UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

(Mark One)


☑			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June 30, 2021~~March 31, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-38711

SolarWinds Corporation

(Exact name of registrant as specified in its charter)


Delaware						81-0753267
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

7171 Southwest Parkway

Building 400

Austin, Texas 78735

(512) 682.9300

(Address and telephone number of principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class	Trading Symbol	Name of Each Exchange on Which Registered
Common Stock, $0.001 par value	SWI	New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). þ Yes ¨ No

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.


Large accelerated filer	☑	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes þ No

On ~~August~~May 2, ~~2021, 158,024,032~~2022, 160,513,119 shares of common stock, par value $0.001 per share, were outstanding.

SOLARWINDS CORPORATION

Table of Contents


PART I - FINANCIAL INFORMATION
		Page
Item 1.	Financial Statements	56
	Condensed Consolidated Balance Sheets as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021	56
	Condensed Consolidated Statements of Operations for the three ~~and six~~month periods ended ~~June 30~~,March 31, 2022 and 2021 ~~and 2020~~	67
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the three ~~and six~~ month periods ended ~~June 30~~,March 31, 2022 and 2021 ~~and 2020~~	7
	~~Condensed Consolidated Statements of Stockholders' Equity for the three~~ ~~and six~~ ~~month periods ended~~ ~~June 30, 2021 and 2020~~	8
	Condensed Consolidated Statements of Stockholders' Equity for the three month periods ended March 31, 2022 and 2021	9
	Condensed Consolidated Statements of Cash Flows for the ~~six~~three month periods ended ~~June 30~~,March 31, 2022 and 2021 ~~and 2020~~	10
	Notes to the Condensed Consolidated Financial Statements	11
	1. Organization and Nature of Operations
	2. Summary of Significant Accounting Policies
	3. Discontinued Operations
	4. Goodwill
	4.5. Fair Value Measurements
	5.6. Debt
	6.7. Earnings (Loss) Per Share
	7.8. Income Taxes
	8.9. Commitment and Contingencies
	~~9. Subsequent Events~~
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	1920
Item 3.	Quantitative and Qualitative Disclosures of Market Risk	3533
Item 4.	Controls and Procedures	3735
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	3836
Item 1A.	Risk Factors	3836
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 6.	Exhibits	3937
	Signatures	4038
	Certifications

Safe Harbor Cautionary Statement

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. Such statements may be signified by terms such as “aim,” “anticipate,” “believe,” “continue,” “expect,” “feel,” “intend,” “estimate,” “seek,” “plan,” “may,” “can,” “could,” “should,” “will,” “would” or similar expressions and the negatives of those terms. In this report, forward-looking statements include statements regarding our financial projections, future financial performance and plans and objectives for future operations including, without limitation, the following:

•expectations regarding our financial condition and results of operations, including ~~revenue, non-GAAP~~ revenue, revenue growth, revenue mix, cost of revenue, operating expenses, operating income, non-GAAP operating income, non-GAAP operating margin, adjusted EBITDA and adjusted EBITDA margin, cash flows and effective income tax rate;

•findings from our investigations into the cyberattack on our Orion Software Platform and internal systems (the "Cyber Incident"), including our understanding of the nature, source and duration of the attack and our plans to ensure our products and internal systems are secure and provide additional information regarding our findings, as well as our expectations regarding the impact of the Cyber Incident on our business and reputation, the success of our related mitigation and remediation efforts and the additional costs, liabilities and other adverse consequences that we may incur as a result of the Cyber Incident;

•expectations regarding the impact the government investigations and litigation resulting from the Cyber Incident may have on our business;

•expectations regarding the impact and benefits of the spin-off of ~~our~~the N-able business into a newly created and separately traded public company;

•expectations regarding investment in product development and our expectations about the results of those efforts;

•expectations ~~concerning acquisitions and opportunities resulting from our acquisitions;~~

•~~expectations~~ regarding hiring additional personnel globally in the areas of sales and marketing and research and development;

•expectations regarding our evolution from monitoring to observability;

•intentions regarding our international ~~earnings;~~earnings and investment of those earnings in international operations;

•expectations regarding our capital expenditures;

•expectations concerning acquisitions and opportunities resulting from our acquisitions;

•expectations regarding the impact of the COVID-19 pandemic on our business, results of operations and financial condition; and

•our beliefs regarding the sufficiency of our cash and cash equivalents, cash flows from operating activities and borrowing capacity.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially and adversely different from any future results, performance or achievements expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, the following:

•numerous risks related to the Cyber Incident, including with respect to (1) the discovery of new or different information regarding the Cyber Incident, including with respect to its scope, the threat actor’s access to SolarWinds’ environments and its related activities during such period, and the related impact on SolarWinds’ systems, products, current or former employees and customers, (2) the possibility that our mitigation and remediation efforts with respect to the Cyber Incident may not be successful, (3) the possibility that additional confidential, proprietary, or personal information, including information of SolarWinds’ current or former employees and customers, was accessed and exfiltrated as a result of the Cyber Incident, (4) numerous financial, legal, reputational and other risks to us related to the Cyber Incident, including risks that the incident or SolarWinds’ response thereto, including with respect to providing notices to any impacted individuals, may result in the loss, compromise or corruption of data and proprietary information, loss of business as a result of termination or non-renewal of agreements or reduced purchases or upgrades of our products, ~~severe~~ reputational damage adversely affecting customer, partner and vendor relationships and investor confidence, increased attrition of personnel and distraction of key and other personnel, U.S. or foreign regulatory investigations and enforcement actions, litigation, indemnity obligations, damages for contractual breach, penalties for violation of applicable laws or regulations, significant costs for remediation and the incurrence of other liabilities, (5) risks that 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, (6) the possibility that our steps to secure our internal environment, improve our product development environment and ensure the security and integrity of the software that we deliver to our customers may not be successful or sufficient to protect against future threat actors or attacks or be

perceived by existing and prospective customers as sufficient to address the harm caused by Cyber Incident and (7) the risk

that the impact of the Cyber Incident may be proportionally greater in future periods as a result of the spin-off of ~~our~~the N-able business;

•other risks related to cyber security, including that we may experience other security incidents or have vulnerabilities in our systems and services exploited, which may result in compromises or breaches of our and our customers’ systems or, theft or misappropriation of our and our customers’ confidential, proprietary or personal information, as well as exposure to legal and other liabilities, including the related risk of higher customer, employee and partner attrition and the loss of key personnel, as well as negative impacts to our sales, renewals and upgrades;

•risks related to the ~~recently completed~~ spin-off of ~~our~~the N-able business into a newly created and ~~separately-traded~~separately traded public company, including ~~the risk~~ that ~~completing the spin-off could disrupt or adversely affect the separate businesses, results of operations and financial condition, and that the spin-off~~we may not ~~achieve~~realize some or all of ~~any~~the anticipated strategic, financial, operational, marketing or other benefits from the separation, or such benefits may be delayed by a variety of circumstances, which may not be under our control, we may experience increased difficulties in attracting, retaining and motivating employees or maintaining or initiating relationships with ~~respect~~partners, customers and other parties with which we currently do business, or may do business in the future, we could incur significant liability if the separation is determined to ~~either business;~~be a taxable transaction, potential indemnification liabilities incurred in connection with the separation could materially affect our business and financial results and N-able may fail to perform under various transaction agreements that were executed as part of the separation;

•the possibility that the global COVID-19 pandemic may adversely affect our business, results of operations and financial condition or the impact of the COVID-19 pandemic on the global economy or on the business operations and financial conditions of our customers, their end-customers and our prospective customers;

•the inability to sell products to new customers or to sell additional products or upgrades to our existing customers;

•any decline in our renewal or net retention rates;

•the ~~possibility that general economic conditions or uncertainty cause information technology spending to be reduced or purchasing decisions to be delayed, including as~~evolving breadth of our sales motion and challenges, investments and additional costs associated with increased selling efforts toward enterprise customers and adopting a ~~result of the COVID-19 pandemic;~~subscription first approach;

•the inability to generate significant volumes of high quality sales leads from our digital marketing initiatives and convert such leads into new business at acceptable conversion rates;

•our ability to develop new products and product upgrades, and the timing and success of any such new product introductions and product upgrades;

•our ability to compete effectively in the markets we serve;

•our ability to attract, retain and motivate employees;

•the possibility that general economic conditions or uncertainty cause information technology spending to be reduced or purchasing decisions to be delayed, including as a result of the war in Ukraine, the COVID-19 pandemic, inflation or other geopolitical events globally;

•our inability to successfully identify, complete and integrate acquisitions and manage our growth effectively;

•risks associated with our international operations;

•our status as a controlled company;

•~~the timing and success of new product introductions and product upgrades by SolarWinds or its competitors;~~

•the possibility that our operating income could fluctuate and may decline as percentage of revenue as we make further expenditures to expand our operations in order to support additional growth in our business;

•potential foreign exchange gains and losses related to expenses and sales denominated in currencies other than the functional currency of an associated entity; and

•such other risks and uncertainties described more fully in documents filed with or furnished to the Securities and Exchange Commission, including the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially and adversely from those anticipated in these forward-looking statements, even if new information becomes available in the future.

Investors and others should note that we announce material information to our investors using our investor relations website (https://investors.solarwinds.com), SEC filings, press releases, public conference calls and webcasts. We use these channels as well as social media to communicate with the public about our company, our business and other matters. It is possible that the information we post on social media could be deemed to be material information. Therefore, we encourage investors, the media, and others interested in our company to review the information we post on the social media channels listed on our investor relations website.

In this report “SolarWinds,” “Company,” “we,” “us” and “our” refer to SolarWinds Corporation and its consolidated subsidiaries. On July 19, 2021, we completed the previously announced separation and distribution of our managed service provider (“N-able”) business into a newly created and separately traded public company, N-able, Inc. Unless otherwise indicated, all references to the Company exclude the N-able business for all periods presented.

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

SolarWinds Corporation

Condensed Consolidated Balance Sheets

(In thousands, except share and per share information)

(Unaudited)


	March 31,		December 31,
	2022		2021
Assets
Current assets:
Cash and cash equivalents	$	751,218	$	732,116

Accounts receivable, net of allowances of $693 and $476 as of March 31, 2022 and December 31, 2021, respectively	98,231		95,095
Income tax receivable	1,343		1,114

Prepaid and other current assets	22,559		30,515
Total current assets	873,351		858,840
Property and equipment, net	27,974		29,722
Operating lease assets	71,373		74,318
Deferred taxes	141,512		144,162
Goodwill	3,299,468		3,308,405
Intangible assets, net	311,874		342,563
Other assets, net	36,197		34,117
Total assets	$	4,761,749	$	4,792,127
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	7,188	$	7,327
Accrued liabilities and other	32,994		41,328
Current operating lease liabilities	14,938		14,382

Accrued interest payable	171		153
Income taxes payable	6,483		3,086
Current portion of deferred revenue	329,017		327,701
Current debt obligation	19,900		19,900
Total current liabilities	410,691		413,877
Long-term liabilities:
Deferred revenue, net of current portion	35,458		34,968
Non-current deferred taxes	10,713		16,918
Non-current operating lease liabilities	70,713		74,543
Other long-term liabilities	88,786		93,156
Long-term debt, net of current portion	1,868,010		1,870,769
Total liabilities	2,484,371		2,504,231


Stockholders’ equity:
Common stock, $0.001 par value: 1,000,000,000 shares authorized and 160,456,486 and 159,176,042 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively	160		159
Preferred stock, $0.001 par value: 50,000,000 shares authorized and no shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively	—		—
Additional paid-in capital	2,577,818		2,566,783
Accumulated other comprehensive income (loss)	(15,589)		1,306
Accumulated deficit	(285,011)		(280,352)
Total stockholders’ equity	2,277,378		2,287,896
Total liabilities and stockholders’ equity	$	4,761,749	$	4,792,127

June 30, December 31,
2021 2020
Assets
Current assets:
Cash and cash equivalents $ 410,635 $ 370,498
Accounts receivable, net of allowances of $2,876 and $2,736 as of June 30, 2021 and December 31, 2020, respectively 97,601 114,298
Income tax receivable 4,677 2,273
Prepaid and other current assets 31,450 25,664
Total current assets 544,363 512,733
Property and equipment, net 66,153 58,649
Operating lease assets 124,828 110,961
Deferred taxes 144,753 149,455
Goodwill 4,206,720 4,249,402
Intangible assets, net 466,667 592,985
Other assets, net 40,531 36,298
Total assets $ 5,594,015 $ 5,710,483
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable $ 10,369 $ 17,932
Accrued liabilities and other 64,145 72,971
Current operating lease liabilities 19,056 17,811
Accrued interest payable 153 157
Income taxes payable 6,787 16,358
Current portion of deferred revenue 326,463 346,075
Current debt obligation 19,900 19,900
Total current liabilities 446,873 491,204
Long-term liabilities:
Deferred revenue, net of current portion 33,776 36,679
Non-current deferred taxes 38,852 59,149
Non-current operating lease liabilities 132,680 115,071
Other long-term liabilities 92,901 115,021
Long-term debt, net of current portion 1,877,220 1,882,672
Total liabilities 2,622,302 2,699,796
Commitments and contingencies (Note 8)
0 0
Stockholders’ equity:
Common stock, $0.001 par value: 1,000,000,000 shares authorized and 158,014,531 and 156,519,611 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively 158 157
Preferred stock, $0.001 par value: 50,000,000 shares authorized and 0 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively 0 0
Additional paid-in capital 3,140,176 3,112,262
Accumulated other comprehensive income 79,107 127,212
Accumulated deficit (247,728) (228,944)
Total stockholders’ equity 2,971,713 3,010,687
Total liabilities and stockholders’ equity $ 5,594,015 $ 5,710,483

~~The accompanying notes are an integral part of these condensed consolidated financial statements.~~

~~SolarWinds Corporation~~

~~Condensed Consolidated Statements of Operations~~

~~(In thousands, except per share information)~~

~~(Unaudited)~~

Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Revenue:
Subscription $ 112,429 $ 95,840 $ 221,417 $ 189,475
Maintenance 122,867 116,498 245,907 232,847
Total recurring revenue 235,296 212,338 467,324 422,322
License 26,678 33,677 51,552 70,643
Total revenue 261,974 246,015 518,876 492,965
Cost of revenue:
Cost of recurring revenue 27,516 21,822 54,474 44,323
Amortization of acquired technologies 41,135 44,834 84,256 89,326
Total cost of revenue 68,651 66,656 138,730 133,649
Gross profit 193,323 179,359 380,146 359,316
Operating expenses:
Sales and marketing 82,371 70,712 165,668 143,090
Research and development 39,106 30,745 76,867 62,590
General and administrative 50,397 24,467 98,107 54,222
Amortization of acquired intangibles 18,158 18,294 38,215 36,590
Total operating expenses 190,032 144,218 378,857 296,492
Operating income 3,291 35,141 1,289 62,824
Other income (expense):
Interest expense, net (16,191) (18,313) (32,365) (42,408)
Other income (expense), net (321) 363 (194) (395)
Total other income (expense) (16,512) (17,950) (32,559) (42,803)
Income (loss) before income taxes (13,221) 17,191 (31,270) 20,021
Income tax expense (benefit) (1,597) 4,346 (12,486) 6,761
Net income (loss) $ (11,624) $ 12,845 $ (18,784) $ 13,260
Net income (loss) available to common stockholders $ (11,624) $ 12,772 $ (18,784) $ 13,169
Net income (loss) available to common stockholders per share:
Basic earnings (loss) per share $ (0.07) $ 0.08 $ (0.12) $ 0.09
Diluted earnings (loss) per share $ (0.07) $ 0.08 $ (0.12) $ 0.08
Weighted-average shares used to compute net income (loss) available to common stockholders per share:
Shares used in computation of basic earnings (loss) per share 157,854 155,122 157,491 154,795
Shares used in computation of diluted earnings (loss) per share 157,854 157,449 157,491 156,937

The accompanying notes are an integral part of these condensed consolidated financial statements.

SolarWinds Corporation

Condensed Consolidated Statements of Operations

(In thousands, except per share information)

(Unaudited)


	Three Months Ended March 31,
	2022		2021
Revenue:
Subscription	$	38,747	$	28,317
Maintenance	115,495		120,665
Total recurring revenue	154,242		148,982
License	22,626		24,874
Total revenue	176,868		173,856
Cost of revenue:
Cost of recurring revenue	17,831		15,654
Amortization of acquired technologies	17,227		40,417
Total cost of revenue	35,058		56,071
Gross profit	141,810		117,785
Operating expenses:
Sales and marketing	61,044		57,666
Research and development	23,422		26,358
General and administrative	32,664		30,865
Amortization of acquired intangibles	13,239		14,038
Total operating expenses	130,369		128,927
Operating income (loss)	11,441		(11,142)
Other income (expense):
Interest expense, net	(16,087)		(16,174)
Other income (expense), net	(169)		656
Total other expense	(16,256)		(15,518)
Loss before income taxes	(4,815)		(26,660)
Income tax benefit	(156)		(4,880)
Net loss from continuing operations	(4,659)		(21,780)
Net income from discontinued operations, net of tax	—		14,620
Net loss	$	(4,659)	$	(7,160)
Net loss from continuing operations available to common stockholders	$	(4,659)	$	(21,780)
Net income from discontinued operations available to common stockholders	$	—	$	14,620
Net income (loss) available to common stockholders per share:
Basic loss from continuing operations per share	$	(0.03)	$	(0.14)
Basic earnings from discontinued operations per share	—		0.09
Basic loss per share	$	(0.03)	$	(0.05)
Diluted loss from continuing operations per share	$	(0.03)	$	(0.14)
Diluted earnings from discontinued operations per share	—		0.09
Diluted loss per share	$	(0.03)	$	(0.05)
Weighted-average shares used to compute net income (loss) available to common stockholders per share:
Shares used in computation of basic earnings (loss) per share	159,847		157,123
Shares used in computation of diluted earnings (loss) per share	159,847		157,123

The accompanying notes are an integral part of these condensed consolidated financial statements.

SolarWinds Corporation

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended March 31,
		2021		2020		2021		2020			2022		2021
Net income (loss)		$	(11,624)	$	12,845	$	(18,784)	$	13,260
Net loss										Net loss	$	(4,659)	$	(7,160)
Other comprehensive income (loss):	Other comprehensive income (loss):									Other comprehensive income (loss):
Foreign currency translation adjustment	Foreign currency translation adjustment	17,645		27,778		(48,105)		(2,651)		Foreign currency translation adjustment	(16,895)		(65,750)

Other comprehensive income (loss)	Other comprehensive income (loss)	17,645		27,778		(48,105)		(2,651)		Other comprehensive income (loss)	(16,895)		(65,750)
Comprehensive income (loss)	Comprehensive income (loss)	$	6,021	$	40,623	$	(66,889)	$	10,609	Comprehensive income (loss)	$	(21,554)	$	(72,910)

The accompanying notes are an integral part of these condensed consolidated financial statements.

SolarWinds Corporation

Condensed Consolidated Statements of Stockholders' Equity

(In thousands)

(Unaudited)


													Three Months Ended March 31, 2022
													Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
													Shares	Amount
Balance at December 31, 2021												Balance at December 31, 2021	159,176	$	159	$	2,566,783	$	1,306	$	(280,352)	$	2,287,896
Foreign currency translation adjustment												Foreign currency translation adjustment	—	—		—		(16,895)		—		(16,895)
Net loss												Net loss	—	—		—		—		(4,659)		(4,659)
Comprehensive loss												Comprehensive loss										(21,554)
Exercise of stock options												Exercise of stock options	16	—		12		—		—		12
Restricted stock units issued, net of shares withheld for taxes												Restricted stock units issued, net of shares withheld for taxes	1,063	1		(6,408)		—		—		(6,407)
Issuance of stock												Issuance of stock	51	—		216		—		—		216
Issuance of stock under employee stock purchase plan												Issuance of stock under employee stock purchase plan	150	—		1,753		—		—		1,753
Stock-based compensation												Stock-based compensation	—	—		15,462		—		—		15,462
Balance at March 31, 2022												Balance at March 31, 2022	160,456	$	160	$	2,577,818	$	(15,589)	$	(285,011)	$	2,277,378

	Three Months Ended June 30, 2021
	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount

Balance at March 31, 2021	157,702	$	158	$	3,124,650	$	61,462	$	(236,104)	$	2,950,166
Foreign currency translation adjustment	—	—		—		17,645		—		17,645
Net loss	—	—		—		—		(11,624)		(11,624)
Comprehensive income										6,021
Exercise of stock options	88	—		390		—		—		390
Restricted stock units issued, net of shares withheld for taxes	189	—		(1,471)		—		—		(1,471)
Issuance of stock	36	—		29		—		—		29

Stock-based compensation	—	—		16,578		—		—		16,578
Balance at June 30, 2021	158,015	$	158	$	3,140,176	$	79,107	$	(247,728)	$	2,971,713

Six Months Ended June 30, 2021

Common Stock Additional
Paid-in
Capital Accumulated
Other
Comprehensive
Income (Loss) Accumulated
Deficit Total
Stockholders’
Equity
Shares Amount
Balance at December 31, 2020 156,520 $ 157 $ 3,112,262 $ 127,212 $ (228,944) $ 3,010,687
Foreign currency translation adjustment — — — (48,105) (48,105)
Net loss — — — (18,784) (18,784)
Comprehensive loss (66,889)
Exercise of stock options 92 — 401 — — 401
Restricted stock units issued, net of shares withheld for taxes 848 1 (9,869) — — (9,868)
Issuance of stock 447 — 492 — — 492
Issuance of stock under employee stock purchase plan 108 — 3,129 — — 3,129
Stock-based compensation — — 33,761 — — 33,761
Balance at June 30, 2021 158,015 $ 158 $ 3,140,176 $ 79,107 $ (247,728) $ 2,971,713

Three Months Ended June 30, 2020

Common Stock Additional
Paid-in
Capital Accumulated
Other
Comprehensive
Income (Loss) Accumulated
Deficit Total
Stockholders’
Equity
Shares Amount
Balance at March 31, 2020 154,946 $ 155 $ 3,054,889 $ (35,676) $ (387,004) $ 2,632,364
Foreign currency translation adjustment — — — 27,778 — 27,778
Net income — — — — 12,845 12,845
Comprehensive income 40,623
Exercise of stock options 112 — 258 — — 258
Restricted stock units issued, net of shares withheld for taxes 190 1 (804) — — (803)
Issuance of stock 38 — 31 — — 31
Stock-based compensation — — 13,239 — — 13,239
Balance at June 30, 2020 155,286 $ 156 $ 3,067,613 $ (7,898) $ (374,159) $ 2,685,712

~~SolarWinds Corporation~~

~~Condensed Consolidated Statements of Stockholders' Equity (Continued)~~

~~(In thousands)~~

~~(Unaudited)~~

Six Months Ended June 30, 2020

Common Stock Additional
Paid-in
Capital Accumulated
Other
Comprehensive
Income (Loss) Accumulated
Deficit Total
Stockholders’
Equity
Shares Amount
Balance at December 31, 2019 154,145 $ 154 $ 3,042,034 $ (5,247) $ (387,419) $ 2,649,522
Foreign currency translation adjustment — — — (2,651) — (2,651)
Net income — — — — 13,260 13,260
Comprehensive income 10,609
Exercise of stock options 141 — 309 — — 309
Restricted stock units issued, net of shares withheld for taxes 329 1 (2,352) — — (2,351)
Issuance of stock 591 1 659 — — 660
Issuance of stock under employee stock purchase plan 80 — 2,357 — — 2,357
Stock-based compensation — — 24,606 — — 24,606
Balance at June 30, 2020 155,286 $ 156 $ 3,067,613 $ (7,898) $ (374,159) $ 2,685,712


	Three Months Ended March 31, 2021
	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balance at December 31, 2020	156,520	$	157	$	3,112,262	$	127,212	$	(228,944)	$	3,010,687
Foreign currency translation adjustment	—	—		—		(65,750)		—		(65,750)
Net loss	—	—		—		—		(7,160)		(7,160)
Comprehensive loss										(72,910)
Exercise of stock options	4	—		11		—		—		11
Restricted stock units issued, net of shares withheld for taxes	659	1		(8,398)		—		—		(8,397)
Issuance of stock	411	—		463		—		—		463
Issuance of stock under employee stock purchase plan	108	—		3,129		—		—		3,129
Stock-based compensation	—	—		17,183		—		—		17,183

Balance at March 31, 2021	157,702	$	158	$	3,124,650	$	61,462	$	(236,104)	$	2,950,166

The accompanying notes are an integral part of these condensed consolidated financial statements.

SolarWinds Corporation

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Three Months Ended March 31,
	2022		2021
Cash flows from operating activities
Net loss from continuing operations	$	(4,659)	$	(21,780)
Adjustments to reconcile net loss from continuing operations to net cash provided by operating activities:
Depreciation and amortization	33,928		58,355
Provision for losses on accounts receivable	297		413
Stock-based compensation expense	15,269		13,794

Amortization of debt issuance costs	2,258		2,239


Deferred taxes	(6,392)		26


Loss (gain) on foreign currency exchange rates	280		(1,462)
Other non-cash expenses	211		2,266
Changes in operating assets and liabilities, net of assets acquired and liabilities assumed in business combinations:
Accounts receivable	(3,332)		(4,515)
Income taxes receivable	(243)		487
Prepaid and other assets	8,073		(9,580)
Accounts payable	(138)		4,834
Accrued liabilities and other	(8,482)		(14,848)
Accrued interest payable	18		(3)
Income taxes payable	(822)		(14,864)
Deferred revenue	3,876		603
Other long-term liabilities	116		—
Net cash provided by operating activities from continuing operations	40,258		15,965
Cash flows from investing activities


Purchases of property and equipment	(1,180)		(3,389)
Purchases of intangible assets	(3,120)		(926)
Acquisitions, net of cash acquired	(6,500)		447


Net cash used in investing activities from continuing operations	(10,800)		(3,868)
Cash flows from financing activities


Proceeds from issuance of common stock under employee stock purchase plan	1,753		3,129
Repurchase of common stock and incentive restricted stock	(6,419)		(8,588)
Exercise of stock options	12		11




Repayments of borrowings from credit agreement	(4,975)		(4,975)



Net cash used in financing activities from continuing operations	(9,629)		(10,423)
Effect of exchange rate changes on cash and cash equivalents from continuing operations	(727)		(4,390)
Cash flows of discontinued operations
Operating activities of discontinued operations	—		10,966
Investing activities of discontinued operations	—		(3,661)
Financing activities of discontinued operations	—		—
Effect of exchange rate changes on cash and cash equivalents from discontinued operations	—		(735)
Net cash provided by discontinued activities	—		6,570
Net increase in cash and cash equivalents	19,102		3,854
Cash and cash equivalents
Beginning of period	732,116		370,498
End of period	$	751,218	$	374,352

Supplemental disclosure of cash flow information
Cash paid for interest	$	13,907	$	13,993
Cash paid for income taxes	$	6,259	$	14,408

Six Months Ended June 30,
2021 2020
Cash flows from operating activities
Net income (loss) $ (18,784) $ 13,260
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization 135,297 136,015
Provision for losses on accounts receivable 895 2,960
Stock-based compensation expense 33,522 24,245
Amortization of debt issuance costs 4,498 4,570
Deferred taxes (17,527) (16,032)
(Gain) loss on foreign currency exchange rates (674) 1,639
Other non-cash expenses (benefits) 1,033 (900)
Changes in operating assets and liabilities, net of assets acquired and liabilities assumed in business combinations:
Accounts receivable 15,455 13,854
Income taxes receivable (2,446) (104)
Prepaid and other assets (8,492) (1,224)
Accounts payable (7,441) (2,794)
Accrued liabilities and other (2,791) 1,239
Accrued interest payable (4) (89)
Income taxes payable (30,491) 4,022
Deferred revenue (18,736) 3,363
Other long-term liabilities (276) 66
Net cash provided by operating activities 83,038 184,090
Cash flows from investing activities
Purchases of property and equipment (18,124) (12,123)
Purchases of intangible assets (3,823) (4,182)
Acquisitions, net of cash acquired 447 0
Net cash used in investing activities (21,500) (16,305)
Cash flows from financing activities
Proceeds from issuance of common stock under employee stock purchase plan 3,129 2,357
Repurchase of common stock and incentive restricted stock (10,059) (2,376)
Exercise of stock options 401 309
Repayments of borrowings from credit agreement (9,950) (9,950)
Payment of debt issuance costs (903) 0
Net cash used in financing activities (17,382) (9,660)
Effect of exchange rate changes on cash and cash equivalents (4,019) (83)
Net increase in cash and cash equivalents 40,137 158,042
Cash and cash equivalents
Beginning of period 370,498 173,372
End of period $ 410,635 $ 331,414
Supplemental disclosure of cash flow information
Cash paid for interest $ 27,995 $ 38,149
Cash paid for income taxes $ 35,715 $ 16,755

The accompanying notes are an integral part of these condensed consolidated financial statements.

SolarWinds Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Organization and Nature of Operations

SolarWinds Corporation, a Delaware corporation, and its subsidiaries (“Company”, “we,” “us” and “our”) is a leading provider of simple, powerful and secure information technology, or IT, management software. Our solutions give organizations worldwide, regardless of type, size or complexity, the power to accelerate business transformation in today's hybrid IT environments. Our approach, which we refer to as the SolarWinds Model, combines ~~powerful, scalable, affordable, easy to use~~customer-driven products with an "inside-first" selling motion. We’ve built our business to enable the technology professionals who use our products to manage “all things IT.” Our range of customers has expanded over time to include network and systems engineers, database administrators, storage administrators, DevOps, SecOps and service desk ~~professionals, as well as managed service providers, or MSPs.~~professionals. Our SolarWinds Model enables us to sell our products for use in organizations ranging in size from very small businesses to large enterprises.

Spin-Off of N-able Business

On July 19, 2021, we completed the separation and distribution 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 Separation, we do not beneficially own any shares of common stock in 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. See Note 3. Discontinued Operationsfor additional information.

2. Summary of Significant Accounting Policies

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, ~~2020.~~

~~Spin-Off of N-able Business~~

On July 19, 2021, we completed the previously announced separation and distribution of our managed service provider (“MSP” or “N-able”) business into a newly created and separately traded public company, N-able, Inc. We refer to this transaction as the “Separation.” The Separation was completed by means of a tax-free, pro-rata distribution in which each holder of our common stock, par value $0.001 per share, received one share of N-able’s common stock, par value $0.001, for every two shares of our common stock held of record as of the close of business on July 12, 2021. The standalone N-able entity will provide broad cloud-based software solutions for MSPs, enabling them to support digital transformation and growth within small and medium-sized enterprises, or SMEs. SolarWinds retained its Core IT Management business focused primarily on selling software and cloud-based services to corporate IT organizations. We believe that the Separation will allow each company to more effectively pursue its distinct operating priorities, strategies and capital allocation policies, while also allowing stockholders to separately evaluate and value the companies on their distinct markets, strategies and performance. Upon completion of the Separation, SolarWinds stockholders owned shares of both companies.

Spin-off costs incurred were $13.2 million and $23.1 million during the three and six months ended June 30, 2021, respectively, which are primarily included in general and administrative expense in the condensed consolidated statements of operations. Spin-off 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 spin-off of the N-able business.

Reverse Stock Split

Effective July 30, 2021, ~~SolarWinds also~~we effected a 2:1 reverse stock split of ~~its~~our common stock. As a result of the reverse stock split, all share and per share figures contained in the condensed consolidated financial statements have been retroactively restated as if the reverse stock split occurred at the beginning of the periods presented.

Use of Estimates

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:

•the valuation of goodwill, intangibles, long-lived assets and contingent consideration;

•revenue recognition;

~~SolarWinds Corporation~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

•stock-based compensation;

•income taxes; and

•loss contingencies.

Recently Adopted Accounting Pronouncements

~~There have been no recent accounting pronouncements or changes~~In October 2021, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") No. 2021-08 "Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers", which requires an entity to recognize and measure contract assets and contract liabilities acquired in ~~accounting pronouncements that are expected~~a business combination in accordance with Accounting Standards Codification ("ASC") 606, "Revenue from Contracts with Customers", instead of at fair value on the acquisition date as previously required by ASC 805. The amendments improve comparability after the business

SolarWinds Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

combination by providing consistent recognition and measurement guidance for acquired revenue contracts and revenue contracts not acquired in a business combination. The updated guidance is effective for public companies for fiscal years beginning after December 15, 2022 and early adoption is permitted. We elected to early adopt the updated guidance prospectively as of January 1, 2022. The adoption of the standard did not have a material impact on our condensed consolidated financial ~~position,~~statements for the three months ended March 31, 2022.

Goodwill

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 when circumstances indicate an impairment may exist.

For the goodwill impairment analysis performed at December 31, 2021, we assessed several events and circumstances that could affect the significant inputs used to determine the fair value of our reporting units, including the significance of the amount of excess fair value over carrying value, consistency of operating margins and cash flows, budgeted-to-actual performance from prior year, overall change in economic climate, changes in the industry and competitive environment, key management turnover, and earnings quality and sustainability. We considered the decline in the market capitalization being less than the carrying value of our reporting unit in our evaluation of goodwill impairment indicators and determined it appropriate to perform a quantitative assessment of our reporting unit as of December 31, 2021. As a result of the impairment analysis, our reporting unit was determined to have a fair value that exceeded its carrying value by approximately 7.2%, and therefore 0 impairment was recognized.

As of March 31, 2022, while we experienced a further decline in our market capitalization, there were no unanticipated changes or negative indicators in the above qualitative factors that would impact the fair value of our reporting unit. In addition, there were no changes to factors used in the determination of our assumptions used in the discounted cash flow models regarding revenue growth rates, discount rate, estimated implications of the Cyber Incident to our cost structure, economic and market trends and other expectations about the anticipated operating results of ~~operations,~~our reporting unit. After considering all available evidence, we determined there were no indicators of impairment or changes to circumstances that more likely than not reduced the fair value of our reporting unit to less than its carrying value. We will continue to evaluate whether circumstances indicate an impairment may exist throughout the year prior to our annual impairment analysis during the fourth quarter of 2022.

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) a decrease in future cash ~~flows.~~flows due to lower than expected license sales or maintenance renewals and higher than estimated costs to respond to the Cyber Incident, (ii) higher than expected customer attrition resulting from customer concerns related to the Cyber Incident, (iii) adverse loss exposure from claims, fines or penalties from the Cyber Incident; and (iv) volatility in the equity and debt markets or other macroeconomic factors which could result in a higher weighted-average cost of capital. Accordingly, if our current cash flow assumptions are not realized or we experience sustained declines in our stock price or market capitalization, it is possible that an impairment charge may be recorded in the future, which could be material.

Fair Value Measurements

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.

See Note 4.5. Fair Value Measurements for a summary of our financial instruments accounted for at fair value on a recurring basis. The carrying amounts reported in our consolidated balance sheets for cash, accounts receivable, accounts payable and other accrued expenses approximate fair value due to relatively short periods to maturity.

SolarWinds Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

Accumulated Other Comprehensive Income (Loss)

Changes in accumulated other comprehensive income (loss) by component are summarized below:


		Foreign Currency Translation Adjustments		Accumulated Other Comprehensive Income (Loss)			Foreign Currency Translation Adjustments		Accumulated Other Comprehensive Income (Loss)

		(in thousands)					(in thousands)

Balance at December 31, 2020		$	127,212	$	127,212
Balance at December 31, 2021						Balance at December 31, 2021	$	1,306	$	1,306
Other comprehensive gain (loss) before reclassification	Other comprehensive gain (loss) before reclassification	(48,105)		(48,105)		Other comprehensive gain (loss) before reclassification	(16,895)		(16,895)
Amount reclassified from accumulated other comprehensive income (loss)	Amount reclassified from accumulated other comprehensive income (loss)	0		0		Amount reclassified from accumulated other comprehensive income (loss)	—		—
Net current period other comprehensive income (loss)	Net current period other comprehensive income (loss)	(48,105)		(48,105)		Net current period other comprehensive income (loss)	(16,895)		(16,895)
Balance at June 30, 2021		$	79,107	$	79,107
Balance at March 31, 2022						Balance at March 31, 2022	$	(15,589)	$	(15,589)

Deferred Revenue

Details of our total deferred revenue balance ~~was~~are as follows:


	Total Deferred Revenue

	(in thousands)
Balance at December 31, ~~2020~~2021	$	~~382,754~~362,669

Deferred revenue recognized	~~(266,089)~~(125,297)
Additional amounts deferred	~~243,574~~126,840
Deferred revenue acquired in business combinations	263
Balance at ~~June 30, 2021~~March 31, 2022	$	~~360,239~~364,475

We expect to recognize revenue related to these remaining performance obligations as of ~~June 30, 2021~~March 31, 2022 as follows:

Revenue Recognition Expected by Period
Total Less than 1
year 1-3 years More than
3 years
(in thousands)
Expected recognition of deferred revenue $ 360,239 $ 326,463 $ 33,408 $ 368


	Revenue Recognition Expected by Period
	Total		Less than 1 year		1-3 years		More than 3 years

	(in thousands)
Expected recognition of deferred revenue	$	364,475	$	329,017	$	34,549	$	909

Deferred Commissions

Details of our deferred commissions balance are as follows:


			Deferred Commissions
			(in thousands)
Balance at December 31, 2021			$	18,897

Commissions capitalized			1,979
Amortization recognized			(1,528)
Balance at March 31, 2022			$	19,348

	March 31,		December 31,
	2022		2021

	(in thousands)
Classified as:
Current	$	5,600	$	5,378
Non-current	13,748		13,519
Total deferred commissions	$	19,348	$	18,897

1213

SolarWinds Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

~~Deferred Commissions~~

~~Details of our deferred commissions balance was as follow~~s:

(in thousands)
Balance at December 31, 2020 $ 14,801
Commissions capitalized 4,137
Amortization recognized (2,363)
Balance at June 30, 2021 $ 16,575
June 30, December 31,
2021 2020
(in thousands)
Classified as:
Current $ 4,474 $ 3,824
Non-current 12,101 10,977
Total deferred commissions $ 16,575 $ 14,801

~~Disaggregation of Revenue~~

~~The following table summarizes our revenue by product group:~~

Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
(in thousands)
Core IT Management product revenue $ 176,788 $ 172,665 $ 350,644 $ 346,403
N-able product revenue 85,186 73,350 168,232 146,562
Total revenue $ 261,974 $ 246,015 $ 518,876 $ 492,965

Cost of Revenue

Amortization of Acquired Technologies. Amortization of acquired technologies included in cost of revenue relate to our licensed products and subscription products as follows:


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended March 31,
		2021		2020		2021		2020			2022		2021

		(in thousands)									(in thousands)
Amortization of acquired license technologies	Amortization of acquired license technologies	$	37,328	$	35,554	$	74,664	$	71,126	Amortization of acquired license technologies	$	14,483	$	37,336
Amortization of acquired subscription technologies	Amortization of acquired subscription technologies	3,807		9,280		9,592		18,200		Amortization of acquired subscription technologies	2,744		3,081
Total amortization of acquired technologies	Total amortization of acquired technologies	$	41,135	$	44,834	$	84,256	$	89,326	Total amortization of acquired technologies	$	17,227	$	40,417

The decrease in amortization of acquired license technologies was primarily due to certain intangible assets acquired in connection with our take private transaction in early 2016 being fully amortized during the three months ended March 31, 2022.

3. Discontinued Operations

As discussed in Note 1. Organization and Nature of Operations, we completed the Separation of the N‑able business into a newly created and separately traded public company, N-able, Inc., on July 19, 2021. The Separation was achieved through the transfer of all the net assets and legal entities associated with the N-able business to N-able, Inc.

In accordance with applicable accounting guidance, the results of the N-able business are presented as discontinued operations for the period up to and including the date of the Separation, and, as such, have been excluded from continuing operations for all periods presented.

SolarWinds Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

The following table summarizes the results of operations of N-able presented as discontinued operations:


	Three Months Ended March 31, 2021

	(in thousands)
Revenue:
Subscription	$	80,671
Maintenance	2,375
Total recurring revenue	83,046
License	—
Total revenue	83,046
Cost of revenue:
Cost of recurring revenue	11,304
Amortization of acquired technologies	2,704
Total cost of revenue	14,008
Gross profit	69,038
Operating expenses:
Sales and marketing	25,631
Research and development	11,403
General and administrative	16,845
Amortization of acquired intangibles	6,019
Total operating expenses	59,898
Operating income from discontinued operations	9,140
Other expense:
Interest (expense) income, net	—
Other expense, net	(529)
Total other expense	(529)
Income from discontinued operations before income taxes	8,611
Income tax benefit	(6,009)
Net income from discontinued operations, net of tax	$	14,620

We incurred $0.2 million and $9.9 million of costs in connection with the Separation during the three months ended March 31, 2022 and 2021, respectively. Spin-off costs incurred in the three months ended March 31, 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.

4. Goodwill

The following table reflects the changes in goodwill for the ~~six~~three months ended ~~June 30, 2021:~~March 31, 2022:


	(in thousands)
Balance at December 31, ~~2020~~2021	$	~~4,249,402~~3,308,405
Acquisitions	5,422
Foreign currency translation and other adjustments	~~(42,682)~~(14,359)
Balance at ~~June 30, 2021~~March 31, 2022	$	~~4,206,720~~3,299,468

SolarWinds Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

4.5. Fair Value Measurements

The following table summarizes the fair value of our financial assets that were measured on a recurring basis as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021. There have been no transfers between fair value measurement levels during the ~~six~~three months ended ~~June 30, 2021.~~March 31, 2022.


		Fair Value Measurements at June 30, 2021 Using									Fair Value Measurements at March 31, 2022 Using
		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total

		(in thousands)									(in thousands)
Money market funds	Money market funds	$	265,000	$	0	$	0	$	265,000	Money market funds	$	475,000	$	—	$	—	$	475,000
Trading security		0		0		5,337		5,337

Total assets	Total assets	$	265,000	$	0	$	5,337	$	270,337	Total assets	$	475,000	$	—	$	—	$	475,000


		Fair Value Measurements at December 31, 2020 Using									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			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total

		(in thousands)									(in thousands)
Money market funds	Money market funds	$	160,000	$	0	$	0	$	160,000	Money market funds	$	645,000	$	—	$	—	$	645,000
Trading security		0		0		5,238		5,238

Total assets	Total assets	$	160,000	$	0	$	5,238	$	165,238	Total assets	$	645,000	$	—	$	—	$	645,000

As of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~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 5.6. Debt for additional information regarding our debt.

5.6. Debt

The following table summarizes information relating to our debt:


		June 30,				December 31,					March 31,				December 31,
		2021				2020					2022				2021
		Amount		Effective Rate		Amount		Effective Rate			Amount		Effective Rate		Amount		Effective Rate

		(in thousands, except interest rates)									(in thousands, except interest rates)
Revolving credit facility	Revolving credit facility	$	0	0	%	$	0	0	%	Revolving credit facility	$	—	—	%	$	—	—	%
First Lien Term Loan (as amended) due Feb 2024	First Lien Term Loan (as amended) due Feb 2024	1,920,350		2.85	%	1,930,300		2.90	%	First Lien Term Loan (as amended) due Feb 2024	1,904,375		3.21	%	1,909,350		2.85	%

Total principal amount	Total principal amount	1,920,350				1,930,300				Total principal amount	1,904,375				1,909,350
Unamortized discount and debt issuance costs	Unamortized discount and debt issuance costs	(23,230)				(27,728)				Unamortized discount and debt issuance costs	(16,465)				(18,681)
Total debt	Total debt	1,897,120				1,902,572				Total debt	1,887,910				1,890,669
Less: Current portion of long-term debt	Less: Current portion of long-term debt	(19,900)				(19,900)				Less: Current portion of long-term debt	(19,900)				(19,900)
Total long-term debt	Total long-term debt	$	1,877,220			$	1,882,672			Total long-term debt	$	1,868,010			$	1,870,769

Senior Secured First Lien Credit Facilities

Our first lien credit agreement, as amended, or First Lien Credit Agreement, provides for senior secured first lien credit facilities, consisting of the following as of ~~June 30, 2021:~~March 31, 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

~~SolarWinds Corporation~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

•a $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 $17.5 million tranche available only in U.S. dollars, with a final maturity date of ~~February~~August 5, ~~2022.~~2023.

SolarWinds Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

Borrowings under our Revolving Credit Facility bear interest at a floating rate which is, at our option, either (1) a Eurodollar rate for a specified interest period plus an applicable margin of 2.50% or (2) a base rate plus an applicable margin of 1.50%, 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 is, at our option, either (1) a Eurodollar rate for a specified interest period plus an applicable margin of 2.75% or (2) a base rate plus an applicable margin of 1.75%, 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 ~~June 30, 2021,~~March 31, 2022, we were in compliance with all covenants of the First Lien Credit Agreement.

6.7. Earnings (Loss) Per Share

A reconciliation of the number of shares in the calculation of basic and diluted earnings (loss) per share follows:


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended March 31,
		2021		2020		2021		2020			2022		2021

		(in thousands)									(in thousands)
Basic earnings (loss) per share	Basic earnings (loss) per share									Basic earnings (loss) per share
Numerator:	Numerator:									Numerator:
Net income (loss)		$	(11,624)	$	12,845	$	(18,784)	$	13,260
Net loss from continuing operations										Net loss from continuing operations	$	(4,659)	$	(21,780)
Net income from discontinued operations										Net income from discontinued operations	—		14,620
Net loss										Net loss	(4,659)		(7,160)

Earnings allocated to unvested restricted stock	Earnings allocated to unvested restricted stock	0		(73)		0		(91)		Earnings allocated to unvested restricted stock	—		—
Net income (loss) available to common stockholders		$	(11,624)	$	12,772	$	(18,784)	$	13,169
Net loss from continuing operations available to common stockholders										Net loss from continuing operations available to common stockholders	$	(4,659)	$	(21,780)
Net income from discontinued operations available to common stockholders										Net income from discontinued operations available to common stockholders	$	—	$	14,620
Denominator:	Denominator:									Denominator:
Weighted-average common shares outstanding used in computing basic earnings (loss) per share		157,854		155,122		157,491		154,795
Weighted-average common shares outstanding used in computing basic net earnings (loss) per share										Weighted-average common shares outstanding used in computing basic net earnings (loss) per share	159,847		157,123

Diluted earnings (loss) per share
Diluted net earnings (loss) per share										Diluted net earnings (loss) per share
Numerator:	Numerator:									Numerator:
Net income (loss) available to common stockholders		$	(11,624)	$	12,772	$	(18,784)	$	13,169
Net loss from continuing operations available to common stockholders										Net loss from continuing operations available to common stockholders	$	(4,659)	$	(21,780)
Net income from discontinued operations available to common stockholders										Net income from discontinued operations available to common stockholders	$	—	$	14,620
Denominator:	Denominator:									Denominator:
Weighted-average shares used in computing basic earnings (loss) per share		157,854		155,122		157,491		154,795
Weighted-average shares used in computing basic net earnings (loss) per share										Weighted-average shares used in computing basic net earnings (loss) per share	159,847		157,123
Add dilutive impact of employee equity plans	Add dilutive impact of employee equity plans	0		2,327		0		2,142		Add dilutive impact of employee equity plans	—		—
Weighted-average shares used in computing diluted earnings (loss) per share		157,854		157,449		157,491		156,937
Weighted-average shares used in computing diluted net earnings (loss) per share										Weighted-average shares used in computing diluted net earnings (loss) per share	159,847		157,123

1517

SolarWinds Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

As a result of the reverse stock split, all share and per share figures contained in the condensed consolidated financial statements have been retroactively restated as if the reverse stock split occurred at the beginning of the periods presented.

The following weighted-average outstanding shares of common stock equivalents were excluded from the computation of the diluted net income (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,
2021 2020 2021 2020
(in thousands)
Stock options to purchase common stock 534 154 575 160
Non-vested restricted stock incentive awards 126 772 229 922
Performance-based non-vested restricted stock incentive awards 0 118 0 151
Restricted stock units 6,206 4,097 5,716 3,464
Performance stock units 62 81 79 122
Employee stock purchase plan 143 102 14 94
Total anti-dilutive shares 7,071 5,324 6,613 4,913


	Three Months Ended March 31,
	2022	2021

	(in thousands)






Total anti-dilutive shares	9,618	6,626

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 ~~purchase of restricted stock~~ or proceeds from the employee stock purchase plan.

7.8. Income Taxes

For the three months ended ~~June 30,~~March 31, 2022 and 2021, ~~and 2020,~~ we recorded income tax benefit from continuing operations of ~~$1.6~~$0.2 million and ~~income tax expense of $4.3~~$4.9 million, respectively, resulting in an effective tax rate of ~~12.1%~~3.2% and 25.3%, respectively. For the six months ended June 30, 2021 and 2020, we recorded income tax benefit of $12.5 million and income tax expense of $6.8 million, respectively, resulting in an effective tax rate of 39.9% and 33.8%18.3%, respectively. The decrease in the effective tax rate for the three months ended ~~June 30, 2021~~March 31, 2022 compared to the same period in ~~2020 was primarily due to a decrease in income before income taxes and an increase in state taxes. The increase in the effective tax rate for the six months ended June 30,~~ 2021 ~~compared to the same period in 2020~~ was primarily due to the ~~reversal of uncertain~~excess tax ~~positions~~deficiency from stock-based compensation, partially offset by an increase in ~~the amount of $6.1 million and related accrued interest in the amount of $2.7 million resulting from an IRS settlement agreement entered into during the six months ended June 30, 2021.~~permanent differences.

Our policy is to include interest and penalties related to unrecognized tax benefits as a component of income tax expense. At ~~June 30, 2021,~~March 31, 2022, we had accrued interest and penalties related to unrecognized tax benefits of approximately $2.9 million.

We file U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitations. The ~~2012~~2013 through ~~2020~~February 2016 and 2018 through 2021 tax years generally remain open and subject to examination by federal tax authorities. The 2012 through 2021 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 2013 through the period ending February 2016. ~~During the three months ended March 31, 2021, we finalized a settlement agreement with the IRS for the tax years 2011 to 2012.~~ We are under audit by the Indian Tax Authority for the 2017 and 2019 tax ~~year.~~years. We are currently under audit by the California Franchise Tax Board for the 2012 through 2014 tax years and the Texas Comptroller for the 2015 through 2018 tax years. ~~The Massachusetts Department of Revenue audit for the 2015 through February 2016 tax years closed with immaterial adjustments.~~ We are not currently under audit in any other taxing jurisdictions.

8.9. Commitments and Contingencies

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. ~~As we disclosed in our investigatory update, we have substantially completed this process and believe the threat actor is no longer active in our environments.~~

Expenses Incurred

For the three months ended ~~June 30, 2021,~~March 31, 2022, we recorded pretax gross expenses related to the Cyber Incident of ~~$13.6~~$5.7 million and included $0.2 million of these gross expenses in cost of recurring revenue, $0.1 million in sales and marketing expense and $5.5 million in general and administrative expense in the condensed consolidated statements of operations.

~~SolarWinds Corporation~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

probable of recovery under our insurance coverage, ~~of $2.9 million,~~ for pretax net expenses of ~~$10.7~~$10.2 million. ~~For the three months ended June 30, 2021, we~~We have included ~~$0.7~~$0.8 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, 2021, we recorded pretax gross expenses related to the Cyber Incident of $34.0 million, partially offset by insurance receipts and expected insurance proceeds for costs we believe are reimbursable and probable of recovery 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$18.8 million in general and administrative expense in the condensed consolidated statements of operations.

Litigation, Claims and Government Investigations

As a result of the Cyber Incident, we are subject to ~~numerous~~multiple lawsuits and investigations. ~~Multiple~~A consolidated putative class action ~~lawsuits~~lawsuit alleging ~~among other things,~~ violations of the federal securities laws ~~are~~is pending against us and certain of our current and former officers. The complainants seek certification of a class of all persons who purchased or otherwise acquired our securities ~~during set periods of time~~between October 18, 2018 and December 17, 2020 and seek unspecified monetary damages, costs and attorneys’ fees. In August 2021, the Company and all other named defendants in the securities class action filed motions to dismiss the

SolarWinds Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

consolidated class action ~~complaint which is pending before~~complaint. On March 30, 2022, the ~~court.~~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, atwo shareholder derivative ~~action,~~actions, purportedly on behalf of the Company, isare 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 ~~cyberattack.~~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.

In 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 class or classes and the size 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 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.~~Incident, which we renewed in June 2021. As of ~~June 30, 2021,~~March 31, 2022, we ~~recorded a loss recovery asset~~had received insurance proceeds payments of ~~$2.1~~$15 million for costs incurred related to the Cyber Incident. In addition, we maintain $50 million of directors and officers liability insurance ~~proceeds deemed probable~~coverage to reduce our exposure to our indemnification obligations for certain expenses incurred by our directors and officers, including as a result of ~~recovery~~the legal proceedings related to the Cyber 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 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 ~~is included in prepaid~~N-able will be responsible. The amount of the indemnification liability, if any, cannot be determined and ~~other current assets~~has not been recorded in our condensed consolidated ~~balance sheet and received payments~~financial statements as of ~~$11.0 million for costs incurred.~~March 31, 2022.

Other Matters

In addition to the Cyber Incident described above, from time to time we are involved in litigation arising from the normal course of business. In management's opinion, this litigation is not expected to have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

~~SolarWinds Corporation~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~9. Subsequent Events~~

~~On July~~ 19 2021, we completed the Separation of our N-able business into a newly created and separately traded public company, N-able, Inc. The Separation was completed by means of a tax-free, pro-rata distribution in which each holder of our common stock, par value $0.001 per share, received one share of N-able’s common stock, par value $0.001, for every two shares of our common stock held of record as of the close of business on July 12, 2021. ~~In connection with the Separation,~~ ~~N‑able~~ closed a private placement of its common stock and entered into a credit facility. Upon the closing of such private placement and such credit facility, and prior to the completion of the Separation, on July 19, 2021, N-able distributed the net proceeds from the private placement of approximately $216.0 million as well as the net proceeds of the term loan of approximately $16.5 million to us.

After the distribution, we do not beneficially own any shares of common stock in N-able and will no longer consolidate N‑able into our financial results for periods ending after July 19, 2021. As a result, beginning in the third quarter of 2021, N‑able's historical financial results through the Separation will be reflected in our consolidated financial statements as a discontinued operation.

On July 26, 2021, we announced that the Company intended to effect a reverse stock split of its common stock at a ratio of one post-split share for every 2 pre-split shares. The reverse stock split became effective on Friday, July 30, 2021 at 5:00pm ET. SolarWinds common stock continued to trade on the NYSE under the symbol SWI and began trading on a split-adjusted basis on Monday, August 2, 2021. As a result of the reverse stock split, all share and per share figures contained in the financial statements have been retroactively restated as if the reverse stock split occurred at the beginning of the periods presented.

On July 27, 2021, we entered into Amendment No. 5 to our First Lien Credit Agreement to extend the maturity date of our Revolving Credit Facility to August 5, 2023. The borrowing capacity under the amended Revolving Credit Facility was unchanged.

On July 30, 2021, the Board declared a special one-time cash dividend, to be paid following the effectiveness of, and after giving effect to, the reverse stock split, equal to $1.50 per share of common stock issued and outstanding as of August 9, 2021, to be paid on August 24, 2021 (the “Special Dividend”). The Special Dividend will be funded primarily from the net proceeds distributed to the Company by N-able in connection with the Separation.

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 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 Annual Report on Form 10-K for the year ended December 31, ~~2020~~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, management software. Our solutions give organizations worldwide, regardless of type, size or complexity, the power to accelerate business transformation in today's hybrid IT environments. We combine ~~powerful, scalable, affordable, easy to use~~customer-driven products with an "inside-first" sales model to grow our business while also generating significant cash flow.

We offer a broad portfolio of solutions designed to help technology professionals to monitor, manage and optimize networks, systems, desktops, applications, storage, databases, website infrastructures and IT 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.

On 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 Take Private. We applied purchase accounting on the date of the Take Private. In October 2018, we completed our initial public offering, or IPO, and once again become a publicly traded company.

Spin-Off of N-able Business

On July 19, 2021, we completed the ~~previously announced~~ separation and distribution of our managed service provider (“~~MSP” or “N-able”~~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 common stock in 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 significant costs in connection with the Separation which we refer to as “spin-off costs.” We incurred $0.2 million and $9.9 million of costs in connection with the Separation during the three months ended March 31, 2022 and 2021, respectively. Spin-off costs incurred in the three months ended March 31, 2021 are primarily reflected in our condensed consolidated statements of operations as discontinued operations. Of these amounts, the spin-off costs included in continuing operations were $0.2 million and $0.3 million for the three months ended March 31, 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. ~~As we disclosed in our investigatory update, we have substantially completed this process and believe the threat actor is no longer active in our environments.~~ 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 March 31, 2021, we recorded pretax gross expenses related to the Cyber Incident of $20.4 million, partially offset by ~~insurance receipts and~~$10.2 million of expected insurance proceeds for costs we believe ~~are~~were reimbursable and probable of recovery under our insurance coverage, ~~of $2.9 million,~~ for pretax net expenses of ~~$10.7~~$10.2 million. ~~For the three months ended June 30, 2021, we~~We have included ~~$0.7~~$0.8 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.~~

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, ~~will increase~~have increased our ~~expenses. We currently estimate that the costs associated with our "Secure By Design" initiatives will be~~ongoing expenses by approximately $20 million on an annual basis. These costs ~~will~~are primarily be 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 ~~Part I, Item 1A. Risk Factors – Risks Related to Cybersecurity and the Cyber Incident~~ ~~in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 and~~Note 8.9. 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 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.

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 ~~will~~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. WeSee Note 9. 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. ~~We are also providing, at our cost, free third-party support services to customers related to the Cyber Incident.~~ 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 business or reputation related to the Cyber Incident are uncertain, they could be significant. ~~We also expect to incur increased expenses and capital investments related to our “Secure By Design” initiatives.~~

Insurance Coverage

We maintain $15 million of cybersecurity insurance coverage to limit our exposure to losses such as those related to the Cyber ~~Incident.~~Incident, which we renewed in June 2021. As of ~~June 30, 2021,~~March 31, 2022, we ~~recorded a loss recovery asset of $2.1 million for~~had received insurance proceeds ~~deemed probable of recovery which is included in prepaid and other current assets in our condensed consolidated balance sheet and received~~ payments of ~~$11.0~~$15 million for costs ~~incurred.~~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

~~The~~We continue to monitor the impact from the ~~rapidly~~ changing market and economic conditions due to the COVID-19 pandemic on our ~~business is uncertain. We initially responded to~~business. While the impact of the COVID-19 pandemic ~~by executing our business continuity plan and transitioning nearly all of our workforce~~contributed to a remote working environment to prioritize the safety of our personnel. Substantially all of our workforce is currently working remotely. Due to the nature of our business, at this time, we have seen an impact on our financial results, including a decline in our license revenue, ~~but~~based on current conditions, we do not expect to experience a significant ~~long-term~~ongoing impact related to the COVID-19 pandemic on our financial results ~~due to the COVID-19 pandemic.~~in future periods. However, we are unable to predict with a level of precision the longer term impact, itif 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, ~~actions that may be taken by governmental authorities in response~~virus mutations and variants, the availability and efficacy of vaccines and boosters, the willingness of individuals to obtain vaccines and boosters, the ~~pandemic, its~~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, ~~2020.~~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.

~~Spin-Off of N-able Business~~

~~On July 19, 2021, we completed~~First Quarter Highlights

Below are our key financial highlights from continuing operations for the ~~previously announced separation of our MSP business into a newly created and separately traded public company, N-able, Inc. We refer to this transaction~~three months ended March 31, 2022 as the “Separation.” The Separation was completed by means of a distribution in which each holder of our common stock, par value $0.001 per share, received one share of N‑able’s common stock, par value $0.001, for every two shares of our common stock held of record as of the close of business on July 12, 2021. The standalone N-able entity will provide broad cloud-based software solutions for managed service providers, or MSPs, enabling them to support digital transformation and growth within small and medium-sized enterprises, or SMEs. SolarWinds retained its Core IT Management business focused primarily on selling software and cloud-based services to corporate IT organizations. We believe that the Separation will allow each company to more effectively pursue its distinct operating priorities, strategies and capital allocation policies, while also allowing stockholders to separately evaluate and value the companies on their distinct markets, strategies and performance. The Separation was structured as a tax-free, pro-rata

distribution to all SolarWinds stockholders as of July 12, 2021. Upon completion of the Separation, SolarWinds stockholders owned shares of both companies. We have incurred significant costs in connection with the Separation which we refer to as “spin-off costs.” Spin-off costs include legal, accounting and advisory fees, implementation and integration costs, duplicative costs for subscriptions and information technology systems, employee and contractor costs and other incremental separation costs relatedcompared to the spin-off of the N‑able business. The Separation has resulted in operating expenses that would not otherwise have been incurred by us in the normal course of our organic business operations. Spin-off costs incurred were $13.2 million and $23.1 million during the three ~~and six~~ months ended ~~June 30, 2021, respectively. We expect spin-off costs to subside in the second half of~~March 31, 2021.

~~Second Quarter Financial Highlights~~Customers

Our approach, which we call the ~~“SolarWinds~~"The SolarWinds Model,~~” is based on our commitment~~" allows us to ~~building~~both sell to a ~~business that is focused on growth~~broad group of potential customers and ~~profitability. Below are our key financial highlights~~close large transactions with significant customers. As of March 31, 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 852 customers who spent more than $100,000 with us for the ~~three months~~trailing twelve-month period ended ~~June 30, 2021~~March 31, 2022 as compared to ~~the three months ended June 30, 2020.~~

~~Revenue~~

~~Our total revenue was $262.0 million and $246.0 million~~771 for the ~~three months~~twelve-month period ended ~~June 30,~~March 31, 2021, and 2020, respectively. Our non-GAAP total revenue, which excludes the impact of purchase accounting, was $262.0 million and $246.6 million for the three months ended June 30, 2021 and 2020, respectively. Recurring revenue, which consists of subscription and maintenance revenue, represented approximately 90% of our total revenue for the three months ended June 30, 2021 comparedas adjusted to ~~86% for the three months ended June 30, 2020. We have increased our recurring revenue as a result~~exclude customers of the ~~growth in our subscription sales and the continued growth of our maintenance revenue.~~N-able business.

Our Core IT Management products are targeted for IT service and operations professionals, DevOps and SecOps professionals, and Database Administrators (DBAs) and provide hybrid IT performance management with a deep visibility into applications, databases, IT infrastructures, and the full IT stack, while remaining infrastructure-location agnostic. Core IT Management product revenue was $176.8 million and $172.7 million for the three months ended June 30, 2021 and 2020, respectively.

~~N‑able product revenue was $85.2 million and $73.4 million for the three months ended June 30, 2021 and 2020, respectively. We did not retain any N-able products following the Separation.~~

We use Subscription Annual Recurring Revenue, or Subscription ARR, and Total Annual Recurring Revenue, or Total ARR, to evaluate the results of our recurring revenue model. Subscription ARR represents the annualized recurring value of all active subscription contracts at the end of a reporting period. As of June 30, 2021, Subscription ARR was $463.3 million, up from $393.6 million as of June 30, 2020. 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. As of June 30, 2021, Total ARR was $992.5 million, up from $872.5 million as of June 30, 2020, reflecting an increase of 13.8%. As of June 30, 2021, Core IT Management Total ARR was $639.7 million, up from $570.6 million as of June 30, 2020, reflecting an increase of 12.1%.

~~As of June 30, 2021, we had over 320,000 customers. We have a broad and diverse customer base that is not concentrated in any segment or vertical industry.~~ 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.

The SolarWinds Model allows us to both sell to a broad group of potential customers and close large transactions with significant customers. While some customers may spend as little as $100 with us over a twelve-month period, we had 1,107 customers who spent more than $100,000 with us for the trailing twelve-month period ended June 30, 2021 as compared to 958 for the twelve-month period ended June 30, 2020.Annual Recurring Revenue (ARR)

We ~~expect that~~use Subscription Annual Recurring Revenue, or Subscription ARR, and Total Annual Recurring Revenue, or Total ARR, to better understand and assess the ~~continued~~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.


	Three Months Ended March 31,				Year-over-Year Growth
	2022		2021

	(in thousands, except percentages)
Subscription ARR(1)	$	141,840	$	108,911	30.2	%
Total ARR(2)	622,860		622,470		0.1

_______

(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 ~~the use~~Subscription ARR was primarily driven by sales of ~~public and private clouds and cross-selling of~~our time-based subscription ~~products into our existing customer base could result in an increase in~~offerings primarily resulting from customers transitioning to our subscription ~~revenue. Our subscription revenue~~pricing model, as well as sales of our database monitoring and service desk solutions. Total ARR increased slightly due to growth in Subscription ARR which was partially offset by a ~~percentage~~decline in the annualized value of ~~total revenue will decrease~~maintenance contracts as a result of ~~the Separation of the N-able business. We expect that our continued efforts to increase subscription revenue, coupled with our~~lower new perpetual license sales and lower maintenance ~~revenue, will result in recurring revenue continuing to increase as a percentage of total revenue.~~

Our license revenue has declined as a percentage of total revenue primarily due to the higher growth of our recurring revenue and the impact of the Cyber Incident on our second quarter results and represented approximately 10.2% of our total

revenue in the three months ended June 30, 2021. We expect license revenue to increase as a percentage of revenue as a result of the Separation of the N-able business. However, over time license revenue as a percentage of total revenue may decline or fluctuate as we grow our recurring revenue.

~~Profitability~~

Our net loss for the three months ended June 30, 2021 was $11.6 million compared to net income of $12.8 million for the three months ended June 30, 2020. Our Adjusted EBITDA was $111.1 million and $119.1 million for the three months ended June 30, 2021 and 2020, respectively.

~~Cash Flow~~

We have built our business to generate strong cash flow over the long term. For the three months ended June 30, 2021 and 2020, cash flows from operations were $56.1 million and $105.7 million, respectively. During those periods, our cash flows from operations were reduced by cash payments for interest on our long-term debt of $14.0 million and $16.2 million, respectively and cash payments for income taxes of $21.3 million and $10.7 million, respectively. The Cyber Incident and the spin-off of our N-able business have negatively impacted our cash flows in 2021.

~~Cyber Incident~~

The Cyber Incident is expected to negatively impact revenue, profitability and cash flows in 2021 and beyond. Certain of our customers have, and others may, defer renewals or cancel subscriptions which would have a negative impact on our revenue. In addition, we expect to incur significant expenses associated with the Cyber Incident in future periods, primarily related to legal proceedings and regulatory investigations, ~~increased customer support activities and other related matters~~, and increased costs and expenses for insurance, compliance activities, and to meet increased legal and regulatory requirements. We also expect to incur increased expenses and capital investments associated with our ~~“Secure By Design” initiatives in 2021. See~~ ~~Note 8. 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~~renewal rates related to the Cyber Incident.

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.

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. ~~Subscription~~We recognize revenue ~~includes sales of our N‑able products as well as our cloud infrastructure, database, application performance management and IT service management, or ITSM products. We generally 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 ~~for~~ 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 ~~monthly based on usage or~~ in advance over the subscription period on either a monthly or annual ~~basis.~~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. In April 2020, we launched subscription pricing options for certain of our network, systems and database management products that have historically been sold as perpetual licenses. The on-premise subscription option gives customers additional flexibility when purchasing our products. The on-premise subscription offerings are time-based revenue arrangements recognized at a point in time upon delivery of the software and support is recognized ratably over the contract period.

•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 allocate revenue to the license component based upon our estimated standalone selling prices, which is derived by evaluating our historical 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 ~~gradual~~continued shift in the mix between license and recurring revenue in each quarter as new customers purchase these ~~on-premise~~ subscription offerings. Our license sales and maintenance renewal rates may decline or fluctuate in future periods as customers transition to our subscription offerings and as a result of the Cyber Incident.

Cost of Revenue

•Cost of Recurring Revenue. Cost of recurring revenue 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 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. Amortization of acquired technologies ~~primarily~~ consists of amortization related to capitalized costs of technologies acquired in connection with the Take Private and ~~to a lesser extent, acquired technologies from 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. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, sales commissions, stock-based compensation and an allocation of overhead costs based

on headcount. The total number of employees as of ~~June 30, 2021~~March 31, 2022 was ~~3,443,~~2,199, as compared to ~~3,274~~2,074 as of ~~June 30, 2020.~~March 31, 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.~~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~~Separation of the N-able business ~~will result~~resulted in dis-synergies associated with increased overhead costs and duplicate hiring which increased certain expenses for ~~the remainder of~~ 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 ~~to employees and directors,~~ which will result in additional stock-based compensation expense in future periods. We also expect our travel costs may 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 costs, acquisition costs, certain Cyber Incident ~~and spin-off~~ costs, professional fees and other general corporate expenses. ~~As a result of the~~The Cyber Incident ~~we expect an increase~~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 ~~near term.~~timing of 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.

Other Income (Expense)

Other income (expense) primarily consists of interest expense and gains (losses) resulting from changes in exchange rates on foreign currency denominated accounts. We expect interest expense ~~to decrease~~may increase as ~~we repay indebtedness.~~a result of 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. 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 ~~may~~could 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.

Comparison of the Three Months Ended ~~June 30,~~March 31, 2022 and 2021 ~~and 2020~~

Revenue


		Three Months Ended June 30,											Three Months Ended March 31,
		2021				2020							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)
Subscription	Subscription	$	112,429	42.9	%	$	95,840	39.0	%	$	16,589	Subscription	$	38,747	21.9	%	$	28,317	16.3	%	$	10,430
Maintenance	Maintenance	122,867		46.9		116,498		47.4		6,369		Maintenance	115,495		65.3		120,665		69.4		(5,170)
Total recurring revenue	Total recurring revenue	235,296		89.8		212,338		86.3		22,958		Total recurring revenue	154,242		87.2		148,982		85.7		5,260
License	License	26,678		10.2		33,677		13.7		(6,999)		License	22,626		12.8		24,874		14.3		(2,248)
Total revenue	Total revenue	$	261,974	100.0	%	$	246,015	100.0	%	$	15,959	Total revenue	$	176,868	100.0	%	$	173,856	100.0	%	$	3,012

Total revenue increased ~~$16.0~~$3.0 million, or ~~6.5%~~1.7%, for the three months ended ~~June 30, 2021~~March 31, 2022 compared to the three months ended ~~June 30, 2020.~~March 31, 2021. Revenue from North America was approximately ~~63% and 66%~~69% of total revenue for both the three months ended ~~June 30, 2021~~March 31, 2022 and ~~2020, 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. ~~Core IT Management product~~

The Cyber Incident has negatively impacted revenue, ~~was $176.8 million~~profitability and cash flows and may continue to do so throughout 2022 and beyond. 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 the Cyber Incident, our maintenance renewal rate for the ~~three months ended June 30, 2021 compared to $172.7 million for the three months ended June 30, 2020, representing an increase of 2.4%. N‑able product revenue~~trailing twelve month period was ~~$85.2 million for the three months ended June 30, 2021 compared to $73.4 million for the three months ended June 30, 2020, representing an increase of 16.1%~~89%.

Recurring Revenue

Subscription Revenue. Subscription revenue increased ~~$16.6~~$10.4 million, or ~~17.3%~~36.8%, for the three months ended ~~June 30, 2021~~March 31, 2022 compared to the three months ended ~~June 30, 2020,~~March 31, 2021, primarily due to increased sales of ~~additional N‑able products and the effect~~our time-based subscription offerings resulting from customers, including our largest maintenance customer, transitioning to our subscription pricing model as well as sales of ~~the strengthening of most foreign currencies relative to the U.S. dollar. N‑able~~our database monitoring solutions. Our subscription revenue ~~was $82.8 million~~increased as a percentage of our total revenue for the three months ended ~~June 30, 2021~~March 31, 2022 as compared to ~~$70.8 million for~~ the three months ended June 30, 2020, representing an increase of 16.9%. Core IT Management subscription revenue was $29.6 million for the three months ended June 30, 2021 compared to $25.0 million for the three months ended June 30, 2020, representing an increase of 18.4%.March 31, 2021.


	Trailing Twelve-Months Ended March 31,
	2022		2021

Net retention rate(1)	96	%	96	%

_______

(1)Net retention rate for subscription products asrepresents 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 ~~increased $6.4~~decreased $5.2 million, or ~~5.5%~~4.3%, for the three months ended ~~June 30, 2021~~March 31, 2022 compared to the three months ended ~~June 30, 2020~~March 31, 2021, primarily due to ~~strong~~the impact on maintenance revenue from decreased sales of our licensed products, customers transitioning to our time-based subscription offerings and a decline in our maintenance renewal ~~rates.~~rate primarily due to the Cyber Incident.

Our maintenance renewal rate for our perpetual license products was ~~approximately 90% and 92%, respectively, for the trailing twelve-month periods ended June 30, 2021 and 2020. The decrease in the maintenance~~as follows:


	Trailing Twelve-Months Ended March 31,
	2022		2021

Maintenance renewal rate(1)	89	%	92	%

_______

(1)Maintenance renewal rate for the trailing twelve-month period ended June 30, 2021 was primarily due to a decline in renewals due to the Cyber Incident. We expect our maintenance renewal rates may decline or fluctuate in future periods as a result of the Cyber Incident and as customers transition to our subscription offerings. We define our maintenance renewal rate asrepresents 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 ~~$7.0~~$2.2 million, or ~~20.8%~~9.0%, primarily due to ~~decreased sales of our licensed products as a result of the Cyber Incident, the continuing impact of the difficult economic environment caused by COVID-19 and~~ an increase in the subscription sales of our network, systems and database management products that have historically been sold only as perpetual licenses. ~~We expect our license sales may decline or fluctuate in future periods as a result of the Cyber Incident and as customers transition to our subscription offerings.~~

Cost of Revenue


		Three Months Ended June 30,											Three Months Ended March 31,
		2021				2020							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	Cost of recurring revenue	$	27,516	10.5	%	$	21,822	8.9	%	$	5,694	Cost of recurring revenue	$	17,831	10.1	%	$	15,654	9.0	%	$	2,177
Amortization of acquired technologies	Amortization of acquired technologies	41,135		15.7		44,834		18.2		(3,699)		Amortization of acquired technologies	17,227		9.7		40,417		23.2		(23,190)
Total cost of revenue	Total cost of revenue	$	68,651	26.2	%	$	66,656	27.1	%	$	1,995	Total cost of revenue	$	35,058	19.8	%	$	56,071	32.3	%	$	(21,013)

Total cost of revenue ~~increased~~decreased in the three months ended ~~June 30, 2021~~March 31, 2022 compared to the three months ended ~~June 30, 2020~~March 31, 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 increased primarily due to increases in public cloud infrastructure and hosting fees related to our subscription ~~products~~offerings of ~~$2.6~~$2.5 million and personnel costs to support ~~new~~our customers and additional product offerings of ~~$1.6~~$0.3 million, ~~which includes~~partially offset by a ~~$0.2 million increase~~decrease in ~~stock-based compensation expense, depreciation and other amortization of $0.8 million and~~ costs related to the Cyber Incident of $0.7 million.

Operating Expenses


	Three Months Ended March 31,
	2022				2021
	Amount		Percentage of Revenue		Amount		Percentage of Revenue		Change

	(in thousands, except percentages)
Sales and marketing	$	61,044	34.5	%	$	57,666	33.2	%	$	3,378
Research and development	23,422		13.2		26,358		15.2		(2,936)
General and administrative	32,664		18.5		30,865		17.8		1,799
Amortization of acquired intangibles	13,239		7.5		14,038		8.1		(799)
Total operating expenses	$	130,369	73.7	%	$	128,927	74.2	%	$	1,442

Sales and Marketing. Sales and marketing expenses increased $3.4 million, or 5.9%, primarily due to increases in personnel costs of $2.6 million, marketing program costs of $0.6 million and travel costs of $0.3 million. These increases were partially offset by a decrease in ~~amortization of acquired subscription technologies.~~

~~Operating Expenses~~

Three Months Ended June 30,
2021 2020
Amount Percentage of Revenue Amount Percentage of Revenue Change
(in thousands, except percentages)
Sales and marketing $ 82,371 31.4 % $ 70,712 28.7 % $ 11,659
Research and development 39,106 14.9 30,745 12.5 8,361
General and administrative 50,397 19.2 24,467 9.9 25,930
Amortization of acquired intangibles 18,158 6.9 18,294 7.4 (136)
Total operating expenses $ 190,032 72.5 % $ 144,218 58.6 % $ 45,814

~~Sales and Marketing.~~ Sales and marketing expenses increased $11.7 million, or 16.5%, primarily due to increases in personnel costs of $7.1 million, which includes an increase of $1.5 million in stock-based compensation expense, and marketing program costs and public relation costs resulting from the Cyber Incident ~~increased $3.6~~of $0.7 million. We have increased our sales and marketing employee headcount, and we expect to ~~support the growth~~incur additional costs in ~~the business~~future periods as we expand our international sales teams and ~~through the acquisitions.~~focus on enterprise customers.

Research and Development. Research and development expenses ~~increased $8.4~~decreased $2.9 million, or ~~27.2%~~11.1%, primarily due to a decrease in personnel costs of $5.2 million, partially offset by an increase in contract services of $1.5 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 ~~personnel costs of $5.3 million,~~employee turnover, as well as a ~~$1.0~~$1.6 million increase in ~~contract services and $0.7 million of~~capitalized employee costs primarily related to ~~the spin-off of~~ our ~~N-able business. We increased~~work on our ~~worldwide research and development employee headcount to expedite delivery of product enhancements and new product offerings to our customers as well as through acquisitions.~~Observability platform.

General and Administrative. General and administrative expenses increased ~~$25.9~~$1.8 million, or ~~106.0%~~5.8%, primarily due to ~~$12.4 million of costs related to the spin-off of our N‑able business, $9.3 million of costs related to the Cyber Incident, net of~~ ~~insurance proceeds,~~ ~~and~~ a ~~$3.2~~$2.5 million increase in personnel costs, which ~~includes a $2.3 million~~is primarily related to an increase in stock-based compensation ~~expense. As~~expense, a ~~result of~~$1.2 million increase in directors and officers liability and cybersecurity insurance costs and professional fees and a $0.7 million increase in restructuring costs. These increases were partially offset by a $3.1 million decrease in costs related to the Cyber ~~Incident, we expect an increase in general and administrative expenses for the remainder of 2021.~~Incident.

Amortization of Acquired Intangibles. Amortization of acquired intangibles decreased ~~$0.1~~$0.8 million, or ~~0.7%~~5.7% primarily due to certain acquired intangibles being fully amortized during the period and the impact of changes in foreign currency exchange rates.

2526

Interest Expense, Net

Three Months Ended June 30,
2021 2020
Amount Percentage of Revenue Amount Percentage of Revenue Change
(in thousands, except percentages)
Interest expense, net $ (16,191) (6.2) % $ (18,313) (7.4) % $ 2,122


	Three Months Ended March 31,
	2022				2021
	Amount		Percentage of Revenue		Amount		Percentage of Revenue		Change

	(in thousands, except percentages)
Interest expense, net	$	(16,087)	(9.1)	%	$	(16,174)	(9.3)	%	$	87

Interest expense, net decreased by ~~$2.1~~$0.1 million, or ~~11.6%~~0.5%, in the three months ended ~~June 30, 2021~~March 31, 2022 compared to the three months ended ~~June 30, 2020.~~March 31, 2021. The decrease in interest expense is primarily due ~~to decreases in interest rates on our debt and~~ the reduction in our outstanding debt balance related to quarterly principal repayments. The weighted-average effective interest rate on our debt was 2.9% for both the three months ended ~~June 30, 2021 was 2.85% compared to 3.26% for the three months ended June 30, 2020.~~March 31, 2022 and 2021. See Note 5.6. 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,
2021 2020
Amount Percentage of Revenue Amount Percentage of Revenue Change
(in thousands, except percentages)
Other income (expense), net $ (321) (0.1) % $ 363 0.1 % $ (684)


	Three Months Ended March 31,
	2022				2021
	Amount		Percentage of Revenue		Amount		Percentage of Revenue		Change

	(in thousands, except percentages)

Other income (expense), net	$	(169)	(0.1)	%	$	656	0.4	%	$	(825)

Other income (expense), net decreased by ~~$0.7~~$0.8 million in the three months ended ~~June 30, 2021~~March 31, 2022 compared to the three months ended ~~June 30, 2020~~March 31, 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,
2021 2020
Amount Percentage of Revenue Amount Percentage of Revenue Change
(in thousands, except percentages)
Income (loss) before income taxes $ (13,221) (5.0) % $ 17,191 7.0 % $ (30,412)
Income tax expense (benefit) (1,597) (0.6) 4,346 1.8 (5,943)
Effective tax rate 12.1 % 25.3 % (13.2) %


	Three Months Ended March 31,
	2022					2021
	Amount			Percentage of Revenue		Amount			Percentage of Revenue		Change

	(in thousands, except percentages)
Loss before income taxes	$	(4,815)		(2.7)	%	$	(26,660)		(15.3)	%	$	21,845
Income tax benefit	(156)			(0.1)		(4,880)			(2.8)		4,724
Effective tax rate	3.2		%			18.3		%			(15.1)		%

Our income tax benefit for the three months ended ~~June 30, 2021~~March 31, 2022 was ~~$1.6~~$0.2 million as compared to ~~income tax expense of $4.3~~$4.9 million for the three months ended ~~June 30, 2020.~~March 31, 2021. The effective tax rate decreased to ~~12.1%~~3.2% for the period primarily due to ~~a decrease in income before income taxes and~~the excess tax deficiency from stock-based compensation, partially offset by an increase in ~~state taxes.~~permanent differences. For additional discussion about our income taxes, see Note 7.8. Income Taxes in the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Form 10-Q.

Discontinued Operations

~~Comparison of the Six Months Ended June 30, 2021 and 2020~~

~~Revenue~~

Six Months Ended June 30,
2021 2020
Amount Percentage of Revenue Amount Percentage of Revenue Change
(in thousands, except percentages)
Subscription $ 221,417 42.7 % $ 189,475 38.4 % $ 31,942
Maintenance 245,907 47.4 232,847 47.2 13,060
Total recurring revenue 467,324 90.1 422,322 85.7 45,002
License 51,552 9.9 70,643 14.3 (19,091)
Total revenue $ 518,876 100.0 % $ 492,965 100.0 % $ 25,911

Total revenue increased $25.9 million, or 5.3%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. Revenue from North America was approximately 63% and 66% of total revenue for the six months ended June 30, 2021 and 2020, respectively. 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. Core IT Management product revenue was $350.6 million for the six months ended June 30, 2021 compared to $346.4 million for the six months ended June 30, 2020, representing an increase of 1.2%. N-able product revenue was $168.2 million for the six months ended June 30, 2021 compared to $146.6 million for the six months ended June 30, 2020, representing an increase of 14.8%.

~~Recurring Revenue~~

~~Subscription Revenue.~~ Subscription revenue increased $31.9 million, or 16.9%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020, primarily due to sales of additional N-able products and the effect of the strengthening of most foreign currencies relative to the U.S. dollar. N‑able subscription revenue was $163.5 million for the six months ended June 30, 2021 compared to $141.0 million for the six months ended June 30, 2020, representing an increase of 15.9%. Core IT Management subscription revenue was $58.0 million for the six months ended June 30, 2021 compared to $48.5 million for the six months ended June 30, 2020, representing an increase of 19.5%.

Our net retention rate for our subscription products was approximately 104% and 105% for the trailing twelve-month periods ended June 30, 2021 and 2020, respectively, and was driven primarily by strong customer retention and expansion in our N-able products. We define our net retention rate for subscription products as 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 calculation for that same customer base.

~~Maintenance Revenue.~~ ~~Maintenance revenue increased $13.1 million, or 5.6%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 primarily due to strong maintenance renewal rates.~~

Our maintenance renewal rate for our perpetual license products was approximately 90% and 92%, respectively for the trailing twelve-month periods ended June 30, 2021 and 2020. The decrease in the maintenance renewal rate for the trailing twelve-month period ended June 30, 2021 was primarily due to a decline in renewals due to the Cyber Incident. We expect our maintenance renewal rates may decline or fluctuate in future periods as a result of the Cyber Incident and as customers transition to our subscription offerings. We define our maintenance renewal rate as 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 decreased $19.1 million, or 27.0%, primarily due to decreased sales of our licensed products as a result of the Cyber Incident, the continuing impact of the difficult economic environment caused by COVID-19 and an increase in the subscription sales of our network, systems and database management products that have historically been sold only as perpetual licenses. We expect our license sales may decline or fluctuate in future periods as a result of the Cyber Incident and as customers transition to our subscription offerings.


		Three Months Ended March 31,
	2021
		Amount		Percentage of Revenue

		(in thousands, except percentages)
Total revenue		$	83,046	100.0	%
Total cost of revenue		14,008		16.9
Operating expenses		59,898		72.1
Income before income taxes		8,611		10.4
Income tax benefit		(6,009)		(7.2)
Income from discontinued operations, net of taxes		14,620		17.6

~~Cost of Revenue~~

Six Months Ended June 30,
2021 2020
Amount Percentage of Revenue Amount Percentage of Revenue Change
(in thousands, except percentages)
Cost of recurring revenue $ 54,474 10.5 % $ 44,323 9.0 % $ 10,151
Amortization of acquired technologies 84,256 16.2 89,326 18.1 (5,070)
Total cost of revenue $ 138,730 26.7 % $ 133,649 27.1 % $ 5,081

Total cost of revenue increased in the six months ended June 30, 2021 compared to the six months ended June 30, 2020 primarily due to increases in public cloud infrastructure and hosting fees related to our subscription products of $4.2 million, personnel costs to support new customers and additional product offerings of $2.7 million, which includes a $0.3 million increase in stock-based compensation expense, depreciation and other amortization of $1.7 million and costs related to the Cyber Incident of $1.5 million. These increases were partially offset by a decrease in amortization of acquired subscription technologies.

~~Operating Expenses~~

Six Months Ended June 30,
2021 2020
Amount Percentage of Revenue Amount Percentage of Revenue Change
(in thousands, except percentages)
Sales and marketing $ 165,668 31.9 % $ 143,090 29.0 % $ 22,578
Research and development 76,867 14.8 62,590 12.7 14,277
General and administrative 98,107 18.9 54,222 11.0 43,885
Amortization of acquired intangibles 38,215 7.4 36,590 7.4 1,625
Total operating expenses $ 378,857 73.0 % $ 296,492 60.1 % $ 82,365

~~Sales and Marketing.~~ Sales and marketing expenses increased $22.6 million, or 15.8%, primarily due to increases in personnel costs of $16.1 million, which includes an increase of $5.0 million in stock-based compensation expense, and marketing program costs and public relation costs resulting from the Cyber Incident increased $5.6 million. We increased our sales and marketing employee headcount to support the growth in the business andN‑able's historical financial results through the ~~acquisitions.~~

~~Research and Development.~~ ~~Research and development expenses increased $14.3 million, or 22.8%, primarily due to an increase in personnel costs~~Separation date of $11.3 million, which includes an increase of $0.7 million in stock-based compensation expense, a $1.3 million increase in contract services and $0.9 million of costs related to the spin-off of our N-able business. We increased our worldwide research and development employee headcount to expedite delivery of product enhancements and new product offerings to our customers as well as through acquisitions.

~~General and Administrative~~. General and administrative expenses increased $43.9 million, or 80.9%, primarily due to a $21.6 million increase in costs related to the spin-off of our N-able business, $17.9 million of costs related to the Cyber Incident, net of insurance proceeds, and a $6.8 million increase in personnel costs, which includes an increase of $4.1 million in stock-based compensation expense. These increases were partially offset by a decreaseJuly 19, 2021 are reflected in our ~~provision for losses on accounts receivables of $2.1 million. As a result of the Cyber Incident, we expect an increase in general and administrative expenses for the remainder of 2021.~~condensed consolidated financial statements as discontinued operations.

~~Amortization of Acquired Intangibles.~~ ~~Amortization of acquired intangibles increased $1.6 million, or 4.4%, primarily due to amortization related to intangibles acquired in the fourth quarter of 2020.~~

~~Interest Expense, Net~~

Six Months Ended June 30,
2021 2020
Amount Percentage of Revenue Amount Percentage of Revenue Change
(in thousands, except percentages)
Interest expense, net $ (32,365) (6.2) % $ (42,408) (8.6) % $ 10,043

Interest expense, net decreased by $10.0 million, or 23.7%, in the six months ended June 30, 2021 compared to the six months ended June 30, 2020. The decrease in interest expense is primarily due to decreases in interest rates on our debt and the reduction in our outstanding debt balance related to quarterly principal repayments. The weighted-average effective interest rate on our debt for the six months ended June 30, 2021 was 2.87% compared to 3.84% for the six months ended June 30, 2020. See ~~Note5. 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~~

Six Months Ended June 30,
2021 2020
Amount Percentage of Revenue Amount Percentage of Revenue Change
(in thousands, except percentages)
Other income (expense), net $ (194) — % $ (395) (0.1) % $ 201

Other income (expense), net decreased by $0.2 million in the six months ended June 30, 2021 compared to the six months ended June 30, 2020 primarily due to the impact of changes in foreign currency exchange rates related to various accounts for the period.

~~Income Tax Expense (Benefit)~~

Six Months Ended June 30,
2021 2020
Amount Percentage of Revenue Amount Percentage of Revenue Change
(in thousands, except percentages)
Income (loss) before income taxes $ (31,270) (6.0) % $ 20,021 4.1 % $ (51,291)
Income tax expense (benefit) (12,486) (2.4) 6,761 1.4 (19,247)
Effective tax rate 39.9 % 33.8 % 6.1 %

Our income tax benefit for the six months ended June 30, 2021 was $12.5 million as compared to income tax expense of $6.8 million for the six months ended June 30, 2020. The effective tax rate increased to 39.9% for the period primarily due to the reversal of uncertain tax positions in the amount of $6.1 million and related accrued interest in the amount of $2.7 million due to an IRS settlement agreement entered into during the first quarter of 2021. For additional discussion about our income taxes, see ~~Note 7. 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.~~

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. 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, ~~costs related to the spin-off of our N‑able business,~~ the Cyber Incident and restructuring costs, 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 from ~~our~~ acquisitions. We ~~monitor these measures~~historically monitored this measure to assess our performance because we ~~believe~~believed our revenue growth ~~rates~~rate would be overstated without ~~these adjustments.~~this adjustment. We ~~believe~~believed presenting ~~non-GAAP subscription revenue, non-GAAP maintenance revenue, non-GAAP license revenue and~~ non-GAAP total revenue ~~aids~~aided 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 June 30, Six Months Ended June 30,
2021 2020 2021 2020
(in thousands)
Revenue:
GAAP subscription revenue $ 112,429 $ 95,840 $ 221,417 $ 189,475
Impact of purchase accounting 55 560 134 2,073
Non-GAAP subscription revenue 112,484 96,400 221,551 191,548
GAAP maintenance revenue 122,867 116,498 245,907 232,847
Impact of purchase accounting — — — —
Non-GAAP maintenance revenue 122,867 116,498 245,907 232,847
GAAP total recurring revenue 235,296 212,338 467,324 422,322
Impact of purchase accounting 55 560 134 2,073
Non-GAAP total recurring revenue 235,351 212,898 467,458 424,395
GAAP license revenue 26,678 33,677 51,552 70,643
Impact of purchase accounting — — — —
Non-GAAP license revenue 26,678 33,677 51,552 70,643
Total GAAP revenue $ 261,974 $ 246,015 $ 518,876 $ 492,965
Impact of purchase accounting $ 55 $ 560 $ 134 $ 2,073
Total non-GAAP revenue $ 262,029 $ 246,575 $ 519,010 $ 495,038


	Three Months Ended March 31,
	2022		2021


	(in thousands)













Total GAAP revenue	$	176,868	$	173,856
Impact of purchase accounting(1)	—		79
Total non-GAAP revenue	$	176,868	$	173,935

_______________

30(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 other ~~costs, spin-off~~ costs, restructuring costs and Cyber Incident costs. 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 and Related Employer-Paid Payroll Taxes. We provide non-GAAP information that excludes expenses related to stock-based 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 Other Costs. We exclude certain expense items resulting from 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 ~~expense~~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 other 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.

•~~Spin-off Costs.~~ We exclude certain expense items resulting from the Separation. These costs include legal, accounting and advisory fees, implementation and integration costs, duplicative costs for subscriptions and information technology systems, employee and contractor costs and other incremental separation costs related to the spin-off of the N‑able business. The Separation has resulted 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 non-GAAP measures that exclude these costs facilitates a more meaningful evaluation of our operating performance and comparisons to our past operating performance.

•Restructuring Costs. We provide non-GAAP information that excludes restructuring costs such as severance and the estimated costs of exiting and terminating facility lease commitments, as they relate to our corporate restructuring and exit 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 costs 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 costs 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.


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended March 31,
		2021			2020			2021			2020				2022			2021

		(in thousands, except margin data)													(in thousands, except margin data)
GAAP operating income		$	3,291		$	35,141		$	1,289		$	62,824
GAAP operating income (loss) from continuing operations														GAAP operating income (loss) from continuing operations	$	11,441		$	(11,142)
Impact of purchase accounting	Impact of purchase accounting	55			560			134			2,073			Impact of purchase accounting	—			79
Stock-based compensation expense and related employer-paid payroll taxes	Stock-based compensation expense and related employer-paid payroll taxes	16,667			13,152			34,779			24,635			Stock-based compensation expense and related employer-paid payroll taxes	15,937			14,528
Amortization of acquired technologies	Amortization of acquired technologies	41,135			44,834			84,256			89,326			Amortization of acquired technologies	17,227			40,417
Amortization of acquired intangibles	Amortization of acquired intangibles	18,158			18,294			38,215			36,590			Amortization of acquired intangibles	13,239			14,038
Acquisition and other costs	Acquisition and other costs	245			878			1,171			2,821			Acquisition and other costs	168			926
Spin-off costs		13,197			—			23,092			—

Restructuring costs	Restructuring costs	1,173			(9)			1,582			213			Restructuring costs	1,423			735
Cyber Incident costs, net	Cyber Incident costs, net	10,732			—			20,895			—			Cyber Incident costs, net	5,716			10,163
Non-GAAP operating income	Non-GAAP operating income	$	104,653		$	112,850		$	205,413		$	218,482		Non-GAAP operating income	$	65,151		$	69,744
GAAP operating margin	GAAP operating margin	1.3		%	14.3		%	0.2		%	12.7		%	GAAP operating margin	6.5		%	(6.4)		%
Non-GAAP operating margin	Non-GAAP operating margin	39.9		%	45.8		%	39.6		%	44.1		%	Non-GAAP operating margin	36.8		%	40.1		%

Adjusted EBITDA and 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 ~~costs, spin-off~~ costs, Cyber Incident costs, interest expense, net, debt related costs 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 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 March 31,
		2021			2020			2021			2020				2022			2021

		(in thousands, except margin data)													(in thousands, except margin data)
Net income (loss)		$	(11,624)		$	12,845		$	(18,784)		$	13,260
Net loss from continuing operations														Net loss from continuing operations	$	(4,659)		$	(21,780)
Amortization and depreciation	Amortization and depreciation	65,612			68,247			135,297			136,015			Amortization and depreciation	33,928			58,355
Income tax expense (benefit)		(1,597)			4,346			(12,486)			6,761
Income tax benefit														Income tax benefit	(156)			(4,880)
Interest expense, net	Interest expense, net	16,191			18,313			32,365			42,408			Interest expense, net	16,087			16,174
Impact of purchase accounting on total revenue	Impact of purchase accounting on total revenue	55			560			134			2,073			Impact of purchase accounting on total revenue	—			79
Unrealized foreign currency (gains) losses	Unrealized foreign currency (gains) losses	367			656			(674)			1,639			Unrealized foreign currency (gains) losses	280			(1,449)
Acquisition and other costs	Acquisition and other costs	245			878			1,171			2,821			Acquisition and other costs	168			926
Spin-off costs		13,197			—			23,092			—

Debt related costs	Debt related costs	93			91			192			184			Debt related costs	102			99
Stock-based compensation expense and related employer-paid payroll taxes	Stock-based compensation expense and related employer-paid payroll taxes	16,667			13,152			34,779			24,635			Stock-based compensation expense and related employer-paid payroll taxes	15,937			14,528
Restructuring costs	Restructuring costs	1,173			(9)			1,582			213			Restructuring costs	1,387			735
Cyber Incident costs, net	Cyber Incident costs, net	10,732			—			20,895			—			Cyber Incident costs, net	5,716			10,163
Adjusted EBITDA	Adjusted EBITDA	$	111,111		$	119,079		$	217,563		$	230,009		Adjusted EBITDA	$	68,790		$	72,950
Adjusted EBITDA margin	Adjusted EBITDA margin	42.4		%	48.3		%	41.9		%	46.5		%	Adjusted EBITDA margin	38.9		%	41.9		%

Liquidity and Capital Resources

Cash and cash equivalents increased during the quarter and were ~~$410.6~~$751.2 million as of ~~June 30, 2021.~~March 31, 2022. Our international subsidiaries held approximately ~~$79.8~~$34.9 million of cash and cash equivalents, of which ~~30.6%~~59.0% were held in Euros. 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 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 on foreign 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.~~ pandemic as well as the war in Ukraine.

However, despite these uncertainties, wewe 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.

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 ~~June 30, 2021,~~March 31, 2022, our total indebtedness was $1.9 billion, with up to $117.5 million of available borrowings under our revolving credit facility. See Note 5.6. 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.

First Lien Credit Agreement

The First Lien Credit Agreement, as amended, provides for a senior secured revolving credit facility in an aggregate principal amount of $117.5 million, or the Revolving Credit Facility, consisting of a $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, plus (b) the amount of certain voluntary prepayments of the First Lien Credit Facilities, plus (c) an unlimited amount subject to pro forma compliance with a first lien net leverage ratio not to exceed 4.75 to 1.00.

As of June 30, 2021, all commitments under the Revolving Credit Facility have a maturity date of February 5, 2022. On July 27, 2021, we entered into Amendment No. 5 to our First Lien Credit Agreement to extend the maturity date of our Revolving Credit Facility to August 5, 2023. The borrowing capacity under the amended Revolving Credit Facility was unchanged.

~~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.

Summary of Cash Flows

Summarized cash flow information is as follows:

Six Months Ended June 30,
2021 2020
(in thousands)
Net cash provided by operating activities $ 83,038 $ 184,090
Net cash used in investing activities (21,500) (16,305)
Net cash used in financing activities (17,382) (9,660)
Effect of exchange rate changes on cash and cash equivalents (4,019) (83)
Net increase in cash and cash equivalents 40,137 158,042


	Three Months Ended March 31,
	2022		2021

	(in thousands)
Net cash provided by operating activities from continuing operations	$	40,258	$	15,965
Net cash used in investing activities from continuing operations	(10,800)		(3,868)
Net cash used in financing activities from continuing operations	(9,629)		(10,423)
Effect of exchange rate changes on cash and cash equivalents from continuing operations	(727)		(4,390)
Net cash provided by discontinued operations	—		6,570
Net increase in cash and cash equivalents	$	19,102	$	3,854

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 ~~six~~three months ended ~~June 30, 2021~~March 31, 2022 as compared to the ~~six~~three months ended ~~June 30, 2020,~~March 31, 2021, the ~~decrease~~increase in cash provided by operating activities was primarily due to decreased cash ~~inflows~~outflows resulting from the changes in our operating assets and ~~liabilities and a decrease in net income for the period.~~liabilities. The net cash outflow resulting from the changes in our operating assets and liabilities was ~~$55.2~~$0.9 million for the ~~six~~three months ended ~~June 30, 2021~~March 31, 2022 as compared to a net cash ~~inflow $18.3~~outflow of $37.9 million for the ~~six~~three months ended ~~June 30, 2020~~March 31, 2021 and was primarily due to the timing of sales and cash payments and receipts. During the ~~six~~three months ended ~~June 30,~~March 31, 2022, cash flow from operations includes $5.0 million of insurance proceeds received for costs incurred related to the Cyber Incident. During the three months ended March 31, 2021, cash flow from operations was impacted by ~~lower license sales and maintenance renewal bookings, as well as~~ an increase in cash

payments for expenses resulting from the ~~spin-off of the N-able business~~Cyber Incident and the ~~Cyber Incident. In addition,~~Separation. Net cash ~~flows from operations for the six months ended June 30, 2021 were~~provided by operating activities was reduced by ~~an increase in~~$6.3 million and $14.4 million of cash paid for ~~taxes.~~taxes for the three months ended March 31, 2022 and 2021, respectively.

Investing Activities

Investing cash flows consist primarily of cash used for ~~purchases of~~acquisitions, capital expenditures and purchases of intangible ~~assets and acquisitions.~~assets. Our capital expenditures primarily relate to purchases of leasehold improvements, computers, servers and equipment to support our domestic and international office locations. Purchases of intangible assets consist primarily of capitalized research and development costs.

Net cash used in investing activities increased in the ~~six~~three months ended ~~June 30, 2021~~March 31, 2022 as compared to the ~~six~~three months ended ~~June 30, 2020~~March 31, 2021, primarily due to the acquisition of Monalytic, Inc., a monitoring, analytics and professional services company, during the period and an increase in ~~cash used for purchases of property~~capitalized research and ~~equipment~~development costs related to ~~purchases of leasehold improvements, equipment and furniture.~~our subscription-based offerings.

Financing Activities

Financing cash flows consist primarily of issuance and repayments associated with our long-term debt, the proceeds from the issuance of shares of common stock through equity incentive plans and the repurchase of unvested incentive restricted stock and common stock to satisfy withholding tax requirements related to the settlement of restricted stock units.

Net cash used in financing activities ~~increased~~decreased slightly in the ~~six~~three months ended ~~June 30, 2021~~March 31, 2022 as compared to the ~~six~~three months ended ~~June 30, 2020~~March 31, 2021, primarily due ~~to an increase~~a reduction in repurchases of common stock and ~~payments for debt issuance costs,~~incentive restricted stock, partially offset by an

~~increase~~a decrease in proceeds from issuance of common stock under our employee stock purchase plan.

In the ~~six~~three months ended ~~June 30,~~March 31, 2022 and 2021, we withheld and retired shares of common stock to satisfy ~~$9.9~~$6.4 million and $8.4 million, respectively, of statutory withholding tax requirements that we pay in cash to the appropriate taxing authorities on behalf of our employees related to the settlement of restricted stock units during the period. These shares are treated as common stock repurchases in our condensed consolidated financial statements. ~~For~~

In each ~~period,~~of the three months ended March 31, 2022 and 2021, we made $5.0 million of quarterly principal payments ~~of $10.0 million due~~ under our First Lien Credit Agreement. ~~In the six months ended June 30, 2021, we paid $0.9 million in debt issuance costs related to the credit facility N-able entered into at the separation and distribution in July 2021.~~

Contractual Obligations and Commitments

As of ~~June 30, 2021,~~March 31, 2022, there have been no material changes in our contractual obligations and commitments as of December 31, ~~2020~~2021 that were disclosed in our Annual Report on Form 10-K.

During the three months ended March 31, 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 purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

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 Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 filed with the SEC on ~~March 1, 2021.~~February 25, 2022. There have been no material changes to our critical accounting policies and estimates since that time.

Goodwill

As of March 31, 2022, while we experienced a further decline in our market capitalization, there were no unanticipated changes or negative indicators in the above qualitative factors that would impact the fair value of our reporting unit. In addition, there were no changes to factors used in the determination of our assumptions used in the discounted cash flow models regarding revenue growth rates, discount rate, estimated implications of the Cyber Incident to our cost structure, economic and market trends and other expectations about the anticipated operating results of our reporting unit. After considering all available evidence, we determined there were no indicators of impairment or changes to circumstances that more likely than not reduced the fair value of our reporting unit to less than its carrying value. We will continue to evaluate whether circumstances indicate an impairment may exist throughout the year prior to our annual impairment analysis during the fourth quarter of 2022.

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) a decrease in future cash flows due to lower than expected license sales or maintenance renewals and higher than estimated costs to respond to the Cyber Incident, (ii) higher than expected customer attrition resulting from customer concerns related to the Cyber Incident, (iii) adverse loss exposure from claims, fines or penalties from the Cyber Incident and (iv) volatility in the equity and debt markets or other macroeconomic factors which could result in a higher weighted-average cost of capital. Accordingly, if our current cash flow assumptions are not realized or we experience sustained declines in our stock price or market capitalization, it is possible that an impairment charge may be recorded in the future, which could be material.

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 six months ended June 30, 2021, 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 ~~$410.6~~$751.2 million and ~~$370.5~~$732.1 million at ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively. Our cash and cash equivalents consist primarily of bank demand deposits and money market funds. 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 ~~June 30, 2021.~~

March 31, 2022.

We had total indebtedness with an outstanding principal balance of ~~$1.9~~$1.90 billion at ~~each of June 30, 2021~~March 31, 2022 and $1.91 billion at December 31, ~~2020.~~2021. Borrowings outstanding under our credit agreement bear interest at variable rates equal to applicable margins plus specified base rates or LIBOR-based rates with a 0% floor. As of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, the annual weighted-average rate on borrowings was ~~2.85%~~3.21% and ~~2.90%~~2.85%, respectively. If there was a hypothetical 100 basis point

increase in interest rates, the annual impact to interest expense would be approximately ~~$19.3~~$19.1 million. This hypothetical change in interest expense has been calculated based on the borrowings outstanding at December 31, ~~2020~~2021 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 $1.9 billion U.S. dollar term loans as of ~~June 30, 2021,~~March 31, 2022, not subject to market pricing.

See Note 5.6. 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.

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, 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 could 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 ~~those~~the functional ~~currencies~~currency 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.

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 ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~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 three ~~and six~~ months ended ~~June 30, 2021~~March 31, 2022 and ~~2020.~~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 ~~June 30, 2021.~~March 31, 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 ~~June 30, 2021,~~March 31, 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 ~~June 30, 2021~~March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

3735

PART II: OTHER INFORMATION

Item 1. Legal Proceedings

For 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 8.9. 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, 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. 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

~~With the exception of the following updated risk factors, there~~There have been no other material changes in our risk factors from those disclosed in Part I, Item 1A, under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021.

Item 2. Unregistered Sales of Equity Securities and ~~those disclosed in Part II, Item 1A, under the heading "Risk Factors" in our Quarterly Report on Form 10-Q for the year ended March 31, 2021.~~Use of Proceeds

~~Risks Related~~Issuer Purchases of Equity Securities


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)
January 1-31, 2022	—	$	—	—	$	—
February 1-28, 2022	—	—		—	—
March 1-31, 2022	3,600	3.39		—	—
Total	3,600			—

________________

(1)All repurchases relate to ~~the N-able Spin-Off~~

~~The spin-off~~employee held restricted stock that is subject to vesting. Unvested shares are subject to a right of ~~N-able may not achieve some or all of the anticipated benefits, which may disrupt or adversely affect our business, results of operations and financial condition.~~

~~We may not realize some or all of the anticipated strategic, financial, operational, marketing or other benefits from the Separation, or such benefits may be delayed~~repurchase by a variety of circumstances, which may not be under our control. SolarWinds is smaller and less diversified after the Separation with a narrower business focus and may be more vulnerable to changing market conditions, which could materially and adversely affect our business, financial condition and results of operations. We may not be successful in achieving our business and operational objectives. We also may experience increased difficulties in attracting, retaining and motivating employees or maintaining or initiating relationships with partners, customers and other parties with which we currently do business, or may do businessus in the ~~future, which may adversely affect our business, results of operations and financial condition.~~

~~We could incur significant liability if~~event the ~~Separation is determined~~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 ~~taxable transaction.~~

We received opinions of tax counsel and tax advisors regarding qualification of the Separation, together with certain related transactions, as transactions that are generally tax-free for U.S. federal income tax purposes under Sections 368(a)(1)(D) and/or 355 of the Code. These opinions are based upon and rely on, among other things, certain facts and assumptions, as well as certain representations, statements and undertakingsresult of us exercising this right and ~~N-able, including those relating~~not pursuant to ~~the past and future conduct. If any of these representations, statements~~a publicly announced plan or undertakings are, or become, incomplete or inaccurate, or if we or N-able breaches any of the respective covenants in any of the Separation-related agreements, the opinion of tax counsel and tax advisors could be invalid and the conclusions reached therein could be jeopardized.

Notwithstanding any opinion of tax counsel and tax advisors, the Internal Revenue Service (the “IRS”) could determine that the Separation (and certain related transactions) should be treated as a taxable transaction if it were to determine that any of the facts, assumptions, representations, statements or undertakings upon which any opinion of tax counsel and tax advisors was based were false or had been violated, or if it were to disagree with the conclusions in the opinions of our tax counsel and tax advisors. The opinions of tax counsel and tax advisors are not binding on the IRS or the courts, and we cannot assure that the IRS or a court would not assert a contrary position.

If the Separation (and certain related transactions) were to fail to qualify as a transaction that is generally tax-free for U.S. federal income tax purposes under Sections 368(a)(1)(D) and/or 355 of the Code, in general, we would recognize taxable gain as if we had sold N-able common stock in a taxable sale for its fair market value, and our stockholders who received shares of N-able common stock in the distribution would be subject to tax as if they had received a taxable distribution equal to the fair market value of such shares.program.

3836

~~Potential indemnification liabilities pursuant to the Separation could materially affect our business and financial statements.~~

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. These agreements provide for specific indemnity and liability obligations of each party that can lead to disputes between us and N-able. If we are required to indemnify N-able under the circumstances set forth in these agreements, we may be subject to substantial liabilities. In addition, with respect to the liabilities for which N-able has agreed to indemnify us under these agreements, there can be no assurance that the indemnity rights we have against N-able will be sufficient to protect us against the full amount of the liabilities, or that N-able will be able to fully satisfy its indemnification obligations. It is also possible that a court could disregard the allocation of assets and liabilities agreed to between SolarWinds and N-able and require SolarWinds to assume responsibility for obligations allocated to N-able.

~~N-able may fail to perform under various transaction agreements that were executed as part of the Separation.~~

In addition to indemnification obligations, the separation and distribution agreement and related agreements with N-able include arrangements with respect to support services and a number of ongoing licensing relationships. We will rely on N-able to satisfy its performance and payment obligations under these agreements. If N-able is unable or unwilling to satisfy its obligations under these agreements we could incur operational difficulties and/or losses.

Item 6. Exhibits

EXHIBIT INDEX


Exhibit Number						Exhibit Title
3.1						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)
3.2						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)
3.3						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)
31.1*						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
31.2*						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
32.1**						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*						Interactive Data Files (formatted as Inline XBRL)
104*						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)


*			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

3937

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.


		SOLARWINDS CORPORATION

Dated:	~~August~~May 6, ~~2021~~2022	By:	/s/ J. Barton Kalsu

			J. Barton Kalsu
			Chief Financial Officer
			(Principal Financial and Accounting Officer)

4038


	Six Months Ended June 30, 2021
	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balance at December 31, 2020	156,520	$	157	$	3,112,262	$	127,212	$	(228,944)	$	3,010,687
Foreign currency translation adjustment	—	—		—		(48,105)				(48,105)
Net loss	—	—		—				(18,784)		(18,784)
Comprehensive loss										(66,889)
Exercise of stock options	92	—		401		—		—		401
Restricted stock units issued, net of shares withheld for taxes	848	1		(9,869)		—		—		(9,868)
Issuance of stock	447	—		492		—		—		492
Issuance of stock under employee stock purchase plan	108	—		3,129		—		—		3,129
Stock-based compensation	—	—		33,761		—		—		33,761
Balance at June 30, 2021	158,015	$	158	$	3,140,176	$	79,107	$	(247,728)	$	2,971,713


	Three Months Ended June 30, 2020
	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount










Balance at March 31, 2020	154,946	$	155	$	3,054,889	$	(35,676)	$	(387,004)	$	2,632,364
Foreign currency translation adjustment	—	—		—		27,778		—		27,778
Net income	—	—		—		—		12,845		12,845
Comprehensive income										40,623
Exercise of stock options	112	—		258		—		—		258
Restricted stock units issued, net of shares withheld for taxes	190	1		(804)		—		—		(803)
Issuance of stock	38	—		31		—		—		31


Stock-based compensation	—	—		13,239		—		—		13,239
Balance at June 30, 2020	155,286	$	156	$	3,067,613	$	(7,898)	$	(374,159)	$	2,685,712


	Six Months Ended June 30, 2020
	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balance at December 31, 2019	154,145	$	154	$	3,042,034	$	(5,247)	$	(387,419)	$	2,649,522
Foreign currency translation adjustment	—	—		—		(2,651)		—		(2,651)
Net income	—	—		—		—		13,260		13,260
Comprehensive income										10,609
Exercise of stock options	141	—		309		—		—		309
Restricted stock units issued, net of shares withheld for taxes	329	1		(2,352)		—		—		(2,351)
Issuance of stock	591	1		659		—		—		660
Issuance of stock under employee stock purchase plan	80	—		2,357		—		—		2,357

Stock-based compensation	—	—		24,606		—		—		24,606
Balance at June 30, 2020	155,286	$	156	$	3,067,613	$	(7,898)	$	(374,159)	$	2,685,712


			(in thousands)
Balance at December 31, 2020			$	14,801

Commissions capitalized			4,137
Amortization recognized			(2,363)
Balance at June 30, 2021			$	16,575

	June 30,		December 31,
	2021		2020

	(in thousands)
Classified as:
Current	$	4,474	$	3,824
Non-current	12,101		10,977
Total deferred commissions	$	16,575	$	14,801