UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the Quarterly Period Ended March 31, 2022
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 001-39637
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation) | (IRS Employer Identification No.) | |||||||
| , | ||||||||||||||
(Address of principal executive offices) | (Zip Code) | |||||||||||||
(Registrant’s telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report.)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
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. 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). 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.
| ☒ | Accelerated filer | ☐ | ||||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||||||||
| Emerging growth company | ||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
At April 30, 2022, there were approximately 165,211,487 shares of the Registrant’s Common Stock outstanding (excluding treasury shares of 362,126).
TABLE OF CONTENTS
| Page | ||||||||
| PART I. | ||||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| PART II | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
OTHER AVAILABLE INFORMATION
Please note that in addition to filing our periodic and current reports, we may announce material business and financial information to our investors using filings we make with the Securities and Exchange Commission (“SEC”), webcasts, press releases, conference calls, and our investor relations website which can be found at www.investors.datto.com. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. We use these media, including our website, to communicate with our stockholders and the public about our company. It is possible that the information that we make available through these media may be deemed to be material information. We therefore encourage investors and others interested in our company to review all such media.
The information contained on the website referenced in this Quarterly Report on Form 10-Q is not incorporated by reference into this filing, and the website address is provided only as a reference.
2
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DATTO HOLDING CORP.
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| Page | ||||||||
| Financial Statements: | ||||||||
3
DATTO HOLDING CORP.
Condensed Consolidated Balance Sheets
(in thousands, except share amounts)
(unaudited)
| March 31, 2022 | December 31, 2021 | |||||||||||||
| ASSETS | ||||||||||||||
| Current assets | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Restricted cash | ||||||||||||||
| Accounts receivable, net | ||||||||||||||
| Inventory | ||||||||||||||
| Prepaid expenses and other current assets | ||||||||||||||
| Total current assets | ||||||||||||||
| Property and equipment, net | ||||||||||||||
| Operating lease assets | ||||||||||||||
| Goodwill | ||||||||||||||
| Intangible assets, net | ||||||||||||||
| Other assets | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||
| Current liabilities | ||||||||||||||
| Accounts payable | $ | $ | ||||||||||||
| Accrued expenses and other current liabilities | ||||||||||||||
| Deferred revenue | ||||||||||||||
| Total current liabilities | ||||||||||||||
| Deferred revenue, noncurrent | ||||||||||||||
| Deferred income taxes | ||||||||||||||
| Operating lease liabilities, noncurrent | ||||||||||||||
| Other long-term liabilities | ||||||||||||||
| Total liabilities | ||||||||||||||
| Commitments and contingencies (Note 8) | ||||||||||||||
| STOCKHOLDERS’ EQUITY | ||||||||||||||
Preferred stock, $ | ||||||||||||||
Common stock, $ | ||||||||||||||
| Additional paid-in capital | ||||||||||||||
Treasury stock, at cost; | ( | ( | ||||||||||||
| Accumulated deficit | ( | ( | ||||||||||||
| Accumulated other comprehensive income (loss) | ( | ( | ||||||||||||
| Total stockholders’ equity | ||||||||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
DATTO HOLDING CORP.
Condensed Consolidated Statements of Operations
(in thousands, except share and per share amounts)
(unaudited)
| Three Months Ended March 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Revenue: | ||||||||||||||
| Subscription | $ | $ | ||||||||||||
| Device | ||||||||||||||
| Professional services and other | ||||||||||||||
| Total revenue | ||||||||||||||
| Cost of revenue: | ||||||||||||||
| Subscription | ||||||||||||||
| Device | ||||||||||||||
| Professional services and other | ||||||||||||||
| Depreciation and amortization | ||||||||||||||
| Total cost of revenue | ||||||||||||||
| Gross profit | ||||||||||||||
| Operating expenses: | ||||||||||||||
| Sales and marketing | ||||||||||||||
| Research and development | ||||||||||||||
| General and administrative | ||||||||||||||
| Depreciation and amortization | ||||||||||||||
| Total operating expenses | ||||||||||||||
| Income from operations | ||||||||||||||
| Other (income) expense: | ||||||||||||||
| Interest expense | ||||||||||||||
| Other income, net | ( | ( | ||||||||||||
| Total other (income) expense | ( | |||||||||||||
| Income before income taxes | ||||||||||||||
| Provision for income taxes | ( | ( | ||||||||||||
| Net income | $ | $ | ||||||||||||
| Net income per share attributable to common stockholders: | ||||||||||||||
| Basic | $ | $ | ||||||||||||
| Diluted | $ | $ | ||||||||||||
| Weighted-average shares used in computing net income per share: | ||||||||||||||
| Basic | ||||||||||||||
| Diluted | ||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
DATTO HOLDING CORP.
Condensed Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net income | $ | $ | |||||||||
| Other comprehensive income (loss): | |||||||||||
| Currency translation adjustment | ( | ( | |||||||||
| Total comprehensive income | $ | $ | |||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
DATTO HOLDING CORP.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(in thousands, except share amounts)
(unaudited)
| Common Stock | Treasury Stock | Additional Paid in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2022 | $ | $ | ( | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Shares issued upon exercise of stock options and vesting of restricted stock units | — | — | — | ||||||||||||||||||||||||||||||||||||||
| ESPP share purchases | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | ( | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||
| Common Stock | Treasury Stock | Additional Paid in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2021 | $ | $ | ( | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Shares issued upon exercise of stock options and vesting of restricted stock units | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | ( | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7
DATTO HOLDING CORP.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| OPERATING ACTIVITIES | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation | |||||||||||
| Amortization of acquired intangible assets | |||||||||||
| Amortization of debt issuance costs | |||||||||||
| Reserve for inventory obsolescence | |||||||||||
| Non-cash operating lease expense | |||||||||||
| Stock-based compensation | |||||||||||
| Provision for expected credit losses | |||||||||||
| Deferred income taxes | ( | ||||||||||
| Unrealized foreign exchange | ( | ( | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Inventory | ( | ( | |||||||||
| Prepaid expenses and other current assets | ( | ( | |||||||||
| Other assets | ( | ( | |||||||||
| Accounts payable, accrued expenses and other | ( | ||||||||||
| Deferred revenue | ( | ( | |||||||||
| Net cash provided by operating activities | |||||||||||
| INVESTING ACTIVITIES | |||||||||||
| Purchase of property and equipment | ( | ( | |||||||||
| Acquisition of business, net of cash acquired | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| FINANCING ACTIVITIES | |||||||||||
| Repayments of debt and capital leases | ( | ( | |||||||||
| Capitalized transaction costs | ( | ||||||||||
| Proceeds from stock option exercises | |||||||||||
| Proceeds from employee stock purchase plan share purchases | |||||||||||
| Net cash provided by (used in) financing activities | ( | ||||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ||||||||||
| Net decrease in cash and cash equivalents | ( | ( | |||||||||
| Cash and cash equivalents and restricted cash, beginning of year | |||||||||||
| Cash and cash equivalents and restricted cash, end of period | $ | $ | |||||||||
| Reconciliation of cash and cash equivalents and restricted cash: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | $ | $ | |||||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | |||||||||||
| Cash paid for income taxes | $ | $ | |||||||||
| Cash paid for interest | $ | $ | |||||||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES | |||||||||||
| Purchase of property and equipment included in accounts payable | $ | $ | |||||||||
| Unpaid initial public offering costs in total current liabilities | $ | $ | |||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
8
DATTO HOLDING CORP.
INDEX TO NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| Page | ||||||||
| Index to Notes to Condensed Consolidated Financial Statements | ||||||||
9
DATTO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1.Description of Business, Basis of Presentation and Principles of Consolidation
Description of Business
Datto Holding Corp. (“Datto Holding”) provides security and cloud-based software solutions purpose-built for delivery through the managed service provider (“MSP”) channel to small and medium businesses (“SMB”). Unless the context otherwise indicates or requires, references to “Datto”, “we,” “us,” “our” and “the Company” shall refer to Datto Holding and its wholly-owned subsidiaries as a consolidated entity.
The Company’s platform enables its MSP partners to serve the SMB information technology market and includes mission-critical cloud-based software and technologies that MSPs sell to SMBs, business management software to help MSPs scale their own businesses, and marketing tools, content, training and industry-leading events that cultivate an empowered and highly engaged MSP partner community. The Company typically has no contractual relationship with the SMBs and considers its MSP partners to be the customers. By selling through the MSP channel, the Company is able to cost-effectively scale the reach of the Company’s solutions and support the global requirements of SMBs without a direct-to-SMB sales and support model.
Basis of Presentation and Principles of Consolidation
The accompanying condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”), consistent in all material respects with those applied in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the Securities and Exchange Commission (“SEC”) on February 23, 2022 (the “Annual Report”). The condensed consolidated financial statements include the Company's accounts and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
The Company's condensed consolidated financial statements are unaudited but include all adjustments of a normal recurring nature necessary for a fair presentation of the quarterly results. These interim results are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2022 or for any other interim period or for any other future year. The Company's condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes in the Annual Report.
Datto Holding owns 100 % of Merritt Holdco, Inc. (“Merritt Holdco”), which owns 100 % of Datto, Inc., the Company’s primary operating company. Datto Holding has no operations or significant assets or liabilities other than its investment in Merritt Holdco. Accordingly, Datto Holding is dependent upon distributions from Merritt Holdco to fund any activity, including the payment of dividends. All obligations under Datto’s 2020 Credit Agreement, as defined in Note 9. Debt, are guaranteed by Merritt Holdco and certain direct and indirect subsidiaries of Datto, Inc.
As of March 31, 2022, funds controlled by Vista Equity Partners (“Vista”) owned approximately 69.1 % of the Company’s outstanding common stock, excluding treasury shares. As a result, the Company is a “controlled company” under New York Stock Exchange (“NYSE”) corporate governance rules. Sales to and purchases from as well as balances due to or from Vista and its portfolio companies as of and for the three months ended March 31, 2022 and 2021, respectively, were immaterial.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and also on assumptions that management believes are reasonable. Actual results could differ materially from those estimates because of risks and uncertainties, including uncertainty in the economic environment resulting from the continuing global impact of the COVID-19 pandemic.
10
2.Significant Accounting Policies
Summary of Significant Accounting Policies
There have been no material changes to the Company's significant accounting policies as of and for the three months ended March 31, 2022, as compared to the significant accounting policies described in the Company's Annual Report. The following information updates certain disclosures in the Company's Annual Report.
Fair Value Measurements
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value of assets and liabilities into three broad levels as follows:
Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date,
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly,
Level 3 – Unobservable inputs for the asset or liability.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs.
The Company's cash and cash equivalents as of March 31, 2022 include money market funds, which are valued using Level 1 inputs. The Company may also hold cash and cash equivalents in highly liquid pooled funds and has elected to apply the net asset value practical expedient provided by Accounting Standards Codification 820 – Fair Value Measurement to determine the fair value. As of March 31, 2022, the Company held $25.0 million of money market funds. The Company did not hold any money market funds as of December 31, 2021.
Accounts Receivable, Net of Allowance for Expected Credit Losses
Trade accounts receivable are recorded at the invoiced amount. Accounts receivable are presented net of an estimated allowance for expected credit losses. The Company maintains an allowance for expected credit losses as a reduction of trade accounts receivable’s amortized cost basis to present the net amount expected to be collected.
The following table summarizes the activity of the allowance for expected credit losses (in thousands):
| Amount | |||||
| Balance as of December 31, 2021 | $ | ||||
| Provision for expected credit losses | |||||
| Net reductions and other | ( | ||||
| Balance as of March 31, 2022 | $ | ||||
Unbilled accounts receivable are included in the accounts receivable balances and represent revenue earned, but the amount is not contractually billable as of the balance sheet date. The unbilled accounts receivable balance is principally invoiced within the following month. As of March 31, 2022 and December 31, 2021, unbilled accounts receivable, net was $2.0 million and $1.6 million, respectively.
11
3.Revenue Recognition
Disaggregation of Revenue
The following tables disaggregate revenue by service and timing of recognition (in thousands):
| Three Months Ended March 31, 2022 | |||||||||||||||||||||||
| Device | Professional Services | Subscription | Total | ||||||||||||||||||||
| Timing of revenue recognition: | |||||||||||||||||||||||
| Recognized at a point in time | $ | $ | $ | $ | |||||||||||||||||||
| Recognized over time | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| Three Months Ended March 31, 2021 | |||||||||||||||||||||||
| Device | Professional Services | Subscription | Total | ||||||||||||||||||||
| Timing of revenue recognition: | |||||||||||||||||||||||
| Recognized at a point in time | $ | $ | $ | $ | |||||||||||||||||||
| Recognized over time | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
The following table summarizes sales to customers by geography (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| United States | $ | $ | |||||||||
| United Kingdom | |||||||||||
| Other international | |||||||||||
| Total | $ | $ | |||||||||
Revenue by geography is determined by the billing address for the customer.
Contract Balances
Contract assets represent amounts for which the Company has recognized revenue, generally for device sales or contracts which contain free subscription periods pursuant to its revenue recognition policy, for contracts that have not yet been fully invoiced to customers where there is a remaining performance obligation. Contract assets relate to contractual arrangements which contain both a subscription and a device, a free subscription period or a professional service performance obligation. Amounts are recorded as a current asset or a non-current asset based on the amounts anticipated to be billed within one year of the balance sheet date. Current contract assets, net of $13.5 million and $12.0 million were included in prepaid expenses and other current assets as of March 31, 2022 and December 31, 2021, respectively. Non-current contract assets, net of $11.5 million and $10.8 million were included in other assets as of March 31, 2022 and December 31, 2021, respectively.
Contract liabilities consist of customer payments in advance of revenue being recognized. Amounts anticipated to be recognized within one year of the balance sheet date are recorded as deferred revenue, current and the remaining portion is recorded as deferred revenue, noncurrent on the condensed consolidated balance sheets. Deferred revenue as of March 31, 2022 and December 31, 2021 was $23.6 million (of which $3.3 million was classified as non-current) and $23.7 million (of which $3.3 million was classified as non-current), respectively.
12
| Three Months Ended March 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Beginning balance | $ | $ | ||||||||||||
| Deferred revenue recognized | ( | ( | ||||||||||||
| Amounts deferred | ||||||||||||||
| Acquired with Infocyte | ||||||||||||||
| Foreign currency translation and other | ( | |||||||||||||
| Ending balance | $ | $ | ||||||||||||
Contract Acquisition Costs
The Company capitalizes commission expenses paid to internal sales personnel for obtaining customer contracts, using a portfolio approach. Contract acquisition costs are included in other assets on the condensed consolidated balance sheets. Contract acquisition costs as of March 31, 2022 and December 31, 2021 were $66.7 million and $63.3 million, respectively.
Remaining Performance Obligations
Revenues expected to be recognized in the future related to performance obligations that are unsatisfied at March 31, 2022 were approximately $399.4 million, of which greater than 50 % is anticipated to be recognized in the next twelve months , with substantially all revenue related to performance obligations to be recognized within thirty-six months. The amount excludes month-to-month contracts.
4.Inventory
Inventory, net of the reserves for obsolescence, consisted of the following (in thousands):
| March 31, 2022 | December 31, 2021 | ||||||||||
| Purchased components and builds in process | $ | $ | |||||||||
| Finished goods | |||||||||||
| Total inventory | $ | $ | |||||||||
5.Property and Equipment, Net
Property and equipment, net, consisted of the following (in thousands):
| Estimated Useful Life (in Years) | March 31, 2022 | December 31, 2021 | |||||||||||||||||||||
| Servers | - | $ | $ | ||||||||||||||||||||
| Leasehold improvements | (a) | ||||||||||||||||||||||
| Computer equipment | - | ||||||||||||||||||||||
| Internally developed software | |||||||||||||||||||||||
| Furniture and fixtures | |||||||||||||||||||||||
| Purchased software | |||||||||||||||||||||||
| Vehicles | |||||||||||||||||||||||
| Total property and equipment | |||||||||||||||||||||||
| Less: accumulated depreciation and amortization | ( | ( | |||||||||||||||||||||
| Total property and equipment, net | $ | $ | |||||||||||||||||||||
(a) The shorter of the remaining lease term or useful life.
The Company capitalized $2.0 million and $1.3 million of internally developed software costs during the three months ended March 31, 2022 and 2021, respectively.
13
6.Acquisitions
Infocyte Acquisition
In January 2022, the Company acquired threat detection and response company Infocyte, Inc. ("Infocyte"), extending Datto’s security capabilities that protect, detect, and respond to cyberthreats found within endpoints and cloud environments. The business combination was accounted for under the acquisition method of accounting. The consideration paid of approximately $43.5 million was allocated to the tangible and intangible assets acquired and liabilities assumed based on a preliminary assessment of the fair values as of the acquisition date, which is subject to adjustment over the measurement period. The preliminary allocation of the purchase consideration was as follows (in thousands):
| Assets acquired | ||||||||
| Other current and noncurrent assets | $ | |||||||
| Definite lived intangible assets | ||||||||
| Goodwill | ||||||||
| Total assets acquired | $ | |||||||
| Total liabilities assumed | $ | |||||||
| Purchase consideration, net of cash acquired | $ | |||||||
The definite lived intangible assets consist of acquired developed technology of $10.5 million and partner relationships of $2.2 million. Goodwill resulting from the Infocyte acquisition is not expected to be deductible for tax purposes.
General and administrative expense within the condensed consolidated statements of operations includes $0.2 million of costs incurred in relation to the Infocyte acquisition in the three months ended March 31, 2022.
BitDam Acquisition
7.Goodwill and Intangible Assets, Net
Goodwill
The following table summarizes the activity of the Company's goodwill balance (in thousands):
| Amount | ||||||||
| Balance at December 31, 2021 | $ | |||||||
| Infocyte acquisition | ||||||||
| Foreign currency translation | ||||||||
| Balance at March 31, 2022 | $ | |||||||
Definite-Lived Intangible Assets
14
| March 31, 2022 | ||||||||||||||||||||||||||
| Gross Carrying Value | Accumulated Amortization | Net Carrying Value | Weighted Average Remaining Life | |||||||||||||||||||||||
| Technology | $ | $ | ( | $ | ||||||||||||||||||||||
| Tradenames | ( | |||||||||||||||||||||||||
| Partner relationships | ( | |||||||||||||||||||||||||
| Total | $ | $ | ( | $ | ||||||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||
| Gross Carrying Value | Accumulated Amortization | Net Carrying Value | Weighted Average Remaining Life | |||||||||||||||||||||||
| Technology | $ | $ | ( | $ | ||||||||||||||||||||||
| Tradenames | ( | |||||||||||||||||||||||||
| Partner relationships | ( | |||||||||||||||||||||||||
| Total | $ | $ | ( | $ | ||||||||||||||||||||||
Amortization expense related to intangible assets included in cost of revenue and operating expenses was $3.1 million and $4.7 million, respectively, for the three months ended March 31, 2022, including $0.5 million and $0.2 million, respectively, resulting from the Infocyte acquisition. Amortization expense related to intangible assets included in cost of revenue and operating expenses was $1.3 million and $4.4 million, respectively, for the three months ended March 31, 2021.
The Company's acquired intangible assets are amortized over periods ranging from 2 to 20 years, depending on their estimated useful lives. As of March 31, 2022, estimated amortization expense for intangible assets is as follows (in thousands):
| Periods Ended December 31, | ||||||||
| Remainder of 2022 | $ | |||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| Thereafter | ||||||||
| $ | ||||||||
8.Commitments and Contingencies
9.Debt
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10.Stock-Based Compensation
The Company has equity awards outstanding under the Datto Holding Corp. Omnibus Incentive Plan (the “2020 Plan”), the 2017 Stock Option Plan (the “2017 Datto Plan”), and the Autotask Superior Holdings 2013 Stock Option Plan (the “Autotask Plan”). Equity award activity under these plans is summarized below.
Stock Options
The following table summarizes stock option activity related to all plans during the three months ended March 31, 2022 (in thousands, except share and per share amounts):
| Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | Aggregate Intrinsic Value | ||||||||||||||||||||
| Options outstanding at December 31, 2021 | $ | $ | |||||||||||||||||||||
| Options exercised | ( | $ | |||||||||||||||||||||
| Options forfeited & expired | ( | $ | |||||||||||||||||||||
| Options outstanding at March 31, 2022 | $ | $ | |||||||||||||||||||||
| Options vested and exercisable at March 31, 2022 | $ | $ | |||||||||||||||||||||
Options outstanding at March 31, 2022 include 80,000 issued under the 2020 Plan, 6,086,041 issued under the 2017 Datto Plan, and 250,552 issued under the Autotask Plan.
The total fair value of stock options that vested during three months ended March 31, 2022 and 2021 was $4.7 million and $8.1 million, respectively.
The aggregate intrinsic value of stock options exercised during the three months ended March 31, 2022 and 2021 was $8.1 million and $0.3 million, respectively.
As of March 31, 2022, unrecognized compensation expense related to outstanding stock options was $16.8 million, which is expected to be recognized over the remaining weighted average term of 1.6 years.
Restricted Stock Units
The following table summarizes RSU activity during the three months ended March 31, 2022:
| Number of Shares | Weighted Average Grant Date Fair Value | |||||||||||||
| RSUs outstanding at December 31, 2021 | $ | |||||||||||||
| RSUs granted | $ | |||||||||||||
| RSUs vested | ( | $ | ||||||||||||
| RSUs forfeited | ( | $ | ||||||||||||
| RSUs outstanding at March 31, 2022 | $ | |||||||||||||
All RSUs outstanding at March 31, 2022 were issued under the 2020 Plan.
While the majority of RSUs vest over a four-year period, the Company also issued RSUs with performance-based vesting conditions in connection with the acquisitions of BitDam in 2021 and Infocyte in 2022, for which stock-based compensation expense is being recorded based on the expected achievement of the performance targets. As of
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March 31, 2022, unrecognized compensation expense related to all outstanding RSUs was $109.4 million, which is expected to be recognized over the remaining weighted average term of 3.2 years.
Shares Available for Future Grants
The following table summarizes the shares available for future grants under the 2020 Plan:
| Shares Available for Future Grant | |||||
| Balance at December 31, 2021 | |||||
| Annual authorization increase | |||||
| Awards granted | ( | ||||
| Awards forfeited or expired | |||||
| Balance at March 31, 2022 | |||||
Datto 2021 Employee Stock Purchase Plan
The Datto Holding Corp. 2021 Employee Stock Purchase Plan (“ESPP”) provides employees with the option to purchase Datto common stock at a purchase price equal to 85 % of the fair market value of Datto common stock on the first or last day of the offering period, whichever is lower, subject to certain plan provisions and tax regulations. As of March 31, 2022, 4,700,580 shares were available for issuance under the ESPP.
Approximately 160,878 shares were issued in January 2022 for total consideration of $3.3 million, which was accumulated over the offering period through employee payroll withholdings. The amount of withholdings from employees held by the Company as of March 31, 2022 and December 31, 2021, were $1.7 million and $3.2 million, respectively, which are included in accrued expenses and other current liabilities within the condensed consolidated balance sheets.
The fair value of shares issued under the ESPP is estimated on the grant date using the Black-Scholes option pricing model. As of March 31, 2022, unrecognized compensation expense related to the ESPP was $0.8 million, which is expected to be recognized over the remaining weighted average term of 0.3 years.
Stock-Based Compensation Expense
Stock-based compensation expense for the three months ended March 31, 2022 and 2021 was as follows (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cost of revenue—subscription | $ | $ | |||||||||
| Cost of revenue—device | |||||||||||
| Cost of revenue—professional services and other | |||||||||||
| Sales and marketing | |||||||||||
| Research and development | |||||||||||
| General and administrative | |||||||||||
| Total stock-based compensation expense | $ | $ | |||||||||
11.Income Taxes
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12.Net Income per Share
| Three Months Ended March 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Numerator: | ||||||||||||||
| Net income attributable to common stockholders | $ | $ | ||||||||||||
| Denominator: | ||||||||||||||
| Weighted-average shares used in computing net income per share attributable to common stockholders | ||||||||||||||
| Basic | ||||||||||||||
| Total dilutive effect of outstanding equity awards including the ESPP | ||||||||||||||
| Diluted | ||||||||||||||
| Net income per share attributable to common stockholders | ||||||||||||||
| Basic | $ | $ | ||||||||||||
| Diluted | $ | $ | ||||||||||||
For the three month periods ended March 31, 2022 and 2021 there were 508,923 and 634,330 , respectively, of weighted-average outstanding options and RSUs that were excluded from the computation of diluted net income per share attributable to common stockholders for the period presented because including them would have been antidilutive.
13.Subsequent Events
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Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “will,” “should,” “can have,” “likely” and other words and terms of similar meaning in connection with any discussion of future operating or financial performance or other events. For example, all statements we make relating to the proposed Merger with Kaseya, our estimated and projected costs, expenditures, cash flows, growth rates and financial results or our plans and objectives for future operations, growth initiatives, or strategies are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including:
•uncertainties associated with the proposed Merger with Kaseya;
•the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement;
•the inability to complete the proposed Merger due to the failure to satisfy conditions to completion of the proposed Merger, including the receipt of applicable approvals and clearances by government authorities;
•risks related to disruption of management’s attention from our ongoing business operations due to the proposed Merger;
•the effect of the announcement of the proposed Merger on our relationships with our customers, operating results and business generally;
•the risk that the proposed Merger will not be consummated in a timely manner or at all;
•the costs of the proposed Merger if the proposed Merger is not consummated;
•restrictions imposed on our business during the pendency of the proposed Merger;
•potential litigation instituted against us or our directors challenging the proposed Merger;
•our ability to recruit, retain and develop key employees and management personnel, including in light of the proposed Merger;
•the continuing impacts on our operations and financial condition from the effects of the COVID-19 pandemic;
•our ability to effectively compete;
•fluctuations in our operating results;
•our ability to sustain cash flows and profitability;
•our ability to attract new managed service provider (“MSP”) partners;
•our ability to sell additional products and subscriptions to our MSP partners;
•the recognition of revenue from our subscription offerings;
•the strength of the small and medium businesses (“SMB”) information technology (“IT”) market;
•our ability to manage the ongoing growth of our business;
•the risks associated with our current and future international operations, including the risks of expansion into new international markets;
•the impact of volatility in the global economy; including heightened inflation, rising interest rates and the effects from the war in Ukraine;
•the ability of our MSP partners to sell our products;
•possible data losses or breaches experienced by MSP partners or their SMB customers using our products or solutions;
•the risks associated with defects or vulnerabilities in our or our third-parties’ software, solutions, infrastructure and hardware;
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•the impact of natural disasters, health pandemics, terrorism or other catastrophic events;
•the impact of changes in SMBs’ IT needs and our ability to adapt our offerings;
•our ongoing ability to utilize the application programming interfaces of products such as Microsoft 365 and Google Workspace;
•our ability to realize benefits from our investment in research and development activities;
•the impact of any manufacturing and logistics delays or pricing fluctuations relating to our manufacturing partners;
•our ability to effectively manage our supply chain and inventory;
•our dependence on a limited number of manufacturers for certain components of our products;
•our ability to provide high quality technical support and the extent to which our MSP partners are able to provide satisfactory technical support to their SMB customers;
•the risks related to our use of open source software in certain of our products and subscription offerings;
•our ability to meet our contractual commitments related to response time and service level, and the quality of professional services we provide;
•the risks associated with indemnity provisions in some of our agreements;
•the risks and uncertainties associated with our limited operating history;
•the risks associated with past and future business acquisitions;
•our ability to make expenditures in order to support additional growth;
•the risk of negative publicity, legal liability or other expenditures which could result from the material stored on our servers;
•the effects of interruptions or delays in services provided by our data centers or other third parties;
•our reliance on technology and intellectual property licensed from other parties;
•our ability to integrate our products with other operating systems, software applications, platforms and hardware;
•the impact of claims by others that we infringe upon their proprietary technology or other rights;
•the potential adverse impact of legal proceedings;
•the risks associated with our indemnification obligations and the limitations of our director and officer liability insurance;
•our ability to protect and enforce our intellectual property rights;
•the ability of our MSP partners to access high-speed internet and the continued reliability of the internet infrastructure;
•our ability to sustain market recognition of and loyalty to our brand;
•our ability to maintain our corporate culture;
•the impact of foreign currency exchange rate fluctuations;
•the impact of fluctuations in interest rates;
•we previously identified a material weakness in our internal control over financial reporting and may identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, which may result in material misstatements of our financial statements or cause us to fail to meet our periodic reporting obligations;
•our ability to develop and maintain proper and effective internal control over financial reporting;
•the impact of changes in financial accounting standards or practices;
•the accuracy of the estimates and judgments relating to our critical accounting policies;
•the impact of tax consequences related to our domestic and international operations;
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•the impact of changes in tax laws or regulations affecting us or our partners;
•our ability to comply with governmental export controls and economic sanctions laws in connection with our international operations;
•our ability to comply with legal requirements, contractual obligations and industry standards relating to security, data protection and privacy;
•our ability to comply with the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”);
•our ability to comply with the Foreign Corrupt Practices Act (“FCPA”) and similar laws associated with our activities outside of the United States;
•our ability to comply with the other government laws and regulations applicable to our business; and
•other factors disclosed in the section entitled “Risk Factors” in this Form 10-Q and our Annual Report on Form 10-K filed with the SEC on February 23, 2022.
We derive many of our forward-looking statements from our operating plans and forecasts, which are based on many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q and in the section entitled “Risk Factors” in this Form 10-Q and our Annual Report on Form 10-K filed with the SEC on February 23, 2022. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements as well as other cautionary statements that are made from time to time in our other SEC filings and public communications. You should evaluate all forward-looking statements made in this Quarterly Report on Form 10-Q in the context of these risks and uncertainties.
We caution you that the risks and uncertainties referenced above that may cause actual results to differ materially from those that we expected may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this filing are made only as of the date hereof. We undertake no obligation to update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.
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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 our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and our 2021 Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on February 23, 2022. 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 from those expressed or implied by such forward-looking statements. Important factors that could cause or contribute to these differences include, but are not limited to, those identified in this Quarterly Report and in our Form 10-K, particularly those discussed in the sections entitled “Risk Factors” and “Forward-Looking Statements.”
Overview
Datto is the leading global provider of security and cloud-based software solutions purpose-built for delivery through the managed service provider, or MSP, channel to small and medium businesses, or SMBs. We enable our more than 19,200 MSP partners to manage and grow their businesses serving the SMB information technology, or SMB IT, market. Our platform combines mission-critical cloud-based software, technologies and security solutions that MSPs sell to SMBs, business management software to help MSPs scale their own businesses, and marketing tools, content, training and industry-leading events that cultivate an empowered and highly engaged MSP partner community.
MSPs represent the future of IT management for SMBs. Digital transformation is driving SMB adoption of modern software and technology, while regulatory and data protection requirements and proliferating security threats are increasing the complexity and risk of IT for SMBs. These trends have created an inflection point in SMB outsourcing to MSPs for IT management. MSPs are equipped with the IT resources and expertise SMBs lack, providing a single source to meet all of an SMB’s IT needs. MSPs are trusted to select, procure, implement and manage software and technology stacks that support their SMB customers’ business needs. The number of MSPs continues to grow, with approximately 132,000 MSPs providing this critical function to millions of SMBs worldwide.
We are committed to the success of MSPs. It is the foundation of our strategy and culture. We empower our MSP partner channel, creating enormous sales and support leverage for us to efficiently address the large, but fragmented, SMB IT market. Our MSP-centric platform enables our partners to generate recurring revenue through the sale of our solutions to SMBs and to scale and effectively manage their own businesses. Our relationships are directly with our MSP partners. We are the leading pure-play vendor serving the MSP market, and believe our MSP-centric approach is highly differentiating as it aligns our mutual incentives, creates a motivated and engaged sales channel and reinforces our position as an integral component of our MSP partners’ businesses.
Our cloud-based offerings include Unified Continuity, Networking, Endpoint Management and Business Management software solutions. Our Unified Continuity offerings ensure the ongoing availability and security of mission-critical IT systems for SMBs in both private and public clouds. Datto’s business continuity and disaster recovery, or BCDR, software enables rapid restoration of an SMB’s full IT environment. Datto’s SaaS Protection is a reliable, automated and secure backup and restoration product for data stored on cloud applications such as Microsoft 365 and Google Workspace. Datto Networking constitutes a suite of MSP-centric networking solutions sold through our MSP partners to easily deliver networking as a managed service. These solutions are simple for MSPs to deploy, configure and manage across their SMB customers through a single portal. Our Endpoint Management software allows MSPs to remotely manage, monitor and secure SMB endpoints. Lastly, Datto's Business Management software provides critical operational tools to MSPs for efficient workflow management and delivery of end-to-end managed services. Our platform also includes a host of business development tools, training and content to help MSPs address the challenges of marketing and selling to SMB customers.
During 2022, we acquired threat detection and response company Infocyte, extending Datto’s security capabilities that protect, detect, and respond to cyberthreats found within endpoints and cloud environments. During late 2021 we launched two new cloud-based solutions - Datto Continuity for Microsoft Azure ("DCMA") and SaaS Defense. DCMA is a comprehensive BCDR solution that protects MSPs and their clients’ data in the public cloud in the event of malicious ransomware attacks, security breaches, and vendor outages. SaaS Defense is an advanced threat protection and spam-filtering solution that provides MSPs and their SMB customers with patented technology to proactively detect and prevent malicious malware, phishing, and Business Email Compromise ("BEC") attacks that target Microsoft Exchange, OneDrive, SharePoint, and Teams. The product was built on technology obtained in Datto’s acquisition of Israel-based cyber threat detection company BitDam in early 2021.
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Merger Transaction
On April 11, 2022, Datto entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Knockout Parent Inc., a Delaware corporation and a wholly owned subsidiary of Kaseya Inc. (“Kaseya”), and certain other parties, providing for the acquisition of the Company by Kaseya, subject to the terms and conditions set forth therein (the “Merger”). Under, and subject to, the terms of the Merger Agreement, Datto stockholders will have the right to receive $35.50 per share in cash, without interest. The Board of Directors of the Company has unanimously approved the Merger Agreement and the transactions contemplated thereby and the necessary stockholder approval has been duly executed and delivered, adopting and approving the Merger Agreement and the transactions contemplated thereby. The obligations of the parties to complete the proposed Merger are subject to customary closing conditions, including, among others, the receipt of applicable regulatory approvals. The proposed Merger is expected to close during the second half of 2022.
Our Business Model
Our cloud-based solutions are purpose-built to address the needs of MSPs and to enable the end-to-end delivery of managed services to their SMB customers.
We generate substantially all our revenue from the sale of subscriptions to our cloud-based solutions and recognize revenue ratably over the subscription term. These contracts typically begin with a 1-year or 3-year term and auto-renew on a monthly or annual basis thereafter. For certain offerings, we enable our ongoing subscription services with an up-front sale of equipment or professional services, for which we recognize revenue at the time of delivery and performance. The majority of our partners pay on a monthly basis, regardless of term length, with some opting to make quarterly, annual or multi-year prepayments.
Subscriptions for our BCDR products are priced based on service tier, which is determined by data storage capacity and data retention period. Subscriptions for Datto SaaS Protection and Datto SaaS Defense (together, SaaS Protection+) are priced based on the number of Microsoft 365 or Google Workspace employee accounts at the SMB domains that our MSP partners protect and data retention period. Networking subscriptions are priced based on the volume and type of networking solutions ordered. Endpoint Management subscriptions are priced per endpoint device at the SMB. Business Management subscriptions are priced based on the number of employees at an MSP that are able to utilize our PSA product.
We employ a highly efficient land-and-expand sales strategy facilitated by offering products that are reliable, easy to adopt and that drive recurring revenue growth and margin efficiency for our MSP partners. We sell our solutions to MSPs primarily through our sales team, benefiting from the reach of our MSP partners for our sell-through products, and provide them with self-service options to upgrade service tiers, add additional units and purchase additional solutions. Our MSP partners often significantly increase usage from their initial purchase and expand their usage to other products on our platform. We also provide access to business development tools and content to help MSPs address the challenges of marketing and selling to SMB customers. We grow alongside our MSP partners as they deploy our solutions across their existing SMB customers, add new customers and upgrade service tiers.
As of March 31, 2022, our annual run-rate revenue, or ARR, was $689.3 million, and our revenue for the three months ended March 31, 2022 was $170.8 million, of which approximately 94% was recurring subscription revenue. For the three months ended March 31, 2022, our net income was $7.9 million and our Adjusted EBITDA was $39.5 million.
As of March 31, 2021, our ARR was $572.5 million and our revenue for the three months ended March 31, 2021, was $144.9 million, of which approximately 94% was recurring subscription revenue. For the three months ended March 31, 2021, our net income was $15.3 million and our Adjusted EBITDA was $46.9 million.
Refer to our discussion of ARR in Key Performance Metrics and Adjusted EBITDA in Non-GAAP Financial Measures.
Trends and Uncertainties
Impact of COVID-19
While we have not incurred significant disruptions from the COVID-19 pandemic, there remains uncertainty relating to the ultimate impact of the pandemic on our business because of numerous global factors, including but not limited to, the impact on our customers and suppliers, supply chain constraints, labor shortages, inflationary pressure and other factors.
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Specifically, we may experience impacts from customers deferring purchasing and activation decisions, reducing expenses and requesting extended payment terms or relief from payments.
Our condensed consolidated financial statements reflect estimates and assumptions made by management that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates and assumptions reflected in our condensed consolidated financial statements include, but are not limited to, establishing allowances for doubtful accounts, assessing the recoverability of prepaid assets, including trade shows and other marketing events impacted by the pandemic, determining useful lives for finite-lived assets, assessing the recoverability of long-lived assets, determining the fair value of assets acquired and liabilities assumed in business combinations, accounting for income taxes and related valuation allowances against deferred tax assets, valuing stock-based awards, recognizing revenue and the estimate for sales returns and upgrades, determining the amortization period for capitalized commissions and assessing the accounting treatment for commitments and contingencies. Management evaluates these estimates and assumptions on an ongoing basis and makes estimates based on historical experience and various other considerations that are believed to be reasonable. Actual results may differ from those estimates, including as a result of the COVID-19 pandemic. We will continue to evaluate the nature and extent of the impact of the pandemic on our business and our consolidated results of operations and financial condition.
Macro-Economic or Industry Trends
As discussed below, we believe continued favorable industry trends will contribute to the growth of our business, including: i) increased adoption by SMBs of digital and cloud-based technologies; ii) increasing complexity in IT, which impacts the ability of SMBs to evaluate, select and implement an optimal IT environment; iii) increased exposure and vulnerability of SMBs to security and regulatory risk, including cyberattacks; iv) lack of SMB sophistication to meet the expanding challenges of IT management; v) the continued trend of remote work, vi) educational organizations and governmental agencies using MSPs to provide IT services, and vii) the meaningful and increasing costs of downtime or data loss. The customer base of our partners continues to expand as a result of these trends and as evidenced by the anticipated 13.4% increase in available market reported by Frost & Sullivan during 2021.
Key Performance Metrics
In addition to our financial information presented in accordance with generally accepted accounting principles in the United States, or GAAP, we review a number of operating and financial metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make operating and strategic decisions.
MSP Partners
The number of MSP partners represents the number of MSPs with active subscriptions as of the end of the period. We use this number to assess our ability to attract and retain MSP partners and thereby grow our business. As of March 31, 2022, we had approximately 19,200 MSP partners, a net increase of approximately 700 since December 31, 2021. Net changes in the number of our MSP partners are a result of the total new partners added during a period, largely based on our sales and marketing efforts, and the churn or reduction of existing partners during the period, which can be affected by the broader economic environment and factors such as the effects of COVID-19 on our partners' SMB end customers. As a result of our land-and-expand model, our revenue growth is driven principally by additional revenue from existing MSP partners. We view new MSP partner additions as a leading indicator of the health of the business, but the additions do not immediately drive material revenue growth in our reported results of operations.
Annual Run-Rate Revenue
We define annual run-rate revenue, or ARR, as the annualized value of all subscription agreements as of the end of a period. We calculate ARR by multiplying the monthly run-rate revenue for the last month of a period by 12. Monthly run-rate revenue is calculated by aggregating monthly subscription values during the final month of the reporting period from both long-term and month-to-month subscriptions. ARR only includes the annualized value of subscription contracts and excludes any one-time revenue for devices or professional services. ARR mitigates fluctuations resulting from seasonality and contract term. ARR does not have any standardized meaning and is therefore unlikely to be comparable to similarly titled measures presented by other companies. ARR should be viewed independently of revenue and deferred revenue and is not intended to be combined
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with or to replace either of those items. ARR is not a forecast and the active contracts at the date used in calculating ARR may or may not be extended or renewed by our MSP partners.
The table below sets forth our ARR as of March 31, 2022 and 2021:
| As of March 31, | |||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | ||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||
| ARR | $ | 689.3 | $ | 572.5 | $ | 116.8 | 20.4 | % | |||||||||||||||
Components of Results of Operations
Revenue
We generate revenue primarily from fees received for subscriptions to our products and services, and also from the sale of BCDR and Networking devices and professional services associated with our Business Management offerings.
Subscription. We derive revenue primarily from security and cloud-based software solutions sold on a recurring subscription basis. Subscription revenue is recognized ratably over the subscription term as revenue recognition criteria have been met. We generally invoice subscription agreements monthly over the subscription period. Subscription revenue for our Unified Continuity, Networking and Endpoint Management solutions grows as our MSP partners add more end customers and as the end-customers of our MSP partners add new subscription products, upgrade the service tier of their existing subscription products, increase the usage of their subscription products or add more end-user devices managed by their MSP. Revenue from our Business Management solutions increases as we sell subscriptions to new and existing MSP partners who did not have our PSA solution and as our MSP partners with PSA subscriptions add employees who require seat licenses and as MSPs purchase Datto Commerce subscriptions.
Device. Device revenue includes the sale of BCDR and Networking devices which enable us to deliver our BCDR and Networking services to our MSP partners under a recurring subscription model. Revenue from devices in our Unified Continuity solution primarily consists of the sale of our proprietary data storage devices. Revenue from devices in our Networking solution primarily consists of the sale of wireless access points, switches and edge routers. We recognize revenue at the point in time when control of the device has transferred to the MSP or upon activation of the related subscription. Revenue from devices does not contribute significantly to overall revenue related to our Unified Continuity solutions.
Professional services and other. We derive revenue from professional services associated with our Business Management and Endpoint Management offerings. These implementation and consulting services include configuration, database merging and data migration. Our professional services are generally priced on a time and materials basis and invoiced monthly, with revenue recognized as the services are performed, and we frequently discount our services to drive adoption of our Business Management and Endpoint Management offerings.
Cost of revenue
Subscription. Subscription cost of revenue consists of costs directly related to our subscription services, including personnel costs associated with operating our Datto Cloud infrastructure and customer support operations, hosting and data center related costs, third-party software licenses and allocated facilities and overhead costs associated with delivering these services.
Device. Device cost of revenue consists of hardware, manufacturing, personnel, shipping and logistics costs, as well as allocated facilities and overhead costs associated with the purchase, production and delivery of our devices. Our BCDR products rely on a mix of off-the-shelf hardware and custom designed hardware. Our Networking devices generally consist of off-the-shelf hardware, although some of our devices feature a unique industrial design.
Professional services and other. Professional services and other cost of revenue consists primarily of personnel costs and allocated facilities and overhead costs associated with delivering implementation and consulting services. Our professional services implementations aim to ensure higher software utilization and positive customer satisfaction, in order to drive greater upsell opportunity and lower churn over time.
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Depreciation and amortization. Depreciation and amortization cost of revenue consists of depreciation of our Datto Cloud infrastructure and amortization of our acquired technology intangible assets.
Gross profit and gross margin
Gross profit, or revenue less cost of revenue, has been, and will continue to be, affected by various factors, including revenue fluctuations, the mix of revenue, the timing and amount of investments to expand our Datto Cloud infrastructure and launch new solutions, the use of third-party software licenses and stock-based compensation expense.
Operating expenses
Our operating expenses consist of sales and marketing, research and development and general and administrative expenses as well as depreciation, amortization of internally developed software and amortization of acquired intangible assets. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, sales commissions, payroll taxes and stock-based compensation expense. Other significant components of operating expenses include professional fees, third-party software subscription costs, facilities and overhead costs, events and travel, marketing and promotion costs, payment processing fees and bad debt expense.
Sales and marketing
Sales and marketing expenses consist primarily of personnel costs, costs for events and travel, costs of marketing and promotional activities, payment processing fees and allocated facilities and overhead costs. Sales and marketing expenses may fluctuate as a percentage of our revenue from period to period because of the timing and extent of marketing activities, trade shows, and events including DattoCon and MSP Technology Days, as well as the timing of amortization of sales commissions and stock-based compensation expense.
Research and development
Research and development expenses consist primarily of personnel costs, third-party professional fees and allocated facilities and overhead costs. Research and development expense may fluctuate as a percentage of our revenue from period to period because of the timing and extent of our investments in research and development activities, as well as the timing of stock-based compensation expense.
General and administrative
General and administrative expenses consist primarily of personnel costs across the corporate functions of executive, finance, human resources, information technology, internal operations and legal, as well as third-party professional fees, provision for expected credit losses expense, travel expenses and costs for facilities. General and administrative expenses also include costs of operating as a publicly listed company, including increased expenses for insurance, costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations pursuant to the rules and regulations of the SEC, expenses related to investor relations, and professional services fees, particularly related to audit services and compliance with the Sarbanes-Oxley Act.
Depreciation and amortization
Depreciation and amortization expenses in operating expenses consist of amortization of tradenames and partner relationship intangibles, depreciation of other property and equipment such as leasehold improvements, furniture and fixtures, and computer equipment, and amortization of internally developed software.
Other (Income) expense
Interest expense
Interest expense consists of commitment fees under our credit facilities and the amortization of debt issuance costs, and to the extent we have outstanding borrowings, interest payments under our credit facilities. Our 2020 Credit Agreement provides a $200.0 million revolving credit facility. As of March 31, 2022, no amounts had been drawn under the 2020 Credit Agreement. See “Liquidity and Capital Resources—Credit Facilities” for additional details.
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Other (income) expense
Other (income) expense primarily consists of the net exchange (gains) or losses on foreign currency transactions, (gains) or losses from our money market funds and (gains) or losses on the disposal of assets.
Provision for income tax
Provision for income tax consists primarily of income taxes related to U.S. federal and state income taxes and income taxes in foreign jurisdictions in which we conduct business.
Stock-Based Compensation
The functional role of the holder determines the financial statement line item within which stock-based compensation expense is recorded.
Condensed Consolidated Results of Operations
The following table sets forth our condensed consolidated statements of operations data for the periods indicated:
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in thousands) | |||||||||||
| Revenue: | |||||||||||
| Subscription | $ | 160,513 | $ | 135,590 | |||||||
| Device | 9,516 | 8,385 | |||||||||
| Professional services and other | 752 | 934 | |||||||||
| Total revenue | 170,781 | 144,909 | |||||||||
| Cost of revenue: | |||||||||||
Subscription (1) | 25,660 | 20,930 | |||||||||
Device (1) | 12,608 | 9,498 | |||||||||
Professional services and other (1) | 1,783 | 1,502 | |||||||||
| Depreciation and amortization | 9,399 | 6,625 | |||||||||
| Total cost of revenue | 49,450 | 38,555 | |||||||||
| Gross profit | 121,331 | 106,354 | |||||||||
| Operating expenses: | |||||||||||
Sales and marketing (1) | 39,862 | 31,926 | |||||||||
Research and development (1) | 33,582 | 22,474 | |||||||||
General and administrative (1) | 32,569 | 24,621 | |||||||||
| Depreciation and amortization | 7,269 | 6,570 | |||||||||
| Total operating expenses | 113,282 | 85,591 | |||||||||
| Income from operations | 8,049 | 20,763 | |||||||||
Other (income) expense: | |||||||||||
| Interest expense | 122 | 102 | |||||||||
| Other income, net | (672) | (19) | |||||||||
| Total other (income) expense | (550) | 83 | |||||||||
| Income before income taxes | 8,599 | 20,680 | |||||||||
| Provision for income taxes | (652) | (5,394) | |||||||||
| Net income | $ | 7,947 | $ | 15,286 | |||||||
(1)Includes stock-based compensation expense as follows:
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| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in thousands) | |||||||||||
| Cost of revenue—subscription | $ | 1,020 | $ | 1,228 | |||||||
| Cost of revenue—device | 36 | 62 | |||||||||
| Cost of revenue—professional services and other | 66 | 103 | |||||||||
| Sales and marketing | 2,588 | 2,295 | |||||||||
| Research and development | 6,174 | 4,874 | |||||||||
| General and administrative | 2,729 | 2,949 | |||||||||
| Total | $ | 12,613 | $ | 11,511 | |||||||
The following table sets forth our condensed consolidated statements of operations data expressed as a percentage of total revenue for the period indicated (percentages may not foot as a result of rounding):
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Revenue: | |||||||||||
| Subscription | 94.0 | % | 93.6 | % | |||||||
| Device | 5.6 | % | 5.8 | % | |||||||
| Professional services and other | 0.4 | % | 0.6 | % | |||||||
| Total revenue | 100.0 | % | 100.0 | % | |||||||
| Cost of revenue: | |||||||||||
| Subscription | 15.0 | % | 14.4 | % | |||||||
| Device | 7.4 | % | 6.6 | % | |||||||
| Professional services and other | 1.0 | % | 1.0 | % | |||||||
| Depreciation and amortization | 5.5 | % | 4.6 | % | |||||||
| Total cost of revenue | 29.0 | % | 26.6 | % | |||||||
| Gross profit | 71.0 | % | 73.4 | % | |||||||
| Operating expenses: | |||||||||||
| Sales and marketing | 23.3 | % | 22.0 | % | |||||||
| Research and development | 19.7 | % | 15.5 | % | |||||||
| General and administrative | 19.1 | % | 17.0 | % | |||||||
| Depreciation and amortization | 4.3 | % | 4.5 | % | |||||||
| Total operating expenses | 66.3 | % | 59.1 | % | |||||||
| Income from operations | 4.7 | % | 14.3 | % | |||||||
Other (income) expense: | |||||||||||
| Interest expense | 0.1 | % | 0.1 | % | |||||||
| Other income, net | (0.4) | % | — | % | |||||||
| Total other (income) expense | (0.3) | % | 0.1 | % | |||||||
| Income before income taxes | 5.0 | % | 14.3 | % | |||||||
| Provision for income taxes | (0.4) | % | (3.7) | % | |||||||
| Net income | 4.7 | % | 10.5 | % | |||||||
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Comparison of the Three Months Ended March 31, 2022 and 2021
Revenue
| Three Months Ended March 31, | Change | ||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Subscription | $ | 160,513 | $ | 135,590 | $ | 24,923 | 18.4 | % | |||||||||||||||
| Device | 9,516 | 8,385 | 1,131 | 13.5 | % | ||||||||||||||||||
| Professional services and other | 752 | 934 | (182) | (19.5) | % | ||||||||||||||||||
| Total revenue | $ | 170,781 | $ | 144,909 | $ | 25,872 | 17.9 | % | |||||||||||||||
Subscription
Subscription revenue increased $24.9 million, or 18.4%, for the three months ended March 31, 2022 compared to the three months ended March 31, 2021. The increase was partially offset by an unfavorable foreign exchange rate impact of approximately 1.3%. The increase in subscription revenue was driven by growth across our offerings, including our Unified Continuity, Endpoint Management and Business Management cloud-based offerings. Recurring subscription revenue accounted for 94.0% of total revenue for the three months ended March 31, 2022 compared to 93.6% for the three months ended March 31, 2021.
Device
Device revenue increased $1.1 million, or 13.5%, for the three months ended March 31, 2022 compared to the three months ended March 31, 2021.
Professional services and other
Professional services and other revenue decreased $0.2 million for the three months ended March 31, 2022 compared to the three months ended March 31, 2021.
Cost of Revenue
| Three Months Ended March 31, | Change | ||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||
| Subscription | $ | 25,660 | $ | 20,930 | $ | 4,730 | 22.6 | % | |||||||||||||||
| Device | 12,608 | 9,498 | 3,110 | 32.7 | % | ||||||||||||||||||
| Professional services and other | 1,783 | 1,502 | 281 | 18.7 | % | ||||||||||||||||||
| Depreciation and amortization | 9,399 | 6,625 | 2,774 | 41.9 | % | ||||||||||||||||||
| Total cost of revenue | $ | 49,450 | $ | 38,555 | $ | 10,895 | 28.3 | % | |||||||||||||||
Subscription
Subscription cost of revenue for the three months ended March 31, 2022 increased $4.7 million, or 22.6%, compared to the three months ended March 31, 2021. The increase was primarily driven by additional costs to support the growth of our subscription offerings, including increased personnel costs and higher service costs to support the growth of our Datto Cloud, including costs related to the launch of our new SaaS Defense solution. Subscription cost of revenue reflects stock-based compensation expense of $1.0 million and $1.2 million for the three months ended March 31, 2022 and 2021, respectively.
Device
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Device cost of revenue increased $3.1 million, or 32.7%, for the three months ended March 31, 2022 compared to the three months ended March 31, 2021, driven primarily by the 13.5% increase in device revenue and the impact of increased shipping costs. Device cost of revenue reflects stock-based compensation expense of approximately $0.1 million for both the three months ended March 31, 2022 and 2021.
Professional services and other
Professional services and other cost of revenue increased $0.3 million for the three months ended March 31, 2022 compared to the three months ended March 31, 2021. Professional services and other cost of revenue reflects stock-based compensation expense of $0.1 million for each of the three months ended March 31, 2022 and 2021.
Depreciation and amortization
Depreciation and amortization expense in cost of revenue increased $2.8 million for the three months ended March 31, 2022 compared to the three months ended March 31, 2021. The increase reflects the increase in amortization of acquired intangible assets in 2022 as a result of recent acquisitions, including the BitDam acquisition in March 2021 and the Infocyte acquisition in January 2022, as well as higher depreciation expense in 2022 associated with the continued capital expenditures for our Datto Cloud infrastructure to support the growth in subscriptions. Depreciation expense was $6.3 million and $5.3 million in the three months ended March 31, 2022 and 2021, respectively, and amortization of intangible assets was $3.1 million and $1.3 million in the three months ended March 31, 2022 and 2021, respectively.
Gross Profit and Gross Margin
| Three Months Ended March 31, | Change | ||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Gross profit: | |||||||||||||||||||||||
| Subscription | $ | 134,853 | $ | 114,660 | $ | 20,193 | 17.6 | % | |||||||||||||||
| Device | (3,092) | (1,113) | (1,979) | 177.8 | % | ||||||||||||||||||
| Professional services and other | (1,031) | (568) | (463) | 81.5 | % | ||||||||||||||||||
| Depreciation and amortization | (9,399) | (6,625) | (2,774) | 41.9 | % | ||||||||||||||||||
| Total gross profit | $ | 121,331 | $ | 106,354 | $ | 14,977 | 14.1 | % | |||||||||||||||
| Gross margin: | |||||||||||||||||||||||
| Subscription | 84.0 | % | 84.6 | % | (55) | bps | |||||||||||||||||
| Device | (32.5) | % | (13.3) | % | (1,922) | bps | |||||||||||||||||
| Professional services and other | (137.1) | % | (60.8) | % | (7,629) | bps | |||||||||||||||||
| Total gross margin | 71.0 | % | 73.4 | % | (235) | bps | |||||||||||||||||
Gross profit increased $15.0 million, or 14.1%, driven by the increase in subscription gross profit as a result of the increase in subscription revenue, partially offset by a decrease in gross profit from increased depreciation and amortization, driven by the impact of increased amortization of acquired intangible assets resulting from recent acquisitions, and increased negative gross profit of device and professional services and other. Gross margin decreased by 235 basis points for the three months ended March 31, 2022 compared to the three months ended March 31, 2021, driven by the negative impact of increased depreciation and amortization as well as increased negative device gross profit margin in 2022 as compared to 2021. Subscription gross margin declined slightly, reflecting additional costs to support the growth of our subscription offerings, including increased personnel costs and higher service costs to support the growth of our Datto Cloud, including costs related to the launch of our new SaaS Defense solution. Cost of revenue reflects stock-based compensation expense of $1.1 million and $1.4 million for the three months ended March 31,2022 and 2021, respectively.
30
Operating Expenses
| Three Months Ended March 31, | Change | ||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Sales and marketing | $ | 39,862 | $ | 31,926 | $ | 7,936 | 24.9 | % | |||||||||||||||
| Research and development | 33,582 | 22,474 | 11,108 | 49.4 | % | ||||||||||||||||||
| General and administrative | 32,569 | 24,621 | 7,948 | 32.3 | % | ||||||||||||||||||
| Depreciation and amortization | 7,269 | 6,570 | 699 | 10.6 | % | ||||||||||||||||||
| Total operating expenses | $ | 113,282 | $ | 85,591 | $ | 27,691 | 32.4 | % | |||||||||||||||
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| As a percentage of total revenue: | |||||||||||
| Sales and marketing | 23.3 | % | 22.0 | % | |||||||
| Research and development | 19.7 | % | 15.5 | % | |||||||
| General and administrative | 19.1 | % | 17.0 | % | |||||||
Sales and marketing
Sales and marketing expense increased $7.9 million, or 24.9% for the three months ended March 31, 2022 compared to the three months ended March 31, 2021, primarily driven by increased personnel costs to support the growth in our business, including higher commission expense and increased stock-based compensation expense of $0.3 million. Sales and marketing expense included $2.6 million and $2.3 million of stock-based compensation expense for the three months ended March 31, 2022 and 2021, respectively.
Research and development
Research and development expense increased $11.1 million, or 49.4%, for the three months ended March 31, 2022 compared to the three months ended March 31, 2021, primarily driven by increased personnel costs reflecting our continued investment in innovation and information security and an increase in stock-based compensation expense of $1.3 million. Research and development expense included $6.2 million and $4.9 million of stock-based compensation expense for the three months ended March 31, 2022 and 2021, respectively.
General and administrative
General and administrative expense increased $7.9 million, or 32.3%, for the three months ended March 31, 2022 compared to the three months ended March 31, 2021, driven primarily by increased personnel costs, and increased transaction related and other expense of $0.8 million, partially offset by a $0.7 million reduction in provision for expected credit losses expense as a result of improved collections activity. General and administrative expense included $2.7 million and $2.9 million of stock-based compensation expense for the three months ended March 31, 2022 and 2021, respectively, and $2.2 million and $1.4 million of transaction related and other expense for the three months ended March 31, 2022 and 2021, respectively.
Depreciation and amortization
Depreciation and amortization expense related to operating expenses increased $0.7 million, or 10.6%, for the three months ended March 31, 2022 compared to the three months ended March 31, 2021. Amortization of intangible assets was $4.7 million and $4.4 million for the three months ended March 31, 2022 and 2021, respectively, reflecting the impact of the Infocyte acquisition, and depreciation expense was $2.6 million and $2.2 million for the three months ended March 31, 2022 and 2021, respectively.
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Other Expenses (Income), Net and Provision for Income Taxes
Interest expense
Interest expense was unchanged, at $0.1 million, for the three months ended March 31, 2022 and 2021. No amounts have been drawn under the 2020 Credit Agreement and we have no outstanding debt as of March 31, 2022.
Other expense (income), net
Other income, net increased $0.7 million for the three months ended March 31, 2022 compared to the three months ended March 31, 2021, primarily as a result of the impact of exchange rate fluctuations on transactions denominated in a foreign currency.
Provision for income taxes
We incurred a provision for income taxes of $0.7 million and $5.4 million for the three months ended March 31, 2022 and 2021, respectively. The effective tax rate for the three months ended March 31, 2022 was 7.6%, reflecting the favorable impact of taxes in certain foreign jurisdictions, including the benefit of the release of valuation allowances, a favorable impact of U.S. state income taxes resulting from a change in tax law, and the tax benefit related to employee stock option exercises.
Non-GAAP Financial Measures
In addition to our results determined in accordance with GAAP, we believe the non-GAAP measures of Non-GAAP Gross Profit, Non-GAAP Income from Operations, Non-GAAP Net Income and Adjusted EBITDA are useful in evaluating our operating performance. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance and assists in comparisons with other companies, some of which use similar non-GAAP information to supplement their GAAP results. The non-GAAP financial information is presented for supplemental informational purposes only and should not be considered a substitute for financial information presented in accordance with GAAP and may be different from similarly titled non-GAAP measures used by other companies. A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures.
Non-GAAP Gross Profit
Non-GAAP Gross Profit is a supplemental measure of operating performance that is not prepared in accordance with GAAP and that does not represent, and should not be considered as, an alternative to gross profit as determined in accordance with GAAP. We define Non-GAAP Gross Profit as gross profit, adjusted for amortization of acquired intangible assets, stock-based compensation expense, and restructuring expense. We use Non-GAAP Gross Profit to understand and evaluate our core operating performance and trends and to develop short-term and long-term operating plans. We believe Non-GAAP Gross Profit is a useful measure to us and to our investors to assist in evaluating our core operating performance because it provides consistency and direct comparability with our past financial performance and between fiscal periods, as the metric eliminates the variability of stock-based compensation expense and amortization of acquired technology intangible assets, which are non-cash expenses that may fluctuate for reasons unrelated to overall operating performance, as well as restructuring expense, which is infrequent in nature. While the amortization expense of acquired technology intangible assets is excluded from Non-GAAP Gross Profit, the revenue related to acquired technology intangible assets is reflected in Non-GAAP Gross Profit as these assets contribute to our revenue generation. Non-GAAP Gross Profit 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. Because of these limitations, Non-GAAP Gross Profit should not be considered as a replacement for gross profit, as determined by GAAP, or as a measure of our profitability. We compensate for these limitations by relying primarily on our GAAP results and using non-GAAP measures only for supplemental purposes. Our presentation of Non-GAAP Gross Profit should not be construed to imply that our future results will be unaffected by the types of items excluded from the calculation of Non-GAAP Gross Profit. Non-GAAP Gross Profit is not a presentation made in accordance with GAAP and the use of the term may vary from other companies.
A reconciliation of Non-GAAP Gross Profit to gross profit, the most directly comparable GAAP measure, is as follows:
32
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in thousands) | |||||||||||
| Gross profit | $ | 121,331 | $ | 106,354 | |||||||
| Amortization of acquired intangible assets | 3,140 | 1,312 | |||||||||
| Stock-based compensation expense | 1,122 | 1,393 | |||||||||
| Non-GAAP Gross Profit | $ | 125,593 | $ | 109,059 | |||||||
Non-GAAP Income from Operations
Non-GAAP Income from Operations is a supplemental measure of operating performance that is not prepared in accordance with GAAP and that does not represent, and should not be considered as, an alternative to income from operations
as determined in accordance with GAAP. We define Non-GAAP Income from Operations as income from operations, adjusted for amortization of acquired intangible assets, stock-based compensation expense, restructuring expense and transaction related and other expense. We use Non-GAAP Income from Operations to understand and evaluate our core operating performance and trends and to develop short-term and long-term operating plans. We believe that Non-GAAP Income from Operations facilitates comparison of our operating performance on a consistent basis between periods, and when viewed in combination with our results prepared in accordance with GAAP, helps provide a broader picture of factors and trends affecting our results of operations. While the amortization expense of acquired technology, partner relationships and tradenames is excluded from Non-GAAP Income from Operations, the revenue related to acquired technology, partner relationships and tradenames is reflected in Non-GAAP Income from Operations as these assets contribute to our revenue generation. Non-GAAP Income from Operations 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. Because of these limitations, Non-GAAP Income from Operations should not be considered as a replacement for operating income, as determined by GAAP, or as a measure of our profitability. We compensate for these limitations by relying primarily on our GAAP results and using non-GAAP measures only for supplemental purposes. Our presentation of Non-GAAP Income from Operations should not be construed to imply that our future results will be unaffected by the types of items excluded from the calculation of Non-GAAP Income from Operations. Non-GAAP Income from Operations is not a presentation made in accordance with GAAP and the use of the term may vary from other companies.
A reconciliation of Non-GAAP Income from Operations to income from operations, the most directly comparable GAAP measure, is as follows:
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in thousands) | |||||||||||
| Income from operations | $ | 8,049 | $ | 20,763 | |||||||
| Amortization of acquired intangible assets | 7,806 | 5,734 | |||||||||
| Stock-based compensation expense | 12,613 | 11,511 | |||||||||
Transaction related and other expense (1) | 2,210 | 1,439 | |||||||||
| Non-GAAP Income from Operations | $ | 30,678 | $ | 39,447 | |||||||
(1)Transaction related and other expense consists of merger and acquisition related costs and other unusual charges for the three months ended March 31, 2022 and 2021.
Non-GAAP Net Income
Non-GAAP Net Income is a supplemental measure of operating performance that is not prepared in accordance with GAAP and that does not represent, and should not be considered as, an alternative to net (loss) income as determined in accordance with GAAP. We define Non-GAAP Net Income as net income before income taxes, adjusted for loss on extinguishment of debt, amortization of acquired intangible assets, stock-based compensation expense, restructuring expense, and transaction related and other expense, as adjusted for a normalized non-GAAP tax rate. The Company utilizes a normalized non-GAAP tax rate to provide better consistency across the interim reporting periods within a given fiscal year by eliminating the effects of non-recurring and period-specific items, which can vary in size and frequency, and which are not necessarily indicative of the Company’s long-term operations. The normalized non-GAAP tax rate applied to each period presented was 25%. We use Non-GAAP Net Income to understand and evaluate our core operating performance and trends and to develop
33
short-term and long-term operating plans. We believe that Non-GAAP Net Income facilitates comparison of our operating performance on a consistent basis between periods, and when viewed in combination with our results prepared in accordance with GAAP, helps provide a broader picture of factors and trends affecting our results of operations. While the amortization expense of acquired technology, customer relationships and tradenames is excluded from Non-GAAP Net Income, the revenue related to acquired technology, customer relationships and tradenames is reflected in Non-GAAP Net Income as these assets contribute to our revenue generation. Non-GAAP Net Income 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. Because of these limitations, Non-GAAP Net Income should not be considered as a replacement for net income, as determined by GAAP, or as a measure of our profitability. We compensate for these limitations by relying primarily on our GAAP results and using non-GAAP measures only for supplemental purposes. Our presentation of Non-GAAP Net Income should not be construed to imply that our future results will be unaffected by the types of items excluded from the calculation of Non-GAAP Net Income. Non-GAAP Net Income is not a presentation made in accordance with GAAP and the use of the term may vary from other companies.
A reconciliation of Non-GAAP Net Income to net income, the most directly comparable GAAP measure, is as follows:
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in thousands) | |||||||||||
| Net income | $ | 7,947 | $ | 15,286 | |||||||
| Provision for income taxes | 652 | 5,394 | |||||||||
| Income before income taxes | 8,599 | 20,680 | |||||||||
| Amortization of acquired intangible assets | 7,806 | 5,734 | |||||||||
| Stock-based compensation expense | 12,613 | 11,511 | |||||||||
Transaction related and other expense (1) | 2,210 | 1,439 | |||||||||
Non-GAAP provision for income taxes (2) | (7,807) | (9,841) | |||||||||
| Non-GAAP Net Income | $ | 23,421 | $ | 29,523 | |||||||
(1)Transaction related and other expense consists of merger and acquisition related costs and other unusual charges for the three months ended March 31, 2022 and 2021 .
(2)The normalized non-GAAP tax rate applied to each period presented was 25%. The Company may adjust its non-GAAP tax rate as additional information becomes available or events occur which may materially affect this rate, including impacts from the rapidly evolving global tax environment, significant changes in our geographic mix, merger and acquisition activity, or changes in our business outlook.
Adjusted EBITDA
Adjusted EBITDA is a supplemental measure of operating performance monitored by management that is not defined under GAAP and that does not represent, and should not be considered as an alternative to net income, as determined by GAAP. We define Adjusted EBITDA as net income adjusted for interest and other (income) expense, net, loss on extinguishment of debt, depreciation and amortization expense, provision for income taxes, stock-based compensation expense, restructuring expense and transaction related and other expense. We use Adjusted EBITDA to understand and evaluate our core operating performance and trends and to develop short-term and long-term operating plans.
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. Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including net income and our other GAAP results. Our presentation of Adjusted EBITDA should not be construed to imply 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 may vary from others in our industry.
A reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP measure, is as follows:
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| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in thousands) | |||||||||||
| Net income | $ | 7,947 | $ | 15,286 | |||||||
Interest and other (income) expense, net(1) | (550) | 83 | |||||||||
| Depreciation and amortization | 16,668 | 13,195 | |||||||||
| Provision for income taxes | 652 | 5,394 | |||||||||
| Stock-based compensation expense | 12,613 | 11,511 | |||||||||
Transaction related and other expense(2) | 2,210 | 1,439 | |||||||||
| Adjusted EBITDA | $ | 39,540 | $ | 46,908 | |||||||
(1)Interest and other expense, net includes interest expense, net, foreign currency gains and losses and other expenses.
(2)Transaction related and other expense consists of merger and acquisition related costs and other unusual charges for the three months ended March 31, 2022 and 2021.
Liquidity and Capital Resources
General
As of March 31, 2022, our principal source of liquidity was cash and cash equivalents and restricted cash totaling $192.8 million, $40.3 million of which was denominated in foreign currencies. In addition, as of March 31, 2022, we had no debt outstanding and $198.1 million of capacity under our 2020 Revolving Credit Facility, as defined below. We believe our existing cash and cash equivalents, cash provided by our ongoing operations and borrowing capacity under our 2020 Revolving Credit Facility will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months and beyond.
Historically, as we invested in our organization and infrastructure to meet increasing demand for our products and services and to drive our rapid growth, we have financed our operations primarily through cash provided by our ongoing operations, debt financing and more recently our initial public offering (" IPO"). The COVID-19 pandemic caused a reduction of marketing, event and travel costs, as many events were held virtually and travel was limited, although we did begin to experience more normalized spending levels over the course of 2021 and into the first quarter of 2022. In the future we will continue to invest in our organization and infrastructure and expect to resume hosting our world-class partner events in-person when it is safe to do so, as we grow and innovate along with our MSP partners.
Our future capital requirements will depend on several factors, including the need to invest in our Datto Cloud infrastructure to support our subscription revenue growth, the timing of cash receipts and payments, the timing and extent of spending to support research and development, the pace of expansion of sales and marketing activities, including in international markets, the level of investment in back-office infrastructure, the cost to operate as a publicly listed company and the amount of our outstanding indebtedness. In the future, we may also enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights.
Beginning in 2022, the Tax Cuts and Jobs Act of 2017 eliminates the option to deduct research and development (“R&D”) expenditures fully in the year incurred and requires taxpayers to deduct such expenditures for tax purposes over multiple years. While it is possible Congress may defer, modify, or repeal this provision, we have no assurance this provision will be deferred, modified, or repealed. We estimate this provision will have a modest negative impact on our cash from operating activities in 2022 and 2023, as the impact is expected to be largely offset through the utilization of net operating loss carryforwards and research and development credits. Beyond 2023, we expect the negative impact on our cash from operating activities to be more significant, although the amount of R&D expenditures deductible for tax purposes increases each year until the deduction normalizes after the five-year anniversary of the tax law change. The actual impact on cash from operating activities for all periods will depend on if this provision is deferred, modified, or repealed by Congress, the timing of such action, and the amount of R&D expenditures incurred by us in future periods, among other factors.
We may be required to seek additional equity or debt financing to meet our future capital requirements. In the event additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to fund the expansion of our operations and invest in new technologies, this could reduce our ability to compete successfully and harm our results of operations.
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Credit Facilities
The Company has a $200.0 million revolving credit loan (the “2020 Revolving Credit Facility”) under its 2020 Credit Agreement. As of March 31, 2022, the 2020 Revolving Credit Facility was undrawn with the exception of $1.9 million of capacity which was being used to backstop outstanding letters of credit.
Cash Flows
The following table presents a summary of our condensed consolidated cash flows from operating, investing and financing activities for the periods indicated.
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in thousands) | |||||||||||
| Net cash provided by operating activities | $ | 15,070 | $ | 35,167 | |||||||
| Net cash used in investing activities | (54,032) | (56,167) | |||||||||
| Net cash provided by (used in) financing activities | 9,472 | (265) | |||||||||
Operating Activities
For the three months ended March 31, 2022, net cash provided by operating activities was $15.1 million, which resulted from net income of $7.9 million, adjusted for non-cash charges of $29.2 million and net cash outflow of $22.1 million
from changes in operating assets and liabilities. Non-cash charges primarily consisted of depreciation and amortization expense of $16.7 million, stock-based compensation expense of $12.6 million, non-cash operating lease expense of $1.9 million, provision for expected credit losses of $0.5 million partially offset by a deferred income tax benefit of $2.6 million. The net cash outflow from changes in operating assets and liabilities resulted from an increase in inventory of $9.4 million primarily to support our SIRIS 5 launch. Additionally, prepaid expenses and other current assets increased $5.0 million, resulting from the timing of payments on SaaS arrangements and increased contract assets, other assets increased $4.3 million driven by deferred contract acquisition costs, and accounts payable, accrued expenses and other decreased $2.2 million primarily resulting from the timing of payments, including the timing impact of annual bonus payments.
For the three months ended March 31, 2021, net cash provided by operating activities was $35.2 million, which resulted from net income of $15.3 million, adjusted for non-cash charges of $32.0 million and net cash outflow of $12.1 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of depreciation and amortization expense of $13.2 million, stock-based compensation expense of $11.5 million, deferred income tax expense of $4.7 million, non-cash operating lease expense of $1.9 million and provision for expected credit losses of $1.2 million. The net cash outflow from changes in operating assets and liabilities was primarily driven by an increase in inventory of $5.6 million, an increase in other assets of $4.1 million and an increase in prepaid expenses and other current assets of $3.8 million, partially offset by an increase in accounts payable, accrued expenses and other of $3.5 million resulting from the timing of payments.
Investing Activities
Cash used in investing activities was $54.0 million during the three months ended March 31, 2022, including $43.5 million, net of cash acquired, for the acquisition of Infocyte, and capital expenditures of $10.5 million, primarily related to investment in servers for our Datto Cloud infrastructure to support our overall subscription growth as well as investments in the development of our cloud-based platforms to serve our partners. We also purchased computer equipment to support our increased workforce.
Cash used in investing activities was $56.2 million during the three months ended March 31, 2021, including $45.5 million, net of cash acquired, for the acquisition of BitDam Ltd., and capital expenditures of $10.7 million, primarily related to investment in servers for our Datto Cloud infrastructure to support our overall subscription growth as well as investments in the development of our cloud-based platforms to serve our partners.
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Financing Activities
Cash provided by financing activities was $9.5 million during the three months ended March 31, 2022, reflecting proceeds from stock option exercises of $6.2 million and proceeds of $3.3 million from purchases under our employee stock purchase plan.
Cash used in financing activities was $0.3 million during the three months ended March 31, 2021, reflecting the payment of IPO transaction related costs, partially offset by proceeds from stock option exercises of $0.2 million.
Contractual Commitments
Our principal commitments consist of obligations under operating leases for office space, co-located data center contracts and credit facilities, to the extent we have outstanding debt. In “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” included in the 2021 Annual Report on Form 10-K filed with the SEC on February 23, 2022 we disclosed our total contractual commitments as of December 31, 2021. There have been no material changes to our contractual commitments since December 31, 2021.
Impact of Inflation
While inflation may impact our net revenues, costs of revenues and operating expenses, we believe the effects of inflation, if any, on our results of operations and financial condition have not been significant. However, there can be no assurance that our results of operations and financial condition will not be materially impacted by inflation in the future.
Indemnification Agreements
In the ordinary course of business, we enter into agreements of varying scope and terms pursuant to which we agree to indemnify MSP partners, vendors, lessors, business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of the breach of such agreements, services to be provided by us or from intellectual property infringement claims made by third parties. No demands have been made upon us to provide indemnification under such agreements and there are no claims that we are aware of that could have a material effect on our consolidated balance sheet, consolidated statement of operations and comprehensive loss or consolidated statement of cash flows. In addition, we have entered into indemnification agreements with our directors and certain officers and employees that require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees.
Critical Accounting Estimates
Our condensed consolidated financial statements and accompanying notes have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected.
For additional information about our critical accounting estimates, see the disclosures included in “Management’s Discussion and Analysis of Financial Conditions and Results of Operations—Critical Accounting Estimates” included in the 2021 Annual Report on Form 10-K filed with the SEC on February 23, 2022, as well as Note 1. Description of Business, Basis of Presentation and Principles of Consolidation and Note 2. Significant Accounting Policies to the condensed consolidated financial statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our financial position because of adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of exposure to potential changes in inflation or interest rates. We do not hold financial instruments for trading purposes.
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Foreign Currency Exchange Risk
The functional currencies of our foreign subsidiaries are generally the respective local currencies. Most of our sales and operating expenses are denominated in the currencies of the countries in which our operations are located, which are primarily in the United States, United Kingdom, Canada, Australia and Europe, although we do have certain arrangements in which we invoice in a non-functional currency, based upon the location of the partner. Our consolidated results of operations and cash flows are, therefore, subject to fluctuations resulting from changes in foreign currency exchange rates and may be adversely affected in the future because of changes in foreign exchange rates. To date, we have not entered into any hedging arrangements with respect to foreign currency risk or other derivative financial instruments. During the three months ended March 31, 2022, a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have had a material impact on our condensed consolidated financial statements.
Interest Rate Risk
At March 31, 2022, we had no outstanding borrowings under the 2020 Credit Agreement. To the extent we incur borrowings, our primary interest rate risk is from changes in interest rates based on the Prime Rate, the Federal Funds Effective Rate or LIBO Rate (and the LIBOR Successor Rate). Interest rate risk is sensitive to many factors, including U.S. monetary and tax policies, U.S. and international economic factors and other factors beyond our control.
Inflation Risk
During 2021 and the first quarter of 2022, the Company experienced inflation in the costs of certain products, services and personnel costs. We expect to be able to largely offset certain higher costs through increased operational efficiencies and potentially certain price increases. If our costs, in particular personnel and data centers costs, were to become subject to substantial inflationary pressures, our inability or failure to offset such increases with other savings or price adjustments could harm our business and operating results.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or furnish under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that it is also accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2022, the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2022.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitation on the Effectiveness of Internal Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, and not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may become involved in various legal proceedings and claims arising in the ordinary course of business. We do not believe that we are a party to any legal proceeding that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, financial condition, or cash flows.
ITEM 1A. RISK FACTORS
Except as described below, there have been no material changes to the risk factors disclosed in the section entitled “Risk Factors” in the Annual Report on Form 10-K filed with the SEC on February 23, 2022.
Uncertainties associated with the Merger with Kaseya could adversely affect our business, results of operations and financial condition.
On April 11, 2022, Datto entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Knockout Parent Inc. (“Parent”), a Delaware corporation and a wholly owned subsidiary of Kaseya Inc. (“Kaseya”), and certain other parties thereto, pursuant to which Datto will merge with and into a wholly-owned subsidiary of Parent, with Datto continuing as the surviving corporation and a wholly-owned subsidiary of Kaseya (the “Merger”). Completion of the Merger is subject to various closing conditions, including but not limited to, the receipt of required regulatory clearances, including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the receipt of certain other approvals and clearances by government authorities. The regulatory agencies from which certain of these clearances will be sought have broad discretion in administering the governing regulations. As a condition to their clearance of the Merger, agencies may impose requirements, limitations or costs or require divestitures or place restrictions on the conduct of the parties’ business. These requirements, limitations, costs, divestitures or restrictions could jeopardize or delay the consummation of the Merger. The parties to the Merger Agreement may not receive the necessary approvals for the transaction or receive them within the expected timeframe. In addition, the Merger may fail to close for other reasons.
The announcement and pendency of the Merger, as well as any delays in the expected timeframe, could cause disruption in and create uncertainties, which could have an adverse effect on our business, results of operations and financial condition, regardless of whether the Merger is completed. These risks include, but are not limited to:
•an adverse effect on our relationship with vendors, customers, and employees, including if our vendors, customers or others attempt to negotiate changes in existing business relationships, consider entering into business relationships with parties other than us, delay or defer decisions concerning their business with us, or terminate their existing business relationships with us during the pendency of the Merger;
•a diversion of a significant amount of management time and resources towards the completion of the Merger;
•being subject to certain restrictions on the conduct of our business;
•possibly foregoing certain business opportunities that we might otherwise pursue absent the pending Merger; and
•difficulties attracting and retaining key employees.
Failure to complete the Merger could adversely affect our business and the market price of our shares of common stock.
The closing of the Merger may not occur on the expected timeline or at all. The Merger Agreement contains certain termination rights for us and Parent, including (i) if the Merger is not consummated on or before the “outside date” of November 11, 2022 (subject to an extension until April 11, 2023 under certain circumstances), (ii) if the other party breaches its representations, warranties or covenants in a manner that would cause the conditions to the closing of the Merger set forth in the Merger Agreement to not be satisfied and fails to cure such breach, or (iii) if any law or order prohibiting the Merger or the transactions contemplated thereby has become final and non-appealable. If the Merger Agreement is terminated and the Merger is not consummated, the price of our common stock may decline and you may not recover your investment or receive a price for your shares similar to what has been offered pursuant to the Merger.
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In addition, if the Merger Agreement is validly terminated by Parent under the circumstances set forth in the Merger Agreement, the Company will be required to pay Parent a termination fee equal to $185,665,475. If the Company is required to pay this termination fee, such fee, together with costs incurred to execute the Merger Agreement and pursue the Merger, could have a material adverse effect on the Company’s financial condition and results of operations.
The Merger Agreement contains provisions that limit our ability to pursue alternatives to the Merger.
Under the Merger Agreement, we are restricted from soliciting, initiating, proposing or encouraging or facilitating alternative acquisition proposals from third parties and/or providing non-public information to third parties in response to any inquiries regarding, or the submission of any proposal or offer that constitutes, or would reasonably be expected to lead to, any Acquisition Proposal (as defined in the Merger Agreement). These provisions could discourage a third party that may have an interest in acquiring all or a significant part of our business from considering or proposing that acquisition, even if such third party were prepared to pay consideration with a higher value than the value of the consideration in the Merger.
We are subject to certain restrictions on the conduct of our business under the terms of the Merger Agreement.
Under the terms of the Merger Agreement, we have agreed to certain restrictions on the operations of our business. We have agreed to limit the conduct of our business to those actions undertaken in the ordinary course of business and to refrain from, among other things, incurring debt; entering into, adopting, amending, modifying or terminating any employee plans (as defined in the Merger Agreement); increasing the compensation of any director, officer or employee or hiring or terminating any employee (other than for cause); settling, releasing, waiving or compromising certain legal proceedings; materially changing our methods, principles or practices of financial accounting; and incurring certain capital expenditures. Because of these restrictions, we may be prevented from undertaking certain actions with respect to the conduct of our business that we might otherwise have taken if not for the Merger Agreement.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
None.
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ITEM 6. EXHIBITS.
| Exhibit No. | Description of Exhibit | |||||||
| 2.1* | ||||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1+ | ||||||||
| 32.2+ | ||||||||
| 101.INS | XBRL Instance Document | |||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File: the cover page XBRL tags are embedded within the Inline XBRL document and are contained within Exhibit 101. | |||||||
| * | All schedules to the Merger Agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company hereby agrees to furnish supplementally a copy of any omitted schedule to the SEC upon request. | ||||
| + | The certifications furnished in Exhibit 32.1 and Exhibit 32.2 hereto are deemed to accompany this Quarterly Report on Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates it by reference. | ||||
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized on May 9, 2022.
| Datto Holding Corp. | ||||||||
| By: | /s/ John Abbot | |||||||
| Name: | John Abbot | |||||||
| Title: | Chief Financial Officer (Principal Financial Officer) | |||||||
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