as compared to the same period in the prior year, primarily due to increases in personnel and related costs, attributable in part to increases in the headcount for our sales team.

The $5.5 million increase in sales and marketing expense for the six months ended June 30, 2021 as compared to the same period in the prior year was primarily due to a $3.0 million increase in personnel and related costs for our Alarm.com segment, attributable in part to increases in the headcount for our sales team and our service provider partner support team to support our growth, net of decreased travel expenses of $0.6 million as a result of the COVID-19 pandemic.

Additionally, the increase in sales and marketing expense for the six months ended June 30, 2021 as compared to the same period in the prior year was due to a $1.2 million increase in marketing costs for our Alarm.com segment due to an increase in advertising.

Sales and marketing expense from our Other segment increased $0.9 million for the six months ended June 30, 2021, as compared to the same period in the prior year, primarily due to increases in personnel and related costs, attributable in part to increases in the headcount for our sales team.

The number of employees in sales and marketing functions increased from 441 as of June 30, 2020 to 456 as of June 30, 2021.

General and Administrative Expense

Three Months Ended

Change Six Months Ended

2021 2020 2021 2020

General and administrative $ 23,268 $ 17,359 34 % $ 46,150 $ 38,224 21 %

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

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.

The $5.9 million increase in general and administrative expense for the three months ended June 30, 2021 as compared to the same period in the prior year was primarily due to a $2.2 million increase in personnel and related costs for our Alarm.com segment due in part to an increase in employee headcount to support our operational growth.

The increase in general and administrative expense was also due to a $1.7 million decrease to the contingent consideration liability from our acquisition of 85% of the issued and outstanding capital stock of OpenEye on October 21, 2019 within our Alarm.com segment during the three months ended June 30, 2020 which did not occur during the three months ended June 30, 2021 as well as a $1.3 million decrease in the provision for credit losses for our Alarm.com segment for the three months ended June 30, 2020 as compared to a $0.1 million decrease in the provision for credit losses for our Alarm.com segment for the three months ended June 30, 2021.

Additionally, costs for external consultants increased $0.9 million within our Alarm.com segment for the three months ended June 30, 2021 as compared to the same period in the prior year.

General and administrative expenses from our Other segment decreased by $0.3 million for the three months ended June 30, 2021 as compared to the same period in the prior year, primarily due to a decrease in the provision for credit losses.

The $7.9 million increase in general and administrative expense for the six months ended June 30, 2021 as compared to the same period in the prior year was primarily due to a $3.1 million increase in legal expenses within our Alarm.com segment resulting from intellectual property litigation during the six months ended June 30, 2021 as compared to the six months ended June 30, 2020.

Additionally, the increase in general and administrative expense for the six months ended June 30, 2021 as compared to the same period in the prior year was due to a $3.0 million increase in personnel and related costs for our Alarm.com segment due in part to an increase in employee headcount to support our operational growth as well as a $2.3 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 incurred during the six months ended June 30, 2020 which did not occur during the six months ended June 30, 2021.

General and administrative expenses from our Other segment decreased $0.5 million for the six months ended June 30, 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 June 30, 2020 to 173 as of June 30, 2021.

Research and Development Expense

Three Months Ended

Change Six Months Ended

2021 2020 2021 2020

Research and development $ 43,491 $ 36,636 19 % $ 85,958 $ 76,366 13 %

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

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.

The $6.9 million increase in research and development expense for the three months ended June 30, 2021 as compared to the same period in the prior year was primarily due to a $5.3 million increases in personnel and related costs for our Alarm.com segment, attributable in part to an increase in headcount of employees in research and development functions.

Research and development expense from our Other segment increased $1.8 million for the three months ended June 30, 2021 as compared to the same period in the prior year, primarily due to a $0.9 million increase in expenses for external consultants and an increase of $0.8 million in personnel and related costs, including salary, benefits and stock-based compensation.

The $9.6 million increase in research and development expense for the six months ended June 30, 2021 as compared to the same period in the prior year was primarily due to a $10.4 million increase in personnel and related costs for our Alarm.com segment, attributable in part to an increase in headcount of employees in research and development functions as well as a $0.8 million increase in our expenses for external consultants.

These increases were partially offset by $4.4 million of in-process research and development we acquired during the six months ended June 30, 2020, which did not occur during the six months ended June 30, 2021.

Research and development expense from our Other segment increased $3.2 million for the six months ended June 30, 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 721 as of June 30, 2020 to 792 as of June 30, 2021.

Amortization and Depreciation

Three Months Ended

Change Six Months Ended

2021 2020 2021 2020

Amortization and depreciation $ 7,477 $ 6,723 11 % $ 14,862 $ 13,145 13 %

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

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.

Amortization and depreciation increased $0.8 million and $1.7 million for the three and six months ended June 30, 2021, 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 SDS on December 14, 2020.

Interest Expense

Three Months Ended

Change Six Months Ended

2021 2020 2021 2020

Interest expense $ (4,154) $ (868) 379 % $ (7,522) $ (1,513) 397 %

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

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 expense increased $3.3 million and $6.0 million for the three and six months ended June 30, 2021, respectively, as compared to the same periods in the prior year, primarily due to the amortization of the debt discount and debt issuance costs related to the 2026 Notes.

Interest Income

Three Months Ended

Change Six Months Ended

2021 2020 2021 2020

Interest income $ 149 $ 157 (5) % $ 306 $ 616 (50) %

% of total revenue — % — % — % — %

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

Interest income remained relatively consistent for the three months ended June 30, 2021 as compared to the same period in the prior year.

Interest income decreased $0.3 million for the six months ended June 30, 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 Income / (Expense), Net

Three Months Ended

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

Change Six Months Ended

2021 2020 2021 2020

Other income / (expense), net $ 32 $ 65 (51) % $ (123) $ 157 (178) %

% of total revenue — % — % — % — %

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

Other income / (expense), net remained relatively consistent for the three months ended June 30, 2021 as compared to the same period in the prior year.

Other income / (expense), net changed by $0.3 million for the six months ended June 30, 2021 as compared to the same periods in the prior year.

The change in other income / (expense), net is primarily due to the $0.2 million loss on the early extinguishment of the 2017 Facility during the six months ended June 30, 2021 which did not occur during the same period in the prior year.

Benefit from Income Taxes

Three Months Ended

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

Change Six Months Ended

2021 2020 2021 2020

Benefit from income taxes $ (1,738) $ (2,277) (24) % $ (4,651) $ (1,075) 333 %

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

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.

The benefit from income taxes decreased by $0.5 million for the three months ended June 30, 2021 and increased by $3.6 million for the six months ended June 30, 2021, as compared to the same periods in the prior year.

Our effective tax rate was

(13.6)% and (19.1)% for the three and six months ended June 30, 2021, respectively, as compared to (15.9)% and (4.5)% for the same periods in the prior year.

The increase in the benefit from income taxes for the six months ended June 30, 2021 was primarily due to increased tax windfall benefits from employee stock-based payment transactions during the six months ended June 30, 2021, as compared to the same period in the prior year.

The increase in the benefit from income taxes was also due to changes in estimated research and development tax credits and taxable income.

Segment Information

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Alarm.com and Other.

Our Alarm.com segment represents our cloud-based and Software platforms for the intelligently connected property and related solutions that contributed 95% of our revenue for 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 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.

Our Alarm.com segment increased from 1,218 employees as of June 30, 2020 to 1,297 employees as of June 30, 2021.

Our Other segment increased from 99 employees as of June 30, 2020 to 124 employees as of June 30, 2021.

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

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Total $ 113,186 $ 75,671 $ 94,765 $ 95,704 $ 45,933 $ 77,638

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.

Six Months Ended

SaaS and license revenue Hardware and other revenue

Operating expenses SaaS and license revenue Hardware and other revenue

Operating expenses

Alarm.com $ 206,159 $ 138,884 $ 171,465 $ 176,334 $ 102,075 $ 150,294

Other 14,410 4,923 15,209 11,320 10,484 11,436

Intersegment Alarm.com — (1,684) (176) — (1,564) —

Intersegment Other — (1,337) — — (5,073) —

Total $ 220,569 $ 140,786 $ 186,498 $ 187,654 $ 105,922 $ 161,730

Our SaaS and license revenue for the Alarm.com segment included software license revenue of $8.3 million and $17.0 million for the three and six months ended June 30, 2021, respectively, as compared to $9.8 million and $19.5 million for the same periods in the prior year.

There was no software license revenue recorded for the Other segment during the three and six months ended June 30, 2021 and 2020.

Critical Accounting Policies and Significant Judgments and Estimates

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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.

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.

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.

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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.

We did not make any material changes to the underlying assumptions used to separate the notes into liability and equity components for the three and six months ended June 30, 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 and six months ended June 30, 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.

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

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

Cash and cash equivalents $ 662,682 $ 253,459

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We define working capital as current assets minus current liabilities.

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

Our cash and cash equivalents as of June 30, 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;

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Liquidity and Capital Resources

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

As of June 30, 2021, we had $662.7 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.

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

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.

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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.

We are using the remaining net proceeds from the issuance of the 2026 Notes for working capital and other general corporate purposes, which may include acquisitions or strategic investments in complementary businesses or technologies.

In 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.

Over the final six months of fiscal year 2021, we expect our capital expenditure requirements to be approximately $4.1 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:

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Sources of Liquidity

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

The 2017 Facility was a revolving credit facility with Silicon Valley Bank, or 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.

On January 20, 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.”

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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 did not declare or pay dividends during the three and six months ended June 30, 2021 and 2020.

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

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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.

No shares were repurchased under this program during the three months ended June 30, 2020.

During the three and six months ended June 30, 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):

Three Months Ended

Six Months Ended

Cash flows from operating activities $ 45,308 $ 48,048

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

For the three months ended March 31, 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.

For the six months ended June 30, 2021, cash flows from operating activities were $45.3 million, compared to $48.0 million for the same period in the prior year.

This $2.7 million decrease in cash flows from operating activities was due to a $15.0 million decrease in cash from operating assets and liabilities, partially offset by a $8.5 million increase in non-cash and other reconciling items and a $3.8 million increase in net income.

The $15.0 million decrease in cash from operating assets and liabilities was primarily due to differences in timing of collection of receipts and payments of disbursements and, to a lesser extent, increases in prepayments for long lead-time parts related to inventory and other assets during the six months ended June 30, 2021, as compared to the same period in the prior year.

The $8.5 million increase in non-cash and other reconciling items was primarily due to a $7.3 million increase in amortization of the debt discount and debt issuance costs related to the convertible senior notes during the six months ended June 30, 2021 as well as a $4.5 million increase in stock-based compensation resulting from additional grants of stock options and restricted stock units during the six months ended June 30, 2021.

These increases in non-cash and other reconciling items were partially offset by a $4.6 million change in deferred income taxes, primarily due to increased tax windfall benefits from employee stock-based payment transactions during the six months ended June 30, 2021, as compared to the same period in the prior year.

Investing Activities

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

For the three months ended March 31, 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.

For the six months ended June 30, 2021, our cash flows used in investing activities was $12.4 million, as compared to $9.3 million for the same period in the prior year.

The $3.1 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 six months ended June 30, 2021 as well as a $2.0 million reduction in repayments of notes receivable during the six months ended June 30, 2021, as compared to the same period in the prior year.

These increases in cash flows used in investing activities were partially offset by $3.3 million used to acquire in-process research and development during the six months ended June 30, 2020 that did not occur during the six months ended June 30, 2021.

Financing Activities

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

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

For the six months ended June 30, 2021, cash flows from financing activities was $376.3 million, compared to $47.5 million for the same period in the prior year.

The $328.8 million increase in cash flows from financing activities was primarily due to $484.3 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.

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 six months ended June 30, 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 six months ended June 30, 2020 that did not occur during six months ended June 30, 2021.

Contractual Obligations

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.

As of June 30, 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

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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:

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;

(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;

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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

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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 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.

On January 20, 2021, we repaid the entire outstanding principal balance of $110.0 million of the 2017 Facility with proceeds from the 2026 Notes and the 2017 Facility was terminated.

We recognized an extinguishment loss of $0.2 million in other income / (expense), net in our condensed consolidated statements of operations during the six months ended June 30, 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.

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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.

For the six months ended June 30, 2020, the effective interest rate on the 2017 Facility was 3.42%.

The carrying value of the 2017 Facility was zero and $110.0 million as of June 30, 2021 and December 31, 2020, respectively.

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

Non-GAAP Measures

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

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

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

The non-cash items include amortization and depreciation expense, stock-based compensation expense related to stock options and other forms of equity compensation, including, but not limited to, the sale of common stock.

The non-cash items include amortization and depreciation expense, amortization of debt discount and debt issuance costs for the 2026 Notes included in interest expense, stock-based compensation expense related to stock options and other forms of equity compensation, including, but not limited to, the sale of common stock.

We do not adjust for ordinary course legal expenses resulting from maintaining and enforcing our intellectual property portfolio and license agreements.

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We have included Adjusted EBITDA in this report because it is a key measure that our management uses to understand and evaluate our core operating performance and trends, to generate future operating plans, to make strategic decisions regarding the allocation of capital and to make investments in initiatives that are focused on cultivating new markets for our solutions.

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

We also use Adjusted EBITDA, a non-GAAP financial measure, as a performance measure under our executive bonus plan.

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

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Three Months Ended

June 30, Six Months Ended

2021 2020 2021 2020

Adjusted EBITDA:

Net income $ 14,490 $ 16,625 $ 29,040 $ 25,196

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

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

Interest expense, interest income and other income / (expense), net 3,973 646 7,339 740

Benefit from income taxes (1,738) (2,277) (4,651) (1,075)

Amortization and depreciation expense 7,477 6,723 14,862 13,145

Stock-based compensation expense 10,056 7,095 17,944 13,453

Acquisition-related expense 29 4,056

Secondary offering expense — 543 — 543

Acquisition-related (benefit) / expense — (1,708) 29 2,348

Litigation expense 3,748 1,563 9,049 4,049

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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