0001834488-21-000008.txt : 20210812 0001834488-21-000008.hdr.sgml : 20210812 20210812161007 ACCESSION NUMBER: 0001834488-21-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 50 CONFORMED PERIOD OF REPORT: 20210630 FILED AS OF DATE: 20210812 DATE AS OF CHANGE: 20210812 FILER: COMPANY DATA: COMPANY CONFORMED NAME: N-able, Inc. CENTRAL INDEX KEY: 0001834488 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 854069861 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-40297 FILM NUMBER: 211167615 BUSINESS ADDRESS: STREET 1: 1209 ORANGE STREET CITY: WILMINGTON STATE: DE ZIP: 19801 BUSINESS PHONE: 5126829300 MAIL ADDRESS: STREET 1: 1209 ORANGE STREET CITY: WILMINGTON STATE: DE ZIP: 19801 FORMER COMPANY: FORMER CONFORMED NAME: N-able, LLC DATE OF NAME CHANGE: 20210323 FORMER COMPANY: FORMER CONFORMED NAME: SWI Spinco, LLC DATE OF NAME CHANGE: 20201202 10-Q 1 nabl-20210630.htm 10-Q nabl-20210630
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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
or
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: 001-40297
N-able, Inc.
(Exact name of registrant as specified in its charter)
Delaware 85-4069861
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)
301 Edgewater Dr
Suite 306
Wakefield, Massachusetts 01880
(781) 328-6490
(Address and telephone number of principal executive offices) 

Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading SymbolName of Each Exchange on Which Registered
Common Stock, $0.001 par valueNABLNew 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 filerAccelerated filer
Non-accelerated filerSmaller 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 5, 2021, 178,747,623 shares of common stock, par value $0.001 per share, were outstanding.



N-able, Inc.

Table of Contents
PART I - FINANCIAL INFORMATION
Page
Item 1.
Item 2.
Item 3.
Item 4.
PART II - OTHER INFORMATION
Item 1.
Item 1A.
Item 2.
Item 5.
Item 6.
Certifications

2


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, 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;
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;
intentions regarding our international earnings;
expectations regarding our capital expenditures;
expectations regarding the impact of the COVID-19 pandemic on our business, results of operations and financial condition;
our beliefs regarding the sufficiency of our cash and cash equivalents, cash flows from operating activities and borrowing capacity; and
expectations regarding our spin-off from SolarWinds Corporation ("SolarWinds") into a newly created and separately traded public company.
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:
risks related to our spin-off from SolarWinds into a newly created and separately-traded public company, including that the spin-off could disrupt or adversely affect our business, results of operations and financial condition, that the spin-off may not achieve some or all of any anticipated benefits with respect to our business; that the distribution, together with certain related transactions, may not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes, which could result in N-able incurring significant tax liabilities, and, in certain circumstances, requiring us to indemnify SolarWinds for material taxes and other related amounts pursuant to indemnification obligations under the tax matters agreement;
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;
our ability to sell subscriptions to new MSP partners, to sell additional solutions to our existing MSP partners and to increase the usage of our solutions by our existing MSP partners, as well as our ability to generate and maintain MSP partner loyalty;
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 a result of the COVID-19 pandemic;
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 inability to successfully identify, complete and integrate acquisitions and manage our growth effectively;
risks associated with our international operations;
risks that cyberattacks, including the cyberattack on SolarWinds’ Orion Software Platform and internal systems announced by SolarWinds in December 2020, or the Cyber Incident, and other security incidents may result, in compromises or breaches of our, our MSP partners’, or their SME customers’ systems, the insertion of malicious code, malware, ransomware or other vulnerabilities into our, our MSP partners’, or their SME customers’ environments, the exploitation of vulnerabilities in our, our MSP partners’, or their SME customers’ security, the theft or misappropriation of our, our
3


MSP partners’, or their SME customers’ proprietary and confidential information, and interference with our, our MSP partners’, or their SME customers’ operations, exposure to legal and other liabilities, higher MSP partner and employee attrition and the loss of key personnel, negative impacts to our sales, renewals and upgrades and reputational harm and other serious negative consequences, any or all of which could materially harm our business;
our status as a controlled company;
our ability to attract and retain qualified employees and key personnel as a standalone public company;
the timing and success of new product introductions and product upgrades by N-able or its competitors;
our ability to protect and defend our intellectual property and not infringe upon others’ intellectual property;
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 this Quarterly Report on Form 10-Q.

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.
In this report “N-able,” “Company,” “we,” “us” and “our” refer to N-able, Inc. and its consolidated subsidiaries, and references to “SolarWinds” and “Parent” refer to SolarWinds Corporation.
4


PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
N-able, Inc.
Combined Balance Sheets
(In thousands)
(Unaudited)
June 30,December 31,
20212020
Assets
Current assets:
Cash and cash equivalents$49,600 $99,790 
Accounts receivable, net of allowances of $652 and $751 as of June 30, 2021 and December 31, 2020, respectively
30,279 29,086 
Income tax receivable1,424 1,262 
Prepaid and other current assets9,491 5,584 
Total current assets90,794 135,722 
Property and equipment, net27,787 19,590 
Operating lease right-of-use assets33,579 13,697 
Deferred taxes3,313 2,982 
Goodwill860,496 874,083 
Intangible assets, net13,211 27,374 
Other assets, net9,611 6,287 
Total assets$1,038,791 $1,079,735 
Liabilities and parent company net investment
Current liabilities:
Accounts payable$174 $5,542 
Due to affiliates20,435 8,023 
Accrued liabilities and other21,823 21,976 
Current operating lease liabilities3,157 2,860 
Accrued related party interest payable438 2,477 
Income taxes payable2,212 4,447 
Current portion of deferred revenue9,462 9,502 
Total current liabilities57,701 54,827 
Long-term liabilities:
Due to affiliates304,030 372,650 
Deferred revenue, net of current portion120 168 
Non-current deferred taxes3,796 5,846 
Non-current operating lease liabilities39,459 14,641 
Other long-term liabilities410 406 
Total liabilities405,516 448,538 
Commitments and contingencies (Note 7)
Parent company net investment:
Parent company net investment598,196 582,206 
Accumulated other comprehensive income35,079 48,991 
Total parent company net investment633,275 631,197 
Total liabilities and parent company net investment$1,038,791 $1,079,735 
The accompanying notes are an integral part of these Combined Financial Statements.
5


N-able, Inc.
Combined Statements of Operations
(In thousands, except per share information)
(Unaudited)
Three Months Ended June 30,Six Months Ended June 30,
2021202020212020
Revenue:
Subscription and other revenue$85,340 $73,424 $168,530 146,692 
Cost of revenue:
Cost of revenue11,783 9,241 23,087 18,527 
Amortization of acquired technologies1,037 6,132 3,741 11,876 
Total cost of revenue12,820 15,373 26,828 30,403 
Gross profit72,520 58,051 141,702 116,289 
Operating expenses:
Sales and marketing24,498 18,939 50,212 37,407 
Research and development12,501 10,077 24,543 21,520 
General and administrative 21,364 9,632 41,592 21,529 
Amortization of acquired intangibles4,276 5,869 10,295 11,734 
Total operating expenses62,639 44,517 126,642 92,190 
Operating income9,881 13,534 15,060 24,099 
Other expense:
Interest expense, net(6,082)(7,113)(12,600)(14,735)
Other (expense) income, net(54)96 (583)(166)
Total other expense(6,136)(7,017)(13,183)(14,901)
Income before income taxes3,745 6,517 1,877 9,198 
Income tax expense3,283 3,293 5,693 5,286 
Net income (loss) $462 $3,224 $(3,816)$3,912 
Net income (loss) available to common stockholders$462 $3,224 $(3,816)$3,912 
Net income (loss) available to common stockholders per share:
    Basic earnings (loss) per share$0.00 $0.02 $(0.02)$0.02 
    Diluted earnings (loss) per share$0.00 $0.02 $(0.02)$0.02 
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:158,124 158,124 158,124 158,124 
    Shares used in computation of diluted earnings (loss) per share:158,124 158,124 158,124 158,124 
The accompanying notes are an integral part of these Combined Financial Statements.
6


N-able, Inc.
Combined Statements of Comprehensive Income (Loss)
(In thousands)
(Unaudited)
Three Months Ended June 30,Six Months Ended June 30,
2021202020212020
Net income (loss) $462 $3,224 $(3,816)$3,912 
Other comprehensive income (loss):
Foreign currency translation adjustment5,407 8,959 (13,912)(3,035)
Other comprehensive income (loss)5,407 8,959 (13,912)(3,035)
Comprehensive income (loss)$5,869 $12,183 $(17,728)$877 
The accompanying notes are an integral part of these Combined Financial Statements.

7


N-able, Inc.
Combined Statements of Changes in Parent Company Net Investment
(In thousands)
(Unaudited)
Three Months Ended June 30, 2021
Parent Company Net InvestmentAccumulated Other Comprehensive IncomeTotal
Balance at March 31, 2021$585,060 $29,672 $614,732 
Net income462 — 462 
Change in cumulative translation adjustment— 5,407 5,407 
Stock-based compensation4,274 — 4,274 
Net transfers from Parent8,400 — 8,400 
Balance at June 30, 2021$598,196 $35,079 $633,275 

Six Months Ended June 30, 2021
Parent Company Net InvestmentAccumulated Other Comprehensive IncomeTotal
Balance at December 31, 2020$582,206 $48,991 $631,197 
Net loss(3,816)— (3,816)
Change in cumulative translation adjustment— (13,912)(13,912)
Stock-based compensation9,023— 9,023 
Net transfers from Parent10,783 — 10,783 
Balance at June 30, 2021$598,196 $35,079 $633,275 

Three Months Ended June 30, 2020
Parent Company Net InvestmentAccumulated Other Comprehensive IncomeTotal
Balance at March 31, 2020$564,184 $(5,417)$558,767 
Net income3,224 — 3,224 
Change in cumulative translation adjustment— 8,959 8,959 
Stock-based compensation3,237— 3,237 
Net transfers from Parent3,065 — 3,065 
Balance at June 30, 2020$573,710 $3,542 $577,252 

Six Months Ended June 30, 2020
Parent Company Net InvestmentAccumulated Other Comprehensive IncomeTotal
Balance at December 31, 2019$557,119 $6,577 $563,696 
Net income3,912 — 3,912 
Change in cumulative translation adjustment— (3,035)(3,035)
Stock-based compensation5,916— 5,916 
Net transfers from Parent6,763 — 6,763 
Balance at June 30, 2020$573,710 $3,542 $577,252 
The accompanying notes are an integral part of these Combined Financial Statements
8


N-able, Inc.
Combined Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended June 30,
20212020
Cash flows from operating activities
Net (loss) income $(3,816)$3,912 
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization19,289 27,460 
Provision for doubtful accounts500 1,389 
Stock-based compensation expense9,023 5,916 
Deferred taxes(2,381)(1,722)
Loss on foreign currency exchange rates467 1,086 
Changes in operating assets and liabilities, net of assets acquired and liabilities assumed in business combinations:
Accounts receivable(1,327)(3,351)
Income tax receivable(153)51 
Prepaid expenses and other assets(6,117)(778)
Accounts payable(5,336)(235)
Due to and from affiliates12,184 5,440 
Accrued liabilities and other5,118 2,228 
Accrued related party interest payable(2,039)6,222 
Income taxes payable(2,197)(1,993)
Deferred revenue(126)2 
Net cash provided by operating activities23,089 45,627 
Cash flows from investing activities
Purchases of property and equipment(12,757)(4,153)
Purchases of intangible assets(2,252)(1,835)
Net cash used in investing activities(15,009)(5,988)
Cash flows from financing activities
Repayments of borrowings due to affiliates(68,620)(21,750)
Net transfers from Parent10,783 6,763 
Net cash used in financing activities(57,837)(14,987)
Effect of exchange rate changes on cash and cash equivalents(433)(2,387)
Net (decrease) increase in cash and cash equivalents(50,190)22,265 
Cash and cash equivalents
Beginning of period99,790 39,348 
End of period$49,600 $61,613 
Supplemental disclosure of cash flow information
Cash paid for interest$14,640 $8,517 
Cash paid for income taxes$9,816 $8,237 
Supplemental disclosure of non-cash activities:
Right-of-use assets obtained in exchange for operating lease liabilities$21,235 $5,765 
The accompanying notes are an integral part of these Combined Financial Statements.
9

N-able, Inc.
Notes to Combined Financial Statements (Unaudited)


1. Organization and Nature of Operations
Background
On August 6, 2020, SolarWinds Corporation ("SolarWinds" or "Parent") announced that its board of directors had authorized management to explore a potential spin-off of its managed service provider ("MSP") business into our company, a newly created and separately traded public company, and separate into two distinct, publicly traded companies (the "Separation").
On July 19, 2021, SolarWinds completed the Separation through a pro-rata distribution (the "Distribution") of all the outstanding shares of our common stock it held to the stockholders of record of SolarWinds as of the close of business on July 12, 2021 (the "Record Date"). Each SolarWinds stockholder of record received one share of our common stock, $0.001 par value, for every two shares of SolarWinds common stock, $0.001 par value, held by such stockholder as of the close of business on the Record Date. SolarWinds distributed 158,124,341 shares of our common stock in the Distribution, which was effective at 11:59 p.m., Eastern Time, on July 19, 2021. The Distribution reflected 316,248,682 shares of SolarWinds common stock outstanding on July 12, 2021 at a distribution ratio of one share of our common stock for every two shares of SolarWinds common stock. In addition, on July 19, 2021, and prior to completion of the Distribution, we issued 20,623,282 newly-issued shares of our common stock in connection with a private placement of N-able’s common stock (the “Private Placement”) (See Note 8. Subsequent Events for further details on the Private Placement). As a result of the Distribution, we became an independent public company and our common stock is listed under the symbol "NABL" on the New York Stock Exchange. The financial statements as of June 30, 2021 are prior to the Separation and thus prepared on a "carve out" basis as described below.
Description of Business
N-able, Inc., a Delaware corporation, together with its subsidiaries is a leading global provider of cloud-based software solutions for MSPs, enabling them to support digital transformation and growth within small and medium-sized enterprises ("SMEs"), which we define as those enterprises having less than 1,000 employees. With a flexible technology platform and powerful integrations, N-able makes it easy for MSPs to monitor, manage, and protect their end-customer systems, data, and networks. Our growing portfolio of security, automation, and backup and recovery solutions is built for IT services management professionals. N-able simplifies complex ecosystems and enables customers to solve their most pressing challenges. In addition, we provide extensive, proactive support—through enriching partner programs, hands-on training, and growth resources—to help MSPs deliver exceptional value and achieve success at scale. Through our multi-dimensional land and expand model and global presence, we are able to drive strong recurring revenue growth, profitability and retention.
N-able qualifies as an “emerging growth company” (“EGC”) as defined in Section 2(a) of the Securities Act of 1933, as amended, (the “Securities Act”), as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”).
2. Summary of Significant Accounting Policies
Basis of Presentation
We prepared our interim Combined Financial Statements in conformity with United States of America generally accepted accounting principles ("GAAP") and the reporting regulations of the Securities and Exchange Commission ("SEC"). They do not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying Combined Financial Statements include the accounts of N-able, Inc. and the accounts of its wholly owned subsidiaries. We have eliminated all intercompany balances and transactions.
The Combined Financial Statements at June 30, 2021 and for the three and six months ended June 30, 2021 and 2020 are unaudited, but in our opinion include all normal recurring adjustments necessary for a fair statement of the results for the interim periods presented. The Combined Balance Sheet at December 31, 2020 was derived from our audited financial statements. The results reported in these Combined Financial Statements should not necessarily be taken as indicative of results that may be expected for the entire year. The financial information included herein should be read in conjunction with the financial statements and notes in our registration statement on Form 10 (File No. 001-40297), initially filed with the Securities and Exchange Commission (“SEC”) on March 29, 2021, as amended by Amendment No. 1 filed on April 6, 2021, Amendment No. 2 filed on April 14, 2021, Amendment No. 3 filed on May 27, 2021, and Amendment No. 4 filed on June 15, 2021 (the "Form 10"). The Form 10 includes a preliminary information statement that describes the Distribution and provides information regarding our business and management. The Registration Statement was declared effective by the SEC at 3:00 p.m. Central Time on June 25, 2021. The final information statement was furnished as exhibit 99.3 to the Form 8-K we filed with the SEC on July 12, 2021 (the "Information Statement").
10

N-able, Inc.
Notes to Combined Financial Statements (Unaudited)

The Combined Statements of Operations include all revenues and costs directly attributable to N-able as well as an allocation of expenses related to facilities, functions and services provided by SolarWinds. These corporate expenses have been allocated to us based on direct usage or benefit, where identifiable, with the remainder allocated based on headcount. See Note 4. Relationship with Parent and Related Entities for further details. The allocated costs are deemed to be settled by N-able to SolarWinds in the period in which the expense was recorded in the Combined Statements of Operations. The Combined Statements of Cash Flows present these corporate expenses as cash flows from operating activities, as these costs were incurred by SolarWinds. Current and deferred income taxes and related tax expense have been determined based on the stand-alone results of N-able by applying Accounting Standards Codification No. 740, Income Taxes (“ASC 740”), to N-able’s operations in each country as if it were a separate taxpayer (i.e. following the Separate Return Methodology).
The Combined Financial Statements include all assets and liabilities that reside in N-able legal entities. Assets and liabilities in shared entities were included in the stand-alone financial statements to the extent the asset or liability is primarily used by N-able. If N-able is not the primary user of the asset or liability, it was excluded entirely from the Combined Financial Statements. SolarWinds uses a legal entity approach to cash management and financing its operations. Accordingly, cash and cash equivalents, related party debt and related interest expense have been attributed to N‑able in the Combined Financial Statements only to the extent such items have been historically legally entitled within N-able legal entities. Any such items which exist in other entities, whether shared or otherwise, are outside of the control of the N-able business and have been excluded from the Combined Financial Statements.
SolarWinds maintains various stock-based compensation plans at a corporate level. N-able employees participated in those programs and a portion of the compensation cost associated with those plans is included in N-able’s Combined Statements of Operations. However, the stock-based compensation expense has been included within Parent company net investment. The amounts presented in the Combined Financial Statements are not necessarily indicative of future awards and may not reflect the results that N-able would have experienced as a stand-alone entity. See Note 4. Relationship with Parent and Related Entities for further details.
SolarWinds' third party debt and the related interest have not been allocated to us for any of the periods presented because SolarWinds' borrowings are primarily for corporate cash purposes and are not directly attributable to N-able. In addition, none of the N-able legal entities guarantee the debt nor are they jointly and severally liable for SolarWinds' debt.
Any transactions which have been included in the Combined Financial Statements from legal entities which are not exclusively operating as N-able legal entities are considered to be effectively settled in the Combined Financial Statements at the time the transaction is recorded between SolarWinds and the N-able business. The total net effect of the settlement of these intercompany transactions is reflected in the Combined Statements of Cash Flows as a financing activity and in the Combined Balance Sheets as Parent company net investment. Other transactions between N-able legal entities and other SolarWinds legal entities, to the extent such transactions have not been settled in cash as of the period-end date, are reflected in the Combined Balance Sheets as due to affiliates, and due from affiliates which is included within accounts receivable.
All of the allocations and estimates in the Combined Financial Statements are based on assumptions that management believes are reasonable. However, the Combined Financial Statements included herein may not be indicative of the financial position, results of operations and cash flows of N-able in the future or if N-able had been a separate, stand-alone publicly traded entity during the periods presented. Actual costs that may have been incurred if we had been a standalone company would depend on a number of factors, including the organizational structure, whether functions were outsourced or performed by employees, and strategic decisions made in areas such as information technology and infrastructure. Going forward, we may perform these functions using our own resources or outsourced services. For a period following the Separation, however, some of these functions will continue to be provided by SolarWinds under a Transition Services Agreement. Additionally, we will provide some services to SolarWinds under such Transition Services Agreement.
Use of Estimates
The preparation of Combined Financial Statements in conformity with GAAP requires 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 impact from the rapidly changing market and economic conditions due to the coronavirus disease 2019 ("COVID-19") pandemic on our business, results of operations and financial condition is uncertain. We have made estimates of the impact of the COVID-19 pandemic within our financial statements as of and for the three and six months ended June 30, 2021 which did not result in material adjustments. The estimates assessed included, but were not limited to, allowances for credit losses, the carrying values of goodwill and intangible assets and other long-lived assets, valuation allowances for tax assets and revenue recognition and may change in future 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;
11

N-able, Inc.
Notes to Combined Financial Statements (Unaudited)

revenue recognition;
income taxes; and
management’s assessment of allocations.
Recently Adopted Accounting Pronouncements
As of June 30, 2021, there have been no recent accounting pronouncements or changes in accounting pronouncements that are expected to have a material impact on our consolidated financial position, results of operations, or cash flows from those that were disclosed in the Information Statement.
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.
The carrying amounts reported in our Combined Balance Sheets for cash, accounts receivable, accounts payable and other accrued expenses approximate fair value due to relatively short periods to maturity. Our related party debt with SolarWinds Holdings, Inc. is not carried at fair value. See Note 4. Relationship with Parent and Related Entities for further details regarding our related party debt.
Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) by component are summarized below:
Foreign Currency Translation AdjustmentsAccumulated Other Comprehensive Income (Loss)
(in thousands)
Balance at December 31, 2020$48,991 $48,991 
Other comprehensive loss before reclassification(13,912)(13,912)
Net current period other comprehensive loss(13,912)(13,912)
Balance at June 30, 2021$35,079 $35,079 
Revenue
Our revenue consists of the following:
Three Months Ended June 30,Six Months Ended June 30,
2021202020212020
(in thousands)
Subscription revenue$82,821 $70,820 $163,492 $140,975 
Other revenue2,519 2,604 5,038 5,717 
Total subscription and other revenue$85,340 $73,424 $168,530 $146,692 
12

N-able, Inc.
Notes to Combined Financial Statements (Unaudited)


During the three months and six months periods ended June 30, 2021 and 2020, respectively, we recognized the following revenue from subscription and other services at a point in time and over time:
Three Months Ended June 30,Six Months Ended June 30,
2021202020212020
(in thousands)
Revenue recognized at a point in time$15,082 $13,917 $30,192 $28,611 
Revenue recognized over time$70,258 $59,507 $138,338 $118,081 
Total revenue recognized$85,340 $73,424 $168,530 $146,692 

Deferred Revenue
Deferred revenue primarily consists of transaction prices allocated to remaining performance obligations from annually billed subscription agreements and maintenance services associated with our historical sales of perpetual license products which are delivered over time. Certain of our maintenance agreements are billed annually in advance for services to be performed over a 12-month period. We initially record the amounts allocated to maintenance performance obligations as deferred revenue and recognize these amounts ratably on a daily basis over the term of the maintenance agreement.
Details of our total deferred revenue balance was as follows:
Total Deferred Revenue
(in thousands)
Balance at December 31, 2020$9,670 
Deferred revenue recognized(8,465)
Additional amounts deferred8,377 
Balance at June 30, 2021$9,582 
We expect to recognize revenue related to remaining performance obligations as follows:
Revenue Recognition Expected by Period
TotalLess than 1
year
1-3 yearsMore than
3 years
(in thousands)
Expected recognition of deferred revenue$9,582 $9,462 $120 $ 

Cost of Revenue
Amortization of Acquired Technologies. Amortization of acquired technologies included in cost of revenue relate to our subscription products as follows:
Three Months Ended June 30,Six Months Ended June 30,
2021202020212020
(in thousands)
Amortization of acquired technologies$1,037 $6,132 $3,741 $11,876 
3. Goodwill
13

N-able, Inc.
Notes to Combined Financial Statements (Unaudited)

The following table reflects the changes in goodwill for the six months ended June 30, 2021:
(in thousands)
Balance at December 31, 2020$874,083 
Foreign currency translation(13,587)
Balance at June 30, 2021$860,496 
4. Relationship with Parent and Related Entities
Historically, the N-able business has been managed and operated in the normal course of business consistent with other affiliates of SolarWinds. Accordingly, certain shared costs have been allocated to N-able and reflected as expenses in the Combined Financial Statements. Management considers the allocation methodologies used to be reasonable and appropriate reflections of the historical SolarWinds expenses attributable to N-able for purposes of the stand-alone financial statements. However, the expenses reflected in the Combined Financial Statements may not be indicative of the actual expenses that would have been incurred during the periods presented if N-able historically operated as a separate, stand-alone entity. In addition, the expenses reflected in the Combined Financial Statements may not be indicative of related expenses that will be incurred in the future by N-able.
General Corporate Overhead
SolarWinds provided facilities, information technology services and certain corporate and administrative services to the N-able business. Expenses relating to these services have been allocated to N-able and are reflected in the Combined Financial Statements. Where direct assignment is not possible or practical, these costs were allocated based on headcount. The following table summarizes the components of general allocated corporate expenses for the three and six months ended June 30, 2021:

Three Months Ended June 30,Six Months Ended June 30,
2021202020212020
(in thousands)
General and administrative$10,012 $4,637 $19,101 $9,388 
Research and development63 400 135 853 
Sales and marketing6 326 34 710 
Cost of revenue8 18 50 106 
Total$10,089 $5,381 $19,320 $11,057 

Due to and from Affiliates
Due to affiliates within long-term liabilities in the Combined Balance Sheets represents N-able's related party debt due to SolarWinds Holdings, Inc. of $304.0 million and $372.7 million as of June 30, 2021 and December 31, 2020, respectively.
On February 25, 2016, we entered into a loan agreement with SolarWinds Holdings, Inc. with an original principal amount of $250.0 million and a maturity date of February 25, 2023. Borrowings under the loan agreement bear interest at a floating rate which is equal to an adjusted London Interbank Offered Rate ("LIBOR") for a three-month interest period plus 9.8%. Prepayments of borrowings under the loan are permitted. As of June 30, 2021 and December 31, 2020, $203.5 million and $228.5 million in borrowings were outstanding, respectively.
On May 27, 2016, we entered into an additional loan agreement with SolarWinds Holdings, Inc. The loan agreement, as amended, has an original principal amount of $200.0 million and a maturity date of May 27, 2026. Borrowings under the loan agreement bear interest at a fixed rate of 2.24%. Prepayments of borrowings under the loan are permitted. As of June 30, 2021 and December 31, 2020, $100.5 million and $144.2 million in borrowings were outstanding, respectively.
Interest expense related to the activity with SolarWinds Holdings, Inc. was $6.1 million and $7.1 million for the three months ended June 30, 2021 and 2020, respectively. Interest expense related to the activity with SolarWinds Holdings, Inc. was $12.6 million and $14.7 million for the six months ended June 30, 2021 and 2020, respectively. The repayment of principal for these related party borrowings is reflected as a financing activity in the Combined Statements of Cash Flows.
14

N-able, Inc.
Notes to Combined Financial Statements (Unaudited)

Due to affiliates within current liabilities comprises intercompany trade payables of $20.4 million and $8.0 million as of June 30, 2021 and December 31, 2020, respectively. Due from affiliates within accounts receivable comprises intercompany trade receivables which were $0.4 million and $0.3 million for the periods ended June 30, 2021 and December 31, 2020, respectively.
Equity-Based Incentive Plans
Certain of our employees participated in our Parent’s equity-based incentive plans. Under the SolarWinds Corporation 2016 Equity Incentive Plan (the "2016 Plan"), our employees, consultants, directors, managers and advisors were awarded stock-based incentive awards in a number of forms, including nonqualified stock options. The ability to grant any future equity awards under the 2016 Plan terminated in October 2018. Under the SolarWinds Corporation 2018 Equity Incentive Plan, our employees can be awarded stock-based incentive awards which includes non-statutory stock options or incentive stock options, stock appreciation rights, restricted stock, restricted stock units, performance stock units and other cash-based or share-based awards. Awards granted to our employees under the incentive plans generally vest over periods ranging from one to five years. We measure stock-based compensation for all stock-based incentive awards at fair value on the grant date. Stock-based compensation expense is generally recognized on a straight-line basis over the requisite service periods of the awards.
Compensation costs associated with our employees’ participation in the incentive plans have been specifically identified for employees who exclusively support our operations and are allocated to us as part of the cost allocations from our Parent. Total costs charged to us related to our employees’ participation in our Parent’s incentive plans were $4.1 million and $3.1 million for the three months ended June 30, 2021 and 2020, respectively. Total costs charged to us related to our employees' participation in our Parent's incentive plans were $8.8 million and $5.7 million for the six months ended June 30, 2021 and 2020, respectively. We include the related expense in operating expense (general and administrative, sales and marketing and research and development) and cost of revenue on our Combined Statements of Operations, depending on the nature of the employee’s role in our operations.
Employee Stock Purchase Plan
Our eligible employees participated in our Parent’s 2018 Employee Stock Purchase Plan (the "ESPP"). The ESPP permited eligible participants to purchase SolarWinds' shares at a discount through regular payroll deductions of up to 20% of their eligible compensation during the offering period. The ESPP was typically implemented through consecutive six-month offering periods. The purchase price of the shares is 85% of the lesser of the fair market value of the closing price per share on the first day of the offering period and the fair market value of the closing price per share on the last day of the offering period. No participant may purchase more than $25,000 worth of common stock per calendar year.
Costs charged to us related to our employees’ participation in our Parent’s ESPP were $0.1 million and $0.1 million for the three months ended June 30, 2021 and 2020, respectively. Costs charged to us related to our employees' participation in our Parent's ESPP were $0.3 million and $0.2 million for the six months ended June 30, 2021 and 2020, respectively.
5. Earnings Per Share
On July 19, 2021, the date of consummation of the Separation, SolarWinds distributed 158,124,341 shares of our common stock, par value $0.001 per share. The Distribution reflected 316,248,682 shares of SolarWinds common stock outstanding on July 12, 2021 at a distribution ratio of one share of our common stock for every two shares of SolarWinds common stock. This share amount is being utilized for the calculation of basic and diluted earnings per share for all periods presented prior to the Separation as all common stock was owned by SolarWinds prior to the Private Placement and the Distribution.
A reconciliation of the number of shares in the calculation of basic and diluted earnings per share follows:
15

N-able, Inc.
Notes to Combined Financial Statements (Unaudited)

Three Months Ended June 30,Six Months Ended June 30,
2021202020212020
(in thousands)
Basic earnings (loss) per share
Numerator:
Net income (loss) $462 $3,224 $(3,816)$3,912 
Net income (loss) available to common stockholders$462 $3,224 $(3,816)$3,912 
Denominator:
Weighted-average common shares outstanding used in computing basic earnings (loss) per share158,124 158,124 158,124 158,124 
Basic earnings (loss) per share$0.00 $0.02 $(0.02)$0.02 
Diluted earnings (loss) per share
Numerator:
Net income (loss) available to common stockholders$462 $3,224 $(3,816)$3,912 
Denominator:
Weighted-average shares used in computing diluted earnings (loss) per share158,124 158,124 158,124 158,124 
Diluted earnings (loss) per share$0.00 $0.02 $(0.02)$0.02 
6. Income Taxes
For the three months ended June 30, 2021 and 2020, we recorded income tax expense of $3.3 million, respectively, resulting in an effective tax rate of 87.7% and 50.5%, respectively. For the six months ended June 30, 2021 and 2020, we recorded income tax expense of $5.7 million and $5.3 million, respectively, resulting in an effective tax rate of 303.3% and 57.5%, respectively. The increase in the effective tax rate for the three and six months ended June 30, 2021 compared to the same period in 2020 was primarily due to a decrease in income before income taxes and due to the valuation allowance recognized on the deferred tax assets in the U.S.
Our policy is to include interest and penalties related to unrecognized tax benefits as a component of income tax expense. At June 30, 2021, we did not have any accrued interest and penalties related to unrecognized tax benefits.
We file U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitations. The 2012 through 2020 tax years generally remain open and subject to examination by federal, state 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 currently under audit by 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.
7. Commitments and Contingencies
Legal Proceedings
From time to time, we have been and may be involved in various legal proceedings arising in our ordinary course of business. In the opinion of management, resolution of any pending claims (either individually or in the aggregate) is not expected to have a material adverse impact on our Combined Financial Statements, cash flows or financial position and it is not possible to provide an estimated amount of any such loss. However, the outcome of disputes is inherently uncertain. Therefore, although management considers the likelihood of such an outcome to be remote, an unfavorable resolution of one or more matters could materially affect our future results of operations or cash flows, or both, in a particular period.
8. Subsequent Events
Credit Facilities

In connection with the Separation and Distribution, on July 19, 2021, certain subsidiaries of the Company entered into a credit agreement (the "Credit Agreement") with JPMorgan Chase, Bank, N.A. as administrative agent and collateral agent and the lenders from time to time party thereto. The Credit Agreement provides for $410.0 million of first lien secured credit facilities
16

N-able, Inc.
Notes to Combined Financial Statements (Unaudited)

(the "Credit Facilities"), consisting of a $60.0 million revolving credit facility (the "Revolving Facility"), and a $350.0 million term loan facility (the "Term Loan"). On July 19, 2021, prior to the completion of the Distribution, the Company distributed approximately $16.5 million, representing the proceeds from the Term Loan, net of the repayment of related party debt due to SolarWinds Holdings, Inc., payment of intercompany trade payables, and fees and other transaction-related expenses, to SolarWinds. The Revolving Facility will primarily be available for general corporate purposes.
Private Placement
On July 11, 2021, the Company entered into a definitive agreement (the “Purchase Agreement”) with certain accredited investors (the “Investors”) in connection with a private placement of N-able’s common stock (the “Private Placement”) in a transaction exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”). On July 19, 2021, prior to the completion of the Distribution, the Company closed the Private Placement of 20,623,282 shares of common stock at a purchase price of $10.91 per share. In consideration of the shares of common stock issued in the Private Placement, the Company received gross proceeds of approximately $225.0 million before deducting placement agent fees and other transaction-related expenses payable by the Company. On July 19, 2021, prior to the completion of the Distribution, the Company distributed approximately $216.0 million, representing the net proceeds from the Private Placement to SolarWinds.

Separation and Distribution

On July 19, 2021, SolarWinds completed the Separation through the Distribution of all the outstanding shares of our common stock it held to the stockholders of record of SolarWinds as of the close of business on the Record Date of July 12, 2021. As a result of the Distribution, we became an independent public company and our common stock is listed under the symbol "NABL" on the New York Stock Exchange. See Note 1. Organization and Nature of Operations for further details on the Separation and Distribution.



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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 Combined Financial Statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. In addition to historical combined 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 "Item 1A. Risk Factors" below 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
N-able, Inc., a Delaware corporation, and its subsidiaries (“Company”, “we,” “us” and “our”) is a leading global provider of cloud-based software solutions for managed service providers ("MSPs"), enabling them to support digital transformation and growth within small and medium-sized enterprises ("SMEs"), which we define as those enterprises having less than 1,000 employees. With a flexible technology platform and powerful integrations, N-able makes it easy for MSPs to monitor, manage, and protect their end-customer systems, data, and networks. Our growing portfolio of security, automation, and backup and recovery solutions is built for IT services management professionals. N-able simplifies complex ecosystems and enables customers to solve their most pressing challenges. In addition, we provide extensive, proactive support—through enriching partner programs, hands-on training, and growth resources—to help MSPs deliver exceptional value and achieve success at scale. Through our multi-dimensional land and expand model and global presence, we are able to drive strong recurring revenue growth, profitability and retention.
Separation from SolarWinds

On August 6, 2020, SolarWinds Corporation ("SolarWinds" or "Parent") announced that its board of directors had authorized management to explore a potential spin-off of its MSP business into our company, a newly created and separately traded public company, and separate into two distinct, publicly traded companies (the "Separation").

On July 19, 2021, SolarWinds completed the Separation through a pro-rata distribution (the "Distribution") of all the outstanding shares of our common stock it held to the stockholders of record of SolarWinds as of the close of business on July 12, 2021 (the "Record Date"). Each SolarWinds stockholder of record received one share of our common stock, $0.001 par value, for every two shares of SolarWinds common stock, $0.001 par value, held by such stockholder as of the close of business on the Record Date. SolarWinds distributed 158,124,341 shares of our common stock in the Distribution, which was effective at 11:59 p.m., Eastern Time, on July 19, 2021. The Distribution reflected 316,248,682 shares of SolarWinds common stock outstanding on July 12, 2021 at a distribution ratio of one share of our common stock for every two shares of SolarWinds common stock. In addition, on July 19, 2021, and prior to completion of the Distribution, we issued 20,623,282 newly-issued shares of our common stock in connection with a private placement of N-able’s common stock (the “Private Placement”) (See Note 8. Subsequent Events for further details on the Private Placement). As a result of the Distribution, we became an independent public company and our common stock is listed under the symbol "NABL" on the New York Stock Exchange. The financial statements as of June 30, 2021 are prior to the Separation and thus prepared on a "carve out" basis as described below.

The Combined Financial Statements at June 30, 2021 and for the three and six months ended June 30, 2021 and 2020 are unaudited, but in our opinion include all normal recurring adjustments necessary for a fair statement of the results for the interim periods presented. The Combined Balance Sheet at December 31, 2020 was derived from audited financial statements. The results reported in these Combined Financial Statements should not necessarily be taken as indicative of results that may be expected for the entire year. The financial information included herein should be read in conjunction with the financial statements and notes in our registration statement on Form 10 (File No. 001-40297), initially filed with the Securities and Exchange Commission (“SEC”) on March 29, 2021, as amended by Amendment No. 1 filed on April 6, 2021, Amendment No. 2 filed on April 14, 2021, Amendment No. 3 filed on May 27, 2021, and Amendment No. 4 filed on June 15, 2021 (the "Form 10"). The Form 10 includes a preliminary information statement that describes the Distribution and provides information regarding our business and management. The Registration Statement was declared effective by the SEC at 3:00 p.m. Central Time on June 25, 2021. The final information statement was furnished as exhibit 99.3 to the Form 8-K we filed with the SEC on July 12, 2021 (the "Information Statement"). See Note 2. Summary of Significant Accounting Policies and Note 4. Relationship with Parent and Related Entities of the Notes to Combined Financial Statements for further details.
Impacts of COVID-19 
The impact from the rapidly changing market and economic conditions due to the coronavirus disease 2019 ("COVID-19") pandemic on our business is uncertain. SolarWinds, of which we were a part, initially responded to the COVID-19 pandemic by executing its business continuity plan and transitioning nearly all of its workforce to a remote work environment to prioritize
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the safety of its personnel. Substantially all of our workforce is still working remotely and, to date, we have not incurred significant disruptions to our business operations as a result of this transition.
We believe that the COVID-19 pandemic creates both opportunities and challenges for our business. As a result of the pandemic, we have seen an acceleration of digital transformation efforts among SMEs with increased demand for secure, modern remote work environments. We believe this will support long-term demand for services offered by our MSP partners. The pandemic also has resulted in significant volatility, uncertainty and disruption in the global economy, in particular for SMEs. As a result of the impact of the COVID-19 pandemic, we experienced a deceleration in our year-over-year subscription revenue growth rate in the second quarter of 2020 as compared to our growth rates in prior periods. We attribute this deceleration primarily to increased churn and downgrades from existing MSP partners and slower MSP partner adds. Beginning in the third quarter of 2020, we began to see improvement in our business, primarily as a result of better stability in our MSP partner base, expansion with certain existing MSP partners and the addition of new MSP partners.
We are unable to predict the long-term impact that the 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 around the world in response to the pandemic, the impacts on the businesses of our MSP partners and their customers and other factors identified in the section entitled Item 1A. Risk Factors in this Quarterly Report on Form 10-Q. We will continue to evaluate the nature and extent of the impacts of the COVID-19 pandemic on our business, results of operations and financial condition.
SolarWinds Cyber Incident

As previously disclosed, SolarWinds was the victim of a cyberattack on its Orion Software Platform and internal systems, or the Cyber Incident. SolarWinds has not identified Sunburst in any of its more than 70 non-Orion products and tools, including, as previously disclosed, any of our N-able solutions. SolarWinds, together with its partners, have undertaken extensive measures to investigate, contain, eradicate, and remediate the Cyber Incident. As SolarWinds previously disclosed in its investigatory updates, it has substantially completed this process and believes the threat actor is no longer active in its environments.

In response to the Cyber Incident and in connection with the separation, we are working to further enhance security, monitoring and authentication of our solutions. Specifically, we have implemented in-product security enhancements to the N-able portfolio of products, including, multi-factor authentication, unified single sign-on services, and secure secret vaults. We have also introduced new identity and access controls, scanning and remediation technologies and standards and monitoring tooling across our enterprise IT and production environments. We expect to incur additional expenses in future periods related to continued enhancements to our security measures across our solutions.

Of the expenses SolarWinds recorded related to the Cyber Incident through June 30, 2021, none have been allocated to the N-able business and, as a result of the indemnification provisions under the Separation and Distribution Agreement entered into in connection with the Separation and Distribution (the “Separation Agreement”), we have not recorded any contingent liabilities with respect to the Cyber Incident as of June 30, 2021. In addition, as a result of the Cyber Incident, SolarWinds is subject to numerous lawsuits and governmental investigations or inquiries. To date, we have not been separately named in such lawsuits and investigations, but in the future we may become subject to lawsuits, investigations or inquiries related to the Cyber Incident. In such event, subject to the terms of the Separation Agreement, SolarWinds would indemnify us for costs we may incur.

We believe the Cyber Incident has caused reputational harm to SolarWinds and also had an adverse impact on our reputation, new subscription sales and net retention rates. In the first half of 2021, we experienced an adverse impact to new subscription sales and expansion rates relative to historical levels. We believe this was due in part to our decision in response to the Cyber Incident to temporarily reduce investments in demand generation activities through January 2021, as well as a result of certain MSP partners delaying their purchasing decisions as they assessed the potential impact of the Cyber Incident. However, we also have seen consistency among renewal rates with our larger MSP partners and have not observed material adverse trends with respect to the usage of our solutions. In addition, following our resumption of regular demand generation activities in February 2021, we were encouraged by engagements with both prospective and existing MSP partners. In general our sales cycles and time from contract to revenue recognition are primarily short in nature and based on trends through the first half of 2021, we believe that the adverse impacts of the Cyber Incident on our financial results will diminish over time in the absence of new discoveries or events. Nevertheless, there is risk that the Cyber Incident may continue to have an adverse impact on our business in future periods, and to the extent such impact continues, including as a result of new discoveries or events, it could have an adverse effect on our business, results of operations, cash flows or financial position.
Results of Operations
Throughout the periods covered by the Combined Financial Statements, we operated as a part of SolarWinds. Therefore, stand-alone financial statements have not historically been prepared for us. The accompanying historical Combined Financial Statements have been prepared from SolarWinds’ historical accounting records and are presented on a stand-alone basis as if
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our business’ operations had been conducted independently from SolarWinds. The Combined Financial Statements present our historical results of operations in accordance with GAAP.
N-able comprises certain stand-alone legal entities for which discrete financial information is available. As SolarWinds records transactions at the legal entity level, for the legal entities which are shared between the N-able business and other SolarWinds operations for which discrete financial information was not available, allocation methodologies were applied to certain accounts to allocate amounts to us as discussed in Note 1. Organization and Nature of Operations of the Notes to Combined Financial Statements.
Our Combined Statements of Operations include all revenue and costs directly attributable to us as well as an allocation of expenses related to facilities, functions and services provided by SolarWinds. These corporate expenses have been allocated to our business based on direct usage or benefit, where identifiable, with the remainder allocated based on headcount where appropriate. These allocations are primarily reflected within operating expenses in our Combined Statements of Operations. We believe the basis on which the expenses have been allocated to be a reasonable reflection of the utilization of services provided to, or the benefit received by, us during the periods presented. However, these allocations may not be indicative of the actual expenses we would have incurred as a stand-alone company during the periods prior to the separation or of the costs we will incur in the future. See Note 4. Relationship with Parent and Related Entities of the Notes to Combined Financial Statements for further details of the allocated costs.
Second Quarter Financial Highlights
Revenue
We deliver a platform of integrated solutions that enables our MSP partners to manage and secure the IT environments and assets for their SME end customers, as well as more efficiently manage their own businesses. Our total revenue was $85.3 million and $73.4 million for the three months ended June 30, 2021 and 2020, respectively.
As of June 30, 2021, we had approximately 25,000 customers. Additionally, as of June 30, 2021, we had 1,647 MSP partners with annualized recurring revenue ("ARR") over $50,000 on our platform, up from 1,252 as of June 30, 2020, representing an increase of 32%. Over the same period, MSP partners with over $50,000 of ARR on our platform grew from approximately 38% of our total ARR as of June 30, 2020 to 46% of our total ARR as of June 30, 2021. We determine ARR as the annualized recurring revenue as of the last month of a given period. We calculate ARR by multiplying the recurring revenue and related usage revenue, excluding the impacts of credits and reserves, recognized during the final month of the reporting period from both long-term and month-to-month subscriptions by twelve. We use ARR, and in particular, ARR attributable to MSP partners with over $50,000 of ARR, to enhance the understanding of our business performance and the growth of our MSP partners.
Profitability
We have grown while maintaining high levels of operating efficiency. Our net income for the three months ended June 30, 2021 was $0.5 million compared to net income of $3.2 million for the three months ended June 30, 2020. The reduction in net income for the three months ended June 30, 2021 was primarily due to an increase in costs associated with our separation from SolarWinds. Our Adjusted EBITDA was $28.2 million and $31.5 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 $9.9 million and $33.6 million, respectively. Our cash flows from operations were reduced by cash payments for interest on our long-term debt of $11.4 million for the three months ended June 30, 2021 and cash payments for income taxes of $2.6 million and $2.7 million for the three months ended June 30, 2021 and 2020, respectively.
Components of Our Results of Operations
Revenue
Our revenue consists of the following:
Subscription Revenue. We primarily derive subscription revenue from the sale of subscriptions to the SaaS solutions that we host and manage on our platform. Our subscriptions provide access to the latest versions of our software platform, technical support and unspecified software upgrades and updates. Subscription revenue for our SaaS solutions is generally recognized ratably over the subscription term once the service is
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made available to the MSP partner or when we have the right to invoice for services performed. In addition, our subscription revenue includes sales of our self-managed solutions, which are hosted and managed by our MSP partners. Subscriptions of our self-managed solutions include term licenses, technical support and unspecified software upgrades. Revenue from the license performance obligation of our self-managed solutions is recognized at a point in time upon delivery of the access to the licenses and revenue from the performance obligation related to the technical support and unspecified software upgrades of our subscription-based license arrangements is recognized ratably over the agreement period. We generally invoice subscription agreements monthly based on usage or in advance over the subscription period on either a monthly or annual basis.
Other Revenue. Other revenue consists primarily of revenue from the sale of our maintenance services associated with the historical sales of perpetual licenses. MSP partners with maintenance agreements are entitled to receive technical support and unspecified upgrades or enhancements to new versions of their solutions on a when-and-if-available basis for the specified agreement period. We expect maintenance revenue to decrease as a proportion of our total revenue over time.
Cost of Revenue
Cost of Revenue. Cost of revenue consists of technical support personnel costs, public cloud infrastructure and hosting fees, royalty fees and an allocation of overhead costs for our subscription revenue and maintenance services. We allocate facilities, depreciation, benefits and IT costs based on headcount.
Amortization of Acquired Technologies. We amortize to cost of revenue capitalized costs of technologies acquired in connection with the take private transaction of SolarWinds in early 2016 and our acquisitions.
Operating Expenses
Operating expenses consist of sales and marketing, research and development and general and administrative expenses as well as amortization of acquired intangibles. Personnel costs include salaries, bonuses and stock-based compensation and related employer-paid payroll taxes, as well as an allocation of our facilities, depreciation, benefits and IT costs. SolarWinds provides facilities, information technology services and certain corporate and administrative services to us. Expenses relating to these services have been allocated to N‑able and are reflected in the Combined Financial Statements. The total number of employees fully dedicated to our business was 1,327, 1,177, and 1,067 as of June 30, 2021, December 31, 2020, and June 30, 2020, respectively. Our stock-based compensation expense increased during the three and six months ended June 30, 2021 as compared to the corresponding periods of the prior fiscal year due to equity awards granted to employees. In addition, our stock-based compensation expense increased during the three and six months ended June 30, 2021 as compared to the corresponding periods of the prior fiscal year due to modifications to certain stock awards during the year to amend award terms and eliminate performance vesting conditions applicable to such awards. Our travel costs declined in 2020 due to COVID-19 and we expect this to continue for the duration of the pandemic.
Sales and Marketing. Sales and marketing expenses primarily consist of related personnel costs, including our sales, marketing and partner success teams. Sales and marketing expenses also include the cost of digital marketing programs such as paid search, search engine optimization and management and website maintenance and design. We expect to continue to hire personnel globally to drive new MSP partner adds, expand with existing MSP partners and pursue initiatives designed to help our MSP partners succeed and grow.
Research and Development. Research and development expenses primarily consist of related personnel costs. We expect to continue to grow our research and development organization domestically and internationally and also to incur additional expenses associated with our enhancements of security, monitoring and authentication of our solutions.
General and Administrative. General and administrative expenses primarily consist of personnel costs for executives, finance, legal, human resources and other administrative personnel, general restructuring charges and other acquisition-related costs, professional fees and other general corporate expenses. We expect our general and administrative expense to increase primarily as a result of the increased costs associated with being a stand-alone public company and costs associated with our separation from SolarWinds.
Amortization of Acquired Intangibles. We amortize to operating expenses capitalized costs of intangible assets acquired in connection with the take private transaction of SolarWinds in early 2016 and our acquisitions.
Other Income (Expense)
Other income (expense) primarily consists of interest expense related to our related party debt and gains (losses) resulting from changes in exchange rates on foreign currency denominated accounts.
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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 1A. Risk Factors for additional information on how foreign currency impacts our financial results.
Income Tax Expense
Income tax expense consists of domestic and foreign corporate income taxes related to the sale of subscriptions. Our effective tax rate will be affected by many factors including changes in tax laws, regulations or rates, new interpretations of existing laws or regulations, valuation allowance, uncertain tax positions, stock based compensation, permanent nondeductible book and tax differences, 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, 2021 and 2020
Revenue
Three Months Ended June 30,
20212020
AmountPercentage of RevenueAmountPercentage of RevenueChange
(in thousands, except percentages)
Subscription revenue$82,821 97.0 %$70,820 96.5 %$12,001 
Other revenue2,519 3.0 2,604 3.5 (85)
Total subscription and other revenue$85,340 100.0 %$73,424 100.0 %$11,916 
Total revenue increased $11.9 million, or 16.2%, for the three months ended June 30, 2021 compared to the three months ended June 30, 2020. Based on MSP partner location, revenue from North America was approximately 50.9% and 52.4% of total revenue for the three months ended June 30, 2021 and 2020, respectively. Revenue from the United Kingdom was approximately 10.9% and 10.5% of total revenue for the three months ended June 30, 2021 and 2020, respectively. Other than the United States and the United Kingdom, no single country accounted for 10% or more of our total revenue during these periods.
Subscription Revenue. Subscription revenue increased $12.0 million, or 16.9%, for the three months ended June 30, 2021 compared to the three months ended June 30, 2020. Our increase in subscription revenue was driven by the addition of new MSP partners and an increase in revenue from existing MSP partners as they added new SME customers and adopted new solutions. Our subscription revenue increased slightly as a percentage of our total revenue for the three months ended June 30, 2021 compared to the three months ended June 30, 2020.
Our annual dollar-based net revenue retention rate for our subscription products was approximately 110% and 109% 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 MSP products. To calculate our annual dollar-based net revenue retention rate, we first identify the MSP partners with active paid subscriptions in the last month of the prior-year period, or the base partners. We then divide the subscription revenue in the last month of the current-year period attributable to the base partners by the revenue attributable to those base partners in the last month of the prior-year period. Our dollar-based net revenue retention rate for a particular period is then obtained by averaging the rates from that particular period with the results from each of the prior eleven months. Our calculation includes any expansion revenue and is net of any contraction or cancellation, but excludes credits and revenue attributable to any MSP partner who was not a partner with a paid subscription in the prior period.
Other Revenue. Other revenue decreased $0.1 million , or 3.3%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 due to decreases in sales of our perpetual licenses, and the related maintenance agreements. As of the three months ended March 31, 2020, we have discontinued perpetual license upgrades.
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Cost of Revenue
Three Months Ended June 30,
20212020
AmountPercentage of RevenueAmountPercentage of RevenueChange
(in thousands, except percentages)
Cost of revenue$11,783 13.8 %$9,241 12.6 %$2,542 
Amortization of acquired technologies1,037 1.2 6,132 8.4 (5,095)
Total cost of revenue$12,820 15.0 %$15,373 21.0 %$(2,553)
Total cost of revenue decreased in the three months ended June 30, 2021 compared to the three months ended June 30, 2020 primarily due to a decrease of $5.1 million in amortization of intangible assets acquired in connection with the take private transaction of SolarWinds in early 2016. This decrease was partially offset by increases in public cloud infrastructure and hosting fees of $2.9 million, depreciation and other amortization of $0.6 million and personnel costs to support new MSP partners and additional solution offerings of $0.4 million, which includes a decrease of less than $0.1 million in stock-based compensation expense.
Operating Expenses
Three Months Ended June 30,
20212020
AmountPercentage of RevenueAmountPercentage of RevenueChange
(in thousands, except percentages)
Sales and marketing$24,498 28.7 %$18,939 25.8 %$5,559 
Research and development12,501 14.6 10,077 13.7 2,424 
General and administrative21,364 25.0 9,632 13.1 11,732 
Amortization of acquired intangibles4,276 5.0 5,869 8.0 (1,593)
Total operating expenses$62,639 73.3 %$44,517 60.6 %$18,122 
Sales and Marketing. Sales and marketing expenses increased $5.6 million, or 29.4%, primarily due to increases in personnel costs of $2.7 million, which includes a decrease of less than $0.1 million in stock-based compensation expense, and increases in marketing program costs of $2.1 million. We increased our sales and marketing employee headcount to support the sales of additional solutions and drive growth in the business.
Research and Development. Research and development expenses increased $2.4 million, or 24.1%, primarily due to an increase in personnel costs of $1.6 million, which includes an increase in stock-based compensation expense of $0.2 million, an increase in contract services costs of $0.4 million, and a $0.1 million increase in costs associated with our separation from SolarWinds. We increased our worldwide research and development employee headcount to expedite delivery of enhancements and new solutions to our MSP partners.
General and Administrative. General and administrative expenses increased $11.7 million, or 121.8%, primarily due to $6.7 million in costs associated with our separation from SolarWinds and a $3.9 million increase in personnel costs, which includes a $1.3 million increase in stock-based compensation expense. We increased our worldwide general and administrative employee headcount in preparation of our separation from SolarWinds.
Amortization of Acquired Intangibles. Amortization of acquired intangibles decreased $1.6 million, or 27.1%, primarily due to the impact of changes in foreign currency exchange rates.
Interest Expense, Net
Three Months Ended June 30,
20212020
AmountPercentage of RevenueAmountPercentage of RevenueChange
(in thousands, except percentages)
Interest expense, net$(6,082)(7.1)%$(7,113)(9.7)%$1,031 
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Interest expense, net decreased by $1.0 million, or 14.5%, in the three months ended June 30, 2021 compared to the three months ended June 30, 2020, primarily due to repayment of borrowings under our long-term related party debt. See Note 4. Relationship with Parent and Related Entities of the Notes to Combined Financial Statements for additional information regarding our related party debt.
Other (Expense) Income, Net
Three Months Ended June 30,
20212020
AmountPercentage of RevenueAmountPercentage of RevenueChange
(in thousands, except percentages)
Other (expense) income, net$(54)(0.1)%$96 0.1 %$(150)
Other (expense) income, net decreased by $0.2 million in the three months ended June 30, 2021 compared to the three 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
Three Months Ended June 30,
20212020
AmountPercentage of RevenueAmountPercentage of RevenueChange
(in thousands, except percentages)
Income before income taxes$3,745 4.4 %$6,517 8.9 %$(2,772)
Income tax expense3,283 3.8 3,293 4.5 (10)
Effective tax rate87.7 %50.5 %37.2 %
Our income tax expense for the three months ended June 30, 2021 remained consistent as compared to the three months ended June 30, 2020. The effective tax rate increased to 87.7% for the period primarily due to a decrease in income before income taxes and due to the valuation allowance recognized on the deferred tax assets in the U.S. For additional discussion about our income taxes, see Note 6. Income Taxes of the Notes to Combined Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
Comparison of the Six Months Ended June 30, 2021 and 2020
Revenue
Six Months Ended June 30,
20212020
AmountPercentage of RevenueAmountPercentage of RevenueChange
(in thousands, except percentages)
Subscription Revenue$163,492 97.0 %$140,975 96.1 %$22,517 
Other revenue5,038 3.0 5,717 3.9 (679)
Total subscription and other revenue$168,530 100.0 %$146,692 100.0 %$21,838 
Total revenue increased $21.8 million, or 14.9%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. Based on MSP partner location, revenue from North America was approximately 51.2% and 52.7% of total revenue for both the six months ended June 30, 2021 and 2020. Revenue from the United Kingdom was approximately10.8% and 10.3% of total revenue for the three months ended June 30, 2021 and 2020, respectively. Other than the United States and the United Kingdom, no single country accounted for 10% or more of our total revenue during these periods.
Recurring Revenue
Subscription Revenue. Subscription revenue increased $22.5 million, or 16.0%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020.Our increase in subscription revenue was driven by the addition of new MSP partners and an increase in revenue from existing MSP partners as they added new SME customers and adopted new solutions.
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Our subscription revenue increased slightly as a percentage of our total revenue for the six months ended June 30, 2021 compared to the six months ended June 30, 2020.
Our annual dollar-based net revenue retention rate for our subscription products was approximately 110% and 109% 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 MSP products. To calculate our annual dollar-based net revenue retention rate, we first identify the MSP partners with active paid subscriptions in the last month of the prior-year period, or the base partners. We then divide the subscription revenue in the last month of the current-year period attributable to the base partners by the revenue attributable to those base partners in the last month of the prior-year period. Our dollar-based net revenue retention rate for a particular period is then obtained by averaging the rates from that particular period with the results from each of the prior eleven months. Our calculation includes any expansion revenue and is net of any contraction or cancellation, but excludes credits and revenue attributable to any MSP partner who was not a partner with a paid subscription in the prior period.
Other Revenue. Other revenue decreased $0.7 million, or 11.9%,for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 due to decreases in sales of our perpetual licenses and the related maintenance agreements. As of the three months ended March 31, 2020, we have discontinued perpetual license upgrades.
Cost of Revenue
Six Months Ended June 30,
20212020
AmountPercentage of RevenueAmountPercentage of RevenueChange
(in thousands, except percentages)
Cost of revenue$23,087 13.7 %$18,527 12.6 %$4,560 
Amortization of acquired technologies3,741 2.2 11,876 8.1 (8,135)
Total cost of revenue$26,828 15.9 %$30,403 20.7 %$(3,575)
Total cost of revenue decreased in the six months ended June 30, 2021 compared to the six months ended June 30, 2020 primarily due to a decrease of $8.1 million in amortization of intangible assets acquired in connection with the take private transaction of SolarWinds in early 2016. This decrease was partially offset by increases in public cloud infrastructure and hosting fees related to our subscription products of $4.9 million and personnel costs to support new MSP partners and additional solution offerings of $0.6 million, which includes an increase of less than $0.1 million in stock-based compensation expense.
Six Months Ended June 30,
20212020
AmountPercentage of RevenueAmountPercentage of RevenueChange
(in thousands, except percentages)
Sales and marketing$50,212 29.8 %$37,407 25.5 %$12,805 
Research and development24,543 14.6 21,520 14.7 3,023 
General and administrative41,592 24.7 21,529 14.7 20,063 
Amortization of acquired intangibles10,295 6.1 11,734 8.0 (1,439)
Total operating expenses$126,642 75.2 %$92,190 62.9 %$34,452 
Sales and Marketing. Sales and marketing expenses increased $12.8 million, or 34.2%, primarily due to increases in personnel costs of $6.4 million, which includes an increase of $0.6 million in stock-based compensation expense, increases in marketing program costs of $4.6 million, and a $0.4 million increase in costs associated with our separation from SolarWinds. partially offset by reductions in travel and acquisition related costs of $0.4 million. We increased our sales and marketing employee headcount to support the sales of additional solutions and drive growth in the business.
Research and Development. Research and development expenses increased $3.0 million, or 14.0%, primarily due to an increase in personnel costs of $2.1 million, which includes an increase of $0.2 million in stock-based compensation expense, an increase in contract services costs of $0.5 million, and a $0.2 million increase in costs associated with our separation from SolarWinds. We increased our worldwide research and development employee headcount to expedite delivery of enhancements and new solutions to our MSP partners.
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General and Administrative. General and administrative expenses increased $20.1 million, or 93.2%, primarily due to $13.1 million in costs associated with our separation from SolarWinds and a $7.6 million increase in personnel costs, which includes an increase of $2.9 million in stock-based compensation expense. We increased our worldwide general and administrative employee headcount in preparation of our separation from SolarWinds.
Amortization of Acquired Intangibles. Amortization of acquired intangibles decreased $1.4 million, or 12.3%, primarily due to the impact of changes in foreign currency exchange rates.
Interest Expense, Net
Six Months Ended June 30,
20212020
AmountPercentage of RevenueAmountPercentage of RevenueChange
(in thousands, except percentages)
Interest expense, net$(12,600)(7.5)%$(14,735)(10.0)%$2,135 
Interest expense, net decreased by $2.1 million, or 14.5%, in the six months ended June 30, 2021 compared to the six months ended June 30, 2020, primarily due to repayment of borrowings under our long-term related party debt. See Note 4. Relationship with Parent and Related Entities of the Notes to Combined Financial Statements for further details regarding our related party debt.
Other Expense, Net
Six Months Ended June 30,
20212020
AmountPercentage of RevenueAmountPercentage of RevenueChange
(in thousands, except percentages)
Other expense, net$(583)(0.3)%$(166)(0.1)%$(417)
Other expense, net increased by $0.4 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
Six Months Ended June 30,
20212020
AmountPercentage of RevenueAmountPercentage of RevenueChange
(in thousands, except percentages)
Income before income taxes$1,877 1.1 %$9,198 6.3 %$(7,321)
Income tax expense 5,693 3.4 5,286 3.6 407 
Effective tax rate303.3 %57.5 %245.8 %
Our income tax expense for the six months ended June 30, 2021 increased by $0.4 million as compared to the six months ended June 30, 2020. The effective tax rate increased to 303.3% for the period primarily due to a decrease in income before income taxes and due to the valuation allowance recognized on the deferred tax assets in the U.S. For additional discussion about our income taxes, see Note 6. Income Taxes of the Notes to Combined Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
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Non-GAAP Financial Measures
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.
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, spin-off costs related to associated with our separation from SolarWinds, as well as the related tax impacts of these items can have a material impact on our GAAP financial results.
Non-GAAP Operating Income and Non-GAAP Operating Margin
We provide non-GAAP operating income and related non-GAAP operating margins excluding such items as stock-based compensation expense and related employer-paid payroll taxes, amortization of acquired intangible assets, acquisition related costs, spin-off costs and restructuring costs and other. Management believes these measures are useful for the following reasons:
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 associated with our employees’ participation in SolarWinds’ stock-based incentive compensation plans. 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 necessarily 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.
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.
Acquisition Related 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. 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 non-GAAP measures that exclude acquisition related costs allows investors 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 spin-off into a newly created and separately traded public company. These costs include legal, accounting and advisory fees, system implementation costs and other incremental separation costs incurred by us related to the spin-off. The spin-off transaction results 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.
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Restructuring Costs and Other. 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. 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.

Three Months Ended June 30,Six Months Ended June 30,
2021202020212020
(in thousands, except margin data)
GAAP operating income$9,881 $13,534 $15,060 $24,099 
Stock-based compensation expense and related employer-paid payroll taxes4,350 3,271 9,472 5,982 
Amortization of acquired technologies1,037 6,132 3,741 11,876 
Amortization of acquired intangibles4,276 5,869 10,295 11,734 
Acquisition related costs(87)10 (87)40 
Spin-off costs6,033 — 12,148 — 
Restructuring costs and other117 (7)130 67 
Non-GAAP operating income$25,607 $28,809 $50,759 $53,798 
GAAP operating margin11.6 %18.4 %8.9 %16.4 %
Non-GAAP operating margin30.0 %39.2 %30.1 %36.7 %

Adjusted EBITDA and Adjusted EBITDA Margin
We regularly monitor adjusted EBITDA and adjusted EBITDA margin, as they are measures we use to assess our operating performance. We define adjusted EBITDA as net income or loss, excluding amortization of acquired intangible assets and developed technology, depreciation expense, income tax expense (benefit), interest expense, net, unrealized foreign currency (gains) losses, acquisition related costs, spin-off costs, stock-based compensation expense and related employer-paid payroll taxes and restructuring costs and other. We define adjusted EBITDA margin as adjusted EBITDA divided by total 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 include:
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 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 related party 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.
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Because of these limitations, you should consider adjusted EBITDA alongside other financial performance measures, including operating income and 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,
 2021202020212020
(in thousands, except margin data)
Net income (loss) $462 $3,224 $(3,816)$3,912 
Amortization5,313 12,001 14,036 23,611 
Depreciation2,646 1,951 5,252 3,850 
Income tax expense