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 ~~September~~March 3031, ~~2021~~2022


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

For the transition period from to

Commission File Number 001-39637

DATTO HOLDING CORP.

(Exact name of registrant as specified in its charter)


Delaware						81-3345706
(State or other jurisdiction of incorporation)						(IRS Employer Identification No.)

101 Merritt 7

Norwalk

06851

(Address of principal executive offices)

(Zip Code)

888-995-1431

(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

Common Stock, $0.001 par value

MSP

The New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 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.

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

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

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

At ~~October~~April 3130, ~~2021~~2022, there were approximately ~~163~~165,~~073~~211,~~476~~487 shares of the Registrant’s Common Stock outstanding (excluding treasury shares of 362,126).

TABLE OF CONTENTS

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020	4
	Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021	4
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2021 and 2020	5
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2022 and 2021	5
	Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2021 and 2020	6
	Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2022 and 2021	6
	Condensed Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2021 and 2020	7
	Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2022 and 2021	7
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020	9
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021	8
	Notes to Condensed Consolidated Financial Statements	109
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2722
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4437
Item 4.	Controls and Procedures	4538
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	4739
Item 1A.	Risk Factors	4739
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4740
Item 3.	Defaults Upon Senior Securities	4740
Item 4.	Mine Safety Disclosures	4740
Item 5.	Other Information	4740
Item 6.	Exhibits	4841
SIGNATURE

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.

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DATTO HOLDING CORP.

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	Page
Financial Statements:
Condensed Consolidated Balance Sheets		4
Condensed Consolidated Statements of Operations		5
Condensed Consolidated Statements of Comprehensive Income		6
Condensed Consolidated Statements of Changes in Stockholders’ Equity		7
Condensed Consolidated Statements of Cash Flows		98
Notes to Condensed Consolidated Financial Statements		109

Table of Contents

DATTO HOLDING CORP.

Condensed Consolidated Balance Sheets

(in thousands, except share amounts)

(unaudited)

September 30,2021

December 31,2020

March 31,2022

December 31,2021

ASSETS

Current assets

Cash and cash equivalents

~~205~~191,~~862~~188

~~168~~221,~~877~~421

Restricted cash

1,~~309~~637

1,~~536~~319

Accounts receivable, net

913,~~400~~419

1312,~~946~~870

Inventory

3143,~~739~~913

1334,~~811~~901

Prepaid expenses and other current assets

3344,~~640~~490

2839,~~316~~456

Total current assets

~~281~~294,~~950~~647

~~226~~309,~~486~~967

Property and equipment, net

~~100~~108,~~420~~475

91106,~~876~~577

Operating lease assets

3031,~~290~~994

—31,003

Goodwill

1,~~144~~172,~~496~~860

1,~~120~~141,~~954~~726

Intangible assets, net

~~295~~292,~~264~~568

287,~~395~~605

Other assets

8289,~~486~~901

6685,~~560~~313

Total assets

1,~~934~~990,~~906~~445

1,~~793~~962,~~271~~191

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities

Accounts payable

1215,~~549~~227

79,~~574~~997

Accrued expenses and other current liabilities

4756,~~538~~125

3959,~~461~~553

Deferred revenue

2120,~~634~~274

2320,~~763~~356

Total current liabilities

8191,~~721~~626

7089,~~798~~906

Deferred revenue, noncurrent

3,~~108~~293

3,~~322~~341

Deferred income taxes

3022,~~476~~725

1824,~~947~~955

Operating lease liabilities, noncurrent

30,~~849~~761

—31,332

Other long-term liabilities

~~3,537~~762

~~11,736~~715

Total liabilities

149,~~691~~167

~~104~~150,~~803~~249

Commitments and contingencies (Note 8)

STOCKHOLDERS’ EQUITY

Preferred stock, $0.001 par value; 50,000,000 authorized at September 30, 2021 and December 31, 2020; no shares issued or outstanding at September 30, 2021 or December 31, 2020

—

Preferred stock, $0.001 par value; 50,000,000 authorized at March 31, 2022 and December 31, 2021; no shares issued or outstanding at March 31, 2022 or December 31, 2021

—

Common stock, $0.001 par value; 500,000,000 shares authorized at September 30, 2021 and December 31, 2020; 163,212,109 and 161,420,016 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively (inclusive of treasury stock)

163

161

Common stock, $0.001 par value; 500,000,000 shares authorized at March 31, 2022 and December 31, 2021; 164,891,735 and 163,991,681 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively (inclusive of treasury stock)

165

164

Additional paid-in capital

1,~~807~~852,~~533~~073

1,~~755~~829,~~387~~957

Treasury stock, at cost; 362,126 shares at September 30, 2021 and December 31, 2020

(3,621)

Treasury stock, at cost; 362,126 shares at March 31, 2022 and December 31, 2021

(3,621)

Accumulated deficit

(195,~~539~~845)

(6513,~~226~~792)

Accumulated other comprehensive income

679

1,767

Accumulated other comprehensive income (loss)

(1,494)

(766)

Total stockholders’ equity

1,~~785~~841,~~215~~278

1,~~688~~811,~~468~~942

Total liabilities and stockholders’ equity

1,~~934~~990,~~906~~445

1,~~793~~962,~~271~~191

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

Table of Contents

DATTO HOLDING CORP.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share amounts)

(unaudited)

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

2021

2020

2021

2020

2022

2021

Revenue:

Subscription

~~146,764~~

~~122,753~~

~~424~~160,~~097~~513

~~356~~135,~~348~~590

Device

~~10,242~~

~~6,964~~

279,~~652~~516

218,~~098~~385

Professional services and other

~~886~~

~~950~~

~~2,654~~752

~~2,347~~934

Total revenue

~~157,892~~

~~130,667~~

~~454~~170,~~403~~781

~~379~~144,~~793~~909

Cost of revenue:

Subscription

~~22,776~~

~~18,915~~

6525,~~344~~660

6020,~~786~~930

Device

~~12,930~~

~~10,089~~

3312,~~552~~608

269,~~464~~498

Professional services and other

~~1,470~~

~~1,332~~

41,~~521~~783

41,~~399~~502

Depreciation and amortization

~~8,572~~

~~5,526~~

239,~~795~~399

156,~~746~~625

Total cost of revenue

~~45,748~~

~~35,862~~

~~127~~49,~~212~~450

~~107~~38,~~395~~555

Gross profit

~~112,144~~

~~94,805~~

~~327~~121,~~191~~331

~~272~~106,~~398~~354

Operating expenses:

Sales and marketing

~~35,173~~

~~24,709~~

9939,~~234~~862

8331,~~828~~926

Research and development

~~26,872~~

~~15,257~~

7633,~~690~~582

4822,~~000~~474

General and administrative

~~27,802~~

~~17,433~~

7832,~~908~~569

5924,~~389~~621

Depreciation and amortization

~~6,531~~

~~6,820~~

197,~~554~~269

206,~~600~~570

Total operating expenses

~~96,378~~

~~64,219~~

~~274~~113,~~386~~282

~~211~~85,~~817~~591

Income from operations

~~15,766~~

~~30,586~~

528,~~805~~049

6020,~~581~~763

Other expense:

Other (income) expense:

Interest expense

~~156~~

~~7,065~~

~~433~~122

~~23,590~~102

Other expense (income), net

338

(987)

224

(1,402)

Other income, net

(672)

(19)

Total other expense

494

6,078

657

22,188

Total other (income) expense

(550)

Income before income taxes

~~15,272~~

~~24,508~~

528,~~148~~599

3820,~~393~~680

Provision for income taxes

~~(1,787)~~

~~(4,962)~~

(~~6,461~~652)

(85,~~727~~394)

Net income

~~13,485~~

~~19,546~~

457,~~687~~947

2915,~~666~~286

Net income per share attributable to common stockholders:

Basic

~~0.08~~

~~0.14~~

0.2805

0.2209

Diluted

~~0.08~~

~~0.14~~

0.2805

0.2209

Weighted-average shares used in computing net income per share:

Basic

~~162,424,260~~

~~135,553,097~~

~~161~~164,~~657~~081,~~479~~628

~~135~~161,~~496~~066,~~696~~404

Diluted

~~166,248,941~~

~~138,590,770~~

~~165~~167,~~483~~535,~~710~~063

~~137~~164,~~006~~734,~~921~~402

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

Table of Contents

DATTO HOLDING CORP.

Condensed Consolidated Statements of Comprehensive Income

(in thousands)

(unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
			Three Months Ended March 31,
	2021		2020		2021		2020
					2022		2021
Net income	$	~~13,485~~	$	~~19,546~~	$	457,~~687~~947	$	2915,~~666~~286
Other comprehensive income (loss):
Currency translation adjustment	~~(1,437)~~		~~719~~		(~~1,088~~728)		(601,012)
Total comprehensive income	$	~~12,048~~	$	~~20,265~~	$	447,~~599~~219	$	2914,~~606~~274

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

Table of Contents

DATTO HOLDING CORP.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(in thousands, except share amounts)

(unaudited)

	Common Stock			TreasuryStock		AdditionalPaid inCapital		AccumulatedDeficit		AccumulatedOtherComprehensiveIncome (Loss)		Total
	Shares	Amount
Balance at January 1, 2021	161,420,016	$	161	$	(3,621)	$	1,755,387	$	(65,226)	$	1,767	$	1,688,468
Balance at January 1, 2022	163,991,681	$	164	$	(3,621)	$	1,829,957	$	(13,792)	$	(766)	$	1,811,942
Stock-based compensation	—	—		—		1112,~~511~~613		—		—		1112,~~511~~613
Shares issued upon exercise of stock options and vesting of restricted stock units	19739,~~139~~176	—1		—		~~117~~6,242		—		—		~~117~~6,243
Other comprehensive loss	—	—		—		—		—		(1,012)		(1,012)
ESPP share purchases	160,878	—		—		3,261		—		—		3,261
Net income	—	—		—		—		15,286		—		15,286
Other comprehensive loss	—	—		—		—		—		(728)		(728)
Balance at March 31, 2021	161,439,155	$	161	$	(3,621)	$	1,767,015	$	(49,940)	$	755	$	1,714,370
Net income	—	—		—		—		7,947		—		7,947
Stock-based compensation	—	—		—		12,241		—		—		12,241
Balance at March 31, 2022	164,891,735	$	165	$	(3,621)	$	1,852,073	$	(5,845)	$	(1,494)	$	1,841,278
Shares issued upon exercise of stock options and vesting of restricted stock units	951,278	1		—		9,587		—		—		9,588
Other comprehensive income	—	—		—		—		—		1,361		1,361
Net income	—	—		—		—		16,916		—		16,916
Balance at June 30, 2021	162,390,433	$	162	$	(3,621)	$	1,788,843	$	(33,024)	$	2,116	$	1,754,476
Stock-based compensation	—	—		—		11,603		—		—		11,603
Shares issued upon exercise of stock options and vesting of restricted stock units	821,676	1		—		7,087		—		—		7,088
Other comprehensive loss	—	—		—		—		—		(1,437)		(1,437)
Net income	—	—		—		—		13,485		—		13,485
Balance at September 30, 2021	163,212,109	$	163	$	(3,621)	$	1,807,533	$	(19,539)	$	679	$	1,785,215


	Common Stock			Treasury Stock		Additional Paid in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Total
	Shares	Amount
Balance at January 1, 2021	161,420,016	$	161	$	(3,621)	$	1,755,387	$	(65,226)	$	1,767	$	1,688,468
Stock-based compensation	—	—		—		11,511		—		—		11,511
Shares issued upon exercise of stock options and vesting of restricted stock units	19,139	—		—		117		—		—		117
Other comprehensive loss	—	—		—		—		—		(1,012)		(1,012)
Net income	—	—		—		—		15,286		—		15,286
Balance at March 31, 2021	161,439,155	$	161	$	(3,621)	$	1,767,015	$	(49,940)	$	755	$	1,714,370

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

Table of Contents

	Common Stock			TreasuryStock		AdditionalPaid inCapital		AccumulatedDeficit		AccumulatedOtherComprehensiveIncome (Loss)		Total
	Shares	Amount
Balance at January 1, 2020	135,655,428	$	136	$	(3,621)	$	1,083,082	$	(87,724)	$	430	$	992,303
Stock-based compensation	—	—		—		1,914		—		—		1,914
Exercise of common stock options	255,438	—		—		2,500		—		—		2,500
Other comprehensive loss	—	—		—		—		—		(700)		(700)
Net income	—	—		—		—		1,353		—		1,353
Balance at March 31, 2020	135,910,866	$	136	$	(3,621)	$	1,087,496	$	(86,371)	$	(270)	$	997,370
Stock-based compensation	—	—		—		1,858		—		—		1,858
Other comprehensive loss	—	—		—		—		—		(79)		(79)
Net income	—	—		—		—		8,767		—		8,767
Balance at June 30, 2020	135,910,866	$	136	$	(3,621)	$	1,089,354	$	(77,604)	$	(349)	$	1,007,916
Net share settlement of stock-based payment awards	4,661	—		—		(53)		—		—		(53)
Stock-based compensation	—	—		—		2,789		—		—		2,789
Other comprehensive income	—	—		—		—		—		719		719
Net income	—	—		—		—		19,546		—		19,546
Balance at September 30, 2020	135,915,527	$	136	$	(3,621)	$	1,092,090	$	(58,058)	$	370	$	1,030,917

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

Table of Contents

DATTO HOLDING CORP.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	Nine Months Ended September 30,
	Three Months Ended March 31,
	2021		2020
	2022		2021
OPERATING ACTIVITIES
Net income	$	457,~~687~~947	$	2915,~~666~~286
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	238,~~368~~862		197,~~615~~461
Amortization of acquired intangible assets	197,~~981~~806		165,~~731~~734
Amortization of debt issuance costs	~~255~~84		~~1,265~~84
Reserve for inventory obsolescence	54375		~~1,508~~36
Non-cash operating lease expense	51,~~273~~926		—1,870
Stock-based compensation	3512,~~355~~613		611,~~561~~511
Provision for bad debt	2,630		4,793
Provision for expected credit losses	485		1,211
Deferred income taxes	4(2,~~727~~607)		74,~~556~~717
Unrealized foreign exchange	(~~296~~298)		(~~647~~626)
Changes in operating assets and liabilities:
Accounts receivable	~~1,878~~(760)		(~~766~~160)
Inventory	(189,~~043~~399)		(65,~~337~~559)
Prepaid expenses and other current assets	(54,~~490~~951)		2(3,~~099~~820)
Other assets	(164,~~719~~253)		(84,~~446~~083)
Accounts payable, accrued expenses and other	(2,~~928~~158)		~~109~~3,535
Deferred revenue	(~~2,479~~602)		~~348~~(2,030)
Net cash provided by operating activities	9915,~~109~~070		7435,~~055~~167
INVESTING ACTIVITIES
Purchase of property and equipment	(3210,~~170~~511)		(2810,~~519~~681)
Acquisition of business, net of cash acquired	(4543,~~486~~521)		(445,~~371~~486)
Net cash used in investing activities	(7754,~~656~~032)		(3256,~~890~~167)
FINANCING ACTIVITIES
Proceeds from debt	—		32,100
Repayments of debt and capital leases	(28)		(28)
Repayments of debt and capital leases	(73)		(4,468)
Capitalized transaction costs	—		(414)
Capitalized transaction costs	(684)		(980)
Proceeds from stock option exercises	6,239		177
Proceeds from stock option exercises	16,839		2,500
Proceeds from employee stock purchase plan share purchases	3,261		—
Net share settlement and settlement of stock-based payment awards	—		(53)
Net cash provided by (used in) financing activities	9,472		(265)
Net cash provided by financing activities	16,082		29,099
Effect of exchange rate changes on cash and cash equivalents	(425)		46
Effect of exchange rate changes on cash and cash equivalents	(777)		720
Net decrease in cash and cash equivalents	(29,915)		(21,219)
Net increase in cash and cash equivalents	36,758		70,984
Cash and cash equivalents and restricted cash, beginning of year	222,740		170,413
Cash and cash equivalents and restricted cash, beginning of year	170,413		29,066
Cash and cash equivalents and restricted cash, end of period	$	192,825	$	149,194
Cash and cash equivalents and restricted cash, end of period	$	207,171	$	100,050
Reconciliation of cash and cash equivalents and restricted cash:
Cash and cash equivalents	$	~~205~~191,~~862~~188	$	98147,~~614~~819
Restricted cash	$	1,~~309~~637	$	1,~~436~~375
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes	$	~~3,533~~816	$	~~151~~226
Cash paid for interest	$	—93	$	~~22,317~~—
NON-CASH INVESTING AND FINANCING ACTIVITIES
Purchase of property and equipment included in accounts payable	$	~~251~~400	$	40271
Unpaid initial public offering costs in total current liabilities	$	—	$	~~2,620~~270

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

Table of Contents

DATTO HOLDING CORP.

INDEX TO NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

	Page
Index to Notes to Condensed Consolidated Financial Statements
1. Business		11
1. Description of Business, Basis of Presentation and Principles of Consolidation		10
2. Significant Accounting Policies		1211
3. Revenue Recognition		1512
4. Inventory		1613
5. Property and Equipment, Net		1713
6. Leases		17
6. Acquisitions		14
7. Acquisitions		18
7. Goodwill and Intangible Assets, Net		14
8. Commitments and Contingencies		1815
9. Debt		1915
10. Stock-Based Compensation		1916
11. Income Taxes		2217
12. Net Income per Share		2218
13. Restructuring		23
13. Subsequent Events		18

109

Table of Contents

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 ~~and security~~ 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 ~~combined~~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.

Initial Public Offering

On October 23, 2020, the Company completed an initial public offering (“IPO”) of its common stock. As part of the IPO, the Company issued and sold 22,000,000 shares of its common stock at a public offering price of $27.00 per share. The Company received proceeds of approximately $558.0 million from the IPO, after deducting the underwriting discount. In addition, on November 3, 2020, the underwriters exercised in full their option to purchase 3,300,000 additional shares of common stock at a price of $27.00 per share, resulting in proceeds of approximately $83.6 million, after deducting the underwriting discount.

The Company utilized the IPO proceeds to repay the outstanding principal balances of $590.2 million under the 2019 Credit Agreement, to pay $5.3 million of IPO offering costs, and to pay $1.2 million in debt issuance costs under the 2020 Credit Agreement. Upon entering the 2020 Credit Agreement in October 2020, the 2019 Credit Agreement was terminated.

As of September 30, 2021, funds controlled by Vista Equity Partners (“Vista”) owned approximately 69.9% 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 and nine months ended September 30, 2021 and 2020, respectively, were immaterial.

Emerging Growth Company Status

The Company is an emerging growth company (“EGC”), as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, EGCs can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act, until such time as those standards apply to private companies.

The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that the Company (i) is no longer an EGC or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, the Company’s condensed consolidated financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards based on public company effective dates.

On June 30, 2021, the last day of the Company’s second fiscal quarter in 2021, the market value of the Company’s common equity held by non-affiliates exceeded $700 million. Accordingly, the Company will no longer qualify as an EGC; rather, it will be deemed a large accelerated filer as of December 31, 2021. Accordingly, the Company will no longer have the ability to take advantage of the extended transition period to comply with new or revised accounting standards.

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2.Significant Accounting Policies

Unaudited Interim Financial Information

The unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and the requirements of the Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP can be condensed or omitted. These financial statements have been prepared on the same basis as the Company’s annual financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for the fair statement of the Company’s financial information. These interim results are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2021 or for any other interim period or for any other future year. The accompanying unaudited condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as filed with the SEC on March 11, 2021 (the “Annual Report”).

There continue to be many uncertainties regarding the ongoing coronavirus 2019 (“COVID-19”) pandemic, and the Company continues to monitor the impact of the pandemic on all aspects of its business, including how it has impacted and may continue to impact the Company’s operations and the operations of its MSP partners and their SMB customers in the future, including as a result of travel restrictions, business shutdowns, supply chain constraints, labor shortages and/or inflationary pressure. The governments of many of the countries in which the Company operates have eased the earlier measures to control the spread of COVID-19. However, it continues to be difficult at this time to estimate the impact that COVID-19 will continue to have on worldwide economic activity, the Company’s business, and the additional measures that may be taken by governments, businesses and other organizations in response to COVID-19 that could affect our business. The Company will continue to assess the evolving impact of the COVID-19 pandemic and will make adjustments to its operations as necessary.

Basis of Presentation and Principles of Consolidation

~~Datto~~The ~~Holding~~accompanying ~~owns~~condensed ~~100%~~consolidated offinancial ~~Merritt~~statements ~~Holdco,~~have ~~Inc.~~been ~~(“Merritt~~prepared ~~Holdco”),~~in ~~which~~conformity ~~owns~~with ~~100% of Datto, Inc~~U.,S. ~~the~~generally ~~Company’s~~accepted ~~primary~~accounting ~~operating~~principles ~~company~~(“U.S. ~~Datto~~GAAP”), ~~Holding~~consistent ~~has~~in noall ~~operations~~material orrespects ~~significant~~with ~~assets~~those orapplied ~~liabilities other than its investment~~ in ~~Merritt~~the ~~Holdco.~~Company's ~~Accordingly,~~Annual ~~Datto~~Report ~~Holding~~on isForm ~~dependent~~10-K ~~upon~~for ~~distributions~~the ~~from~~fiscal ~~Merritt~~year ~~Holdco~~ended toDecember ~~fund~~31, ~~any activity~~2021, ~~including~~filed with the ~~payment~~Securities ofand ~~dividends.~~Exchange ~~All~~Commission ~~obligations~~(“SEC”) ~~under~~on ~~Datto’s~~February ~~2020 Credit Agreement~~23, as2022 ~~defined~~(the in“Annual ~~Note 9~~Report”). ~~Debt, are guaranteed by Merritt Holdco and certain direct and indirect subsidiaries of Datto, Inc.~~ The condensed consolidated financial statements include the Company's accounts ~~of Datto Holding~~ 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 ~~the~~ 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.

On an ongoing basis, the Company evaluates its estimates and assumptions, including those related to revenue recognition, contract balances, contract acquisition costs, allowances for doubtful accounts, reserves for inventory obsolescence, useful lives and recoverability of long-lived assets, the incremental borrowing rate for operating leases, determining the fair value of assets acquired and liabilities assumed in business combinations, income taxes, stock-based compensation and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, including the uncertainty surrounding rapidly changing market and economic conditions from the COVID-19 pandemic. Actual results could materially differ from these estimates. With the exception of the adoption of the lease standard discussed below, there have been no material changes to the Company’s significant accounting policies.10

Foreign Currency Translation

The Company’s reporting currency is the U.S. Dollar. The functional currency of the Company's foreign subsidiaries is generally the local currency. Assets and liabilities are translated into U.S. Dollars at the exchange rates at the balance sheet date, equity accounts are translated at historical exchange rates and revenue, expenses, gains and losses are

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~~translated using average exchange rates for the reporting period~~2.Significant ~~Resulting~~Accounting ~~foreign currency translation adjustments are recorded directly within accumulated other comprehensive income (loss), a separate component of stockholders’ equity.~~Policies

~~Transaction~~Summary gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in other (income) expense, net in the accompanying condensed consolidated statements of ~~operations.~~Significant ~~Transaction~~Accounting ~~gains and losses were a charge of $0.3 million for the nine months ended September 30, 2021 and income of $1.0 million for the nine months ended September 30, 2020.~~ Policies

~~Cash~~There ~~and~~have ~~Cash~~been ~~Equivalents~~no material changes to the Company's significant accounting policies as of and ~~Restricted~~for ~~Cash~~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.

~~Cash~~Fair isValue stated at fair value. As of September 30, 2021 and December 31, 2020, the U.S. Dollar value of cash and restricted cash denominated in foreign currencies was $30.3 million and $28.1 million, respectively, comprised of various currencies in which the Company operates, including Euros, Australian Dollars and British Pounds.Measurements

~~Cash~~The ~~equivalents~~fair ~~consist~~value ofhierarchy ~~short-term,~~prioritizes ~~highly~~the ~~liquid~~inputs ~~investments~~to ~~with~~valuation antechniques ~~original~~used ~~maturity~~to ofmeasure ~~three~~fair ~~months~~value orof ~~earlier.~~assets ~~The~~and ~~Company~~liabilities ~~did~~into ~~not~~three ~~hold~~broad ~~any~~levels ~~cash equivalents~~ as ~~of September 30, 2021 or December 31, 2020.~~follows:

~~Restricted~~Level ~~cash~~1 ~~primarily~~– ~~includes~~Quoted ~~amounts~~prices ~~held~~(unadjusted) byin ~~banks~~active asmarkets ~~security~~for ~~related~~identical toassets ~~lease~~or ~~arrangements~~liabilities ~~for~~that ~~office~~the ~~space.~~reporting entity can access at the measurement date,

~~Accounts~~Level ~~Receivable~~2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, ~~Net~~either directly or indirectly,

~~Trade~~Level ~~accounts~~3 ~~receivable~~– ~~are~~Unobservable ~~recorded~~inputs ~~at the invoiced amount and do not bear interest. Accounts receivable are presented net of an estimated allowance~~ for ~~doubtful accounts. The Company maintains an allowance for doubtful accounts based upon an analysis of past credit history and~~ the ~~current~~asset ~~financial~~or ~~condition of the Company's partners, as well as the consideration of expected trends based upon characteristics of the accounts receivable and general economic conditions~~liability. The Company also considers other specific operational factors which may impact the Company's ability to collect past due amounts, including the impact of COVID-19. Account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

~~The~~In ~~following~~determining ~~table~~fair ~~summarizes~~value, the ~~activity~~Company ofutilizes ~~the~~valuation ~~allowance~~techniques ~~for~~that ~~doubtful~~maximize ~~accounts~~the ~~(in thousands):~~use of observable inputs.

	Amount
Balance as of December 31, 2020	$	5,485
Provision for bad debt	2,630
Net reductions and other	(2,495)
Balance as of September 30, 2021	$	5,620

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.

~~Unbilled~~Accounts ~~accounts receivable are included in the accounts receivable balances and represent revenue earned~~Receivable, ~~but~~Net ~~the amount is not contractually billable as~~ of ~~the~~Allowance ~~balance~~for ~~sheet~~Expected ~~date.~~Credit The unbilled accounts receivable balance is principally invoiced within the following month. As of September 30, 2021 and December 31, 2020, unbilled accounts receivable was $1.7 million and $3.0 million, respectively.Losses

~~Leases~~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 ~~Company~~following ~~determines~~table ifsummarizes ~~an arrangement is or contains a lease at inception by assessing whether~~ the ~~arrangement~~activity ~~contains an identified asset and whether the Company has the right to control the identified asset. Right-~~of~~-use~~ ~~(“ROU”) assets represent~~ the ~~Company’s~~allowance ~~right to use an underlying asset~~ for ~~the~~expected ~~lease~~credit ~~term~~losses ~~and lease liabilities represent the Company’s obligation to make lease payments~~ (in order to obtain the right to use the asset over the lease term. Lease liabilities are recognized at the lease commencement date based on the present value of future lease payments over the lease term. The Company elected to combine lease and non-lease components for its office and equipment leases. ROU assets are based on the measurement of the lease liability and also include any lease prepayments and any initial direct costs incurred, offset by tenant incentives received by the Company. For leases with an initial term of 12 months or less, the Company does not recognize a ROU asset and corresponding lease liability. Rent expense for the Company’s operating leases is recognized on a straight-line basis over the lease term. thousands):

Generally, the Company’s leases do not provide an implicit interest rate, and therefore the Company uses its incremental borrowing rate based on the estimated rate of interest for a collateralized borrowing over a similar term of the lease payments at the commencement date. The Company includes options to extend or terminate the lease in the determination of the ROU asset and corresponding lease liability when it is reasonably certain the Company will exercise the option.


	Amount
Balance as of December 31, 2021	$	1,918
Provision for expected credit losses	140
Net reductions and other	(6)
Balance as of March 31, 2022	$	2,052

13Unbilled 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.

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Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), (“ASC 842”). ASC 842 amends a number of aspects of lease accounting under ASC Topic 840 — Leases (“ASC 840”), including requiring lessees to recognize almost all leases with a term greater than one year as an ROU asset and corresponding lease liability, measured at the present value of the lease payments. ASC 842 provides a number of optional practical expedients in transition. On January 1, 2021, the Company adopted ASC 842 using the modified retrospective approach, and elected the practical expedients to i) not reassess its prior conclusions about lease identification under the new standard, ii) not reassess lease classification, and iii) not reassess initial direct costs. The Company did not elect the practical expedient allowing the use-of-hindsight, which would require the Company to reassess the lease term of its leases based on all facts and circumstances through the effective date.

Upon adoption of ASC 842 the Company recognized operating lease assets of $35.8 million and operating lease liabilities of $46.3 million at January 1, 2021. Prior period amounts were not restated and are reported in accordance with ASC 840.

For a description of the Company’s leases, see Note 6. Leases.

Accounting Pronouncements Issued but Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASC 326”). This standard changes the impairment model for most financial assets, including trade receivables and financial instruments and will require the Company to use a forward-looking expected loss method, which may result in earlier recognition of allowances for losses and require expected credit losses to be reflected as allowances rather than reductions in the amortized cost basis of financial assets. For public entities, the standard is currently effective. As the Company will cease to be an EGC as of December 31, 2021, the Company will adopt the standard on December 31, 2021, with the initial application of ASC 326 beginning on January 1, 2021. The Company is evaluating the impact this guidance will have on its consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASC 740”), which simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related i) to the approach for intraperiod tax allocation, ii) the methodology for calculating income taxes in an interim period and iii) the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill and allocating consolidated income taxes to separate financial statements of entities not subject to income tax. The standard is currently effective for publicly traded companies. As the Company will cease to be an EGC as of December 31, 2021, the Company will adopt the standard on December 31, 2021, with the initial application of the standard beginning on January 1, 2021. Upon adoption, the Company must apply certain aspects of this standard retrospectively for all periods presented while other aspects are applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The Company is currently evaluating the impact this guidance will have on the Company’s consolidated financial statements.

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3.Revenue Recognition

Disaggregation of Revenue

The following ~~table~~tables ~~disaggregates~~disaggregate revenue by service and timing of recognition (in thousands):

Three Months Ended September 30, 2021

Three Months Ended March 31, 2022

Device

ProfessionalServices

Subscription

Total

Timing of revenue recognition:

Recognized at a point in time

109,~~242~~516

—

109,~~242~~516

Recognized over time

—

~~886~~752

~~146~~160,~~764~~513

~~147~~161,~~650~~265

Total

109,~~242~~516

~~886~~752

~~146~~160,~~764~~513

~~157~~170,~~892~~781

Three Months Ended September 30, 2020

Three Months Ended March 31, 2021

Device

ProfessionalServices

Subscription

Total

Timing of revenue recognition:

Recognized at a point in time

68,~~964~~385

—

68,~~964~~385

Recognized over time

—

~~950~~934

~~122~~135,~~753~~590

~~123~~136,~~703~~524

Total

68,~~964~~385

~~950~~934

~~122~~135,~~753~~590

~~130~~144,~~667~~909

	Nine Months Ended September 30, 2021
	Device		ProfessionalServices		Subscription		Total
Timing of revenue recognition:
Recognized at a point in time	$	27,652	$	—	$	—	$	27,652
Recognized over time	—		2,654		424,097		426,751
Total	$	27,652	$	2,654	$	424,097	$	454,403

	Nine Months Ended September 30, 2020
	Device		ProfessionalServices		Subscription		Total
Timing of revenue recognition:
Recognized at a point in time	$	21,098	$	—	$	—	$	21,098
Recognized over time	—		2,347		356,348		358,695
Total	$	21,098	$	2,347	$	356,348	$	379,793

The following table summarizes sales to customers by geography (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
			Three Months Ended March 31,
	2021		2020		2021		2020
					2022		2021
United States	$	~~110,273~~	$	~~94,632~~	$	~~317~~119,~~892~~097	$	~~277~~102,~~654~~042
International	47,619		36,035		136,511		102,139
United Kingdom					17,759		14,822
Total	$	157,892	$	130,667	$	454,403	$	379,793
Other international					33,925		28,045
Total					$	170,781	$	144,909

Revenue by geography is determined by the billing address for the customer.

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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 $1013.45 million and $712.70 million were included in prepaid expenses and other current assets as of ~~September~~March 3031, ~~2021~~2022 and December 31, ~~2020~~2021, respectively. Non-current contract assets, net of $1011.35 million and $710.98 million were included in other assets as of ~~September~~March 3031, ~~2021~~2022 and December 31, ~~2020~~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 ~~September~~March 3031, ~~2021~~2022 and December 31, ~~2020,~~2021 was $2423.76 million (of which $3.13 million was classified as non-current) and $2723.17 million (of which $3.3 million was classified as non-current), respectively.

The following table summarizes the activity of the Company's current and noncurrent deferred revenue balances for the ~~nine~~three months ended ~~September~~March 3031, ~~2020~~2022 and 2021 (in thousands):

	Amount
Balance at December 31, 2020	$	27,085
Deferred revenue recognized	(19,631)
Amounts deferred	17,341
Foreign currency translation and other	(53)
Balance at September 30, 2021	$	24,742

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	Three Months Ended March 31,
	2022		2021
Beginning balance	$	23,697	$	27,085
Deferred revenue recognized	(8,483)		(10,209)
Amounts deferred	7,913		8,324
Acquired with Infocyte	442		—
Foreign currency translation and other	(2)		61
Ending balance	$	23,567	$	25,261

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 ~~September~~March 3031, ~~2021~~2022 and December 31, ~~2020~~2021 were $5966.17 million and $4863.23 million, respectively.

Remaining Performance Obligations

Revenues expected to be recognized in the future related to performance obligations that are unsatisfied at ~~September~~March 3031, ~~2021~~2022 were approximately $~~354~~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):

	September 30,2021		December 31,2020
	March 31,2022		December 31,2021
Components	$	22,578	$	8,914
Purchased components and builds in process	$	36,967	$	29,712
Work in progress	3,449		580
Finished goods	6,946		5,189
Finished goods	5,712		4,317
Total inventory	$	43,913	$	34,901
Total inventory	$	31,739	$	13,811

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5.Property and Equipment, Net

Property and equipment, net, consisted of the following (in thousands):

EstimatedUseful Life(in Years)

~~September~~March 3031,~~2021~~2022

December 31,~~2020~~2021

Servers

~~117~~137,~~637~~465

96127,~~048~~710

Leasehold improvements

(a)

31,~~365~~613

3231,~~455~~450

Computer equipment

1417,~~284~~385

1415,~~977~~655

Internally developed software

1317,~~254~~135

715,~~811~~109

Furniture and fixtures

56,~~807~~272

6,~~305~~263

Purchased software

1,~~149~~233

~~999~~1,178

Vehicles

~~134~~135

~~103~~134

Total property and equipment

~~183~~211,~~630~~238

~~158~~197,~~698~~499

Less: accumulated depreciation and amortization

(83102,~~210~~763)

(6690,~~822~~922)

Total property and equipment, net

~~100~~108,~~420~~475

91106,~~876~~577

(a) The shorter of the remaining lease term or useful life.

The Company capitalized $52.40 million and $1.63 million of internally developed software costs during the ~~nine~~three months ended ~~September~~March 3031, ~~2021~~2022 and ~~2020~~2021, respectively.

Depreciation expense included in cost of revenue and operating expenses was $5.9 million and $2.1 million, respectively, for the three months ended September 30, 2021, and $4.4 million and $2.4 million, respectively, for the three months ended September 30, 2020.13

Depreciation expense included in cost of revenue and operating expenses was $17.1 million and $6.3 million, respectively, for the nine months ended September 30, 2021, and $12.2 million and $7.4 million, respectively, for the nine months ended September 30, 2020.

6.Leases

The Company enters into operating leases from time to time, primarily for office space and co-located data centers. The Company’s leases have remaining lease terms which vary, up to approximately 8 years. These leases require monthly lease payments that may be subject to annual increases throughout the lease term. Certain of these leases also include options at the election of the Company to renew or extend the leases. The periods associated with these options to renew or extend have not been included in the determination of the ROU assets or lease liabilities associated with these leases as the Company did not consider it reasonably certain it would exercise the renewal options.

For the three months ended September 30, 2021 and 2020, the Company recorded $2.4 million and $2.3 million, respectively, of operating lease costs in the condensed consolidated statements of operations. For the nine months ended September 30, 2021 and 2020, the Company recorded $7.1 million and $7.2 million, respectively, of operating lease costs in the condensed consolidated statements of operations. Variable lease costs, which are comprised primarily of the Company's proportionate share of operating expenses, property taxes, and insurance, were $0.6 million and $1.8 million, for the three and nine months ended September 30, 2021, respectively. Variable lease costs are not included in the measurement of the Company's ROU assets and lease liabilities.

Cash paid for amounts related to operating lease liabilities for the nine months ended September 30, 2021 was $7.9 million.

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~~The~~Depreciation ~~following~~expense ~~represents~~included ~~the~~in ~~Company's~~cost ~~future~~of ~~minimum~~revenue ~~payments~~and ~~under~~operating ~~non-cancelable~~expenses ~~operating~~was ~~leases~~$6.3 asmillion ofand ~~September~~$2.6 million, respectively, for the three months ended March 3031, ~~2021~~2022, ~~(in~~and $5.3 million and $2.2 million, respectively, for the three months ended March ~~thousands):~~31, 2021.

Remaining 2021	$	2,608
2022	9,756
2023	9,852
2024	8,944
2025	5,375
Thereafter	6,725
Total future undiscounted lease payments	$	43,260
Less imputed interest	3,470
Total reported lease liability	$	39,790

6.Acquisitions

~~The~~Infocyte weighted average remaining lease term and discount rate as of September 30, 2021 were 4.9 years and 3.3%, respectively. As of September 30, 2021, the Company recorded operating lease assets of $30.3 million, and lease liabilities of $9.0 million and $30.8 million in accrued expenses and other current liabilities and operating lease liabilities, noncurrent, respectively, within the condensed consolidated balance sheets. Acquisition

7In January 2022, the Company acquired threat detection and response company Infocyte, Inc.~~Acquisitions~~ ("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):

In March 2021, the Company acquired BitDam Ltd., an Israel-based cyber threat detection company (“BitDam”). The business combination was accounted for under the acquisition method of accounting. The consideration paid was allocated to the tangible and intangible assets acquired and liabilities assumed based on their fair values as of the acquisition date. As of September 30, 2021, the Company has performed a preliminary valuation of the assets acquired and liabilities assumed, including the fair value of acquired intangible assets. The preliminary valuation is subject to adjustment as the Company finalizes the allocation during the measurement period. The preliminary allocation of the purchase consideration is as follows (in thousands):



Assets acquired
Other current and noncurrent assets	$	374

Definite lived intangible assets	12,700
Goodwill	31,071
Total assets acquired	$	44,145


Total liabilities assumed	$	624
Purchase consideration, net of cash acquired	$	43,521

Acquisition of BitDam
Assets acquired
Other current and noncurrent assets	$	63
Property and equipment	49
Finite lived intangible assets	27,400
Goodwill	23,155
Total assets acquired	$	50,667
Other current and noncurrent liabilities	879
Deferred tax liabilities	4,302
Total liabilities assumed	$	5,181
Purchase consideration, net of cash acquired	$	45,486

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.

~~The~~General ~~finite~~and ~~lived~~administrative ~~intangible~~expense ~~assets~~within ~~consist~~the ofcondensed ~~acquired~~consolidated ~~developed~~statements ~~technology with an estimated life~~ of 5operations ~~years.~~includes ~~The Company has recorded~~ $10.~~4 million and $~~2.8 million of ~~amortization~~costs ~~expense~~incurred ~~within~~in ~~cost~~relation ofto ~~revenue~~the ~~for~~Infocyte acquisition in the three ~~and nine~~ months ended ~~September~~March 3031, ~~2021, respectively, related to this asset~~2022.

~~General and administrative expense within the condensed consolidated statements of operations includes $1.0 million of costs incurred in relation to the~~ BitDam ~~acquisition in the nine months ended September 30, 2021.~~ Acquisition

In ~~July~~March ~~2020~~2021, the Company acquired ~~all~~BitDam ~~of the outstanding equity of two affiliated Australian entities~~Ltd., ~~Gluh~~an ~~Pty~~Israel-based ~~Ltd~~cyber ~~and~~threat ~~Keystone~~detection ~~Software~~company ~~Holdings Pty Ltd~~ (~~together,~~ “~~Gluh~~BitDam”). ~~Gluh offers a real-time quoting platform that enables MSPs to simplify the procurement of IT products and services for their clients.~~ The purchase consideration was approximately $445.45 million~~, reflecting the purchase price of $4~~.~~0 million and certain closing adjustments.~~

87.~~Commitments~~Goodwill and ~~Contingencies~~Intangible Assets, Net

18The following table summarizes the activity of the Company's goodwill balance (in thousands):


	Amount
Balance at December 31, 2021	$	1,141,726
Infocyte acquisition	31,071
Foreign currency translation	63
Balance at March 31, 2022	$	1,172,860

Definite-Lived Intangible Assets

The following tables sets forth the gross carrying value and net carrying value of definite-lived intangible assets (in thousands):

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with loss contingencies are expensed as incurred. The Company believes there is no litigation or other liabilities for loss contingencies pending, individually or in the aggregate, that could have a material adverse effect on the Company’s financial position, results of operations, or cash flows.


	March 31, 2022
	Gross Carrying Value		Accumulated Amortization		Net Carrying Value		Weighted Average Remaining Life
Technology	$	122,453	$	(38,394)	$	84,059	8.1
Tradenames	126,757		(28,789)		97,968		15.6
Partner relationships	174,510		(63,969)		110,541		9.5
Total	$	423,720	$	(131,152)	$	292,568


	December 31, 2021
	Gross Carrying Value		Accumulated Amortization		Net Carrying Value		Weighted Average Remaining Life
Technology	$	111,876	$	(35,227)	$	76,649	8.8
Tradenames	126,757		(27,173)		99,584		15.9
Partner relationships	172,287		(60,915)		111,372		9.9
Total	$	410,920	$	(123,315)	$	287,605

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	$	23,621
2023	31,345
2024	30,242
2025	29,792
2026	25,921
Thereafter	151,647
	$	292,568

8.Commitments and Contingencies

Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. The Company believes there is no litigation or other liabilities for loss contingencies pending, individually or in the aggregate, that could have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

9.Debt

On October 23, 2020, Datto, Inc., as borrower (the “Borrower”), and certain ~~of its~~ direct and indirect wholly-owned subsidiaries of Datto ~~(the “Guarantors~~,” ~~and, together with the Borrower, the “Loan Parties”),~~ entered into a ~~new~~ credit agreement with the lenders party thereto and Morgan Stanley Senior Funding, Inc., as administrative agent (the "2020 Credit Agreement"). The 2020 Credit Agreement is guaranteed by ~~the~~certain ~~“Guarantors”~~direct and isindirect ~~supported~~subsidiaries ~~by a security interest in substantially all~~ of Datto (the ~~Loan~~“Guarantors,” ~~Parties’ personal property~~ and ~~assets~~, ~~subject~~together towith ~~customary~~the ~~exceptions~~Borrower, ~~as defined in~~ the ~~2020~~“Loan ~~Credit~~Parties”) ~~Agreement.~~

The 2020 Credit Agreement provides for an initial $200.0 million in commitments for revolving credit loans, which may be increased or decreased under specific circumstances, with a $40.0 million letter of credit sublimit and a $100.0 million alternative currency sublimit. In addition, the 2020 Credit Agreement provides for the ability of the Borrower to request term loan facilities. Borrowings pursuant to the 2020 Credit Agreement may be used for working capital and other general corporate purposes, including for acquisitions permitted under the 2020 Credit Agreement, and are scheduled to mature on October 23, 2025. The 2020 Credit Agreement contains certain customary representations and warranties and affirmative and negative covenants. At September 30, 2021, the Company was in compliance with all applicable covenants.15

The interest rates applicable to the revolving borrowings under the 2020 Credit Agreement, are, at the Borrower’s option, either (i) a base rate, equal to the greater of (a) the Prime Rate, (b) the Federal Funds Effective Rate plus 0.5% or (c) the Adjusted LIBO Rate for a one month Interest Period (each term as defined in the 2020 Credit Agreement) plus 1%, or (ii) the Adjusted LIBO Rate equal to the LIBO Rate for the applicable Interest Period, plus in the case of each of clauses (i) and (ii), the Applicable Rate (as defined in the 2020 Credit Agreement). The Applicable Rate (i) for base rate loans ranges from 0.25% to 1.0% per annum and (ii) for LIBO Rate loans ranges from 1.25% to 2.0% per annum, in each case, based on the Company's Senior Secured Net Leverage Ratio (as defined in the 2020 Credit Agreement). The 2020 Credit Agreement provides for a commitment fee ranging from 0.20% to 0.35% per annum of the average daily undrawn portion of the revolving commitments based on the Company's Senior Secured Net Leverage Ratio (as defined in the 2020 Credit Agreement).

As of September 30, 2021 and December 31, 2020, the 2020 Credit Agreement was undrawn, with the exception of $1.9 million of outstanding letters of credit.

The Company recorded amortization of the debt issuance costs and original issue discount of $0.1 million and $0.4 million as interest expense during the three months ended September 30, 2021 and 2020, respectively.

The Company recorded amortization of the debt issuance costs and original issue discount of $0.3 million and $1.3 million as interest expense during the nine months ended September 30, 2021 and 2020, respectively.

Until October 2020, the Company was party to the 2019 Credit Agreement, which provided for a $550.0 million term loan facility and a $50.0 million revolving credit facility. In connection with the IPO and entering into the 2020 Credit Agreement, the 2019 Credit Agreement was terminated.

10.Stock-Based Compensation

The Company has equity awards outstanding under various plans, as described further below.

Datto 2020 Omnibus Incentive Plan

In conjunction with the IPO, in October 2020, the Board adopted the Datto Holding Corp. Omnibus Incentive Plan (the “2020 Plan”) in order to align the interests of the participants with the interests of the Company's stockholders. The 2020 Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), bonus stock, dividend equivalents, other stock-based awards, substitute awards, annual incentive awards and performance awards to employees, consultants, and members of the Board. Authorized shares under the 2020 Plan automatically increase each January 1st by 5% of the outstanding number of shares of the Company's common stock on the immediately preceding December 31st, or such lesser number of shares as determined by the Board. See below for a reconciliation of

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~~shares~~and ofis ~~the~~supported ~~Company’s~~by ~~common~~a ~~stock~~security ~~reserved~~interest ~~for~~in ~~issuance~~substantially ~~under~~all of the ~~2020~~Loan ~~Plan.~~Parties’ ~~Under~~personal ~~the~~property ~~2020~~and ~~Plan~~assets, ~~4,068,399~~subject ~~RSUs~~to ~~and~~customary 80exceptions,~~000~~ ~~stock~~as ~~options~~defined ~~were~~in ~~outstanding~~the as2020 ofCredit ~~September 30, 2021~~Agreement.

~~2017~~The ~~Stock~~Company ~~Option~~has ~~Plan~~a $200.0 million revolving credit loan under its 2020 Credit Agreement. As of March 31, 2022, the Company was in compliance with all applicable covenants. As of March 31, 2022 and December 31, 2021, the 2020 Credit Agreement was undrawn, with the exception of $1.9 million of outstanding letters of credit.

~~In December 2017, the Company adopted the 2017~~ 10.Stock-Based Option Plan (the “2017 Plan”), as amended, which provides for grants of stock options to employees, directors, officers, and consultants. As of September 30, 2021, 7,314,484 stock options were outstanding under the 2017 Plan. No additional awards may be issued under the 2017 Plan.Compensation

~~Other~~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 ~~Plans~~award activity under these plans is summarized below.

The Company also has outstanding options which were issued under the Autotask Superior Holdings 2013 Stock Option Plan (the “Autotask Plan”). As of September 30, 2021, 265,095 fully-vested stock options were outstanding under the Autotask Plan. No additional awards may be issued under the Autotask Plan. In addition, the Company has two other plans, which were adopted in relation to grants to independent members of the Board, prior to the adoption of the 2020 Plan. As of September 30, 2021, 11,719 RSUs were outstanding and no additional awards may be issued under these plans.

Stock Options

The following table summarizes stock option activity related to all plans during the ~~nine~~three months ended ~~September~~March 3031, ~~2021~~2022 (in thousands, except share and per share amounts):

	Number ofShares	WeightedAverageExercisePrice		WeightedAverageRemainingContractualLife (Years)	AggregateIntrinsicValue
Options outstanding at December 31, 2020	9,555,082	$	10.49	7.5	$	157,800
Options outstanding at December 31, 2021	7,055,006	$	10.80	7.1	$	109,720
Options granted	80,000	$	25.50
Options exercised	(568,481)	$	10.81
Options exercised	(1,704,829)	$	9.86
Options forfeited & expired	(69,932)	$	11.27
Options forfeited & expired	(270,674)	$	10.97
Options outstanding at March 31, 2022	6,416,593	$	10.79	6.6	$	102,208
Options outstanding at September 30, 2021	7,659,579	$	10.76	7.3	$	100,738
Options vested and exercisable at March 31, 2022	4,306,236	$	10.26	6.2	$	70,887
Options vested and exercisable at September 30, 2021	4,509,837	$	10.14	7.0	$	62,067

~~The~~Options ~~aggregate~~outstanding ~~intrinsic~~at ~~value~~March of31, ~~stock~~2022 ~~options~~include 80,000 ~~exercised~~issued ~~during~~under the ~~nine~~2020 ~~months~~Plan, ~~ended September 30~~6,086,041 ~~2021~~issued ~~and~~under ~~2020~~the ~~was~~2017 ~~$27.7~~Datto ~~million~~Plan, and ~~$1.3 million~~250,552 ~~respectively~~issued under the Autotask Plan.

The ~~weighted~~total ~~average~~ fair value of stock options ~~granted~~that tovested ~~purchase common stock~~ during ~~the~~three ~~nine~~ months ended ~~September 30~~March 31, 2022 and 2021 was $114.607 million and $8.1 million, respectively.

AsThe ofaggregate ~~September 30,~~intrinsic ~~2021,~~value ~~unrecognized~~of ~~compensation expense related to outstanding~~ stock options ~~was~~exercised ~~$27.0 million,~~during ~~which~~the isthree ~~expected~~months toended beMarch ~~recognized~~31, ~~over~~2022 ~~the~~and ~~remaining~~2021 ~~weighted~~was ~~average~~$8.1 ~~term~~million ofand 1$0.83 million, ~~years~~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 ~~under all plans~~ during the ~~nine~~three months ended ~~September~~March 3031, ~~2021~~2022:

	Number ofShares	~~WeightedAverageGrant~~Weighted AverageGrant Date Fair Value
RSUs outstanding at December 31, 2020	696,338	$	26.73
RSUs outstanding at December 31, 2021	4,185,843	$	25.71
RSUs granted	31,~~560~~150,~~809~~872	$	2524.8370
RSUs vested	(91170,~~854~~783)	$	25.1069
RSUs forfeited	(85201,~~175~~153)	$	2625.1772
RSUs outstanding at September 30, 2021	4,080,118	$	25.99
RSUs outstanding at March 31, 2022	4,964,779	$	25.48

20All 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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~~As of September~~March 3031, ~~2021~~2022, unrecognized compensation expense related to all outstanding RSUs was $95109.14 million, which is expected to be recognized over the remaining weighted average term of 3.52 years.

Shares Available for Future Grants

The following table summarizes the shares available for future grants under the 2020 Plan:

			SharesAvailable forFuture Grant
			Shares Available forFuture Grant
Balance at December 31, 2020			20,195,974
Balance at December 31, 2021			24,380,324
Annual authorization increase			8,~~071~~199,~~001~~584
Options and RSUs granted			(3,640,809)
Awards granted			(1,150,872)
Options and RSUs forfeited or expired			86,346
Awards forfeited or expired			201,241
Balance at September 30, 2021			24,712,512
Balance at March 31, 2022			31,630,277

Datto 2021 Employee Stock Purchase Plan

InThe ~~May 2021, shareholders approved the~~ Datto Holding Corp. 2021 Employee Stock Purchase Plan (“ESPP”). The ESPP contains a component intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code (the “423 Component”) and a component primarily related to purchases by international employees. The ESPP provides ~~all eligible Datto~~ employees with the ~~opportunity~~option to ~~contribute up to 15% of their base earnings and other eligible compensation to~~ purchase ~~shares of~~ Datto common stock. ~~A participant can purchase a maximum of 1,000 shares of Datto common stock per biannual offering period, although participants in the 423 Component cannot purchase shares that would accrue~~ at a ~~rate which exceeds $25,000 of fair market value of Datto common stock (determined based on the fair market value on the first day of each offering period) for each calendar year. The~~ purchase price is 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~~. There are 3~~,~~221,541~~ ~~shares available for issuance under the ESPP, although none were outstanding at September 30, 2021. The pool of shares available for issuance under the ESPP is~~ subject to ancertain ~~annual~~plan ~~increase~~provisions onand ~~the~~tax ~~first~~regulations. ~~day~~As of ~~each year beginning on January 1~~March 31, 2022 and annually thereafter ending in 2031 equal to the lesser of (i) 1% of all classes of the Company’s shares outstanding on the last day of the immediately preceding calendar year and (ii) such smaller number of shares as may be determined by the Board; provided, ~~however~~4, ~~no more than 16~~700,~~000,000~~580 shares ~~may~~were beavailable ~~issued~~for inissuance ~~total~~ under the ~~423 Component~~ESPP.

Approximately ~~0.2 million~~160,878 shares ~~will~~were beissued ~~purchased~~in atJanuary ~~the~~2022 ~~end~~for total consideration of $3.3 million, which was accumulated over the offering period inthrough ~~January~~employee ~~2022,~~payroll ~~based~~withholdings. onThe ~~the~~amount ~~enrollment~~of ~~and~~withholdings ~~stock~~from ~~price~~employees held by the Company as of ~~September~~March 3031, ~~2021.~~2022 ~~The~~and ~~Company~~December ~~has~~31, ~~withheld~~2021, were $1.57 million onand ~~behalf~~$3.2 ofmillion, ~~employees for these future purchases under the ESPP~~respectively, which isare included in accrued expenses and other current liabilities within the condensed consolidated balance sheets ~~as of September 30, 2021~~.

The fair value of shares issued under the ESPP is estimated on the grant date using the Black-Scholes option pricing model. As of ~~September~~March 3031, ~~2021~~2022, unrecognized compensation expense related to the ESPP was $0.7 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 ~~and nine~~ months ended ~~September~~March 3031, ~~2021~~2022 and ~~2020~~2021 was as follows (in thousands):

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

2021

2020

2021

2020

2022

2021

Cost of revenue—subscription

~~1,052~~

31,~~165~~020

~~118~~1,228

Cost of revenue—device

—

~~150~~36

—62

Cost of revenue—professional services and other

~~(15)~~

—

~~151~~66

—103

Sales and marketing

~~2,354~~

~~524~~

62,~~491~~588

12,~~803~~295

Research and development

~~5,325~~

~~494~~

176,~~257~~174

14,~~115~~874

General and administrative

~~2,844~~

~~1,694~~

82,~~141~~729

32,~~525~~949

Total stock-based compensation expense

~~11,603~~

~~2,789~~

3512,~~355~~613

611,~~561~~511

21The table reflects stock-based compensation expense based upon the functional role of the holder.

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The table reflects stock-based compensation expense based upon the functional role of the holder. Stock-based compensation expense for awards with only a time-based vesting condition was recorded in all periods presented. During the three and nine months ended September 30, 2020, the Company also had awards which contained both a time-based and a performance-based vesting condition, which was the closing of an IPO. Stock-based compensation for these awards commenced during the fourth quarter of 2020 as a result of the Company's IPO ("IPO Contingent Options"). In 2021 the Company also issued restricted stock units with performance-based vesting conditions in connection with the acquisition of BitDam, for which stock-based compensation expense is being recorded based on the expected achievement of the performance targets.

11.Income Taxes

The Company incurred a provision for income taxes of $10.87 million and $5.04 million for the three months ended ~~September 30~~March 31, ~~2021~~2022 and ~~2020~~2021, respectively. The effective tax rate for the three months ended ~~September~~March 3031, ~~2021~~2022 was ~~11.~~7.6%, ~~driven~~reflecting by the ~~tax~~favorable ~~benefit~~impact ~~related~~of ~~to employee stock option exercises. The Company incurred a provision for income~~ taxes ofin ~~$6.5~~certain ~~million~~foreign ~~and~~jurisdictions, ~~$8.7~~including ~~million for~~ the ~~nine~~benefit ~~months~~of ~~ended September 30, 2021 and 2020, respectively. The effective tax rate for~~ the ~~nine~~release ~~months~~of ~~ended~~valuation ~~September 30~~allowances, ~~2021~~a ~~was 12.4%, reflecting the~~ favorable impact of aU.S. ~~change in tax law in the~~ state ofincome ~~Connecticut~~taxes resulting infrom ~~the~~a ~~ability~~change ~~to utilize additional research and development credits generated~~ in ~~prior~~tax ~~years~~law, and the tax benefit related to employee stock option exercises~~, and the favorable impact of an amendment to the Company's 2018 federal tax return resulting from clarification of certain tax guidance~~.

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12.Net Income per Share

Basic net income per share attributable to common stockholders is calculated by dividing the net income attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share attributable to common stockholders is calculated by giving effect to all potential shares of common stock, including the Company's outstanding stock options, common stock related to unvested RSUs, and the estimated number of shares to be issued under the ESPP based upon the enrollment and stock price as of ~~September 30~~March 31, ~~2021~~2022, to the extent such potential shares are dilutive. For the purpose of computing diluted earnings per share, options with a performance-based vesting condition are considered contingently issuable, and such contingent shares are included in the denominator for computing diluted net income per share only once the performance condition is met, and only to the extent such options are dilutive. As described in Note 10. Stock-Based Compensation, the IPO Contingent Options contained a performance-vesting condition, and were only considered in computing diluted net income per share after the IPO in October of 2020. The calculation of basic and diluted income per share is as follows (in thousands, except share and per share amounts):

	Three Months Ended September 30,				Nine Months Ended September 30,
			Three Months Ended March 31,
	2021		2020		2021		2020
					2022		2021
Numerator:
Net income attributable to common stockholders	$	~~13,485~~	$	~~19,546~~	$	457,~~687~~947	$	2915,~~666~~286
Denominator:
Weighted-average shares used in computing net income per share attributable to common stockholders
Basic	~~162,424,260~~		~~135,553,097~~		~~161~~164,~~657~~081,~~479~~628		~~135~~161,~~496~~066,~~696~~404
Total dilutive effect of outstanding equity awards including the ESPP	~~3,824,681~~		~~3,037,673~~		3,~~826~~453,~~231~~435		13,~~510~~667,~~225~~998
Diluted	~~166,248,941~~		~~138,590,770~~		~~165~~167,~~483~~535,~~710~~063		~~137~~164,~~006~~734,~~921~~402
Net income per share attributable to common stockholders
Basic	$	~~0.08~~	$	~~0.14~~	$	0.2805	$	0.2209
Diluted	$	~~0.08~~	$	~~0.14~~	$	0.2805	$	0.2209

For the three ~~and nine~~ month periods ended ~~September 30~~March 31, 2022 and 2021 there were ~~256~~508,~~111~~923 and ~~316~~634,~~521~~330, respectively, of weighted-average outstanding options toand ~~purchase~~RSUs ~~shares~~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. ~~For the three and nine month periods ended September 30, 2020 there were 1,058,594 and 2,216,118,~~

2213.Subsequent Events

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.

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respectively, of weighted-average outstanding options to purchase shares 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.Restructuring

In response to the COVID-19 pandemic, the Company undertook various measures during the second quarter of 2020 to mitigate the risk of potential reductions in revenue and delays or reductions in payments from the Company's customers. The measures included a focus on the Company's cost structure to match expenditures to its revised forecasts of revenue and cash generation activities at that time. As a result of these actions, the Company incurred approximately $3.8 million for restructuring activities in the second quarter of 2020, primarily related to severance for a reduction in workforce, including $0.6 million in cost of revenue and $3.2 million in operating expenses, all of which was paid as of December 31, 2020.

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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:

•~~the~~uncertainties ~~impact~~associated onwith ~~our operations and financial condition from~~ the ~~effects~~proposed ofMerger ~~the~~with ~~current COVID-19 pandemic~~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;

~~•the impact of natural disasters, terrorism or other catastrophic events;~~19

~~•our~~Table ~~ability~~of ~~to recruit, retain and develop key employees and management personnel;~~Contents

•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;

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•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;

•~~our~~we ~~ability~~previously toidentified ~~remediate~~a ~~our existing~~ 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 ~~account~~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;

•the impact of the Tax Cuts and Jobs Act of 2017;

•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~~Foreign ~~corrupt~~Corrupt ~~practices~~Practices ~~act~~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

25•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.

~~Table~~We derive many of ~~Contents~~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.

•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 March 11, 2021.

We derive many of our forward-looking statements from our operating budgets 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 March 11, 2021. 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.

2621

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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 ~~2020~~2021 Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on ~~March~~February 1123, ~~2021~~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 ~~and security~~ solutions purpose-built for delivery through the managed service provider, or MSP, channel to small and medium businesses, or SMBs. We enable our ~~over~~more 18than 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 ~~and security~~ needs. The number of MSPs continues to grow, with approximately ~~125~~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 ~~platform~~offerings ~~provides~~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 ~~on-premise,~~ in both private ~~clouds~~ and ~~in the~~ public ~~cloud~~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.

WeDuring ~~recently~~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 ~~Business Continuity and Disaster Recovery ("~~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 iswas ~~based~~built on technology obtained in Datto’s acquisition of Israel-based cyber threat detection company BitDam ~~earlier~~in ~~this~~early ~~year~~2021.

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Merger Transaction

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.

27We 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.

~~Table~~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 ~~Contents~~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 ~~generate~~employ ~~substantially~~a ~~all~~highly ~~our~~efficient ~~revenue~~land-and-expand ~~from~~sales ~~the~~strategy ~~sale~~facilitated ofby ~~subscriptions~~offering toproducts ~~our~~that ~~cloud-based~~are ~~software~~reliable, ~~and~~easy ~~security~~to ~~solutions~~adopt and ~~recognize~~that drive recurring revenue ~~ratably~~growth ~~over~~and ~~the~~margin ~~subscription~~efficiency ~~term~~for our MSP partners. ~~These~~We ~~contracts~~sell ~~typically~~our ~~begin~~solutions ~~with~~to aMSPs ~~1-year~~primarily orthrough 3our sales team, benefiting from the reach of our MSP partners for our sell-~~year~~through ~~term~~products, and ~~auto~~provide them with self-~~renew~~service onoptions ato ~~monthly~~upgrade orservice ~~annual~~tiers, ~~basis~~add ~~thereafter~~additional units and purchase additional solutions. ~~For~~Our ~~certain~~MSP ~~offerings,~~partners weoften ~~enable~~significantly ~~our~~increase ~~ongoing~~usage ~~subscription~~from ~~services~~their ~~with~~initial anpurchase ~~up-front~~and ~~sale~~expand oftheir ~~equipment~~usage orto ~~professional~~other ~~services,~~products ~~for~~on ~~which~~our weplatform. ~~recognize~~We ~~revenue~~also atprovide access to business development tools and content to help MSPs address the ~~time~~challenges of ~~delivery~~marketing and ~~performance~~selling to SMB customers. ~~The~~We ~~majority~~grow ofalongside our MSP partners ~~pay~~as onthey adeploy ~~monthly~~our ~~basis,~~solutions ~~regardless~~across oftheir ~~term~~existing ~~length~~SMB customers, ~~with~~add ~~some~~new ~~opting~~customers toand ~~make~~upgrade ~~quarterly,~~service ~~annual or multi-year prepayments~~tiers.

As of ~~September~~March 3031, ~~2021~~2022, our annual run-rate revenue, or ARR, was $~~626~~689.73 million, and our revenue for the three months ended ~~September~~March 3031, ~~2021~~2022 was $~~157~~170.~~9 million, of which approximately 93% was recurring subscription revenue. For the three months ended September 30, 2021, our net income was $13.5 million and our Adjusted EBITDA was $43.~~8 ~~million. Our revenue for the nine months ended September 30, 2021 was $454.4~~ million, of which approximately 9394% was recurring subscription revenue. For the ~~nine~~three months ended ~~September~~March 3031, ~~2021~~2022, our net income was $~~45.~~7.9 million and our Adjusted EBITDA was $~~135~~39.65 million.

As of ~~September~~March 3031, ~~2020~~2021, our ARR was $~~522~~572.85 million and our revenue for the three months ended ~~September~~March 3031, ~~2020~~2021, was $~~130~~144.7 9 million, of which approximately 94% was recurring subscription revenue. For the three months ended ~~September~~March 3031, ~~2020~~2021, our net income was $1915.~~5 million and our Adjusted EBITDA was $45.8 million. Our revenue for the nine months ended September 30, 2020, was $379.8~~3 million, ~~of which approximately 94% was recurring subscription revenue. For the nine months ended September 30, 2020, our net income was $29.7 million~~ and our Adjusted EBITDA was $~~109~~46.79 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 isremains ~~still~~ uncertainty relating to the ~~extent~~ultimate ~~of the~~ impact of the pandemic on our business because of numerous global factors, including but not limited to, the ~~severity of the disease, the duration of the pandemic, the reoccurrence or emergence of variants of the virus, the effectiveness and speed of vaccinations, actions taken by government authorities, the~~ impact on our customers and suppliers, supply chain constraints, labor shortages, inflationary pressure and other factors. ~~Specifically, we may experience impacts from customers deferring purchasing and activation decisions, reducing expenses and requesting extended payment terms or relief from payments.~~

The effect of the COVID-19 pandemic will not be fully reflected in our results of operations and overall financial performance until future periods. In addition, 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.23

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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.

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MSP Partners

The number of MSP partners represents the number of MSPs with active subscriptions as of the end of athe period. We use this number to assess our ability to attract and retain MSP partners and thereby grow our business. As of ~~September~~March 3031, ~~2021~~2022, we had approximately 1819,200 MSP partners, a net increase of approximately ~~1,200~~700 since December 31, ~~2020~~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 ~~reported~~ 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 ~~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 September 30, 2021 and 2020:~~24

	As of September 30, 2021		As of September 30, 2020		$ Change		% Change
	(dollars in millions)
ARR	$	626.7	$	522.8	$	103.9	19.9	%

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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 ~~and security~~ solutions sold on a recurring subscription basis. Subscription revenue is recognized ratably over the subscription term ~~after all~~ 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 ~~Networking~~Endpoint Management solutions grows as our MSP partners add more end customers and as the end-customers, ~~managed~~of by our MSP partners, add new subscription products, upgrade the service tier of their existing subscription products, or increase the usage of their subscription products or add more end-user devices managed by their MSP. Revenue from our Business Management solutions increases ~~with~~as ~~the~~we ~~addition~~sell ofsubscriptions ~~employees~~to ofnew ~~our~~and existing MSP partners who ~~require~~did ~~seat~~not ~~licenses,~~have ~~the~~our ~~proliferation~~PSA ofsolution ~~end-user~~and ~~devices~~as ~~managed~~our byMSP ~~those~~partners ~~MSPs~~with ~~and~~PSA ~~the~~subscriptions ~~expansion~~add ofemployees ~~products~~who ~~used~~require byseat ~~those~~licenses ~~MSPs~~and toas ~~manage~~MSPs ~~their~~purchase ~~SMB~~Datto ~~customers’~~Commerce ~~IT infrastructures~~subscriptions.

Device. ~~Our device revenue is derived from the sale of devices in conjunction with subscription solutions.~~ 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 athe 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.

29Professional 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.

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Professional services and other. We derive revenue from professional services associated with our Business 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 offerings.

Cost of revenue

Subscription. Subscription cost of revenue consists of costs directly related to our subscription services, including personnel costs ~~related~~associated towith 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, ~~personnel~~as ~~costs~~well ~~and~~as allocated facilities and overhead costs associated with the purchase, production and delivery of our devices. Our ~~Unified~~BCDR ~~Continuity~~ 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 ~~events~~professional ~~and travel~~fees, ~~professional~~third-party ~~fees~~software subscription costs, facilities and overhead costs, ~~third~~events ~~party~~and ~~software subscription costs~~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 ~~DattoCon~~MSP ~~EMEA~~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.

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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, ~~bad~~provision ~~debt~~for expected credit losses expense, travel expenses and costs for facilities. ~~Following~~General ~~the completion of our initial public offering ("IPO") we began incurring additional general~~ and administrative expenses asalso ainclude ~~result~~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 ~~expenses~~fees, particularly related to audit services and ~~increased~~compliance ~~stock-based~~with ~~compensation~~the ~~expense~~Sarbanes-Oxley Act.

Depreciation and amortization

Depreciation and amortization expenses in operating expenses consist of amortization of tradenames and partner relationship intangibles, ~~as well as~~ depreciation of other property and equipment such as leasehold improvements, furniture and fixtures, and computer equipment, asand ~~well as~~ amortization of internally developed software.

Other (Income) expense

Interest expense

Interest expense consists of ~~interest payments on outstanding borrowings under our credit facilities, as well as~~ commitment fees under our credit facilities and the amortization of debt issuance costs., Inand ~~conjunction~~to ~~with~~the ~~our~~extent ~~IPO~~we inhave ~~October~~outstanding ~~2020~~borrowings, weinterest ~~repaid~~payments ~~all amounts outstanding~~ under our ~~2019 Credit Agreement. In October 2020, Datto, Inc. and certain direct and indirect wholly-owned subsidiaries of Datto, entered into a new~~ credit ~~agreement with the lenders party thereto and Morgan Stanley Senior Funding, Inc~~facilities., asOur ~~administrative agent (the “~~2020 Credit Agreement~~”),~~ ~~which~~ provides a $200.0 million revolving credit facility. NoAs of March 31, 2022, no amounts ~~have~~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.

~~Benefit~~Provision ~~from (provision~~ for) income ~~taxes~~tax

~~Benefit~~Provision ~~from (provision~~ for) income ~~taxes~~tax consists primarily of income ~~tax~~taxes ~~expense~~ related to U.S. federal and state income taxes and income taxes in foreign jurisdictions in which we conduct business.

Stock-Based Compensation

~~Stock-based~~The ~~compensation expense is recorded based upon the~~ functional role of the holder. ~~Stock-based~~determines compensation expense for awards which contained only a time-based vesting condition was recorded in all periods presented. Stock-based compensation expense for awards which contained both a time-based and a performance-based vesting condition, which was the ~~closing~~financial ofstatement anline ~~IPO,~~item ~~commenced~~within during the fourth quarter of 2020 as a result of our IPO. Additionally, in 2021 the Company issued restricted stock units with performance-based vesting conditions in relation to the acquisition of BitDam, for which stock-based compensation expense ~~was~~is recorded ~~based on the expected achievement of the performance targets~~.

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Condensed Consolidated Results of Operations

The following table sets forth our condensed consolidated statements of operations data for the periods indicated:

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

2021

2020

2021

2020

2022

2021

~~(in thousands)~~

(in thousands)

Revenue:

Subscription

~~146,764~~

~~122,753~~

~~424~~160,~~097~~513

~~356~~135,~~348~~590

Device

~~10,242~~

~~6,964~~

279,~~652~~516

218,~~098~~385

Professional services and other

~~886~~

~~950~~

~~2,654~~752

~~2,347~~934

Total revenue

~~157,892~~

~~130,667~~

~~454~~170,~~403~~781

~~379~~144,~~793~~909

Cost of revenue:

Subscription (1)

~~22,776~~

~~18,915~~

6525,~~344~~660

6020,~~786~~930

Device (1)

~~12,930~~

~~10,089~~

3312,~~552~~608

269,~~464~~498

Professional services and other (1)

~~1,470~~

~~1,332~~

41,~~521~~783

41,~~399~~502

Depreciation and amortization

~~8,572~~

~~5,526~~

239,~~795~~399

156,~~746~~625

Total cost of revenue

~~45,748~~

~~35,862~~

~~127~~49,~~212~~450

~~107~~38,~~395~~555

Gross profit

~~112,144~~

~~94,805~~

~~327~~121,~~191~~331

~~272~~106,~~398~~354

Operating expenses:

Sales and marketing (1)

~~35,173~~

~~24,709~~

9939,~~234~~862

8331,~~828~~926

Research and development (1)

~~26,872~~

~~15,257~~

7633,~~690~~582

4822,~~000~~474

General and administrative (1)

~~27,802~~

~~17,433~~

7832,~~908~~569

5924,~~389~~621

Depreciation and amortization

~~6,531~~

~~6,820~~

197,~~554~~269

206,~~600~~570

Total operating expenses

~~96,378~~

~~64,219~~

~~274~~113,~~386~~282

~~211~~85,~~817~~591

Income from operations

~~15,766~~

~~30,586~~

528,~~805~~049

6020,~~581~~763

Other expense:

Other (income) expense:

Interest expense

~~156~~

~~7,065~~

~~433~~122

~~23,590~~102

Other expense (income), net

338

(987)

224

(1,402)

Other income, net

(672)

(19)

Total other expense

494

6,078

657

22,188

Total other (income) expense

(550)

Income before income taxes

~~15,272~~

~~24,508~~

528,~~148~~599

3820,~~393~~680

Provision for income taxes

~~(1,787)~~

~~(4,962)~~

(~~6,461~~652)

(85,~~727~~394)

Net income

~~13,485~~

~~19,546~~

457,~~687~~947

2915,~~666~~286

(1)Includes stock-based compensation expense as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
	(in thousands)
Cost of revenue—subscription	$	1,052	$	77	$	3,165	$	118
Cost of revenue—device	43		—		150		—
Cost of revenue—professional services and other	(15)		—		151		—
Sales and marketing	2,354		524		6,491		1,803
Research and development	5,325		494		17,257		1,115
General and administrative	2,844		1,694		8,141		3,525
Total	$	11,603	$	2,789	$	35,355	$	6,561

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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 September 30,				Nine Months Ended September 30,
			Three Months Ended March 31,
	2021		2020		2021		2020
					2022		2021
Revenue:
Subscription	~~93.0~~	%	~~94.0~~	%	9394.30	%	93.86	%
Device	~~6.4~~	%	~~5.3~~	%	65.16	%	5.68	%
Professional services and other	~~0.6~~	%	~~0.7~~	%	0.64	%	0.6	%
Total revenue	~~100.0~~	%	~~100.0~~	%	100.0	%	100.0	%
Cost of revenue:
Subscription	~~14.4~~	%	~~14.5~~	%	1415.40	%	1614.04	%
Device	~~8.2~~	%	~~7.7~~	%	7.4	%	76.06	%
Professional services and other	~~0.9~~	%	~~1.0~~	%	1.0	%	1.20	%
Depreciation and amortization	~~5.4~~	%	~~4.2~~	%	5.25	%	4.16	%
Total cost of revenue	~~29.0~~	%	~~27.4~~	%	2829.0	%	2826.36	%
Gross profit	~~71.0~~	%	~~72.6~~	%	7271.0	%	7173.74	%
Operating expenses:
Sales and marketing	~~22.3~~	%	~~18.9~~	%	2123.83	%	22.10	%
Research and development	~~17.0~~	%	~~11.7~~	%	1619.97	%	1215.65	%
General and administrative	~~17.6~~	%	~~13.3~~	%	1719.41	%	1517.60	%
Depreciation and amortization	~~4.1~~	%	~~5.2~~	%	4.3	%	5.4.5	%
Total operating expenses	~~61.0~~	%	~~49.1~~	%	6066.43	%	5559.81	%
Income from operations	~~9.9~~	%	~~23.4~~	%	114.67	%	1614.03	%
Other expense:
Other (income) expense:
Interest expense	~~0.1~~	%	~~5.4~~	%	0.1	%	60.21	%
Other expense (income), net	0.2	%	(0.8)	%	—	%	(0.4)	%
Other income, net					(0.4)	%	—	%
Total other expense	0.3	%	4.7	%	0.1	%	5.8	%
Total other (income) expense					(0.3)	%	0.1	%
Income before income taxes	~~9.7~~	%	~~18.8~~	%	~~11.~~5.0	%	1014.13	%
Provision for income taxes	~~(1.1)~~	%	~~(3.8)~~	%	(10.4)	%	(2.3.7)	%
Net income	~~8.5~~	%	~~15.0~~	%	104.17	%	710.85	%

~~Comparison of the Three and Nine Months Ended September 30, 2021 and 2020~~28

Revenue

	Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change
	2021		2020		$		%		2021		2020		$		%
	(dollars in thousands)
Revenue:
Subscription	$	146,764	$	122,753	$	24,011	19.6	%	$	424,097	$	356,348	$	67,749	19.0	%
Device	10,242		6,964		3,278		47.1	%	27,652		21,098		6,554		31.1	%
Professional services and other	886		950		(64)		(6.7)	%	2,654		2,347		307		13.1	%
Total revenue	$	157,892	$	130,667	$	27,225	20.8	%	$	454,403	$	379,793	$	74,610	19.6	%

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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 $24.09 million, or 1918.64%, for the three months ended ~~September~~March 3031, ~~2021~~2022 compared to the three months ended ~~September~~March 3031, ~~2020,~~2021. ~~including~~The aincrease ~~benefit~~was ~~from~~partially ~~favorable~~offset by an unfavorable foreign exchange ~~rates~~rate impact of approximately 1.53%. The increase in subscription revenue was ~~primarily~~ driven by ~~increased~~growth ~~sales~~across of our ~~Unified Continuity cloud-based~~ offerings, asincluding ~~well~~our asUnified ~~increases~~Continuity, inEndpoint ~~our~~Management and Business Management cloud-based offerings. Recurring subscription revenue accounted for 9394.0% of total revenue for the three months ended ~~September~~March 3031, ~~2021~~2022 compared to 9493.06% for the three months ended ~~September~~March 3031, ~~2020~~2021.

Subscription revenue increased $67.7 million, or 19.0%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, including a benefit from favorable foreign exchange rates of approximately 2.7%. The increase in subscription revenue was primarily driven by increased sales of our Unified Continuity cloud-based offerings, as well as increases in Business Management offerings. Recurring subscription revenue accounted for 93.3% of total revenue for the nine months ended September 30, 2021 compared to 93.8% for the nine months ended September 30, 2020.

Device

Device revenue increased $31.31 million, or 4713.15%, for the three months ended ~~September~~March 3031, ~~2021~~2022 compared to the three months ended ~~September~~March 3031, ~~2020~~2021.

Device revenue increased $6.6 million, or 31.1%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

Professional services and other

Professional services and other revenue decreased $0.12 million for the three months ended ~~September~~March 3031, ~~2021~~2022 compared to the three months ended ~~September~~March 3031, ~~2020~~2021.

Professional services and other revenue increased $0.3 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

Cost of Revenue

	Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change
					Three Months Ended March 31,				Change
	2021		2020		$		%		2021		2020		$		%
									2022		2021		$		%
	~~(dollars in thousands)~~								(dollars in thousands)
Cost of revenue:
Subscription	$	~~22,776~~	$	~~18,915~~	$	~~3,861~~	~~20.4~~	%	$	6525,~~344~~660	$	6020,~~786~~930	$	4,~~558~~730	722.56	%
Device	~~12,930~~		~~10,089~~		~~2,841~~		~~28.2~~	%	3312,~~552~~608		269,~~464~~498		73,~~088~~110		2632.87	%
Professional services and other	~~1,470~~		~~1,332~~		~~138~~		~~10.4~~	%	41,~~521~~783		41,~~399~~502		~~122~~281		218.87	%
Depreciation and amortization	~~8,572~~		~~5,526~~		~~3,046~~		~~55.1~~	%	239,~~795~~399		156,~~746~~625		82,~~049~~774		5141.19	%
Total cost of revenue	$	~~45,748~~	$	~~35,862~~	$	~~9,886~~	~~27.6~~	%	$	~~127~~49,~~212~~450	$	~~107~~38,~~395~~555	$	1910,~~817~~895	1828.53	%

Subscription

Subscription cost of revenue for the three months ended ~~September~~March 3031, ~~2021~~2022 increased $34.97 million, or 2022.46%, compared to the three months ended ~~September~~March 3031, ~~2020~~2021. The increase was primarily driven by anadditional ~~increase in personnel~~ costs to support the growth ~~in revenue, including an increase in stock-based compensation expense~~ of ~~$1.0~~our ~~million~~subscription ~~for~~offerings, ~~the~~including ~~three~~increased ~~months~~personnel ~~ended~~costs ~~September 30, 2021,~~ 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.

Subscription cost of revenue for the nine months ended September 30, 2021 increased $4.6 million, or 7.5%, compared to the nine months ended September 30, 2020. The increase was primarily driven by an increase in stock-based compensation expense of $3.0 million and other increased personnel costs to support the growth in revenue for the nine months ended

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September 30, 2021. During the nine months ended September 30, 2020, we recorded $0.5 million of restructuring costs related to our reduction in workforce in subscription cost of revenue.

Device

Device cost of revenue increased $2.8 million, or 28.2%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020, driven by the 47.1% increase in device revenue.29

~~Device~~Table ~~cost~~ of revenue increased $7.1 million, or 26.8%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, driven by the 31.1% increase in device revenue, and the impact of stock-based compensation expense of $0.2 million for the nine months ended September 30, 2021.Contents

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 $0.13 million for the three months ended ~~September~~March 3031, ~~2021~~2022 compared to the three months ended ~~September~~March 3031, ~~2020~~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.

Professional services and other cost of revenue increased $0.1 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The nine months ended September 30, 2021 included stock-based compensation expense of $0.2 million. During the nine months ended September 30, 2020, we recorded $0.1 million of restructuring costs related to our reduction in workforce in professional services and other cost of revenue.

Depreciation and amortization

Depreciation and amortization expense in cost of revenue increased $32.0 8 million for the three months ended ~~September~~March 3031, ~~2021~~2022 compared to the three months ended ~~September~~March 3031, ~~2020,~~2021. ~~and~~The ~~increased~~increase ~~$8.0 million~~reflects ~~for~~ the ~~nine~~increase ~~months~~in ~~ended~~amortization ~~September~~of 30acquired intangible assets in 2022 as a result of recent acquisitions, ~~2021~~including ~~compared~~the toBitDam acquisition in March 2021 and the ~~nine~~Infocyte ~~months~~acquisition ~~ended~~in ~~September~~January 302022, ~~2020.~~as ~~The~~well ~~increases~~as ~~were~~higher ~~attributable~~depreciation toexpense ~~ongoing~~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 ~~the~~$5.3 ~~increase~~million in the three months ended March 31, 2022 and 2021, respectively, and amortization of ~~acquired~~ intangible assets aswas a$3.1 ~~result~~million ofand ~~recent~~$1.3 ~~acquisitions~~million in the three months ended March 31, 2022 and 2021, respectively.

Gross Profit and Gross Margin

	Three Months Ended September 30,						Change				Nine Months Ended September 30,						Change
							Three Months Ended March 31,				Change
	2021			2020			$		%		2021			2020			$		%
											2022			2021			$		%
	~~(dollars in thousands)~~										(dollars in thousands)
Gross profit:
Subscription	$	~~123,988~~		$	~~103,838~~		$	~~20,150~~	~~19.4~~	%	$	~~358~~134,~~753~~853		$	~~295~~114,~~562~~660		$	6320,~~191~~193	2117.46	%
Device	~~(2,688)~~			~~(3,125)~~			~~437~~		~~(14.0)~~	%	(53,~~900~~092)			(51,~~366~~113)			(~~534~~1,979)		10177.08	%
Professional services and other	~~(584)~~			~~(382)~~			~~(202)~~		~~52.9~~	%	(1,~~867~~031)			(~~2,052~~568)			~~185~~(463)		(981.0)5	%
Depreciation and amortization	~~(8,572)~~			~~(5,526)~~			~~(3,046)~~		~~55.1~~	%	(239,~~795~~399)			(156,~~746~~625)			(82,~~049~~774)		5141.19	%
Total gross profit	$	~~112,144~~		$	~~94,805~~		$	~~17,339~~	~~18.3~~	%	$	~~327~~121,~~191~~331		$	~~272~~106,~~398~~354		$	5414,~~793~~977	2014.1	%
Gross margin:
Subscription	~~84.5~~		%	~~84.6~~		%	~~(11)~~		~~bps~~		84.60		%	8284.96		%	~~165~~(55)		bps
Device	~~(26.2)~~		%	~~(44.9)~~		%	~~1,863~~		~~bps~~		(2132.35)		%	(2513.43)		%	~~410~~(1,922)		bps
Professional services and other	~~(65.9)~~		%	~~(40.2)~~		%	~~(2,570)~~		~~bps~~		(70137.31)		%	(8760.48)		%	1(7,~~708~~629)		bps
Total gross margin	~~71.0~~		%	~~72.6~~		%	~~(153)~~		~~bps~~		7271.0		%	7173.74		%	28(235)		bps

Gross profit increased $1715.3 0 million, or 1814.31%, ~~for~~driven by the ~~three~~increase ~~months~~in ~~ended~~subscription ~~September~~gross ~~30,~~profit ~~2021~~as ~~compared~~a toresult of the ~~three~~increase ~~months~~in ~~ended~~subscription ~~September 30~~revenue, ~~2020,~~partially ~~driven~~offset by ~~the~~a ~~increase~~decrease in ~~subscription~~ gross profit, ~~partially~~from ~~offset~~increased depreciation and amortization, driven by the ~~increase~~impact inof ~~depreciation~~increased amortization of acquired intangible assets resulting from recent acquisitions, and ~~amortization~~increased negative gross profit of device and professional services and other. Gross margin decreased by ~~153~~235 basis points for the three months ended ~~September~~March 3031, ~~2021~~2022 compared to the three months ended ~~September~~March 3031, ~~2020~~2021, ~~primarily~~driven ~~because~~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 ~~acquired~~our ~~intangible~~subscription ~~assets~~offerings, ~~resulting~~including ~~from~~increased ~~recent~~personnel ~~acquisitions~~costs and higher ~~depreciation~~service ~~expense~~costs ~~resulting~~to ~~from~~support the growth of our ~~ongoing~~Datto ~~investment~~Cloud, inincluding costs related to the launch of our ~~Datto~~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.

3530

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Cloud infrastructure, as well as an increase in stock-based compensation expense of $1.0 million. Subscription gross margin declined slightly for the three months ended September 30, 2021 compared to the three months ended September 30, 2020, as higher stock-based compensation expense of $1.0 million and higher costs related to the launch of our new SaaS Defense solution were partially offset by the continued realization of operating efficiencies in providing our other Unified Continuity solutions.

Gross profit increased $54.8 million, or 20.1%, and gross margin increased by 28 basis points for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, driven by the increase in subscription gross profit and gross margin. The increase was partially offset by higher depreciation and amortization expense, primarily as a result of our investment in our Datto Cloud infrastructure and the amortization of acquired intangible assets, and an increase in personnel costs, including an increase in stock-based compensation expense of $3.3 million. Subscription gross margin increased 165 basis points for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 as a result of our revenue growth out pacing the increased costs to provide our Unified Continuity solutions, partially offset by an increase in personnel costs, including an increase in stock-based compensation expense of $3.0 million as well as higher costs related to the launch of our new SaaS Defense solution. During the nine months ended September 30, 2020, we recorded $0.6 million of restructuring costs related to our reduction in workforce, including $0.5 million in subscription cost of revenue and $0.1 million in professional services and other cost of revenue.

Operating Expenses

	Three Months Ended September 30,				Change				Nine Months Ended September 30,				Change
					Three Months Ended March 31,				Change
	2021		2020		$		%		2021		2020		$		%
									2022		2021		$		%
	~~(dollars in thousands)~~								(dollars in thousands)
Operating expenses:
Sales and marketing	$	~~35,173~~	$	~~24,709~~	$	~~10,464~~	~~42.3~~	%	$	9939,~~234~~862	$	8331,~~828~~926	$	157,~~406~~936	1824.49	%
Research and development	~~26,872~~		~~15,257~~		~~11,615~~		~~76.1~~	%	7633,~~690~~582		4822,~~000~~474		2811,~~690~~108		5949.84	%
General and administrative	~~27,802~~		~~17,433~~		~~10,369~~		~~59.5~~	%	7832,~~908~~569		5924,~~389~~621		197,~~519~~948		32.93	%
Depreciation and amortization	~~6,531~~		~~6,820~~		~~(289)~~		~~(4.2)~~	%	197,~~554~~269		206,~~600~~570		~~(1,046)~~699		(510.1)6	%
Total operating expenses	$	~~96,378~~	$	~~64,219~~	$	~~32,159~~	~~50.1~~	%	$	~~274~~113,~~386~~282	$	~~211~~85,~~817~~591	$	6227,~~569~~691	2932.54	%

	Three Months Ended September 30,				Nine Months Ended September 30,
			Three Months Ended March 31,
	2021		2020		2021		2020
					2022		2021
As a percentage of total revenue:
Sales and marketing	~~22.3~~	%	~~18.9~~	%	2123.83	%	22.10	%
Research and development	~~17.0~~	%	~~11.7~~	%	1619.97	%	1215.65	%
General and administrative	~~17.6~~	%	~~13.3~~	%	1719.41	%	1517.60	%

Sales and marketing

Sales and marketing expense increased $107.59 million, or 4224.39% for the three months ended ~~September~~March 3031, ~~2021~~2022 compared to the three months ended ~~September~~March 3031, ~~2020~~2021, ~~reflecting~~primarily driven by increased personnel costs to support the growth in our business, including higher commission expense and increased stock-based compensation expense of $10.83 million ~~and higher commission expense~~. In addition, marketing and promotional costs increased during 2021 as compared to 2020, as we increased our marketing efforts in support of our launch of DCMA and SaaS Defense and our other Unified Continuity solutions, as well as the impact of curtailing certain programs in 2020 as a result of the COVID-19 pandemic. Sales and marketing expense included $2.4 6 million and $02.53 million of stock-based compensation expense for the three months ended ~~September~~March 3031, ~~2021~~2022 and ~~2020~~2021, respectively.

Sales and marketing expense increased $15.4 million, or 18.4% for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, primarily driven by increased personnel costs to support the growth in our business, including increased stock-based compensation expense of $4.7 million and higher commission expense, partially offset by lower restructuring costs. Marketing and promotional costs also increased during 2021 as compared to 2020, as we

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increased our marketing efforts in support of our launch of DCMA and SaaS Defense and our other Unified Continuity solutions, as well as the impact of curtailing certain programs in 2020 as a result of the COVID-19 pandemic. The increases in sales and marketing expense were partially offset by lower travel and event costs resulting from the COVID-19 pandemic. Sales and marketing expense included $6.5 million and $1.8 million of stock-based compensation expense for the nine months ended September 30, 2021 and 2020, respectively. During the nine months ended September 30, 2020, we recorded $1.9 million of restructuring costs related to our reduction in workforce in sales and marketing expense.

Research and development

Research and development expense increased $11.6 1 million, or 7649.14%, for the three months ended ~~September~~March 3031, ~~2021~~2022 compared to the three months ended ~~September~~March 3031, ~~2020~~2021, primarily driven by increased personnel costs, ~~including~~reflecting our continued investment in innovation and information security and an increase in stock-based compensation expense of $41.83 million~~, and our continued investment in innovation and information security~~. Research and development expense included $56.3 2 million and $04.59 million of stock-based compensation expense for the three months ended ~~September~~March 3031, ~~2021~~2022 and ~~2020~~2021, respectively.

Research and development expense increased $28.7 million, or 59.8%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, primarily driven by increased personnel costs, including an increase in stock-based compensation expense of $16.1 million, and our continued investment in innovation and information security. Research and development expense included $17.3 million and $1.1 million of stock-based compensation expense for the nine months ended September 30, 2021 and 2020, respectively. During the nine months ended September 30, 2020, we recorded $0.9 million of restructuring costs related to our reduction in workforce in research and development expense.

General and administrative

General and administrative expense increased $107.4 9 million, or 5932.53%, for the three months ended ~~September~~March 3031, ~~2021~~2022 compared to the three months ended ~~September~~March 3031, ~~2020~~2021, driven primarily by increased personnel costs, ~~including~~and anincreased ~~increase~~transaction inrelated ~~stock-based~~and ~~compensation~~other expense of $10.2 8 million, aspartially ~~well~~offset asby ~~increased~~a ~~expenses~~$0.7 ~~related~~million toreduction ~~being~~in aprovision ~~publicly~~for ~~listed~~expected ~~company~~credit ~~and~~losses ~~transaction~~expense ~~related~~as ~~and~~a ~~other~~result ~~expense~~of improved collections activity. General and administrative expense included $2.8 7 million and $12.79 million of stock-based compensation expense for the three months ended ~~September~~March 3031, ~~2021~~2022 and ~~2020~~2021, respectively, and $12.32 million and $0.1 .4 million of transaction related and other expense for the three months ended ~~September~~March 3031, ~~2021~~2022 and ~~2020~~2021, respectively.

General and administrative expense increased $19.5 million, or 32.9%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, driven primarily by increased personnel costs, including an increase in stock-based compensation expense of $4.6 million, increased expenses related to being a publicly listed company and transaction related and other expense. Partially offsetting these increases were a $2.2 million reduction in bad debt expense as a result of improved collections activity, and decreased travel and events costs resulting from the COVID-19 pandemic. General and administrative expense included $8.1 million and $3.5 million of stock-based compensation expense for the nine months ended September 30, 2021 and 2020, respectively, and $4.1 million and $2.3 million of transaction related and other expense for the nine months ended September 30, 2021 and 2020, respectively.

During the nine months ended September 30, 2020, we recorded $0.4 million of restructuring costs related to our reduction in workforce in general and administrative expense.

Depreciation and amortization

Depreciation and amortization expense related to operating expenses ~~decreased~~increased $0.3 7 million, or 410.26%, for the three months ended ~~September~~March 3031, ~~2021~~2022 compared to the three months ended ~~September~~March 3031, ~~2020~~2021. Amortization of intangible assets was $4.47 million inand ~~both~~$4.4 million for the three months ended ~~September~~March 3031, ~~2021~~2022 and ~~2020~~2021, respectively, reflecting the impact of the Infocyte acquisition, and depreciation expense was $2.16 million and $2.42 million for the three months ended ~~September~~March 3031, ~~2021~~2022 and ~~2020~~2021, respectively.

Depreciation and amortization expense related to operating expenses decreased $1.0 million, or 5.1%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. Amortization of intangible assets was $13.3 million and $13.2 million for the nine months ended September 30, 2021 and 2020, respectively, and depreciation expense was $6.3 million and $7.4 million for the nine months ended September 30, 2021 and 2020, respectively.31

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Other Expenses (Income), Net and Provision for Income Taxes

Interest expense

Interest expense ~~decreased~~was ~~$6.9~~unchanged, ~~million~~at ~~and~~ $230.2 1 million, ~~respectively,~~ for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2021~~2022 ~~compared to the three~~ and ~~nine months ended September 30, 2020 as a result of the repayment of all outstanding debt with the proceeds from our IPO in the fourth quarter of 2020~~2021. ~~In conjunction with the IPO, we terminated our 2019 Credit Agreement and entered into the 2020 Credit Agreement.~~ No amounts have been drawn under the 2020 Credit Agreement and we have no outstanding debt as of ~~September~~March 3031, ~~2021~~2022.

Other expense (income), net

Other ~~expense~~income, net increased $10.3 7 million for the three months ended ~~September~~March 3031, ~~2021~~2022 compared to the three months ended ~~September~~March 3031, ~~2020, and $1.6 million for the nine months ended September 30,~~ 2021 ~~compared to the nine months ended September 30~~, ~~2020,~~ 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 $10.87 million and $5.04 million for the three months ended ~~September~~March 3031, ~~2021~~2022 and ~~2020~~2021, respectively. The effective tax rate for the three months ended ~~September~~March 3031, ~~2021~~2022 was ~~11.~~7.6%, ~~driven~~reflecting by the ~~tax~~favorable ~~benefit~~impact ~~related~~of ~~to employee stock option exercises. We incurred a provision for income~~ taxes ofin ~~$6.5~~certain ~~million~~foreign ~~and~~jurisdictions, ~~$8.7~~including ~~million for~~ the ~~nine~~benefit ~~months~~of ~~ended September 30, 2021 and 2020, respectively. The effective tax rate for~~ the ~~nine~~release ~~months~~of ~~ended~~valuation ~~September 30~~allowances, ~~2021~~a ~~was 12.4%, reflecting the~~ favorable impact of aU.S. ~~change in tax law in the~~ state ofincome ~~Connecticut~~taxes resulting infrom ~~the~~a ~~ability~~change ~~to utilize additional research and development credits generated~~ in ~~prior~~tax ~~years~~law, and the tax benefit related to employee stock option exercises~~, and the favorable impact of an amendment to the 2018 federal tax return as a result of clarification of certain tax guidance~~.

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.

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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:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
	(in thousands)
Gross profit	$	112,144	$	94,805	$	327,191	$	272,398
Amortization of acquired intangible assets	2,702		1,175		6,714		3,525
Stock-based compensation expense	1,080		77		3,466		118
Restructuring expense(1)	—		—		—		601
Non-GAAP Gross Profit	$	115,926	$	96,057	$	337,371	$	276,642

~~(1) Restructuring~~Table ~~expense primarily relates to severance costs incurred in connection with a reduction in workforce undertaken in Q2 2020 to align our cost structure to expectations~~ of ~~potentially reduced revenue resulting from the COVID-19 pandemic. Approximately $0.6 million of restructuring expense was recorded within cost of revenue for the nine months ended September 30, 2020.~~Contents


	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 September 30,				Nine Months Ended September 30,
			Three Months Ended March 31,
	2021		2020		2021		2020
					2022		2021
	~~(in thousands)~~				(in thousands)
Income from operations	$	~~15,766~~	$	~~30,586~~	$	528,~~805~~049	$	6020,~~581~~763
Amortization of acquired intangible assets	~~7,124~~		~~5,577~~		197,~~981~~806		165,~~731~~734
Stock-based compensation expense	~~11,603~~		~~2,789~~		3512,~~355~~613		611,~~561~~511
Restructuring expense(1)	—		(15)		—		3,835
Transaction related and other expense (1)					2,210		1,439
Transaction related and other expense (2)	1,338		95		4,137		2,329
Non-GAAP Income from Operations					$	30,678	$	39,447
Non-GAAP Income from Operations	$	35,831	$	39,032	$	112,278	$	90,037

(1)~~Restructuring~~Transaction ~~expense~~related ~~primarily~~and ~~relates~~other toexpense ~~severance~~consists ~~costs~~of ~~incurred~~merger inand ~~connection~~acquisition ~~with~~related acosts ~~reduction~~and inother ~~workforce~~unusual ~~undertaken~~charges infor Q2the ~~2020~~three tomonths ~~align~~ended ~~our~~March 31, ~~cost~~2022 ~~structure~~and ~~to expectations of potentially reduced revenue resulting from the COVID-19~~ 2021.

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pandemic. Approximately $3.2 million and $0.6 million of restructuring expense was recorded within operating expenses and cost of revenue, respectively, for the nine months ended September 30, 2020.

(2)Transaction related and other expense consists of acquisition related costs and litigation related charges or benefits for the three and nine months ended September 30, 2021 as well as costs incurred in the three and nine months ended September 30, 2020 to support our public company readiness, acquisition related costs, and costs related to a decision to discontinue development of a back-office system.

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 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:~~33

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
	(in thousands)
Net income	$	13,485	$	19,546	$	45,687	$	29,666
Provision for income taxes	1,787		4,962		6,461		8,727
Income before income taxes	15,272		24,508		52,148		38,393
Amortization of acquired intangible assets	7,124		5,577		19,981		16,731
Stock-based compensation expense	11,603		2,789		35,355		6,561
Restructuring expense(1)	—		(15)		—		3,835
Transaction related and other expense (2)	1,338		95		4,137		2,329
Non-GAAP provision for income taxes (3)	(8,834)		(8,239)		(27,905)		(16,963)
Non-GAAP Net Income	$	26,503	$	24,715	$	83,716	$	50,886

(1)Restructuring expense primarily relates to severance costs incurred in connection with a reduction in workforce undertaken in Q2 2020 to align our cost structure to expectations of potentially reduced revenue resulting from the COVID-19 pandemic. Approximately $3.2 million and $0.6 million of restructuring expense was recorded within operating expenses and cost of revenue, respectively, for the nine months ended September 30, 2020.

(3)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.

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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) ~~benefit from~~ 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:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
	(in thousands)
Net income	$	13,485	$	19,546	$	45,687	$	29,666
Interest and other expense, net(1)	494		6,078		657		22,188
Depreciation and amortization	15,103		12,346		43,349		36,346
Provision for income taxes	1,787		4,962		6,461		8,727
Stock-based compensation expense	11,603		2,789		35,355		6,561
Restructuring expense(2)	—		(15)		—		3,835
Transaction related and other expense(3)	1,338		95		4,137		2,329
Adjusted EBITDA	$	43,810	$	45,801	$	135,646	$	109,652

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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)~~Restructuring~~Transaction ~~expense~~related ~~primarily~~and ~~relates~~other toexpense ~~severance~~consists ~~costs incurred in connection with a reduction in workforce undertaken in Q2 2020 to align our cost structure to expectations~~ of ~~potentially~~merger ~~reduced revenue resulting from the COVID-19 pandemic. Approximately $3.2 million~~ and ~~$0.6~~acquisition ~~million~~related ofcosts ~~restructuring expense was recorded within operating expenses~~ and ~~cost~~other ofunusual ~~revenue,~~charges ~~respectively,~~ for the ~~nine~~three months ended ~~September~~March 3031, ~~2020~~2022 and 2021.

(3)Transaction related and other expense consists of acquisition related costs and litigation related charges or benefits for the three and nine months ended September 30, 2021 as well as costs incurred in the three and nine months ended September 30, 2020 to support our public company readiness, acquisition related costs, and costs related to a decision to discontinue development of a back-office system.

Liquidity and Capital Resources

General

As of ~~September~~March 3031, ~~2021~~2022, our principal source of liquidity was cash and cash equivalents and restricted cash totaling $~~207~~192.28 million, $3040.3 million of which was denominated in foreign currencies. In addition, as of ~~September~~March 3031, ~~2021~~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"). ~~During~~The ~~2020,~~COVID-19 inpandemic ~~response~~caused toa ~~the~~reduction ~~spread~~ of ~~COVID-19~~marketing, event and ~~its~~travel ~~impacts~~costs, onas ~~the~~many ~~world~~events ~~economy,~~were weheld ~~undertook~~virtually ~~various~~and ~~measures~~travel towas ~~improve~~limited, ~~our~~although ~~liquidity~~we ~~position~~did ~~and~~begin ~~match~~to ~~our~~experience ~~cost~~more ~~structure~~normalized tospending ~~our~~levels ~~revenue~~over ~~and~~the ~~cash~~course ~~generation~~of ~~activities,~~2021 and weinto ~~continue~~the tofirst ~~benefit~~quarter ~~from~~of ~~these measures~~2022. In ~~addition,~~ the ~~COVID-19~~future ~~pandemic~~we ~~continues~~will continue to ~~cause~~invest ain ~~reduction~~our oforganization ~~marketing,~~and ~~event~~infrastructure and ~~travel~~expect ~~costs,~~to ~~such~~resume ashosting ~~costs for~~ our ~~annual sales kick~~world-~~off,~~class ~~which~~partner ~~was~~events ~~held virtually~~ in-person ~~the~~when ~~first~~it ~~quarter~~is ofsafe ~~2021.~~to Indo ~~the~~so, ~~future~~as we ~~will~~grow ~~continue~~and toinnovate ~~invest~~along inwith our ~~organization~~MSP ~~and~~ partners.

41Our 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.

~~Table~~Beginning in 2022, the Tax Cuts and Jobs Act of ~~Contents~~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.

infrastructure and will 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 but not limited to, our subscription revenue growth rate and the need to invest in our Datto Cloud infrastructure to support such 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.

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

~~Our~~The ~~2020~~Company ~~Credit~~has ~~Agreement~~a ~~provides for an initial~~ $200.0 million ~~in commitments for~~ revolving credit ~~loans,~~loan ~~which may be increased or decreased under specific circumstances, with a $40.0 million letter of credit sublimit and a $100.0 million alternative currency sublimit~~ (the “2020 Revolving Credit Facility”). Inunder ~~addition,~~its ~~the~~ 2020 Credit Agreement ~~provides for the ability to request incremental term loan facilities~~. ~~Borrowings~~As ~~pursuant~~of toMarch 31, ~~the 2020 Credit Agreement may be used for working capital and other general corporate purposes~~2022, ~~including for acquisitions permitted under~~ the 2020 ~~Credit~~Revolving ~~Agreement. Borrowings under the 2020~~ Credit ~~Agreement~~Facility ~~are~~was ~~scheduled~~undrawn towith ~~mature~~the onexception ~~October~~of ~~23, 2025~~$1.9 ~~The~~million ~~2020~~of ~~Credit~~capacity ~~Agreement~~which ~~contains~~was ~~certain~~being ~~customary~~used ~~representations~~to ~~and~~backstop ~~warranties,~~outstanding ~~covenants~~letters ~~and~~of ~~restrictions~~credit.

The 2020 Revolving Credit Facility was undrawn as of September 30, 2021, 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.

	Nine Months Ended September 30,
	Three Months Ended March 31,
	2021		2020
	2022		2021
	(in thousands)
Net cash provided by operating activities	$	9915,~~109~~070	$	7435,~~055~~167
Net cash used in investing activities	(7754,~~656~~032)		(3256,~~890~~167)
Net cash provided by financing activities	16,082		29,099
Net cash provided by (used in) financing activities	9,472		(265)

Operating Activities

For the ~~nine~~three months ended ~~September~~March 3031, ~~2021~~2022, net cash provided by operating activities was $9915.1 million, which resulted from net income of $~~45.~~7.9 million, adjusted for non-cash charges of $9129.32 million and net cash outflow of $3722.91 million

from changes in operating assets and liabilities. Non-cash charges primarily consisted of depreciation and amortization expense of $4316.37 million, stock-based compensation expense of $3512.46 million, non-cash operating lease expense of $51.39 million, provision ~~deferred~~for ~~income~~expected ~~tax~~credit ~~expense~~losses of $40.75 million ~~and~~partially ~~provision~~offset ~~for~~by ~~bad~~a ~~debt~~deferred income tax benefit of $2.6 million. The net cash outflow from changes in operating assets and liabilities ~~was~~resulted ~~primarily~~from ~~driven by~~ an increase in inventory of $189.04 million, asprimarily ~~we have increased purchases~~ to ~~guard~~support ~~against~~our ~~possible~~SIRIS ~~supply~~5 ~~chain~~launch. ~~disruptions resulting from the COVID-19 pandemic~~Additionally, anprepaid ~~increase~~expenses inand other current assets ofincreased $165.7 0 million, ~~driven~~resulting byfrom ~~deferred~~the ~~contract~~timing ~~acquisition~~of ~~costs, an~~payments ~~increase~~on inSaaS ~~prepaid~~arrangements ~~expenses~~ and ~~other~~increased ~~current~~contract assets, ofother assets increased $54.5 3 million, ~~partially~~driven ~~offset~~ by andeferred ~~increase~~contract inacquisition costs, and accounts payable, accrued expenses and other ofdecreased $2.92 million primarily resulting from the timing of payments, including the timing impact of annual bonus payments.

For the ~~nine~~three months ended ~~September~~March 3031, ~~2020~~2021, net cash provided by operating activities was $7435.12 million, which resulted from net income of $2915.73 million, adjusted for non-cash charges of $5732.40 million and net cash outflow of $1312.01 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.

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of $36.3 million, deferred income taxes of $7.6 million, stock-based compensation expense of $6.6 million and provision for bad debt of $4.8 million. The net cash outflow from changes in operating assets and liabilities was primarily driven by an increase in other assets of $8.4 million driven by deferred contract acquisition costs and an increase in inventory of $6.3 million, as we have increased purchases to guard against possible supply chain disruptions resulting from the COVID-19 pandemic. We elected to defer payment of our obligation for social security tax for the remainder of 2020 as provided in the CARES Act, resulting in a reduction in cash outflows of $4.1 million during the nine months ended September 30, 2020.

Investing Activities

Cash used in investing activities was $7754.70 million during the ~~nine~~three months ended ~~September~~March 3031, ~~2021~~2022, including $4543.5 million, net of cash acquired, for the acquisition of ~~BitDam Ltd.~~Infocyte, and capital expenditures of $3210.25 million, primarily related to ~~our~~ 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 $3256.92 million during the ~~nine~~three months ended ~~September~~March 3031, ~~2020~~2021, including $2845.5 million, net of cash acquired, for the acquisition of BitDam Ltd., and capital expenditures of $10.7 million, primarily related to ~~our~~ investment in servers for our Datto Cloud infrastructure to support our overall subscription growth. Inas ~~addition,~~well weas ~~incurred~~investments ~~expenses~~in ~~for~~the ~~leasehold~~development ~~improvements~~of ~~and~~our ~~furniture~~cloud-based ~~and~~platforms ~~fixtures~~ to ~~expand~~serve ~~and update certain offices and purchased computer equipment to support~~ our ~~increased workforce~~partners. ~~In July 2020, we paid $4.4 million to acquire two affiliated Australian entities, Gluh Pty Ltd and Keystone Software Holdings Pty Ltd.~~

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Financing Activities

Cash provided by financing activities was $169.15 million during the ~~nine~~three months ended ~~September~~March 3031, ~~2021~~2022, reflecting ~~the~~ proceeds from stock option exercises of $166.82 million, ~~partially~~and ~~offset~~proceeds ~~by the payment~~ of ~~capitalized~~$3.3 ~~transaction~~million ~~costs~~from ~~related~~purchases tounder our ~~IPO~~employee ofstock ~~$0.7~~purchase ~~million~~plan.

Cash ~~provided~~used byin financing activities was $290.13 million during the ~~nine~~three months ended ~~September~~March 3031, ~~2020~~2021, reflecting ~~proceeds~~the ~~from~~payment ~~our~~of ~~Revolving~~IPO ~~Credit~~transaction ~~Facility~~related ofcosts, ~~$32.1~~partially ~~million~~offset ~~and~~by proceeds from stock option exercises of $20.52 million~~, partially offset by the scheduled amortization payments of our Term Loan Facility of $4~~.~~1 million and principal payments under various capital lease arrangements, as well as the payment of capitalized transaction costs related to our IPO of $1.0 million.~~

Contractual ~~Obligations and~~ 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 ~~2020~~2021 Annual Report on Form 10-K filed with the SEC on ~~March~~February 1123, ~~2021~~2022 we disclosed our total contractual ~~obligations~~commitments as of December 31, ~~2020~~2021. There have been no material changes to our contractual ~~obligations~~commitments since December 31, ~~2020~~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~~, including inflation as a result of the COVID-19 pandemic~~.

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 ~~indemnification~~demands ~~claims~~ have been made upon us to provide indemnification under such agreements and there are no ~~potential indemnification~~ claims that we are aware of that could have a material effect on our ~~condensed~~consolidated balance sheet, consolidated ~~financial~~statement ~~statements.~~of Inoperations ~~connection~~and ~~with~~comprehensive ~~the~~loss ~~IPO~~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.

~~Off-Balance~~Critical ~~Sheet~~Accounting ~~Arrangements~~Estimates

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We did not have any material off-balance sheet arrangements as of September 30, 2021.

JOBS Act

We currently qualify as an “emerging growth company” ("EGC") pursuant to the provisions of the JOBS Act. For as long as we are an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding shareholder advisory “say-on-pay” votes on executive compensation and shareholder advisory votes on golden parachute compensation.

The JOBS Act also permits an emerging growth company like us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to “opt-in” to this extended transition period for complying with new or revised accounting standards and, therefore, we will not be subject to the same new or revised accounting standards as other public companies that comply with such new or revised accounting standards on a non-delayed basis.

On June 30, 2021, the last day of our second fiscal quarter in 2021, the market value of our common equity held by non-affiliates exceeded $700 million. Accordingly, we will be deemed a large accelerated filer as of December 31, 2021, and will no longer qualify as an EGC with the ability to take advantage of the extended transition period to comply with new or revised accounting standards.

Critical Accounting Policies

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.

WeFor ~~adopted~~additional ~~the~~information ~~provisions~~about ofour ~~ASU~~critical ~~2016-02,~~accounting ~~Leases (Topic 842) as of January 1~~estimates, ~~2021,~~see ~~which requires~~ the ~~recording~~disclosures ofincluded ~~right~~in of“Management’s ~~use~~Discussion ~~assets~~ and ~~associated~~Analysis ~~lease~~of ~~liabilities.~~Financial ~~See~~Conditions ~~Note 2. Significant Accounting Policies~~ and ~~Note~~Results 6.of ~~Leases~~Operations—Critical toAccounting ~~our~~Estimates” ~~condensed consolidated financial statements~~ included in ~~Part~~the 1,2021 ~~Item~~Annual ~~1 of this Quarterly~~ Report on Form 10-QK ~~for~~filed ~~further~~with ~~discussion. For~~the ~~additional~~SEC ~~information~~on ~~about~~February ~~our~~23, ~~critical accounting policies and estimates~~2022, ~~see~~as ~~the~~well ~~disclosures~~as ~~included~~Note in1. ~~the~~Description ~~Form~~of ~~10-K~~Business, asBasis ~~well~~of asPresentation ~~Note~~and 1.Principles ~~Business~~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.

Recent Accounting Pronouncements

For a description of our recently adopted accounting pronouncements and accounting pronouncements issued but not yet adopted, see Note 2. Significant Accounting Policies, to our condensed consolidated financial statements included in Part 1, 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, ~~foreign exchange rates~~ or interest rates~~, to the extent we have outstanding debt~~. We do not hold financial instruments for trading purposes.

~~Foreign Currency Exchange Risk~~37

The functional currencies of our foreign subsidiaries are the respective local currencies. Most of our revenues 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 and Europe, although we do have certain arrangements in which we invoice in a non-

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~~functional~~Foreign ~~currency,~~Currency ~~based~~Exchange upon the location of the partner. Our condensed 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. In addition, we maintain cash balances in foreign currencies, which are also subject to foreign currency exchange risk. To date, we have not entered into any hedging arrangements or other derivative financial instruments with respect to foreign currency risk. During the nine months ended September 30, 2021, 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.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 ~~September~~March 3031, ~~2021~~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)~~-based interest rates~~. 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, or (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 ~~submit~~furnish under the Exchange Act is recorded, processed, summarized and reported ~~accurately and~~ 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.

~~Disclosure~~Our ~~controls~~management, ~~and~~with ~~procedures~~the ~~include,~~participation ~~without~~of ~~limitation,~~our ~~controls~~Chief Executive Officer and ~~procedures~~our ~~designed~~Chief toFinancial ~~provide~~Officer, ~~reasonable~~evaluated ~~assurance~~the ~~that~~effectiveness ~~information~~of ~~required~~our todisclosure becontrols ~~disclosed~~and byprocedures usas inof ~~the~~March 31, ~~reports~~2022, ~~that~~the weend ~~file~~of orthe ~~submit~~period ~~under~~covered ~~the~~by ~~Exchange~~this ~~Act~~Quarterly isReport ~~accumulated~~on ~~and~~Form ~~communicated~~10-Q. toBased ~~our~~on ~~management~~that evaluation, ~~including~~ our Chief Executive Officer and Chief Financial Officer, asconcluded ~~appropriate,~~that ~~accurately~~our ~~and~~disclosure ~~within~~controls aand ~~reasonable~~procedures ~~time~~were ~~period~~effective toas ~~allow~~of ~~for~~March 31, ~~timely decisions regarding required disclosure~~2022.

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 September 30, 2021, 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 not effective as of September 30, 2021 because of the material weakness in internal control over financial reporting discussed below.

Notwithstanding the material weakness in internal control over financial reporting described below, our management has concluded that our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q are fairly stated in all material respects in accordance with accounting principles generally accepted in the United States of America.

Material Weakness

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis.

As disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as filed with the SEC on March 11, 2021, we have identified a material weakness in our internal control over the financial statement close process related to deficiencies in information technology general controls and process level controls. These control deficiencies could result in a misstatement of our accounts or disclosures that could result in a material misstatement of our financial results that would not be prevented or detected, and accordingly, we determined that these control deficiencies constitute a material weakness.

Remediation Plan

We have developed a detailed plan for compliance with Section 404 of the Sarbanes-Oxley Act, including developing and maintaining appropriate information technology general controls and process level controls. While we have performed certain remediation activities to strengthen our controls, control weaknesses are not considered remediated until new internal controls have been operational for a period of time, are tested, and management concludes that these controls are operating effectively. We will continue to monitor the effectiveness of our remediation measures in connection with our future assessments of the

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effectiveness of internal control over financial reporting and disclosure controls and procedures, and we will make any changes to the design of our plan and take such other actions that we deem appropriate given the circumstances. We expect to complete the remediation process by the end of the fourth quarter of 2021.

Changes in Internal Control Over Financial Reporting

There ~~was~~were no ~~change~~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 ~~September~~March 3031, ~~2021~~2022 that ~~has~~have materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting. ~~We are continuing to take steps to remediate the material weakness in our internal control over financial reporting, as discussed above.~~

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

~~There~~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 ~~March~~February 1123, ~~2021 except as noted in the Quarterly Reports on Form 10-Q filed periodically with the SEC~~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*			Agreement and Plan of Merger, by and among Datto Holding Corp., Knockout Parent Inc. and Knockout Merger Sub Inc., and, for limited purposes set forth therein, Kaseya Holdings Inc. and Kaseya Inc. dated April 11, 2022 (incorporated by reference to Exhibit 2.1 to Datto Holding Corp.’s Current Report on Form 8-K filed on April 13, 2022).
3.1			Third Amended and Restated Certificate of Incorporation of Datto Holding Corp., dated October 23, 2020 (incorporated by reference to Exhibit 3.1 to Datto Holding Corp.’s Current Report on Form 8-K filed on October 26, 2020).
3.2			Amended and Restated Bylaws of Datto Holding Corp., dated October 20, 2020 (incorporated by reference to Exhibit 3.2 to Datto Holding Corp.’s Current Report on Form 8-K filed on October 26, 2020).
31.1			Certification of Chief Executive Officer, pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2			Certification of Chief Financial Officer, pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1+			Certification of Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2+			Certification of Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.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.

*			~~Indicates~~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 ~~management~~copy ~~contract~~of orany ~~compensatory~~omitted ~~plan~~schedule orto ~~arrangement~~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 ~~November~~May 109, ~~2021~~2022.


Datto Holding Corp.

By:						/s/ John Abbot
Name:						John Abbot
Title:						Chief Financial Officer (Principal Financial Officer)

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