Washington D.C. 20549
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
1. Organization and Nature of Operations
We prepared our interim condensed consolidated financial statements in conformity with United States of America generally accepted accounting principles or GAAP,("GAAP"), and the reporting regulations of the Securities and Exchange Commission or the SEC.(the "SEC"). They do not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying condensed consolidated financial statements include the accounts of SolarWinds Corporation and the accounts of its wholly owned subsidiaries. We have eliminated all intercompany balances and transactions.
The interim financial information is unaudited, but reflects all normal adjustments that are, in our opinion, necessary to provide a fair statement of results for the interim periods presented. This interim information should be read in conjunction with the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2017,2021.
The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the reported amounts and the disclosure of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. The actual results that we experience may differ materially from our estimates. The accounting estimates that require our most significant, difficult and subjective judgments include:
We apply the authoritative guidance on fair value measurements for financial assets and liabilities that are measured at fair value on a recurring basis and non-financial assets and liabilities, such as goodwill, intangible assets and property, plant and equipment that are measured at fair value on a non-recurring basis.
The guidance establishes a three-tiered fair value hierarchy that prioritizes inputs to valuation techniques used in fair value calculations. The three levels of inputs are defined as follows:
Level 1: Unadjusted quoted prices for identical assets or liabilities in active markets accessible by us.
Level 2: Inputs that are observable in the marketplace other than those inputs classified as Level 1.
Level 3: Inputs that are unobservable in the marketplace and significant to the valuation.
Changes in accumulated other comprehensive income (loss) by component are summarized below:
3. AcquisitionsDiscontinued Operations
4. GoodwillInvestments
|
| | | |
| (in thousands) |
Balance at December 31, 2017 | $ | 3,695,640 |
|
Acquisitions | 41,789 |
|
Foreign currency translation and other adjustments | (38,118 | ) |
Balance at September 30, 2018 | $ | 3,699,311 |
|
The goodwill from acquisitions resulted primarily from our expectations that we will now be able to offer our customers additional products in new markets. Additionally, we expect the acquisitions will attract new customers for our entire line of products.
SolarWinds Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table summarizes our short-term investments as of June 30, 2022:
Intangible Assets | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 |
| Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| | | | | | | |
| (in thousands) |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Short-term investments: | | | | | | | |
Available-for-sale securities: | | | | | | | |
U.S. Treasury securities | $ | 23,958 | | | $ | — | | | $ | (72) | | | $ | 23,886 | |
Corporate bonds | 22,034 | | | 10 | | | (121) | | | 21,923 | |
Commercial paper | 8,959 | | | — | | | — | | | 8,959 | |
Asset-backed securities | 1,003 | | | — | | | (3) | | | 1,000 | |
Total short-term investments | $ | 55,954 | | | $ | 10 | | | $ | (196) | | | $ | 55,768 | |
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Intangible assets consistedThe following table summarizes the fair value of our available-for-sale securities with unrealized losses aggregated by type of investment instrument and length of time those securities have been in a continuous unrealized loss position:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less Than 12 Months | | 12 Months or Greater | | Total |
| Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
| | | | | | | | | | | |
| (in thousands) |
As of June 30, 2022 | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
U.S. Treasury securities | $ | 23,886 | | | $ | (72) | | | $ | — | | | $ | — | | | $ | 23,886 | | | $ | (72) | |
Corporate bonds | 20,897 | | | (121) | | | — | | | — | | | 20,897 | | | (121) | |
| | | | | | | | | | | |
Asset-backed securities | 1,000 | | | (3) | | | — | | | — | | | 1,000 | | | (3) | |
| $ | 45,783 | | | $ | (196) | | | $ | — | | | $ | — | | | $ | 45,783 | | | $ | (196) | |
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The following table summarizes the contractual underlying maturities of our available-for-sale securities as of June 30, 2022:
| | | | | | | | | | | |
| June 30, 2022 |
| Cost | | Fair Value |
| (in thousands) |
Due in one year or less | $ | 54,951 | | | $ | 54,768 | |
Due after one year through five years | 1,003 | | | 1,000 | |
| $ | 55,954 | | | $ | 55,768 | |
5. Goodwill
The following table reflects the changes in goodwill for the six months ended June 30, 2022:
| | | | | |
| (in thousands) |
Balance at December 31, 2021 | $ | 3,308,405 | |
Acquisitions | 5,415 | |
Goodwill impairment | (612,395) | |
Foreign currency translation and other adjustments | (59,037) | |
Balance at June 30, 2022 | $ | 2,642,388 | |
As of June 30, 2022, our accumulated goodwill impairment was $612.4 million. See Note 2. Summary of Significant Accounting Policies for discussion of the following at Septembergoodwill impairment recorded during the six months ended June 30, 2018 and December 31, 2017:2022.
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| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2018 | | December 31, 2017 |
| Gross Carrying Amount | | Accumulated Amortization | | Net | | Gross Carrying Amount | | Accumulated Amortization | | Net |
| | | | | | | | | | | |
| (in thousands) |
Developed product technologies | $ | 1,010,952 |
| | $ | (452,420 | ) | | $ | 558,532 |
| | $ | 1,006,454 |
| | $ | (324,196 | ) | | $ | 682,258 |
|
Customer relationships | 544,823 |
| | (166,597 | ) | | 378,226 |
| | 546,207 |
| | (118,930 | ) | | 427,277 |
|
Intellectual property | 764 |
| | (109 | ) | | 655 |
| | 547 |
| | (59 | ) | | 488 |
|
Trademarks | 84,800 |
| | (1,218 | ) | | 83,582 |
| | 85,257 |
| | (1,075 | ) | | 84,182 |
|
Customer backlog | — |
| | — |
| | — |
| | 6,200 |
| | (5,906 | ) | | 294 |
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Total intangible assets | $ | 1,641,339 |
| | $ | (620,344 | ) | | $ | 1,020,995 |
| | $ | 1,644,665 |
| | $ | (450,166 | ) | | $ | 1,194,499 |
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SolarWinds Corporation
Intangible asset amortization expense was as follows:Notes to Condensed Consolidated Financial Statements (Unaudited)
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| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| | | | | | | |
| (in thousands) |
Intangible asset amortization expense | $ | 60,360 |
| | $ | 60,559 |
| | $ | 182,459 |
| | $ | 177,721 |
|
5.6. Fair Value Measurements
The following table summarizes the fair value of our financial assets that were measured on a recurring basis as of SeptemberJune 30, 20182022 and December 31, 2017.2021. There have been no transfers between fair value measurement levels during the ninesix months ended SeptemberJune 30, 2018.2022.
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at June 30, 2022 Using | | |
| Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
| | | | | | | |
| (in thousands) | | |
Cash equivalents: | | | | | | | |
Money market funds | $ | 361,055 | | | $ | — | | | $ | — | | | $ | 361,055 | |
U.S. Treasury securities | — | | | 7,494 | | | — | | | 7,494 | |
Corporate bonds | — | | | 1,784 | | | — | | | 1,784 | |
Commercial paper | — | | | 33,846 | | | — | | | 33,846 | |
Total cash equivalents | 361,055 | | | 43,124 | | | — | | | 404,179 | |
Short-term investments: | | | | | | | |
U.S. Treasury securities | — | | | 23,886 | | | — | | | 23,886 | |
Corporate bonds | — | | 21,923 | | — | | 21,923 |
Commercial paper | — | | | 8,959 | | | — | | | 8,959 |
Asset-backed securities | — | | | 1,000 | | | — | | | 1,000 | |
Total short-term investments | — | | | 55,768 | | | — | | | 55,768 | |
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Total assets | $ | 361,055 | | | $ | 98,892 | | | $ | — | | | $ | 459,947 | |
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| Fair Value Measurements at September 30, 2018 Using | | |
| Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
| | | | | | | |
| (in thousands) | | |
Money market funds | $ | 67,100 |
| | $ | — |
| | $ | — |
| | $ | 67,100 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at December 31, 2021 Using | | |
| Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
| | | | | | | |
| (in thousands) | | |
Cash equivalents: | | | | | | | |
Money market funds | $ | 645,000 | | | $ | — | | | $ | — | | | $ | 645,000 | |
| | | | | | | |
| | | | | | | |
Total cash equivalents | 645,000 | | | — | | | — | | | 645,000 | |
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Total assets | $ | 645,000 | | | $ | — | | | $ | — | | | $ | 645,000 | |
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| | | | | | | | | | | | | | | |
| Fair Value Measurements at December 31, 2017 Using | | |
| Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
| | | | | | | |
| (in thousands) | | |
Money market funds | $ | 67,100 |
| | $ | — |
| | $ | — |
| | $ | 67,100 |
|
As of SeptemberJune 30, 20182022 and December 31, 2017,2021, the carrying value of our long-term debt approximates its estimated fair value as the interest rate on the debt agreements is adjusted for changes in the market rates. See Note 6.7. Debt for additional information regarding our debt.
The fair value of our non-financial assets and liabilities, which include goodwill, intangible assets and property, plant and equipment, are measured on a non-recurring basis. Fair value adjustments are made in the period an impairment charge is recognized. During the three months ended June 30, 2022 we recognized impairment charges of $612.4 million and $9.4 million related to our goodwill and our trade name indefinite-lived intangible asset, respectively. The fair value of our reporting unit and indefinite-lived intangible asset are classified as Level 3 within the fair value hierarchy due to the significant unobservable inputs developed using company-specific information. For additional information, see the discussion of our impairment charges in Note 2. Summary of Significant Accounting Policies- Impairment of Goodwill, Intangible Assets and Long-lived Assets, including the valuation methods and inputs used in the fair value measurements.
SolarWinds Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
6.7. Debt
Debt Agreements
The following table summarizes information relating to our debt:
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| September 30, | | December 31, |
| 2018 | | 2017 |
| Amount | | Effective Rate | | Amount | | Effective Rate |
| | | | | | | |
| (in thousands, except interest rates) |
Revolving credit facility | $ | — |
| | — | % | | $ | — |
| | — | % |
First Lien Term Loan (as amended) due Feb 2024 | 1,975,075 |
| | 5.24 | % | | 1,678,050 |
| | 5.07 | % |
Second Lien Floating Rate Notes (as amended) due Feb 2024 | — |
| | — | % | | 680,000 |
| | 10.14 | % |
Second Lien Term Loan due Feb 2025 | 315,000 |
| | 9.49 | % | | — |
| | — | % |
Total principal amount | 2,290,075 |
| | | | 2,358,050 |
| | |
Unamortized discount and debt issuance costs | (53,903 | ) | | | | (95,478 | ) | | |
Total debt | 2,236,172 |
| | | | 2,262,572 |
| | |
Less: Current portion of long-term debt | (19,900 | ) | | | | (16,950 | ) | | |
Total long-term debt | $ | 2,216,272 |
| | | | $ | 2,245,622 |
| | |
Senior Secured Debt | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, | | December 31, |
| 2022 | | 2021 |
| Amount | | Effective Rate | | Amount | | Effective Rate |
| | | | | | | |
| (in thousands, except interest rates) |
Revolving credit facility | $ | — | | | — | % | | $ | — | | | — | % |
First Lien Term Loan (as amended) due Feb 2024 | 1,899,400 | | | 4.42 | % | | 1,909,350 | | | 2.85 | % |
| | | | | | | |
| | | | | | | |
Total principal amount | 1,899,400 | | | | | 1,909,350 | | | |
Unamortized discount and debt issuance costs | (14,230) | | | | | (18,681) | | | |
Total debt | 1,885,170 | | | | | 1,890,669 | | | |
Less: Current portion of long-term debt | (19,900) | | | | | (19,900) | | | |
Total long-term debt | $ | 1,865,270 | | | | | $ | 1,870,769 | | | |
Senior Secured First Lien Credit Facilities
On February 5, 2016, we were acquired by the Sponsors in a take private transaction, or the Take Private. In connection with the Take Private, we entered into aOur first lien credit agreement, with Credit Suisse AG, Cayman Islands Branch, or Credit Suisse, as administrative agent and collateral agent, and a syndicate of institutional lenders and financial institutions, or Initial First Lien Credit Agreement.
In March 2018, we entered into Amendment No. 4 to the Initial First Lien Credit Agreement, or Amendment No. 4, which replaced the outstanding borrowings with a new $1.99 billion U.S. dollar term loan, or First Lien Term Loan. The Initial First Lien Credit Agreement, as amended, is referred to here as the First Lien Credit Agreement. The proceeds of the First Lien Term Loan were used to repay all outstanding borrowings including accrued interest under the existing First Lien Term Loan and a portion of the Second Lien Notes, including accrued interest and related transaction costs. In connection with Amendment No. 4, a loss on debt extinguishment of $21.4 million was recorded to other income (expense) in the consolidated statement of operations for the nine months ended September 30, 2018.
Theor First Lien Credit Agreement, provides for senior secured first lien credit facilities, consisting of the following as of SeptemberJune 30, 2018 of:2022:
•a $1.99 billion U.S. dollar term loan, or First Lien Term Loan, with a final maturity date of February 5, 2024; and
•a $125.0$117.5 million revolving credit facility (with a letter of credit sub-facility in the amount of $35.0 million), or the Revolving Credit Facility, consisting of (i) a $100.0 million multicurrency tranche and (ii) a $25.0$17.5 million tranche available only in U.S. dollars, of which $7.5 million haswith a final maturity date of FebruaryAugust 5, 2021 and $17.5 million has a final maturity date of February 5, 2022.2023.
Borrowings under our Revolving Credit Facility bear interest at a floating rate which can be,is, at our option, either (1) a Eurodollar rate for a specified interest period plus an applicable margin of 3.00%2.50% or (2) a base rate plus an applicable margin of 2.00%. The applicable margins for Eurodollar rate and base rate borrowings are subject to reductions to 2.75% and 2.50%, and to 1.75% and 1.50%, respectively, based on our first lien net leverage ratio or based upon the completion of an initial public offering.respectively. The Eurodollar rate applicable to the Revolving Credit Facility is subject to a “floor” of 0.0%.
Borrowings under our First Lien Term Loan bear interest at a floating rate which can be,is, at our option, either (1) a Eurodollar rate for a specified interest period plus an applicable margin of 3.00%2.75% or (2) a base rate plus an applicable margin of 2.00%. The applicable margins for Eurodollar and base rate borrowings are each subject to a reduction to 2.75% and 1.75%, respectively, based
SolarWinds Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
on our first lien net leverage ratio or based upon the completion of an initial public offering.respectively. The Eurodollar rate applicable to the First Lien Term Loan is subject to a “floor” of 0.0%.
The Eurodollar rate is equal to an adjusted London Interbank Offered Rate, or LIBOR, for a one-, two-, three- or six-month interest period with a LIBOR floor of 0%. The base rate for any day is a fluctuating rate per annum equal to the highest of (a) the rate of interest in effect for such day as publicly announced by Credit Suisse as its “prime rate” and (b) the federal funds effective rate in effect on such day plus 0.50% and (c) the one-month adjusted LIBOR plus 1.0% per annum.
The First Lien Term Loan requires equal quarterly repayments equal to 0.25% of the original principal amount.
In addition to paying interest on loans outstanding under the Revolving Credit Facility and the First Lien Term Loan, we are required to pay a commitment fee of 0.50% per annum of unused commitments under the Revolving Credit Facility. The commitment fee is subject to a reduction to 0.375% per annum based on our first lien net leverage ratio.
The First Lien Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, our ability to: incur additional indebtedness; incur liens; engage in mergers, consolidations, liquidations or dissolutions; pay dividends and distributions on, or redeem, repurchase or retire our capital stock; and make certain investments, acquisitions, loans, or advances. In addition, the terms of the First Lien Credit Agreement include a financial covenant which requires that, at the end of each fiscal quarter, if the aggregate amount of borrowings under the Revolving Credit Facility exceeds 35% of the aggregate commitments under the Revolving Credit Facility, our first lien net leverage ratio cannot exceed 7.40 to 1.00. The First Lien Credit Agreement also contains certain customary representations and warranties, affirmative covenants and events of default. As of SeptemberJune 30, 2018,2022, we were in compliance with all covenants of the First Lien Credit Agreement.
The following table summarizes the future minimum principal payments under the First Lien Term Loan outstanding as of September 30, 2018:
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| | | |
| As of September 30, 2018 |
| |
| (in thousands) |
2018 | $ | 4,975 |
|
2019 | 19,900 |
|
2020 | 19,900 |
|
2021 | 19,900 |
|
2022 | 19,900 |
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Thereafter | 1,890,500 |
|
Total minimum principal payments | $ | 1,975,075 |
|
Senior Secured Second Lien Credit Facility
In March 2018, we terminated the agreements governing our senior secured second lien floating rate notes, or the Second Lien Notes, and repaid or exchanged the then-outstanding principal on our Second Lien Notes of $680.0 million and replaced the Second Lien Notes with a new second lien credit agreement, or the Second Lien Credit Agreement, with Wilmington Trust, National Association or Wilmington Trust, as administrative agent and collateral agent, and certain other financial institutions. The Second Lien Credit Agreement provides for a $315.0 million U.S. dollar term loan, or the Second Lien Term Loan, with a final maturity of February 5, 2025 and does not require periodic principal payments. In connection with the redemption and exchange of our Second Lien Notes, a loss on debt extinguishment of $39.2 million, which includes a $22.7 million redemption premium, was recorded to other income (expense) in the consolidated statement of operations for the nine months ended September 30, 2018.
The borrowings under the Second Lien Term Loan bear interest at a floating rate which can be, at our option, either (1) a Eurodollar rate for a specified interest period plus an applicable margin of 7.25% or (2) a base rate plus an applicable margin of 6.25%. The Eurodollar rate is equal to the adjusted LIBOR Rate for a one-, two-, three or six-month interest period. The base rate for any day is a fluctuating rate per annum equal to the rate last quoted by the Wall Street Journal as the “Prime Rate” in the United States, or if the Wall Street Journal ceases to quote such rate, the highest per annum interest rate published by the Federal Reserve Board as “bank prime loan” rate or, if such rate is no longer quoted therein (as determined by Wilmington Trust) or any similar release by the Federal Reserve Board (as determined by Wilmington Trust).
SolarWinds Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Second Lien Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, our ability to: incur additional indebtedness; incur liens; engage in mergers, consolidations, liquidations or dissolutions; pay dividends and distributions on, or redeem, repurchase or retire our capital stock; or make investments, acquisitions, loans, or advances. The Second Lien Credit Agreement also contains certain customary representations and warranties, affirmative covenants and events of default. As of September 30, 2018, we were in compliance with all covenants of the Second Lien Credit Agreement.
In October 2018, we completed our IPO and used a portion of the net proceeds from the offering to repay the $315.0 million in borrowings outstanding under our Second Lien Term Loan. See Note 13. Subsequent Eventsfor additional information.
7. Redeemable Convertible Class A Common Stock
Class A Common Stock accrued dividends at a rate of 9% per annum and had a liquidation preference equal to $1,000 per share plus any accrued and unpaid dividends. Prior to the conversion of the Class A Common Stock into common stock, in a future liquidation event, such as a sale, the holders of the Class A Common Stock would have been entitled to payment up to the amount of the liquidation preference and holders of the Class B Common Stock would have been entitled to the residual value of the Company.
Cumulative undeclared and unpaid dividends on Class A Common Stock totaled $702.5 million and $485.9 million at September 30, 2018 and December 31, 2017, respectively. Redeemable convertible Class A Common Stock was recorded at liquidation value plus accrued, unpaid dividends in our consolidated balance sheets.
Immediately prior to the completion of our IPO in October 2018, we converted each outstanding share of our Class A Common Stock into a number of shares of common stock equal to the result of the liquidation value of such share of Class A Common Stock, divided by $19.00 per share. The liquidation value for each share of Class A Common Stock was equal to $1,000. At the time of the conversion of the Class A Common Stock, we converted $717.4 million of accrued and unpaid dividends on the Class A Common Stock into 37,758,109 shares of common stock equal to the result of the accrued and unpaid dividends on each share of Class A Common Stock, divided by $19.00 per share. See Note 13. Subsequent Eventsfor additional information regarding the conversion of our Class A Common Stock.
8. Stockholders’ Deficit and Stock-Based Compensation
Common Stock
As of September 30, 2018, the Company had authorized capital stock of 238,755,000 shares consisting of 5,755,000 shares of Class A Common Stock, par value $0.001 per share, or Class A Common Stock, and 233,000,000 shares of Class B Common Stock, par value of $0.001 per share, or Class B Common Stock. See Note 13. Subsequent Eventsfor additional information regarding the conversion of our Class A Common Stock and Class B Common Stock into common stock immediately prior to the completion of our IPO.
2016 Equity Plan
Equity awards to the Company’s employees, consultants, directors, managers and advisors are issued by the Company. The board of directors adopted, and the stockholders approved, the SolarWinds Corporation Equity Plan, or 2016 Plan, in June 2016. Under the 2016 Plan, the Company is able to sell or grant shares of Class A Common Stock and Class B Common Stock and common stock-based awards, including nonqualified stock options, to the Company’s employees, consultants, directors, managers and advisors.
The Company has issued common stock-based incentive awards, consisting of nonqualified stock options exercisable for shares of Class B Common Stock and restricted shares of Class B Common Stock, under the 2016 Plan to employees and certain members of the Company’s board of directors. As of September 30, 2018, common stock-based incentive awards of 8,241,934 were outstanding under the 2016 Plan consisting of 3,199,400 stock options and 5,042,534 shares of restricted Class B Common Stock and 502,833 shares of Class B Common Stock were reserved for future equity incentive awards under the 2016 Plan. For the nine months ended September 30, 2018, the Company repurchased 250,333 shares of vested and unvested restricted Class B Common Stock upon employee terminations.
SolarWinds Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
Stock Option Awards
Option grant activity under the 2016 Plan was as follows:
|
| | | | | | | | | | | | |
| Number of Shares Outstanding | | Weighted- Average Exercise Price | | Aggregate Intrinsic Value (in thousands) | | Weighted- Average Remaining Contractual Term (in years) |
Outstanding balances at December 31, 2017 | 2,156,550 |
| | $ | 0.45 |
| | | | |
Options granted | 1,327,475 |
| | 3.40 |
| | | | |
Options exercised | (38,600 | ) | | 0.35 |
| | | | |
Options forfeited | (231,075 | ) | | 0.94 |
| | | | |
Options expired | (30,050 | ) | | 0.30 |
| | | | |
Outstanding balances at September 30, 2018 | 3,184,300 |
| | $ | 1.65 |
| | | | |
Options exercisable at September 30, 2018 | 618,250 |
| | $ | 0.41 |
| | $ | 5,980 |
| | 8.17 |
Options vested and expected to vest at September 30, 2018 | 3,184,300 |
| | $ | 1.65 |
| | $ | 26,856 |
| | 8.84 |
Additional information regarding options follows (in thousands except for per share amounts):
|
| | | |
| Nine Months Ended September 30, |
| 2018 |
Weighted-average grant date fair value per share of options granted during the period | $ | 1.98 |
|
Aggregate intrinsic value of options exercised during the period | 302 |
|
Aggregate fair value of options vested during the period | 102 |
|
Stock-based compensation expense related to stock option awards recorded for the three and nine months ended September 30, 2018 and 2017 was immaterial. The unrecognized stock-based compensation expense related to unvested stock options and subject to recognition in future periods was approximately $2.5 million and $0.3 million as of September 30, 2018 and December 31, 2017, respectively. We expect to recognize this expense over weighted average periods of approximately 3.5 years and 3.8 years at September 30, 2018 and December 31, 2017, respectively.
Restricted Stock
The following table summarizes information about employee restricted stock activity subject to vesting under the 2016 Plan:
|
| | |
| Number of
Shares
Outstanding
|
Unvested balances at December 31, 2017 | 5,789,401 |
|
Restricted stock granted and issued | 820,500 |
|
Restricted stock vested | (1,371,334 | ) |
Restricted stock repurchased - unvested shares | (196,033 | ) |
Unvested balances at September 30, 2018 | 5,042,534 |
|
Restricted stock is purchased at fair market value by the employee and Class B Common Stock is issued at the date of grant. The weighted-average grant date fair market value of restricted Class B Common Stock purchased was $2.10 per share for the nine months ended September 30, 2018. Restricted stock is subject to certain restrictions, such as vesting and a repurchase right. The Class B Common Stock acquired by the employee is restricted stock because vesting is conditioned upon (i) continued employment through the applicable vesting date and (ii) for employees at the level of group vice president and above, the achievement of certain financial performance targets determined by the board of directors. The restricted stock is subject to repurchase in the event the stockholder ceases to be employed or engaged (as applicable) by the Company for any reason or in the event of a change of control or due to certain regulatory burdens. As the restricted stock is purchased at fair market value at the time of grant, there is no stock-based compensation expense recognized related to these awards. The related liability for unvested
SolarWinds Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
shares is included in other long-term liabilities on the consolidated balance sheet and was $2.9 million and $1.7 million as of September 30, 2018 and December 31, 2017. See Note 13. Subsequent Eventsfor additional information regarding the adoption of our 2018 Equity Incentive Plan.
9. Net LossEarnings (Loss) Per Share
A reconciliation of the number of shares in the calculation of basic and diluted lossearnings (loss) per share follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| | | | | | | |
| (in thousands) |
Basic net loss per share | | | | | | | |
Numerator: | | | | | | | |
Net income (loss) | $ | (398 | ) | | $ | 1,637 |
| | $ | (87,323 | ) | | $ | (44,105 | ) |
Accretion of dividends on Class A common stock | (74,608 | ) | | (68,264 | ) | | (216,621 | ) | | (198,205 | ) |
Net loss available to common stockholders | $ | (75,006 | ) | | $ | (66,627 | ) | | $ | (303,944 | ) | | $ | (242,310 | ) |
Denominator: | | | | | | | |
Weighted-average Class B common shares outstanding used in computing basic net loss per share | 102,078 |
| | 100,759 |
| | 101,915 |
| | 100,330 |
|
Diluted net loss per share | | | | | | | |
Numerator: | | | | | | | |
Net loss available to common stockholders | $ | (75,006 | ) | | $ | (66,627 | ) | | $ | (303,944 | ) | | $ | (242,310 | ) |
Denominator: | | | | | | | |
Weighted-average shares used in computing basic net loss per share | 102,078 |
| | 100,759 |
| | 101,915 |
| | 100,330 |
|
Add options and restricted stock units to purchase common stock | — |
| | — |
| | — |
| | — |
|
Weighted-average shares used in computing diluted net loss per share | 102,078 |
| | 100,759 |
| | 101,915 |
| | 100,330 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| (in thousands) |
Basic earnings (loss) per share | | | | | | | |
Numerator: | | | | | | | |
Net loss from continuing operations | $ | (622,124) | | | $ | (21,885) | | | $ | (626,783) | | | $ | (43,665) | |
Net income from discontinued operations | — | | | 10,261 | | | — | | | 24,881 | |
Net loss | (622,124) | | | (11,624) | | | (626,783) | | | (18,784) | |
| | | | | | | |
| | | | | | | |
Earnings allocated to unvested restricted stock | — | | | — | | | — | | | — | |
Net loss from continuing operations available to common stockholders | $ | (622,124) | | | $ | (21,885) | | | $ | (626,783) | | | $ | (43,665) | |
Net income from discontinued operations available to common stockholders | $ | — | | | $ | 10,261 | | | $ | — | | | $ | 24,881 | |
Denominator: | | | | | | | |
Weighted-average common shares outstanding used in computing basic net earnings (loss) per share | 160,663 | | | 157,854 | | | 160,257 | | | 157,491 | |
| | | | | | | |
Diluted net earnings (loss) per share | | | | | | | |
Numerator: | | | | | | | |
Net loss from continuing operations available to common stockholders | $ | (622,124) | | | $ | (21,885) | | | $ | (626,783) | | | $ | (43,665) | |
Net income from discontinued operations available to common stockholders | $ | — | | | $ | 10,261 | | | $ | — | | | $ | 24,881 | |
Denominator: | | | | | | | |
Weighted-average shares used in computing basic net earnings (loss) per share | 160,663 | | | 157,854 | | | 160,257 | | | 157,491 | |
Add dilutive impact of employee equity plans | — | | | — | | | — | | | — | |
Weighted-average shares used in computing diluted net earnings (loss) per share | 160,663 | | | 157,854 | | 160,257 | | | 157,491 |
The following weighted averageweighted-average outstanding shares of common stock equivalents were excluded from the computation of the diluted net lossincome (loss) per share attributable to common stockholders for the periods presented because their effect would have been anti-dilutive or for which the performance condition had not been met at the end of the period:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| (in thousands) |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total anti-dilutive shares | 12,594 | | | 7,071 | | | 11,074 | | | 6,613 | |
|
| | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| | | | | | | |
| (in thousands) |
Stock options to purchase common stock | 2,782 |
| | 1,816 |
| | 2,525 |
| | 1,509 |
|
Performance-based stock options to purchase common stock | 316 |
| | 116 |
| | 267 |
| | 96 |
|
Non-vested restricted stock incentive awards | 3,512 |
| | 3,410 |
| | 3,435 |
| | 3,605 |
|
Performance-based non-vested restricted stock incentive awards | 1,537 |
| | 2,260 |
| | 1,566 |
| | 2,601 |
|
Total anti-dilutive shares | 8,147 |
| | 7,602 |
| | 7,793 |
| | 7,811 |
|
Class A Common Stock was not included in the basic or diluted earnings (loss) per share calculations as it was contingently convertible upon a future event. The calculation of diluted earnings (loss) per share requires us to make certain assumptions related to the use of proceeds that would be received upon the assumed exercise of stock options.
10. Related Party Transactions
Management Fee Agreement with Silver Lake Management, Thoma Bravo and TB Partners
On February 5, 2016, we entered into a Management Fee Agreement with Silver Lake Management Company IV, L.L.C. (Silver Lake Management), Thoma Bravo, LLC (Thoma Bravo) and Thoma Bravo Partners XI, L.P. (TB Partners and, collectively with Silver Lake Management and Thoma Bravo,options or proceeds from the Managers), pursuant to which the Managers provided business and organizational strategy and financial and advisory services. Under the Management Fee Agreement, we paid to the Managers quarterly payments of $2.5 million in the aggregate, plus fees for certain corporate transactions in the Managers’ discretion. Each
employee stock purchase plan.
SolarWinds Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
payment of fees under the Management Fee Agreement was allocated among the Managers as follows: 50% to Silver Lake Management, 40.73% to Thoma Bravo and 9.27% to TB Partners. We also reimbursed each of the Managers for all out-of-pocket costs incurred in connection with activities under the Management Fee Agreement, and we indemnified the Managers and their respective related parties from and against all losses, claims, damages and liabilities related to the performance of the Managers obligations under the Management Fee Agreement. The Management Fee Agreement terminated upon the consummation of the IPO in October 2018 and no future payments are required.
The following table details the management fees for the respective periods:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| | | | | | | |
| (in thousands) |
Silver Lake Management | $ | 1,250 |
| | $ | 1,250 |
| | $ | 3,750 |
| | $ | 3,750 |
|
Thoma Bravo | 1,018 |
| | 1,018 |
| | 3,054 |
| | 3,054 |
|
TB Partners | 232 |
| | 232 |
| | 696 |
| | 696 |
|
| $ | 2,500 |
| | $ | 2,500 |
| | $ | 7,500 |
| | $ | 7,500 |
|
11.9. Income Taxes
For the three months ended SeptemberJune 30, 20182022 and 2017,2021, we recorded income tax expense from continuing operations of $7.9 million and income tax benefit of $0.1 million and $3.1$2.1 million, respectively, resulting in an effective tax rate of 24.0%(1.3)% and 215.4%8.8%, respectively. For the ninesix months ended SeptemberJune 30, 20182022 and 2017,2021, we recorded income tax benefitexpense from continuing operations of $20.0$7.7 million and $12.5income tax benefit $7.0 million, respectively, resulting in an effective tax rate of 18.7%(1.2)% and 22.0%13.8%, respectively. The decrease in the effective tax rate for the three and ninesix months ended SeptemberJune 30, 20182022 compared to the same periods in 2017 were generally a result of the lower U.S. corporate tax rate attributable2021 was primarily due to the Tax Cuts and Jobs Act, or the Tax Act, as well as discrete items related to expired statutes in various jurisdictions.
The Tax Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that have not been taxed previously in the U.S., and creates new taxes on certain foreign sourced earnings. We are required to recognize the effect of the tax law changes in the period of enactment, such as determining the transition tax, re-measuring our U.S. deferred tax assets and liabilities as well as reassessing the net realizability of our deferred tax assets and liabilities. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118),goodwill impairment charge, which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, the Company made reasonable estimates of the effects and recorded provisional amounts in our consolidated financial statements for the year ended December 31, 2017.
As the Company collects and prepares the necessary data, interprets the Tax Act and reviews any additional guidance issued by the U.S. Treasury Department, state taxation authorities and other standard-setting bodies, the Company may make adjustments to the provisional amounts noted above which may materially impact its provisionis primarily non-deductible for income taxes from continuing operations in the period in which the adjustments are made. The accounting for the tax effects of the Tax Act will be completed in 2018.purposes.
Our policy is to include interest and penalties related to unrecognized tax benefits as a component of income tax expense. At SeptemberJune 30, 2018,2022, we had accrued interest and penalties related to unrecognized tax benefits of approximately $3.8$3.1 million.
We establish valuation allowances when necessary to reduce deferred tax assets to amounts expected to be realized. During the three months ended June 30, 2022, as a result of the goodwill impairment charge, we increased our valuation allowance primarily related to the component of tax-deductible goodwill.
We file U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitations. The 20112013 through 2017February 2016 and 2018 through 2021 tax years generally remain open and subject to examination by federal tax authorities. The 20102012 through 20172021 tax years generally remain open and subject to examination by the state tax authorities and foreign tax authorities. We are currently under examination by the IRS for the tax years 20112013 through the period ending February 2016. We are under audit by the Indian Tax Authority for the 20142017 and 20172019 tax years. We are currently under audit by the California Franchise Tax Board for the 2012 through 2014 tax years. We were notified in December 2017 thatyears and the Swiss Tax Authorities would auditTexas Comptroller for the 20142015 through 20162018 tax years. This audit concluded in April 2018 with no adjustments. We are not currently under audit in any other taxing jurisdictions.
On July 24, 2018, U.S. Court
10. Commitments and Contingencies
Cyber Incident
As previously disclosed, we were the victim of Appeals fora cyberattack on our Orion Software Platform and internal systems, or the Ninth Circuit reversedCyber Incident. We, together with our partners, have undertaken extensive measures to investigate, contain, eradicate, and remediate the decision ofCyber Incident.
Expenses Incurred
For the U.S. Tax Court in Altera Corp. v. Commissionerthree months ended June 30, 2022, we recorded pretax gross expenses related to the treatmentCyber Incident of stock-based compensation$3.7 million, primarily included in an intercompanygeneral and administrative expense in the condensed consolidated statements of operations. For the three months ended June 30, 2021, we recorded pretax gross expenses related to the Cyber Incident of $13.6 million, partially offset by proceeds under our insurance coverage of $2.9 million, for pretax net expenses of $10.7 million. For the three months ended June 30, 2021, we have included $0.7 million of these gross expenses in cost sharing arrangement. Onof recurring revenue, $0.8 million in sales and marketing expense and $12.2 million in general and administrative expense in the condensed consolidated statements of operations.
For the six months ended June 30, 2022, we recorded pretax gross expenses related to the Cyber Incident of $9.5 million and have included $0.2 million of these gross expenses in cost of recurring revenue, $0.1 million in sales and marketing expense and $9.2 million in general and administrative expense in the condensed consolidated statements of operations. For the six months ended June 30, 2021, we recorded pretax gross expenses related to the Cyber Incident of $34.0 million, partially offset by proceeds under our insurance coverage of $13.1 million, for pretax net expenses of $20.9 million. For the six months ended June 30, 2021, we have included $1.5 million of these gross expenses in cost of recurring revenue, $1.5 million in sales and marketing expense and $31.0 million in general and administrative expense in the condensed consolidated statements of operations.
General and administrative expense is presented net of insurance proceeds in the condensed consolidated statements of operations. Expenses include one-time costs to investigate and remediate the Cyber Incident, and legal and other professional services related thereto, and consulting services being provided to customers at no charge, all of which were expensed as incurred.
Litigation, Claims and Government Investigations
As a result of the Cyber Incident, we are subject to multiple lawsuits and investigations. A consolidated putative class action lawsuit alleging violations of the federal securities laws is pending against us and certain of our current and former officers. The complainants sought certification of a class of all persons who purchased or otherwise acquired our securities between October 18, 2018 and December 17, 2020 and seek unspecified monetary damages, costs and attorneys’ fees. In August 7, 2018,2021, the Ninth Circuit withdrewCompany and all other named defendants in the opinionsecurities class action filed motions to allow time for a reconstituted panel to confer on this appeal. Untildismiss the reconstituted
SolarWinds Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
consolidated class action complaint. On March 30, 2022, the District Court for the Western District of Texas entered an order denying the Company's motion to dismiss. Discovery has commenced in the action. In addition, two shareholder derivative actions, purportedly on behalf of the Company, are pending, one in the Western District of Texas and one in the Delaware Court of Chancery, in each case asserting breach of duty and other claims against certain of our current and former officers and directors in connection with the Cyber Incident. In January 2022, the Company and all other named defendants filed motions to dismiss the Delaware derivative complaint which is pending before the court. We dispute the allegations in these complaints and intend to defend against the claims.
panel issuesIn addition, there are underway numerous investigations and inquiries by domestic and foreign law enforcement and other governmental authorities related to the Cyber Incident, including from the Department of Justice, the Securities and Exchange Commission, and various state Attorneys General. We are cooperating and providing information in connection with these investigations and inquiries and are incurring, and in future periods expect to incur, costs and other expenses in connection with these investigations and inquiries.
While we believe it is reasonably possible that we could incur losses associated with these proceedings and investigations, it is not possible to estimate the amount of any loss or range of possible loss that might result from adverse judgments, settlements, penalties or other resolutions of such proceedings and investigations based on the early stage thereof, the fact that alleged damages have not been specified, the uncertainty as to the certification of a decision,class or classes and the Tax Court's decisionsize of any certified class, as applicable, and the lack of resolution on significant factual and legal issues. The Company will continue to evaluate information as it becomes known and will record an estimate for losses at the time or times when it is both probable that a loss has been incurred and the amount of the loss is reasonably estimable. Losses associated with any adverse judgments, settlements, penalties or other resolutions of such proceedings and investigations could be material to our business, results of operations, financial condition or cash flows in Altera controls. future periods.
Additional lawsuits and claims related to the Cyber Incident may be asserted by or on behalf of customers, stockholders or others seeking damages or other related relief and additional inquiries from governmental agencies may be received or investigations by governmental agencies commenced.
Insurance Coverage
We maintain $15 million of cybersecurity insurance coverage to limit our exposure to losses such as those related to the Cyber Incident, which we renewed in June 2022. As of SeptemberJune 30, 2018,2022, we have not recorded any tax benefithad received insurance proceeds payments of excluding stock-based compensation from$15 million for costs incurred related to the Cyber Incident. In addition, we maintain $50 million of directors and officers liability insurance coverage to reduce our cost sharing agreement.
12. Commitmentsexposure to our indemnification obligations for certain expenses incurred by our directors and Contingencies
Take Private Deferred Stock Payments
Asofficers, including as a result of the Take Private, RSUs granted to certain of our employees under the existing stock plans not subject to accelerated vesting were cancelled and converted into the right to receive the per share price of $60.10 less applicable withholding taxes shortly after those RSUs would have vested based on the underlying original RSU vesting schedule and subject to continued employment of the holders of those RSUs. As of September 30, 2018, we had a liability for Take Private deferred stock payments recorded of $1.8 million included in accrued liabilities and other,legal proceedings related to the future paymentCyber Incident.
Indemnification
In connection with the Separation, we entered into a separation and distribution agreement and related agreements with N‑able to govern the Separation and related transactions and the relationship between the respective companies going forward. The separation and distribution agreement provides for service provided. For the nine months ended September 30, 2018,certain indemnity and liability obligations, including that we recognized $2.4 millionwill indemnify N-able for all liabilities based upon, arising out of compensation expense and made cash payments of approximately $3.5 million to employeesor related to the deferred compensation. We expectCyber Incident other than certain specified expenses for which N-able will be responsible. The amount of the indemnification liability, if any, cannot be determined and has not been recorded in our condensed consolidated financial statements as of June 30, 2022.
Other Matters
In addition to pay approximately $4.2 million through the year 2020. The expected future payment may differCyber Incident described above, from actual payment amounts due to future employee terminations.
Legal Proceedings
From time to time we have been and may beare involved in various legal proceedingslitigation arising in our ordinaryfrom the normal course of business. In themanagement's opinion, of management, resolution of any pending claims (either individually or in the aggregate)this litigation is not expected to have a material adverse impacteffect on our consolidated financial statements, cash flows or financial position and it is not possible to provide an estimated amount of any such loss. However, the outcome of disputes is inherently uncertain. Therefore, although management considers the likelihood of such an outcome to be remote, an unfavorable resolution of one or more matters could materially affect our futurecondition, results of operations or cash flows, or both, in a particular period.flows.
13. Subsequent Events
Initial Public Offering
In October 2018, we completed our IPO, in which we sold and issued 25,000,000 shares of our common stock at an issue price of $15.00 per share. We raised a total of $375.0 million in gross proceeds from the offering, or approximately $353.0 million in net proceeds after deducting underwriting discounts and commissions of $17.8 million and estimated offering-related expenses of approximately $4.2 million. A portion of the net proceeds from the offering were used to repay the $315.0 million in borrowings outstanding under our Second Lien Term Loan. In connection with the voluntary prepayment of the Second Lien Term Loan, we paid a $14.2 million prepayment fee.
Upon the closing of our IPO, all 2,661,015 shares of Class A Common Stock that were outstanding immediately prior to the closing of such offering converted into 140,053,370 shares of common stock in accordance with the terms of our certificate of incorporation. In addition, we converted $717.4 million of accrued and unpaid dividends on the Class A Common Stock into 37,758,109 shares of common stock equal to the result of the accrued and unpaid dividends on each share of Class A Common Stock, divided by $19.00 per share. All outstanding shares of Class B Common Stock converted into common stock on a one-for-one basis.
Following consummation of our IPO, we amended our certificate of incorporation to, among other things, set the authorized capital stock of the company at 1,000,000,000 shares of common stock, par value of $0.001 per share, and 50,000,000 shares of preferred stock, par value of $0.001 per share. Each share of common stock entitles the holder thereof to one vote on each matter submitted to a vote at any meeting of stockholders.
2018 Equity Incentive Plan
In October 2018, the board of directors adopted, and the stockholders approved, the SolarWinds Corporation 2018 Equity Incentive Plan, or 2018 Plan. We reserved 30,000,000 shares of our common stock for issuance under the 2018 Plan. On October 27, 2018, we granted 7,342,878 equity awards to our employees and directors consisting of 6,371,956 restricted stock units, or RSUs, and 970,922 performance stock units, or PSUs. RSUs generally vest over a four-year service period. PSUs generally vest over a three-year period based on the achievement of specified performance targets for the fiscal year ended December 31, 2019 and subject to continued service through the applicable vesting dates. Based on the extent to which the performance targets are achieved, vested shares may range from 0% to 150% of the target award amount. We will not grant any additional awards under our 2016 Plan; however, the 2016 Plan will continue to govern the terms and conditions of all outstanding equity awards granted under the 2016 Plan.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes thereto included elsewhere in this quarterly reportQuarterly Report on Form 10-Q. In addition to historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially and adversely from those anticipated in the forward-looking statements. Please see the section entitled “Safe Harbor Cautionary Statement” above and the risk factors discussed in our final prospectus dated October 18, 2018 and filed withAnnual Report on Form 10-K for the SEC on October 22, 2018 pursuant to Rule 424(b) of the Securities Act of 1933, as amendedyear ended December 31, 2021 for a discussion of the uncertainties, risks and assumptions associated with these statements. The following discussion and analysis also includes a discussion of certain non-GAAP financial measures. For a description and reconciliation of the non-GAAP measures discussed in this section, see “Non-GAAP Financial Measures.”
Overview
SolarWinds is a leading provider of simple, powerful, and secure information technology, or IT, infrastructure management software. Our productssolutions give organizations worldwide, regardless of type, size or IT infrastructure complexity, the power to monitor and manage the performance of theiraccelerate business transformation in today's hybrid IT environments, whether on-premise, in the cloud, or in hybrid models.environments. We combine powerful, scalable, affordable, easy to usecustomer-driven products with a high-velocity, low-touchan "inside-first" sales model to grow our business while also generating significant cash flow.
We offer over 50 productsa broad portfolio of solutions designed to help technology professionals to monitor, manage and manage network,optimize networks, systems, desktop, application,desktops, applications, storage, database anddatabases, website infrastructures whether on-premise, in the public or private cloud or in a hybridand IT infrastructure.service desks. We intend to continue to innovate and invest in areas of product development that bring new products to market and enhance the functionality, ease of use and integration of our current products. We believe this will strengthen the overall value proposition of our products in any IT environment.
Financial Highlights
Key financial highlights forOn February 5, 2016, we were acquired by affiliates of Silver Lake Group, L.L.C and Thoma Bravo, LLC in a take private transaction, or the period includeTake Private. We applied purchase accounting on the following:
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change |
| | | | | | | | | | | |
| (in thousands, except per share data and percentages) |
GAAP Results | | | | | | | | | | | |
Total revenue | $ | 213,277 |
| | $ | 189,112 |
| | 12.8 | % | | $ | 611,908 |
| | $ | 529,678 |
| | 15.5 | % |
Net income (loss) | (398 | ) | | 1,637 |
| | (124.3 | )% | | (87,323 | ) | | (44,105 | ) | | 98.0 | % |
Net cash flow provided by operations | 58,957 |
| | 40,226 |
| | 46.6 | % | | 166,082 |
| | 135,899 |
| | 22.2 | % |
Non-GAAP Results(1) | | | | | | | | | | | |
Non-GAAP total revenue | $ | 214,005 |
| | $ | 191,035 |
| | 12.0 | % | | $ | 615,197 |
| | $ | 541,229 |
| | 13.7 | % |
Non-GAAP total recurring revenue | 170,258 |
| | 150,542 |
| | 13.1 | % | | 496,877 |
| | 428,411 |
| | 16.0 | % |
Adjusted EBITDA | 106,482 |
| | 99,302 |
| | 7.2 | % | | 295,656 |
| | 261,804 |
| | 12.9 | % |
______________ | |
(1) | See "Non-GAAP Financial Measures" for a reconciliationdate of our GAAP to non-GAAP results. |
Business Highlights
During the third quarter, SolarWinds made a number of updates and enhancements to its network and systems management, MSP and public cloud IT management product lines. We also released new products that add depth and breadth to our IT infrastructure management products while also introducing new security capabilities to quickly position us in the infrastructure security market:
We released Log Manager, making enterprise class machine data analysis accessible to companies of all sizes with an easy to use product at a disruptive price point. We also broadened our systems management capabilities with the release of SolarWinds Server Configuration Monitor (SCM) and added user access rights management with the release of Access Rights Manager (ARM).
We launched the latest version of SolarWinds N-Central with a wide range of features, including deeper PSA application integration, enhanced patch management, and NetPath. NetPath is a strong example of how SolarWinds is designing products and features that can be utilized across a wider set of product lines.
We added threat monitoring and management and entered the infrastructure security market. The new product, SolarWinds Threat Monitor, is an automated tool that is designed to reduce the complexity of threat detection for IT operations teams as well as for MSPs and MSSPs (Managed Security Service Providers).
Initial Public Offering
Take Private. In October 2018, we completed our initial public offering, or IPO, in whichand once again become a publicly traded company.
Spin-Off of N-able Business
On July 19, 2021, we soldcompleted the separation and issued 25,000,000distribution of our managed service provider (“N-able”) business into a newly created and separately traded public company, N-able, Inc. We refer to this transaction as the “Separation.” After the distribution, we do not beneficially own any shares of our common stock at an issue pricein N-able and no longer consolidate N‑able into our financial results for periods ending after July 19, 2021. As a result, N‑able's historical financial results through the Separation are reflected in our consolidated financial statements as discontinued operations.
We incurred $13.2 million of $15.00 per share. We raised a total of $375.0 millioncosts in gross proceeds from the offering, or approximately $353.0 million in net proceeds after deducting underwriting discounts and commissions of $17.8 million and estimated offering-related expenses of approximately $4.2 million. A portion of the net proceeds from the offering were used to repay the $315.0 million in borrowings outstanding under our Second Lien Term Loan. In connection with the voluntary prepayment ofSeparation during the Second Lien Term Loan, we paid a $14.2three months June 30, 2021 and $0.2 million prepayment fee.
See Note 13. Subsequent Eventsand $23.1 million for the six months ended June 30, 2022 and 2021, respectively. We incurred insignificant costs in connection with the Separation for the three months ended June 30, 2022. Spin-off costs incurred in the three and six months ended June 30, 2021 are primarily reflected in our condensed consolidated statements of operations as discontinued operations. These costs include legal, accounting and advisory fees, implementation and integration costs, duplicative costs for subscriptions and information technology systems, employee and contract costs and other incremental separation costs related to the Separation. Of these amounts, the spin-off costs included in continuing operations were $0.5 million for the three months ended June 30, 2021 and $0.2 million and $0.8 million for the six months ended June 30, 2022 and 2021, respectively. We do not expect to incur significant spin-off costs in 2022.
See Note 3. Discontinued Operations in the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional discussion of the Separation.
Cyber Incident
As previously disclosed, we were the victim of a cyberattack on our Orion Software Platform and internal systems, or the “Cyber Incident.” We, together with our partners, have undertaken extensive measures to investigate, contain, eradicate, and remediate the Cyber Incident. In addition, as part of our “Secure by Design” initiative, we continue to work with industry experts to implement enhanced security practices designed to further strengthen and protect our products and environment against these and other types of attacks in the future.
Expenses
For the three months ended June 30, 2022, we recorded pretax gross expenses related to the Cyber Incident of $3.7 million, primarily included in general and administrative expense in the condensed consolidated statements of operations. For the three months ended June 30, 2021, we recorded pretax gross expenses related to the Cyber Incident of $13.6 million, partially offset by proceeds under our insurance coverage of $2.9 million, for pretax net expenses of $10.7 million. For the three months ended June 30, 2021, we have included $0.7 million of these gross expenses in cost of recurring revenue, $0.8 million in sales and marketing expense and $12.2 million in general and administrative expense in the condensed consolidated statements of operations.
For the six months ended June 30, 2022, we recorded pretax gross expenses related to the Cyber Incident of $9.5 million and have included $0.2 million of these gross expenses in cost of recurring revenue, $0.1 million in sales and marketing expense and $9.2 million in general and administrative expense in the condensed consolidated statements of operations. For the six months ended June 30, 2021, we recorded pretax gross expenses related to the Cyber Incident of $34.0 million, partially offset by proceeds under our insurance coverage of $13.1 million, for pretax net expenses of $20.9 million. For the six months ended June 30, 2021, we have included $1.5 million of these gross expenses in cost of recurring revenue, $1.5 million in sales and marketing expense and $31.0 million in general and administrative expense in the condensed consolidated statements of operations.
General and administrative expense is presented net of insurance proceeds in the condensed consolidated statements of operations. Expenses include one-time costs to investigate and remediate the Cyber Incident, and legal and other professional services related thereto, and consulting services being provided to customers at no charge, all of which were expensed as incurred. Our "Secure By Design" initiatives which include costs to enhance our security measures across our systems and our software development and build environments, have increased our ongoing expenses by approximately $20 million on an annual basis. These costs are primarily included in research and development expense, as well as general and administrative expense.
Litigation, Claims and Government Investigations
As a result of the Cyber Incident, we are subject to numerous lawsuits and investigations or inquiries as described in Note 10. Commitments and Contingencies in the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q. While we will incur costs and other expenses associated with these proceedings and investigations, it is not possible to estimate the amount of any loss or range of possible loss that might result from adverse judgments, settlements, penalties or other resolutions of such proceedings and investigations based on the early stage thereof, the fact that alleged damages have not been specified, the uncertainty as to the certification of a class or classes and the size of any certified class, as applicable, and the lack of resolution on significant factual and legal issues. We will continue to evaluate information regardingas it becomes known and will record an estimate for losses at the time or times when it is both probable that a loss has been incurred and the amount of the loss is reasonably estimable.
Future Costs
We expect to continue to incur additional legal and other professional services costs and expenses associated with the Cyber Incident in future periods. We expect to recognize these expenses as services are received. Costs related to the Cyber Incident that will be incurred in future periods may include increased expenses associated with ongoing claims, investigations and inquiries, and any new claims, investigations and inquiries, as well as increased customer support activities and other related matters. See Note 10. Commitments and Contingencies in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q for information related to the legal proceedings and governmental investigations related to the Cyber Incident. While we will incur costs and other expenses associated with these proceedings and investigations, it is currently not possible to estimate the amount of any loss or range of possible loss that might result from adverse judgments, settlements, penalties or other resolutions of such proceedings and investigations based on the early stage thereof, the fact that alleged damages have not been specified, the uncertainty as to the certification of a class or classes and the size of any certified class, as applicable, and the lack of resolution on significant factual and legal issues.
In addition, we expect to incur increased expenses for insurance, finance, compliance activities, and to meet increased legal and regulatory requirements. In addition, in connection with the Separation, we entered into a separation and distribution agreement and related agreements with N-able to govern the Separation and related transactions and the relationship between the respective companies going forward. The separation and distribution agreement provides for certain indemnity and liability obligations, including that we will indemnify N-able for all liabilities based upon, arising out of or related to the Cyber Incident other than certain specified expenses for which N-able will be responsible. Although the ultimate magnitude and timing of expenses or other impacts to our IPO.business or reputation related to the Cyber Incident are uncertain, they could be significant.
Insurance Coverage
We maintain $15 million of cybersecurity insurance coverage to limit our exposure to losses such as those related to the Cyber Incident, which we renewed in June 2022. As of June 30, 2022, we had received insurance proceeds payments of $15 million for costs incurred related to the Cyber Incident. In addition, we maintain $50 million of directors and officers liability insurance coverage to reduce our exposure to our indemnification obligations for certain expenses incurred by our directors and officers, including as a result of the legal proceedings related to the Cyber Incident.
Impacts of COVID-19
We continue to monitor the impact from the changing market and economic conditions due to the COVID-19 pandemic on our business. While the impact of the COVID-19 pandemic contributed to a decline in our license revenue, based on current conditions, we do not expect to experience a significant ongoing impact related to the COVID-19 pandemic on our financial results in future periods. However, we are unable to predict with a level of precision the longer term impact, if any, that the COVID-19 pandemic may have on our business, results of operations and financial condition due to numerous uncertainties, including the duration of the pandemic, virus mutations and variants, the availability and efficacy of vaccines and boosters, the willingness of individuals to obtain vaccines and boosters, the pandemic's impact to the business of our customers and their end-customers and other factors identified in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. We will continue to evaluate the nature and extent of the impact of the COVID-19 pandemic to our business, consolidated results of operations and financial condition.
Impacts of Macroeconomic Conditions
As a global company, we are subject to risks and exposures from foreign currency exchange rate fluctuations caused by significant events with macroeconomic impacts, including, but not limited to, the conflict between Russia and Ukraine and resulting sanctions and other actions against Russia and Belarus, as well as market concerns related to inflation, changes in interest rates and supply chain disruption issues. During the second quarter of 2022, we suspended all of our business activities in Russia and Belarus, but such suspension has not had, and we do not expect it to have, a material impact on our financial results. Foreign currency exchange rate fluctuations have to date, and may continue through the remainder of 2022, to negatively impact our revenues. Although we continuously monitor the direct and indirect impacts of these events on our business and financial results, as well as the overall global economy, the broader implications of these macroeconomic events on our results of operation remain uncertain. See Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 for further discussion of the possible impacts of these macroeconomic conditions on our business and financial results.
Second Quarter Highlights
Below are our key financial highlights from continuing operations for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021.
Customers
Our approach allows us to both sell to a broad group of potential customers and close large transactions with significant customers. As of June 30, 2022, we had over 300,000 customers after giving effect to the Separation. While some customers may spend as little as $100 with us over a twelve-month period, we had 879 customers who spent more than $100,000 with us for the trailing twelve-month period ended June 30, 2022 as compared to 775 for the twelve-month period ended June 30, 2021, as adjusted to exclude customers of the N-able business.
We define customers as individuals or entities that have purchased one or more of our products under a unique customer identification number since our inception for our perpetual license products and individuals or entities that have an active subscription for at least one of our subscription products. Each unique customer identification number constitutes a separate customer regardless of the amount purchased. We may have multiple purchasers of our products within a single organization, each of which may be assigned a unique customer identification number and deemed a separate customer.
Annual Recurring Revenue (ARR)
We use Subscription Annual Recurring Revenue, or Subscription ARR, and Total Annual Recurring Revenue, or Total ARR, to better understand and assess the performance of our business, as our mix of revenue generated from recurring revenue has increased in recent years. Subscription ARR and Total ARR each provides a normalized view of customer retention, renewal and expansion, as well as growth from new customers. Subscription ARR and Total ARR should each be viewed independently of revenue and deferred revenue and are not intended to be combined with or to replace either of those items.
| | | | | | | | | | | | | | | | | |
| As of June 30, | | Year-over-Year Growth |
| 2022 | | 2021 | |
| | | | | |
| (in thousands, except percentages) |
Subscription ARR(1) | $ | 148,277 | | | $ | 119,189 | | | 24.4 | % |
Total ARR(2) | 625,496 | | | 621,072 | | | 0.7 | |
_______(1)Subscription ARR represents the annualized recurring value of all active subscription contracts at the end of a reporting period.
(2)Total ARR represents the sum of Subscription ARR and the annualized value of all maintenance contracts related to perpetual licenses active at the end of a reporting period.
The year-over-year growth in Subscription ARR was primarily driven by sales of our time-based subscription offerings as a result of customers transitioning to our subscription products and pricing models, as well as sales of our service desk and database monitoring solutions. Total ARR increased slightly due to growth in Subscription ARR which was partially offset by a decline in the annualized value of maintenance contracts as a result of lower new perpetual license sales and the impact of customers transitioning to our time-based subscription offerings, along with the effect of the weakening of most foreign currencies relative to the U.S. dollar.
Components of Our Results of Operations
Revenue
Our revenue consists of recurring revenue and perpetual license revenue.
•Recurring Revenue.The significant majority of our revenue is recurring and consists of subscription and maintenance revenue.
•Subscription Revenue. We primarily derive subscription revenue from fees received for subscriptions to our SaaS offerings, and to a lesser extent, our time-based license arrangements. We recognize revenue for SaaS offerings ratably over the subscription term once the service is made available to the customer or when we have the right to invoice services performed. We also offer time-based subscription offerings for many of our products historically sold as perpetual licenses, such as our network, systems and database management products, to give customers additional flexibility when purchasing our products. The time-based subscription offerings are recognized at a point in time upon delivery of the on-premise software and support is recognized ratably over the contract period. We generally invoice subscription agreements in advance over the subscription period on either a monthly or annual basis and to a lesser extent, monthly based on usage. Our subscription revenue grows as customers add new subscription products, upgrade the capacity level of their existing subscription products or increase the usage of their subscription products.
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▪ | Subscription Revenue. We derive subscription revenue from fees received for subscriptions to our cloud management and MSP products. Subscription revenue is recognized ratably over the subscription term after all revenue recognition criteria have been met. We generally invoice subscription agreements monthly in arrears based on usage or monthly in advance over the subscription period. Our subscription revenue grows as customers add new subscription products, upgrade the capacity level of their existing subscription products or increase the usage of their subscription products. Our revenue from MSP products increases with the addition of end customers served by our MSP customers, the proliferation of devices managed by those MSPs and the expansion of products used by those MSPs to manage end customers’ IT infrastructures.
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•Maintenance Revenue. We derive maintenance revenue from the sale of maintenance services associated with our perpetual license products. Perpetual license customers pay for maintenance services based on the products they have purchased. We recognize maintenance revenue ratably on a daily basis over the contract period. Our maintenance revenue grows when we renew existing maintenance contracts and add new perpetual license customers, and as existing customers add new products. In addition, we typically implement annual price increases for our maintenance services. Customers typically renew their maintenance contracts at our standard list maintenance renewal pricing for their applicable products. We generally invoice maintenance contracts annually in advance.
•License Revenue.We derive license revenue from sales of perpetual licenses of our on-premise network, systems, storage and database management products to new and existing customers. We include one year of maintenance services as part of our customers’ initial license purchase. License revenue is recognized at a point in time upon delivery of the electronic license key. We calculate the amount ofallocate revenue allocated to the license by subtracting the fair value,component based upon our estimated standalone selling prices, which is determinedderived by evaluating our standardhistorical pricing and discounting practices in observable bundled transactions.
We plan to continue to sell perpetual licenses for our network, systems and database management products and not require customers to transition to a subscription pricing model discussed above. The subscription pricing option, and our continued efforts to increase subscription revenue, may impact the mix of license and recurring revenue, but this impact is difficult to predict at this time due to uncertainty regarding the level of customer adoption of the new subscription pricing options. We expect a continued shift in the mix between license and recurring revenue in each quarter as new customers purchase these
subscription offerings. Our license sales and maintenance renewal price list,rates may decline or fluctuate in future periods as customers transition to our subscription offerings and as a result of the applicable maintenance services from the total invoice or contract amount. If we increase list prices for maintenance services without increasing prices by a similar percentage for perpetual licenses, the amount of license revenue we recognize at the time of the sale of the perpetual license could be adversely affected.
Cyber Incident.Cost of Revenue
•Cost of Recurring Revenue.Cost of recurring revenue primarily consists of technical support personnel costs, royalty fees,public cloud infrastructure and hosting fees and an allocation of overhead costs for our subscription revenue and maintenance services. Allocated costs consist of certain facilities, depreciation, benefits recruiting and IT costs allocated based on headcount.
We expect our public cloud infrastructure and hosting fees to increase as we expand our subscription-based offerings.•Amortization of Acquired Technologies.We amortizeAmortization of acquired technologies consists of amortization related to cost of revenue the capitalized costs of technologies acquired in connection with the Take Private and our other acquisitions.
Operating Expenses
Operating expenses consists of sales and marketing, research and development and general and administrative expenses as well as amortization of acquired intangibles. Personnelintangibles and goodwill impairment charges. Generally, personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, sales commissions, stock-based compensation and contractor fees.an allocation of overhead costs based on headcount. The total number of employees as of June 30, 2022 was 2,215, as compared to 2,116 as of June 30, 2021, which was adjusted to exclude employees of the N-able business.
We expect our operating expenses to continue to increase in absolute dollars as we make long-term investments in our business, including increasing our selling efforts toward enterprise customers. Our operating expenses in future periods also may increase in absolute dollars and fluctuate as a percentage of revenue as a result of any future acquisitions and any further decisions to increase our investment in our business. In addition, the Separation of the N-able business resulted in dis-synergies associated with increased overhead costs and duplicate hiring which increased certain expenses for 2021. Our stock-based compensation expense has increased due to equity awards granted to our employees and directors. We intend to continue to grant equity awards which will result in additional stock-based compensation expense in future periods. We have also seen our travel costs increase during the first half of 2022 and expect that they may continue to increase throughout the year as our employees begin to resume business travel activities.
•Sales and Marketing. Sales and marketing expenses primarily consist of related personnel costs, including our sales, marketing and maintenance renewal and subscription retention teams. Sales and marketing expenses also includes the cost of digital marketing programs such as paid search, search engine optimization and management, website maintenance and design. We expect to continue to hire personnel globally to drive new sales and maintenance renewals.
•Research and Development. Research and development expenses primarily consist of related personnel costs.costs for our product development employees and executives and, to a lesser extent, contractor fees. We expect to continue to grow our research and development organization, particularly internationally.
We capitalize certain research and development costs related to developing new functionality for our suite of products that are hosted and accessed by our customers on a subscription basis, which may cause our research and development expense to fluctuate from period to period.
•General and Administrative. General and administrative expenses primarily consist of personnel costs for our executive, finance, legal, human resources and other administrative personnel, general restructuring charges and other acquisition-relatedcosts, acquisition costs, certain Cyber Incident costs, professional fees, certain non-cash impairment charges and other general corporate expenses. SinceThe Cyber Incident has resulted in increased general and administrative expenses which we expect to continue in 2022, although expenses may fluctuate from period to period depending on the Take Private, these expenses have also included management fees payable to our Sponsors that were eliminated upon the completiontiming of our initial public offering.
related activities.•Amortization of Acquired Intangibles. We amortize to operating expenses the capitalized costs of intangible assets acquired in connection with the Take Private and our other acquisitions.
•Goodwill Impairment. We review our goodwill for impairment on an annual basis or more frequently if there is an indication that impairment may exist. An impairment of goodwill is recognized when the carrying value of our reporting unit exceeds its fair value as of the assessment date and recorded as a separate component of operating expenses.
Other Income (Expense)
Other income (expense) primarily consists of interest expense, interest income and gains (losses) resulting from changes in exchange rates on foreign currency denominated intercompany loans, and lossesaccounts. Our interest expense on extinguishment of debt.our debt has increased due to increases in interest rates. We expect interest expense may continue to decrease following the completion of our initial public offering as we repay indebtedness.
We established a foreign currency denominated intercompany loan as part of the Take Private to provide a conduit to utilize foreign earnings effectively. Until any cash payments are made with respect to this loan, the gains (losses) associated with the changes in exchange rates on amounts borrowed are unrealized non-cash events. Substantially all of these unrealized amounts are related to this one foreign currency denominated loan. As of July 1, 2018, this foreign currency denominated intercompany loan was designated as long-term due to a change in our investment strategy and the new Tax Act. Therefore, beginning on July 1, 2018, the foreign currency transaction gains and losses resulting from remeasurement are recognizedincrease as a componentresult of accumulated other comprehensive income (loss).anticipated interest rate increases since our borrowings outstanding under our credit agreement currently bear interest at variable rates.
Foreign Currency
As a global company, we face exposure to adverse movements in foreign currency exchange rates. Fluctuations in foreign currencies impact the amount of total assets, liabilities, revenue, operating expenses and cash flows that we report for our foreign subsidiaries upon the translation of these amounts into U.S. dollars. See “Item 3: 3. Quantitative and Qualitative Disclosures About Market Risk”for additional information on how foreign currency impacts our financial results.
Income Tax Expense (Benefit)
Income tax expense (benefit) consists of domestic and foreign corporate income taxes related to the sale of products. The tax rate on income earned by our North American entities is higher than the tax rate on income earned by our international entities. We expect the income earned by our international entities to grow over time as a percentage of total income, which maycould result in a decline in our effective income tax rate. However, our effective tax rate will be affected by many other factors including changes in tax laws, regulations or rates, new interpretations of existing laws or regulations, shifts in the allocation of income earned throughout the world and changes in overall levels of income before tax.
The Tax Act was enacted on December 22, 2017. The Tax Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that have not been taxed previously in the U.S. and creates new taxes on certain foreign sourced earnings. For additional discussion about our income taxes, see Note 11. Income Taxes in the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
Comparison of the Three Months Ended SeptemberJune 30, 20182022 and 20172021
Revenue
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | |
| 2018 | | 2017 | | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | |
| | | (in thousands, except percentages) | | |
Subscription | $ | 67,713 |
| | 31.7 | % | | $ | 55,361 |
| | 29.3 | % | | $ | 12,352 |
|
Maintenance | 101,817 |
| | 47.7 |
| | 93,258 |
| | 49.3 |
| | 8,559 |
|
Total recurring revenue | 169,530 |
| | 79.5 |
| | 148,619 |
| | 78.6 |
| | 20,911 |
|
License | 43,747 |
| | 20.5 |
| | 40,493 |
| | 21.4 |
| | 3,254 |
|
Total revenue | $ | 213,277 |
| | 100.0 | % | | $ | 189,112 |
| | 100.0 | % | | $ | 24,165 |
|
Our revenue recognized is impacted by our accounting for acquisitions, including the Take Private. We account for acquired businesses using the acquisition method of accounting, which requires the assets acquired and liabilities assumed, including deferred revenue, be recorded at the date of acquisition at their respective fair values which could differ from the historical book values. In most cases, adjusting the acquired deferred revenue balances to fair value on the date of acquisition had the effect of reducing the historical deferred revenue balance and therefore reducing the revenue recognized in subsequent periods. The impact to revenue as a result of purchase accounting adjustments during the relevant periods were as follows:
| | | Three Months Ended September 30, | | | | Three Months Ended June 30, | |
| 2018 | | 2017 | | | | 2022 | | 2021 | |
| Amount | | Amount | | Change | | Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | | | | | | | |
| | | (in thousands) | | | | (in thousands, except percentages) | |
Subscription | $ | 154 |
| | $ | 353 |
| | $ | (199 | ) | Subscription | $ | 36,980 | | | 21.0 | % | | $ | 29,608 | | | 16.7 | % | | $ | 7,372 | |
Maintenance | 574 |
| | 1,570 |
| | (996 | ) | Maintenance | 113,972 | | | 64.8 | | | 120,502 | | | 68.2 | | | (6,530) | |
Total recurring revenue | 728 |
| | 1,923 |
| | (1,195 | ) | Total recurring revenue | 150,952 | | | 85.8 | | | 150,110 | | | 84.9 | | | 842 | |
License | — |
| | — |
| | — |
| License | 25,082 | | | 14.2 | | | 26,678 | | | 15.1 | | | (1,596) | |
Total revenue | $ | 728 |
| | $ | 1,923 |
| | $ | (1,195 | ) | Total revenue | $ | 176,034 | | | 100.0 | % | | $ | 176,788 | | | 100.0 | % | | $ | (754) | |
Total revenue increased $24.2decreased $0.8 million, or 12.8%0.4%, for the three months ended SeptemberJune 30, 20182022 compared to the three months ended SeptemberJune 30, 2017.2021 primarily due to decreases in license and maintenance revenue, partially offset by an increase in subscription revenue. Revenue from North America was approximately 64% and 67%69% of total revenue for both the three months ended SeptemberJune 30, 20182022 and 2017, respectively.2021. Other than the United States, no single country accounted for 10% or more of our total revenue during these periods. We expect our international total revenue to increase slightly as a percentage of total revenue as we expand our international sales and marketing efforts across our product lines.
Macroeconomic conditions, such as foreign currency exchange rate fluctuations, inflation, changes in interest rates and supply chain disruption issues, as well as the Cyber Incident have negatively impacted revenue, profitability and cash flows and may continue to do so throughout 2022 and beyond. The weakening of most foreign currencies relative to the U.S. dollar had a negative impact on our revenues for the three month period ended June 30, 2022. In addition, certain of our customers have, and others may, defer renewals or cancel subscriptions which has had, and could in the future have, a negative impact on our revenue. However, despite the impact of macroeconomic conditions and the Cyber Incident, our maintenance renewal rate for the trailing twelve month period was 91%.
Recurring Revenue
Subscription Revenue. Subscription revenue increased $12.4$7.4 million, or 22.3%24.9%, for the three months ended SeptemberJune 30, 20182022 compared to the three months ended SeptemberJune 30, 2017,2021, primarily due to increased sales of additional cloud management and MSP products.our time-based subscription offerings resulting from customers transitioning to our subscription pricing model. Our subscription revenue increased as a percentage of our total revenue for the three months ended SeptemberJune 30, 2018 compared to the three months ended September 30, 2017.
Maintenance Revenue. Maintenance revenue increased $8.6 million, or 9.2%, for the three months ended September 30, 2018 compared to the three months ended September 30, 2017. Of this change, $7.6 million was attributable to a growing maintenance renewal customer base from sales of our perpetual license products and maintenance renewal rates in the low- to mid-90 percent range. The remaining $1.0 million increase was attributable to a smaller purchase accounting adjustment to deferred revenue in the three months ended September 30, 20182022 as compared to the three months ended SeptemberJune 30, 2017.2021.
We defineOur net retention rate for our subscription products was as follows:
| | | | | | | | | | | |
| Trailing Twelve-Months Ended June 30, |
| 2022 | | 2021 |
| | | |
Net retention rate(1) | 97 | % | | 96 | % |
_______
(1)Net retention rate for subscription products represents the implied monthly subscription revenue at the end of a period for the base set of customers from which we generated subscription revenue in the year prior to the calculation, divided by the implied monthly subscription revenue one year prior to the date of the calculation for that same customer base.
Maintenance Revenue. Maintenance revenue decreased $6.5 million, or 5.4%, for the three months ended June 30, 2022 compared to the three months ended June 30, 2021, primarily due to the impact on maintenance revenue from decreased sales of our licensed products, customers transitioning to our time-based subscription offerings, the effect of the weakening of most foreign currencies relative to the U.S. dollar and the continuing impact of the decline in our maintenance renewal rate primarily due to the Cyber Incident.
Our maintenance renewal rate for our perpetual license products was as follows:
| | | | | | | | | | | |
| Trailing Twelve-Months Ended June 30, |
| 2022 | | 2021 |
| | | |
Maintenance renewal rate(1) | 91 | % | | 90 | % |
_______
(1)Maintenance renewal rate represents the sales of maintenance services for all existing maintenance contracts expiring in a period, divided by the sum of previous sales of maintenance services corresponding to those services expiring in the current period. The calculation of maintenance renewal rate only includes customers renewing maintenance contracts and excludes all customers that transition from maintenance contracts to subscription offerings. Sales of maintenance services includes sales of maintenance renewals for a previously purchased product and the amount allocated to maintenance revenue from a license purchase.
License Revenue
License revenue decreased $1.6 million, or 6.0%, primarily due to an increase in the subscription sales of our network, systems and database management products that have historically been sold only as perpetual licenses and the effect of the weakening of most foreign currencies relative to the U.S. dollar.
Cost of Revenue
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | |
| 2022 | | 2021 | | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | |
| (in thousands, except percentages) | | |
Cost of recurring revenue | $ | 15,460 | | | 8.8 | % | | $ | 15,728 | | | 8.9 | % | | $ | (268) | |
Amortization of acquired technologies | 3,648 | | | 2.1 | | | 40,098 | | | 22.7 | | | (36,450) | |
Total cost of revenue | $ | 19,108 | | | 10.9 | % | | $ | 55,826 | | | 31.6 | % | | $ | (36,718) | |
Total cost of revenue decreased in the three months ended June 30, 2022 compared to the three months ended June 30, 2021 primarily due to a decrease in amortization of acquired technologies due to certain intangible assets acquired in connection with the Take Private being fully amortized during the period. Cost of recurring revenue decreased primarily due to a decrease in costs related to the Cyber Incident of $0.6 million, partially offset by increases in public cloud infrastructure and hosting fees related to our subscription offerings.
Operating Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | |
| 2022 | | 2021 | | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | |
| (in thousands, except percentages) | | |
Sales and marketing | $ | 64,615 | | | 36.7 | % | | $ | 58,076 | | | 32.9 | % | | $ | 6,539 | |
Research and development | 22,108 | | | 12.6 | | | 25,831 | | | 14.6 | | | (3,723) | |
General and administrative | 41,283 | | | 23.5 | | | 30,719 | | | 17.4 | | | 10,564 | |
Amortization of acquired intangibles | 13,103 | | | 7.4 | | | 13,882 | | | 7.8 | | | (779) | |
Goodwill impairment | 612,395 | | | 347.9 | | | — | | | — | | | 612,395 | |
Total operating expenses | $ | 753,504 | | | 428.0 | % | | $ | 128,508 | | | 72.7 | % | | $ | 624,996 | |
Sales and Marketing. Sales and marketing expenses increased $6.5 million, or 11.3%, primarily due to increases in personnel costs of $5.2 million, marketing program costs of $1.0 million and travel costs of $0.8 million. These increases were partially offset by a decrease in public relation costs resulting from the Cyber Incident of $0.7 million. We have increased our sales and marketing employee headcount, and we expect to incur additional costs in future periods as we continue to expand our international sales teams and focus on enterprise customers.
Research and Development. Research and development expenses decreased $3.7 million, or 14.4%, primarily due to a decrease in personnel costs of $5.7 million, partially offset by increases in contract services of $1.4 million and travel costs of $0.3 million. The decrease in personnel costs was primarily due to an increase in employee turnover, as well as a $2.7 million increase in capitalized employee costs primarily related to our work on our Observability platform.
General and Administrative. General and administrative expenses increased $10.6 million, or 34.4%, primarily due to a $9.4 million non-cash impairment charge recognized during the period related to the SolarWinds trade name originally recorded in connection with the Take Private. See Note 2. Summary of Significant Accounting Policiesin the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information. In addition, the increase to general and administrative expenses also includes a $4.3 million increase in personnel costs, which includes a $3.2 million increase in stock-based compensation expense, in addition to a $2.2 million increase in directors and officers liability and cybersecurity insurance costs and professional fees. These increases were partially offset by a $5.6 million decrease in costs related to the Cyber Incident.
Amortization of Acquired Intangibles. Amortization of acquired intangibles decreased $0.8 million, or 5.6% primarily due to certain acquired intangibles being fully amortized during the period and the impact of changes in foreign currency exchange rates.
Goodwill Impairment. As a result of the interim goodwill impairment analysis as of June 30, 2022, we recognized a $612.4 million non-cash goodwill impairment charge. See Note 2. Summary of Significant Accounting Policiesin the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information.
Interest Expense, Net
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | |
| 2022 | | 2021 | | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | |
| (in thousands, except percentages) | | |
Interest expense, net | $ | (18,401) | | | (10.5) | % | | $ | (16,191) | | | (9.2) | % | | $ | (2,210) | |
Interest expense, net increased by $2.2 million, or 13.6%, in the three months ended June 30, 2022 compared to the three months ended June 30, 2021. The increase in interest expense is primarily due to the increase in interest rates on our debt. The weighted-average effective interest rate on our debt was 3.5% for the three months ended June 30, 2022 compared to 2.9% for the three months ended June 30, 2021. See Note 7. Debt in the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information regarding our debt.
Other Income (Expense), Net
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | |
| 2022 | | 2021 | | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | |
| (in thousands, except percentages) | | |
| | | | | | | | | |
Other income (expense), net | $ | 726 | | | 0.4 | % | | $ | (269) | | | (0.2) | % | | $ | 995 | |
| | | | | | | | | |
Other income (expense), net increased by $1.0 million in the three months ended June 30, 2022 compared to the three months ended June 30, 2021 primarily due to the impact of changes in foreign currency exchange rates related to various accounts for the period.
Income Tax Expense (Benefit)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | |
| 2022 | | 2021 | | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | |
| (in thousands, except percentages) | | |
Loss before income taxes | $ | (614,253) | | | (348.9) | % | | $ | (24,006) | | | (13.6) | % | | $ | (590,247) | |
Income tax expense (benefit) | 7,871 | | | 4.5 | | | (2,121) | | | (1.2) | | | 9,992 | |
Effective tax rate | (1.3) | % | | | | 8.8 | % | | | | (10.1) | % |
Our income tax expense for the three months ended June 30, 2022 was $7.9 million as compared to an income tax benefit of $2.1 million for the three months ended June 30, 2021. The effective tax rate decreased to (1.3)% for the period primarily due to the effect of the goodwill impairment charge, which is primarily non-deductible for income tax purposes. For additional discussion about our income taxes, see Note 9. Income Taxes in the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Form 10-Q.
Discontinued Operations
| | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended | | |
| | | June 30, 2021 | | |
| | | | | Amount | | Percentage of Revenue | | |
| | | | | | | | | |
| | | | | (in thousands, except percentages) | | |
Total revenue | | | | | $ | 85,186 | | | 100.0 | % | | |
Total cost of revenue | | | | | 12,825 | | | 15.1 | | | |
Operating expenses | | | | | 61,524 | | | 72.2 | | | |
Income before income taxes | | | | | 10,785 | | | 12.7 | | | |
Income tax expense | | | | | 524 | | | 0.6 | | | |
Income from discontinued operations, net of taxes | | | | | 10,261 | | | 12.0 | | | |
N‑able's historical financial results through the Separation date of July 19, 2021 are reflected in our condensed consolidated financial statements as discontinued operations.
Comparison of the Six Months Ended June 30, 2022 and 2021
Revenue
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | |
| 2022 | | 2021 | | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | |
| (in thousands, except percentages) | | |
Subscription | $ | 75,727 | | | 21.5 | % | | $ | 57,925 | | | 16.5 | % | | $ | 17,802 | |
Maintenance | 229,467 | | | 65.0 | | | 241,167 | | | 68.8 | | | (11,700) | |
Total recurring revenue | 305,194 | | | 86.5 | | | 299,092 | | | 85.3 | | | 6,102 | |
License | 47,708 | | | 13.5 | | | 51,552 | | | 14.7 | | | (3,844) | |
Total revenue | $ | 352,902 | | | 100.0 | % | | $ | 350,644 | | | 100.0 | % | | $ | 2,258 | |
Total revenue increased $2.3 million, or 0.6%, for the six months ended June 30, 2022 compared to the six months ended June 30, 2021 primarily due to an increase in subscription revenue, partially offset by decreases in license and maintenance revenue. Revenue from North America was approximately 69% of total revenue for both the six months ended June 30, 2022 and 2021. Other than the United States, no single country accounted for 10% or more of our total revenue during these periods. We expect our international total revenue to increase slightly as a percentage of total revenue as we expand our international sales and marketing efforts across our product lines.
Recurring Revenue
Subscription Revenue. Subscription revenue increased $17.8 million, or 30.7%, for the six months ended June 30, 2022 compared to the six months ended June 30, 2021, primarily due to increased sales of our time-based subscription offerings resulting from customers transitioning to our subscription pricing model, as well as sales of our service desk and database monitoring solutions.
Our net retention rate for our subscription products was as follows:
| | | | | | | | | | | |
| Trailing Twelve-Months Ended June 30, |
| 2022 | | 2021 |
| | | |
Net retention rate(1) | 97 | % | | 96 | % |
_______
(1)Net retention rate for subscription products represents the implied monthly subscription revenue at the end of a period for the base set of customers from which we generated subscription revenue in the year prior to the calculation, divided by the implied monthly subscription revenue one year prior to the date of the calculation for that same customer base.
Maintenance Revenue. Maintenance revenue decreased $11.7 million, or 4.9%, for the six months ended June 30, 2022 compared to the six months ended June 30, 2021, primarily due to the impact on maintenance revenue from decreased sales of our licensed products, customers transitioning to our time-based subscription offerings, the effect of the weakening of most foreign currencies relative to the U.S. dollar and the continuing impact of the decline in our maintenance renewal rate primarily due to the Cyber Incident.
Our maintenance renewal rate for our perpetual license products was as follows:
| | | | | | | | | | | |
| Trailing Twelve-Months Ended June 30, |
| 2022 | | 2021 |
| | | |
Maintenance renewal rate(1) | 91 | % | | 90 | % |
_______
(1)Maintenance renewal rate represents the sales of maintenance services for all existing maintenance contracts expiring in a period, divided by the sum of previous sales of maintenance services corresponding to those services expiring in the current period. Sales of maintenance services includes sales of maintenance renewals for a previously purchased product and the amount allocated to maintenance revenue from a license purchase.
License Revenue
License revenue increased $3.3decreased $3.8 million, or 8.0%7.5%, primarily due to increasedan increase in the subscription sales of our licensednetwork, systems and database management products in eachthat have historically been sold only as perpetual licenses and the effect of our North American and international locations. We believe our more tenured sales and marketing leadership teams, particularly in our international regions, during 2018 was primarily the reason forweakening of most foreign currencies relative to the increased growth in sales of our licensed products globally.
U.S. dollar.
Cost of Revenue
| | | Three Months Ended September 30, | | | | Six Months Ended June 30, | |
| 2018 | | 2017 | | | | 2022 | | 2021 | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change | | Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | | | | | | | | | | | |
| | | (in thousands, except percentages) | | | | (in thousands, except percentages) | |
Cost of recurring revenue | $ | 18,022 |
| | 8.5 | % | | $ | 15,190 |
| | 8.0 | % | | $ | 2,832 |
| Cost of recurring revenue | $ | 33,291 | | | 9.4 | % | | $ | 31,382 | | | 8.9 | % | | $ | 1,909 | |
Amortization of acquired technologies | 43,835 |
| | 20.6 |
| | 43,513 |
| | 23.0 |
| | 322 |
| Amortization of acquired technologies | 20,875 | | | 5.9 | | | 80,515 | | | 23.0 | | | (59,640) | |
Total cost of revenue | $ | 61,857 |
| | 29.0 | % | | $ | 58,703 |
| | 31.0 | % | | $ | 3,154 |
| Total cost of revenue | $ | 54,166 | | | 15.3 | % | | $ | 111,897 | | | 31.9 | % | | $ | (57,731) | |
Total cost of revenue increaseddecreased in the threesix months ended SeptemberJune 30, 20182022 compared to the threesix months ended SeptemberJune 30, 20172021 primarily due to a decrease in amortization of acquired technologies due to certain intangible assets acquired in connection with the Take Private being fully amortized during the period. Cost of recurring revenue increased primarily due to increases in personnel costs of $1.1 million to support new customers and additional product offerings, royaltypublic cloud infrastructure and hosting fees related to our subscription products of $1.0$2.6 million, and depreciation and other amortization of $0.8 million. In addition, amortization of acquired technologies increased $0.3 million. Amortization of acquired technologies includes $41.3 million and $41.4 million of amortizationpartially offset by a decrease in costs related to the Take Private for the three months ended September 30, 2018 and three months ended September 30, 2017, respectively, with the remaining balance related primarily to the LOGICnow acquisition in May 2016.Cyber Incident of $1.3 million.
Operating Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | |
| 2022 | | 2021 | | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | |
| (in thousands, except percentages) | | |
Sales and marketing | $ | 125,659 | | | 35.6 | % | | $ | 115,742 | | | 33.0 | % | | $ | 9,917 | |
Research and development | 45,530 | | | 12.9 | | | 52,189 | | | 14.9 | | | (6,659) | |
General and administrative | 73,947 | | | 21.0 | | | 61,584 | | | 17.6 | | | 12,363 | |
Amortization of acquired intangibles | 26,342 | | | 7.5 | | | 27,920 | | | 7.9 | | | (1,578) | |
Goodwill impairment | 612,395 | | | 173.5 | | | — | | | — | | | 612,395 | |
Total operating expenses | $ | 883,873 | | | 250.5 | % | | $ | 257,435 | | | 73.4 | % | | $ | 626,438 | |
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | |
| 2018 | | 2017 | | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | |
| | | (in thousands, except percentages) | | |
Sales and marketing | $ | 56,926 |
| | 26.7 | % | | $ | 50,942 |
| | 26.9 | % | | $ | 5,984 |
|
Research and development | 23,274 |
| | 10.9 |
| | 20,521 |
| | 10.9 |
| | 2,753 |
|
General and administrative | 19,597 |
| | 9.2 |
| | 15,080 |
| | 8.0 |
| | 4,517 |
|
Amortization of acquired intangibles | 16,507 |
| | 7.7 |
| | 17,035 |
| | 9.0 |
| | (528 | ) |
Total operating expenses | $ | 116,304 |
| | 54.5 | % | | $ | 103,578 |
| | 54.8 | % | | $ | 12,726 |
|
Sales and Marketing. Sales and marketing expenses increased $6.0$9.9 million, or 11.7%8.6%, primarily due to increases in personnel costs of $5.8$7.8 million, and marketing program costs of $0.5$1.7 million and travel costs of $1.1 million. These increases were partially offset by a decrease in public relation costs resulting from the Cyber Incident of $1.4 million. We have increased our sales and marketing employee headcount, and we expect to support theincur additional costs in future periods as we expand our international sales of additional productsteams and growth in the business.focus on enterprise customers.
Research and Development. Research and development expenses increased $2.8decreased $6.7 million, or 13.4%12.8%, primarily due to a decrease in personnel costs of $10.8 million, partially offset by increases in contract services of $2.9 million and travel costs of $0.5 million. The decrease in personnel costs, which includes a $1.1 million decrease in stock-based compensation expense, was primarily due to an increase in personnelemployee turnover, as well as a $4.2 million increase in capitalized employee costs of $3.7 million. We increased our worldwide research and development employee headcount to expedite delivery of product enhancements and new product offeringsprimarily related to our customers. This increase was offset by reductions in acquisition and Take Private related costs of $0.6 million and contract services of $0.3 million.work on our Observability platform.
General and Administrative. General and administrative expenses increased $4.5$12.4 million, or 30.0%20.1%, primarily due to a $3.1$9.4 million non-cash impairment charge recognized during the period related to the SolarWinds trade name originally recorded in connection with the Take Private. See Note 2. Summary of Significant Accounting Policiesin the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information. In addition, the increase to general and administrative expenses also includes a $7.8 million increase in personnel costs, to support the growth of the business,which includes a $1.1$5.6 million increase in stock-based compensation expense, in addition to a $3.4 million increase in directors and officers liability and cybersecurity insurance costs and professional fees and other offeringfees. These increases were partially offset by a $8.7 million decrease in costs related to our IPO.the Cyber Incident.
Amortization of Acquired Intangibles. Amortization of acquired intangibles decreased $0.5$1.6 million, or 3.1%5.7%, primarily due to certain acquired intangibles being fully amortized during the period and the impact of changes in foreign currency exchange rates.
Goodwill Impairment. As a result of the interim goodwill impairment analysis as of June 30, 2022, we recognized a $612.4 million non-cash goodwill impairment charge. See Note 2. Summary of Significant Accounting Policiesin the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q for the three months ended September 30, 2018 compared to the three months ended September 30, 2017. Amortization of intangible assets includes $11.9 million and $12.7 million of amortization related to the Take Privatefor the three months ended September 30, 2018 and 2017, respectively, with the remaining balance related primarily to the LOGICnow acquisition in May 2016.
additional information.
Interest Expense, Net
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | |
| 2022 | | 2021 | | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | |
| (in thousands, except percentages) | | |
Interest expense, net | $ | (34,488) | | | (9.8) | % | | $ | (32,365) | | | (9.2) | % | | $ | (2,123) | |
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | |
| 2018 | | 2017 | | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | |
| | | (in thousands, except percentages) | | |
Interest expense, net | $ | (35,627 | ) | | (16.7 | )% | | $ | (42,534 | ) | | (22.5 | )% | | $ | 6,907 |
|
Interest expense, net decreasedincreased by $6.9$2.1 million, or 16.2%6.6%, in the threesix months ended SeptemberJune 30, 20182022 compared to the threesix months ended SeptemberJune 30, 2017.2021. The decreaseincrease in interest expense is primarily due to increases in interest rates on our debt. The weighted-average effective interest rate on our debt for the reduction six months ended June 30, 2022 was 3.2% compared to 2.9% for the six months ended June 30, 2021. See Note 7. Debt in the interest rate spread under our credit facilities resulting from the refinancing transaction we completed in March 2018. See Note6. Debtin the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information regarding our debt.
Other Income (Expense), Net
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | |
| 2018 | | 2017 | | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | |
| | | (in thousands, except percentages) | | |
Unrealized net transaction gains (losses) related to remeasurement of intercompany loans | $ | 51 |
| | — | % | | $ | 14,774 |
| | 7.8 | % | | $ | (14,723 | ) |
Other income (expense) | (64 | ) | | — |
| | (489 | ) | | (0.3 | ) | | 425 |
|
Total other income (expense), net | $ | (13 | ) | | — | % | | $ | 14,285 |
| | 7.6 | % | | $ | (14,298 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | |
| 2022 | | 2021 | | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | |
| (in thousands, except percentages) | | |
| | | | | | | | | |
| | | | | | | | | |
Other income (expense), net | $ | 557 | | | 0.2 | % | | $ | 387 | | | 0.1 | % | | $ | 170 | |
| | | | | | | | | |
Other income (expense), net decreasedincreased by $14.3$0.2 million in the threesix months ended SeptemberJune 30, 20182022 compared to the threesix months ended SeptemberJune 30, 20172021 primarily due to the impact of changes in foreign currency exchange rates related to various intercompany loans and accounts for the period. As of July 1, 2018, we changed our assertion regarding the planned settlement of a certain intercompany loan. We have evaluated our investment strategy in light of our global treasury plans and the new Tax Act and have determined there is no need to settle the principal related to the loan. Therefore, beginning on July 1, 2018, the foreign currency transaction gains and losses resulting from the remeasurement of this long-term intercompany loan denominated in a currency other than the subsidiary's functional currency are recognized as a component of accumulated other comprehensive income (loss) and not included in other income (expense), net.
Income Tax Expense (Benefit)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | |
| 2022 | | 2021 | | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | |
| (in thousands, except percentages) | | |
Loss before income taxes | $ | (619,068) | | | (175.4) | % | | $ | (50,666) | | | (14.4) | % | | $ | (568,402) | |
Income tax expense (benefit) | 7,715 | | | 2.2 | | | (7,001) | | | (2.0) | | | 14,716 | |
Effective tax rate | (1.2) | % | | | | 13.8 | % | | | | (15.0) | % |
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | |
| 2018 | | 2017 | | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | |
| | | (in thousands, except percentages) | | |
Income tax expense (benefit) | $ | (126 | ) | | (0.1 | )% | | $ | (3,055 | ) | | (1.6 | )% | | $ | 2,929 |
|
Effective tax rate | 24.0 | % | | | | 215.4 | % | | | | (191.4 | )% |
Our income tax benefitexpense for the threesix months ended SeptemberJune 30, 2018 decreased by $2.92022 was $7.7 million as compared to an income tax benefit of $7.0 million for the threesix months ended SeptemberJune 30, 2017 primarily as a result of a decrease in the loss before income taxes for the period and a lower U.S. corporate tax rate attributable to the Tax Act.2021. The effective tax rate decreased to (1.2)% for the period as a resultprimarily due to the effect of the lower U.S. corporategoodwill impairment charge, which is primarily non-deductible for income tax rate attributable to the Tax Act as well as discrete items related to expired statutes in various jurisdictions recorded in the three months ended September 30, 2017.purposes. For additional discussion about our income taxes, see Note 11.9. Income Taxesin the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
Comparison ofDiscontinued Operations
| | | | | | | | | | | | | | | | | |
| | | | | Six Months Ended | | |
| | | June 30, 2021 | | |
| | | | | Amount | | Percentage of Revenue | | |
| | | | | | | | | |
| | | | | (in thousands, except percentages) | | |
Total revenue | | | | | $ | 168,232 | | | 100.0 | % | | |
Total cost of revenue | | | | | 26,833 | | | 15.9 | % | | |
Operating expenses | | | | | 121,422 | | | 72.2 | % | | |
Income before income taxes | | | | | 19,396 | | | 11.5 | % | | |
Income tax benefit | | | | | (5,485) | | | (3.3) | % | | |
Income from discontinued operations, net of taxes | | | | | 24,881 | | | 14.8 | % | | |
N‑able's historical financial results through the Nine Months Ended September 30, 2018 and 2017
Revenue
|
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | |
| 2018 | | 2017 | | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | |
| | | (in thousands, except percentages) | | |
Subscription | $ | 196,004 |
| | 32.0 | % | | $ | 155,402 |
| | 29.3 | % | | $ | 40,602 |
|
Maintenance | 297,584 |
| | 48.6 |
| | 261,461 |
| | 49.4 |
| | 36,123 |
|
Total recurring revenue | 493,588 |
| | 80.7 |
| | 416,863 |
| | 78.7 |
| | 76,725 |
|
License | 118,320 |
| | 19.3 |
| | 112,815 |
| | 21.3 |
| | 5,505 |
|
Total revenue | $ | 611,908 |
| | 100.0 | % | | $ | 529,678 |
| | 100.0 | % | | $ | 82,230 |
|
Our revenue recognized is impacted by our accounting for acquisitions, including the Take Private. We account for acquired businesses using the acquisition method of accounting, which requires the assets acquired and liabilities assumed, including deferred revenue, be recorded at theSeparation date of acquisition at their respective fair values which could differ from the historical book values. In most cases, adjusting the acquired deferred revenue balances to fair value on the date of acquisition had the effect of reducing the historical deferred revenue balance and therefore reducing the revenue recognized in subsequent periods. The impact to revenue as a result of purchase accounting adjustments during the relevant periods were as follows:
|
| | | | | | | | | | | |
| Nine Months Ended September 30, | | |
| 2018 | | 2017 | | |
| Amount | | Amount | | Change |
| | | | | |
| | | (in thousands) | | |
Subscription | $ | 1,116 |
| | $ | 1,168 |
| | $ | (52 | ) |
Maintenance | 2,173 |
| | 10,380 |
| | (8,207 | ) |
Total recurring revenue | 3,289 |
| | 11,548 |
| | (8,259 | ) |
License | — |
| | 3 |
| | (3 | ) |
Total revenue | $ | 3,289 |
| | $ | 11,551 |
| | $ | (8,262 | ) |
Total revenue increased $82.2 million, or 15.5%, for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. Revenue from North America was approximately 65% and 67% of total revenue for the nine months ended September 30, 2018 and 2017, respectively. Other than the United States, no single country accounted for 10% or more of our total revenue during these periods.
Recurring Revenue
Subscription Revenue. Subscription revenue increased $40.6 million, or 26.1%, for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017, primarily due to sales of additional cloud management and MSP products. Our subscription revenue increased as a percentage of our total revenue for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017.
Maintenance Revenue. Maintenance revenue increased $36.1 million, or 13.8%, for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. Of this change, $27.9 million was attributable to a growing maintenance renewal customer base from sales of our perpetual license products and maintenance renewal rates in the low- to mid-90 percent range. The remaining $8.2 million increase was attributable to a smaller purchase accounting adjustment to deferred revenue in the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017.
License Revenue
License revenue increased $5.5 million, or 4.9%, due to increased sales of our licensed products, particularlyJuly 19, 2021 are reflected in our international locations. We believe our more tenured sales and marketing leadership teams in international regions during 2018 was primarily the reason for the increased growth in these regions.
Cost of Revenueconsolidated financial statements as discontinued operations.
|
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | |
| 2018 | | 2017 | | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | |
| | | (in thousands, except percentages) | | |
Cost of recurring revenue | $ | 52,617 |
| | 8.6 | % | | $ | 44,879 |
| | 8.5 | % | | $ | 7,738 |
|
Amortization of acquired technologies | 132,121 |
| | 21.6 |
| | 127,781 |
| | 24.1 |
| | 4,340 |
|
Total cost of revenue | $ | 184,738 |
| | 30.2 | % | | $ | 172,660 |
| | 32.6 | % | | $ | 12,078 |
|
Total cost of revenue increased in the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 primarily due to increases in amortization of acquired technologies of $4.3 million, royalty and hosting fees related to our subscription products of $2.8 million, personnel costs to support new customers and additional product offerings of $2.6 million and depreciation and other amortization of $2.3 million. Amortization of acquired technologies includes $124.6 million and $122.0 million of amortization related to the Take Private for the nine months ended September 30, 2018 and September 30, 2017, respectively, with the remaining balance related primarily to the LOGICnow acquisition in May 2016.
Operating Expenses
|
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | |
| 2018 | | 2017 | | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | |
| | | (in thousands, except percentages) | | |
Sales and marketing | $ | 166,022 |
| | 27.1 | % | | $ | 152,070 |
| | 28.7 | % | | $ | 13,952 |
|
Research and development | 71,800 |
| | 11.7 |
| | 63,414 |
| | 12.0 |
| | 8,386 |
|
General and administrative | 59,849 |
| | 9.8 |
| | 50,865 |
| | 9.6 |
| | 8,984 |
|
Amortization of acquired intangibles | 50,288 |
| | 8.2 |
| | 49,910 |
| | 9.4 |
| | 378 |
|
Total operating expenses | $ | 347,959 |
| | 56.9 | % | | $ | 316,259 |
| | 59.7 | % | | $ | 31,700 |
|
Sales and Marketing. Sales and marketing expenses increased $14.0 million, or 9.2%, primarily due to increases in personnel costs of $13.3 million and marketing program costs of $0.9 million. We increased our sales and marketing employee headcount to support the sales of additional products and growth in the business.
Research and Development. Research and development expenses increased $8.4 million, or 13.2%, primarily due to an increase in personnel costs of $10.7 million. We increased our worldwide research and development employee headcount to expedite delivery of product enhancements and new product offerings to our customers. This increase was offset by reductions in contract services of $1.2 million and acquisition and Take Private related costs of $1.1 million.
General and Administrative. General and administrative expenses increased $9.0 million, or 17.7%, primarily due to a $9.1 million increase in personnel costs to support the growth of the business, a $2.3 million increase in offering costs related to our IPO and other professional fees. These increases were partially offset by a lease abandonment charge of $1.7 million in the nine months ended September 30, 2017 that did not reoccur in the nine months ended September 30, 2018 and a decrease of acquisition and Take Private related costs of $1.5 million.
Amortization of Acquired Intangibles. Amortization of acquired intangibles increased $0.4 million, or 0.8%, for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 due to the addition of intangible assets related to acquisitions. Amortization of intangible assets includes $36.3 million and $37.7 million of amortization related to the Take Privatefor the nine months ended September 30, 2018 and September 30, 2017, respectively, with the remaining balance related primarily to the LOGICnow acquisition in May 2016.
Interest Expense, Net
|
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | |
| 2018 | | 2017 | | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | |
| | | (in thousands, except percentages) | | |
Interest expense, net | $ | (112,103 | ) | | (18.3 | )% | | $ | (127,018 | ) | | (24.0 | )% | | $ | 14,915 |
|
Interest expense, net decreased by $14.9 million, or 11.7%, in the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. The decrease in interest expense is due to the reduction in the interest rate spread under our credit facilities resulting from the refinancing transaction we completed in March 2018. See Note6. Debt in the Notes to Consolidated Financial Statements included in Item 1 of Part I of this Form 10-Q for additional information regarding our debt.
Other Income (Expense), Net
|
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | |
| 2018 | | 2017 | | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | |
| | | (in thousands, except percentages) | | |
Unrealized net transaction gains (losses) related to remeasurement of intercompany loans | $ | (12,660 | ) | | (2.1 | )% | | $ | 49,955 |
| | 9.4 | % | | $ | (62,615 | ) |
Loss on extinguishment of debt | (60,590 | ) | | (9.9 | ) | | (18,559 | ) | | (3.5 | ) | | (42,031 | ) |
Other income (expense) | (1,226 | ) | | (0.2 | ) | | (1,711 | ) | | (0.3 | ) | | 485 |
|
Total other income (expense), net | $ | (74,476 | ) | | (12.2 | )% | | $ | 29,685 |
| | 5.6 | % | | $ | (104,161 | ) |
Other income (expense), net decreased by $104.2 million in the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 primarily due to the impact of changes in foreign currency exchange rates related to various intercompany loans for the period and a loss of $60.6 million on extinguishment of debt related to the refinancing of our credit facilities in March 2018. See Note6. Debtin the Notes to Consolidated Financial Statements included in Item 1 of Part I of this Form 10-Q for additional information regarding our debt.
Income Tax Expense (Benefit)
|
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | |
| 2018 | | 2017 | | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | |
| | | (in thousands, except percentages) | | |
Income tax expense (benefit) | $ | (20,045 | ) | | (3.3 | )% | | $ | (12,469 | ) | | (2.4 | )% | | $ | (7,576 | ) |
Effective tax rate | 18.7 | % | | | | 22.0 | % | | | | (3.3 | )% |
Our income tax benefit for the nine months ended September 30, 2018 increased by $7.6 million as compared to the nine months ended September 30, 2017 primarily as a result of an increase in the loss before income taxes for the period offset by a lower U.S. corporate tax rate attributable to the Tax Act. For additional discussion about our income taxes, see Note 11. Income Taxes in the Notes to Consolidated Financial Statements included in Item 1 of Part I of this Form 10-Q.
Non-GAAP Financial Measures from Continuing Operations
In addition to financial measures prepared in accordance with GAAP, we use certain non-GAAP financial measures to clarify and enhance our understanding, and aid in the period-to-period comparison, of our performance. We believe that these non-GAAP financial measures provide supplemental information that is meaningful when assessing our operating performance because they exclude the impact of certain amounts that our management and board of directors do not consider part of core operating results when assessing our operational performance, allocating resources, preparing annual budgets and determining compensation. Accordingly, these non-GAAP financial measures may provide insight to investors into the motivation and decision-making of management in operating the business. Set forth in the first table below are the corresponding GAAP financial measures for each non-GAAP financial measure. Investors are encouraged to review the reconciliation of each of these non-GAAP financial measures to its most comparable GAAP financial measure included below. Unless noted otherwise, all non-GAAP financial measures are derived from our GAAP financial measures from continuing operations.
While we believe that these non-GAAP financial measures provide useful supplemental information, non-GAAP financial measures have limitations and should not be considered in isolation from, or as a substitute for, their most comparable GAAP measures. These non-GAAP financial measures are not prepared in accordance with GAAP, do not reflect a comprehensive system of accounting and may not be comparable to similarly titled measures of other companies due to potential differences in their financing and accounting methods, the book value of their assets, their capital structures, the method by which their assets were acquired and the manner in which they define non-GAAP measures. Items such as the amortization of intangible assets, stock-based compensation expense and related employer-paid payroll taxes, acquisition related adjustments, the Cyber Incident, restructuring costs and restructuring charges,goodwill and indefinite-lived intangible asset impairment, as well as the related tax impacts of these items can have a material impact on our GAAP financial results.
Non-GAAP Revenue from Continuing Operations
We define non-GAAP subscription revenue, non-GAAP maintenance revenue, non-GAAP license revenue and non-GAAP total revenue as subscription revenue, maintenance revenue, license revenue and total revenue respectively, excluding the impact of purchase accounting.accounting from acquisitions. We monitor these measureshistorically monitored this measure to assess our performance because we believebelieved our revenue growth ratesrate would be overstated without these adjustments.this adjustment. We believebelieved presenting non-GAAP subscription revenue, non-GAAP maintenance revenue, non-GAAP license revenue and non-GAAP total revenue aidsaided in the comparability between periods and in assessing our overall operating performance. Beginning in the first quarter of 2022, we no longer adjust our GAAP revenue for the impact of purchase accounting.
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| | | | | | | |
| (in thousands) |
Revenue: | | | | | | | |
GAAP subscription revenue | $ | 67,713 |
| | $ | 55,361 |
| | $ | 196,004 |
| | $ | 155,402 |
|
Impact of purchase accounting | 154 |
| | 353 |
| | 1,116 |
| | 1,168 |
|
Non-GAAP subscription revenue | 67,867 |
| | 55,714 |
| | 197,120 |
| | 156,570 |
|
GAAP maintenance revenue | 101,817 |
| | 93,258 |
| | 297,584 |
| | 261,461 |
|
Impact of purchase accounting | 574 |
| | 1,570 |
| | 2,173 |
| | 10,380 |
|
Non-GAAP maintenance revenue | 102,391 |
| | 94,828 |
| | 299,757 |
| | 271,841 |
|
GAAP total recurring revenue | 169,530 |
| | 148,619 |
| | 493,588 |
| | 416,863 |
|
Impact of purchase accounting | 728 |
| | 1,923 |
| | 3,289 |
| | 11,548 |
|
Non-GAAP total recurring revenue | 170,258 |
| | 150,542 |
| | 496,877 |
| | 428,411 |
|
GAAP license revenue | 43,747 |
| | 40,493 |
| | 118,320 |
| | 112,815 |
|
Impact of purchase accounting | — |
| | — |
| | — |
| | 3 |
|
Non-GAAP license revenue | 43,747 |
| | 40,493 |
| | 118,320 |
| | 112,818 |
|
Total GAAP revenue | $ | 213,277 |
| | $ | 189,112 |
| | $ | 611,908 |
| | $ | 529,678 |
|
Impact of purchase accounting | $ | 728 |
| | $ | 1,923 |
| | $ | 3,289 |
| | $ | 11,551 |
|
Total non-GAAP revenue | $ | 214,005 |
| | $ | 191,035 |
| | $ | 615,197 |
| | $ | 541,229 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| | | | | | | |
| (in thousands) |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total GAAP revenue | $ | 176,034 | | | $ | 176,788 | | | $ | 352,902 | | | $ | 350,644 | |
Impact of purchase accounting(1) | — | | | 55 | | | — | | | 134 | |
Total non-GAAP revenue | $ | 176,034 | | | $ | 176,843 | | | $ | 352,902 | | | $ | 350,778 | |
| | | | | | | |
| | | | | | | |
_______________
(1)Adjustment represents the impact of purchase accounting to the subscription revenue line item. There were no adjustments to the maintenance revenue line item for the period presented.
Non-GAAP Operating Income and Non-GAAP Operating Margin from Continuing Operations
We provide non-GAAP operating income and related non-GAAP margin using non-GAAP revenue as discussed above and excluding such items as the write-down of deferred revenue related to purchase accounting, amortization of acquired intangible assets, stock-based compensation expense and related employer-paid payroll taxes, acquisition and Sponsor relatedother costs, restructuring costs, Cyber Incident costs and restructuring chargesgoodwill and other.indefinite-lived intangible asset impairment. Management believes these measures are useful for the following reasons:
•Amortization of Acquired Intangible Assets. We provide non-GAAP information that excludes expenses related to purchased intangible assets associated with our acquisitions. We believe that eliminating this expense from our non-GAAP measures is useful to investors, because the amortization of acquired intangible assets can be inconsistent in amount and frequency and is significantly impacted by the timing and magnitude of our acquisition transactions, which also vary in frequency from period to period. Accordingly, we analyze the performance of our operations in each period without regard to such expenses.
•Stock-Based Compensation Expense. Expense and Related Employer-Paid Payroll Taxes. We provide non-GAAP information that excludes expenses related to stock-based compensation.compensation and related employer-paid payroll taxes. We believe that the exclusion of stock-based compensation expense provides for a better comparison of our operating results to prior periods and to our peer companies as the calculations of stock-based compensation vary from period to period and
company to company due to different valuation methodologies, subjective assumptions and the variety of award types. Employer-paid payroll taxes on stock-based compensation is dependent on our stock price and the timing of the taxable events related to the equity awards, over which our management has little control, and does not correlate to the core operation of our business. Because of these unique characteristics of stock-based compensation and related employer-paid payroll taxes, management excludes these expenses when analyzing the organization’s business performance.
•Acquisition and Sponsor RelatedOther Costs. We exclude certain expense items resulting from the Take Private and other acquisitions, such as legal, accounting and advisory fees, changes in fair value of contingent consideration, costs related to integrating the acquired businesses, deferred compensation, severance and retention expense. In addition, we exclude certain other costs including expenses related to our offerings. We consider these adjustments, to some extent, to be unpredictable and dependent on a significant number of factors that are outside of our control. Furthermore, acquisitions result in operating expenses that would not otherwise have been incurred by us in the normal course of our organic business operations. We believe that providing these non-GAAP measures that exclude acquisition and Sponsor relatedother costs, allows users of our financial statements to better review and understand the historical and current results of our continuing operations, and also facilitates comparisons to our historical results and results of less acquisitive peer companies, both with and without such adjustments.
•Restructuring Charges and Other. Costs. We provide non-GAAP information that excludes restructuring chargescosts such as severance and the estimated costs of exiting and terminating facility lease commitments, as they relate to our corporate restructuring and exit activities.activities and costs related to the separation of employment with executives of the Company. In addition, we exclude certain costs, primarily legal and accounting fees, resulting from the spin-off of N-able reported in continuing operations. Spin-off costs incurred in historical periods are included in discontinued operations and therefore are no longer presented as a separate adjustment. These restructuring chargescosts are inconsistent in amount and are significantly impacted by the timing and nature of these events. Therefore, although we may incur these types of expenses in the future, we believe that eliminating these chargescosts for purposes of calculating the non-GAAP financial measures facilitates a more meaningful evaluation of our operating performance and comparisons to our past operating performance.
•Cyber Incident Costs. We exclude certain expenses resulting from the Cyber Incident. Expenses include costs to investigate and remediate the Cyber Incident, and legal and other professional services related thereto, and consulting services being provided to customers at no charge. Cyber Incident costs are provided net of expected and received insurance reimbursements, although the timing of recognizing insurance reimbursements may differ from the timing of recognizing the associated expenses. We expect to incur significant legal and other professional services expenses associated with the Cyber Incident in future periods. The Cyber Incident results in operating expenses that would not have otherwise been incurred by us in the normal course of our organic business operations. We believe that providing non-GAAP measures that exclude these costs facilitates a more meaningful evaluation of our operating performance and comparisons to our past operating performance. We continue to invest significantly in cybersecurity and expect to make additional investments. These estimated investments are in addition to the Cyber Incident costs and not included in the net Cyber Incident costs reported.
•Goodwill and Indefinite-lived Intangible Asset Impairment. We provide non-GAAP information that excludes non-cash goodwill and indefinite-lived intangible asset impairment charges. We believe that providing these non-GAAP measures that exclude these non-cash impairment charges allows users of our financial statements to better review and understand our historical and current operating results. In addition, as a significant portion of our goodwill and indefinite-lived intangible assets were derived from the Take Private transaction, providing these non-GAAP measures that exclude these impairment charges facilitates comparisons to our peers who may not have undertaken a transformational acquisition resulting in significant goodwill and indefinite-lived intangible assets.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| (in thousands, except percentages) |
GAAP operating loss from continuing operations | $ | (596,578) | | | $ | (7,546) | | | $ | (585,137) | | | $ | (18,688) | |
Impact of purchase accounting | — | | | 55 | | | — | | | 134 | |
Stock-based compensation expense and related employer-paid payroll taxes | 17,541 | | | 13,865 | | | 33,478 | | | 28,393 | |
Amortization of acquired technologies | 3,648 | | | 40,098 | | | 20,875 | | | 80,515 | |
Amortization of acquired intangibles | 13,103 | | | 13,882 | | | 26,342 | | | 27,920 | |
Acquisition and other costs | 118 | | | 245 | | | 286 | | | 1,171 | |
| | | | | | | |
Restructuring costs | 7 | | | 1,565 | | | 1,430 | | | 2,300 | |
Cyber Incident costs, net | 3,748 | | | 10,732 | | | 9,464 | | | 20,895 | |
Goodwill and indefinite-lived intangible asset impairment | 621,760 | | | — | | | 621,760 | | | — | |
Non-GAAP operating income | $ | 63,347 | | | $ | 72,896 | | | $ | 128,498 | | | $ | 142,640 | |
GAAP operating margin | (338.9) | % | | (4.3) | % | | (165.8) | % | | (5.3) | % |
Non-GAAP operating margin | 36.0 | % | | 41.2 | % | | 36.4 | % | | 40.7 | % |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| | | | | | | |
| (in thousands, except margin data) |
GAAP operating income | $ | 35,116 |
| | $ | 26,831 |
| | $ | 79,211 |
| | $ | 40,759 |
|
Impact of purchase accounting | 728 |
| | 1,923 |
| | 3,289 |
| | 11,551 |
|
Stock-based compensation expense | 160 |
| | 21 |
| | 332 |
| | 49 |
|
Amortization of acquired technologies | 43,835 |
| | 43,513 |
| | 132,121 |
| | 127,781 |
|
Amortization of acquired intangibles | 16,507 |
| | 17,035 |
| | 50,288 |
| | 49,910 |
|
Acquisition and Sponsor related costs | 5,614 |
| | 6,097 |
| | 16,361 |
| | 18,163 |
|
Restructuring costs and other | 281 |
| | 556 |
| | 1,494 |
| | 2,644 |
|
Non-GAAP operating income | $ | 102,241 |
|
| $ | 95,976 |
|
| $ | 283,096 |
|
| $ | 250,857 |
|
GAAP operating margin | 16.5 | % | | 14.2 | % | | 12.9 | % | | 7.7 | % |
Non-GAAP operating margin | 47.8 | % | | 50.2 | % | | 46.0 | % | | 46.3 | % |
Adjusted EBITDAand Adjusted EBITDA Margin from Continuing Operations
We regularly monitor adjusted EBITDA and adjusted EBITDA margin, as it is a measure we use to assess our operating performance. We define adjusted EBITDA as net income or loss, excluding the impact of purchase accounting on total revenue, amortization of acquired intangible assets and developed technology, depreciation expense, stock-based compensation expense and related employer-paid payroll taxes, restructuring costs, acquisition and other charges,
acquisitioncosts, Cyber Incident costs, goodwill and Sponsorindefinite-lived intangible asset impairment charges, interest expense, net, debt related costs interest expense, net,including fees related to our credit agreements, debt extinguishment and refinancing costs, unrealized foreign currency (gains) losses, and income tax expense (benefit). We define adjusted EBITDA margin as adjusted EBITDA divided by non-GAAP revenue. Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are: although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; adjusted EBITDA excludes the impact of the write-down of deferred revenue due to purchase accounting in connection with our acquisition,acquisitions, and therefore includes revenue that will never be recognized under GAAP; adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
Because of these limitations, you should consider adjusted EBITDA alongside other financial performance measures, including net income (loss) and our other GAAP results. In evaluating adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of adjusted EBITDA should not be construed as an inference that our future results will be unaffected by the types of items excluded from the calculation of adjusted EBITDA. Adjusted EBITDA is not a presentation made in accordance with GAAP and the use of the term varies from others in our industry.
| | | | | | | | | | | | Three Months Ended June 30, | | Six Months Ended June 30, |
| Three Months Ended September 30, | | Nine Months Ended September 30, | | 2022 | | 2021 | | 2022 | | 2021 |
| 2018 | | 2017 | | 2018 | | 2017 | | | | | | | | |
| | | | | | | | | (in thousands, except margin data) |
| (in thousands) | |
Net income (loss) | $ | (398 | ) | | $ | 1,637 |
| | $ | (87,323 | ) | | $ | (44,105 | ) | |
Net loss from continuing operations | | Net loss from continuing operations | $ | (622,124) | | | $ | (21,885) | | | $ | (626,783) | | | $ | (43,665) | |
Amortization and depreciation | 64,289 |
| | 63,825 |
| | 193,903 |
| | 187,086 |
| Amortization and depreciation | 20,131 | | | 57,653 | | | 54,059 | | | 116,008 | |
Income tax expense (benefit) | (126 | ) | | (3,055 | ) | | (20,045 | ) | | (12,469 | ) | Income tax expense (benefit) | 7,871 | | | (2,121) | | | 7,715 | | | (7,001) | |
Interest expense, net | 35,627 |
| | 42,534 |
| | 112,103 |
| | 127,018 |
| Interest expense, net | 18,401 | | | 16,191 | | | 34,488 | | | 32,365 | |
Impact of purchase accounting on total revenue | 728 |
| | 1,923 |
| | 3,289 |
| | 11,551 |
| Impact of purchase accounting on total revenue | — | | | 55 | | | — | | | 134 | |
Unrealized foreign currency (gains) losses(1) | 202 |
| | (14,428 | ) | | 13,704 |
| | (47,551 | ) | |
Acquisition and Sponsor related costs | 5,614 |
| | 6,097 |
| | 16,361 |
| | 18,163 |
| |
Unrealized foreign currency (gains) losses | | Unrealized foreign currency (gains) losses | (720) | | | 333 | | | (440) | | | (1,116) | |
Acquisition and other costs | | Acquisition and other costs | 118 | | | 245 | | | 286 | | | 1,171 | |
| Debt related costs(2) | 105 |
| | 192 |
| | 61,838 |
| | 19,418 |
| 95 | | | 93 | | | 197 | | | 192 | |
Stock-based compensation expense | 160 |
| | 21 |
| | 332 |
| | 49 |
| |
Restructuring costs and other | 281 |
| | 556 |
| | 1,494 |
| | 2,644 |
| |
Stock-based compensation expense and related employer-paid payroll taxes | | Stock-based compensation expense and related employer-paid payroll taxes | 17,541 | | | 13,865 | | | 33,478 | | | 28,393 | |
Restructuring costs | | Restructuring costs | 3 | | | 1,565 | | | 1,390 | | | 2,300 | |
Cyber Incident costs, net | | Cyber Incident costs, net | 3,748 | | | 10,732 | | | 9,464 | | | 20,895 | |
Goodwill and indefinite-lived intangible asset impairment | | Goodwill and indefinite-lived intangible asset impairment | 621,760 | | | — | | | 621,760 | | | — | |
Adjusted EBITDA | $ | 106,482 |
| | $ | 99,302 |
| | $ | 295,656 |
| | $ | 261,804 |
| Adjusted EBITDA | $ | 66,824 | | | $ | 76,726 | | | $ | 135,614 | | | $ | 149,676 | |
Adjusted EBITDA margin | 49.8 | % | | 52.0 | % | | 48.1 | % | | 48.4 | % | Adjusted EBITDA margin | 38.0 | % | | 43.4 | % | | 38.4 | % | | 42.7 | % |
________________
| |
(1) | Unrealized foreign currency (gains) losses primarily relate to the remeasurement of our intercompany loans and to a lesser extent, unrealized foreign currency (gains) losses on selected assets and liabilities. |
| |
(2) | Debt related costs include fees related to our credit agreements, debt refinancing costs and the related write-off of debt issuance costs. The fees related to our credit agreements were $0.1 million and $0.2 million for the three months ended September 30, 2018 and 2017, respectively and $1.2 million and $0.9 million for the nine months ended September 30, 2018 and 2017, respectively. See Note 6. Debt in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information regarding our debt and the write-off of debt issuance costs.
|
Liquidity and Capital Resources
Cash and cash equivalents and short-term investments were $278.3$778.2 million as of SeptemberJune 30, 2018.2022. Our international subsidiaries held approximately $129.9$29.0 million of cash and cash equivalents, of which 73.7%62.5% were held in Euros. The Tax Act imposes a mandatory transition tax on accumulated foreign earnings and eliminates U.S. federal income taxes on foreign subsidiary distribution. Effective January 1, 2018, we began recognizing the tax impact of including certain foreign earnings in U.S. taxable income as a period cost. We intend either to invest our foreign earnings permanently in foreign operations or to remit these earnings to our U.S. entities in a tax-free manner. For this reason, we have not recognized deferredmanner with the exception for immaterial state income taxes. The U.S. Tax Act imposed a mandatory transition tax on accumulated foreign earnings and eliminates U.S. federal income taxes for local country income and withholding taxes that could be incurred on distributions of certain foreign earnings or for outside basis differences in our subsidiaries.subsidiary distribution.
Our primary source of cash for funding operations and growth has been through cash provided by operating activities. We continue to evaluate the nature and extent of the impact of the Cyber Incident to our business and financial position. Currently it is not possible to estimate the amount of loss or range of possible loss that might result from adverse judgments, settlements, penalties, or other resolution of the proceedings and investigations resulting from the Cyber Incident. Such potential payments, if great enough, could have an adverse effect on our liquidity. In addition, there continues to be uncertainty in the rapidly changing market and economic conditions related in part to the ongoing COVID-19 pandemic as well as the war in Ukraine. However, despite these uncertainties, we believe that our existing cash and cash equivalents, our cash flows from operating activities and our borrowing capacity under our credit facilities will be sufficient to fund our operations, fund required debt repayments and meet our commitments for capital expenditures for at least the next 12 months.
In October 2018, we completed our IPO, in which we sold and issued 25,000,000 shares of our common stock at an issue price of $15.00 per share. We raised a total of $375.0 million in gross proceeds from the offering, or approximately $353.0 million in net proceeds after deducting underwriting discounts and commissions of $17.8 million and estimated offering-related expenses of approximately $4.2 million. A portion of the net proceeds from the offering were used to repay the $315.0 million in borrowings outstanding under our Second Lien Term Loan. In connection with the voluntary prepayment of the Second Lien Term Loan, we paid a $14.2 million prepayment fee. See Note 13. Subsequent Events in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information regarding our IPO.
Although we are not currently a party to any material definitive agreement regarding potential investments in, or acquisitions of, complementary businesses, applications or technologies, we may enter into these types of arrangements, which could reduce our cash and cash equivalents, require us to seek additional equity or debt financing or repatriate cash generated by our international operations that could cause us to incur withholding taxes on any distributions. Additional funds from financing arrangements may not be available on terms favorable to us or at all.
Indebtedness
As of SeptemberJune 30, 2018,2022, our total indebtedness was $2.3$1.9 billion, with up to $125.0$117.5 million of available borrowings under our revolving credit facility. See Note 6.7. Debtin the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information regarding our debt.
First Lien Credit Agreement
On March 15, 2018, or the Refinancing Date, we entered into Amendment No. 4 to First Lien Credit Agreement, originally dated as of February 5, 2016.
The First Lien Credit Agreement, as amended, provides for a senior secured revolving credit facility in an aggregate principal amount of $125.0$117.5 million, or the Revolving Credit Facility, consisting of a $25.0$17.5 million U.S. dollar revolving credit facility, or the U.S. Dollar Revolver, and a $100.0 million multicurrency revolving credit facility, or the Multicurrency Revolver. The Revolving Credit Facility includes a $35.0 million sublimit for the issuance of letters of credit. The First Lien Credit Agreement also contains a term loan facility (which we refer to as the First Lien Term Loan, and together with the Revolving Credit Facility, as the First Lien Credit Facilities) in an original aggregate principal amount of $1,990.0 million.
The First Lien Credit Agreement provides us the right to request additional commitments for new incremental term loans and revolving loans, in an aggregate principal amount not to exceed (a) the greater of (i) $400.0 million and (ii) 100% of our
consolidated EBITDA, as defined in the First Lien Credit Agreement (calculated on a pro forma basis), for the most recent four fiscal quarter period, or the First Lien Fixed Basket, minusplus (b) the amount of any incremental loans incurred under the Second Lien Fixed Basket (as defined below), plus (c) the amount of certain voluntary prepayments of the First Lien Credit Facilities, plus (d) (c) an unlimited amount subject to pro forma compliance with a first lien net leverage ratio not to exceed 4.75 to 1.00.
Under the U.S. Dollar Revolver, $7.5 million of commitments will mature on February 5, 2021, and $17.5 million along with all commitments under the Multicurrency Revolver will mature on February 5, 2022. The First Lien Term Loan will mature on February 5, 2024.
The First Lien Term Loan requires equal quarterly repayments equal to 0.25% of the original principal amount.
SecondThe First Lien Credit Facility
OnTerm Loan has a final maturity date of February 5, 2024. As we near the Refinancing Date,maturity date, we entered into the Second Lien Credit Agreement with Wilmington Trust, National Association, or Wilmington Trust, as administrative agentexpect to reduce our levels of gross debt and collateral agent, and the other parties thereto. The Second Lien Credit Agreement provides for a term loan facility, or the Second Lien Credit Facility, in an original aggregate principal amount of $315.0 million.
In October 2018, we completedpotentially refinance our IPO and used a portion of our net proceeds from the offering to repay the borrowings under our Second Lien Credit Facility.
outstanding debt balance.
Summary of Cash Flows
Summarized cash flow information is as follows:
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| | | | | | | |
| Nine Months Ended September 30, |
| 2018 | | 2017 |
| | | |
| (in thousands) |
Net cash provided by operating activities | $ | 166,082 |
| | $ | 135,899 |
|
Net cash used in investing activities | (64,739 | ) | | (31,497 | ) |
Net cash used in financing activities | (97,287 | ) | | (30,768 | ) |
Effect of exchange rate changes on cash and cash equivalents | (3,439 | ) | | 8,042 |
|
Net increase in cash and cash equivalents | 617 |
| | 81,676 |
|
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 |
| | | |
| (in thousands) |
Net cash provided by operating activities from continuing operations | $ | 81,440 | | | $ | 48,213 | |
Net cash used in investing activities from continuing operations | (73,426) | | | (6,491) | |
Net cash used in financing activities from continuing operations | (16,081) | | | (16,479) | |
Effect of exchange rate changes on cash and cash equivalents from continuing operations | (1,609) | | | (3,453) | |
Net cash provided by discontinued operations | — | | | 18,347 | |
Net increase (decrease) in cash and cash equivalents | $ | (9,676) | | | $ | 40,137 | |
Operating Activities
Our primary source of cash from operating activities is cash collections from our customers. We expect cash inflows from operating activities to be affected by the timing of our sales. Our primary uses of cash from operating activities are for personnel-related expenditures, and other general operating expenses, as well as payments related to taxes, interest and facilities.
For the ninesix months ended SeptemberJune 30, 2018, net2022 as compared to the six months ended June 30, 2021, the increase in cash provided by operating activities was $166.1 million which consisted of a net loss of $87.3 million, adjusted for $266.2 million of non-cash expenses and other adjustments and a $12.8 million net changeprimarily due to increased cash inflows resulting from the changes in our operating assets and liabilities. Non-cash expenses include depreciation and amortization of $193.9 million primarily related toThe net cash inflow resulting from the intangible assets recordedchanges in connection with the Take Private and other acquisitions. The other adjustments include the loss on extinguishment of debt related to amendments to our credit facilities of $60.6 million. Significant changes in operating assets and liabilities include:
Deferred revenue increasedwas $4.1 million for the six months ended June 30, 2022 as compared to a net cash outflow of $47.6 million for the balance at December 31, 2017 resulting insix months ended June 30, 2021 and was primarily due to the timing of sales and cash payments and receipts. During the six months ended June 30, 2022, cash flow from operations includes $5.0 million of insurance proceeds received for costs incurred related to the Cyber Incident. During the six months ended June 30, 2021, cash flow from operations was impacted by an increase in operating liabilities and reflecting a cash inflow of $22.3 million for the nine months ended September 30, 2018.
Changes in our income tax receivable and payable balances are significant components of our cash flows from operating activities. The cash outflows related to our income tax payable balance includes $10.4 million related to the impacts of the Tax Act enacted during 2017 and $8.0 million of income tax payments for expenses resulting from the nine months ended September 30, 2018. See Note11. Income Taxes inCyber Incident and the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Form 10-Q for additional information.
For the nine months ended September 30, 2017, netSeparation. Net cash provided by operating activities was $135.9reduced by $19.4 million which consisted of a net loss of $44.1 million, adjusted for $156.1and $35.7 million of non-cash expensescash paid for taxes for the six months ended June 30, 2022 and other adjustments2021, respectively.
Investing Activities
Investing cash flows consist primarily of cash used for acquisitions, purchases and a $23.9 million net change in operating assetsmaturities of investments, capital expenditures and liabilities. Non-cash expenses include depreciationpurchases of intangible assets. Our capital expenditures primarily relate to purchases of leasehold improvements, computers, servers and amortizationequipment to support our domestic and international office locations. Purchases of $187.1 million primarily related to the intangible assets recorded in connection with the Take Privateconsist primarily of capitalized research and other acquisitions. The significant changes in operating assets and liabilities during the period include the following:
Deferred revenue increased as compared to the balance in prior period at September 30, 2017 resulting in an increase in operating liabilities and reflecting a cash inflow of $24.2 million for the nine months ended September 30, 2017. The deferred revenue balances were impacted by the purchase accounting adjustments made at the Take Private.
Investing Activitiesdevelopment costs.
Net cash used in investing activities forincreased in the ninesix months ended SeptemberJune 30, 2018 was2022, as compared to the six months ended June 30, 2021, primarily relateddue to $60.6$55.9 million in purchases of short-term investments, along with cash used for acquisitionsthe acquisition of Monalytic, Inc., a monitoring, analytics and $12.8 millionprofessional services company, and an increase in capitalized research and development costs related to our subscription-based offerings during the period.
Financing Activities
Financing cash flows consist primarily of cash used to purchase propertyissuance and equipment, offset by $10.7 million of cashrepayments associated with our long-term debt, the proceeds from the saleissuance of a cost-method investment.
Net cash used in investing activities forshares of common stock through equity incentive plans and the nine months ended September 30, 2017 was primarilyrepurchase of unvested incentive restricted stock and common stock to satisfy withholding tax requirements related to $24.0 millionthe settlement of cash used for acquisitions and $6.3 million of cash used to purchase property and equipment.
Financing Activitiesrestricted stock units.
Net cash used in financing activities fordecreased slightly in the ninesix months ended SeptemberJune 30, 2018 was2022 as compared to the six months ended June 30, 2021, primarily due to debt principal repaymentsa reduction in repurchases of $694.9 million,common stock and incentive restricted stock, partially offset by $627.0 million of additionala decrease in proceeds from issuance of common stock under our employee stock purchase plan.
In the refinancingsix months ended June 30, 2022 and 2021, we withheld and retired shares of common stock to satisfy $7.9 million and $9.9 million, respectively, of statutory withholding tax requirements that we pay in cash to the appropriate taxing authorities on behalf of our debt agreements.employees related to the settlement of restricted stock units during the period. These cash flows primarily relate to deemed gross repaymentsshares are treated as common stock repurchases in our condensed consolidated financial statements.
In each of the six months ended June 30, 2022 and borrowings2021, we made in connection with the refinancing of debt agreements and $14.9$10.0 million of total quarterly principal payments under our First Lien Credit Agreement. In addition, we paid a redemption premium of $22.7 million in connection with the redemption and exchange of our Second Lien Notes.
Net cash used in financing activities for the nine months ended September 30, 2017 was primarily due to debt repayments of $32.7 million related to the repayment of outstanding borrowings under our revolving credit facility and quarterly principal payments
under our First Lien Credit Agreement. These repayments were offset by $3.5 million of additional proceeds from refinancing related to Amendment 3 of our First Lien Credit Agreement.
Contractual Obligations and Commitments
As of SeptemberJune 30, 2018, with the exception of long-term debt obligations and cash interest expense,2022, there have been no material changes in our contractual obligations and commitments as of December 31, 20172021 that were disclosed in our final prospectus dated October 18, 2018 and filedAnnual Report on Form 10-K.
During the six months ended June 30, 2022, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the SEC on October 22, 2018 pursuant to Rule 424(b)purpose of the Securities Act of 1933, as amended, and included below.facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
The following table summarizes our outstanding contractual obligations as of December 31, 2017 that require us to make future cash payments:
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| | | | | | | | | | | | | | | | | | | |
| Payments Due by Period |
| Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
| | | | | | | | | |
| (in thousands) |
Long-term debt obligations(1) | $ | 2,358,050 |
| | $ | 16,950 |
| | $ | 33,900 |
| | $ | 33,900 |
| | $ | 2,273,300 |
|
Cash interest expense(1) | 854,933 |
| | 155,832 |
| | 309,474 |
| | 305,567 |
| | 84,060 |
|
Operating leases | 144,049 |
| | 16,607 |
| | 32,549 |
| | 28,762 |
| | 66,131 |
|
Purchase obligations(2) | 65,986 |
| | 47,810 |
| | 18,176 |
| | — |
| | — |
|
Related party consulting agreement(3) | 50,986 |
| | 10,000 |
| | 20,000 |
| | 20,000 |
| | 986 |
|
Take Private deferred stock payments(4) | 8,071 |
| | 4,553 |
| | 3,518 |
| | — |
| | — |
|
Acquisition related retention and deferred compensation | 5,549 |
| | 2,699 |
| | 2,850 |
| | — |
| | — |
|
Transition tax payable(5) | 120,793 |
| | 6,545 |
| | 19,327 |
| | 19,327 |
| | 75,594 |
|
Total(6) | $ | 3,608,417 |
| | $ | 260,996 |
| | $ | 439,794 |
| | $ | 407,556 |
| | $ | 2,500,071 |
|
________________
| |
(1) | Represents principal maturities of our Senior Secured First Lien Credit Facility and our Senior Secured Second Lien Floating Rate Note Agreement in effect at December 31, 2017. The estimated cash interest expense is based upon (i) an interest rate of 5.07% on our First Lien and (ii) an interest rate of 10.14% on the Second Lien Notes. |
In March 2018, we entered into Amendment No. 4 to First Lien Credit Agreement. In addition, we terminated our Second Lien Notes Agreement and entered into a new Senior Secured Second Lien Credit Agreement. The amounts below reflect the obligations due under these new and amended agreements as of September 30, 2018. The estimated cash interest expense is based upon (i) an interest rate of 5.24% on our First Lien and (ii) an interest rate of 9.49% on our Second Lien.
In October 2018, we completed our IPO and used a portion of our net proceeds from the offering to repay the $315.0 million of borrowings under our Second Lien Credit Facility.
The following table summarizes principal maturities and estimated cash interest expense as of September 30, 2018:
|
| | | | | | | | | | | | | | | | | | | |
| Payments Due by Period |
| Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
| | | | | | | | | |
| (in thousands) |
Long-term debt obligations, as amended | $ | 2,290,075 |
| | $ | 4,975 |
| | $ | 39,800 |
| | $ | 39,800 |
| | $ | 2,205,500 |
|
Cash interest expense | 739,511 |
| | 34,101 |
| | 268,564 |
| | 263,966 |
| | 172,880 |
|
Total | $ | 3,029,586 |
| | $ | 39,076 |
| | $ | 308,364 |
| | $ | 303,766 |
| | $ | 2,378,380 |
|
| |
(2) | Purchase obligations primarily represent outstanding purchase orders for purchases of software license and support fees, marketing activities, hosting, corporate health insurance costs, accounting, legal and contractor fees and computer hardware and software costs. |
| |
(3) | Our consulting agreement with our Sponsors terminated in October 2018 upon the consummation of the IPO. For more information, see Note10. Related Party Transactionsin the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
|
| |
(4) | As a result of the Take Private, certain restricted stock units, or RSUs, not subject to accelerated vesting were cancelled and converted into the right to receive the per share price of $60.10 less applicable withholding taxes shortly after those RSUs would have vested based on the underlying original RSU vesting schedule and subject to the continued employment of the holders of those RSUs. See Note 12. Commitments and Contingenciesin the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional details.
|
| |
(5) | Represents the provisional one–time transition tax as a result of the Tax Act which we have elected to pay over eight years. See Note 11. Income Taxes in the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional details of the impact of the Tax Act.
|
| |
(6) | Other long-term obligations on our balance sheet at December 31, 2017 included non-current income tax liabilities of $22.5 million, which related primarily to unrecognized tax benefits. We have not included this amount in the table above because we cannot reasonably estimate the period during which this obligation may be incurred, if at all. |
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in conformity with GAAP and require our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates, and such estimates may change if the underlying conditions or assumptions change. 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, perhaps materially.
In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application, while in other cases, management’s judgment is required in selecting among available alternative accounting standards that allow different accounting treatment for similar transactions. We believe that these accounting policies requiring significant management judgment and estimates are critical to understanding our historical and future performance, as these policies relate to the more significant areas of our financial results. These critical accounting policies are:
•the valuation of goodwill, intangibles, long-lived assets and contingent consideration;
•revenue recognition;
•stock-based compensation;
•income taxes; and
•loss contingencies.
A full description of our critical accounting policies that involve significant management judgment appears in our final prospectus dated October 18, 2018 andAnnual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on October 22, 2018 pursuant to Rule 424(b) of the Securities Act of 1933, as amended.February 25, 2022. There have been no material changes to our critical accounting policies and estimates since that time.
Recent Accounting PronouncementsGoodwill
Our goodwill was derived from the Take Private transaction and acquisitions where the purchase price exceeded the fair value of the net identifiable assets acquired. Goodwill is tested for impairment at least annually on October 1st or more frequently if events or circumstances indicate it is more likely than not that the fair value of our reporting unit is less than its carrying value. See Note 2. Summary of Significant Accounting Policies in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional discussion regarding our goodwill impairment analysis and evaluation of goodwill impairment indicators.
As of June 30, 2022, after considering all available evidence in our evaluation of goodwill impairment indicators, we determined it appropriate to perform an interim quantitative assessment of our reporting unit as of June 30, 2022, for which we engaged a third-party valuation specialist to assist.
For the interim quantitative goodwill impairment analysis performed as of June 30, 2022, we utilized a combination of both an income and market approach to determine the fair value of our reporting unit. We applied a 66.7% weighting to the income approach and a 33.3% weighting to the market approach to arrive at the total fair value used for impairment testing. We applied a greater weighting to the income approach as we believe the income approach is a better indicator of fair value by using projected cash flows of the reporting unit being valued. The income approach utilizes a discounted cash flow method which is based on the present value of projected cash flows. The discounted cash flow models reflect our assumptions regarding revenue growth rates, risk-adjusted discount rate, terminal period growth rate, economic and market trends and other expectations about
the anticipated operating results of our reporting unit. The terminal period growth rate is selected based on economic conditions and consideration of growth rates used in the forecast period and historical performance of the reporting unit. We utilized a weighted-average cost of capital of 11.5% as our discount rate. Under the market approach, we estimate the fair value based on market multiples of revenue derived from comparable publicly traded companies with operating characteristics similar to our reporting unit. In evaluating the estimates derived by the market based approach, we make judgments in the selection of the peer group and valuation multiples used as they apply to the reporting unit. After determining the fair value of our reporting unit, we reconciled the fair value of the reporting unit to the Company's market capitalization as of June 30, 2022. As a result of the interim goodwill impairment analysis as of June 30, 2022, our reporting unit was determined to have a carrying value that exceeded its fair value and therefore, a $612.4 million non-cash goodwill impairment charge was recognized in our condensed consolidated statements of operations for the three months ended June 30, 2022. Prior to performing the goodwill impairment analysis, we performed a quantitative assessment of our indefinite-lived intangible assets as discussed below. In addition, we performed a recoverability test of our long-lived assets, by comparing the net book value of our long-lived assets or asset groups, to the future undiscounted net cash flows attributable to such assets, and determined no impairment was required.
We also performed sensitivity analyses on the key inputs and assumptions used in determining the estimated fair value of our reporting unit by utilizing changes in assumptions that reflect reasonably likely future changes in the discount rate used in the weighted-average cost of capital calculation and the terminal growth rate. Assuming all other assumptions and inputs used in the discounted cash flow analysis are held constant, a 50 basis point increase in the discount rate assumption would result in decreases in fair value of approximately $101.6 million. Comparatively, a 50 basis point decrease in the terminal period growth rate assumption would result in decreases in fair value of approximately $78.8 million.
Fair value determination of our reporting unit requires considerable judgment and is sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the quantitative goodwill impairment tests will prove to be an accurate prediction of future results. Examples of events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impact the estimated fair value of our reporting unit may include such items as: (i) volatility in the equity and debt markets or other macroeconomic factors, (ii) an increase in the weighted-average cost of capital due to further increases in interest rates, (iii) timing and success of new products introduced in our evolution from monitoring to observability, (iv) the ongoing impact of the Cyber Incident including a decrease in future cash flows due to lower than expected license sales or maintenance renewals, higher than expected customer attrition, higher than estimated costs to respond and adverse loss exposure from claims, fines or penalties resulting from government investigations and litigation; and (v) fluctuations in foreign currency exchange rates that may negatively impact our reported results of operations. Accordingly, if our current cash flow assumptions are not realized, we experience further sustained declines in our stock price or market capitalization, or there are further declines in the market multiplies used in our analysis, it is possible that an additional impairment charge may be recorded in the future, which could be material.
Indefinite-lived Intangible Assets
We review our indefinite-lived intangible assets for impairment annually, in the fourth quarter, or more frequently if a triggering event occurs. As of June 30, 2022, due to the factors discussed above, we performed a quantitative assessment of our indefinite-lived intangible assets utilizing a relief from royalty method. Significant estimates and assumptions included in the relief from royalty method are expectations of revenue growth rates, and selection of royalty rate and discount rate. We utilized a royalty rate of 0.7% and a discount rate of 11.5%. We determined the estimated fair value of the SolarWinds trade name, recorded in connection with the Take Private, was less than its carrying value. As a result, we recorded a $9.4 million non-cash impairment charge, which is included in general and administrative expense, in our condensed consolidated statements of operation, for the three months ended June 30, 2022.
We also performed a sensitivity analysis on the discount rate used in determining the estimated fair value of our indefinite-lived intangible assets. Assuming all other assumptions and inputs used in the analysis are held constant, a 50 basis point increase in the discount rate assumption would result in a decrease in fair value of approximately $3.2 million.
Recent Accounting Pronouncements
See Note 2. Summary of Significant Accounting Policies in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q, for a full description of recent accounting pronouncements, if any, which is incorporated herein by reference.
Off-Balance Sheet Arrangements
During the nine months ended September 30, 2018, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We had cash and cash equivalents of $278.3$722.4 million and $277.7$732.1 million at SeptemberJune 30, 20182022 and December 31, 2017,2021, respectively. We also had short-term investments classified as available-for-sale securities of $55.8 million at June 30, 2022. Our cash and cash equivalents consist primarily of bank demand deposits, and money market funds.funds and investments with original maturities of three months or less. We hold cash and cash equivalents and short-term investments for working capital purposes. Our investments are made for capital preservation purposes, and we do not enter into investments for trading or speculative purposes.
We do not have material exposure to market risk with respect to our cash and cash equivalents, as these consist primarily of highly liquid investments purchased with original maturities of three months or less at SeptemberJune 30, 2018.2022.
We had total indebtedness with an outstanding principal balance of $2.3 billion and $2.4$1.90 billion at SeptemberJune 30, 20182022 and $1.91 billion at December 31, 2017, respectively.2021. Borrowings outstanding under our various credit agreementsagreement bear interest at variable rates equal to applicable margins plus specified base rates or LIBOR-based rates with a 1%0% floor. As of SeptemberJune 30, 20182022 and December 31, 2017,2021, the annual weighted-average rate on borrowings was 5.8%4.42% and 6.5%2.85%, respectively. If there was a hypothetical 100 basis point increase in interest rates, the annual impact to interest expense would be approximately $22.9$19.1 million. This hypothetical change in interest expense has been calculated based on the borrowings outstanding at December 31, 20172021 and a 100 basis point per annum change in interest rate applied over a one-year period.
We do not have material exposure to fair value market risk with respect to our total long-term outstanding indebtedness which consists of $2.3$1.9 billion U.S. dollar term loans as of SeptemberJune 30, 2018,2022, not subject to market pricing.
See Note6. 7. Debtin the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information regarding our debt.
Foreign Currency Exchange Risk
As a global company, we face exposure to adverse movements in foreign currency exchange rates. We primarily conduct business in the following locations: the United States, Europe, Canada, South America and Australia. This exposure is the result of selling in multiple currencies, growth in our international investments, additional headcount in foreign countries and operating in countries where the functional currency is the local currency. Specifically, our results of operations and cash flows are subject to fluctuations in the following currencies: the Euro, British Pound Sterling and Australian Dollar against the United States Dollar, or USD. These exposures may change over time as business practices evolve and economic conditions change.change, including as a result of the impact of the COVID-19 pandemic or the war in Ukraine on the global economy, or governmental actions taken in response to the COVID-19 pandemic. Changes in foreign currency exchange rates have had and could continue to have an adverse impact on our financial results and cash flows.
Our condensed consolidated statements of operations are translated into USD at the average exchange rates in each applicable period. Our international revenue, operating expenses and significant balance sheet accounts denominated in currencies other than the USD primarily flow through our United Kingdom and European subsidiaries, which have British Pound Sterling and Euro functional currencies, respectively.currency. This results in a two-step currency exchange process wherein the currencies other than the British Pound Sterling and Euro are first converted into thosethe functional currenciescurrency and then translated into USD for our consolidated financial statements. As an example, revenue for sales in Australia is translated from the Australian Dollar to the Euro and then into the USD.
Our statement of operations and balance sheet accounts are also impacted by the re-measurement of non-functional currency transactions such as intercompany loans, cash accounts held by our overseas subsidiaries, accounts receivable denominated in foreign currencies, deferred revenue and accounts payable denominated in foreign currencies. Our foreign currency denominated intercompany loan was established as part of the Take Private to provide a conduit to utilize foreign earnings effectively. The gains (losses) associated with the changes in exchange rates on amounts borrowed are unrealized non-cash events. As of July 1, 2018, the foreign currency denominated intercompany loan is designated as long-term due to a change in our investment strategy and the new Tax Act. Therefore, beginning on July 1, 2018, the foreign currency transaction gains and losses resulting from remeasurement are recognized as a component of accumulated other comprehensive income (loss).
Foreign Currency Transaction Risk
Our foreign currency exposures typically arise from selling annual and multi-year maintenance contracts and subscriptions in multiple currencies, accounts receivable, intercompany transfer pricing arrangements and other intercompany transactions. Our foreign currency management objective is to minimize the effect of fluctuations in foreign exchange rates on selected assets or liabilities without exposing us to additional risk associated with transactions that could be regarded as speculative.
We utilize purchased foreign currency forward contracts to minimize our foreign exchange exposure on certain foreign balance sheet positions denominated in currencies other than the Euro. We do not enter into any derivative financial instruments for trading or speculative purposes. Our objective in managing our exposure to foreign currency exchange rate fluctuations is to reduce the impact of adverse fluctuations in such exchange rates on our earnings and cash flow. The notional amounts and currencies underlying our foreign currency forward contracts will fluctuate period to period as they are principally dependent on the balances of the balance sheet positions that are denominated in currencies other than the Euro held by our global entities.
There can be no assurance that our foreign currency hedging activities will substantially offset the impact of fluctuation in currency exchange rates on our results of operations and functional positions. As of SeptemberJune 30, 20182022 and December 31, 2017,2021, we did not have any forward contracts outstanding and while we do not have a formal policy to settle all derivatives prior to the end of each quarter, our current practice is to do so. The effect of derivative instruments on our condensed consolidated statements of operations was insignificant for the ninethree and six months ended SeptemberJune 30, 20182022 and 2017.2021.
We are exposed to credit-related losses in the event of non-performance by counterparties to derivative financial instruments, but we do not expect any counterparties to fail to meet their obligations given their high credit ratings. In addition, we diversify this risk across several counterparties and actively monitor their ratings.
Foreign Currency Translation Risk
Fluctuations in foreign currencies impact the amount of total assets, liabilities, revenue, operating expenses and cash flows that we report for our foreign subsidiaries upon the translation of these amounts into U.S. dollars. If there is a change in foreign currency exchange rates, the amounts of assets, liabilities, revenue, operating expenses and cash flows that we report in U.S. dollars for foreign subsidiaries that transact in international currencies may be higher or lower to what we would have reported using a constant currency rate. To the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currency denominated transactions results in reduced assets, liabilities, revenue, operating expenses and cash flows for our international operations. Similarly, our assets, liabilities, revenue, operating expenses and cash flows will increase for our international operations if the U.S. dollar weakens against foreign currencies. The conversion of the foreign subsidiaries’ financial statements into U.S. dollars will also lead to remeasurement gains and losses recorded in income, or translation gains or losses that are recorded as a component of accumulated other comprehensive income (loss).
Item 4: Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of SeptemberJune 30, 2018.2022. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of SeptemberJune 30, 2018,2022, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at a reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended SeptemberJune 30, 20182022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
FromFor a description of the lawsuits and government investigations or inquiries related to the Cyber Incident, see Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 10. Commitments and Contingenciesin the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q, which description is incorporated herein by reference.
In addition, from time to time, we have been and may be involved in various legal proceedings and claims arising in our ordinary course of business. At this time,Other than with respect to the Cyber Incident, neither we nor any of our subsidiaries is a party to, and none of our respective property is the subject of, any material legal proceeding. However, the outcome of legal proceedings and claims brought against us are subject to significant uncertainty. Therefore, if one or more of these legal matters were resolved against us in the same reporting period for amounts in excess of management’s expectations, our consolidated financial statements for a particular period could be materially adversely affected.
Item 1A. Risk Factors
For a discussionWith the exception of the following updated risk factor, there have been no other material changes in our potential risks and uncertainties, see the informationrisk factors from those disclosed in Part I, Item 1A, under the heading "Risk Factors"“Risk Factors” in our final prospectus dated October 18, 2018Annual Report on Form 10-K for the year ended December 31, 2021.
Risks Related to Cybersecurity and filedthe Cyber Incident
Cyberattacks, including the Cyber Incident, and other security incidents have resulted, and in the future may result, in compromises or breaches of our and our customers’ systems, the insertion of malicious code, malware, ransomware or other vulnerabilities into our systems and products and in our customers’ systems, the exploitation of vulnerabilities in our and our customers’ environments, theft or misappropriation of our and our customers’ proprietary and confidential information, interference with our and our customers’ operations, exposure to legal and other liabilities, higher customer, employee and partner attrition, negative impacts to our sales, renewals and upgrades and reputational harm and other serious negative consequences, any or all of which could materially harm our business.
We are heavily dependent on our technology infrastructure to operate our business, and our customers rely on our products to help manage and secure their own IT infrastructure and environments, including their and their customers’ confidential information. Despite our implementation of security measures and controls, our systems and those of third parties upon whom we rely are vulnerable to attack from numerous threat actors, including sophisticated nation-state and nation-state-supported actors (including advanced persistent threat intrusions). Threat actors have been, and may in the future be, able to compromise our security measures or otherwise exploit vulnerabilities in our systems, including vulnerabilities that may arise from, or have been introduced through, the actions, inactions or errors of our employees or contractors or defects in the design or manufacture of our products and systems or the products and systems that we procure from third parties. In doing so, they have been, and may in the future be, able to breach or compromise our IT systems, including those which we use to design, develop, deploy and support our products, and access and misappropriate our, our current or former employees’ and our customers’ proprietary and confidential information, including our software source code, introduce malware, ransomware or vulnerabilities into our products and systems and create system disruptions or shutdowns. By virtue of the role our products play in helping to manage and secure the environments and systems of our customers, attacks on our systems and products can result in similar impacts on our customers’ systems and data.
Moreover, the number and scale of cyberattacks have continued to increase and the methods and techniques used by threat actors, including sophisticated “supply-chain” attacks such as the Cyber Incident, malware, ransomware, viruses, denial of service attacks and phishing and social engineering attacks, continue to evolve at a rapid pace. As a result, we may be unable to identify current attacks, anticipate these attacks or implement adequate security measures. We have experienced, and may in the future experience, security breaches that may remain undetected for an extended period and, therefore, have a greater impact on our systems, our products, the proprietary data contained therein, our customers and ultimately, our business. In addition, our ability to defend against and mitigate cyberattacks depends in part on prioritization decisions that we and third parties upon whom we rely make to address vulnerabilities and security defects. While we endeavor to address all identified vulnerabilities in our products, we must make determinations as to how we prioritize developing and deploying the respective fixes, and we may be unable to do so prior to an attack. Likewise, even once a vulnerability has been addressed, for certain of our products, the fix will only be effective once a customer has updated the impacted product with the SEC on October 22, 2018 pursuantlatest release, and customers that do not install and run the latest supported versions of our products may remain vulnerable to Rule 424(b)attack.
Cyberattacks, including the Cyber Incident, and other security incidents have resulted, and in the future may result, in numerous risks and adverse consequences to our business, including that (a) our prevention, mitigation and remediation efforts may not be successful or sufficient, (b) our confidential and proprietary information, including our source code, as well as information that related to current or former employees and customers may be accessed, exfiltrated, misappropriated, compromised or corrupted, (c) we incur significant financial, legal, reputational and other harms to our business, including loss of business, decreased sales, severe reputational damage adversely affecting current and prospective customer, employee or vendor relations and investor confidence, U.S. or foreign regulatory investigations and enforcement actions, litigation, indemnity obligations, damages for contractual breach, penalties for violation of applicable laws or regulations, including laws and regulations in the United States and other jurisdictions relating to the collection, use and security of user and other personally identifiable information and data, significant costs for remediation, impairment of our ability to protect our intellectual property, stock price volatility and other significant liabilities, (d) our insurance coverage, including coverage relating to certain security and privacy damages and claim expenses, may not be available or sufficient to compensate for all liabilities we incur related to these matters or that we may face increased costs to obtain and maintain insurance in the future and (e) our steps to secure our internal environment, adapt and enhance our software development and build environments and ensure the security and integrity of the Securities Actproducts that we deliver to customers may not be successful or sufficient to protect against future threat actors or cyberattacks. For example, during the second quarter of 1933, as amended. There2022, we identified that one of our employees was the victim of a phishing scheme that enabled a third party to introduce several fraudulent invoices, which were immaterial in amount but paid by us prior to our detection and remediation of the incident. We have been no material changes from the risk factors disclosed inincurred and expect to continue to incur significant expenses related to our final prospectus.cybersecurity initiatives.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On October 18, 2018, the Registration Statement on Form S-1 (File No. 333-227479) (the “Registration Statement”) relating to our initial public offering was declared effective by the SEC. Pursuant to the Registration Statement, we registered an aggregate of 25,000,000 shares of our common stock, all of which were sold by us at a price to the public of $15.00 per share. Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC acted as the representatives of the underwriters in our initial public offering. We received approximately $353.0 million in net proceeds after deducting underwriting discounts and commissions of $17.8 million and estimated offering-related expenses of approximately $4.2 million. No payments of the net proceeds were made to our directors or officers or their associates, holders of 10% or more of any class of our equity securities or any affiliates.
We used a portion of the net proceeds from the offering to repay $315.0 million in borrowings outstanding under our Second Lien Term Loan and a related voluntary prepayment fee of approximately $14.2 million concurrently with the closing of our initial public offering in October 2018. All of the remaining net proceeds are held in cash and have not been deployed. We intend to apply the remaining net proceeds to monthly interest payments under our First Lien Credit Agreement.
Issuer Purchases of Equity Securities
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| Class A Common Stock | | Class B Common Stock | | | | |
Period | Number of Shares Purchased (1) | | Average Price Paid Per Share (2) | | Number of Shares Purchased (1) | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of a Publicly Announced Plan or Program | | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plan or Program (in thousands) |
July 1-31, 2018 | — |
| | $ | — |
| | 16,000 |
| | $ | 0.27 |
| | — |
| | $ | — |
|
August 1-31, 2018 | 14.85 |
| | 1,179.85 |
| | 126,054 |
| | 3.58 |
| | — |
| | — |
|
September 1-30, 2018 | — |
| | — |
| | 12,000 |
| | 3.54 |
| | — |
| | — |
|
Total | 14.85 |
| | | | 154,054 |
| | | | — |
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Period | Number of Shares Purchased (1) | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of a Publicly Announced Plan or Program | | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plan or Program (in thousands) |
April 1-30, 2022 | — | | | $ | — | | | — | | | $ | — | |
May 1-31, 2022 | — | | | — | | | — | | | — | |
June 1-30, 2022 | 6,750 | | | 4.00 | | | — | | | — | |
Total | 6,750 | | | | | — | | | |
________________
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(1) | All repurchases relate to employee held common stock and common stock-based incentive awards that are subject to repurchase in the event the stockholder ceases to be employed or engaged (as applicable) by the Company for any reason or in the event of a change of control or due to certain regulatory burdens. |
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(2) | Class A common stock price paid includes the $1,000 per share liquidation value plus accrued dividends. |
(1)All repurchases relate to employee held restricted stock that is subject to vesting. Unvested shares are subject to a right of repurchase by us in the event the employee stockholder ceases to be employed or engaged (as applicable) by us prior to vesting. All shares in the above table were shares repurchased as a result of us exercising this right and not pursuant to a publicly announced plan or program.
Item 6. Exhibits
EXHIBIT INDEX
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Exhibit Number | | Exhibit Title |
| | Third Amended and Restated Certificate of Incorporation as currently in effect (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 10-Q (File No. 001-38711), filed with the Securities and Exchange Commission on November 27, 2018) |
| | Certificate of Amendment to the Third Amended and Restated Certificate of Incorporation of SolarWinds Corporation (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K (File No. 001-38711), filed with the Securities and Exchange Commission on July 26, 2021) |
| | Amended and Restated Bylaws as currently in effect (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 10-Q (File No. 001-38711), filed with the Securities and Exchange Commission on November 27, 2018) |
| | Amended and Restated Stockholders' Agreement, dated October 18, 2018, by and among the Company and the stockholders' named therein |
| | SolarWinds Corporation 2018 Equity Incentive Plan and forms of agreements thereunder |
| | SolarWinds Corporation 2018 Employee Stock Purchase Plan |
| | Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101.INS101* | | XBRL Instance DocumentInteractive Data Files (formatted as Inline XBRL) |
101.SCH104* | | Cover Page Interactive Data File (formatted as Inline XBRL Taxonomy Extension Schema Document |
101.CAL | | XBRL Taxonomy Calculation Linkbase Document |
101.DEF | | XBRL Taxonomy Definition Linkbase Document |
101.LAB | | XBRL Taxonomy Label Linkbase Document |
101.PRE | | XBRL Taxonomy Presentation Linkbase Documentand contained in Exhibit 101)
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* | Filed herewith | |
** | The certifications attached as Exhibit 32.1 accompanying this Quarterly Report on Form 10-Q, are deemed furnished and not filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of the Registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing | |
SOLARWINDS CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | SOLARWINDS CORPORATION |
| | | |
Dated: | August 5, 2022 | SOLARWINDS CORPORATION |
By: | | | |
Dated: | November 27, 2018 | By: | /s/ J. Barton Kalsu |
| | | |
| | | J. Barton Kalsu |
| | | Chief Financial Officer |
| | | (Principal Financial and Accounting Officer) |