# N-able, Inc. (NABL) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from N-able, Inc.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1834488/000183448822000040/nabl-20211231.htm
Accession: 0001834488-22-000040
Filing date: 2022-03-08
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/NABL/
All MD&A years: /company/NABL/mda/
Next year: /company/NABL/mda/fy2022/ (FY 2022)

ITEM 7. 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 our Consolidated Financial Statements and related notes thereto included elsewhere in this report. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially and adversely from those anticipated in the forward-looking statements. Please see the sections entitled “Safe Harbor Cautionary Statement” and "Risk Factors" above 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” below.

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 for 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 and profitability.

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 158,020,156 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 316,040,312 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”). 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.

Our financial statements for the periods through the Separation and Distribution date of July 19, 2021 are Consolidated Financial Statements prepared on a “carve-out” basis. Our financial statements for the period from July 20, 2021 through December 31, 2021 are Consolidated Financial Statements based on our reported results as a standalone company. 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 11. Relationship with Parent and Related Entities in the Notes to Consolidated 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. Prior to the Separation and Distribution, 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 the safety of its personnel. We have maintained a similar plan following the Separation

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and Distribution, and 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, and continuing through the fourth quarter of 2021, 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 Annual Report on Form 10-K. 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 confirmed to us that it has concluded its internal investigations related to 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 and Distribution, 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 the Separation and Distribution date of July 19, 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 and Distribution Agreement”), we have not recorded any contingent liabilities with respect to the Cyber Incident as of December 31, 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 and Distribution 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 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 fiscal 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.

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Results of Operations

Our financial statements for the periods through the Separation and Distribution date of July 19, 2021 are Consolidated Financial Statements prepared on a “carve-out” basis. Our financial statements for the period from July 20, 2021 through December 31, 2021 are Consolidated Financial Statements based on our reported results as a standalone company. Through the Separation and Distribution date of July 19, 2021, we operated as a part of SolarWinds. Therefore, stand-alone financial statements were not historically prepared for us. The accompanying historical Consolidated Financial Statements have been prepared from SolarWinds’ historical accounting records and are presented on a stand-alone basis as if our business’ operations had been conducted independently from SolarWinds. The Consolidated Financial Statements present our historical results of operations in accordance with GAAP.

Prior to the Separation and Distribution, N-able comprised certain stand-alone legal entities for which discrete financial information was available. As SolarWinds recorded transactions at the legal entity level, for the legal entities which were 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 in the Notes to Consolidated Financial Statements.

The Consolidated Statements of Operations include all revenue and costs directly attributable to N-able as well as an allocation of expenses related to facilities, functions and services provided by SolarWinds prior to the Separation and Distribution. 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 Consolidated 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 and Distribution or of the costs we will incur in the future. See Note 11. Relationship with Parent and Related Entities in the Notes to Consolidated Financial Statements for further details of the allocated costs.

Fourth 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 $89.5 million and $79.9 million for the three months ended December 31, 2021 and 2020, respectively.

As of December 31, 2021, we had approximately 25,000 customers. Additionally, as of December 31, 2021, we had 1,678 MSP partners with ARR over $50,000 on our platform, up from 1,473 as of December 31, 2020, representing an increase of 14%. Over the same period, MSP partners with over $50,000 of ARR on our platform grew from approximately 42% of our total ARR as of December 31, 2020 to approximately 47% of our total ARR as of December 31, 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 relationships with our MSP partners.

Profitability

We have grown while maintaining high levels of operating efficiency. Our net income for the three months ended December 31, 2021 was $2.1 million compared to a net loss of $(9.9) million for the three months ended December 31, 2020. The increase in net income for the three months ended December 31, 2021 was primarily due to an increase in revenue and a decrease in both the cost of amortization of acquired technologies and interest expense. Our Adjusted EBITDA, calculated as net income of $2.1 million and net loss of $(9.9) million for the three months ended December 31, 2021 and 2020, respectively, excluding amortization of acquired intangible assets and developed technology of $3.1 million and $12.3 million, respectively, depreciation expense of $5.6 million and $2.4 million, respectively, income tax expense of $1.9 million and $3.5 million, respectively, interest expense, net of $4.8 million and $6.7 million, respectively, unrealized foreign currency losses of $0.2 million and $0.3 million, respectively, acquisition related costs of zero and $0.1 million, respectively, spin-off costs of $1.1 million and $6.0 million, respectively, stock-based compensation expense and related employer-paid payroll taxes of $8.7 million and $9.3 million, respectively, and restructuring costs and other of $0.3 million and less than $0.1 million, respectively, was $27.8 million and $30.6 million for the three months ended December 31, 2021 and 2020, respectively.

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Cash Flow

We have built our business to generate strong cash flow over the long term. For the three months ended December 31, 2021 and 2020, cash flows from operations were $19.2 million and $16.2 million, respectively. The increase in cash provided by operating activities for the three months ended December 31, 2021 compared to the three months ended December 31, 2020 was primarily due to an increase in net income of $12.0 million, partially offset by a decrease in the net cash provided by our operating assets and liabilities of $9.0 million due to the timing of sales, cash payments and receipts. Our cash flows from operations were reduced by cash payments for interest of $2.6 million and $9.8 million for the three months ended December 31, 2021 and 2020, respectively, and cash payments for income taxes of $4.0 million and $2.7 million for the three months ended December 31, 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 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. For the periods through the Separation and Distribution date of July 19, 2021, SolarWinds provided 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 Consolidated Financial Statements. The total number of employees fully dedicated to our business was 1,399 and 1,177 as of December 31, 2021 and December 31, 2020, respectively. Our stock-based compensation expense increased during the year ended December 31, 2021 as compared to the prior fiscal year primarily due to the impact of both the conversion of existing unvested and unexercised equity awards in connection with the Separation and Distribution and new equity awards granted to employees during the six months ended December 31, 2021. Our travel costs declined in fiscal year 2020 and remained at a decreased level during the year ended December 31, 2021 due to COVID-19.

•Sales and Marketing. Sales and marketing expenses primarily consist of related personnel costs, including our sales, marketing, partner success and product management 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 grow our sales and marketing organization domestically and internationally to drive new MSP

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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 the Separation and Distribution.

•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 Expense

Other 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.

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 Years Ended December 31, 2021 and 2020

Revenue

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020"],["","Amount","","Percentage of Revenue","","Amount","","Percentage of Revenue","","Change"],["","(in thousands, except percentages)"],["Subscription revenue","$","336,845","","","97.2","%","","$","292,027","","","96.4","%","","$","44,818"],["Other revenue","9,611","","","2.8","","","10,844","","","3.6","","","(1,233)"],["Total subscription and other revenue","$","346,456","","","100.0","%","","$","302,871","","","100.0","%","","$","43,585"]]
[[/GREPCENT_TABLE]]

Total revenue increased $43.6 million or 14.4%, for the year ended December 31, 2021 compared to the year ended December 31, 2020, driven by our security and data protection solutions. We base revenue by geography on the shipping address of each MSP partner. Based on MSP partner location, revenue from the United States was approximately 46.4% and 47.8% of total revenue for the year ended December 31, 2021 and 2020, respectively. Revenue from the United Kingdom was approximately 11.1% and 10.4% of total revenue for the year ended December 31, 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 $44.8 million, or 15.3%, for the year ended December 31, 2021 compared to the year ended December 31, 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 year ended December 31, 2021 compared to the year ended December 31, 2020.

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Our annual dollar-based net revenue retention rate for our subscription products was approximately 110% and 109% for the year ended December 31, 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 $(1.2) million, or (11.4)%, for the year ended December 31, 2021 compared to the year ended December 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.

Cost of Revenue

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020"],["","Amount","","Percentage of Revenue","","Amount","","Percentage of Revenue","","Change"],["","(in thousands, except percentages)"],["Cost of revenue","$","46,677","","","13.5","%","","$","38,916","","","12.8","%","","$","7,761"],["Amortization of acquired technologies","5,755","","","1.7","","","24,257","","","8.0","","","(18,502)"],["Total cost of revenue","$","52,432","","","15.2","%","","$","63,173","","","20.8","%","","$","(10,741)"]]
[[/GREPCENT_TABLE]]

Total cost of revenue decreased in the year ended December 31, 2021 compared to the year ended December 31, 2020 primarily due to a decrease of $18.5 million in amortization of intangible assets acquired in connection with the take private transaction of SolarWinds in early 2016, partially offset by an increase in royalties and public cloud infrastructure and hosting fees of $4.7 million, an increase of $2.1 million in depreciation and other amortization, and an increase in personnel costs of $0.6 million, which includes an increase in stock-based compensation expense of $0.3 million.

Operating Expenses

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020"],["","Amount","","Percentage of Revenue","","Amount","","Percentage of Revenue","","Change"],["","(in thousands, except percentages)"],["Sales and marketing","$","112,678","","","32.5","%","","$","82,034","","","27.1","%","","$","30,644"],["Research and development","53,959","","","15.6","","","42,719","","","14.1","","","11,240"],["General and administrative","80,575","","","23.3","","","57,331","","","18.9","","","23,244"],["Amortization of acquired intangibles","13,482","","","3.9","","","23,848","","","7.9","","","(10,366)"],["Total operating expenses","$","260,694","","","75.3","%","","$","205,932","","","68.0","%","","$","54,762"]]
[[/GREPCENT_TABLE]]

Sales and Marketing. Sales and marketing expenses increased $30.6 million, or 37.4%, primarily due to an increase in personnel costs of $14.6 million, which includes an increase in stock-based compensation expense of $4.4 million, an increase in allocated costs of $6.8 million, an increase in advertising expense of $4.6 million, an increase in marketing program costs of $1.3 million, an increase in contract services costs of $0.9 million, and an increase in costs associated with the Separation and Distribution of $0.5 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 $11.2 million, or 26.3%, primarily due to an increase in personnel costs of $6.6 million, which includes an increase in stock-based compensation expense of $1.5 million, an increase in contract services costs of $3.5 million, and an increase of $0.6 million of costs associated with the Separation and Distribution. 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 $23.2 million, or 40.5%, primarily due to an increase of $11.1 million in costs associated with the Separation and Distribution, a $9.4 million increase in personnel costs, which includes an increase in stock-based compensation expense of $2.2 million, and an increase of $2.5 million in contract

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services costs. We increased our worldwide general and administrative employee headcount in connection with the Separation and Distribution.

Amortization of Acquired Intangibles. Amortization of acquired intangibles decreased $(10.4) million, or (43.5)%, primarily due to a decrease in amortization of intangible assets acquired in connection with the take private transaction of SolarWinds in early 2016 and the impact of changes in foreign currency exchange rates.

Interest Expense, Net

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020"],["","Amount","","Percentage of Revenue","","Amount","","Percentage of Revenue","","Change"],["","(in thousands, except percentages)"],["Interest expense, net","$","(20,472)","","","(5.9)","%","","$","(28,137)","","","(9.3)","%","","$","7,665"]]
[[/GREPCENT_TABLE]]

Interest expense, net decreased by $7.7 million, or (27.2)%, in the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily due to repayment of borrowings under our long-term related party debt and the impact of lower interest rates under the Credit Agreement compared to our long-term related party debt. See Note 11. Relationship with Parent and Related Entities and Note 7. Debt in the Notes to Consolidated Financial Statements for additional information regarding our related party debt.

Other Expense, Net

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020"],["","Amount","","Percentage of Revenue","","Amount","","Percentage of Revenue","","Change"],["","(in thousands, except percentages)"],["Other expense, net","$","(1,266)","","","(0.4)","%","","$","(773)","","","(0.3)","%","","$","(493)"]]
[[/GREPCENT_TABLE]]

Other expense, net increased by $(0.5) million in the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily due to the impact of changes in foreign currency exchange rates related to various accounts for the period, partially offset by $0.7 million of other income related to the settlement of a sublease agreement with SolarWinds.

Income Tax Expense

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020"],["","Amount","","Percentage of Revenue","","Amount","","Percentage of Revenue","","Change"],["","(in thousands, except percentages)"],["Income before income taxes","$","11,592","","","3.3","%","","$","4,856","","","1.6","%","","$","6,736"],["Income tax expense","11,479","","","3.3","","","12,014","","","4.0","","","(535)"],["Effective tax rate","99.0","%","","","","247.4","%","","","","(148.4)","%"]]
[[/GREPCENT_TABLE]]

Our income tax expense for the year ended December 31, 2021 decreased by $(0.5) million as compared to the year ended December 31, 2020. The effective tax rate decreased to 99.0% for the year ended December 31, 2021 primarily due to changes in income before income taxes by jurisdiction, offset by the valuation allowance recognized on the deferred tax assets in the U.S. and non-deductible stock-based compensation and costs associated with the Separation and Distribution. For additional discussion about our income taxes, see Note 12. Income Taxes in the Notes to Consolidated Financial Statements.

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Comparison of the Years Ended December 31, 2020 and 2019

Revenue

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2020","","2019"],["","Amount","","Percentage of Revenue","","Amount","","Percentage of Revenue","","Change"],["","(in thousands, except percentages)"],["Subscription Revenue","$","292,027","","","96.4","%","","$","251,695","","","95.5","%","","$","40,332"],["Other revenue","10,844","","","3.6","","","11,823","","","4.5","","","(979)"],["Total subscription and other revenue","$","302,871","","","100.0","%","","$","263,518","","","100.0","%","","$","39,353"]]
[[/GREPCENT_TABLE]]

Total revenue increased $39.4 million, or 14.9%, for the year ended December 31, 2020 compared to the year ended December 31, 2019, driven by our security and data protection solutions. We base revenue by geography on the shipping address of each MSP partner. Based on MSP partner location, revenue from the United States was approximately 47.8% and 47.7% of total revenue for the year ended December 31, 2020 and 2019, respectively. Revenue from the United Kingdom was approximately 10.4% and 10.8% of total revenue for the year ended December 31, 2020 and 2019, 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 $40.3 million, or 16.0%, for the year ended December 31, 2020 compared to the year ended December 31, 2019. Our increase in subscription revenue was driven primarily by 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 year ended December 31, 2020 compared to the year ended December 31, 2019.

Our annual dollar-based net revenue retention rate for our subscription products was approximately 109% and 108% for the year ended December 31, 2020 and 2019, respectively, and was driven primarily by strong customer retention and expansion in our MSP products.

Other Revenue. Other revenue decreased $(1.0) million, or (8.3)%, for the year ended December 31, 2020 compared to the year ended December 31, 2019 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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2020","","2019"],["","Amount","","Percentage of Revenue","","Amount","","Percentage of Revenue","","Change"],["","(in thousands, except percentages)"],["Cost of revenue","$","38,916","","","12.8","%","","$","33,253","","","12.6","%","","$","5,663"],["Amortization of acquired technologies","24,257","","","8.0","","","24,067","","","9.1","","","190"],["Total cost of revenue","$","63,173","","","20.8","%","","$","57,320","","","21.8","%","","$","5,853"]]
[[/GREPCENT_TABLE]]

Total cost of revenue increased for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to an increase in public cloud infrastructure and hosting fees of $3.3 million, depreciation of servers for cloud infrastructure and other amortization of $1.5 million and personnel costs to support new MSP partners and additional solution offerings of $1.1 million, which includes a $0.2 million increase in stock-based compensation.

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[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2020","","2019"],["","Amount","","Percentage of Revenue","","Amount","","Percentage of Revenue","","Change"],["","(in thousands, except percentages)"],["Sales and marketing","$","82,034","","","27.1","%","","$","70,254","","","26.7","%","","$","11,780"],["Research and development","42,719","","","14.1","","","37,172","","","14.1","","","5,547"],["General and administrative","57,331","","","18.9","","","38,971","","","14.8","","","18,360"],["Amortization of acquired intangibles","23,848","","","7.9","","","23,189","","","8.8","","","659"],["Total operating expenses","$","205,932","","","68.0","%","","$","169,586","","","64.4","%","","$","36,346"]]
[[/GREPCENT_TABLE]]

Sales and Marketing. Sales and marketing expenses increased $11.8 million, or 16.8%, primarily due to an increase in personnel costs of $7.3 million, which includes an increase of $2.1 million in stock-based compensation expense, an increase in marketing program costs of $4.5 million, and a $0.7 million increase in costs associated with the Separation and Distribution. These increases were partially offset by a reduction in travel related expenses of $1.4 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 $5.5 million, or 14.9%, primarily due to an increase in personnel costs of $5.4 million, which includes an increase of $0.9 million in stock-based compensation expense, and an increase in third-party contractors of $0.9 million. These increases were partially offset by a reduction in travel related expenses of $0.5 million. 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 $18.4 million, or 47.1%, primarily due to a $13.3 million increase in personnel costs, which includes a $9.3 million increase in stock-based compensation expense and a $6.6 million increase in costs associated with the Separation and Distribution. These increases were partially offset by a $1.8 million decrease in acquisition related and travel costs. The increase in stock-based compensation expense is primarily related to modifications of performance-based stock awards during the year.

Amortization of Acquired Intangibles. Amortization of acquired intangibles increased $0.7 million, or 2.8%, for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to additional amortization related to acquisitions.

Interest Expense, Net

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2020","","2019"],["","Amount","","Percentage of Revenue","","Amount","","Percentage of Revenue","","Change"],["","(in thousands, except percentages)"],["Interest expense, net","$","(28,137)","","","(9.3)","%","","$","(33,805)","","","(12.8)","%","","$","5,668"]]
[[/GREPCENT_TABLE]]

Interest expense, net decreased by $5.7 million, or (16.8)%, for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to repayment of borrowings under our long-term related party debt and the impact of lower interest rates under the Credit Agreement compared to our long-term related party debt. See Note 11. Relationship with Parent and Related Entities and Note 7. Debt in the Notes to Consolidated Financial Statements for further details regarding our related party debt.

Other (Expense) Income, Net

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2020","","2019"],["","Amount","","Percentage of Revenue","","Amount","","Percentage of Revenue","","Change"],["","(in thousands, except percentages)"],["Other (expense) income, net","$","(773)","","","(0.3)","%","","$","386","","","0.1","%","","$","(1,159)"]]
[[/GREPCENT_TABLE]]

Other (expense) income, net decreased by $(1.2) million for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to the impact of changes in foreign currency exchange rates related to various accounts for the period.

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Income Tax Expense

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2020","","2019"],["","Amount","","Percentage of Revenue","","Amount","","Percentage of Revenue","","Change"],["","(in thousands, except percentages)"],["Income before income taxes","$","4,856","","","1.6","%","","$","3,193","","","1.2","%","","$","1,663"],["Income tax expense","12,014","","","4.0","","","5,705","","","2.2","","","6,309"],["Effective tax rate","247.4","%","","","","178.7","%","","","","68.7","%"]]
[[/GREPCENT_TABLE]]

Our income tax expense for the year ended December 31, 2020 increased by $6.3 million as compared to the year ended December 31, 2019. The effective tax rate increased to 247.4% for the period primarily due to an increase 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 12. Income Taxes in the Notes to Consolidated Financial Statements.

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 the Separation and Distribution, 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 N-able's 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.

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•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 costs incurred by us related to the Separation and Distribution. 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.

•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.

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020","","2019"],["","(in thousands, except margin data)"],["GAAP operating income","$","33,330","","","$","33,766","","","$","36,612"],["Stock-based compensation expense and related employer-paid payroll taxes","30,092","","","21,496","","","9,080"],["Amortization of acquired technologies","5,755","","","24,257","","","24,067"],["Amortization of acquired intangibles","13,482","","","23,848","","","23,189"],["Acquisition related costs","(87)","","","175","","","3,175"],["Spin-off costs","15,653","","","7,430","","","\u2014"],["Restructuring costs and other","422","","","309","","","538"],["Non-GAAP operating income","$","98,647","","","$","111,281","","","$","96,661"],["GAAP operating margin","9.6","%","","11.1","%","","13.9","%"],["Non-GAAP operating margin","28.5","%","","36.7","%","","36.7","%"]]
[[/GREPCENT_TABLE]]

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 and other costs. 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

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•other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

Because of these limitations, you should consider adjusted EBITDA alongside other financial performance measures, including 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.

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020","","2019"],["","(in thousands, except margin data)"],["Net income (loss)","$","113","","","$","(7,158)","","","$","(2,512)"],["Amortization","20,384","","","48,104","","","47,256"],["Depreciation","13,385","","","8,346","","","6,883"],["Income tax expense","11,479","","","12,014","","","5,705"],["Interest expense, net","20,472","","","28,137","","","33,805"],["Unrealized foreign currency losses (gains)","1,433","","","1,707","","","(601)"],["Acquisition related costs","(87)","","","175","","","3,175"],["Spin-off costs","15,653","","","7,430","","","\u2014"],["Stock-based compensation expense and related employer-paid payroll taxes","30,092","","","21,496","","","9,080"],["Restructuring costs and other","422","","","309","","","538"],["Adjusted EBITDA","$","113,346","","","$","120,560","","","$","103,329"],["Adjusted EBITDA margin","32.7","%","","39.8","%","","39.2","%"]]
[[/GREPCENT_TABLE]]

Liquidity and Capital Resources

Cash and cash equivalents were $66.7 million as of December 31, 2021. As our sales and operating cash flows are primarily generated by international entities in the United Kingdom and Canada, our international subsidiaries held approximately $62.6 million of cash and cash equivalents, of which 69.4%, 12.7% and 11.7% were held in United States Dollars, British Pound Sterling, and Euros, respectively. We intend either to invest our foreign earnings permanently into foreign operations or to remit these earnings to our U.S. entities in a tax-efficient manner. The Tax Act imposed a mandatory transition tax on accumulated foreign earnings and eliminates U.S. federal income taxes on foreign subsidiary distribution.

Our primary source of cash for funding operations and growth has been through cash provided by operating activities. Given the uncertainty in the rapidly changing market and economic conditions related to the COVID-19 pandemic, we continue to evaluate the nature and extent of the impact to our business and financial position. However, despite this uncertainty, we believe that our existing cash and cash equivalents and our cash flows from operating activities will be sufficient to fund our operations and meet our commitments for capital expenditures for at least the next twelve months.

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 (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. We had total borrowings, net of debt issuance costs of $10.2 million, of $338.9 million as of December 31, 2021. In addition to our total borrowings, we are also committed to cash interest payments of approximately $78.6 million over the term of the Credit Agreement, based upon an interest rate as of December 31, 2021 of 3.50%. See Note 7. Debt in the Notes to Consolidated Financial Statements for further details regarding the Credit Agreement.

In addition to committed payments related to the Credit Agreement, we are also committed to purchase obligations of $53.0 million through the fiscal year ended December 31, 2026 and remaining operating lease liabilities of $42.7 million through the fiscal year ended December 31, 2032. Purchase obligations represent outstanding purchase orders for items including public

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cloud infrastructure and hosting fees, royalty fees, marketing activities, software license and support fees, and accounting and legal fees. See Note 5. Leases in the Notes to Consolidated Financial Statements for further details regarding our operating leases.

In addition, as contemplated by the Separation and Distribution agreement, cash in excess of $50.0 million was distributed by the Company to SolarWinds during the three months ended September 30, 2021.

Although we are not currently a party to any material definitive agreement regarding potential investments in, or acquisitions of, complementary businesses, applications or technologies, we may enter into these types of arrangements, which could reduce our cash and cash equivalents, require us to seek additional equity or debt financing or repatriate cash generated by our international operations. Additional funds from financing arrangements may not be available on terms favorable to us or at all.

During the year ended December 31, 2021, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes

Related Party Indebtedness

Due to affiliates within long-term liabilities in the Consolidated Balance Sheets represents N-able's related party debt due to SolarWinds Holdings, Inc. of $372.7 million as of December 31, 2020. In connection with the Separation and Distribution, we repaid this related party debt and we had no remaining related party debt due to SolarWinds Holdings, Inc. as of December 31, 2021.

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 December 31, 2020, $228.5 million in borrowings were outstanding. In connection with the Separation and Distribution, we repaid this debt and no borrowings were outstanding as of December 31, 2021.

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 December 31, 2020, $144.2 million in borrowings were outstanding. In connection with the Separation and Distribution, we repaid this debt and no borrowings were outstanding as of December 31, 2021.

Interest expense related to the activity with SolarWinds Holdings, Inc. was $13.8 million, $28.1 million, and $34.1 million for the for the year ended December 31, 2021, 2020, and 2019, respectively. The repayment of principal for these related party borrowings is reflected as a financing activity in the Consolidated Statements of Cash Flows.

See Note 11. Relationship with Parent and Related Entities in the Notes to Consolidated Financial Statements for further details regarding our borrowings due to affiliates.

Summary of Cash Flows

Summarized cash flow information is as follows:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020"],["","(in thousands)"],["Net cash provided by operating activities","$","45,341","","","$","85,665"],["Net cash used in investing activities","(34,833)","","","(16,140)"],["Net cash used in financing activities","(42,322)","","","(10,558)"],["Effect of exchange rate changes on cash and cash equivalents","(1,240)","","","1,475"],["Net (decrease) increase in cash and cash equivalents","$","(33,054)","","","$","60,442"]]
[[/GREPCENT_TABLE]]

Operating Activities

Our primary source of cash from operating activities is cash collections from our MSP partners and our distributors. We expect cash inflows from operating activities to be affected by the timing of our sales and the consumption of our solutions by our MSP partners. Our primary uses of cash from operating activities are for personnel-related expenditures, and other general operating expenses, as well as payments related to taxes, interest and facilities.

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For the year ended December 31, 2021 as compared to the year ended December 31, 2020, the decrease in cash provided by operating activities was primarily due to a decrease in due to and from affiliates, an increase in prepaid expenses and other assets, an increase in income taxes receivable, a decrease in accrued related party interest payable, a decrease in accounts payable, and an increase in accounts receivable, partially offset by cash provided by an increase in accrued liabilities and other current liabilities. The net cash outflow of $19.9 million and inflow of $16.2 million resulting from the changes in our operating assets and liabilities for the year ended December 31, 2021 and 2020, respectively, excluding the changes noted above, was primarily due to the timing of sales, cash payments and receipts. Cash flows from operations for the year ended December 31, 2021 and 2020 was reduced by $19.0 million and $14.2 million of cash paid for taxes, respectively.

Investing Activities

Investing cash flows consist of cash used for capital expenditures and intangible assets. Our capital expenditures principally relate to purchases of servers for cloud infrastructure primarily to support our data protection solutions, as well as leasehold improvements, computers and equipment to support our domestic and international office locations. Purchases of intangible assets consist of capitalized research and development costs.

Net cash used in investing activities increased for the year ended December 31, 2021 as compared to the year ended December 31, 2020, primarily due to increases in capital expenditures and capitalized research and development costs.

Financing Activities

Financing cash flows consist of proceeds from the Credit Agreement, payments for debt issuance costs, proceeds and distributions from the Private Placement, repayments associated with our borrowings due to affiliates, net transfers to and from Parent, payments of tax withholding obligations related to restricted stock, and the exercise of stock options.

Net cash used in financing activities increased for the year ended December 31, 2021 as compared to the year ended December 31, 2020, primarily due to an increase in repayments of borrowings due to affiliates, an increase in net transfers to Parent, payments for debt issuance costs, payments of tax withholding obligations related to restricted stock, and repayments of borrowings from the Credit Agreement, partially offset by proceeds from the Credit Agreement. Net transfers to Parent include the total net effect of the settlement of any transactions which have been included in our Consolidated Financial Statements from legal entities which are not exclusively operating as our legal entities and are considered to be effectively settled at the time the transaction is recorded between SolarWinds and us. See Note 1. Organization and Nature of Operations and Note 11. Relationship with Parent and Related Entities in the Notes to Consolidated Financial Statements for further details regarding the Parent company net investment.

Critical Accounting Policies and Estimates

Our Consolidated Financial Statements are prepared in conformity with GAAP and require our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates, and such estimates may change if the underlying conditions or assumptions change. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected, perhaps materially.

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application, while in other cases, management’s judgment is required in selecting among available alternative accounting standards that allow different accounting treatment for similar transactions. We believe that these accounting policies requiring significant management judgment and estimates are critical to understanding our historical and future performance, as these policies relate to the more significant areas of our financial results. These critical accounting policies are:

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

•revenue recognition;

•income taxes; and

•management’s assessment of allocations of expenses prior to the Separation and Distribution.

Acquisitions

We allocate the purchase prices of our acquired businesses to the assets acquired and the liabilities assumed based on their estimated fair values, with the excess recorded as goodwill. If applicable, we estimate the fair value of contingent consideration payments in determining the purchase price. The fair value of identifiable intangible assets is based on significant judgments made by management. We typically engage third-party valuation appraisal firms to assist us in determining the fair values and

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useful lives of the assets acquired. The valuation estimates and assumptions are based on historical experience and information obtained from management, and also include, but are not limited to, future expected cash flows earned from the intangible asset and discount rates applied in determining the present value of those cash flows. Unanticipated events and circumstances may occur that could affect the accuracy or validity of such assumptions, estimates or actual results.

Goodwill

Our goodwill was derived from the take private transaction of SolarWinds in February 2016 and acquisitions in May 2016, August 2017, July 2018, and April 2019 where the purchase price exceeded the fair value of the net identifiable assets acquired. The N-able legal entities were managed as a single reporting unit of the Parent prior to the Separation and Distribution and N-able continues to be managed as a single reporting unit following the Separation and Distribution. Goodwill is tested for impairment at least annually during the fourth quarter or sooner when circumstances indicate an impairment may exist. An impairment of goodwill is recognized when the carrying amount of a reporting unit exceeds its fair value. For purposes of the annual impairment test, we assess qualitative factors to determine if it is more likely than not that goodwill might be impaired and whether it is necessary to perform the quantitative impairment test which considers the fair value of the reporting unit compared with the carrying value on the date of the test. Qualitative factors include industry and market considerations, overall financial performance, changes in management or key personnel, changes in strategy, changes in customers and other relevant events and circumstances affecting the reporting unit.

On October 1, 2021, we performed the annual qualitative assessment for our reporting unit. For the annual impairment analysis, we assessed several events and circumstances that could affect the significant inputs used to determine the fair value of our reporting unit, including the significance of the amount of excess fair value over carrying value, consistency of operating margins and cash flows, budgeted-to-actual performance from prior year, overall change in economic climate, changes in the industry and competitive environment, key management turnover, and earnings quality and sustainability. As of October 1, 2021, there were no unanticipated changes or negative indicators in the above qualitative factors that would impact the fair value of our reporting unit as of the annual impairment analysis date. As such, we determined there were no indicators of impairment and that it was more likely than not that the fair value of our reporting unit was greater than its carrying value and therefore performing the next step of impairment test was unnecessary.

Fair value determination of our reporting unit requires considerable judgment and is sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the qualitative goodwill impairment test will prove to be an accurate prediction of future results. If an event occurs that would cause us to revise our estimates and assumptions used in analyzing the value of our goodwill, the revision could result in a non-cash impairment charge that could have a material impact on our financial results.

Identifiable Intangible Assets

We evaluate long-lived assets, including finite-lived intangible assets and other assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset group may not be recoverable. Events or changes in circumstances that could result in an impairment review include, but are not limited to, significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for our overall business, and significant negative industry or economic trends. If an event occurs that would cause us to revise our estimates and assumptions used in analyzing the value of our property and equipment or our finite-lived intangibles and other assets, that revision could result in a non-cash impairment charge that could have a material impact on our financial results.

Revenue Recognition

We primarily generate revenue from the sale of subscriptions to our SaaS solutions and subscription-based term licenses and, to a lesser extent, from the sale of maintenance services associated with our perpetual licenses. We recognize revenue when we transfer promised goods or services in amounts that reflect the consideration to which the entity expects to be entitled in exchange for those goods or services. This is determined by following a five-step process which includes (1) identifying the agreement with a customer, (2) identifying the performance obligations in the agreement, (3) determining the transaction price, (4) allocating the transaction price, and (5) recognizing revenue when or as we satisfy a performance obligation, as described below.

We identify performance obligations in an agreement based on the goods and services that will be transferred to the MSP partner that are separately identifiable from other promises in the agreement, or distinct. If not considered distinct, the promised goods or services are combined with other goods or services and accounted for as a combined performance obligation. Determining the distinct performance obligations in an agreement requires judgment. Our performance obligations primarily relate to our SaaS solutions, subscription-based term licenses and maintenance support including unspecified upgrades or enhancements to new versions of our solutions.

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We allocate the transaction price of the agreement to each distinct performance obligation based on a relative stand-alone selling price basis. Determining stand-alone selling prices for our performance obligations requires judgment and are based on multiple factors primarily including historical selling prices and discounting practices for our solutions and services. We review the stand-alone selling price for our performance obligations periodically and update, if needed, to ensure that the methodology utilized reflects our current pricing practices.

Income Taxes

We use the liability method of accounting for income taxes as set forth in the authoritative guidance for accounting for income taxes. For the years ended December 31, 2020 and 2019, as well as the period ended July 19, 2021, income taxes as presented in the financial statements of N-able attribute current and deferred income taxes of SolarWinds to stand-alone financial statements of N-able in a manner that is systematic, rational and consistent with the asset and liability method prescribed by FASB ASC Topic 740: Income Taxes (“ASC 740”). Accordingly, the income tax provisions of N-able for these periods were prepared following the separate return method. Under this method, we recognize deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the respective carrying amounts and tax basis of our assets and liabilities. For the period beginning July 20, 2021, the income tax provision was computed on a post-Separation and Distribution basis following the authoritative guidance reflected in ASC 740.

In calculating our effective tax rate, we make judgments regarding certain tax positions, including the timing and amount of deductions and allocations of income among various tax jurisdictions.

The guidance on accounting for uncertainty in income taxes requires us to identify, evaluate and measure all uncertain tax positions taken or to be taken on tax returns and to record liabilities for the amount of these positions that may not be sustained, or may only partially be sustained, upon examination by the relevant taxing authorities. Although we believe that our estimates and judgments are reasonable, actual results may differ from these estimates. Some or all of these judgments are subject to review by the taxing authorities. To the extent that the actual results of these matters is different than the amounts recorded, such differences will affect our effective tax rate. We recognize interest expense and penalties on uncertain tax positions as a component of our income tax expense. ASC 740 defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the tax authority based solely on its technical merits as of the reporting date. If a tax position is not considered more-likely-than-not to be sustained solely on its technical merits, no benefits of the position are to be recognized in the financial statements. If a tax position meets the more-likely-than-not threshold, it should be measured based on the largest benefit that is more than 50 percent likely to be realized.

We establish valuation allowances when necessary to reduce deferred tax assets to the amounts expected to be realized. On a quarterly basis, we evaluate the need for, and the adequacy of, valuation allowances based on the expected realization of our deferred tax assets. The factors used to assess the likelihood of realization include our latest forecast of future taxable income, available tax planning strategies that could be implemented, reversal of taxable temporary differences and carryback potential to realize the net deferred tax assets. As of December 31, 2021 and 2020, we have recorded a valuation allowance of $2.9 million and $18.3 million, respectively, in the U.S. If, based upon the weight of all available evidence, it is more likely than not (a likelihood of greater than 50%) that some portion or all of the deferred tax assets will not be realized, a valuation allowance must be recorded to reduce the deferred tax assets.

Management’s Assessment of Allocations

For the periods through the Separation and Distribution date of July 19, 2021, N-able operated as a part of SolarWinds. Consequently, stand-alone financial statements were not historically prepared for N-able. The Consolidated Financial Statements have been prepared using the legal entity approach from SolarWinds’ historical Consolidated Financial Statements and accounting records of N-able prior to the Separation and Distribution and are presented on a stand-alone basis as if N-able’s operations had been conducted independently from SolarWinds.

For the periods through the Separation and Distribution date of July 19, 2021, SolarWinds provided facilities, information technology services and certain corporate and administrative services to N-able. Expenses relating to these services have been allocated to N-able and are reflected in the Consolidated Financial Statements. Where direct assignment is not possible or practical, these costs were allocated based on headcount. Management believes the assumptions underlying the Consolidated Financial Statements, including the assumptions regarding allocated expenses, reasonably reflect the utilization of services provided to, or the benefit received by, us during the periods presented. However, the expenses reflected in the Consolidated 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. Actual costs that would have been incurred if we had been a stand-alone company would depend on multiple factors, including organizational structure and strategic decisions in various areas, such as information technology and infrastructure. In addition, the expenses reflected in the Consolidated Financial Statements may not be indicative of related expenses that will be incurred in the future by N-able.

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Recent Accounting Pronouncements

See Note 2. Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K, for a full description of recent accounting pronouncements, which is incorporated herein by reference.