What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-02-26 compared with 2020-02-28 · 397 added, 446 removed, 757 unchanged (53% of the section changed)

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Notes to Consolidated Financial Statements

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Changes in Accounting Principles

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standards Update 2016-02, Leases (Topic 842) .

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of revenue recognition as of January 1, 2018 due to the adoption of Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) .

Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standards Update 2016-02, Leases (Topic 842).

Basis for Opinions

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A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and

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dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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Evaluation of standalone selling prices of revenue performance obligations

As discussed in Note 2 to the consolidated financial statements, the Company recognized products revenue of $261.1 million, maintenance and support revenue of $36.8 million and professional services revenue of $29.1 million for the year ended December 31, 2019.

As discussed in Note 2 to the consolidated financial statements, the Company recognized products revenue of $382.9 million and professional services revenue of $28.6 million for the year ended December 31, 2020.

The Company allocates value to each distinct performance obligation on a relative standalone selling price basis.

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We identified the evaluation of standalone selling prices for the Company’s products and services as a critical audit matter.

Subjective auditor judgment is involved in evaluating the Company’s assumptions regarding market conditions and pricing practices where there is no direct observable data available, including historical sales data and discounts from list price.

The primary procedures we performed to address this critical audit matter included the following.

We tested certain internal controls in the Company’s revenue process, including controls over the determination of standalone selling prices, and the assumptions described above.

Subjective auditor judgment was involved in evaluating the Company’s assumptions regarding market conditions and pricing practices, including historical sales data and discounts from list price, where there was no direct observable data available.

The following are primary procedures we performed to address this critical audit matter.

We evaluated the design and tested the operating effectiveness of certain internal controls in the Company’s revenue process, including controls over the determination of standalone selling prices, and the assumptions described above.

We evaluated the Company’s estimated standalone selling prices, including their compliance with the Company’s accounting policy, by assessing available, relevant external information and comparing the estimated standalone selling prices to internal historical disaggregated sales data, including discounts from list price, by geographic location and selling method.

We selected a sample of customer agreements and read contract source documents to assess the relevance and reliability of the historical sales data used by the Company to estimate standalone selling prices, and tested the mathematical accuracy of the median or average discount from list price for the products and services.

We selected certain customer agreements and read contract source documents to assess the relevance and reliability of the historical sales data used by the Company to estimate standalone selling prices, and tested the mathematical accuracy of the median or average discount from list price for the products and services.

We have served as the Company's auditor since 2013.

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February 26, 2021

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CONSOLIDATED BALANCE SHEETS

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See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF OPERATIONS

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Products $ 382,922 $ 297,897 $ 210,794

Maintenance and support 36,778 42,223 46,268

Professional services 28,564 29,050 33,297

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Products 96,864 68,179 47,488

Maintenance and support 8,495 7,678 7,491

Professional services 24,653 22,967 23,595

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Loss before income taxes ( 96,863 ) ( 53,803 ) ( 55,079 )

Provision for (benefit from) income taxes 42 466 ( 2,236 )

Provision for income taxes 1,986 42 466

Net loss $ ( 98,849 ) $ ( 53,845 ) $ ( 55,545 )

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See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

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Total change in unrealized gains (losses) on investments ( 191 ) 244 8

Change in unrealized gains on cash flow hedges 432 — —

Total other comprehensive income 241 244 8

Comprehensive loss $ ( 98,608 ) $ ( 53,601 ) $ ( 55,537 )

See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

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Stock-based compensation expense — — — — 27,593 — — 27,593

Cumulative-effect adjustment for the adoption of ASU 2016-09 — — — — 105 — ( 105 ) —

Cumulative-effect adjustment for the adoption of ASC 606

— — — — — — 25,873 25,873

Equity component of convertible senior notes, net — — — — 52,194 — — 52,194

Purchase of capped calls related to convertible senior notes — — — — ( 26,910 ) — — ( 26,910 )

Issuance of common stock related to secondary offering 1,500 15 — — 30,892 — — 30,907

Issuance of common stock under employee stock purchase plan 219 2 — — 3,635 — — 3,637

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Issuance of common stock upon exercise of stock options 945 9 — — 7,597 — — 7,606

Net unrealized loss on investments — — — — — ( 20 ) — ( 20 )

Other comprehensive income — — — — — 8 — 8

Net loss — — — — — — ( 55,545 ) ( 55,545 )

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Stock-based compensation expense — — — — 40,664 — — 40,664

Cumulative-effect adjustment for the adoption of ASC 606 — — — — — — 25,873 25,873

Equity component of convertible senior notes, net — — — — 52,194 — — 52,194

Purchase of capped calls related to convertible senior notes — — — — ( 26,910 ) — — ( 26,910 )

Issuance of common stock related to secondary offering 1,500 15 — — 30,892 — — 30,907

Issuance of common stock under employee stock purchase plan 185 2 — — 5,519 — — 5,521

Vesting of restricted stock units 1,292 13 — — ( 13 ) — — —

Forfeiture of restricted stock awards ( 3 ) — — — — — — —

Shares withheld for employee taxes ( 134 ) ( 2 ) — — ( 6,950 ) — — ( 6,952 )

Issuance of common stock upon exercise of stock options 968 10 — — 10,207 — — 10,217

Net unrealized gain on investments — — — — — 8 — 8

Other comprehensive income — — — — — 244 — 244

Net loss — — — — — — ( 53,845 ) ( 53,845 )

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Issuance of common stock upon exercise of stock options 784 8 — — 7,811 — — 7,819

Net unrealized gain on investments — — — — — 244 — 244

Equity component of convertible senior notes, net — — — — 46,832 — — 46,832

Purchase of capped called related to convertible senior notes — — — — ( 27,255 ) — — ( 27,255 )

Other comprehensive income — — — — — 241 — 241

Net loss — — — — — — ( 98,849 ) ( 98,849 )

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See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS

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Net loss $ ( 98,849 ) $ ( 53,845 ) $ ( 55,545 )

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

Depreciation and amortization 22,631 16,528 11,097

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Deferred income taxes 737 ( 645 ) ( 69 )

Foreign currency re-measurement (gain) loss 255 757 ( 364 )

Foreign currency re-measurement loss 263 255 757

Other non-cash items 168 ( 1,889 ) ( 506 )

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Other liabilities ( 425 ) 1,018 367

Net cash (used in) provided by operating activities ( 1,420 ) 6,066 13,286

Net cash provided by (used in) operating activities 4,887 ( 1,420 ) 6,066

Cash flows from investing activities:

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Sales and maturities of investments 166,524 214,980 70,226

Net cash used in investing activities 16,811 ( 193,733 ) ( 22,221 )

Net cash (used in) provided by investing activities ( 156,287 ) 16,811 ( 193,733 )

Cash flows from financing activities:

Proceeds from issuance of convertible senior notes, net of issuance costs of $ 6,879

Proceeds from issuance of convertible senior notes, net of issuance costs of $ 7,201 and $ 6,879 for the years ended December 31, 2020 and 2018, respectively

222,799 — 223,121

Purchase of capped calls related to convertible senior notes ( 27,255 ) — ( 26,910 )

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Deferred business acquisition payment ( 150 ) — —

Payment of debt issuance costs ( 440 ) — —

Taxes paid related to net share settlement of equity awards ( 8,921 ) ( 6,952 ) ( 2,197 )

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Net cash provided by financing activities 200,925 8,788 236,164

Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 331 ) ( 694 ) 281

Net increase (decrease) in cash, cash equivalents and restricted cash 23,848 47,803 ( 1,386 )

Cash, cash equivalents and restricted cash, beginning of period 99,565 51,762 53,148

Cash, cash equivalents and restricted cash, end of period $ 123,413 $ 99,565 $ 51,762

Effect of exchange rate changes on cash and cash equivalents 679 ( 331 ) ( 694 )

Net increase in cash and cash equivalents 50,204 23,848 47,803

Cash and cash equivalents, beginning of period 123,413 99,565 51,762

Cash and cash equivalents, end of period $ 173,617 $ 123,413 $ 99,565

Supplemental cash flow information:

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Leasehold improvements acquired through tenant improvement allowance $ — $ 14,016 $ —

Reconciliation of cash, cash equivalents and restricted cash:

Cash and cash equivalents $ 123,413 $ 99,565 $ 51,562

Restricted cash in other assets — — 200

Total cash, cash equivalents and restricted cash $ 123,413 $ 99,565 $ 51,762

See accompanying notes to consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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(a) Basis of Presentation and Consolidation

The accompanying consolidated financial statements include our results of operations and those of our wholly-owned subsidiaries.

All intercompany transactions and balances have been eliminated in consolidation.

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).

The consolidated financial statements include our results of operations and those of our wholly-owned subsidiaries.

All intercompany transactions and balances have been eliminated in consolidation.

(b) 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.

The management estimates include, but are not limited to 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 and recoverability of long-lived assets, the valuation of allowance for doubtful accounts, the valuation of stock-based compensation, the fair value of assets acquired and liabilities assumed in business combinations, the incremental borrowing rate for operating leases, the fair value of the debt component of convertible senior notes 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.

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 and AppSpider products, and associated content subscriptions for our Nexpose and Metasploit products.

We also generate appliance revenue that is included in our products revenue and is associated with hardware sold with our Nexpose product to certain customers.

We generate maintenance and support revenue associated with customers’ purchases of our software licenses for Nexpose, Metasploit and AppSpider.

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.

We adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) (ASC 606) on January 1, 2018 using the modified retrospective method.

The adoption of ASC 606 resulted in a cumulative adjustment to increase our accumulated deficit by $ 25.9 million at January 1, 2018, which included a $ 0.9 million increase in deferred revenue and $ 0.4 million increase in deferred tax liabilities, offset by a $ 27.1 million increase in deferred contract asset and fulfillment costs.

As a result of the adoption of ASC 606, the net loss on our consolidated statement of operations for the year ended December 31, 2018 was decreased by $ 0.6 million.

The change in the net loss was primarily due to a $ 12.9 million decrease in sales and marketing expense, due to the capitalization of commissions, partially offset by a $ 11.8 million decrease in revenue, primarily due to a decrease in perpetual license revenue and a $ 0.3 million increase in provision to income taxes due additional deferred taxes for the temporary differences between the accounting and tax treatment of capitalized costs to

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obtain and fulfill a contract.

The adoption of ASC 606 resulted in offsetting changes in operating assets and liabilities and had no impact on net cash flow from operations.

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.

Our operational and financial performance for the year ended December 31, 2020 was negatively impacted by the slowdown in activity associated with the COVID-19 pandemic and we expect that to continue going forward.

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.

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 year ended December 31, 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 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.

(d) Revenue Recognition

We generate revenue primarily from:

(1) subscription revenue from the sale of cloud-based subscriptions, managed services and content subscriptions associated with our software licenses, (2) term and perpetual software licenses, (3) maintenance and support associated with the purchase of software licenses and (4) professional services from the sale of our deployment and training services related to our solutions, incident response services, penetration testing and security advisory services.

We recognize revenue when a customer obtains control of promised products or services.

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• 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

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provide the customer with the right to take possession of our software operating on our cloud platform at any time.

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.

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• Revenue related to our content subscriptions associated with our software licenses is recognized ratably over the contractual period.

• Some of our customers have the option to purchase additional subscription and support services at a stated price.

These options generally do not provide a material right as they are priced at our SSP.

Certain subscription contracts contain service level commitments, which entitle our customers to receive service credits and, in certain cases, refunds, if our services do not meet certain levels.

These service credits and refunds represent variable consideration.

We have historically not experienced any significant incidents affecting the defined levels of reliability and performance as required by our subscription contracts and accordingly, no estimated refunds have been considered in the allocation of the transaction price.

Term and Perpetual Software Licenses

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Other revenue primarily includes revenue from delivery of appliances and other miscellaneous revenue.

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Contracts with Multiple Performance Obligations

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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 SSP basis.

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.

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.

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As of December 31, 2020 and 2019, we have no contract assets recorded on our consolidated balance sheet.

ASC 605 Revenue Accounting Policy

For periods prior to January 1, 2018, revenue was recognized in accordance with ASC 605.

Under ASC 605, revenue was recognized when all of the following criteria were met:

(1) Persuasive evidence of an arrangement existed, (2) delivery had occurred, (3) the sales price was fixed or determinable and (4) collectability was probable.

Substantially all of our software licenses were sold in multiple-element arrangements that included maintenance and support and content subscriptions, and in addition could include cloud-based subscriptions, professional services and/or managed services.

All of these elements were considered to be software elements other than cloud-based subscriptions and managed services which were non-software elements.

Non-software elements included in multiple-element arrangements consist of a single deliverable that had stand-alone value and represented a single unit of accounting.

We determined that we did not have vendor-specific objective evidence, or VSOE, of the selling price for the elements comprising these multiple-element arrangements as our software licenses were generally not sold on a stand-alone basis and we purposefully employed variable pricing for our offerings in order to meet customer purchase requirements along the multiple price points of the demand curve.

When all of the elements of a multiple-element arrangement were software elements, the revenue for software licenses and any other products and services that were sold along with the license was generally deferred on our balance sheet and recognized as revenue on our consolidated statements of operations ratably over the contractual period of the maintenance and support, typically one to three years, which was longer than the period over which the professional services were performed.

Revenue recognition began upon delivery of the software license, assuming that all other criteria for revenue recognition had been met.

When a multiple-element arrangement included both software elements and non-software elements, the total arrangement consideration was first allocated between the software elements and the non-software elements based on the selling price hierarchy, which included (1) VSOE, if available, (2) third-party evidence, or TPE, if VSOE was not available or (3) best estimate of selling price, or BESP, if neither VSOE nor TPE was

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We were not able to establish a selling price for any element using VSOE or TPE.

We determined BESP by considering our overall pricing objectives and market conditions.

Significant pricing practices taken into consideration included our discounting practices, the size and volume of our transactions, our price lists, historical standalone sales and contract prices.

The portion of the consideration allocated to the non-software elements was recognized ratably over the service period of the non-software elements, assuming all other criteria for revenue recognition had been met.

The portion of the consideration allocated to software elements was recognized as described above.

With respect to our managed services and cloud-based subscription offerings sold on a stand-alone basis, we recognized revenue ratably over the term of the managed service agreement or subscription, assuming that the other criteria for revenue recognition were met.

We recognized revenue from professional services sold on a stand-alone basis as those services were rendered.

(d) Cash and Cash Equivalents

(e) Cash and Cash Equivalents

We consider all highly liquid instruments with original maturities of three months or less at the date of purchase to be cash equivalents.

Cash and cash equivalents are recorded at cost, which approximates fair value.

As of December 31, 2019 and 2018, $ 106.8 million and $ 58.6 million, respectively, of our cash equivalents were invested in money market funds and commercial paper.

(e) Restricted Cash

As of December 31, 2017, we had $ 0.2 million of restricted cash recorded on our balance sheet in other non-current assets as collateral for a credit card program.

This restricted cash was released during 2018, therefore as of December 31, 2019 and 2018, we had no restricted cash on our balance sheet.

(f) Investments

We classify our investments as available-for-sale and record these investments at fair value.

We currently invest primarily in commercial paper, corporate bonds, agency bonds, U.S.

Our investments consist of commercial paper, corporate bonds, agency bonds, U.S.

Government agencies and asset-backed securities.

Investments with an original maturity of greater than three months at the date of purchase and less than one year from the date of the balance sheet are classified as short-term and those with maturities of more than one year from the date of the balance sheet are classified as long-term in the consolidated balance sheet.

Additionally, we do not invest in any securities with contractual maturities greater than 24 months.

Unrealized gains and losses that are considered temporary are reported as a component of other comprehensive loss.

We classify our investments as available-for-sale and record these investments at fair value.

When the fair value of an investment declines below its amortized cost basis, any portion of that decline attributable to credit losses, to the extent expected to be nonrecoverable before the sale of the security, is recognized in our consolidated statements of operations.

When the fair value of the investment declines below its amortized cost basis due to changes in interest rates, such amounts are recorded in accumulated other comprehensive income (loss), and are recognized in our consolidated statement of operations only if we sell or intend to sell the security before recovery of its cost basis.

Realized gains and losses are determined based on the specific identification method, and are reflected in our consolidated statements of operations.

We regularly review our investment portfolio to identify and evaluate investments that have indicators of possible impairment.

Factors considered in determining whether a loss is other-than-temporary include, but are not limited to:

the length of time and extent a security’s fair value has been below its cost, the financial condition and near-term prospects of the investee, the credit quality of the security’s issuer, likelihood of recovery and our intent and ability to hold the security for a period of time sufficient to allow for any anticipated recovery in value.

For our debt instruments, we also evaluate whether we have the intent to sell the security or it is more likely than not that we will be required to sell the security before recovery of its cost basis.

We do not invest in any securities with contractual maturities greater than 24 months.

(g) Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are recorded at the invoiced amount, net of allowances for doubtful accounts.

Management regularly reviews the adequacy of the allowance for doubtful accounts by considering specific customer collection issues and historical write-off trends to determine whether an allowance is appropriate.

Accounts receivable are recorded at the invoiced amount, net of allowances for doubtful accounts for any potential uncollectible amounts.

We maintain an allowance for doubtful accounts for estimated credit losses resulting from the inability of our customers to make required payments.

Management regularly reviews the adequacy of the allowance based upon historical collection experience, the age of the receivable, an evaluation of each customer's expected ability to pay and current and future economic and market conditions.

Accounts receivable are charged against the allowance for doubtful accounts after all means of collection have been exhausted and the potential for recovery is considered remote.

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The following table displays the changes in our allowance for doubtful accounts:

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(in thousands)

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(h) Concentration of Credit Risk

Financial instruments that potentially expose us to concentrations of credit risk consist primarily of cash and cash equivalents, accounts receivable and short-term and long-term investments.

Financial instruments that potentially expose us to concentrations of credit risk consist primarily of cash and cash equivalents, accounts receivable, short-term and long-term investments and derivative financial instruments.

Management believes that the financial institutions that hold our investments are financially sound and, accordingly, are subject to minimal credit risk.

Deposits held with banks may exceed the amount of insurance provided on such deposits.

We have not experienced any losses in such accounts and believe that we are not exposed to any significant risk.

We provide credit to customers in the normal course of business.

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No single customer, including channel partners, accounted for 10% or more of our total revenues in 2020, 2019 or 2018 or accounts receivable as of December 31, 2020 or 2019.

Our short-term and long-term investments primarily consist of commercial paper, corporate bonds, agency bonds, U.S.

Government agencies and asset-backed securities.

All of our investments are highly-rated by credit rating agencies and are issued by organizations with reputable credit, and therefore bear minimal credit risk.

Our derivative financial instruments expose us to credit risk to the extent that the counterparties may be unable to meet the terms of the arrangement.

We mitigate this credit risk by transacting with major financial institutions with high credit ratings.

(i) Deferred Contract Acquisition and Fulfillment Costs

We adopted ASC 606 on January 1, 2018 using the modified retrospective method.

The adoption of ASC 606 resulted in a cumulative adjustment to increase our accumulated deficit as of January 1, 2018.

Comparative prior periods were not adjusted.

In accordance with ASC 606, we capitalize commission expenses paid to internal sales personnel and partner referral fees that are incremental costs to obtaining customer contracts.

We capitalize commission expenses paid to internal sales personnel and partner referral fees that are incremental costs to obtaining customer contracts.

These costs are recorded as deferred contract acquisition costs on the consolidated balance sheets.

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We determined the estimated period of benefit by taking into consideration the contractual term and expected renewals of customer contracts, our technology and other factors, including the fact that commissions paid on renewals are not commensurate with commissions paid on initial sales transactions.

We periodically review the carrying amount of deferred contract acquisition costs to determine whether events or changes in circumstances have occurred that could impact the period of benefit.

Commissions paid relating to contract renewals are deferred and amortized on a straight-line basis over the related renewal period.

Costs to obtain a contract for professional services arrangements are expensed as incurred in accordance with the practical expedient as the contractual period of our professional services arrangements are one year or less.

We periodically review the carrying amount of deferred contract acquisition costs to determine whether events or changes in circumstances have occurred that could impact the period of benefit.

Amortization expense associated with deferred contract acquisition costs is recorded to sales and marketing expense in our consolidated statements of operations.

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Contract fulfillment costs are amortized on a straight-line basis over the estimated period of benefit and recorded as cost of products in our consolidated statement of operations.

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For periods prior to January 1, 2018, sales commissions were recognized in the period that the commissions were earned by our employees, which was typically upon signing of an arrangement.

(j) Property and Equipment

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Once technological feasibility is established, all software costs are capitalized until the product is available for release to customers.

To date, the software development costs have not been capitalized as we believe our current software development process is essentially completed concurrently with the establishment of technological feasibility.

To date, the software development costs have not been capitalized as the cost incurred and time between technological feasibility and product release was insignificant.

As such, these costs are expensed as incurred and recognized in research and development expenses in our consolidated statements of operations.

With respect to software developed for internal use, we capitalize qualifying internal costs, such as payroll and benefits of those employees directly associated with the development of the software, and other qualifying consulting costs.

Costs incurred during the preliminary planning and evaluation and post implementation stages of the project are expensed as incurred.

Costs related to software developed, acquired or modified for internal use are capitalized.

Costs incurred during the preliminary planning and evaluation stage of the project and during the post implementation stages of the project are expensed as incurred.

Costs incurred during the application development stage of the project are capitalized.

These capitalized costs consist of internal compensation related costs and external direct costs.

Costs related to software developed for internal use are amortized over an useful life of 3 years.

We capitalized $ 6.1 million, $ 6.1 million and $ 3.3 million of costs related to software developed for internal use in the years ended December 31, 2020, 2019 and 2018, respectively.

Effective January 1, 2019, we adopted FASB ASU 2016-02, Leases (Topic 842), as amended (ASC 842).

In accordance with ASC 842, at the inception of an arrangement, we determine whether the arrangement is or contains a lease based on the unique facts and circumstances present and the classification of the lease.

Most leases with a term greater than one year are recognized on the consolidated balance sheet as right-of-use (ROU) assets, lease liabilities and, if applicable, long-term lease liabilities.

We have elected not to recognize on the balance sheet leases with terms of one year or less.

For contracts with lease and non-lease components, we have elected not to allocate the contract consideration and to account for the lease and non-lease components as a single lease component.

Lease liabilities and their corresponding ROU assets are recorded based on the present value of lease payments over the expected lease term.

We determine whether an arrangement is or contains a lease at inception based on the unique facts and circumstances present.

We evaluate the classification of a lease at inception and, as necessary, at modification.

Operating leases are recognized on the consolidated balance sheet as right-of-use (ROU) assets, lease liabilities and, if applicable, long-term lease liabilities.

Operating lease ROU assets and liabilities are recognized at the present value of future lease payments at the lease commencement date.

The implicit rate within our operating leases are generally not determinable and therefore we use the incremental borrowing rate at the lease commencement date to determine the present value of lease payments.

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We determine our incremental borrowing rate for each lease using our estimated borrowing rate, adjusted for various factors including level of collateralization, term and currency to align with the terms of the lease.

The operating lease ROU asset also includes any lease prepayments, offset by lease incentives.

The operating lease ROU asset also includes any lease prepayments and initial direct costs, offset by lease incentives.

Certain of our leases include options to extend or terminate the lease.

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An option to terminate is considered unless it is reasonably certain we will not exercise the option.

For periods prior to the adoption of ASC 842, we recorded rent expense on a straight-line basis over the term of the related lease.

The difference between the straight-line rent expense and the payments made in accordance with the operating lease agreements were recognized as a deferred rent liability on the accompanying consolidated balance sheets.

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(m) Long-Lived Assets

We have elected not to recognize on the balance sheet leases with terms of one year or less.

For contracts with lease and non-lease components, we have elected not to allocate the contract consideration and to account for the lease and non-lease components as a single lease component.

(m) Impairment of Long-Lived Assets

We evaluate our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable.

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If such assets are considered to be impaired, the impairment recognized is the amount by which the carrying value exceeds the fair value of the assets.

For the year ended December 31, 2019, we determined there were no indicators of impairment of our long-lived assets.

For the year ended December 31, 2020, there was no impairment of our long-lived assets.

(n) Business Combinations

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The excess of the purchase price for acquisitions over the fair value of the net assets acquired, including other intangible assets, is recorded as goodwill.

Acquisition-related transaction costs are expensed as incurred.

Determining the fair value of assets and liabilities assumed requires management to make significant estimates and assumptions, especially with respect to intangible assets.

While we use our best estimates and assumptions as part of the purchase price allocation to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement.

As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill to the extent that we identify adjustments to the preliminary purchase price allocation.

Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations.

During the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the fair value of these assets acquired and liabilities assumed with the corresponding offset to goodwill.

Upon the conclusion of the final determination of the fair value of assets acquired or liabilities assumed any subsequent adjustments are recorded to the consolidated statements of operations.

Acquisition-related transaction costs are expensed as incurred.

1 unchanged sentence

Goodwill is not amortized but is tested for impairment at least annually or more frequently when events or circumstances occur that indicate that it is more likely than not that an impairment has occurred.

We test goodwill for impairment on the last day of each fiscal year and whenever events or changes in circumstances indicate that the carrying amount of this asset may exceed its fair value.

We perform an annual goodwill impairment test on the last day of each fiscal year and whenever events or changes in circumstances indicate that the carrying amount of this asset may exceed its fair value.

For our goodwill impairment analysis, we operate with a single reporting unit.

1 unchanged sentence

The single-step impairment test begins with an estimation of the fair value of a reporting unit.

Goodwill impairment exists when a reporting unit’s carrying value exceeds its fair value.

Goodwill impairment exists when the net assets of a reporting unit exceed its fair value.

In performing the single step of the goodwill impairment testing and measurement process, we estimated the fair value of our single reporting unit using our market capitalization.

6 unchanged sentences

Foreign currency transaction and re-measurement gains and losses are included in other income (expense), net.

In 2019, we recorded foreign currency transactional losses of $( 0.2 ) million.

In 2018 and 2017, we recorded no minal foreign currency transactional gains (losses).

In 2019, 2018 and 2017, we recorded foreign currency re-measurement gains (losses) of $( 0.3 ) million, $( 0.8 ) million and $ 0.4 million, respectively.

(q) Stock-Based Compensation

Stock-based compensation expense related to our stock options, restricted stock awards (RSAs), restricted stock units (RSUs) and purchase rights issued under our 2015 Employee Stock Purchase Plan (ESPP) is calculated based on the estimated fair value of the award on the grant date.

The fair value is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period of the

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respective award.

We recognize forfeitures as they occur and do not estimate a forfeiture rate when calculating the stock-based compensation expense.

The fair values of RSAs and RSUs are based on the closing market price of our common stock on the Nasdaq Global Market on the date of grant.

In 2020, 2019 and 2018, foreign currency transactional gains (losses) and foreign currency re-measurement gains (losses) were not material.

(q) Derivative 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.

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.

Derivative financial instruments are recorded 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 our consolidated statement of operations.

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.

(r) Stock-Based Compensation

Stock-based compensation expense related to our stock options, restricted stock units (RSUs), performance-based restricted stock units (PSUs) and purchase rights issued under our 2015 Employee Stock Purchase Plan (ESPP) is calculated based on the estimated fair value of the award on the grant date.

The fair values of RSUs and PSUs are based on the value of our common stock on the date of grant.

The fair values of stock options and ESPP purchase rights are estimated on the grant date using the Black-Scholes option pricing model which requires management to make a number of assumptions, including the expected life of the option, the volatility of the underlying stock, the risk-free interest rate and expected dividends.

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If any assumptions change, our stock-based compensation expense could be materially different in the future.

(r) Advertising

The fair value is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period of the respective award.

The actual number of PSUs earned and eligible to vest are determined based on the performance conditions defined when the awards are granted.

We recognize share-based compensation expense for the PSUs on a straight-line basis over the requisite service period for each separately vesting portion of the award when it is probable that the performance conditions will be achieved.

We reassess the probability of vesting at each reporting period for awards with performance conditions and adjust stock-based compensation cost based on its probability assessment.

We recognize forfeitures as they occur and do not estimate a forfeiture rate when calculating the stock-based compensation expense.

(s) Advertising

Advertising costs are expensed as incurred, and are recorded in sales and marketing expense in our consolidated statement of operations.

We incurred $ 16.4 million, $ 12.8 million and $ 8.9 million in advertising expense in 2020, 2019 and 2018, respectively.

(s) Income Taxes

(t) Income Taxes

Income taxes are accounted for using the asset and liability method.

Under this method, deferred tax assets and liabilities are recognized for differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases, and operating loss and tax credit carryforwards using tax rates expected to be in effect in the years in which the differences are expected to reverse.

Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax assets will not be realized in the future.

Under this method, deferred tax assets and liabilities are recognized for differences between the consolidated financial statements carrying amounts of assets and liabilities and their respective income tax bases, and operating loss and tax credit carryforwards using enacted tax rates expected to apply to taxable income in the years in which the differences are expected to reverse.

Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax assets will not be realized.

Significant judgment is required in determining any valuation allowance recorded against deferred tax assets.

In assessing the need for a valuation allowance, we consider all available evidence, including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies.

In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.

We recognize tax benefits from uncertain tax positions if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position.

Interest and penalties associated with such uncertain tax positions are classified as a component of income tax expense.

(t) Net Loss per Share

(u) Net Loss per Share

We calculate basic net loss per share by dividing our net loss by the weighted-average number of common shares outstanding during the period.

Diluted net loss per share is computed by giving effect to all potentially dilutive securities, including stock options, RSAs, RSUs, the impact of our ESPP and the impact of the conversion spread of our consolidated senior notes (Notes).

Diluted net loss per share is computed by giving effect to all potentially dilutive securities, including stock options, RSUs, PSUs, the impact of our ESPP and the impact of the conversion spread of our convertible senior notes (Notes).

Basic and diluted net loss per share was the same for all periods presented as the inclusion of all potentially dilutive securities outstanding was anti-dilutive.

(u) Recent Accounting Pronouncements

(v) Recent Accounting Pronouncements

Accounting Pronouncements Recently Adopted

In February 2016, the FASB issued ASU 2016-02, Leases , (Topic 842), as amended (ASC 842), which required companies to recognize on the balance sheet the assets and liabilities for the rights and obligations created by the leased asset.

We adopted this standard effective January 1, 2019 using the modified retrospective approach for all leases entered into before the effective date.

We also elected to implement the new standard at the adoption date with a cumulative-effect adjustment, if any, recognized to the opening balance of accumulative deficit in the period of adoption.

For comparability purposes, we will continue to comply with the previous disclosure requirements in accordance with the existing lease guidance for all periods presented in the year of adoption.

We elected the package of practical expedients as permitted under the transition guidance, which allowed us:

(1) to carry forward the historical lease classification;

(2) not to reassess whether expired or existing contracts are or contain leases;

and (3) not reassess the treatment of initial direct costs of existing leases.

In addition, we elected an accounting policy to not recognize leases with an initial term of one year or less on the balance sheet.

Upon the adoption of this standard on January 1, 2019, we recognized a total lease liability of $ 21.3 million, representing the present value of the minimum rental payments as of the adoption date and a right-of-use asset

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in the amount of $ 15.4 million.

We did not have any finance leases (formerly referred to as capital leases prior to the adoption of ASC 842), therefore there was no change in accounting treatment required.

Accounting Pronouncements Not Yet Effective

In August 2018, the FASB issued 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.

The new standard will be effective for us in the first quarter of 2020.

Entities can choose to adopt the new guidance prospectively or retrospectively.

We plan to adopt this standard using the prospective adoption approach, however we are currently in the process of evaluating the effects of this pronouncement on our consolidated financial statements.

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):

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.

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments , which introduced a new methodology for accounting for credit losses on financial instruments.

The standard establishes a new forward looking expected loss model that requires entities to estimate current expected credit losses on accounts receivable and other financial instruments by using all practical and relevant information.

We adopted this standard in the first quarter of 2020.

The impact to our consolidated financial statements as a result of the adoption was not material.

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 the first quarter of fiscal 2022 and can be adopted on a full or modified retrospective basis.

We plan to adopt this standard in the first quarter of 2021 under the modified retrospective basis.

Adopting this guidance will reduce non-cash interest expense, and thereby increase net income, in our consolidated financial statements.

Additionally, the treasury stock method for calculating earnings per share will no longer be allowed for convertible debt instruments whose principal amount may be settled using shares.

Rather, the if-converted method will be required.

Application of the “if converted” method may reduce our reported diluted earnings per share.

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.

We do not expect this ASU to have an impact on our consolidated financial statements.

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.

We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

(3) Revenue from Contracts with Customers

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Year Ended December 31,

2020 2019 2018

(in thousands)

7 unchanged sentences

Year Ended December 31,

2020 2019 2018

(in thousands)

5 unchanged sentences

The estimated revenues do not include unexercised contract renewals.

2020 2021 2022 and thereafter

Next Twelve Months Thereafter

(in thousands)

2 unchanged sentences

Maintenance and support 18,011 4,222

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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.

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(4) Business Combinations

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.

We expensed the related acquisition costs of $ 0.5 million in general and administrative expense.

The following table summarizes the allocation of purchase price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date (in thousands):

Purchase price $ 16,130

DivvyCloud 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 working capital and other purchase price adjustments.

The deferred cash payments will be held by us to satisfy indemnification obligations and certain post-closing purchase price adjustments.

The deferred cash payments for post-closing purchase price adjustments was 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 $ 6.9 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 year ended December 31, 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 $ 130,865

Deferred cash consideration 6,917

Fair value of total consideration transferred $ 137,782

Recognized amount of identifiable assets acquired and liabilities assumed:

Cash and cash equivalents 5,039

Other net working capital 325

Operating lease right-of-use assets 3,320

Other assets 2,206

Deferred revenue ( 4,779 )

Deferred tax liability ( 761 )

Intangible asset 6,084

Operating lease liabilities ( 3,297 )

Other liabilities ( 1,642 )

Intangible assets 21,200

Total identifiable net assets assumed 22,047

Goodwill 115,735

Total purchase price allocation $ 16,130

Net purchase price $ 137,782

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 Amortization Life (years)

(in thousands)

Amount Weighted Average Amortization Life

(in thousands) (in years)

Developed technology $ 18,600 6

The excess of the purchase price over the tangible assets acquired, identifiable intangible asset acquired and assumed liabilities was recorded as goodwill.

We believe that the amount of goodwill reflects the expected synergistic benefits of being able to leverage the integration of the technology acquired with our existing product offerings and to be able to successfully market and sell these new products and features to our customer base.

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 asset were not 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 restricted stock units (RSUs), which will vest over a maximum of three years .

The vesting of the RSUs are subject to the employee's continued service with us.

Accordingly, stock-based compensation expense associated with the RSUs will be expensed as incurred in our post-acquisition financial statements.

Proforma results of operations have not been included, as the acquisition of NetFort was not material to our results of operations for any periods presented.

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tCell.io, Inc.

On October 15, 2018, we acquired tCell.io, Inc.

(tCell) for total cash consideration of $ 15.4 million.

The acquired goodwill and intangible assets were not 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 and net loss attributable to the DivvyCloud business for the year ended December 31, 2020 was $ 6.3 million and $ 18.5 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.

Year Ended December 31,

(in thousands)

Revenue $ 416,999 $ 332,392

Net loss $ ( 102,766 ) $ ( 78,258 )

NetFort Technologies Limited

The $ 16.1 million purchase price was funded with cash.

We expensed the related acquisition costs of $ 0.5 million in general and administrative expense.

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The excess of the purchase price over the assets acquired and liabilities assumed was recorded as goodwill.

The fair value of goodwill and intangible assets were $ 5.3 million and $ 9.2 million, respectively.

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 were not deductible for tax purposes.

On July 12, 2017, we acquired 100 % of the outstanding equity of Komand, Inc.

(Komand) for total cash consideration of $ 14.7 million, net of cash acquired of $ 0.1 million.

We expensed the related acquisition costs of $ 0.2 million in general and administrative expense.

The acquired goodwill and intangible asset will not be deductible for tax purposes.

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 service with us.

Accordingly, the compensation expense associated with the RSUs is expensed as incurred in our post-acquisition financial statements.

tCell.io, Inc.

On October 15, 2018, we acquired tCell.io, Inc.

(tCell) for total cash consideration of $ 15.4 million.

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 goodwill and intangible assets were $ 8.1 million and $ 9.4 million, respectively.

The fair value of net assets acquired, goodwill and intangible assets were $ 0.9 million, $ 5.3 million and $ 9.2 million, respectively.

The goodwill was allocated to our one reporting unit.

The acquired goodwill and intangible asset were not deductible for tax purposes.

(5) Fair Value Measurements and Investments

(5) Investments

Our investments, which are all classified as available-for-sale, consisted of the following:

As of December 31, 2020

Losses Fair Value

(in thousands)

Government agencies $ 83,596 $ 3 $ ( 12 ) $ 83,587

Corporate bonds 24,162 31 ( 1 ) 24,192

Commercial paper 34,766 — — 34,766

Agency bonds 3,998 1 — 3,999

Asset-backed securities 2,419 — — 2,419

Total $ 148,941 $ 35 $ ( 13 ) $ 148,963

As of December 31, 2019

Losses Fair Value

(in thousands)

Government agencies $ 36,880 $ 99 $ — $ 36,979

Commercial paper 19,965 1 — 19,966

Corporate bonds 60,803 77 ( 2 ) 60,878

Agency bonds 12,198 44 — 12,242

Asset-backed securities 8,986 1 ( 7 ) 8,980

Total $ 138,832 $ 222 $ ( 9 ) $ 139,045

As of December 31, 2020 and 2019, our available-for-sale investments had maturities ranging from 1 to 16 months and from 3 months to 2 years, respectively .

For all of our investments for which the amortized cost basis was greater than the fair value at December 31, 2020 and 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 recovery.

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.

(6) Fair Value Measurements

We measure certain financial assets and liabilities at fair value.

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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 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.

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:

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Money market funds $ 152,570 $ — $ — $ 152,570

Corporate bonds — 60,878 — 60,878

Government agencies 83,587 — — 83,587

Commercial paper — 34,766 — 34,766

Corporate bonds — 24,192 — 24,192

Agency bonds — 3,999 — 3,999

Asset-backed securities — 2,419 — 2,419

Foreign currency forward contracts designated as cash flow hedges — 432 — 432

Total assets $ 236,157 $ 65,808 $ — $ 301,965

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As of December 31, 2019

2 unchanged sentences

Money market funds $ 106,781 $ — $ — $ 106,781

Corporate bonds — 60,878 — 60,878

Government agencies 36,979 — — 36,979

Commercial paper — 19,966 — 19,966

Corporate bonds — 48,495 — 48,495

Agency bonds — 12,242 — 12,242

1 unchanged sentence

Total assets $ 143,760 $ 102,066 $ — $ 245,826

As of December 31, 2019, the fair value of our 1.25 % convertible senior notes due 2023 (Notes), as further described in Note 9, Convertible Senior Notes and Capped Calls , was $ 342.7 million based upon quoted market prices.

As of December 31, 2020, the fair value of our 1.25 % and 2.25 % convertible senior notes due 2023 and 2025, respectively, as further described in Note 11, Debt, was $ 501.8 million and $ 373.3 million, respectively, based upon quoted market prices.

We consider the fair value of the notes to be a Level 2 measurement due to limited trading activity of the notes.

We had no financial liabilities measured and recorded at fair value on a recurring basis as of December 31, 2020 and 2019.

Our investments, which are all classified as available-for-sale, consisted of the following:

As of December 31, 2019

Losses Fair Value

(in thousands)

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 $ 138,832 $ 222 $ ( 9 ) $ 139,045

As of December 31, 2018

Losses Fair Value

(in thousands)

Government agencies $ 71,480 $ 20 $ ( 17 ) $ 71,483

Commercial paper 57,554 — — 57,554

Corporate bonds 48,532 15 ( 52 ) 48,495

Agency bonds 19,077 16 ( 6 ) 19,087

Asset-backed securities 7,490 — ( 7 ) 7,483

Total $ 204,133 $ 51 $ ( 82 ) $ 204,102

As of December 31, 2019 and 2018, our available-for-sale investments had maturities ranging from 3 months to 2 years.

Our available-for-sale investments as of December 31, 2018 included $ 3.0 million of U.S.

Government agencies investments which are classified as cash and cash equivalents as the original maturity was less than three months.

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For all of our investments for which the amortized cost basis was greater than the fair value at December 31, 2019 and 2018, 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 recovery.

(6) Deferred Contract Acquisition and Fulfillment Costs

The following table summarizes the activity of the deferred contract acquisition and fulfillment costs for the years ended December 31, 2019 and 2018:

Year Ended December 31,

(in thousands)

Beginning balance $ 39,955 $ 27,165

Capitalization of contract acquisition and fulfillment costs 26,109 22,765

Amortization of deferred contract acquisition and fulfillment costs ( 14,804 ) ( 9,975 )

Ending balance $ 51,260 $ 39,955

(7) Property and Equipment

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Leasehold improvements 50,336 44,050

44,050 19,437

Total 73,429 64,678

1 unchanged sentence

Property and equipment, net $ 53,114 $ 50,670

(1) As of December 31, 2019, $ 30.2 million and $ 4.0 million of leasehold improvements and furniture and fixtures, respectively, related to our new Boston, Massachusetts corporate headquarters.

As of December 31, 2018, leasehold improvements included $ 4.0 million of construction-in progress related to our new corporate headquarters facility.

In 2020, we disposed of $ 3.6 million, $ 0.7 million and $ 0.4 million of computer equipment and software, leasehold improvements and furniture and fixtures, respectively, of fully depreciated assets which were no longer in use.

6 unchanged sentences

Balance at December 31, 2018 $ 88,420

tCell acquisition 5,256

Balance at December 31, 2018 $ 88,420

NetFort acquisition 9,446

Balance at December 31, 2019 $ 97,866

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DivvyCloud acquisition 115,735

Balance at December 31, 2020 $ 213,601

The following table presents details of our intangible assets which include acquired identifiable intangible assets and capitalized internal-use software costs:

As of December 31, 2019 As of December 31, 2018

Average Estimated Useful Life (years) Gross Carrying

Average Estimated Useful Life (years) As of December 31, 2020 As of December 31, 2019

Gross Carrying

Amount Accumulated

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Internal-use software 16,002 ( 3,903 ) 12,099 9,873 ( 1,446 ) 8,427

9,873 ( 1,446 ) 8,427 3,786 ( 360 ) 3,426

Total intangible assets $ 74,616 $ ( 30,320 ) $ 44,296 $ 47,287 $ ( 18,726 ) $ 28,561

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Estimated future amortization expense of the acquired identifiable intangible assets and completed capitalized internal-use software costs as of December 31, 2020 is as follows (in thousands):

2021 $ 13,039

2026 and thereafter 1,128

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The table above excludes the impact of $ 5.4 million of capitalized internal-use software costs for projects that have not been completed as of December 31, 2020, and therefore, we have not determined the useful life of the software, nor have all the costs associated with these projects been incurred.

(9) Convertible Senior Notes and Capped Calls

In August 2018, we issued $ 200.0 million aggregate principal amount of convertible senior notes due August 1, 2023 and an additional $ 30.0 million aggregate principal amount of such notes pursuant to the exercise in full of the over-allotment options of the initial purchasers (collectively, the Notes).

The Notes are our senior unsecured obligations and 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, commencing on February 1, 2019.

The Notes will mature and are payable in full on August 1, 2023, unless earlier converted, redeemed or repurchased.

The Notes do not contain any financial covenants.

The total net proceeds from the Notes offering, after deducting initial purchase discounts and estimated debt issuance costs was $ 223.1 million.

The Notes are governed by an indenture between the Company, as an issuer, and U.S.

National Association, as trustee (the Indenture).

Each $1,000 principal amount of the Notes is initially convertible into 24.0460 shares of our common stock, the Conversion Option, which is equivalent to an initial conversion price of approximately $ 41.59 per share, subject to adjustment upon the occurrence of specified events.

The holders of the Notes may convert their notes at their option at any time prior to the close of business on the business day immediately preceding February 1, 2023, only under the following circumstances:

(1) during any calendar quarter commencing after the calendar quarter ending on December 31, 2018 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20

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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 Notes on each applicable trading day;

(2) 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 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 Notes on each such trading day;

(3) if we call any or all of the Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date;

or (4) upon the occurrence of specified corporate events (as set forth in the Indenture).

On or after February 1, 2023 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Notes at any time, 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 Indenture) 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 Indenture, 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.

During the three months ended December 31, 2019, the conversion feature of the 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 Notes are currently convertible, in whole or in part, at the option of the holders between January 1, 2020 through March 31, 2020.

Whether the 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 audited consolidated financial statements.

Since we have the election of repaying the Notes in cash, shares of our common stock, or a combination of both, we have continued to classify the Notes as long-term debt on our consolidated balance sheet as of December 31, 2019.

We may not redeem the Notes prior to August 6, 2021.

On or after August 6, 2021, we may redeem for cash all or any portion of the 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 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 Notes, which are incorporated by reference as Exhibits 4.4 and 4.5 to this Annual Report on Form 10-K.

In accounting for the transaction, the Notes have been separated into liability and equity components.

The initial carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature.

The initial carrying amount of the equity component representing the Conversion Option was $ 53.8 million and was determined by deducting the fair value of the liability component from the par value of the Notes.

The equity component was recorded as an increase to additional paid-in capital and is not remeasured as long as it continues to meet the conditions for equity classification.

The excess of the principal amount of the Notes over the initial carrying amount of the liability component, the debt discount, is amortized to interest expense over the contractual term of the Notes at an effective interest rate of 7.36 %.

In accounting for the debt issuance costs of $ 6.9 million related to the Notes, we allocated the total amount incurred to the liability and equity components of the Notes based on their relative fair values.

Issuance costs attributable to the liability component of $ 5.3 million are netted against the principal balance of the Notes and will be amortized to interest expense using the effective interest method over the contractual term of the Notes.

Issuance costs attributable to the equity component of $ 1.6 million were netted with the equity component in additional paid-in capital.

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The net carrying amount of the liability component of the Notes was as follows:

As of December 31,

(9) Deferred Contract Acquisition and Fulfillment Costs

The following table summarizes the activity of the deferred contract acquisition and fulfillment costs for the years ended December 31, 2020 and 2019:

Year Ended December 31,

(in thousands)

Beginning balance $ 51,260 $ 39,955

Capitalization of contract acquisition and fulfillment costs 33,525 26,109

Amortization of deferred contract acquisition and fulfillment costs ( 20,146 ) ( 14,804 )

Ending balance $ 64,639 $ 51,260

(10) 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 twelve months or less, and as of December 31, 2020, outstanding forward contracts had a total notional value of $ 12.5 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 year ended December 31, 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 December 31, 2020

Derivative assets:

Foreign currency forward contracts designated as cash flow hedges Prepaid expenses and other current assets $ 432

Total derivative assets $ 432

During the year ended December 31, 2020, 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 were not material.

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;

• upon the occurrence of specified corporate events (as set forth in the Indenture).

During the three months ended December 31, 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 from January 1, 2021 through March 31, 2021.

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.

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 December 31, 2020.

As of December 31, 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.

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.

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 option to convert the Notes 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.

The net carrying amount of the liability components of the 2023 Notes and the 2025 Notes were as follows (in thousands):

As of December 31, 2020 As of December 31, 2019

2023 Notes 2025 Notes Total 2023 Notes

Principal $ 230,000 $ 230,000 $ 460,000 $ 230,000

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Net carrying amount $ 196,566 $ 182,020 $ 378,586 $ 185,200

The net carrying amount of the equity component as of December 31, 2019 and 2018 was as follows:

The net carrying amount of the equity component as of December 31, 2020 and 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

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Net carrying amount $ 52,194 $ 46,832 $ 99,026

Interest expense related to the Notes was as follows:

Year Ended December 31,

(in thousands)

Interest expense related to the 2023 Notes and the 2025 Notes was as follows (in thousands):

Year Ended December 31, 2020 Year Ended December 31, 2019

2023 Notes 2025 Notes Total 2023 Notes 2025 Notes Total

Contractual interest expense $ 2,875 $ 3,450 $ 6,325 $ 2,875 $ — $ 2,875

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2024 — 5,175 5,175

2025 230,000 2,588 232,588

Total $ 460,000 $ 31,913 $ 491,913

In connection with the offering of the Notes, we entered into privately negotiated capped call transactions with certain counterparties (Capped Calls).

The Capped Calls each have an initial strike price of $ 41.59 per share, subject to certain adjustments, which correspond to the initial conversion price of the Notes.

The Capped Calls have initial cap prices of $ 63.98 per share, subject to certain adjustments.

The Capped Calls are expected to offset potential dilution to our common stock upon conversion of the Notes, with such offset subject to a cap based on the cap price.

The Capped Calls cover, subject to anti-dilution adjustments, approximately 5.5 million shares of our common stock.

For accounting purposes, the Capped Calls are separate transactions, and not part of the terms of the Notes.

The Capped Calls are recorded in stockholders' equity and are not accounted for as derivatives.

Accordingly, the cost of $ 26.9 million incurred in connection with the 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 Notes was as follows (in thousands):

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

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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 December 31, 2020, we did not have any outstanding borrowings and we were in compliance with all covenants under the Credit Agreement.

As of December 31, 2020, we had a total of $ 8.1 million in letters of credit outstanding as collateral for certain office space leases and corporate credit card programs which reduce the amount of borrowing available under our Credit Agreement.

Our leases primarily relate to office facilities that have remaining terms of up to 9.9 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 6.7 years.

All of our leases are classified as operating leases.

In November 2017, we entered into a lease agreement with respect to approximately 147,000 square feet of office space at 120 Causeway Street, Boston, Massachusetts for our new corporate headquarters.

The term of the lease was 126 months.

We took possession of the leased office space on May 1, 2019 at which time we recorded a ROU asset and corresponding lease liability of $ 58.6 million.

The components of lease expense were as follows:

December 31, 2019

Year Ended December 31,

(in thousands)

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Supplemental balance sheet information related to the operating leases was as follows:

December 31, 2019

As of December 31,

(in thousands, except lease term and discount rate)

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Supplemental cash flow information related to leases was as follows:

December 31, 2019

As of December 31,

(in thousands)

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ROU assets obtained in exchange for new lease obligations $ 15,838 $ 65,873

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Maturities of operating lease liabilities as of December 31, 2020 were as follows (in thousands):

4 unchanged sentences

Total $ 85,349

In July 2019, we entered into a lease agreement with respect to approximately 67,000 square feet at 100 Causeway Street, Boston, Massachusetts, to be located in the same complex as, and in order to expand, our corporate headquarters.

The term of the lease is 102 months and is expected to commence in June 2021.

Our future lease payments are approximately $ 35.0 million.

We plan to take possession of the leased office space in the second quarter of 2021, at which time we will record an operating ROU asset and corresponding lease liability.

In October 2019, we entered into a lease agreement with respect to approximately 48,000 square feet located in Belfast, Northern Ireland.

The term of the lease is 120 months and is expected to commence in March 2020.

Our future lease payments are approximately $ 10.1 million.

We plan to take possession of the leased office space in the first quarter of 2020, at which time we will record an operating ROU asset and corresponding lease liability.

Under the prior lease accounting standard, as of December 31, 2018, the future minimum payments under non-cancellable leases, which included the initial office space for our headquarters, were as follows (in thousands):

Thereafter 53,648

Total $ 108,286

(11) Stockholders’ Equity

On January 30, 2018, we completed a public offering of 5,950,000 shares of our common stock, of which 1,500,000 shares of common stock were sold by us and 4,450,000 shares of common stock were sold by certain existing stockholders, at an offering price of $ 22.00 per share, including 770,000 shares pursuant to the underwriters' option to purchase additional shares from the existing stockholders.

Our net proceeds from the offering were $ 30.9 million, after deducting underwriting discounts and commissions and our offering expenses.

We did not receive any of the proceeds from the sale of shares by the existing stockholders.

(13) Stock-Based Compensation

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The 2011 Plan will continue to govern outstanding awards granted thereunder.

The 2011 Plan provided for the grant of qualified incentive stock options and nonqualified stock options or other awards such as RSAs to our employees, officers, directors and outside consultants.

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The 2011 Plan provided for the grant of qualified incentive stock options and nonqualified stock options or other awards such as restricted stock awards (RSAs) to our employees, officers, directors and outside consultants.

In July 2015, our board of directors adopted and our stockholders approved our 2015 Equity Incentive Plan (the 2015 Plan).

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The 2015 Plan also provides that (i) any shares subject to awards granted under the 2011 Plan that would have otherwise returned to the 2011 Plan (such as upon the expiration or termination of a stock award prior to vesting) will be added to, and available for issuance under, the 2015 Plan and (ii) the number of shares reserved and available for issuance under the 2015 Plan automatically increases each January 1, beginning on January 1, 2016, by 4 % of the outstanding number of shares of our common stock on the immediately preceding December 31 (known as the “evergreen” provision) or such lesser number of shares as determined by our board of directors.

Additionally, on October 8, 2015, our board of directors amended, effective as of the acquisition of Logentries, the 2015 Plan to reserve an additional 1,500,000 shares of our common stock for issuance of inducement awards.

In February 2019, March 2018 and March 2017, we registered the increase in the number of shares authorized to be issued under the 2015 Plan by 1,904,017 , 1,762,149 and 1,702,187 shares, respectively, which represents the amount automatically added pursuant to the annual evergreen provision contained therein.

Additionally, on October 8, 2015, our board

of directors amended, effective as of the acquisition of Logentries, the 2015 Plan to reserve an additional 1,500,000 shares of our common stock for issuance of inducement awards.

In February 2020, March 2019, March 2018, March 2017 and March 2016, we registered the increase in the number of shares authorized to be issued under the 2015 Plan by 1,996,444 , 1,904,017 1,762,149 , 1,702,187 and 1,661,616 shares, respectively, which represents the amount automatically added pursuant to the annual evergreen provision contained therein.

As of December 31, 2020, the shares of common stock authorized to be issued under the 2015 Plan totaled 15,788,542 and there were 2,305,220 shares of common stock available for grant.

We recognize stock-based compensation expense for all awards on a straight-line basis over the applicable vesting period, which is generally four years .

Stock-based compensation expense for restricted stock, restricted stock units, stock options and purchase rights issued under our employee stock purchase plan was classified in the accompanying consolidated statements of operations as follows:

Stock-based compensation expense for restricted stock, restricted stock units (RSUs), performance-based restricted stock units (PSUs), stock options and purchase rights issued under our employee stock purchase plan was classified in the accompanying consolidated statements of operations as follows:

Year Ended December 31,

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Total stock-based compensation expense $ 63,888 $ 40,664 $ 27,593

(b) Restricted Stock and Restricted Stock Units

Restricted stock and restricted stock unit activity during 2019, 2018 and 2017 was as follows:

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Restricted Stock Restricted Stock Units

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).

For the year ended December 31, 2020, we recognized stock-based compensation expense related to such bonuses in the amount of $ 2.5 million, based on the performance attainment of the pre-established corporate financial objectives as of December 31, 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, Restricted Stock Units and Performance-Based Restricted Stock Units

Restricted stock, restricted stock unit and performance-based restricted stock unit activity during 2020, 2019 and 2018 was as follows:

Restricted Stock RSUs and PSUs

Shares Weighted-

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Unvested balance as of December 31, 2020 — $ — 2,941,914 $ 45.86

As of December 31, 2019, the unrecognized compensation cost related to shares of unvested restricted stock units expected to vest was $ 87.6 million.

As of December 31, 2020, the unrecognized compensation cost related to shares of unvested RSUs and PSUs expected to vest was $ 121.9 million.

This unrecognized compensation will be recognized over an estimated weighted-average amortization period of 2.3 years.

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Outstanding as of December 31, 2018 3,713,179 10.32

Granted 107,850 24.44

Exercised ( 968,057 ) 10.55 $ 39,526

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The total fair value of stock options vested in 2020, 2019 and 2018 was $ 2.2 million, $ 3.7 million and $ 5.1 million, respectively.

The weighted-average grant date fair value per share of stock options granted in 2018 and 2017 was $ 11.86 and $ 6.72 per share, respectively.

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(d) Determining the Fair Value of Options

We use the Black-Scholes option pricing model to estimate the fair value of stock option awards.

The Black-Scholes option pricing model requires management to make a number of assumptions, including the expected life of the option, the volatility of the underlying stock, the risk-free interest rate and expected dividends.

The assumptions used in our Black-Scholes option-pricing model represent management’s best estimates at the time of grant.

These estimates involve a number of variables, uncertainties and assumptions and the application of management’s judgment, as they are inherently subjective.

If any assumptions change, our stock-based compensation expense could be materially different in the future.

Expected Term

The expected term represents the period that our stock options are expected to be outstanding.

We calculated the expected term using the simplified method based on the average of each option’s vesting term and the contractual period during which the option can be exercised, which is typically 10 years following the date of grant.

Expected Volatility

We determine the price volatility factor based on the historical volatilities of our publicly traded peer group as we do not have a significant trading history for our common stock.

Industry peers consist of several public companies in the technology industry that are similar to us in size, stage of life cycle, and financial leverage.

We used the same set of peer group companies in all the relevant valuation estimates.

We intend to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own common stock share price becomes available, or unless circumstances change such that the identified companies are no longer similar to us, in which case, more suitable companies whose share prices are publicly available would be utilized in the calculation.

Risk-Free Interest Rate

The risk-free interest rate was based on U.S.

Treasury zero-coupon securities with maturities consistent with the estimated expected term.

Expected Dividend Yield

We have not paid dividends on our common stock nor do we expect to pay dividends in the foreseeable future.

We did not grant any stock options in 2019.

The following table reflects the range of assumptions for options granted during 2018 and 2017:

Year Ended December 31,

Expected term (in years) 6.1 5.5 – 6.1

Expected volatility 46 – 48 %

Risk-free interest rate 2.4 – 2.8 %

Expected dividend yield — —

Grant date fair value per share $ 10.55 – 13.11

$ 6.09 – 9.38

(e) Employee Stock Purchase Plan

The weighted-average grant date fair value per share of stock options granted in 2018 was $ 11.86 per share.

(d) Employee Stock Purchase Plan

On July 17, 2015, we filed a registration statement on Form S-8 with the Securities and Exchange Commission registering 800,000 shares of our common stock reserved under our 2015 Employee Stock Purchase Plan (ESPP).

In February 2019, March 2018 and March 2017, we increased the number of shares to be authorized under the ESPP by 476,004 , 440,537 and 425,547 shares, respectively, which represents the amount automatically added pursuant to the annual evergreen provision of the ESPP.

In February 2020, February 2019, March 2018, March 2017 and March 2016, we increased the number of shares to be authorized under the ESPP by 499,111 , 476,004 , 440,537 , 425,547 and 415,404 shares, respectively, which represents the amount automatically added pursuant to the annual evergreen provision of the ESPP.

As of December 31, 2020, the shares of common stock authorized to be issued under the ESPP totaled 3,056,603 and there were 1,824,947 shares of common stock available for grant.

Under the ESPP, employees may set aside up to 15 % of their gross earnings, on an after-tax basis, to purchase our common shares at a discounted price, which is calculated at 85 % of the lesser of:

(i) the market value of

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our common stock at the beginning of each offering period and (ii) the market value of our common stock on the applicable purchase date.

(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.

The fair value of shares issued under our ESPP are estimated on the grant date using the Black-Scholes option pricing model.

The expected term represents the term from the first day of the offering period to the purchase dates within each offering period.

The expected volatility is based on the historical volatilities of our own common stock.

The risk-free interest rate is based on U.S.

Treasury zero-coupon securities with maturities consistent with the estimated expected term.

We have not paid dividends on our common stock nor do we expect to pay dividends in the foreseeable future.

The following table reflects the assumptions used in the Black-Scholes option pricing model to calculate the expense related to the ESPP:

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$ 6.62 – 10.95

On March 15, 2017, we issued 138,085 shares of common stock to employees for aggregate proceeds of $ 1.5 million.

The purchase prices of the shares of common stock were $ 10.60 and $ 12.79 per share, which were discounted in accordance with the terms of the ESPP from the closing prices of our common stock on March 16, 2016 of $ 12.47 and on March 15, 2017 of $ 15.05 , respectively.

On September 15, 2017, we issued 109,144 shares of common stock to employees for aggregate proceeds of $ 1.4 million.

The purchase price of the shares of common stock was $ 12.96 per share, which was discounted in accordance with the terms of the ESPP from the closing price of our common stock on March 16, 2017 of $ 15.25 .

On March 15, 2018, we issued 123,607 shares of common stock to employees for aggregate proceeds of $ 1.6 million.

The purchase prices of the shares were $ 12.96 and $ 14.78 per share, which were discounted in accordance with the terms of the ESPP from the closing prices of our common stock on March 16, 2017 of $ 15.25 and on September 18, 2017 of $ 17.39 , respectively.

On September 14, 2018, we issued 96,108 shares of common stock to employees for aggregate proceeds of $ 2.0 million.

The purchase prices of the shares were $ 21.96 and $ 14.78 per share, which were discounted in accordance with the terms of the ESPP from the closing prices of our common stock on March 16, 2018 of $ 25.84 and on September 18, 2017 of $ 17.39 , respectively.

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 price 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, 2018, we issued 123,607 shares of common stock to employees, with purchase prices of $ 12.96 and $ 14.78 per share, for aggregate proceeds of $ 1.6 million.

On September 14, 2018, we issued 96,108 shares of common stock to employees, with purchase prices of $ 21.96 and $ 14.78 per share, for aggregate proceeds of $ 2.0 million.

On March 15, 2019, we issued 110,822 shares of common stock to employees, with purchase prices of $ 30.46 and $ 21.96 per share, for aggregate proceeds of $ 2.6 million.

On September 13, 2019, we issued 74,221 shares of common stock to employees, with purchase prices of $ 30.46 and $ 42.22 per share, for aggregate proceeds of $ 2.9 million.

On March 15, 2020, we issued 101,806 shares of common stock to employees, with a purchase price of $ 32.87 per share, for aggregate proceeds of $ 3.3 million.

On September 15, 2020, we issued 131,585 shares of common stock to employees, with a purchase price of the shares was $ 28.39 per share, for aggregate proceeds of $ 3.7 million.

(14) Income Taxes

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Loss before income taxes $ ( 96,863 ) $ ( 53,803 ) $ ( 55,079 )

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Income tax expense (benefit) included in the consolidated statements of operations was as follows:

Income tax expense included in the consolidated statements of operations was as follows:

Year Ended December 31,

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Foreign 696 ( 593 ) 257

Total deferred tax benefit ( 582 ) ( 12 ) ( 2,860 )

Income tax expense (benefit) $ 42 $ 466 $ ( 2,236 )

The reconciliation of income tax expense (benefit) to the amount computed at the federal statutory rate of 21% for the years ended December 31, 2019 and 2018 and 34% for the year ended December 31, 2017 was as follows:

Total deferred tax expense (benefit) 707 ( 582 ) ( 12 )

Income tax expense $ 1,986 $ 42 $ 466

The reconciliation of the federal statutory rate of 21% to the effective income tax rate for the years ended December 31, 2020, 2019 and 2018 was as follows:

Year Ended December 31,

2020 2019 2018

Expected income tax 21.0 % 21.0 % 34.0 %

Federal statutory rate 21.0 % 21.0 % 21.0 %

State taxes, net of federal benefit ( 0.1 ) ( 0.2 ) ( 0.2 )

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Other ( 0.8 ) 0.7 1.5

Total income tax expense (benefit) ( 0.1 ) % ( 0.9 ) % 4.7 %

The Tax Cuts and Jobs Act of 2017 (the Tax Act) requires a U.S.

corporation to record taxes on global intangible low-tax income (GILTI) and elect an accounting policy to either 1) recognize GILTI as a current period expense when incurred or 2) to record deferred taxes for the temporary basis differences expected to reverse in the future as GILTI.

We did not generate any GILTI during 2019 or 2018.

We have elected to recognize GILTI tax as a period cost when incurred.

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Effective income tax rate ( 2.1 ) % ( 0.1 ) % ( 0.9 ) %

Net deferred tax assets and liabilities, as set forth in the table below, reflect the impact of temporary differences between the amounts of assets and liabilities recorded for financial statement purposes and such amounts measured in accordance with tax laws:

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Research and development credits 6,201 4,665

Operating lease liabilities 20,967 19,657

Stock-based compensation 4,755 3,806

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Other 2,105 61

Gross deferred tax assets 165,207 132,398

Valuation allowance ( 110,350 ) ( 94,581 )

Total deferred tax assets 54,857 37,817

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Intangible assets ( 5,717 ) ( 2,249 )

Operating lease ROU assets ( 16,233 ) ( 14,792 )

Convertible senior notes ( 17,961 ) ( 9,959 )

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Total deferred tax liabilities ( 56,362 ) ( 38,585 )

Valuation allowance ( 94,581 ) ( 60,130 )

Net deferred tax liabilities $ ( 1,505 ) $ ( 768 )

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As of December 31, 2020, we had federal and state net operating loss carryforwards of $ 376.7 million and $ 290.2 million, respectively.

As part of the Tax Act, federal net operating losses generated after December 31, 2017, which total $ 156.3 million, have no expiration date and will be carried forward indefinitely.

Of our federal net operating losses, $ 257.2 million will carry forward indefinitely.

The remaining federal and state net operating loss carryforwards expire at various dates beginning in 2021.

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These credit carryforwards expire at various dates beginning in 2023.

We believe that a change of ownership within the meaning of Section 382 and 383 of the Internal Revenue Code of 1986, as amended, occurred in 2011 and 2018.

Under Section 382 and 383 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change,” generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards (NOLs), and other pre-change tax attributes, such as research and development credits, to offset its post-change income may be limited.

The analysis indicates that although an ownership change occurred, our U.S.

federal net operating losses and research and development credits would not expire before utilization as a result of the ownership change.

In the event we have subsequent changes in ownership, net operating losses and research and development credit carryforwards could be limited.

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We are currently subject to the annual limitation under Sections 382 and 383 of the Internal Revenue Code.

We will not be precluded from realizing the net operating loss carryforwards and tax credits but may be limited in the amount we could utilize in any given tax year in the event that the federal and state taxable income exceeds the limitation imposed by Section 382.

The amount of the annual limitation is determined based on our value immediately prior to the ownership change.

Subsequent ownership changes may further affect the limitation in future years.

We file income tax returns in all jurisdictions in which we operate.

We have established reserves to provide for additional income taxes that management believes will more likely or not be due in future years.

The reserves have been established based upon our assessment as to the potential exposure.

Changes in our reserves for unrecognized income tax benefits are as follows:

(in thousands)

Balance at December 31, 2017 $ 29

Reductions based on lapse in statute of limitations ( 17 )

Balance at December 31, 2018 12

Reductions based on lapse in statute of limitations ( 12 )

Balance at December 31, 2019 $ —

In the normal course of business, we are subject to examination by federal, state, and foreign jurisdictions, where applicable.

The statute of limitations for these jurisdictions is generally three to six years.

However, to the extent we utilize net operating losses or other similar carryforward attributes such as credits, the statute remains open to the extent of the net operating losses or credits that are utilized.

We have no tax returns under examination as of December 31, 2019 and in the fourth quarter of 2019 all reserves related to uncertain tax positions were released as the statute of limitations has expired in the applicable jurisdictions.

We also released any associated interest and penalties on any income tax liability previously recorded.

During the next 12 months, we do not expect any material changes to our uncertain tax positions.

In the normal course of business, we are subject to examination by federal, state, and foreign tax authorities, where applicable.

The statute of limitations for these jurisdictions is generally three to seven years.

However, to the extent we utilize net operating losses or other similar

carryforward attributes such as credits, the statute remains open to the extent of the net operating losses or credits that are utilized.

We have no tax returns under examination as of December 31, 2020.

As of December 31, 2020 and 2019, we had no reserves for unrecognized tax benefits.

(15) Net Loss Per Share

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Net loss per share, basic and diluted $ ( 1.94 ) $ ( 1.10 ) $ ( 1.20 )

The shares underlying the conversion option in the 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 price, the entire outstanding principal amount of the Notes as of December 31, 2019 would have been convertible into approximately 5.5 million shares.

We expect to settle the principal amount of the Notes in cash.

As a result, only the amount by which the conversion value exceeds the aggregated principal amount of the 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 price of $ 41.59 per share for the Notes.

In connection with the issuance of the Notes, we entered into 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.

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 December 31, 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.

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 December 31, 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 Notes are currently convertible, in whole or in part, at the option of the holders.

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For disclosure purposes, we have calculated the potentially dilutive effect of the conversion spread, which is included in the table below.

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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:

The following potentially dilutive securities outstanding, prior to the use of the treasury stock 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:

Year Ended December 31,

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Shares to be issued under ESPP 101,658 53,167 74,634

Shares underlying the conversion spread in the Notes 1,424,499 — —

Convertible senior notes 9,299,432 5,530,176 5,530,176

Total 14,276,017 11,225,725 12,113,439

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(a) Purchase Obligations

As of December 31, 2019, we have non-cancellable firm purchase commitments relating to cloud infrastructure services, including with Amazon Web Services (AWS), and software subscriptions that will be payable in the amounts of $ 28.1 million, $ 30.0 million, $ 0.3 million, $ 0.1 million, $ 0.1 million and $ 0.1 million for 2020, 2021, 2022, 2023, 2024 and thereafter.

In January 2020, we amended our contract with 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 $ 105.0 million.

(b) Letters of Credit

As of December 31, 2019, we had a total of $ 8.0 million in letters of credit outstanding as collateral for certain office space leases and corporate credit card programs.

These irrevocable letters of credit, which are not included in the table of contractual obligations above, are unsecured and are expected to remain in effect, until 2020.

We intend to renew certain of these letters of credit annually over the term of the office space leases or corporate credit card programs.

As of December 31, 2020, we have non-cancellable firm purchase commitments relating to cloud infrastructure services, including with Amazon Web Services (AWS), and software subscriptions.

The following table presents details of the future non-cancellable purchase commitments under these agreements as of December 31, 2020 (in thousands):

2021 $ 45,545

Total $ 138,349

We provide limited product warranties.

Historically, any payments made under these provisions have been immaterial.

(d) Litigation and Claims

In October 2018, Finjan, Inc.

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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.

(e) Indemnification Obligations

(d) Indemnification Obligations

We agree to standard indemnification provisions in the ordinary course of business.

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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.

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.

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Total $ 53,114 $ 50,670

(19) Subsequent Event

On January 28, 2021, we acquired Alcide.IO Ltd., a leading provider of Kubernetes security for a total purchase price of approximately $ 50 million in cash, subject to certain adjustments.

Supplementary Data

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Our historical results are not necessarily indicative of the results to be expected in the future.

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Three Months Ended

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Products $ 104,384 $ 98,559 $ 92,430 $ 87,549 $ 82,997 $ 76,476 $ 72,579 $ 65,845

Maintenance and support 8,671 9,178 9,372 9,557 10,246 10,614 10,610 10,753

Professional services 8,775 6,516 6,482 6,791 8,651 6,679 6,380 7,340

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Products 27,295 25,196 23,118 21,256 19,470 17,703 16,637 14,369

Maintenance and support 2,454 2,076 2,081 1,884 1,921 1,901 2,007 1,849

Professional services 6,399 5,832 5,963 6,458 5,892 5,927 5,544 5,604

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data