Item 2. Management’s Discussion and Analysis
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with (1) our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and (2) the audited consolidated financial statements and the related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended December 31, 2019 included in our Annual Report on Form 10-K, filed with the SEC on February 28, 2020.
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “will,” “would” or the negative or plural of these words or similar expressions or variations and such forward-looking statements include, but are not limited to, statements with respect to the impact of new accounting standards; deferred revenue; our business strategy, plans and objectives for future operations; our future financial and business performance and the uncertain negative impacts that COVID-19 may have on our business, financial condition, results of operations and the global economy. The events described in these forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled “Risk Factors,” set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q and in our other SEC filings. You should not rely upon forward-looking statements as predictions of future events. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
Overview
Rapid7 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.
In the nearly 20 years that Rapid7 has been in business, security companies and trends have come and gone, while broader technology innovation continues to advance rapidly. Every company is now a technology company, and rampant innovation inevitably creates security risk. The migration of businesses to the cloud and ubiquitous connected devices present security teams with an increasingly complex, ever-changing, and unpredictable attack surface.
We believe as cybersecurity challenges continue to rise exponentially, two key factors can prevent organizations from effectively managing their growing security exposure. First, the tools to manage complex security problems are often equally complicated to use. Second, there is a scarcity of cybersecurity professionals who are qualified to successfully manage these sophisticated tools. These two factors compound the difficulties that resource-constrained organizations face when attempting to minimize their security exposure, meet security compliance regulations and provide visibility to their leadership. The expanding divide between risk created through innovation and risk managed by security teams is called the Security Achievement Gap.
We believe Rapid7 is uniquely positioned to improve how customer security challenges are addressed. Our solutions simplify the complex, allowing teams to more effectively reduce vulnerabilities, monitor malicious behavior, investigate and shut down attacks, and automate routine tasks. All of our solutions and services are built with and supported by the expertise of our dedicated team of security researchers and consultants, who bring knowledge of attacker behavior and emerging vulnerabilities directly to customers. We also continue to invest in further simplifying our technology to improve usability, lowering the barrier to managing security for teams and organizations who lack resources.
While our security technology is the foundation of our mission to make successful security accessible to all, technology alone will not solve today’s cybersecurity challenges. Our ongoing commitment to researching and partnering with the technology community helps to curb new security risks born through innovation. We are also investing in under-served, at risk communities, like non-profits and hospitals, to better understand their needs and make security technology and services accessible. By continuously improving our technology, stemming the creation of risk in the community, and making security more usable and accessible, Rapid7 aims to close the Security Achievement Gap.
We market and sell our products and professional services to organizations of all sizes globally, including mid-market businesses, enterprises, non-profits, educational institutions and government agencies. Our customers span a wide variety of industries such as technology, energy, financial services, healthcare and life sciences, manufacturing, media and entertainment, retail, education, real estate, transportation, government and professional services. As of September 30, 2020, we had over 9,300 customers in 130 countries, including 48% of the Fortune 100. Our revenue was not concentrated with any individual
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customer and no customer represented more than 1% of our revenue for the three and nine months ended September 30, 2020 or 2019.
We sell our products and professional services through direct inside and field sales teams and indirect channel partner relationships. Our sales teams focus on both new customer acquisition as well as up-selling and cross-selling additional offerings to our existing customers. Our sales teams are organized by geography, consisting of the Americas; Europe, the Middle East and Africa (EMEA); and Asia Pacific (APAC), as well as by target organization size. Our highly technical sales engineers help define customer use cases, manage solution evaluations and train channel partners. In addition, we maintain a global channel partner network that complements our sales organization, particularly in EMEA, APAC and Latin America.
Recent Developments
COVID-19 Response
Rapid7 remains focused on supporting its customers, partners, employees and communities during the COVID-19 pandemic. The impact of COVID-19 on the global economy and on our business continues to be a fluid situation. We responded quickly to adopt a virtual sales strategy to enable most of our employees to work productively from home, continued our focus on customers and new customers and worked to guard the health and safety of our team, support our customers and partners, mitigate risk, and maximize our financial performance. We are focused on ensuring continuity for our customers and partners. During the third quarter of 2020, we slowed hiring and reduced discretionary spending from what was initially anticipated at the beginning of the fiscal year 2020. In addition, we continue to realize savings that naturally accrue from less travel and virtual rather than in-person events.
The continuing 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 year ending December 31, 2020 and beyond. The extent of the impact of the COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the disease, its impact on industry events, and its effect on our customers, partners, suppliers and vendors and other parties with whom we do business, all of which are uncertain and cannot be predicted at this time. To the extent possible, we are conducting business as usual, with necessary or advisable modifications to employee travel, employee work locations, and cancellation of Rapid7 in-person marketing events. We will continue to actively monitor the at times rapidly evolving situation related to COVID-19 and may take further actions that alter our business operations, including those that may be required by federal, foreign, state or local authorities, or that we determine are in the best interests of our employees, customers, partners, suppliers, vendors and stockholders. At this point, the extent to which the COVID-19 pandemic may impact our business, results of operations and financial condition is uncertain. Furthermore, due to our subscription model, the effect of the COVID-19 pandemic may not be fully reflected in our results of operations until future periods.
Our Business Model
We have offerings in five key areas: (1) Vulnerability Risk Management, (2) Incident Detection and Response, (3) Application Security, (4) Cloud Security and (5) Security Orchestration and Automation Response.
We offer our products through a variety of delivery models to meet the needs of our diverse customer base, including:
• Cloud-based subscriptions, which provide our software capabilities to our customers through cloud access and on a SaaS basis. Our InsightIDR, InsightVM, InsightAppSec and InsightConnect products are offered as cloud-based subscriptions, generally with a one-year term.
• Managed services, through which we operate our products and provide our capabilities on behalf of our customers. Our Managed Vulnerability Management, Managed Application Security and Managed Detection and Response products are offered on a managed service basis, generally pursuant to one-year agreements.
• Licensed software, including both term and perpetual licenses, and the simultaneous sale of maintenance and support. Our Nexpose, Metasploit, AppSpider and DivvyCloud products are offered through term or perpetual software licenses. Our customers who purchase software licenses also purchase maintenance and support, which provides our customers with telephone and web-based support and ongoing bug fixes and repairs during the term of the maintenance and support agreement, and our customers who purchase our Nexpose and Metasploit products also purchase content subscriptions, which provide them with real-time access to the latest vulnerabilities and exploits. Our maintenance and support and content subscription agreements are typically for one-year terms.
We also offer various professional services across all of our offerings, including deployment and training services related to our software and cloud-based products, incident response services, penetration testing and security advisory services. Customers
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can purchase our professional services together with our product offerings or on a stand-alone basis pursuant to fixed fee or time-and-materials agreements.
For the three months ended September 30, 2020 and 2019, recurring revenue, defined as revenue from term software licenses, content subscriptions, managed services, cloud-based subscriptions and maintenance and support, was 91% and 88%, respectively, of total revenue. For the nine months ended September 30, 2020 and 2019, recurring revenue was 91% and 87%, respectively, of total revenue.
Our renewal rate was 103% and 111% for the three months ended September 30, 2020 and 2019, respectively. We calculate our renewal rate by dividing the dollar value of renewed customer agreements, including upsells and cross-sells of additional products, but excluding professional services, in a trailing 12-month period by the dollar value of the corresponding customer agreements.
Key Metrics
We monitor the following key metrics to help us measure and evaluate the effectiveness of our operations:
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
(dollars in thousands)
Total revenue $ 105,075 $ 83,155 $ 298,327 $ 235,299
Year-over-year revenue growth 26.4 % 33.3 % 26.8 % 34.2 %
Non-GAAP income from operations $ 2,444 $ 542 $ 2,776 $ 1,619
Operating cash flow $ 11,078 $ 1,839 $ 4,305 $ (9,244)
As of September 30,
2020 2019
(dollars in thousands)
Number of customers 9,347 8,625
Year-over-year customer growth 8 % 17 %
Annualized recurring revenue (ARR) $ 398,725 $ 310,184
Year-over-year ARR growth 28.5 % 42.7 %
Total Revenue and Growth . We are focused on driving continued revenue growth through increased sales of our products and professional services to new and existing customers.
Non-GAAP Income from Operations . We monitor non-GAAP income from operations, a non-GAAP financial measure, to analyze our financial results. We believe non-GAAP income from operations is useful to investors, as a supplement to U.S. GAAP measures, in evaluating our ongoing operational performance and enhancing an overall understanding of our past financial performance and allowing for greater transparency with respect to metrics used by our management in its financial and operational decision-making. See Non-GAAP Financial Results below for further information on non-GAAP income from operations and a reconciliation of non-GAAP income from operations to the comparable GAAP financial measure.
Operating Cash Flow . We monitor our operating cash flow as a measure of our overall business performance, which enables us to analyze our financial performance without the effects of certain non-cash items such as stock-based compensation expenses and depreciation and amortization. Additionally, operating cash flow takes into account the increase in deferred revenue as a result of increases in sales of products and services, which reflects the receipt of cash payment for products before they are recognized into revenue. Our operating cash flow is impacted by the timing of commission and bonus payments, accounts payable payments and collections of accounts receivable.
Number of Customers . We believe that the size of our customer base is an indicator of our global market penetration and that our net customer additions are an indicator of the growth of our business. We define a customer as any entity that has (1) an active Rapid7 contract or a contract that expired within 90 days or less of the applicable measurement date; and for Logentries products, those customers with a contract value equal to or greater than $2,400 per year, or (2) purchased Rapid7 professional services within the 12 months preceding the applicable measurement date.
Annualized Recurring Revenue and Growth. Annualized Recurring Revenue ( ARR) is defined as the annual value of all recurring revenue related to contracts in place at the end of the quarter. ARR should be viewed independently of revenue and deferred revenue as ARR is an operating metric and is not intended to be combined with or replace these items. ARR is not a forecast of future revenue, which can be impacted by contract start and end dates and renewal rates and does not include revenue reported as perpetual license or professional services revenue in our consolidated statement of operations.
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Non-GAAP Financial Results
To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide investors with certain non-GAAP financial measures and key metrics, including non-GAAP gross profit, non-GAAP income from operations, non-GAAP net income (loss), non-GAAP net income (loss) per share and adjusted EBITDA. The presentation of the non-GAAP financial measures is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. We use these non-GAAP financial measures and key metrics for financial and operational decision-making purposes and as a means to evaluate period-to-period comparisons, and use certain non-GAAP financial measures as performance measures under our executive bonus plan. We believe that these non-GAAP financial measures and key metrics provide useful information about our operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to metrics used by our management in its financial and operational decision-making. While our non-GAAP financial measures are an important tool for financial and operational decision-making and for evaluating our own operating results over different periods of time, you should review the reconciliation of our non-GAAP financial measures to the comparable GAAP financial measures included below, and not rely on any single financial measure to evaluate our business.
We define non-GAAP gross profit, non-GAAP income from operations, non-GAAP net income (loss) and non-GAAP net income (loss) per share as the respective GAAP balances excluding the effect of stock-based compensation expense, amortization of acquired intangible assets, amortization of debt discount and issuance costs, and certain other items such as acquisition-related expenses and litigation-related expenses. Non-GAAP net income (loss) per basic and diluted share is calculated as Non-GAAP net income (loss) divided by the weighted average shares used to compute net income (loss) per share, with the number of weighted average shares decreased to reflect the anti-dilutive impact of the capped call transactions entered into in connection with our convertible senior notes.
We believe these non-GAAP financial measures are useful to investors in assessing our operating performance due to the following factors:
Stock-based compensation expense. We exclude stock-based compensation expense because of varying available valuation methodologies, subjective assumptions and the variety of equity instruments that can impact our non-cash expense. We believe that providing non-GAAP financial measures that exclude stock-based compensation expense allows for more meaningful comparisons between our operating results from period to period.
Amortization of acquired intangible assets. We believe that excluding the impact of amortization of acquired intangible assets allows for more meaningful comparisons between operating results from period to period as the intangible assets are valued at the time of acquisition and are amortized over several years after the acquisition.
Amortization of debt discount and issuance costs. The expense for the amortization of debt discount and debt issuance costs related to our convertible senior notes and revolving credit facility is a non-cash item and we believe the exclusion of this interest expense provides a more useful comparison of our operational performance in different periods.
Litigation-related expenses. We exclude certain litigation-related expenses consisting of professional fees and related costs incurred by us related to significant litigation outside the ordinary course of business. We believe it is useful to exclude such expenses because we do not consider such amounts to be part of our ongoing operations.
Acquisition-related expenses. We exclude acquisition-related expenses as costs that are unrelated to the current operations and neither are comparable to the prior period nor predictive of future results.
Anti-dilutive impact of capped call transaction. Our capped calls transactions are intended to offset potential dilution from the conversion features in our convertible senior notes. Although we cannot reflect the anti-dilutive impact of the capped call transactions under GAAP, we do reflect the anti-dilutive impact of the capped call transactions in non-GAAP net income (loss) per diluted share to provide investors with useful information in evaluating our financial performance on a per share basis.
Adjusted EBITDA. We define adjusted EBITDA as net loss before (1) interest income, (2) interest expense, (3) other income (expense), net, (4) provision for (benefit from) income taxes, (5) depreciation expense, (6) amortization of intangible assets, (7) stock-based compensation expense, and (8) certain other items. We believe that the use of adjusted EBITDA is useful to investors and other users of our financial statements in evaluating our operating performance because it provides them with an additional tool to compare business performance across companies and across periods.
Our non-GAAP financial measures may not provide information that is directly comparable to that provided by other companies in our industry, as other companies in our industry may calculate non-GAAP financial results differently, particularly related to non-recurring, unusual items. In addition, there are limitations in using non-GAAP financial measures because the non-GAAP financial measures are not prepared in accordance with GAAP, may be different from non-GAAP financial measures used by other companies and exclude expenses that may have a material impact upon our reported financial
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results. Further, stock-based compensation expense has been and will continue to be for the foreseeable future a significant recurring expense in our business and an important part of the compensation provided to our employees.
The following tables reconcile GAAP gross profit to non-GAAP gross profit 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)
GAAP total gross profit $ 74,047 $ 59,525 $ 210,504 $ 169,515
Stock-based compensation expense 1,132 679 3,194 1,970
Amortization of acquired intangible assets 2,434 1,661 6,267 4,681
Non-GAAP total gross profit $ 77,613 $ 61,865 $ 219,965 $ 176,166
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
(in thousands)
GAAP gross profit – products $ 73,363 $ 58,773 $ 208,969 $ 166,191
Stock-based compensation expense 730 386 2,013 1,036
Amortization of acquired intangible assets 2,434 1,661 6,267 4,681
Non-GAAP gross profit – products $ 76,527 $ 60,820 $ 217,249 $ 171,908
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
(in thousands)
GAAP gross profit – professional services $ 684 $ 752 $ 1,535 $ 3,324
Stock-based compensation expense 402 293 1,181 934
Non-GAAP gross profit – professional services $ 1,086 $ 1,045 $ 2,716 $ 4,258
The following table reconciles GAAP loss from operations to non-GAAP income from operations 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)
GAAP loss from operations $ (17,916) $ (11,756) $ (53,468) $ (33,680)
Stock-based compensation expense 17,128 10,426 46,921 29,490
Amortization of acquired intangible assets 2,581 1,694 6,556 4,789
Acquisition-related expenses — — 1,138 514
Litigation-related expenses 651 178 1,629 506
Non-GAAP income from operations $ 2,444 $ 542 $ 2,776 $ 1,619
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The following table reconciles GAAP net loss to non-GAAP net income (loss) and GAAP net loss per share to non-GAAP net income (loss) per share 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)
GAAP net loss $ (25,541) $ (14,406) $ (69,931) $ (39,499)
Stock-based compensation expense 17,128 10,426 46,921 29,490
Amortization of acquired intangible assets 2,581 1,694 6,556 4,789
Acquisition-related expenses — — 1,138 514
Litigation-related expenses 651 178 1,629 506
Amortization of debt discount and issuance costs 5,206 2,679 12,213 7,783
Release of valuation allowance, acquisition-related — — — (761)
Non-GAAP net income (loss) $ 25 $ 571 $ (1,474) $ 2,822
Reconciliation of net income (loss) per share, basic:
GAAP net loss per share, basic $ (0.50) $ (0.29) $ (1.38) $ (0.82)
Non-GAAP adjustments to net loss 0.50 0.30 1.35 0.88
Non-GAAP net income (loss) per share, basic $ 0.00 $ 0.01 $ (0.03) $ 0.06
Reconciliation of net income (loss) per share, diluted:
GAAP net loss per share, diluted $ (0.50) $ (0.29) $ (1.38) $ (0.82)
Non-GAAP adjustments to net loss 0.50 0.30 1.35 0.87
Non-GAAP net income (loss) per share, diluted $ 0.00 $ 0.01 $ (0.03) $ 0.05
Weighted average shares used in GAAP per share calculation, basic and diluted 51,293,210 49,020,449 50,707,553 48,437,686
Weighted average shares used in non-GAAP per share calculation:
Basic 51,293,210 49,020,449 50,707,553 48,437,686
Diluted 53,894,202 52,404,657 50,707,553 51,879,345
The following table reconciles GAAP net loss to adjusted EBITDA 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)
GAAP net loss $ (25,541) $ (14,406) $ (69,931) $ (39,499)
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
Provision for (benefit from) income taxes 527 207 1,005 (87)
Depreciation expense 2,706 2,520 8,121 6,426
Amortization of intangible assets 3,222 2,078 8,226 5,543
Stock-based compensation expense 17,128 10,426 46,921 29,490
Acquisition-related expenses — — 1,138 514
Litigation-related expenses 651 178 1,629 506
Adjusted EBITDA $ 5,791 $ 3,446 $ 12,567 $ 8,799
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Components of Results of Operations
Revenue
We generate revenue primarily from selling products and professional services through a variety of delivery models to meet the needs of our diverse customer base.
Products
We generate products revenue from the sale of (1) cloud-based subscriptions for our InsightVM, InsightIDR, 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, as well as associated content subscriptions for our Nexpose and Metasploit products. We also generate revenue when customers purchase or renew agreements for maintenance and support of their Nexpose, Metasploit and AppSpider software licenses. Substantially all of our customers purchase an agreement for maintenance and support in connection with their purchase of a Nexpose, Metasploit or AppSpider software license.
Professional Services
We generate professional service revenue from the sale of deployment and training services related to our products, incident response services and security advisory services.
Cost of Revenue
Our total cost of revenue consists of the costs of products and professional services. Cost of revenue includes overhead costs for depreciation, facilities, IT, information security, and recruiting. Our IT overhead costs include IT personnel compensation costs and costs associated with our IT infrastructure. All overhead costs are allocated based on relative headcount.
Cost of Products
Cost of products consists of personnel and related costs for our content, support, managed service and cloud operations teams, including salaries and other payroll related costs, bonuses, stock-based compensation and allocated overhead costs. Also included in cost of products are software license fees, cloud computing costs and internet connectivity expenses directly related to delivering our products, amortization of contract fulfillment costs, as well as amortization of certain intangible assets including internally developed software.
Cost of Professional Services
Cost of professional services consists of personnel and related costs for our professional services team, including salaries and other payroll related costs, bonuses, stock-based compensation, costs of contracted third-party vendors, travel and entertainment expenses and allocated overhead costs.
We expect our cost of revenue to increase on an absolute dollar basis as we continue to grow our revenue.
Gross Margin
Gross margin, or gross profit as a percentage of revenue, has been and will continue to be affected by a variety of factors, including the average sales price of our products and services, transaction volume growth, the mix of revenue between software licenses, cloud-based subscriptions, managed services and professional services and changes in cloud computing costs. We expect our gross margins to fluctuate over time depending on the factors described above.
Operating Expenses
Operating expenses consist of research and development, sales and marketing, and general and administrative expenses. Operating expenses include overhead costs for depreciation, facilities, IT, information security and recruiting. Our IT overhead costs include IT personnel compensation costs and costs associated with our IT infrastructure. All overhead costs are allocated based on relative headcount.
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Research and Development Expense
Research and development expense consists of personnel costs for our research and development team, including salaries and other payroll related costs, bonuses and stock-based compensation. Additional expenses include travel and entertainment, consulting and professional fees for third-party development resources as well as allocated overhead costs.
We expect research and development expense to increase on an absolute dollar basis in the near term as we continue to increase investments in our products and technology platform innovation, but to remain relatively consistent as a percentage of total revenue.
Sales and Marketing Expense
Sales and marketing expense consists of personnel costs for our sales and marketing team, including salaries and other payroll related costs, commissions, including amortization of deferred commissions, bonuses and stock-based compensation. Additional expenses include marketing activities and promotional events, travel and entertainment, training costs, amortization of certain intangible assets and allocated overhead costs.
We expect sales and marketing expense to increase on an absolute dollar basis in the near term as we continue to increase investments to drive our revenue growth, but to decrease as a percentage of total revenue.
General and Administrative Expense
General and administrative expense consists of personnel costs for our executive, legal, human resources, and finance and accounting departments, including salaries and other payroll related costs, bonuses and stock-based compensation. Additional expenses include travel and entertainment, professional fees, litigation-related expenses, insurance, acquisition-related expenses, amortization of certain intangible assets and allocated overhead costs.
We expect general and administrative expense to increase on an absolute dollar basis in the near term as we continue to increase investments to support our growth, but to remain relatively consistent as a percentage of total revenue.
Interest Income
Interest income consists primarily of interest income on our cash and cash equivalents and our short and long-term investments.
Interest Expense
Interest expense consists primarily of contractual interest expense, as well as amortization of debt discount and issuance costs related to our convertible senior notes and revolving credit facility.
Other Income (Expense), Net
Other income (expense), net consists primarily of unrealized and realized gains and losses related to changes in foreign currency exchange rates and realized gains and losses on the sale of investments.
Provision for Income Taxes
Provision for income taxes relates to U.S. federal and state, as well as certain foreign jurisdiction, income taxes. Historically, we have generated net losses in the U.S., U.K and Ireland and recorded a full valuation allowance against our U.S., U.K. and Ireland deferred tax assets. We expect to maintain a full valuation allowance on our U.S., Ireland and U.K. deferred tax assets in the near term. Realization of our U.S., Ireland and U.K. deferred tax assets depends upon future earnings, the timing and amount of which are uncertain.
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Results of Operations
The following table sets forth our selected consolidated statements of operations data:
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
(in thousands)
Consolidated Statement of Operations Data:
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: (1)
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
Operating expenses: (1)
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)
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)
(1) Cost of revenue and operating expenses include stock-based compensation expense and depreciation and amortization expense 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
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
(in thousands)
Depreciation and amortization expense:
Cost of revenue $ 3,589 $ 2,498 $ 9,450 $ 6,658
Research and development 693 581 2,045 1,476
Sales and marketing 1,139 1,123 3,529 2,845
General and administrative 507 396 1,323 990
Total depreciation and amortization expense $ 5,928 $ 4,598 $ 16,347 $ 11,969
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The following table sets forth our selected consolidated statements of operations data expressed as a percentage of revenue:
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Consolidated Statement of Operations Data:
Revenue:
Products 93.8 % 92.0 % 93.4 % 91.3 %
Professional services 6.2 8.0 6.6 8.7
Total revenue 100.0 100.0 100.0 100.0
Cost of revenue:
Products 24.0 21.3 23.3 20.7
Professional services 5.5 7.1 6.1 7.3
Total cost of revenue 29.5 28.4 29.4 28.0
Operating expenses:
Research and development 27.1 24.2 26.4 24.5
Sales and marketing 46.1 48.0 47.5 48.1
General and administrative 14.3 13.5 14.6 13.7
Total operating expenses 87.5 85.7 88.5 86.4
Loss from operations (17.0) (14.1) (17.9) (14.3)
Interest income 0.1 1.7 0.5 2.0
Interest expense (7.0) (4.1) (5.7) (4.2)
Other income (expense), net 0.1 (0.6) — (0.3)
Loss before income taxes (23.8) (17.1) (23.1) (16.8)
Provision for (benefit from) income taxes 0.5 0.2 0.3 —
Net loss (24.3) % (17.3) % (23.4) % (16.8) %
Comparison of the Three Months Ended September 30, 2020 and 2019
Revenue
Three Months Ended September 30, Change
2020 2019 $ %
(dollars in thousands)
Revenue:
Products $ 98,559 $ 76,476 $ 22,083 28.9 %
Professional services 6,516 6,679 (163) (2.4)
Total revenue $ 105,075 $ 83,155 $ 21,920 26.4 %
Total revenue increased by $21.9 million in the three months ended September 30, 2020 compared to the same period in 2019. The $21.9 million increase in revenue was primarily from existing customers and was due to an increase in revenue from renewals, upsells and cross-sells as a result of the continued growth of our customer base. Revenue from new customers represents the revenue recognized from the customer's initial purchase. All renewals, upsells and cross-sells are considered revenue from existing customers.
The increase in total revenue in the three months ended September 30, 2020 compared to the same period in 2019 was comprised of $17.7 million generated from sales in North America and $4.2 million generated from sales from the rest of the world.
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Cost of Revenue
Three Months Ended September 30, Change
2020 2019 $ %
(dollars in thousands)
Cost of revenue:
Products $ 25,196 $ 17,703 $ 7,493 42.3 %
Professional services 5,832 5,927 (95) (1.6)
Total cost of revenue $ 31,028 $ 23,630 $ 7,398 31.3 %
Gross margin %:
Products 74.4 % 76.9 %
Professional services 10.5 11.3
Total gross margin % 70.5 % 71.6 %
Total cost of revenue increased by $7.4 million in the three months ended September 30, 2020 compared to the same period in 2019, primarily due to a $4.0 million increase in personnel costs, inclusive of a $0.5 million increase in stock-based compensation expense, resulting from an increase in headcount to support our growing customer base, and a $2.9 million increase in cloud computing costs related to growing cloud-based subscription revenue. The $4.0 million increase in personnel costs included $0.3 million of additional costs attributable to the employees acquired in the DivvyCloud acquisition in May 2020. Our increase in total cost of revenue also included a $0.8 million increase in amortization expense for acquired intangible assets, a $0.3 million increase in amortization expense for capitalized internally-developed software and a $0.3 million increase in allocated overhead driven largely by an increase in IT and facilities costs. These increases were partially offset by a $0.4 million decrease in third-party professional service consulting costs and a $0.5 million decrease in other expenses.
Total gross margin percentage decreased for the three months ended September 30, 2020 compared to the same period in 2019. The decrease in products gross margin for the three months ended September 30, 2020 was primarily due to an increase in revenue from cloud-based subscriptions and managed services, which have lower gross margins than our licensed software products.
Operating Expenses
Research and Development Expense
Three Months Ended September 30, Change
2020 2019 $ %
(dollars in thousands)
Research and development $ 28,509 $ 20,154 $ 8,355 41.5 %
% of revenue 27.1 % 24.2 %
Research and development expense increased by $8.4 million in the three months ended September 30, 2020 compared to the same period in 2019, primarily due to a $7.1 million increase in personnel costs and an increase of $0.7 million in allocated overhead driven largely by an increase in IT and facilities costs and a $0.6 million increase in other expenses. The $7.1 million increase in personnel costs was primarily due to a $4.3 million increase in salaries and related costs driven by growth in headcount, including $2.2 million in additional salaries and related costs attributable to the employees acquired in the acquisition of DivvyCloud in May 2020, and a $2.8 million increase in stock-based compensation expense, including $1.6 million of stock-based compensation expense related to restricted stock units (RSUs) issued to retained employees and common stock to be issued to the founders as part of the acquisition of DivvyCloud.
Sales and Marketing Expense
Three Months Ended September 30, Change
2020 2019 $ %
(dollars in thousands)
Sales and marketing $ 48,448 $ 39,904 $ 8,544 21.4 %
% of revenue 46.1 % 48.0 %
Sales and marketing expense increased by $8.5 million in the three months ended September 30, 2020 compared to the same period in 2019, primarily due to a $6.8 million increase in personnel costs, a $1.4 million increase in marketing and advertising costs, a $1.6 million increase in commission expense and a $0.1 million increase in other expenses. The $6.8 million increase in personnel costs was primarily due a $5.3 million increase in salaries and related costs driven by growth in headcount, including $2.2 million of additional costs attributable to the employees acquired in the DivvyCloud acquisition in May 2020, and a $1.5 million increase in stock-based compensation expense, including $0.6 million in stock-based compensation expense related to
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RSUs issued to DivvyCloud retained employees. These increases were partially offset by a $1.4 million decrease in travel and entertainment expenses as a result of reduced travel due to the COVID-19 pandemic.
General and Administrative Expense
Three Months Ended September 30, Change
2020 2019 $ %
(dollars in thousands)
General and administrative $ 15,006 $ 11,223 $ 3,783 33.7 %
% of revenue 14.3 % 13.5 %
General and administrative expense increased by $3.8 million in the three months ended September 30, 2020 compared to the same period in 2019, primarily due to a $2.5 million increase in personnel costs due to an increase in headcount, inclusive of a $2.0 million increase in stock-based compensation expense, and a $0.4 million increase in professional fees primarily due to litigation expenses and other professional consulting fees, a $0.4 million increase in other office expenses and a $0.5 million increase in other expenses.
Interest Income
Three Months Ended September 30, Change
2020 2019 $ %
(dollars in thousands)
Interest income $ 87 $ 1,448 $ (1,361) (94.0) %
% of revenue 0.1 % 1.7 %
Interest income decreased by $1.4 million in the three months ended September 30, 2020 compared to the same period in 2019 primarily due to a decrease in interest rates.
Interest Expense
Three Months Ended September 30, Change
2020 2019 $ %
(dollars in thousands)
Interest expense $ (7,328) $ (3,399) $ (3,929) 115.6 %
% of revenue (7.0) % (4.1) %
Interest expense increased by $3.9 million in the three months ended September 30, 2020 compared to the same period in 2019 primarily due to an increase in interest expense and amortization of debt discount and issuance costs related to the 2025 Notes.
Other Income (Expense), Net
Three Months Ended September 30, Change
2020 2019 $ %
(dollars in thousands)
Other income (expense), net $ 143 $ (492) $ 635 (129.1) %
% of revenue 0.1 % (0.6) %
Other income (expense), net changed from other expense of $0.5 million in the three months ended September 30, 2019 to other income of $0.1 million in the three months ended September 30, 2020 due to realized and unrealized foreign currency gains and losses, primarily related to the euro and British pound sterling.
Provision for Income Taxes
Three Months Ended September 30, Change
2020 2019 $ %
(dollars in thousands)
Provision for income taxes $ 527 $ 207 $ 320 154.6 %
% of revenue 0.5 % 0.2 %
Provision for income taxes increased by $0.3 million in the three months ended September 30, 2020 compared to the same period in 2019 due to an increase in our operations in foreign jurisdictions.
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Comparison of the Nine Months Ended September 30, 2020 and 2019
Revenue
Nine Months Ended September 30, Change
2020 2019 $ %
(dollars in thousands)
Revenue:
Products $ 278,538 $ 214,900 $ 63,638 29.6 %
Professional services 19,789 20,399 (610) (3.0)
Total revenue $ 298,327 $ 235,299 $ 63,028 26.8 %
Total revenue increased by $63.0 million in the nine months ended September 30, 2020 compared to the same period in 2019. The $63.0 million increase in revenue was primarily from existing customers and was due to an increase in revenue from renewals, upsells and cross-sells. All renewals, upsells and cross-sells are considered revenue from existing customers.
The increase in total revenue in the nine months ended September 30, 2020 compared to the same period in 2019 was comprised of $50.6 million generated from sales in North America and $12.4 million generated from sales from the rest of the world.
The $0.6 million decrease in professional services revenue in the nine months ended September 30, 2020 compared to the same period in 2019 was primarily due to a decline in services as customers delayed the scheduling of services in response to the COVID-19 pandemic.
Cost of Revenue
Nine Months Ended September 30, Change
2020 2019 $ %
(dollars in thousands)
Cost of revenue:
Products 69,569 48,709 $ 20,860 42.8 %
Professional services 18,254 17,075 1,179 6.9
Total cost of revenue $ 87,823 $ 65,784 $ 22,039 33.5 %
Gross margin %:
Products 75.0 % 77.3 %
Professional services 7.8 16.3
Total gross margin % 70.6 % 72.0 %
Total cost of revenue increased by $22.0 million in the nine months ended September 30, 2020 compared to the same period in 2019, primarily due to a $10.4 million increase in personnel costs, inclusive of a $1.2 million increase in stock-based compensation expense, resulting from an increase in headcount to support our growing customer base, and a $8.1 million increase in cloud computing costs related to growing cloud-based subscription revenue. The $10.4 million increase in personnel costs included $0.8 million of additional costs attributable to the employees acquired in the May 2020 DivvyCloud acquisition. Our increase in total cost of revenue also included a $2.3 million increase in allocated overhead driven by costs related to our global kick-off meeting as well as an increase in IT and facilities costs, a $1.6 million increase in amortization expense for acquired intangible assets and a $0.9 million increase in amortization expense for capitalized internally-developed software. These increases were partially offset by a $1.3 million decrease in other expenses.
Total gross margin percentage decreased for the nine months ended September 30, 2020 compared to the same period in 2019. The decrease in products gross margin for the nine months ended September 30, 2020 was primarily due to an increase in revenue from cloud-based subscriptions and managed services, which have lower gross margins than our licensed software products. The decrease in professional services gross margin for the nine months ended September 30, 2020 was primarily due to a reduction in professional services revenue as customers rescheduled services in response to the COVID-19 pandemic.
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Operating Expenses
Research and Development Expense
Nine Months Ended September 30, Change
2020 2019 $ %
(dollars in thousands)
Research and development $ 78,831 $ 57,645 $ 21,186 36.8 %
% of revenue 26.4 % 24.5 %
Research and development expense increased by $21.2 million in the nine months ended September 30, 2020 compared to the same period in 2019, primarily due to a $16.5 million increase in personnel costs and an increase of $4.3 million in allocated overhead driven by costs related to our global kick-off meeting and an increase in IT and facilities costs, and an increase of $0.4 million in other expenses. The $16.5 million increase in personnel costs was primarily due to a $9.9 million increase in salaries and related costs driven by growth in headcount, including $3.0 million in additional salaries and related costs attributable to the employees acquired in the acquisition of DivvyCloud in May 2020, and a $6.6 million increase in stock-based compensation expense including, $2.6 million of stock-based compensation expense related to RSUs issued to retained employees and common stock to be issued to the founders as part of the acquisition of DivvyCloud.
Sales and Marketing Expense
Nine Months Ended September 30, Change
2020 2019 $ %
(dollars in thousands)
Sales and marketing $ 141,552 $ 113,214 $ 28,338 25.0 %
% of revenue 47.5 % 48.1 %
Sales and marketing expense increased by $28.3 million in the nine months ended September 30, 2020 compared to the same period in 2019, primarily due to a $20.3 million increase in personnel costs, a $5.2 million increase in allocated overhead driven by costs related to our global kick-off meeting as well as an increase in IT and facilities costs, a $4.6 million increase in commission expense, a $1.1 million increase in marketing and advertising costs and a $0.3 million increase in other expenses. The $20.3 million increase in personnel costs was primarily due a $16.2 million increase in salaries and related costs driven by growth in headcount, including $3.5 million of additional costs attributable to the employees acquired in the DivvyCloud acquisition in May 2020, and a $4.1 million increase in stock-based compensation expense, including $1.0 million in stock-based compensation expense related to RSUs issued to DivvyCloud retained employees. These increases were partially offset by a $3.2 million decrease in travel and entertainment expenses as a result of reduced travel due to the COVID-19 pandemic.
General and Administrative Expense
Nine Months Ended September 30, Change
2020 2019 $ %
(dollars in thousands)
General and administrative $ 43,589 $ 32,336 $ 11,253 34.8 %
% of revenue 14.6 % 13.7 %
General and administrative expense increased by $11.3 million in the nine months ended September 30, 2020 compared to the same period in 2019, primarily due to a $7.6 million increase in personnel costs due to an increase in headcount, inclusive of a $5.5 million increase in stock-based compensation expense, a $2.1 million increase in professional fees primarily due to litigation and acquisition-related expenses and other professional consulting fees, a $0.4 million increase in allocated overhead driven by costs related to our global kick-off meeting as well as an increase in IT and facilities costs, a $0.5 million increase in other office expenses and a $0.7 million increase in other expenses.
Interest Income
Nine Months Ended September 30, Change
2020 2019 $ %
(dollars in thousands)
Interest income $ 1,343 $ 4,761 $ (3,418) (71.8) %
% of revenue 0.5 % 2.0 %
Interest income decreased by $3.4 million in the nine months ended September 30, 2020 compared to the same period in 2019 primarily due to a decrease in interest rates.
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Interest Expense
Nine Months Ended September 30, Change
2020 2019 $ %
(dollars in thousands)
Interest expense $ (16,707) $ (9,940) $ (6,767) 68.1 %
% of revenue (5.7) % (4.2) %
Interest expense increased by $6.8 million in the nine months ended September 30, 2020 compared to the same period in 2019 primarily due to an increase in interest expense and amortization of debt discount and issuance costs related to the 2025 Notes.
Other Income (Expense), Net
Nine Months Ended September 30, Change
2020 2019 $ %
(dollars in thousands)
Other income (expense), net $ (94) $ (727) $ 633 (87.1) %
% of revenue — % (0.3) %
Other income (expense), net decreased by $0.6 million in the nine months ended September 30, 2020 compared to the same period in 2019 due to realized and unrealized foreign currency gains and losses, primarily related to the euro and British pound sterling.
Provision for (Benefit from) Income Taxes
Nine Months Ended September 30, Change
2020 2019 $ %
(dollars in thousands)
Provision for (benefit from) income taxes $ 1,005 $ (87) $ 1,092 NM
% of revenue 0.3 % — %
Provision for (benefit from) income taxes changed from a benefit of $0.1 million in the nine months ended September 30, 2019 to an expense of $1.0 million in the nine months ended September 30, 2020 primarily due to a $0.8 million deferred tax benefit in the prior period which resulted 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 in the acquisition of NetFort, which was not deductible for tax purposes, and a $0.3 million increase in our operations in foreign jurisdictions.
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Liquidity and Capital Resources
As of September 30, 2020, we had $239.4 million in cash and cash equivalents, $92.0 million in short- and long-term investments that have maturities ranging from one to nineteen months and an accumulated deficit of $588.4 million. Since our inception, we have generated significant losses and expect to continue to generate losses for the foreseeable future. Our principal sources of liquidity are cash and cash equivalents, short and long-term investments and our Credit and Security Agreement (Credit Agreement). To date, we have financed our operations primarily through private and public equity financings and issuance of convertible senior notes and through cash generated by operating activities.
We believe that our existing cash and cash equivalents, our short and long-term investments and our available borrowings under our Credit Agreement will be sufficient to meet our working capital expenditure requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support research and development efforts, the expansion of sales and marketing activities, particularly internationally, the introduction of new and enhanced products and service offerings and the cost of any future acquisitions of technology or businesses. In the event that additional financing is required from outside sources, we may be unable to raise the funds on acceptable terms, if at all. If we are unable to raise additional capital on terms satisfactory to us when we require it, our business, operating results and financial condition could be adversely affected.
Cash Flows
The following table shows a summary of our cash flows for the nine months ended September 30, 2020 and 2019:
Nine Months Ended September 30,
2020 2019
(in thousands)
Cash, cash equivalents and restricted cash at beginning of period $ 123,413 $ 99,565
Net cash provided by (used in) operating activities 4,305 (9,244)
Net cash (used in) provided by investing activities (90,469) 16,733
Net cash provided by financing activities 202,300 8,519
Effect of exchange rate changes on cash, cash equivalents and restricted cash 160 (648)
Cash, cash equivalents and restricted cash at end of period $ 239,709 $ 114,925
Uses of Funds
Our historical uses of cash have primarily consisted of cash used for operating activities such as expansion of our sales and marketing operations, research and development activities and other working capital needs, as well as cash used for business acquisitions and purchases of property and equipment including leasehold improvements for our facilities.
Operating Activities
Operating activities provided $4.3 million of cash and cash equivalents in the nine months ended September 30, 2020, which reflects our continued growth in revenue offset by continued investments in our operations and impact of the timing of working capital items. Cash provided by operating activities reflected our net loss of $69.9 million and an increase in our net operating assets and liabilities of $3.2 million, offset by $77.4 million of non-cash charges related primarily to depreciation and amortization, stock-based compensation expense, amortization of debt discount and debt issuance costs, provision for doubtful accounts and other non-cash charges. The increase in our net operating assets and liabilities was primarily due to a $10.5 million decrease in deferred revenue, a $5.3 million increase in deferred contract acquisition and fulfillment costs, a $3.1 million decrease in accrued expenses, primarily as a result of the payout of annual bonuses and year-end commissions, and a $0.9 million decrease in other liabilities, which each had a negative impact on operating cash flow. These factors were partially offset by a $13.2 million decrease in accounts receivable due to an increase in collections, and a $1.9 million increase in accounts payable and a $1.4 million decrease in prepaid expenses and other assets, which each had a positive impact on operating cash flow.
Operating activities used $9.2 million of cash and cash equivalents in the nine months ended September 30, 2019, which reflects our continued growth in revenue offset by continued investments in our operations and impact of the timing of working capital items. Cash used in operating activities reflected our net loss of $39.5 million and an increase in our net operating assets and liabilities of $18.9 million, offset by $49.2 million of non-cash charges related primarily to depreciation and amortization, stock-based compensation expense, amortization of debt discount and debt issuance costs, provision for doubtful accounts and other non-cash charges. The increase in our net operating assets and liabilities was primarily due to a $5.3 million decrease in accrued expenses, a $12.1 million decrease in deferred revenue, a $5.4 million increase in deferred contract acquisition and
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fulfillment costs, and a $9.9 million increase in prepaid expenses and other assets, which each had a negative impact on operating cash flow. These factors were partially offset by a $10.9 million decrease in accounts receivable due to collections, a $1.3 million increase in other liabilities and a $1.1 million increase in accounts payable, which each had a positive impact on operating cash flow.
Investing Activities
Investing activities used $90.5 million of cash in the nine months ended September 30, 2020, consisting of $125.8 million of cash paid for the acquisition of DivvyCloud, net of cash acquired of $5.0 million, $7.1 million in capital expenditures to purchase leasehold improvements, furniture and fixtures and computer equipment and $4.4 million for capitalization of internal-use software costs, partially offset by $46.8 million of investment sales and maturities, net of purchases.
Investing activities provided $16.7 million of cash in the nine months ended September 30, 2019, consisting of $63.1 million of investment sales and maturities, net of purchases, partially offset by $27.1 million in capital expenditures to purchase leasehold improvements and furniture and fixtures, primarily related to office space build-outs including our new corporate headquarters and computer equipment, $14.6 million of cash paid for the acquisition of NetFort and $4.7 million for capitalization of internal-use software costs.
Financing Activities
Financing activities provided $202.3 million of cash in the nine months ended September 30, 2020, which consisted primarily of $222.8 million in proceeds from the issuance of the 2025 Notes, net of issuance costs paid of $7.2 million, $6.2 million in proceeds from the exercise of stock options and $7.1 million in proceeds from the issuance of common stock purchased by employees under the Rapid7, Inc. 2015 Employee Stock Purchase Plan (ESPP), partially offset by $27.3 million for the purchase of 2025 Capped Calls, $5.9 million in withholding taxes paid for the net share settlement of equity awards, $0.4 million of payments of debt issuance costs and $0.2 million of deferred consideration payments.
Financing activities provided $8.5 million of cash in the nine months ended September 30, 2019, which consisted primarily of $7.9 million in proceeds from the exercise of stock options and $5.5 million in proceeds from the issuance of common stock purchased by employees under the ESPP, partially offset by $4.9 million in withholding taxes paid for the net share settlement of equity awards.
Contractual Obligations and Commitments
In May 2020, we issued $230.0 million aggregate principal amount of convertible senior notes. The 2025 Notes are unsecured obligations and 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 2025 Notes will mature on May 1, 2025, unless earlier converted, redeemed or repurchased.
In January 2020, we amended our contract with Amazon Web Services (AWS) which increased our total purchase obligation by $15.0 million, $40.0 million and $50.0 million in 2021, 2022 and 2023, respectively, for a total additional obligation of $105.0 million.
As of September 30, 2020, other than the items noted above, there were no material changes in our contractual obligations and commitments from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on February 28, 2020.
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We do not engage in off-balance sheet financing arrangements.
Recent Accounting Pronouncements
See Note 1 in the notes to the consolidated financial statements for a discussion of recent accounting pronouncements.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (GAAP). The preparation of our consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates. There have been no
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material changes in our critical accounting policies from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on February 28, 2020.
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