Item 1. Financial Statements
Item 1. Financial Statements.
RAPID7, INC.
Consolidated Balance Sheets (Unaudited)
(in thousands, except share and per share data)
September 30, 2020 December 31, 2019
Assets
Current assets:
Cash and cash equivalents $ 239,409 $ 123,413
Short-term investments 81,209 116,158
Accounts receivable, net of allowance for doubtful accounts of $ 3,203 and $ 1,829 at September 30, 2020 and December 31, 2019, respectively
73,625 87,927
Deferred contract acquisition and fulfillment costs, current portion 19,269 17,047
Prepaid expenses and other current assets 20,521 20,051
Total current assets 434,033 364,596
Long-term investments 10,813 22,887
Property and equipment, net 50,305 50,670
Operating lease right-of-use assets 69,797 60,984
Deferred contract acquisition and fulfillment costs, non-current portion 37,269 34,213
Goodwill 213,727 97,866
Intangible assets, net 45,942 28,561
Other assets 4,931 5,136
Total assets $ 866,817 $ 664,913
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 9,033 $ 6,836
Accrued expenses 48,035 41,021
Operating lease liabilities, current portion 9,568 7,179
Deferred revenue, current portion 231,560 231,518
Other current liabilities 85 119
Total current liabilities 298,281 286,673
Convertible senior notes, net 373,318 185,200
Operating lease liabilities, non-current portion 77,863 72,294
Deferred revenue, non-current portion 30,632 36,226
Other long-term liabilities 1,370 1,352
Total liabilities 781,464 581,745
Stockholders’ equity:
Preferred stock, $ 0.01 par value per share; 10,000,000 shares authorized at September 30, 2020 and December 31, 2019; 0 shares issued at September 30, 2020 and December 31, 2019
— —
Common stock, $ 0.01 par value per share; 100,000,000 shares authorized at September 30, 2020 and December 31, 2019; 52,264,083 and 50,397,922 shares issued at September 30, 2020 and December 31, 2019, respectively; 51,777,275 and 49,911,114 shares outstanding at September 30, 2020 and December 31, 2019, respectively
518 499
Treasury stock, at cost, 486,808 shares at September 30, 2020 and December 31, 2019
( 4,764 ) ( 4,764 )
Additional paid-in-capital 677,983 605,650
Accumulated other comprehensive (loss) income ( 23 ) 213
Accumulated deficit ( 588,361 ) ( 518,430 )
Total stockholders’ equity 85,353 83,168
Total liabilities and stockholders’ equity $ 866,817 $ 664,913
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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RAPID7, INC.
Consolidated Statements of Operations (Unaudited)
(in thousands, except share and per share data)
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Revenue:
Products $ 98,559 $ 76,476 $ 278,538 $ 214,900
Professional services 6,516 6,679 19,789 20,399
Total revenue 105,075 83,155 298,327 235,299
Cost of revenue:
Products 25,196 17,703 69,569 48,709
Professional services 5,832 5,927 18,254 17,075
Total cost of revenue 31,028 23,630 87,823 65,784
Total gross profit 74,047 59,525 210,504 169,515
Operating expenses:
Research and development 28,509 20,154 78,831 57,645
Sales and marketing 48,448 39,904 141,552 113,214
General and administrative 15,006 11,223 43,589 32,336
Total operating expenses 91,963 71,281 263,972 203,195
Loss from operations ( 17,916 ) ( 11,756 ) ( 53,468 ) ( 33,680 )
Other income (expense), net:
Interest income 87 1,448 1,343 4,761
Interest expense ( 7,328 ) ( 3,399 ) ( 16,707 ) ( 9,940 )
Other income (expense), net 143 ( 492 ) ( 94 ) ( 727 )
Loss before income taxes ( 25,014 ) ( 14,199 ) ( 68,926 ) ( 39,586 )
Provision for (benefit from) income taxes 527 207 1,005 ( 87 )
Net loss $ ( 25,541 ) $ ( 14,406 ) $ ( 69,931 ) $ ( 39,499 )
Net loss per share, basic and diluted $ ( 0.50 ) $ ( 0.29 ) $ ( 1.38 ) $ ( 0.82 )
Weighted-average common shares outstanding, basic and diluted 51,293,210 49,020,449 50,707,553 48,437,686
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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RAPID7, INC.
Consolidated Statements of Comprehensive Loss (Unaudited)
(in thousands)
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Net loss $ ( 25,541 ) $ ( 14,406 ) $ ( 69,931 ) $ ( 39,499 )
Other comprehensive income (loss):
Change in fair value of investments ( 20 ) ( 47 ) ( 127 ) 335
Adjustments for net gains realized and included in net loss — — ( 21 ) —
Total change in unrealized gains (losses) on investments ( 20 ) ( 47 ) ( 148 ) 335
Change in unrealized losses on cash flow hedges ( 88 ) — ( 88 ) —
Total other comprehensive income (loss) ( 108 ) ( 47 ) ( 236 ) 335
Comprehensive loss $ ( 25,649 ) $ ( 14,453 ) $ ( 70,167 ) $ ( 39,164 )
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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RAPID7, INC.
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
(in thousands)
Three Months Ended September 30, 2020
Common stock Treasury stock Additional paid-in-capital Accumulated other comprehensive gain (loss) Accumulated deficit Total stockholders’ equity
Shares Amount Shares Amount
Balance, June 30, 2020 50,952 $ 509 487 $ ( 4,764 ) $ 657,678 $ 85 $ ( 562,820 ) $ 90,688
Stock-based compensation expense — — — — 16,620 — — 16,620
Issuance of common stock under employee stock purchase plan 132 1 — — 3,735 — — 3,736
Vesting of restricted stock units 369 4 — — ( 4 ) — — —
Shares withheld for employee taxes ( 43 ) — — — ( 2,534 ) — — ( 2,534 )
Issuance of common stock upon exercise of stock options 367 4 — — 2,491 — — 2,495
Other comprehensive loss — — — — — ( 108 ) — ( 108 )
Equity component of convertible senior notes, net — — — — ( 3 ) — — ( 3 )
Net loss — — — — — — ( 25,541 ) ( 25,541 )
Balance, September 30, 2020 51,777 $ 518 487 $ ( 4,764 ) $ 677,983 $ ( 23 ) $ ( 588,361 ) $ 85,353
Three Months Ended September 30, 2019
Common stock Treasury stock Additional paid-in-capital Accumulated other comprehensive gain (loss) Accumulated deficit Total stockholders’ equity
Shares Amount Shares Amount
Balance, June 30, 2019 48,798 $ 488 487 $ ( 4,764 ) $ 581,127 $ 351 $ ( 489,678 ) $ 87,524
Stock-based compensation expense — — — — 10,426 — — 10,426
Issuance of common stock under employee stock purchase plan 74 1 — — 2,886 — — 2,887
Vesting of restricted stock units 319 3 — — ( 3 ) — — —
Shares withheld for employee taxes ( 38 ) — — — ( 2,087 ) — — ( 2,087 )
Issuance of common stock upon exercise of stock options 150 1 — — 1,877 — — 1,878
Other comprehensive loss — — — — — ( 47 ) — ( 47 )
Net loss — — — — — — ( 14,406 ) ( 14,406 )
Balance, September 30, 2019 49,303 $ 493 487 $ ( 4,764 ) $ 594,226 $ 304 $ ( 504,084 ) $ 86,175
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Nine Months Ended September 30, 2020
Common stock Treasury stock Additional
paid-in-capital Accumulated
other
comprehensive
gain (loss) Accumulated
deficit Total
stockholders’
equity
Shares Amount Shares Amount
Balance, December 31, 2019 49,911 $ 499 487 $ ( 4,764 ) $ 605,650 $ 213 $ ( 518,430 ) $ 83,168
Stock-based compensation expense — — — — 45,449 — — 45,449
Issuance of common stock under employee stock purchase plan 234 2 — — 7,080 — — 7,082
Vesting of restricted stock units 1,092 11 — — ( 11 ) — — —
Shares withheld for employee taxes ( 112 ) — — — ( 5,984 ) — — ( 5,984 )
Issuance of common stock upon exercise of stock options 652 6 — — 6,222 — — 6,228
Other comprehensive loss — — — — — ( 236 ) — ( 236 )
Equity component of convertible senior notes, net — — — — 46,832 — — 46,832
Purchase of capped calls related to convertible senior notes — — — — ( 27,255 ) — — ( 27,255 )
Net loss — — — — — — ( 69,931 ) ( 69,931 )
Balance, September 30, 2020 51,777 $ 518 487 $ ( 4,764 ) $ 677,983 $ ( 23 ) $ ( 588,361 ) $ 85,353
Nine Months Ended September 30, 2019
Common stock Treasury stock Additional
paid-in-capital Accumulated
other
comprehensive
gain (loss) Accumulated
deficit Total
stockholders’
equity
Shares Amount Shares Amount
Balance, December 31, 2018 47,600 $ 476 487 $ ( 4,764 ) $ 556,223 $ ( 31 ) $ ( 464,585 ) $ 87,319
Stock-based compensation expense — — — — 29,490 — — 29,490
Issuance of common stock under employee stock purchase plan 185 2 5,519 5,521
Vesting of restricted stock units 914 9 — — ( 9 ) — — —
Shares withheld for employee taxes ( 96 ) ( 1 ) — — ( 4,925 ) — — ( 4,926 )
Issuance of common stock upon exercise of stock options 700 7 — — 7,928 — — 7,935
Other comprehensive income — — — — — 335 — 335
Net loss — — — — — — ( 39,499 ) ( 39,499 )
Balance, September 30, 2019 49,303 $ 493 487 $ ( 4,764 ) $ 594,226 $ 304 $ ( 504,084 ) $ 86,175
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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RAPID7, INC.
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
Nine Months Ended September 30,
2020 2019
Cash flows from operating activities:
Net loss $ ( 69,931 ) $ ( 39,499 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization 16,347 11,969
Amortization of debt discount and issuance costs 12,213 7,783
Stock-based compensation expense 46,921 29,490
Provision for doubtful accounts 1,760 1,782
Deferred income taxes — ( 761 )
Foreign currency re-measurement loss 308 570
Other non-cash (income) expense ( 87 ) ( 1,635 )
Changes in operating assets and liabilities:
Accounts receivable 13,228 10,860
Deferred contract acquisition and fulfillment costs ( 5,278 ) ( 5,403 )
Prepaid expenses and other assets 1,352 ( 9,878 )
Accounts payable 1,922 1,132
Accrued expenses ( 3,079 ) ( 4,822 )
Deferred revenue ( 10,456 ) ( 12,124 )
Other liabilities ( 915 ) 1,292
Net cash provided by (used in) operating activities 4,305 ( 9,244 )
Cash flows from investing activities:
Business acquisition, net of cash acquired ( 125,826 ) ( 14,607 )
Purchases of property and equipment ( 7,125 ) ( 27,053 )
Capitalization of internal-use software costs ( 4,407 ) ( 4,686 )
Purchases of investments ( 108,710 ) ( 114,208 )
Sales/maturities of investments 155,599 177,287
Net cash (used in) provided by investing activities ( 90,469 ) 16,733
Cash flows from financing activities:
Proceeds from issuance of convertible senior notes, net of issuance costs paid of $ 7,201
222,799 —
Purchase of capped calls related to convertible senior notes ( 27,255 ) —
Deferred business acquisition payment ( 150 ) —
Payments of debt issuance costs ( 411 ) —
Taxes paid related to net share settlement of equity awards ( 5,984 ) ( 4,926 )
Proceeds from employee stock purchase plan 7,082 5,521
Proceeds from stock option exercises 6,219 7,924
Net cash provided by financing activities 202,300 8,519
Effect of exchange rate changes on cash, cash equivalents and restricted cash 160 ( 648 )
Net increase in cash, cash equivalents and restricted cash 116,296 15,360
Cash, cash equivalents and restricted cash, beginning of period 123,413 99,565
Cash, cash equivalents and restricted cash, end of period $ 239,709 $ 114,925
Supplemental cash flow information:
Cash paid for interest on convertible senior notes $ 2,875 $ 2,779
Cash paid for income taxes, net of refunds $ 333 $ 404
Non-cash investing activities:
Leasehold improvements acquired through tenant improvement allowance $ — $ 14,016
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents $ 239,409 $ 114,925
Restricted cash in other current assets 300 —
Total cash, cash equivalents and restricted cash $ 239,709 $ 114,925
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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RAPID7, INC.
Notes to Consolidated Financial Statements (Unaudited)
Note 1. Description of Business, Basis of Presentation and Consolidation and Significant Accounting Policies
Description of Business
Rapid7, Inc. and subsidiaries (we, us or our) is advancing security with visibility, analytics, and automation delivered through our Insight Platform. Our solutions simplify the complex, allowing security teams to work more effectively with IT and development to reduce vulnerabilities, monitor for malicious behavior, investigate and shut down attacks, and automate routine tasks.
Basis of Presentation and Consolidation
The accompanying unaudited consolidated financial statements have been prepared by us in accordance with accounting principles generally accepted in the United States of America (GAAP), as well as pursuant to the rules and regulations of the Securities and Exchange Commission (SEC), regarding interim financial reporting. Accordingly, certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on February 28, 2020.
The consolidated financial statements include our results of operations and those of our wholly-owned subsidiaries and reflect all adjustments (consisting solely of normal, recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods presented. All intercompany transactions and balances have been eliminated in consolidation. The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for any future period or the entire fiscal year.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant items subject to such estimates and assumptions include the determination of the estimated economic life of perpetual licenses for revenue recognition, the determination of standalone selling prices in revenue transactions with multiple performance obligations, the estimated period of benefit for deferred contract acquisition and fulfillment costs, the useful lives of long-lived assets, the valuation of allowance for doubtful accounts, the valuation of stock-based compensation, the valuation of intangible assets acquired in a business combination, the incremental borrowing rate for operating leases and the valuation for deferred tax assets. We base our estimates on historical experience and on various other assumptions that we believe are reasonable. Actual results could differ from those estimates.
The COVID-19 pandemic is expected to result in a sustained global slowdown of economic activity that is likely to decrease demand for a broad variety of goods and services, including from our customers. We currently expect our operational and financial performance to be negatively impacted by the slowdown in activity associated with the COVID-19 pandemic for the quarter and the year ending December 31, 2020 and beyond. Estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require the exercise of judgment. As of the date of issuance of these financial statements, we are not aware of any specific event or circumstance that would require us to update our estimates, assumptions and judgments or revise the carrying value of our assets or liabilities. These estimates may change as new events occur and additional information is obtained and will be recognized in the consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to our financial statements.
Reclassification
Prior to the fiscal year beginning January 1, 2020, we have presented revenue on our consolidated statement of operations as products, maintenance and support and professional services revenue. For the three and nine months ended September 30, 2020, we have combined products and maintenance and support revenue as products revenue on our consolidated statement of operations as our customers continue to migrate from our on-premise products to our SaaS Insight Platform. Given this continued migration, we believe it is more relevant to categorize maintenance and support revenue together as products revenue. Prior periods have been adjusted to conform with this presentation.
Significant Accounting Policies
Our significant accounting policies are described in Note 2, Summary of Significant Accounting Policies , to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019. There have been no
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changes to the significant accounting policies during the three and nine-month periods ended September 30, 2020 other than those noted below.
Derivatives and Hedging Activities
As a global business, we are exposed to currency exchange rate risk. Although the majority of our revenue is denominated in U.S. dollars, a portion of our operating expenses are denominated in foreign currencies, making them subject to fluctuations in foreign currency exchange rates. In order to manage certain exposures to currency fluctuations, we initiated a derivative instrument and hedging program during the quarter ended September 30, 2020. We enter into foreign currency derivative contracts, which we designate as cash flow hedges to manage the foreign currency exchange risk associated with these expenses denominated in certain foreign currencies.
Derivative instruments are measured at fair value and reported as either an asset or liability on our consolidated balance sheets. Gains or losses related to our cash flow hedges are recorded as a component of accumulated other comprehensive income (loss) in our consolidated balance sheets and are reclassified into the financial statement line item associated with the underlying hedged transaction in our consolidated statement of operations when the underlying hedged transaction is recognized in earnings. If it becomes probable that the hedged transaction will not occur, the cumulative unrealized gain or loss is reclassified immediately from accumulated other comprehensive income (loss) into the financial statement line item associated with the underlying hedged transaction in our consolidated statement of operations. Derivatives designated as cash flow hedges are classified in our consolidated statements of cash flow in the same manner as the underlying hedged transaction, primarily within cash flow from operating activities.
Recent Accounting Pronouncements
Accounting Pronouncements Recently Adopted
In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which aligns the requirements for capitalizing implementation costs in cloud computing arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. We adopted this standard on January 1, 2020 using the prospective adoption approach. The impact to our consolidated financial statements as a result of the adoption was not material.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, modifies and adds disclosure requirements for fair value measurements. We adopted this standard on January 1, 2020 and there was no impact to our consolidated financial statements as a result of the adoption.
Accounting Pronouncements Not Yet Effective
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity , which simplify the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The standard eliminates beneficial conversion feature and cash conversion models resulting in more convertible instruments being accounted for as a single unit; and simplifies classification of debt on the balance sheet and earnings per share calculation. The standard is effective for us in our first quarter of fiscal 2022 and can be adopted on a full or modified retrospective basis. Early adoption is permitted from our first quarter of fiscal 2021. We are currently assessing the timing, method of adoption and overall impact that the adoption of this standard will have on our consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting , which provides temporary optional expedients and exceptions to GAAP guidance on contract modifications to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) to alternative reference rates. We may elect to apply the amendments prospectively through December 31, 2022. The impact to our consolidated financial statements from the adoption of this standard is expected to be immaterial.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes . This standard is intended to simplify various aspects related to accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifying certain aspects of the current guidance to promote consistency among reporting entities. The new standard will be effective for us in the first quarter of 2021, with early adoption permitted. An entity that elects early adoption must adopt all the amendments in the same period. Most amendments within this ASU are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis.
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We are currently assessing the impact of adopting this standard but do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
Note 2. Revenue from Contracts with Customers
We generate products revenue from the sale of (1) cloud-based subscriptions for our InsightIDR, InsightVM, InsightAppSec and InsightConnect products, (2) managed services offerings which utilize our products and (3) term or perpetual software licenses for our Nexpose, Metasploit, AppSpider and DivvyCloud products, and associated content subscriptions for our Nexpose and Metasploit products. We generate maintenance and support revenue that is included in our products revenue and is associated with customers’ purchases of our software licenses for Nexpose, Metasploit and AppSpider products. We generate professional service revenue from the sale of our deployment and training services related to our solutions, incident response services, penetration testing and security advisory services. Our deployment services educate and assist our customers on the best use and best practices to deploy our solutions.
The following table summarizes revenue from contracts with customers for the three and nine months ended September 30, 2020 and 2019:
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
(in thousands)
Subscription revenue $ 78,721 $ 57,885 $ 220,142 $ 157,163
Term and perpetual software licenses 11,904 9,160 33,456 28,151
Maintenance and support 7,743 9,178 24,315 28,107
Professional services 6,516 6,679 19,789 20,399
Other 191 253 625 1,479
Total revenue $ 105,075 $ 83,155 $ 298,327 $ 235,299
Subscription Revenue
Subscription revenue consists of revenue from our cloud-based subscription, managed services offerings and content subscriptions associated with our software licenses.
• We generate cloud-based subscription revenue primarily from sales of subscriptions to access our cloud platform, together with related support services to our customers. These arrangements do not provide the customer with the right to take possession of our software operating on our cloud platform at any time. Instead, customers are granted continuous access to our cloud platform over the contractual period. Revenue is recognized over time on a ratable basis over the contract term beginning on the date that our service is made available to the customer. Our cloud-based subscription contracts generally have annual or multi-year contractual terms which are billed in advance of the annual subscription period and are non-cancellable.
• Managed services offerings consist of fees generated when we operate our software and provide our capabilities on behalf of our customers. Revenue is recognized on a ratable basis over the contract term beginning on the date that our service is made available to the customer. Our managed services offerings generally have annual or multi-year contractual terms which are billed in advance of the annual subscription period and are non-cancellable.
• Revenue related to our content subscriptions associated with our software licenses is recognized ratably over the contractual period.
Term and Perpetual Software Licenses
For our perpetual software licenses where the utility to the customer is dependent on the continued delivery of content subscriptions, the content subscription renewal options result in a material right with respect to the perpetual software license. As a result, the revenue attributable to the perpetual software license is recognized ratably over the customer’s estimated economic life of five years , which represents a longer period of time in comparison to the initial contractual period of maintenance and support. The estimated economic life of five years represents the period which the customer is expected to benefit from the material right. We estimated this period of benefit by taking into consideration several factors, including the terms and conditions of our customer contracts and renewals and the expected useful life of our technology.
For our term software licenses where the utility to the customer is dependent on the continued delivery of content subscriptions, we recognize the license revenue over the contractual term of the arrangement as a material right does not exist.
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For our term and perpetual software licenses, which are not dependent on the continued delivery of content subscriptions, the license is considered distinct from the maintenance and support, and we therefore recognize revenue attributable to the license at the time of delivery.
Maintenance and support services are sold with our perpetual and term software licenses. As maintenance and support services are distinct from the perpetual and term software license, revenue attributable to maintenance and support services is recognized ratably over the contractual period.
Professional Services
All of our professional services are considered distinct performance obligations when sold stand alone or with other products. These contracts generally have terms of one year or less. For the majority of these contracts, revenue is recognized over time based upon the proportion of work performed to date.
Other
Other revenue primarily includes revenue from delivery of appliances and other miscellaneous revenue.
Contracts with Multiple Performance Obligations
The majority of our contracts with customers contain multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price (SSP) basis. We determine SSP of our products and services based on our overall pricing objectives using all information reasonably available to us, taking into consideration market conditions and other factors, including the geographic locations of our customers, negotiated discounts from price lists and selling method (i.e., partner or direct). When available, we use directly observable stand-alone transactions to determine SSP. When not regularly sold on a stand-alone basis, we estimate SSP for our products and services utilizing historical sales data, including discounts from list price. The historical data is aggregated and analyzed by geographic location and selling method to establish a median or average price. Once SSP is established it is applied consistently to all transactions including that product or service utilizing a portfolio approach.
Contract Balances
Contract liabilities consist of deferred revenue and include payments received in advance of performance under the contract. Such amounts are recognized as revenue over the contractual period consistent with the above methodology. For the three months ended September 30, 2020 and 2019, we recognized revenue of $ 90.4 million and $ 72.7 million, respectively, and for the nine months ended September 30, 2020 and 2019, we recognized $ 197.4 million and $ 158.7 million, respectively, that was included in the corresponding contract liability balance at the beginning of the periods presented. Deferred revenue that will be realized during the succeeding 12-month period is recorded as current, and the remaining deferred revenue is recorded as non-current.
We receive payments from customers based upon contractual billing schedules. Accounts receivable are recorded when the right to consideration becomes unconditional. Unbilled receivables include amounts related to our contractual right to consideration for both completed and partially completed performance obligations that have not been invoiced. If the right to consideration is based on satisfaction of another performance obligation in the contract other than the passage of time, we record a contract asset. As of September 30, 2020 and December 31, 2019, unbilled receivables of $ 2.0 million and $ 0.8 million, respectively, are included in prepaid expenses and other current assets in our consolidated balance sheet. As of September 30, 2020 and December 31, 2019, we had no contract assets recorded on our consolidated balance sheet.
Transaction price allocated to the remaining performance obligations
The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied as of September 30, 2020. The estimated revenues do not include unexercised contract renewals.
Next Twelve Months Thereafter
(in thousands)
Subscription revenue $ 197,007 $ 46,101
Term and perpetual software licenses 30,925 12,985
Maintenance and support 16,859 3,809
Professional services 13,674 —
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The amounts presented in the table above primarily consist of fixed fees, which are typically recognized ratably as the performance obligation is satisfied.
Note 3. Business Combinations
Divvy Cloud Corporation
On May 1, 2020, we acquired Divvy Cloud Corporation (DivvyCloud), a Cloud Security Posture Management (CSPM) company, for a purchase price with an aggregate fair value of $ 137.8 million. The purchase consideration consisted of $ 130.8 million in cash paid at closing, $ 7.4 million in deferred cash payments and $ 0.1 million in estimated working capital and other purchase price adjustments. The deferred cash payments will be held by Rapid7 to satisfy indemnification obligations and certain post-closing purchase price adjustments. The deferred cash payments for post-closing purchase price adjustments is payable three months from the acquisition date in the amount of $ 0.2 million and the remaining $ 7.2 million is payable on the fifteenth month anniversary of the acquisition date. We have determined the fair value of the deferred cash payments was $ 7.0 million as of the acquisition date. During the third quarter of 2020, we made a $ 0.2 million payment for the first deferred cash payment and final working capital and other purchase price adjustments.
In addition, in connection with the acquisition, we will issue an aggregate of 200,596 shares of Rapid7’s common stock to the founders of DivvyCloud in three equal annual installments beginning on the first anniversary of the closing date. The 200,596 shares of common stock were accounted for as stock-based compensation expense as continued service was required. The fair value of the 200,596 shares of common stock was $ 8.9 million. In the nine months ended September 30, 2020, we recorded $ 1.1 million of acquisition-related costs in general and administrative expense.
The following table summarizes the preliminary allocation of purchase price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date (in thousands):
Consideration:
Cash $ 130,810
Deferred cash consideration 6,963
Working capital and other purchase price adjustments 55
Fair value of total consideration transferred $ 137,828
Recognized amounts of identifiable assets and liabilities assumed:
Cash and cash equivalents $ 5,039
Accounts receivable, net 904
Prepaid expenses and other current assets 810
Property and equipment, net 492
Operating lease right-of-use assets 3,320
Accounts payable ( 288 )
Accrued expenses ( 1,308 )
Operating lease liabilities, current portion ( 313 )
Deferred revenue, current portion ( 3,545 )
Operating lease liabilities, non-current portion ( 2,984 )
Deferred revenue, non-current portion ( 1,360 )
Intangible assets 21,200
Total identifiable net assets assumed $ 21,967
Goodwill 115,861
Net purchase price $ 137,828
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The fair value of identifiable intangible assets was based on valuations using the income approach. The estimated fair value and useful life of identifiable intangible assets are as follows:
Amount Weighted Average Life
(in thousands) (in years)
Developed technology $ 18,600 6
Customer relationships 1,700 6
Trade name 900 5
Total identifiable intangible assets $ 21,200
The excess of the purchase price over the tangible assets acquired, identifiable intangible assets acquired and assumed liabilities was recorded as goodwill. We believe the goodwill is attributable to expanded product offerings resulting from the integration of the technology acquired with our existing product offerings and increased opportunities to successfully market and sell these new products and features to our customer base. The goodwill was allocated to our one reporting unit. The acquired goodwill and intangible assets were no t deductible for tax purposes.
These preliminary amounts are subject to subsequent adjustment as we obtain additional information to finalize certain components of working capital.
Following the acquisition, we granted to certain retained employees of DivvyCloud restricted stock units (RSUs) for an aggregate of 153,643 shares of our common stock, which will vest over three years subject to continued service. In addition, we granted certain retained employees of DivvyCloud performance-based restricted stock units (PSUs) for an aggregate of 109,760 shares of our common stock, which will vest over a maximum of three years based upon achievement of certain performance conditions and continued service. The RSUs and PSUs are expensed as stock-based compensation expense over the required service periods, assuming the service and performance conditions are achieved.
Our revenue attributable to the DivvyCloud business for the three and nine months ended September 30, 2020 was $ 2.3 million and $ 3.4 , respectively. Our net loss attributable to the DivvyCloud business for the three and nine months ended September 30, 2020 was $ 6.7 million and $ 11.1 million, respectively.
Pro Forma Financial Information
The unaudited pro forma financial information in the table below summarizes the combined results of our operations and DivvyCloud, on a pro forma basis, as though we had acquired DivvyCloud on January 1, 2019. The unaudited pro forma financial information for all periods presented also includes the effects of business combination accounting resulting from the acquisition, including an adjustment to revenue for the deferred revenue fair value adjustment, amortization expense from acquired intangibles assets, reversal of acquisition-related expenses and the stock-compensation expense recorded to retain certain employees.
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Revenue $ 105,904 $ 84,628 $ 303,203 $ 238,695
Net loss $ ( 24,712 ) $ ( 19,726 ) $ ( 74,485 ) $ ( 59,954 )
NetFort Technologies Limited
On April 1, 2019, we acquired NetFort Technologies Limited (NetFort), a provider of end-to-end network traffic visibility and analytics across cloud, virtual and physical platforms for a purchase price of $ 16.1 million. The $ 16.1 million purchase price was funded with cash. In the nine months ended September 30, 2019, we recorded $ 0.5 million of acquisition-related costs in general and administrative expense.
The assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. The excess of the purchase price over the assets acquired and liabilities assumed was recorded as goodwill. The fair value of net assets acquired, goodwill and intangible assets were $ 0.6 million, $ 9.4 million and $ 6.1 million, respectively.
The goodwill was allocated to our one reporting unit. The acquired goodwill and intangible asset will no t be deductible for tax purposes. Accordingly, a $ 0.8 million deferred tax benefit was recorded resulting from a partial release of our valuation allowance to account for the creation of a deferred tax liability for the developed technology intangible asset acquired.
Following the acquisition, certain retained employees and non-employee contractors of NetFort received an aggregate of 123,623 RSUs, which vest over a maximum of three years . The vesting of the RSUs is subject to the employee's continued
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service with us. Accordingly, the compensation expense associated with the RSUs is expensed as incurred in our post-acquisition financial statements.
Note 4. Fair Value Measurements
We measure certain financial assets and liabilities at fair value. Fair value is determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as determined by either the principal market or the most advantageous market. Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy, as follows:
Level 1 : Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 : Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 : Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the asset or liability.
We consider an active market to be one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis, and we consider an inactive market to be one in which there are infrequent or few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers.
The following table presents our financial assets measured and recorded at fair value on a recurring basis using the above input categories:
As of September 30, 2020
Level 1 Level 2 Level 3 Total
(in thousands)
Description:
Assets:
Money market funds $ 215,449 $ — $ — $ 215,449
U.S. government agencies 32,987 — — 32,987
Commercial paper — 32,252 — 32,252
Corporate bonds — 20,349 — 20,349
Agency bonds — 3,998 — 3,998
Asset-backed securities — 2,436 — 2,436
Total assets $ 248,436 $ 59,035 $ — $ 307,471
Liabilities:
Foreign currency forward contracts designated as cash flow hedges $ — $ 88 $ — $ 88
Total liabilities $ — $ 88 $ — $ 88
As of December 31, 2019
Level 1 Level 2 Level 3 Total
(in thousands)
Description:
Assets:
Money market funds $ 106,781 $ — $ — $ 106,781
Corporate bonds — 60,878 — 60,878
U.S. government agencies 36,979 — — 36,979
Commercial paper — 19,966 — 19,966
Agency bonds — 12,242 — 12,242
Asset-backed securities — 8,980 — 8,980
Total assets $ 143,760 $ 102,066 $ — $ 245,826
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As of September 30, 2020, the fair values of our 1.25 % and 2.25 % convertible senior notes due 2023 and 2025, respectively, as further described in Note 9, Debt , were $ 359.5 million and $ 289.2 million, respectively, based upon quoted market prices. We consider the fair values of the convertible senior notes to be a Level 2 measurement due to the limited trading activity of both notes. We had no other liabilities measured and recorded at fair value on a recurring basis as of September 30, 2020 or December 31, 2019.
Our investments, which are all classified as available-for-sale, consisted of the following:
As of September 30, 2020
Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value
(in thousands)
Description:
U.S. government agencies 32,984 3 — 32,987
Commercial paper 32,252 — — 32,252
Corporate bonds 20,287 69 ( 7 ) 20,349
Agency bonds 3,998 — — 3,998
Asset-backed securities 2,436 — — 2,436
Total assets $ 91,957 $ 72 $ ( 7 ) $ 92,022
As of December 31, 2019
Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value
(in thousands)
Description:
U.S. government agencies $ 36,880 $ 99 $ — $ 36,979
Corporate bonds 60,803 77 ( 2 ) 60,878
Commercial paper 19,965 1 — 19,966
Agency bonds 12,198 44 — 12,242
Asset-backed securities 8,986 1 ( 7 ) 8,980
Total assets $ 138,832 $ 222 $ ( 9 ) $ 139,045
As of September 30, 2020, our available-for-sale investments had maturities ranging from one to nineteen months . As of December 31, 2019, our available-for-sale investments had maturities ranging from three months to two years .
For all of our investments for which the amortized cost basis was greater than the fair value at September 30, 2020 and December 31, 2019, we have concluded that there is no plan to sell the security nor is it more likely than not that we would be required to sell the security before its anticipated maturity. In making the determination as to whether the unrealized loss is other-than-temporary, we considered the length of time and extent the investment has been in an unrealized loss position, the financial condition and near-term prospects of the issuers, the issuers’ credit rating and the time to maturity.
Note 5. Property and Equipment
Property and equipment are recorded at cost and consist of the following:
As of September 30, 2020 As of December 31, 2019
(in thousands)
Computer equipment and software $ 15,397 $ 13,106
Furniture and fixtures 8,520 7,522
Leasehold improvements 47,944 44,050
Total 71,861 64,678
Less accumulated depreciation ( 21,556 ) ( 14,008 )
Property and equipment, net $ 50,305 $ 50,670
Depreciation expense was $ 2.7 million and $ 2.5 million for the three months ended September 30, 2020 and 2019, respectively, and $ 8.1 million and $ 6.4 million for the nine months ended September 30, 2020 and 2019, respectively.
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Note 6. Goodwill and Intangible Assets
Goodwill was $ 213.7 million and $ 97.9 million as of September 30, 2020 and December 31, 2019, respectively. The following table displays the changes in goodwill:
Amount
(in thousands)
Balance at December 31, 2019 $ 97,866
DivvyCloud acquisition 115,861
Balance at September 30, 2020 $ 213,727
The following table presents details of our intangible assets, which include acquired identifiable intangible assets and capitalized internal-use software costs:
As of September 30, 2020 As of December 31, 2019
Weighted-
Average
Life (years) Gross Carrying
Amount Accumulated
Amortization Net Book Value Gross Carrying
Amount Accumulated
Amortization Net Book Value
(in thousands)
Intangible assets subject to amortization:
Developed technology
5.6 $ 54,455 $ ( 22,346 ) $ 32,109 $ 35,855 $ ( 16,080 ) $ 19,775
Customer relationships
6.3 2,700 ( 856 ) 1,844 1,000 ( 641 ) 359
Trade names
5.4 1,419 ( 594 ) 825 519 ( 519 ) —
Non-compete agreements
2.0 40 ( 40 ) — 40 ( 40 ) —
Total acquired intangible assets 58,614 ( 23,836 ) 34,778 37,414 ( 17,280 ) 20,134
Internal-use software
3.0 14,280 ( 3,116 ) 11,164 9,873 ( 1,446 ) 8,427
Total intangible assets $ 72,894 $ ( 26,952 ) $ 45,942 $ 47,287 $ ( 18,726 ) $ 28,561
Amortization expense was $ 3.2 million and $ 2.1 million for the three months ended September 30, 2020 and 2019, respectively, and $ 8.2 million and $ 5.5 million for the nine months ended September 30, 2020 and 2019, respectively.
Estimated future amortization expense of the acquired identifiable intangible assets and completed capitalized internal-use software costs as of September 30, 2020 was as follows (in thousands):
2020 (for the remaining three months) $ 3,246
2021 12,245
2022 9,374
2023 6,611
2024 3,868
2025 and thereafter 4,571
Total $ 39,915
The table above excludes the impact of $ 6.0 million of capitalized internal-use software costs for projects that have not been completed as of September 30, 2020, and, therefore, we have not determined the useful life of the software, nor have all the costs associated with these projects been incurred.
Note 7. Deferred Contract Acquisition and Fulfillment Costs
The following table summarizes the activity of the deferred contract acquisition and fulfillment costs for the nine months ended September 30, 2020 and 2019:
Nine Months Ended September 30,
2020 2019
(in thousands)
Beginning balance $ 51,260 $ 39,955
Capitalization of contract acquisition and fulfillment costs 19,932 16,084
Amortization of deferred contract acquisition and fulfillment costs ( 14,654 ) ( 10,682 )
Ending balance $ 56,538 $ 45,357
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Note 8. Derivatives and Hedging Activities
To mitigate our exposure to foreign currency fluctuations resulting from certain expenses denominated in certain foreign currencies, we enter into forward contracts that are designated as cash flow hedging instruments. These forward contracts have contractual maturities of thirteen months or less, and as of September 30, 2020, outstanding forward contracts had a total notional value of $ 8.9 million. The notional value represents the gross amount of foreign currency that will be bought or sold upon maturity of the forward contract. During the three months ended September 30, 2020, all cash flow hedges were considered effective.
The fair values of outstanding derivative instruments were as follows (in thousands):
Consolidated Balance Sheet Location As of September 30, 2020
Derivative liabilities:
Foreign currency forward contracts designated as cash flow hedges Other current liabilities $ 84
Foreign currency forward contracts designated as cash flow hedges Other non-current liabilities 4
Total derivative liabilities $ 88
For the three and nine months ended September 30, 2020, there were no amounts reclassified from accumulated other comprehensive income (loss) on our consolidated balance sheet to the financial statement line item associated with the underlying hedged transaction on our consolidated statement of operations for our cash flow hedges.
Note 9. Debt
Convertible Senior Notes
In August 2018, we issued $ 230.0 million aggregate principal amount of convertible senior notes due August 1, 2023 (the 2023 Notes) and in May 2020, we issued $ 230.0 million aggregate principal amount of convertible senior notes due May 1, 2025 (the 2025 Notes) (collectively, the Notes). The 2023 Notes bear interest at a fixed rate of 1.25 % per annum, payable semi-annually in arrears on February 1 and August 1 of each year. The 2025 Notes bear interest at a fixed rate of 2.25 % per annum, payable semi-annually in arrears on May 1 and November 1 of each year, commencing on November 1, 2020. The 2023 Notes and the 2025 Notes mature on August 1, 2023 and May 1, 2025, respectively unless earlier converted, redeemed or repurchased. The 2023 Notes and 2025 Notes are senior unsecured obligations, do not contain any financial covenants and are governed by an indenture between the Company, as issuer, and U.S. Bank National Association, as trustee (the 2023 Indenture and the 2025 Indenture, respectively).
The total net proceeds from the 2023 Notes and the 2025 Notes offerings, after deducting initial purchase discounts and estimated debt issuance costs, were $ 223.1 million and $ 222.8 million, respectively.
Terms of the 2023 Notes and the 2025 Notes
The holders of the Notes may convert their respective Notes at their option at any time prior to the close of business on the business day immediately preceding their respective convertible dates only under the following circumstances:
• during any calendar quarter commencing after the calendar quarter ending on December 31, 2018 for the 2023 Notes and September 30, 2020 for the 2025 Notes (and only during such calendar quarter), if the last reported sale price of our 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 of the respective Notes on each applicable trading day;
• during the five business day period after any five consecutive trading day period (measurement period) in which the trading price (as defined in the Indenture) per $1,000 principal amount of the applicable series of Notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of our common stock and the conversion rate of the respective Notes on each such trading day;
• if we call any or all of the respective Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the respective redemption date; or
• upon the occurrence of specified corporate events (as set forth in the Indenture).
During the three months ended September 30, 2020, the conversion feature of the 2023 Notes was triggered as the last reported price of our common stock was more than or equal to 130 % of the conversion price for at least 20 trading days in the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter, and therefore the 2023 Notes are currently convertible, in whole or in part, at the option of the holders between October 1, 2020 through December 31, 2020. Whether the 2023 Notes will be convertible following such period will depend on the continued
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satisfaction of this condition or another conversion condition in the future. We had not received any conversion notices through the issuance date of our consolidated financial statements. Since we may elect to repay the 2023 Notes in cash, shares of our common stock, or a combination of both, we have continued to classify the 2023 Notes as long-term debt on our consolidated balance sheet as of September 30, 2020. As of September 30, 2020, the 2025 Notes are not convertible at the option of the holder.
The following table presents details of the Notes (number of shares in millions):
Initial Conversion Price per $1,000 Principal Initial Conversion Price Initial Number of Shares
2023 Notes 24.0460 $ 41.59 5.5
2025 Notes 16.3875 $ 61.02 3.8
The holders may convert the 2023 Notes and 2025 Notes at any time on or after February 1, 2023 and November 1, 2024, respectively, until the close of business on the second scheduled trading day immediately preceding the maturity date, regardless of the foregoing circumstances. Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election, in the manner and subject to the terms and conditions provided in the Indenture.
If we undergo a fundamental change (as set forth in the Indentures) at any time prior to the maturity date, holders of the Notes will have the right, at their option, to require us to repurchase for cash all or any portion of their Notes at a repurchase price equal to 100 % of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, following certain corporate events that occur prior to the maturity date or following our issuance of a notice of redemption, in each case as described in the Indentures, we will increase the conversion rate for a holder of the Notes who elects to convert its Notes in connection with such a corporate event or during the related redemption period in certain circumstances.
We may not redeem the 2023 Notes or 2025 Notes prior to August 6, 2021 and May 6, 2023 (Redemption Dates), respectively. On or after the respective Redemption Dates, we may redeem for cash all or any portion of the 2023 Notes or 2025 Notes, at our option, if the last reported sale price of our 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 immediately preceding, the date on which we provide the redemption notice at a redemption price equal to 100 % principal amount of the 2023 Notes or 2025 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
The foregoing description is qualified in its entirety by reference to the text of the Indenture and the Form of the 2023 Notes, which were incorporated by reference as Exhibits 4.4 and 4.5 to our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 28, 2020. In addition, the foregoing description of the 2025 Notes is qualified in its entirety by reference to the text of the Indenture and the Form of the 2025 Notes, which were filed with the SEC as Exhibit 4.1 to our Current Report on Form 8-K on May 4, 2020.
Accounting for the 2023 Notes and the 2025 Notes
In accounting for the transactions, the 2023 Notes and the 2025 Notes have been separated into liability and equity components. The initial carrying amounts of the liability components were calculated by measuring the fair value of similar debt instruments that do not have an associated convertible feature. The initial carrying amounts of the equity components representing the Conversion Option was $ 53.8 million and $ 48.3 million for the 2023 Notes and the 2025 Notes, respectively, and were determined by deducting the fair values of the liability components from the par value of the 2023 Notes and 2025 Notes. The equity components were recorded as an increase to additional paid-in capital and are not remeasured as long as they continue to meet the conditions for equity classification. The excess of the principal amount of the 2023 Notes and the 2025 Notes over their respective carrying amount of the liability component, or debt discount, are amortized to interest expense using the effective interest method over the contractual terms of the respective Notes.
In accounting for the debt issuance costs of $ 6.9 million and $ 7.2 million related to the 2023 Notes and the 2025 Notes, respectively, we allocated the total amount incurred to the liability and equity components of the 2023 Notes and 2025 Notes based on their relative values. Issuance costs attributable to the liability component were $ 5.3 million and $ 5.7 million, for the 2023 Notes and the 2025 Notes, respectively, and will be amortized to interest expense using the effective interest method over the contractual term of the 2023 Notes and 2025 Notes, respectively. Issuance costs attributable to the equity component of $ 1.6 million and $ 1.5 million for the 2023 Notes and the 2025 Notes, respectively, were netted with the equity component in additional paid-in capital.
The effective interest rates for the 2023 Notes and the 2025 Notes were 7.36 % and 7.85 %, respectively.
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The net carrying amounts of the liability components of the 2023 Notes and the 2025 Notes were as follows (in thousands):
As of September 30, 2020 As of December 31, 2019
2023 Notes 2025 Notes Total 2023 Notes
Principal $ 230,000 $ 230,000 $ 460,000 $ 230,000
Unamortized debt discount ( 33,101 ) ( 45,012 ) ( 78,113 ) ( 40,768 )
Unamortized issuance costs ( 3,274 ) ( 5,295 ) ( 8,569 ) ( 4,032 )
Net carrying amount $ 193,625 $ 179,693 $ 373,318 $ 185,200
The net carrying amount of the equity component as of September 30, 2020 and December 31, 2019 (for the 2023 Notes only) was as follows (in thousands):
2023 Notes 2025 Notes Total
Debt discount for conversion option $ 53,820 $ 48,346 $ 102,166
Issuance costs ( 1,626 ) ( 1,514 ) ( 3,140 )
Net carrying amount $ 52,194 $ 46,832 $ 99,026
Interest expense related to the 2023 Notes and the 2025 Notes was as follows (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
2023 2025 2023 2025 2023 2025 2023 2025
Notes Notes Total Notes Notes Total Notes Notes Total Notes Notes Total
Contractual interest expense $ 718 $ 1,293 $ 2,011 $ 719 $ — $ 719 $ 2,156 $ 2,156 $ 4,312 $ 2,156 $ — $ 2,156
Amortization of debt discount 2,627 2,041 4,668 2,437 — 2,437 7,666 3,334 11,000 7,082 — 7,082
Amortization of issuance costs 260 241 501 242 — 242 758 393 1,151 701 — 701
Total interest expense $ 3,605 $ 3,575 $ 7,180 $ 3,398 $ — $ 3,398 $ 10,580 $ 5,883 $ 16,463 $ 9,939 $ — $ 9,939
Capped Calls
In connection with the offering of the 2023 Notes and the 2025 Notes, we entered into privately negotiated capped call transactions with certain counterparties (the 2023 Capped Calls and 2025 Capped Calls). The initial strike prices for the 2023 Capped Calls and the 2025 Capped Calls are $ 41.59 and $ 61.02 per share, respectively, subject to certain adjustments, which correspond to the initial conversion price of the 2023 Notes and the 2025 Notes. The initial cap prices for the 2023 Capped Calls and the 2025 Capped Calls are $ 63.98 and $ 93.88 per share, respectively, subject to certain adjustments. The 2023 Capped Calls and the 2025 Capped Calls are expected to offset potential dilution to our common stock upon conversion of the respective 2023 Notes or the 2025 Notes, with such offset subject to a cap based on the cap price. The 2023 Capped Calls and the 2025 Capped Calls cover, subject to anti-dilution adjustments, approximately 5.5 million and 3.8 million shares of our common stock, respectively. For accounting purposes, the 2023 Capped Calls and the 2025 Capped Calls are separate transactions, and not part of the terms of the 2023 Notes and the 2025 Notes. The 2023 Capped Calls and the 2025 Capped Calls are recorded in stockholders' equity and are not accounted for as derivatives. Accordingly, the cost of $ 26.9 million and $ 27.3 million, respectively, for the 2023 Capped Calls and 2025 Capped Calls was recorded as a reduction to additional paid-in capital.
The net impact to our stockholders' equity, included in additional paid-in capital, of the above components of the 2023 Notes and the 2025 Notes was as follows (in thousands):
2023 Notes 2025 Notes
Conversion option $ 53,820 $ 48,346
Purchase of capped calls ( 26,910 ) ( 27,255 )
Issuance costs ( 1,626 ) ( 1,514 )
Total $ 25,284 $ 19,577
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Credit Agreement
On April 23, 2020, we entered into a Credit and Security Agreement (the Credit Agreement), with KeyBank National Association that provides for a $ 30.0 million revolving credit facility, with a letter of credit sublimit of $ 15.0 million and an accordion feature under which we can increase the credit facility to up to $ 70.0 million. We incurred fees of $ 0.4 million in connection with entering into the Credit Agreement. The fees are recorded in other current assets on the consolidated balance sheet and are amortized on a straight-line basis over the contractual term of the arrangement. The commitment fee of 0.2 % per annum on the unused portion of the credit facility is expensed as incurred and included within interest expense on the consolidated statement of operations. The Credit Agreement matures on April 23, 2023 and contains certain financial covenants including a requirement that we maintain specified minimum recurring revenue and liquidity amounts. In May 2020, we utilized the accordion feature to increase the credit facility to $ 50.0 million.
The borrowings under the Credit Agreement bear interest, at our option, at a rate equal to either the London Interbank Offered Rate (LIBOR) rate (subject to a 1.00 % floor), plus an applicable margin equal to 2.50 % per annum or the alternate base rate (subject to a floor), plus an applicable margin equal to 0 % per annum. As of September 30, 2020, we did no t have any outstanding borrowings under the Credit Agreement.
Note 10. Leases
Our leases primarily relate to office facilities that have remaining terms of up to 10.2 years, some of which include one or more options to renew with renewal terms of up to 5 years and some of which include options to terminate the leases within the next 3.9 years. All of our leases are classified as operating leases.
The components of lease expense were as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
(in thousands)
Operating lease cost $ 3,836 $ 3,288 $ 11,088 $ 8,321
Short-term lease costs 301 323 815 998
Variable lease costs 1,181 894 3,471 2,407
Total lease costs $ 5,318 $ 4,505 $ 15,374 $ 11,726
Supplemental balance sheet information related to the operating leases was as follows:
As of September 30, 2020 As of December 31, 2019
(in thousands, except lease term and discount rate)
Operating lease right-of-use (ROU) assets $ 69,797 $ 60,984
Operating lease liabilities, current portion $ 9,568 $ 7,179
Operating lease liabilities, non-current portion 77,863 72,294
Total operating lease liabilities $ 87,431 $ 79,473
Weighted average remaining lease term (in years) - operating leases 8.0 8.7
Weighted average discount rate - operating leases 7.7 % 7.6 %
Supplemental cash flow information related to leases was as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
(in thousands)
Cash paid for amounts included in the measurement of lease liabilities $ 5,743 $ 3,006 $ 12,103 $ 8,421
Operating lease ROU assets obtained in exchange for new lease obligations $ 456 $ 3,682 $ 16,053 $ 64,454
Maturities of operating lease liabilities as of September 30, 2020 were as follows (in thousands):
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2020 (for the remaining three months) $ 2,642
2021 16,491
2022 13,859
2023 14,046
2024 13,339
2025 and thereafter 53,933
Total lease payments $ 114,310
Less: imputed interest ( 26,879 )
Total $ 87,431
Note 11. Stock-Based Compensation Expense
(a) General
Stock-based compensation expense for restricted stock units, stock options and issuances of common stock pursuant to our employee stock purchase plan was classified in the accompanying consolidated statements of operations as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
(in thousands)
Stock-based compensation expense:
Cost of revenue $ 1,132 $ 679 $ 3,194 $ 1,970
Research and development 6,818 3,996 17,852 11,224
Sales and marketing 4,506 3,047 12,529 8,453
General and administrative 4,672 2,704 13,346 7,843
Total stock-based compensation expense $ 17,128 $ 10,426 $ 46,921 $ 29,490
We recognize compensation cost of all awards on a straight-line basis over the applicable vesting period, which is generally four years .
In the first quarter of 2020, our Compensation Committee adopted and approved the performance goals, targets and payout formulas for 2020 under our bonus plans, including permitting our executive officers and other employees the opportunity to receive payment of their earned bonuses for fiscal year 2020 in the form of common stock (in lieu of cash). During the three and nine months ended September 30, 2020, we recognized stock-based compensation expense related to such bonuses in the amount of $ 0.5 million and $ 1.5 million, respectively, based on the probable expected performance against the pre-established corporate financial objectives as of September 30, 2020. For all employees, including executive officers, who elected to receive their 2020 bonuses in the form of common stock (in lieu of cash), the payouts are expected to be made in the form of fully vested stock awards in the first quarter of 2021 pursuant to our 2015 Equity Incentive Plan, as amended. The number of shares underlying such awards shall be determined by dividing the dollar value of the actual bonus award payment by the closing price per share of our common stock on the date of grant.
(b) Restricted Stock Units
Restricted stock unit activity during the nine months ended September 30, 2020 was as follows:
Shares Weighted-Average
Grant Date
Fair Value
Unvested balance as of December 31, 2019 2,936,924 $ 32.43
Granted 1,618,363 56.56
Vested ( 1,092,477 ) 33.10
Forfeited ( 201,187 ) 39.92
Unvested balance as of September 30, 2020 3,261,623 $ 43.74
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As of September 30, 2020, the unrecognized compensation expense related to our unvested restricted stock units expected to vest was $ 131.2 million. This unrecognized compensation expense will be recognized over an estimated weighted-average amortization period of 2.5 years.
(c) Stock Options
Stock option activity during the nine months ended September 30, 2020 was as follows:
Shares Weighted
Average
Exercise
Price Weighted
Average
Remaining
Contractual Life
(in years) Aggregate
Intrinsic
Value
(in thousands)
Outstanding as of December 31, 2019 2,735,392 $ 10.10
Granted — —
Exercised ( 652,160 ) 9.55 $ 31,337
Forfeited/cancelled ( 16,484 ) 17.01
Outstanding as of September 30, 2020 2,066,748 $ 10.21 4.4 $ 105,458
Vested and exercisable as of September 30, 2020 1,906,500 $ 9.75 4.2 $ 98,167
As of September 30, 2020, the unrecognized compensation expense related to our unvested stock options expected to vest was $ 0.9 million. This unrecognized compensation expense will be recognized over an estimated weighted-average amortization period of 0.6 years.
The total fair value of stock options vested in the nine months ended September 30, 2020 was $ 1.8 million.
(d) Employee Stock Purchase Plan
Under the Rapid7, Inc. 2015 Employee Stock Purchase Plan (ESPP), employees may set aside up to 15 % of their gross earnings, on an after-tax basis, to purchase our common stock at a discounted price, which is calculated at 85 % of the lesser of: (i) the market value of our common stock at the beginning of each offering period and (ii) the market value of our common stock on the applicable purchase date.
On March 15, 2019, we issued 110,822 shares of common stock to employees for aggregate proceeds of $ 2.6 million. The purchase prices of the shares were $ 30.46 and $ 21.96 per share, which were discounted in accordance with the terms of the ESPP from the closing prices of our common stock on September 17, 2018 of $ 35.84 and on March 16, 2018 of $ 25.84 , respectively.
On September 13, 2019, we issued 74,221 shares of common stock to employees for aggregate proceeds of $ 2.9 million. The purchase prices of the shares were $ 30.46 and $ 42.22 per share, which were discounted in accordance with the terms of the ESPP from the closing prices of our common stock on September 17, 2018 of $ 35.84 and on September 13, 2019 of $ 49.67 , respectively.
On March 15, 2020, we issued 101,806 shares of common stock to employees for aggregate proceeds of $ 3.3 million. The purchase price of the shares was $ 32.87 per share, which was discounted in accordance with the terms of the ESPP from the closing price of our common stock on March 13, 2020 of $ 38.67 .
On September 15, 2020, we issued 131,585 shares of common stock to employees for aggregate proceeds of $ 3.7 million. The purchase price of the shares was $ 28.39 per share, which was discounted in accordance with the terms of the ESPP from the closing price of our common stock on March 16, 2020 of $ 33.40 .
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Note 12. Net Loss per Share
The following table summarizes the computation of basic and diluted net loss per share of our common stock for the three and nine months ended September 30, 2020 and 2019:
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
(in thousands, except share and per share data)
Numerator:
Net loss $ ( 25,541 ) $ ( 14,406 ) $ ( 69,931 ) $ ( 39,499 )
Denominator:
Weighted-average common shares outstanding, basic and diluted 51,293,210 49,020,449 50,707,553 48,437,686
Net loss per share attributable to common stockholders, basic and diluted $ ( 0.50 ) $ ( 0.29 ) $ ( 1.38 ) $ ( 0.82 )
The shares underlying the conversion options in the 2023 Notes and the 2025 Notes were not considered in the calculation of diluted net loss per share as the effect would have been anti-dilutive. Based on the initial conversion prices, the entire outstanding principal amount of the 2023 Notes and the 2025 Notes as of September 30, 2020 would have been convertible into approximately 5.5 million and 3.8 million shares, respectively. We expect to settle the principal amount of the 2023 Notes and the 2025 Notes in cash. As a result, only the amount by which the conversion value exceeds the aggregate principal amount of the 2023 Notes and the 2025 Notes is considered in the diluted earnings per share computation under the treasury stock method. The conversion spread has a dilutive impact on diluted net income per share when the average market price of our common stock for a given period of time exceeds the initial conversion prices of $ 41.59 per share for the 2023 Notes and $ 61.02 per share for the 2025 Notes. In connection with the issuance of the 2023 Notes and the 2025 Notes, we entered into 2023 Capped Calls and 2025 Capped Calls, which were not included for the purpose of calculating the number of diluted shares outstanding, as their effect would have been anti-dilutive.
During the three months ended September 30, 2020, the conversion feature of the 2023 Notes was triggered as the last reported price of our common stock was more than or equal to 130 % of the conversion price for at least 20 trading days in the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter, and therefore the 2023 Notes are currently convertible, in whole or in part, at the option of the holders between October 1, 2020 through December 31, 2020. Whether the 2023 Notes will be convertible following such period will depend on the continued satisfaction of this condition or another conversion condition in the future. We had not received any conversion notices through the issuance date of our consolidated financial statements. For disclosure purposes, we have calculated the potentially dilutive effect of the conversion spread, which is included in the table below.
The following potentially dilutive securities outstanding, prior to the use of the treasury stock method or if-converted method, have been excluded from the computation of diluted weighted-average shares outstanding for the respective periods below because they would have been anti-dilutive:
As of September 30,
2020 2019
Options to purchase common stock 2,066,748 2,977,698
Unvested restricted stock units 3,261,623 3,249,228
Common shares to be issued to DivvyCloud founders 200,596 —
Shares to be issued under ESPP 23,805 10,822
Shares underlying the conversion spread in the 2023 Notes 1,774,460 —
Total 7,327,232 6,237,748
Note 13. Commitments and Contingencies
(a) Warranty
We provide limited product warranties. Historically, any payments made under these provisions have been immaterial.
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(b) Litigation and Claims
In October 2018, Finjan, Inc. (Finjan) filed a complaint against us and our wholly-owned subsidiary, Rapid7 LLC, in the United States District Court, District of Delaware, alleging patent infringement of seven patents held by them. In the complaint, Finjan sought unspecified damages, attorneys' fees and injunctive relief. We intend to vigorously contest Finjan's claims. The final outcome, including our liability, if any, with respect to Finjan's claims, is uncertain. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
In addition, from time to time, we are a party to litigation or subject to claims incident to the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not have a material adverse effect on our business, financial condition or results of operations. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
(c) Indemnification Obligations
We agree to standard indemnification provisions in the ordinary course of business. Pursuant to these provisions, we agree to indemnify, hold harmless and reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally our customers, in connection with any United States patent, copyright or other intellectual property infringement claim by any third party arising from the use of our products or services in accordance with the agreement or arising from our gross negligence, willful misconduct or violation of the law (provided that there is not gross or willful misconduct on the part of the other party) with respect to our products or services. The term of these indemnification provisions is generally perpetual from the time of execution of the agreement. We carry insurance that covers certain third-party claims relating to our services and limits our exposure. We have never incurred costs to defend lawsuits or settle claims related to these indemnification provisions.
As permitted under Delaware law, we have entered into indemnification agreements with our officers and directors, indemnifying them for certain events or occurrences while they serve as officers or directors of the company.
Note 14. Segment Information and Information about Geographic Areas
We operate in one segment. Our chief operating decision maker is our Chief Executive Officer, who makes operating decisions, assesses performance and allocates resources on a consolidated basis.
Net revenues by geographic area presented based upon the location of the customer were as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
(in thousands)
United States $ 84,319 $ 69,883 $ 239,613 $ 198,223
Other 20,756 13,272 58,714 37,076
Total $ 105,075 $ 83,155 $ 298,327 $ 235,299
Property and equipment, net by geographic area was as follows:
As of September 30, 2020 As of December 31, 2019
(in thousands)
United States $ 41,492 $ 42,570
Other 8,813 8,100
Total $ 50,305 $ 50,670
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