NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Summary of Significant Accounting Policies
SailPoint Technologies Holdings, Inc. (“we,” “our,” the “Company” or “SailPoint”) was incorporated in the state of Delaware on August 8, 2014, in preparation for the purchase of SailPoint Technologies, Inc. The purchase occurred on September 8, 2014 and our certificate of incorporation was amended and restated as of such date. SailPoint Technologies, Inc. was formed on July 14, 2004 as a Delaware corporation. The Company designs, develops and markets identity security software that helps organizations govern user access to critical systems and data. The Company currently markets its products and services worldwide.
Merger Agreement
On April 10, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, SailPoint Intermediate Holdings III, LP (f/k/a Project Hotel California Holdings, LP), a Delaware limited partnership (“Parent”), and Project Hotel California Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Parent (“Merger Sub”), pursuant to which Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Parent. Parent and Merger Sub are affiliates of Thoma Bravo Fund XV, L.P. (the “Thoma Bravo Fund”), managed by Thoma Bravo, L.P. (“Thoma Bravo”).
As a result of the Merger, each share of the Company’s common stock outstanding immediately prior to the effective time of the Merger (the “Effective Time”) (subject to certain exceptions, including shares of common stock owned by stockholders of the Company who have not voted in favor of the adoption of the Merger Agreement and have properly exercised appraisal rights in accordance with Section 262 of the General Corporation Law of the State of Delaware) will, at the Effective Time, automatically be converted into the right to receive $65.25 in cash (the “Merger Consideration”), subject to applicable withholding taxes.
On May 31, 2022, the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 expired, and on June 21, 2022, SailPoint received written notice from the UK Department for Business, Energy and Industrial Strategy (“BEIS”) that BEIS had concluded that no further action is to be taken in relation to the transaction under the UK National Security and Investment Act 2021, as amended. On June 30, 2022, SailPoint stockholders voted to approve the transaction. Each of the foregoing events satisfied certain conditions to the closing of the transaction.
If the Merger is consummated, the Company’s common stock will be delisted from the New York Stock Exchange and deregistered under the Securities Exchange Act of 1934 (the “Exchange Act”). Completion of the Merger remains subject to certain closing conditions, including (1) regulatory approvals, (2) the absence of any order, injunction or law prohibiting the Merger, (3) the accuracy of the other party’s representations and warranties, subject to certain materiality standards set forth in the Merger Agreement, (4) compliance in all material respects with the other party’s obligations under the Merger Agreement, and (5) no Company Material Adverse Effect (as defined in the Merger Agreement) having occurred since the date of the Merger Agreement. Subject to the satisfaction or waiver of such closing conditions, the parties expect the transaction to close in the second half of 2022.
Either the Company or Parent may terminate the Merger Agreement in certain circumstances, including if (1) the Merger is not completed by October 10, 2022 (the “End Date”), subject to certain limitations, and provided that the End Date will automatically be extended until January 10, 2023 if certain regulatory conditions have not been satisfied as of the close of business on the business day immediately prior to the then-current End Date, (2) a governmental authority of competent jurisdiction has issued a final non-appealable governmental order prohibiting the Merger, and (3) the other party materially breaches its representations, warranties or covenants in the Merger Agreement, subject in certain cases, to the right of the breaching party to cure the breach. Parent and the Company may also terminate the Merger Agreement by mutual written consent.
The Company is also entitled to terminate the Merger Agreement and receive a termination fee of $425.1 million from Parent if (1) Parent fails to consummate the Merger following the satisfaction or waiver of the applicable closing conditions or (2) Parent otherwise breaches its obligations under the Merger Agreement such that the conditions to the consummation of the Merger cannot be satisfied. The Company is also entitled to receive this termination fee from Parent if Parent terminates the Merger Agreement because the Merger has not been completed by the End Date and at the time of such termination, the Company could have validly terminated the Merger Agreement for either of the reasons described in the preceding sentence.
If the Merger Agreement is terminated in certain other circumstances, including by the Company in order to enter into a superior proposal or by Parent because the Board withdraws its recommendation in favor of the Merger, the Company would be required to pay Parent a termination fee of $212.5 million.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements, which include the accounts of the Company and its wholly owned subsidiaries, have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) as well as the instructions to Form 10-Q and the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) for interim reporting. Accordingly, the Company has condensed or omitted certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP. All intercompany accounts and transactions have been eliminated in consolidation.
The unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the balance sheets, statements of operations, statements of stockholders’ equity and the statements of cash flows for the interim periods but are not necessarily indicative of the results of operations to be anticipated for the full year ending December 31, 2022 or any future period.
These financial statements and accompanying notes should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on February 28, 2022 (the “Annual Report”).
Certain items have been reclassified in the prior year financial statements to conform to the presentation and classifications used in the current year. These reclassifications had no net effect on the Company’s consolidated operating results, financial position or cash flows.
Use of Estimates
The preparation of unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Management periodically evaluates such estimates and assumptions for continued reasonableness. In particular, we make estimates with respect to the fair value allocation of multiple performance obligations in revenue recognition, the expected period of benefit of deferred contract acquisition costs, the collectability of accounts receivable, stock-based compensation expense, recognition and measurement of income tax positions, realizability of deferred tax assets and the valuation, estimated useful lives and impairment of intangible assets and goodwill arising from business combinations. Appropriate adjustments, if any, to the estimates used are made prospectively based upon such periodic evaluation. Actual results could differ from those estimates.
Concentration of Credit Risk and Other Risks
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and accounts receivable. The Company maintains its cash in bank deposit accounts that, at times, may exceed federally insured limits. As of June 30, 2022 and December 31, 2021, no individual entity represented more than 10% of the balance in accounts receivable. Management considers concentration of credit risk to be minimal with respect to accounts receivable due to the positive historical collection experience of the Company. No customer represented more than 10% of revenue for the three and six months ended June 30, 2022 or 2021. The Company does not experience concentration of credit risk in foreign countries as no foreign country represents more than 10% of the Company’s consolidated revenues or net assets.
Significant Accounting Policies
The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes in the Annual Report, most notably Note 1 “Description of Business and Summary of Significant Accounting Policies.” There have been no changes to our significant accounting policies described in the Annual Report that have had a material impact on our unaudited condensed consolidated financial statements and related notes.
Recently Issued Accounting Standards Not Yet Adopted
In October 2021, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires application of Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, to recognize and measure contract assets and liabilities from contracts with customers acquired in a business combination. ASU 2021-08 creates an exception to the general recognition and measurement principle in ASC 805, Business Combinations, and will result in recognition of contract assets and contract liabilities consistent with those recorded by the acquiree immediately before the acquisition date. The guidance is effective for us beginning January 1, 2023 and interim periods therein, with early adoption permitted.
2. Revenue Recognition
Disaggregation of Revenue
The Company’s revenue by geographic region based on customers’ locations is presented in Note 13 “Geographic Information.”
The following table presents the Company’s revenue by timing of revenue recognition to understand the risks of timing of transfer of control and cash flows:
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| Licenses | | SaaS (1) | | Maintenance and Support (1) | | Other Subscription Services (1) | | Total Subscription | | Services and Other |
| (In thousands) |
| Three Months Ended June 30, 2022 | | | | | | | | | | | |
| Revenue recognized at a point in time | $ | 25,743 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Revenue recognized over time | — | | | 46,362 | | | 43,799 | | | 2,128 | | | 92,289 | | | 16,251 | |
| Total revenue | $ | 25,743 | | | $ | 46,362 | | | $ | 43,799 | | | $ | 2,128 | | | $ | 92,289 | | | $ | 16,251 | |
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| Three Months Ended June 30, 2021 | | | | | | | | | | | |
| Revenue recognized at a point in time | $ | 24,450 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Revenue recognized over time | — | | | 25,369 | | | 37,304 | | | 1,682 | | | 64,355 | | | 13,681 | |
| Total revenue | $ | 24,450 | | | $ | 25,369 | | | $ | 37,304 | | | $ | 1,682 | | | $ | 64,355 | | | $ | 13,681 | |
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| Six Months Ended June 30, 2022 | | | | | | | | | | | |
| Revenue recognized at a point in time | $ | 41,014 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Revenue recognized over time | — | | | 87,489 | | | 86,131 | | | 4,260 | | | 177,880 | | | 30,809 | |
| Total revenue | $ | 41,014 | | | $ | 87,489 | | | $ | 86,131 | | | $ | 4,260 | | | $ | 177,880 | | | $ | 30,809 | |
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| Six Months Ended June 30, 2021 | | | | | | | | | | | |
| Revenue recognized at a point in time | $ | 43,685 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Revenue recognized over time | — | | | 47,258 | | | 72,778 | | | 3,561 | | | 123,597 | | | 25,966 | |
| Total revenue | $ | 43,685 | | | $ | 47,258 | | | $ | 72,778 | | | $ | 3,561 | | | $ | 123,597 | | | $ | 25,966 | |
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(1) Subscription revenue is further disaggregated into Software as a Service ("SaaS"), Maintenance and Support and Other Subscription Services revenue in the table above.
Contract Balances
A summary of the activity impacting our contract balances during the reporting periods is presented below:
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| Contract Acquisition Costs |
| Six Months Ended |
| June 30, 2022 | | June 30, 2021 |
| (In thousands) |
| Beginning Balance | $ | 94,691 | | | $ | 54,102 | |
Additional deferred contract acquisition costs | 21,824 | | | 16,598 | |
Amortization of deferred contract acquisition costs | (14,366) | | | (9,002) | |
| Ending Balance | $ | 102,149 | | | $ | 61,698 | |
There were no material impairments of deferred contract acquisition costs for the periods ended June 30, 2022 or 2021.
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| Deferred Revenue |
| Six Months Ended |
| June 30, 2022 | | June 30, 2021 |
| (In thousands) |
| Beginning Balance | $ | 244,130 | | | $ | 184,718 | |
| Increase, net | 13,070 | | | 4,411 | |
| Ending Balance | $ | 257,200 | | | $ | 189,129 | |
Deferred revenue, which is netted with unbilled amounts at the contract level, is a contract liability, and consists primarily of payments received in advance of revenue recognition under the Company’s contracts with customers and is recognized as revenue recognition criteria are met. Revenue recognized that was previously deferred was $93.8 million and $175.9 million during the three and six months ended June 30, 2022, respectively, compared to $73.6 million and $124.8 million during the three and six months ended June 30, 2021, respectively. The difference between the opening and closing balances of the Company’s contract assets and deferred revenue primarily results from the timing difference between the Company’s performance obligations and customer billings.
Contract assets primarily relate to unbilled amounts, which are netted with deferred revenue at the contract level, and typically result from sales contracts when revenue recognized exceeds the amount billed to the customer, and the right to payment is subject to more than the passage of time. Contract assets are transferred to accounts receivable when the rights become unconditional and the customer is billed. During the six months ended June 30, 2022 and 2021, amounts reclassified from contract assets to accounts receivable were $29.5 million and $12.5 million, respectively. Total contract assets as of June 30, 2021 and December 31, 2020 were $32.3 million and $24.9 million, respectively.
Remaining Performance Obligations
Our contracts with customers include amounts allocated to performance obligations that will be satisfied at a later date. These remaining performance obligations represent contract revenue that has not yet been recognized and is included in deferred revenue, the balance of which includes both invoices that have been issued to customers but have not been recognized as revenue and amounts that will be invoiced and recognized as revenue in future periods. As of June 30, 2022, amounts allocated to these additional performance obligations, prior to netting, are $642.7 million, of which we expect to recognize $345.9 million as revenue over the next 12 months with the remaining balance recognized over the period from 2023 to 2028.
3. Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present the Company’s financial assets that are measured at fair value on a recurring basis:
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| As of June 30, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (In thousands) |
| Assets | | | | | | | |
| Cash equivalents | | | | | | | |
| Money market funds | $ | 104,165 | | | — | | | — | | | $ | 104,165 | |
| Total cash equivalents | $ | 104,165 | | | — | | | — | | | $ | 104,165 | |
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| As of December 31, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (In thousands) |
| Assets | | | | | | | |
| Cash equivalents | | | | | | | |
| Money market funds | $ | 24,996 | | | — | | | — | | | $ | 24,996 | |
| Total cash equivalents | $ | 24,996 | | | — | | | — | | | $ | 24,996 | |
The Company’s carrying amounts of financial instruments, including cash, accounts receivable, accounts payable, and accrued expenses are considered Level 1 instruments as their carrying values approximate their fair values due to their short maturities as of June 30, 2022 and December 31, 2021 and therefore are excluded from the fair value tables above.
See Note 9 “Convertible Senior Notes and Capped Call Transactions” for the carrying amount and estimated fair value of the Notes (as defined below) as of June 30, 2022.
4. Business Combinations
2021 Acquisitions
Intello
On February 22, 2021, the Company acquired Intello Inc. ("Intello"), a Delaware corporation, pursuant to an Agreement and Plan of Merger whereby Intello became a wholly owned subsidiary of the Company. Intello is an early-stage SaaS management company that helps organizations discover, manage, and secure SaaS applications. The aggregate consideration paid in connection with this acquisition was $42.9 million, net of cash acquired.
The following table summarizes the final purchase price allocation as of the date of acquisition:
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| As of |
| February 22, 2021 |
| (In thousands) |
| Cash and cash equivalents | $ | 1,143 | |
| Accounts receivable | 146 | |
| Prepayments and other current assets | 43 | |
| Property and equipment | 17 | |
| Goodwill | 32,425 | |
| Intangible assets | 12,300 | |
| Accrued expenses and other liabilities | (97) | |
| Deferred tax liability - non-current | (1,409) | |
| Deferred revenue | (536) | |
Total fair value of assets acquired and liabilities assumed | $ | 44,032 | |
The following table presents the estimated fair values and useful lives of the identifiable intangible assets acquired:
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| Amount | | Estimated Useful Life |
| (In thousands) | | (In years) |
| Developed technology | $ | 9,500 | | | 5 |
| Customer lists | $ | 2,800 | | | 3 |
The fair value of developed technology was estimated using the relief from royalty method (Level 3), which utilized assumptions for annual obsolescence, royalty rates, tax rate and discount rate. The fair value of customer lists was estimated using the replacement cost method (Level 3), which utilized assumptions for the cost to recreate the customer relationships, such as the timing and resources required, distributor's profit mark-up and opportunity cost.
ERP Maestro
On March 15, 2021, the Company acquired ERP Maestro, Inc. ("ERP Maestro"), a Florida corporation, pursuant to an Agreement and Plan of Merger whereby ERP Maestro became a wholly owned subsidiary of the Company. ERP Maestro is an early-stage SaaS governance, risk and compliance solution that provides separation-of-duty controls monitoring for an organization’s most critical applications. The aggregate consideration paid in connection with this acquisition was $28.1 million, net of cash acquired.
The following table summarizes the final purchase price allocation as of the date of acquisition:
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| As of |
| March 15, 2021 |
| (In thousands) |
| Cash and cash equivalents | $ | 924 | |
| Accounts receivable | 850 | |
| Prepayments and other current assets | 59 | |
| Property and equipment | 152 | |
| Right-of-use assets | 223 | |
| Goodwill | 15,902 | |
| Intangible assets | 13,900 | |
| Accrued expenses and other liabilities | (503) | |
| Deferred tax liability - non-current | (1,314) | |
| Deferred revenue | (1,200) | |
| Total fair value of assets acquired and liabilities assumed | $ | 28,993 | |
The following table presents the estimated fair values and useful lives of the identifiable intangible assets acquired:
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| Amount | | Estimated Useful Life |
| (In thousands) | | (In years) |
| Developed technology | $ | 10,000 | | | 5 |
| Customer lists | $ | 3,900 | | | 3 |
The fair value of developed technology was estimated using the replacement cost method (Level 3), which utilized assumptions for the cost to replace, such as the workforce, timing and resources required, annual obsolescence, as well as a theoretical developer’s profit margin and entrepreneurial incentive and opportunity cost. The fair value of customer lists was estimated using the replacement cost method (Level 3), which utilized assumptions for the cost to recreate the customer relationships, such as the timing and resources required, distributor's profit mark-up, opportunity cost and customer age.
Additional Acquisition Related Information
The operating results of the acquired companies are included in our unaudited condensed consolidated statement of operations from the respective dates of acquisition. Pro forma results of operations have not been presented because the effects
of these acquisitions, individually and in the aggregate, were not material to our unaudited condensed consolidated statement of operations. During the six months ended June 30, 2021, acquisition related costs were $2.2 million, which included primarily legal, accounting and consulting professional service fees and have been included in general and administrative expenses on the unaudited condensed consolidated statement of operations.
These acquisitions have been accounted for as business combinations. Assets acquired and liabilities assumed have been recorded at their estimated fair values as of the respective acquisition date. The Company finalized the purchase price within the required one-year measurement period as of the dates of acquisition.
The Company believes that for each acquisition, the acquired companies will provide opportunities for growth through investing in additional products and capabilities, among other factors. This contributed to a purchase price in excess of the estimated fair value of each acquired company’s net identifiable assets acquired and, as a result, goodwill was recorded in connection with each acquisition. The excess of the purchase price over the tangible assets and identifiable intangible assets acquired less assumed liabilities was recorded as goodwill. Goodwill arising from these acquisitions is not deductible for tax purposes.
5. Goodwill and Intangible Assets
Goodwill
Goodwill represents the excess of the purchase price over the identifiable tangible and intangible assets acquired less liabilities assumed arising from business combinations. As of June 30, 2022 and December 31, 2021, the carrying amount of goodwill was $289.4 million. There was no change in the carrying amounts of goodwill for the six months ended June 30, 2022. There were no impairments of goodwill during the periods ended June 30, 2022 or 2021.
Intangible Assets
Total cost and amortization of intangible assets are comprised of the following:
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| | | As of |
| Weighted Average
Useful Life | | June 30, 2022 | | December 31, 2021 |
| Intangible assets, net | (In years) | | (In thousands) |
Customer lists | 14.6 | | $ | 49,200 | | | $ | 49,200 | |
Developed technology | 8.6 | | 66,260 | | | 66,260 | |
Trade names and trademarks | 17.0 | | 24,500 | | | 24,500 | |
Other intangible assets | 4.8 | | 2,976 | | | 2,976 | |
Total intangible assets | | | 142,936 | | | 142,936 | |
Less: Accumulated amortization | | | (77,826) | | | (69,467) | |
Total intangible assets, net | | | $ | 65,110 | | | $ | 73,469 | |
Amortization expense for the periods presented is as follows:
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| Three Months Ended | | Six Months Ended |
| June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
| (In thousands) |
| Cost of revenue - licenses | $ | 829 | | | $ | 1,008 | | | $ | 1,658 | | | $ | 2,016 | |
| Cost of revenue - subscription | 1,557 | | | 1,557 | | | 3,109 | | | 2,414 | |
| Research and development | 169 | | | 169 | | | 338 | | | 337 | |
| Sales and marketing | 1,627 | | | 1,626 | | | 3,254 | | | 2,846 | |
| Total amortization expense | $ | 4,182 | | | $ | 4,360 | | | $ | 8,359 | | | $ | 7,613 | |
Periodically, the Company evaluates intangible assets for possible impairment. There were no impairments of intangible assets during the three or six month periods ended June 30, 2022 or 2021.
The total estimated future amortization expense of these intangible assets as of June 30, 2022 is as follows:
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| Year Ending December 31, | (In thousands) |
| 2022 (except the six months ended June 30, 2022) | $ | 8,360 | |
| 2023 | 16,557 | |
| 2024 | 12,674 | |
| 2025 | 8,175 | |
| 2026 | 4,968 | |
| Thereafter | 14,376 | |
| Total amortization expense | $ | 65,110 | |
6. Leases
Letters of Credit
As of June 30, 2022 and December 31, 2021, the Company had an aggregate of $6.0 million of cash collateral for an unconditional standby letter of credit related to the Company’s corporate headquarters lease. The Company is also required to maintain a small amount of restricted cash to guarantee rent payments for our subsidiaries.
Operating Leases
As of June 30, 2022, our leases, which primarily consist of office leases, have remaining lease terms of less than one year to less than seven years. Certain leases include early termination and/or extension options; however, exercise of these options is at the Company’s sole discretion. As of June 30, 2022, the Company determined that it is not reasonably certain that it will exercise the options to extend its leases or terminate them early. As of June 30, 2022, we have no financing leases and no material sub-leases, and our non-cancelable operating lease commitments exclude variable consideration.
The undiscounted annual future minimum lease payments are summarized by year in the table below:
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| Year Ending December 31, | (In thousands) |
| 2022 (except the six months ended June 30, 2022) | $ | 3,012 | |
| 2023 | 5,778 | |
| 2024 | 5,479 | |
| 2025 | 5,419 | |
| 2026 | 5,577 | |
| Thereafter | 12,447 | |
| Total minimum lease payments | 37,712 | |
| Less: interest | (4,730) | |
| Total present value of operating lease liabilities | $ | 32,982 | |
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| Current operating lease liabilities | $ | 4,723 | |
| Long-term operating lease liabilities | 28,259 | |
| Total operating lease liabilities | $ | 32,982 | |
7. Commitments and Contingencies
Contingencies
The completion of the Merger with Thoma Bravo remains subject to customary closing conditions. As part of the Merger, the Company has incurred $1.8 million in Merger-related expenses through June 30, 2022 and expects to incur additional liabilities of approximately $66.9 million that are contingent on the consummation of the Merger. These liabilities include banker fees, legal fees and other third-party professional fees.
Indemnification Arrangements
In the ordinary course of business, the Company enters into contractual arrangements under which it agrees to provide indemnification of varying scope and terms to customers, business partners and other parties with respect to certain matters, including losses arising out of the breach of such agreements, intellectual property infringement claims made by third parties, and other liabilities with respect to our products, services and business. In these circumstances, payment may be conditioned on the other party making a claim pursuant to the procedures specified in a particular contract. The Company includes service level commitments to customers of our cloud-based products warranting certain levels of uptime reliability and performance and permitting those customers to receive credits in the event that we fail to meet those levels.
To date, the Company has not incurred any material costs as a result of these commitments, and we expect the time between any potential claims and issuance of the credits to be short. As a result, we have not accrued any liabilities related to these commitments in our unaudited condensed consolidated financial statements.
Litigation Claims and Assessments
The Company is subject to claims and suits that may arise from time to time in the ordinary course of business. In addition, some legal actions, claims and governmental inquiries may be instituted or asserted in the future against us and our subsidiaries. Although the outcome of our legal proceedings cannot be predicted with certainty and no assurances can be provided, based upon current information, we do not believe the liabilities, if any, which may ultimately result from the outcome of such matters, individually or in the aggregate, will have a material adverse impact on our unaudited condensed consolidated financial statements.
8. Credit Agreement
On March 11, 2019, SailPoint Technologies, Inc., as borrower (the "Borrower"), and certain of our other wholly owned subsidiaries entered into a credit agreement (as amended, restated, amended and restated, supplemented or otherwise modified from time to time through the date hereof, the “Credit Agreement”). The Credit Agreement is guaranteed by SailPoint Technologies Intermediate Holdings, LLC, a wholly owned subsidiary of the Company, and the Borrower’s material domestic subsidiaries (collectively, the “Guarantors” and, together with the Borrower, the “Loan Parties”) and is supported by a security interest in substantially all of the Loan Parties’ personal property and assets.
In September 2019, the Company amended the Credit Agreement in connection with the issuance and sale of the Notes. Such amendment included a decrease in the commitments for revolving credit loans from $150.0 million to $75.0 million, with a $15.0 million letter of credit sublimit, which amount can be increased or decreased under certain circumstances and is subject to certain financial covenants. In addition, the Credit Agreement provides for the ability to incur uncommitted term loan facilities if, among other things, the Senior Secured Net Leverage Ratio (as defined in the Credit Agreement), calculated giving pro forma effect to the requested term loan facility, is no greater than 3.50 to 1.00. Borrowings pursuant to the Credit Agreement may be used for working capital and other general corporate purposes, including acquisitions permitted under the Credit Agreement. The Credit Agreement contains certain customary representations and warranties and affirmative and negative covenants. The Credit Agreement has established priority for the lenders over all assets of the Company.
The interest rates applicable to revolving credit loans under the Credit Agreement are at the Company’s option. The Company pays an unused commitment fee during the term of the Credit Agreement ranging from 0.20% to 0.30% per annum based on the Senior Secured Net Leverage Ratio. Borrowings under the Credit Agreement are scheduled to mature on March 11, 2024.
The Company had no outstanding revolving credit loan balance under the Credit Agreement as of June 30, 2022 or December 31, 2021. The Company was in compliance with all applicable covenants as of June 30, 2022.
The Company incurred total debt issuance costs of $0.8 million in connection with the Credit Agreement, the net balance of which is included in other non-current assets in the accompanying unaudited condensed consolidated balance sheets. These costs are being amortized to interest expense over the life of the Credit Agreement on a straight-line basis. Amortization of debt issuance costs for the periods ended June 30, 2022 and 2021 were not material and were recorded in interest expense on the accompanying unaudited condensed consolidated statements of operations.
9. Convertible Senior Notes and Capped Call Transactions
In September 2019, the Company issued and sold $400.0 million aggregate principal amount of 0.125% Convertible Senior Notes due 2024 (the “Notes”) in a private offering (the “Offering”) to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The net proceeds from the Offering were $391.2 million, after deducting discounts and commissions and other fees and expenses payable by the Company in connection with the Offering. The Company used $37.1 million of the net proceeds from the Offering to pay the cost of the privately negotiated capped call transactions (the "Capped Call Transactions") it entered into with the initial purchasers of the Notes or their respective affiliates and another financial institution.
The Notes were issued pursuant to an indenture (the “Indenture”), by and between the Company and U.S. Bank National Association, as trustee. The Notes are senior unsecured obligations of the Company and will mature on September 15, 2024, unless earlier redeemed, repurchased or converted. The Notes bear interest at a fixed rate of 0.125% per year payable semiannually in arrears on March 15 and September 15 of each year.
The Notes will be convertible at the option of the holders at any time prior to the close of business on the business day immediately preceding March 15, 2024, only under the following circumstances:
•during any calendar quarter commencing after the calendar quarter ending on December 31, 2019 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock, for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
•during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price (as defined in the Indenture) per $1,000 principal amount of the Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of common stock and the conversion rate for the Notes on each such trading day;
•if the Company calls any or all of the Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or
•upon the occurrence of specified corporate events as set forth in the Indenture.
On or after March 15, 2024 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Notes, in multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing circumstances.
Upon conversion, the Company may satisfy its conversion obligation by paying and/or delivering, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock, at the Company’s election, in the manner and subject to the terms and conditions provided in the Indenture. The Notes are convertible at an initial conversion rate of 35.1849 shares of common stock per $1,000 principal amount of the Notes, which is equivalent to an initial conversion price of $28.42 per share of common stock, subject to adjustment upon the occurrence of specified events. The conversion rate is subject to adjustment under certain circumstances in accordance with the terms of the Indenture.
In addition, following certain corporate events that occur prior to the maturity date or if the Company delivers a notice of redemption, the Company will, in certain circumstances, increase the conversion rate for a holder who elects to convert its Notes in connection with such a corporate event or notice of redemption, as the case may be. For example, upon the occurrence of a make-whole fundamental change, as defined in the purchase agreement, the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its Notes in connection with such make-whole fundamental change or during the relevant redemption period.
The Company may not redeem the Notes prior to September 20, 2022. The Company may redeem for cash all or any portion of the Notes, at its option, on or after September 20, 2022, if the last reported sale price of common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus any accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the Notes, which means that the Company is not required to redeem or retire the Notes periodically.
If the Company undergoes a fundamental change (as defined in the Indenture), holders may require the Company to repurchase for cash all or any portion of their Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
The Indenture includes customary covenants and sets forth certain events of default after which the Notes may be declared immediately due and payable and sets forth certain types of bankruptcy or insolvency events of default involving the Company after which the Notes become automatically due and payable. The Company was in compliance with all applicable covenants as of June 30, 2022.
For at least 20 trading days during the period of 30 consecutive trading days ended September 30, 2020, the last reported sale price of the Company’s common stock was equal to or exceeded 130% of the conversion price of the Notes on each applicable trading day. This conversion trigger has been met each quarter since then, including the quarter ended June 30, 2022. As a result, the Notes continue to be convertible at the option of the holders during the fiscal quarter ended June 30, 2022 and remained classified as current liabilities on the unaudited condensed consolidated balance sheet as of June 30, 2022.
During the three months ended March 31, 2021, upon the request of certain holders, the Company settled the conversion of $10.2 million in aggregate principal amount of the Notes (the "2021 Converted Notes") with cash and settled all other amounts owed to the respective holders through the issuance of 181,629 shares of the Company's common stock with an aggregate fair value of approximately $10.1 million. The Company recognized an immaterial amount related to the acceleration of unamortized debt issuance costs related to these early note conversions, which was recorded in interest expense on the accompanying unaudited condensed consolidated statements of operations. As of the date of this filing, no other holders of the Notes have submitted requests for conversion.
Transaction costs related to the issuance of the Notes were $8.8 million and are being amortized to interest expense at an effective interest method rate of 0.57% over the term of the Notes.
As of June 30, 2022, the Notes have a remaining life of 27 months.
The net carrying amount of the liability component of the Notes for the periods presented is as follows:
| | | | | | | | | | | |
| As of |
| June 30, 2022 | | December 31, 2021 |
| (In thousands) |
| Liability component | | | |
| Principal | $ | 389,840 | | | $ | 389,840 | |
| Unamortized issuance costs | (3,812) | | | (4,668) | |
| Net carrying amount | $ | 386,028 | | | $ | 385,172 | |
The interest expense recognized related to the Notes for the periods presented is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
| (In thousands) |
| Contractual interest expense | $ | 122 | | | $ | 122 | | | $ | 244 | | | $ | 240 | |
Amortization of debt issuance costs (1) | 429 | | | 426 | | | 856 | | | 1,018 | |
Total | $ | 551 | | | $ | 548 | | | $ | 1,100 | | | $ | 1,258 | |
(1) Amortization of debt issuance costs includes the acceleration of unamortized debt issuance costs related to the partial conversion of the Notes.
As of June 30, 2022, the total estimated fair value of the Notes was $861.2 million. The fair value was determined based on the closing trading price per $100 of the Notes as of the last day of trading for the period. The fair value of the Notes is primarily affected by the trading price of our common stock and market interest rates. The fair value of the Notes is
considered Level 2 within the fair value hierarchy and was determined based on inputs that are observable in the market or that could be derived from, or corroborated with, observable market data, and quoted prices of the Notes in an over-the-counter market.
Capped Call Transactions
In September 2019, in connection with the pricing of the Notes and in connection with the initial purchasers’ exercise in full of their option to purchase additional Notes, the Company entered into the Capped Call Transactions. The Capped Call Transactions are generally expected to reduce potential dilution to common stock upon any conversion of the Notes and/or offset any potential cash payments the Company is required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap. The Capped Call Transactions have an initial strike price of $28.42 per share, which corresponds to the initial conversion price of the Notes and is subject to certain adjustments, and an initial cap price of $41.34 per share, which is subject to certain adjustments. For accounting purposes, the Capped Call Transactions are separate transactions and not part of the terms of the Notes. As the Capped Call Transactions are considered indexed to our own stock and equity classified, they are recorded in stockholders’ equity and are not accounted for as derivatives. The cost of $37.1 million incurred in connection with the Capped Call Transactions was recorded as a reduction to additional paid in capital.
The Capped Call Transactions initially covered, subject to anti-dilution adjustments substantially similar to those applicable to the Notes, 14.1 million shares of our common stock. In connection with the settlement of the 2021 Converted Notes during the three months ended March 31, 2021, the Company terminated a pro rata amount of the Capped Call Transactions pursuant to the terms thereof. As a result of this pro rata termination, the Company received 37,301 shares of its common stock with an aggregate value of approximately $1.9 million based on the trading price of our common stock at that time. As of June 30, 2022, the Capped Call Transactions cover, subject to anti-dilution adjustments, 13.7 million shares of our common stock.
10. Stock-Based Compensation
2015 Stock Option Plans
In 2015 the Company adopted (i) the Amended and Restated 2015 Stock Option and Grant Plan and (ii) the 2015 Stock Incentive Plan (together, the “2015 Stock Option Plans”) under which it may grant incentive stock options (“ISOs”) and nonqualified stock options (“NSOs”) for the right to purchase shares of common stock and restricted stock units (“RSUs”). The 2015 Stock Option Plans reserve 5.0 million shares of common stock for issuance pursuant to ISOs, 0.5 million shares of common stock for issuance pursuant to RSUs and 0.25 million shares of common stock for issuance under the 2015 Stock Incentive Plan. Under the 2015 Stock Option Plans, ISOs may not be granted at less than fair market value on the date of the grant and generally vest over a four-year period based on continued service. Options generally expire ten years after the grant date.
As of June 30, 2022, there were 0.7 million shares available for issuance under the 2015 Stock Option Plans, including 33 thousand shares available for issuance under the 2015 Stock Incentive Plan. The Company currently uses authorized and unissued shares to satisfy share award exercises.
2017 Long Term Incentive Plan
In November 2017, the Company’s Board of Directors (the "Board") adopted the 2017 Long Term Incentive Plan (the “2017 Plan”) under which it may grant stock options to purchase shares of common stock and RSUs. As of June 30, 2022, the Company had reserved 26.6 million shares of common stock available for issuance under the 2017 Plan to employees, directors, officers and consultants of the Company and its subsidiaries. The number of shares of common stock available for issuance under the 2017 Plan is increased annually on each January 1st by 4.4 million shares of common stock. Options and RSUs granted to employees under the 2017 Plan generally vest over terms of one to four years based on continued service and generally expire ten years after the grant date. Common stock subject to an award that expires or is canceled, forfeited, exchanged or otherwise terminated without delivery of shares, and shares withheld or surrendered to pay the exercise price of, or to satisfy the withholding obligations with respect to an award, will become available for future grants under the 2017 Plan.
As of June 30, 2022, there were 16.0 million shares available for issuance under the 2017 Plan. The Company currently uses authorized and unissued shares to satisfy share award exercises.
The fair values for the Company’s stock options granted and Employee Stock Purchase Plan (the "ESPP") purchase rights, as discussed further below, during the periods presented were estimated at the grant date using a Black Scholes option-pricing model using the following weighted average assumptions:
| | | | | | | | | | | | | | | | | | | | | | | |
| Stock Options | | ESPP |
| June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
| Expected dividend rate | 0% | | 0% | | 0% | | 0% |
| Expected volatility | 50.8% | | 47.3% - 50.8% | | 47.9% | | 50% - 50.8% |
| Risk-free interest rate | 2.00% | | 0.80% - 1.14% | | 0.09% | | 0.04% - 0.09% |
| Expected term (in years) | 6.25 | | 6.25 | | 0.50 | | 0.50 |
Stock Options
The following table summarizes stock option activity for the six months ended June 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number
of Options | | Weighted
Average
Exercise
Price | | Weighted
Average
Remaining
Contractual
Term | | Aggregate
Intrinsic
Value |
| (In thousands) | | (Per share) | | (In years) | | (In thousands) |
| Balances at December 31, 2021 | 1,901 | | | $ | 25.52 | | | 7.0 | | $ | 46,895 | |
| Granted | 445 | | | $ | 39.75 | | | | | |
| Exercised | (144) | | | $ | 19.29 | | | | | |
| Forfeited | (125) | | | $ | (31.97) | | | | | |
| Balances at June 30, 2022 | 2,077 | | | $ | 28.62 | | | 7.3 | | $ | 70,746 | |
| Options vested and expected to vest at June 30, 2022 | 2,077 | | | $ | 28.62 | | | 7.3 | | $ | 70,746 | |
| Options vested and exercisable at June 30, 2022 | 1,165 | | | $ | 20.83 | | | 6.2 | | $ | 48,737 | |
The Company expects all outstanding stock options to fully vest. The weighted average grant date fair value per share for the six months ended June 30, 2022 and 2021 was $20.15 and $29.51, respectively. The total fair value of shares vested for the three and six months ended June 30, 2022 was $1.2 million and $4.2 million, respectively, compared to $1.3 million and $4.5 million for the three and six months ended June 30, 2021, respectively.
The total unrecognized compensation expense related to non-vested stock options granted is $16.2 million and is expected to be recognized over a weighted average period of 2.6 years as of June 30, 2022.
Restricted Stock Units
The following table summarizes the RSU activity for the Company for the six months ended June 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of
Shares | | Weighted
Average
Grant Date
Fair Value | | Weighted
Average
Remaining
Contractual
Term | | Aggregate
Intrinsic
Value |
| (In thousands) | | (Per share) | | (In years) | | (In thousands) |
| Balances at December 31, 2021 | 3,631 | | | $ | 41.17 | | | 1.4 | | $ | 175,508 | |
Granted | 1,963 | | | $ | 42.40 | | | | | |
Vested | (784) | | | $ | 37.79 | | | | | |
Forfeited | (363) | | | $ | 41.96 | | | | | |
| Balances at June 30, 2022 | 4,447 | | | $ | 42.24 | | | 2.9 | | $ | 278,741 | |
| Units expected to vest at June 30, 2022 | 4,447 | | | $ | 42.24 | | | 2.9 | | $ | 278,741 | |
The Company expects all outstanding RSUs to fully vest. The total unrecognized compensation expense related to RSUs was $171.6 million as of June 30, 2022 and is expected to be recognized over a weighted average period of 2.89 years.
Employee Stock Purchase Plan
The Company initially reserved 1.8 million shares of common stock for issuance under the ESPP. The number of shares available for issuance under the ESPP increases annually on January 1st by 0.9 million shares of common stock. The ESPP will continue in effect unless terminated by the Company’s Board or Compensation Committee, each of which has the right to terminate the ESPP at any time.
As of June 30, 2022, 4.0 million shares were available for issuance under the ESPP. During the six months ended June 30, 2022 and 2021, the Company issued and distributed 0.1 million and 0.1 million shares of common stock, respectively. Pursuant to the Merger Agreement, the Company suspended the ESPP, allowing the then-current offering period to expire on its scheduled end date of June 3, 2022 (with certain restrictions) but permitting no additional offering period to commence thereafter. The Company will terminate the ESPP immediately prior to, but contingent upon the occurrence of, the Effective Time.
A summary of the Company’s stock-based compensation expense, which includes stock options, RSUs and the ESPP, is presented below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
| (In thousands) |
| Stock options | $ | 1,793 | | | $ | 1,796 | | | $ | 3,331 | | | $ | 3,412 | |
| RSUs | 15,670 | | | 10,204 | | | 29,033 | | | 17,775 | |
| ESPP | 637 | | | 872 | | | 1,537 | | | 1,758 | |
| Total stock-based compensation expense | $ | 18,100 | | | $ | 12,872 | | | $ | 33,901 | | | $ | 22,945 | |
A summary of the Company’s stock-based compensation expense as recognized on the unaudited condensed consolidated statements of operations is presented below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
| (In thousands) |
| Cost of revenue - subscription | $ | 1,434 | | | $ | 873 | | | $ | 2,690 | | | $ | 1,535 | |
| Cost of revenue - services and other | 1,379 | | | 938 | | | 2,506 | | | 1,712 | |
| Research and development | 4,757 | | | 3,186 | | | 9,192 | | | 5,406 | |
| General and administrative | 2,895 | | | 2,534 | | | 5,444 | | | 4,596 | |
| Sales and marketing | 7,635 | | | 5,341 | | | 14,069 | | | 9,696 | |
| Total stock-based compensation expense | $ | 18,100 | | | $ | 12,872 | | | $ | 33,901 | | | $ | 22,945 | |
11. Income Taxes
Income Taxes
The income tax expense for the three and six months ended June 30, 2022 is $1.0 million and $2.0 million, respectively. The effective tax rate for the three and six months ended June 30, 2022 is (3.4)% and (3.3)%, respectively, compared to 5.1% and 5.3% for the three and six months ended June 30, 2021. The primary drivers for the differences in the rates from the prior-year period to the current-year period are related to differences in pre-tax book loss and the discrete tax benefit recognized for the change in valuation allowance in the prior-year period.
Provision for income taxes consists of U.S. and state income taxes and income taxes in certain foreign jurisdictions in which the Company conducts business. The Company is in an overall deferred tax asset position and maintains its valuation allowance for certain federal and state tax jurisdictions as existing deferred tax liabilities do not provide sufficient future taxable income to realize the full benefit of its deferred tax assets.
The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. During the periods ended June 30, 2022 and 2021, the Company did not record any material interest or penalties.
The Company files tax returns in the U.S. federal jurisdiction, in several state jurisdictions, and in several foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations for years before 2018 and is no longer subject to state, local and foreign income tax examinations by tax authorities for years before 2015. The Company is currently under audit for income tax in a single foreign jurisdiction. The audit is ongoing and is not expected to materially impact the unaudited condensed consolidated financial statements.
12. Net Loss Per Share
Basic and diluted net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated using our weighted average outstanding common shares including the dilutive effect of stock awards and shares related to the Notes. In periods when the Company recognizes a net loss, the Company excludes the impact of outstanding stock awards and shares related to the Notes from the diluted loss per share calculation as their inclusion would have an anti-dilutive effect.
The following table sets forth the calculation of basic and diluted net loss per share for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
| (In thousands, except per share data) |
| Numerator | | | | | | | |
| Net loss | $ | (29,371) | | | $ | (16,742) | | | $ | (62,455) | | | $ | (32,033) | |
| | | | | | | |
| Denominator | | | | | | | |
| Weighted average shares outstanding | | | | | | | |
| Basic | 94,469 | | | 92,464 | | | 94,206 | | | 92,076 | |
| Diluted | 94,469 | | | 92,464 | | | 94,206 | | | 92,076 | |
| | | | | | | |
| Net loss per share | | | | | | | |
| Basic | $ | (0.31) | | | $ | (0.18) | | | $ | (0.66) | | | $ | (0.35) | |
| Diluted | $ | (0.31) | | | $ | (0.18) | | | $ | (0.66) | | | $ | (0.35) | |
The following weighted average outstanding shares of common stock equivalents were excluded from the computation of the diluted net loss per share for the periods presented because their effect would have been anti-dilutive:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
| (In thousands) |
| Stock options to purchase common stock | 2,107 | | | 2,399 | | | 2,091 | | | 2,432 | |
| RSUs issued and outstanding | 4,624 | | | 3,623 | | | 4,440 | | | 3,532 | |
| ESPP | 96 | | | 145 | | | 121 | | | 142 | |
| Convertible senior notes | 10,845 | | | 10,029 | | | 10,330 | | | 10,314 | |
Total | 17,672 | | | 16,196 | | | 16,982 | | | 16,420 | |
13. Geographic Information
ASC 280, Segment Reporting, establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision makers in deciding how to allocate resources and in assessing performance. The Company manages its business on the basis of one reportable segment and derives revenues from the licensing of software and the sale of our maintenance, SaaS subscription offerings, professional services and technical support. Revenue is classified by the following major geographic areas: (i) United States, (ii) Europe, the Middle East and Africa (“EMEA”) and (iii) the rest of the world.
The following is a summary of consolidated revenues within geographic areas:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
| (In thousands) |
| United States | $ | 96,938 | | | $ | 69,742 | | | $ | 173,590 | | | $ | 135,149 | |
EMEA (1) | 24,289 | | | 19,422 | | | 47,435 | | | 34,878 | |
Rest of the World (1) | 13,056 | | | 13,322 | | | 28,678 | | | 23,221 | |
| Total revenue | $ | 134,283 | | | $ | 102,486 | | | $ | 249,703 | | | $ | 193,248 | |
(1) No single country outside of the United States represented more than 10% of our revenue.