Rapid7, Inc. 10-Q

Item 1. Financial Statements. RAPID7, INC. Consolidated Balance Sheets (Unaudited) (in thousands, except share and per share data) June 30, 2021 December 31, 2020 Assets Current assets: Cash and cash equivalents $ 493,568 $ 173,617 Short-term investments 114,284 138,839 Accounts receivable, net of allowance for doubtful accounts of $ 2,549 and $ 3,251 at June 30, 2021 and December 31, 2020, respectively 98,483 111,599 Deferred contract acquisition and fulfillment costs, current portion 23,960 21,536 Prepaid expenses and other current assets 27,555 27,844 Total current assets 757,850 473,435 Long-term investments 5,377 10,124 Property and equipment, net 49,431 53,114 Operating lease right-of-use assets 63,472 67,178 Deferred contract acquisition and fulfillment costs, non-current portion 46,132 43,103 Goodwill 254,418 213,601 Intangible assets, net 54,179 44,296 Other assets 9,450 8,271 Total assets $ 1,240,309 $ 913,122 Liabilities and Stockholders’ Equity (Deficit) Current liabilities: Accounts payable $ 2,063 $ 3,860 Accrued expenses 55,633 61,677 Operating lease liabilities, current portion 9,285 9,612 Deferred revenue, current portion 302,186 278,585 Convertible senior notes, current portion, net 44,730 — Other current liabilities 303 — Total current liabilities 414,200 353,734 Convertible senior notes, non-current portion, net 810,093 378,586 Operating lease liabilities, non-current portion 71,691 75,737 Deferred revenue, non-current portion 30,124 31,365 Other long-term liabilities 9,596 2,164 Total liabilities 1,335,704 841,586 Stockholders’ equity (deficit): Preferred stock, $ 0.01 par value per share; 10,000,000 shares authorized at June 30, 2021 and December 31, 2020; 0 shares issued at June 30, 2021 and December 31, 2020 — — Common stock, $ 0.01 par value per share; 100,000,000 shares authorized at June 30, 2021 and December 31, 2020; 56,235,219 and 52,712,084 shares issued at June 30, 2021 and December 31, 2020, respectively; 55,748,411 and 52,225,276 shares outstanding at June 30, 2021 and December 31, 2020, respectively 557 522 Treasury stock, at cost, 486,808 shares at June 30, 2021 and December 31, 2020 ( 4,764 ) ( 4,764 ) Additional paid-in-capital 562,652 692,603 Accumulated other comprehensive (loss) income ( 137 ) 454 Accumulated deficit ( 653,703 ) ( 617,279 ) Total stockholders’ equity (deficit) ( 95,395 ) 71,536 Total liabilities and stockholders’ equity (deficit) $ 1,240,309 $ 913,122 The accompanying notes are an integral part of these unaudited consolidated financial statements. 1 Table of Contents RAPID7, INC. Consolidated Statements of Operations (Unaudited) (in thousands, except share and per share data) Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Revenue: Products $ 119,147 $ 92,430 $ 228,432 $ 179,979 Professional services 7,274 6,482 15,440 13,273 Total revenue 126,421 98,912 243,872 193,252 Cost of revenue: Products 33,169 23,118 62,819 44,373 Professional services 6,139 5,963 12,778 12,422 Total cost of revenue 39,308 29,081 75,597 56,795 Total gross profit 87,113 69,831 168,275 136,457 Operating expenses: Research and development 35,305 26,120 68,385 50,322 Sales and marketing 56,246 44,959 111,224 93,104 General and administrative 17,488 14,484 33,708 28,583 Total operating expenses 109,039 85,563 213,317 172,009 Loss from operations ( 21,926 ) ( 15,732 ) ( 45,042 ) ( 35,552 ) Other income (expense), net: Interest income 122 208 218 1,256 Interest expense ( 3,059 ) ( 5,917 ) ( 8,453 ) ( 9,379 ) Other income (expense), net 148 210 ( 919 ) ( 237 ) Loss before income taxes ( 24,715 ) ( 21,231 ) ( 54,196 ) ( 43,912 ) Provision for income taxes 9,449 235 9,813 478 Net loss $ ( 34,164 ) $ ( 21,466 ) $ ( 64,009 ) $ ( 44,390 ) Net loss per share, basic and diluted $ ( 0.62 ) $ ( 0.42 ) $ ( 1.18 ) $ ( 0.88 ) Weighted-average common shares outstanding, basic and diluted 55,392,383 50,695,706 54,169,464 50,411,508 The accompanying notes are an integral part of these unaudited consolidated financial statements. 2 Table of Contents RAPID7, INC. Consolidated Statements of Comprehensive Loss (Unaudited) (in thousands) Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Net loss $ ( 34,164 ) $ ( 21,466 ) $ ( 64,009 ) $ ( 44,390 ) Other comprehensive income (loss): Change in fair value of investments ( 3 ) 128 ( 12 ) ( 107 ) Adjustments for net losses (gains) realized and included in net loss — 35 — ( 21 ) Total change in unrealized (losses) gains on investments ( 3 ) 163 ( 12 ) ( 128 ) Change in fair value of cash flow hedges ( 72 ) — ( 201 ) — Adjustments for net gains realized and included in net loss ( 174 ) — ( 378 ) — Total change in unrealized losses on cash flow hedges ( 246 ) — ( 579 ) — Total other comprehensive (loss) income ( 249 ) 163 ( 591 ) ( 128 ) Comprehensive loss $ ( 34,413 ) $ ( 21,303 ) $ ( 64,600 ) $ ( 44,518 ) The accompanying notes are an integral part of these unaudited consolidated financial statements. 3 Table of Contents RAPID7, INC. Consolidated Statements of Changes in Stockholders' Equity (Deficit) (Unaudited) (in thousands) Common stock Treasury stock Additional paid-in-capital Accumulated other comprehensive gain (loss) Accumulated deficit Total stockholders’ (deficit) Shares Amount Shares Amount Balance, March 31, 2021 55,091 $ 551 487 $ ( 4,764 ) $ 542,415 $ 112 $ ( 619,539 ) $ ( 81,225 ) Stock-based compensation expense — — — — 22,487 — — 22,487 Vesting of restricted stock units 500 5 — — ( 5 ) — — — Shares withheld for employee taxes ( 42 ) ( 1 ) — — ( 3,346 ) — — ( 3,347 ) Issuance of common stock upon exercise of stock options 109 1 — — 1,102 — — 1,103 Issuance of common stock in connection with conversion of convertible senior notes 23 — — — — — — — Issuance of common stock related to acquisition 67 1 — — ( 1 ) — — — Other comprehensive loss — — — — — ( 249 ) — ( 249 ) Net loss — — — — — — ( 34,164 ) ( 34,164 ) Balance, June 30, 2021 55,748 $ 557 487 $ ( 4,764 ) $ 562,652 $ ( 137 ) $ ( 653,703 ) $ ( 95,395 ) Common stock Treasury stock Additional paid-in-capital Accumulated other comprehensive gain (loss) Accumulated deficit Total stockholders’ equity Shares Amount Shares Amount Balance, March 31, 2020 50,419 $ 504 487 $ ( 4,764 ) $ 621,992 $ ( 78 ) $ ( 541,354 ) $ 76,300 Stock-based compensation expense — — — — 15,864 — — 15,864 Vesting of restricted stock units 415 4 — — ( 4 ) — — — Shares withheld for employee taxes ( 42 ) — — — ( 1,917 ) — — ( 1,917 ) Issuance of common stock upon exercise of stock options 160 1 — — 2,163 — — 2,164 Other comprehensive gain — — — — — 163 — 163 Equity component of convertible senior notes, net — — — — 46,835 — — 46,835 Purchase of capped calls related to convertible senior notes — — — — ( 27,255 ) — — ( 27,255 ) Net loss — — — — — — ( 21,466 ) ( 21,466 ) Balance, June 30, 2020 50,952 $ 509 487 $ ( 4,764 ) $ 657,678 $ 85 $ ( 562,820 ) $ 90,688 4 Table of Contents Common stock Treasury stock Additional paid-in-capital Accumulated other comprehensive gain (loss) Accumulated deficit Total stockholders’ equity (deficit) Shares Amount Shares Amount Balance, December 31, 2020 52,225 $ 522 487 $ ( 4,764 ) $ 692,603 $ 454 $ ( 617,279 ) $ 71,536 Stock-based compensation expense — — — — 44,771 — — 44,771 Issuance of common stock under employee stock purchase plan 148 1 — — 4,466 — — 4,467 Vesting of restricted stock units 874 9 — — ( 9 ) — — — Shares withheld for employee taxes ( 80 ) ( 1 ) — — ( 6,670 ) — — ( 6,671 ) Issuance of common stock upon exercise of stock options 279 3 — — 2,518 — — 2,521 Purchase of capped calls related to convertible senior notes — — — — ( 76,020 ) — — ( 76,020 ) Issuance of common stock in connection with repurchase and conversion of convertible senior notes 2,200 22 — — ( 2,720 ) — — ( 2,698 ) Issuance of common stock in connection with inducement of convertible senior notes 35 — — — 2,740 — — 2,740 Issuance of common stock related to acquisition 67 1 — — ( 1 ) — — — Cumulative-effect adjustment for the adoption of ASU 2020-06 — — — — ( 99,026 ) 27,585 ( 71,441 ) Other comprehensive loss — — — — — ( 591 ) — ( 591 ) Net loss — — — — — — ( 64,009 ) ( 64,009 ) Balance, June 30, 2021 55,748 $ 557 487 $ ( 4,764 ) $ 562,652 $ ( 137 ) $ ( 653,703 ) $ ( 95,395 ) Common stock Treasury stock Additional paid-in-capital Accumulated other comprehensive gain (loss) Accumulated deficit Total stockholders’ equity Shares Amount Shares Amount Balance, December 31, 2019 49,911 $ 499 487 $ ( 4,764 ) $ 605,650 $ 213 $ ( 518,430 ) $ 83,168 Stock-based compensation expense — — — — 28,829 — — 28,829 Issuance of common stock under employee stock purchase plan 102 1 — — 3,345 — — 3,346 Vesting of restricted stock units 723 7 — — ( 7 ) — — — Shares withheld for employee taxes ( 69 ) — — — ( 3,450 ) — — ( 3,450 ) Issuance of common stock upon exercise of stock options 285 2 — — 3,731 — — 3,733 Other comprehensive loss — — — — — ( 128 ) — ( 128 ) Equity component of convertible senior notes, net — — — — 46,835 — — 46,835 Purchase of capped calls related to convertible senior notes — — — — ( 27,255 ) — — ( 27,255 ) Net loss — — — — — — ( 44,390 ) ( 44,390 ) Balance, June 30, 2020 50,952 $ 509 487 $ ( 4,764 ) $ 657,678 $ 85 $ ( 562,820 ) $ 90,688 The accompanying notes are an integral part of these unaudited consolidated financial statements. 5 Table of Contents RAPID7, INC. Consolidated Statements of Cash Flows (Unaudited) (in thousands) Six Months Ended June 30, 2021 2020 Cash flows from operating activities: Net loss $ ( 64,009 ) $ ( 44,390 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 13,768 10,419 Amortization of debt discount and issuance costs 1,791 7,007 Stock-based compensation expense 44,676 29,793 Deferred income taxes 3,924 — Induced conversion expense 2,740 — Other 1,446 1,060 Changes in operating assets and liabilities: Accounts receivable 12,816 10,835 Deferred contract acquisition and fulfillment costs ( 5,453 ) ( 2,994 ) Prepaid expenses and other assets 394 1,773 Accounts payable ( 1,329 ) 137 Accrued expenses ( 7,592 ) ( 7,437 ) Deferred revenue 22,220 ( 11,996 ) Other liabilities 4,389 ( 980 ) Net cash provided by (used in) operating activities 29,781 ( 6,773 ) Cash flows from investing activities: Business acquisition, net of cash acquired ( 52,420 ) ( 125,771 ) Purchases of property and equipment ( 2,671 ) ( 3,955 ) Capitalization of internal-use software costs ( 4,205 ) ( 2,948 ) Purchases of investments ( 59,308 ) ( 49,259 ) Sales/maturities of investments 87,938 146,599 Other ( 1,500 ) — Net cash used in investing activities ( 32,166 ) ( 35,334 ) Cash flows from financing activities: Proceeds from issuance of convertible senior notes, net of issuance costs paid of $ 14,560 and $ 6,500 for the six months ended June 30, 2021 and 2020, respectively 585,440 223,500 Purchase of capped calls related to convertible senior notes ( 76,020 ) ( 27,255 ) Payments of debt issuance costs — ( 248 ) Payments for repurchase and conversion of convertible senior notes ( 184,649 ) — Payments related to business acquisition ( 2,431 ) — Taxes paid related to net share settlement of equity awards ( 6,671 ) ( 3,450 ) Proceeds from employee stock purchase plan 4,467 3,346 Proceeds from stock option exercises 2,530 3,728 Net cash provided by financing activities 322,666 199,621 Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 293 ) ( 301 ) Net increase in cash, cash equivalents and restricted cash 319,988 157,213 Cash, cash equivalents and restricted cash, beginning of period 173,617 123,413 Cash, cash equivalents and restricted cash, end of period $ 493,605 $ 280,626 Supplemental cash flow information: Cash paid for interest on convertible senior notes $ 4,025 $ 1,438 Cash paid for income taxes, net of refunds $ 632 $ 135 Reconciliation of cash, cash equivalents and restricted cash: Cash and cash equivalents $ 493,568 $ 279,343 Restricted cash included in prepaid expenses and other current assets 37 $ 1,283 Total cash, cash equivalents and restricted cash $ 493,605 $ 280,626 The accompanying notes are an integral part of these unaudited consolidated financial statements. 6 Table of Contents RAPID7, INC. Notes to Consolidated Financial Statements (Unaudited) Note 1. Description of Business, Basis of Presentation and Consolidation and Significant Accounting Policies Description of Business Rapid7, Inc. and subsidiaries (“we,” “us” or “our”) is advancing security with visibility, analytics, and automation delivered through our Insight Platform. Our solutions simplify the complex, allowing security teams to work more effectively with IT and development to reduce vulnerabilities, monitor for malicious behavior, investigate and shut down attacks, and automate routine tasks. Basis of Presentation and Consolidation The accompanying unaudited consolidated financial statements have been prepared by us in accordance with accounting principles generally accepted in the United States of America (GAAP), as well as pursuant to the rules and regulations of the Securities and Exchange Commission (SEC), regarding interim financial reporting. Accordingly, certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on February 26, 2021. The consolidated financial statements include our results of operations and those of our wholly-owned subsidiaries and reflect all adjustments (consisting solely of normal, recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods presented. All intercompany transactions and balances have been eliminated in consolidation. The results of operations for the three and six months ended June 30, 2021 are not necessarily indicative of the results to be expected for any future period or the entire fiscal year. Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. 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 and the valuation for deferred tax assets. We base our estimates on historical experience and on various other assumptions that we believe are reasonable. Actual results could differ from those estimates. The COVID-19 pandemic has resulted in a sustained global slowdown of economic activity that has decreased demand for a broad variety of goods and services, including from our customers. While we have not experienced significant disruptions from the COVID-19 pandemic during the three and six months ended June 30, 2021, we are unable to accurately predict the extent to which the COVID-19 pandemic may impact our business, results of operations and financial condition 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. Significant Accounting Policies Our significant accounting policies are described in Note 2, Summary of Significant Accounting Policies , to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020. Other than the impact of our early adoption of Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 (ASU 2020-06) on January 1, 2021, as further detailed in Note 10, Debt , there have been no additional changes to the significant accounting policies during the three and six-month periods ended June 30, 2021. 7 Table of Contents Recent Accounting Pronouncements Accounting Pronouncements Recently Adopted In August 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 (ASU 2020-06), which simplified the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. We early adopted this standard on January 1, 2021 under the modified retrospective basis. Refer to Note 10, Debt , for further details of the impact the adoption of this standard had on our consolidated balance sheet. 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. We adopted this standard on January 1, 2021 and there was no impact to our consolidated financial statements as a result of the adoption. Accounting Pronouncements Not Yet Effective 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. Note 2. Revenue from Contracts with Customers We generate revenue primarily from: (1) subscriptions from the sale of cloud-based subscriptions, managed services, term software licenses, content subscriptions and maintenance and support associated with our software licenses, (2) perpetual software licenses, and (3) professional services from the sale of our deployment and training services related to our solutions, incident response services, penetration testing and security advisory services. The following table summarizes revenue from contracts with customers for the three and six months ended June 30, 2021 and 2020: Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 (in thousands) Subscriptions $ 117,014 $ 89,591 $ 224,181 $ 174,139 Perpetual software licenses 2,036 2,636 4,150 5,406 Professional services 7,274 6,482 15,440 13,273 Other 97 203 101 434 Total revenue $ 126,421 $ 98,912 $ 243,872 $ 193,252 Subscriptions Subscriptions consists of revenue from our cloud-based subscription, managed services offerings, term software licenses and content subscriptions maintenance and support associated with our software licenses. • We generate cloud-based subscription revenue primarily from sales of subscriptions to access our cloud platform, together with related support services to our customers. These arrangements do not provide the customer with the right to take possession of our software operating on our cloud platform at any time. Instead, customers are granted continuous access to our cloud platform over the contractual period. Revenue is recognized over time on a ratable basis over the contract term beginning on the date that our service is made available to the customer. Our cloud-based subscription contracts generally have annual or multi-year contractual terms which are billed in advance of the annual subscription period and are non-cancellable. • Managed services offerings consist of fees generated when we operate our software and provide our capabilities on behalf of our customers. Revenue is recognized on a ratable basis over the contract term beginning on the date that our 8 Table of Contents service is made available to the customer. Our managed services offerings generally have annual or multi-year contractual terms which are billed in advance of the annual subscription period and are non-cancellable. • For our term software licenses where the utility to the customer is dependent on the continued delivery of content subscriptions, we recognize the license revenue over the contractual term of the arrangement as a material right does not exist. For our term software licenses which are not dependent on the continued delivery of content subscriptions, the license is considered distinct from the maintenance and support, and we therefore recognize revenue attributable to the license at the time of delivery. • Content subscriptions and our maintenance and support services are sold with our perpetual and term software licenses. Revenue related to our content subscriptions associated with our software licenses is recognized ratably over the contractual period. Maintenance and support services are distinct from the perpetual and term software license and revenue attributable to maintenance and support services is recognized ratably over the contractual period. Perpetual Software Licenses For our perpetual software licenses where the utility to the customer is dependent on the continued delivery of content subscriptions, the content subscription renewal options result in a material right with respect to the perpetual software license. As a result, the revenue attributable to the perpetual software license is recognized ratably over the customer’s estimated economic life of five years , which represents a longer period of time in comparison to the initial contractual period of maintenance and support. The estimated economic life of five years represents the period which the customer is expected to benefit from the material right. We estimated this period of benefit by taking into consideration several factors, including the terms and conditions of our customer contracts and renewals and the expected useful life of our technology. For our perpetual software licenses which are not dependent on the continued delivery of content subscriptions, the license is considered distinct from the maintenance and support, and we therefore recognize revenue attributable to the license at the time of delivery. Professional Services All of our professional services are considered distinct performance obligations when sold stand alone or with other products. These contracts generally have terms of one year or less. For the majority of these contracts, revenue is recognized over time based upon the proportion of work performed to date. Contracts with Multiple Performance Obligations The majority of our contracts with customers contain multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price (SSP) basis. We determine SSP of our products and services based on our overall pricing objectives using all information reasonably available to us, taking into consideration market conditions and other factors, including the geographic locations of our customers, negotiated discounts from price lists and selling method (i.e., partner or direct). When available, we use directly observable stand-alone transactions to determine SSP. When not regularly sold on a stand-alone basis, we estimate SSP for our products and services utilizing historical sales data, including discounts from list price. The historical data is aggregated and analyzed by geographic location and selling method to establish a median or average price. Once SSP is established it is applied consistently to all transactions including that product or service utilizing a portfolio approach. Contract Balances Contract liabilities consist of deferred revenue and include payments received in advance of performance under the contract. Such amounts are recognized as revenue over the contractual period consistent with the above methodology. For the three months ended June 30, 2021 and 2020, we recognized revenue of $ 108.2 million and $ 84.8 million, respectively, and for the six months ended June 30, 2021 and 2020, we recognized revenue of $ 181.3 million and $ 149.3 million, respectively, that was included in the corresponding contract liability balance at the beginning of the periods presented. Deferred revenue that will be realized during the succeeding 12-month period is recorded as current, and the remaining deferred revenue is recorded as non-current. We receive payments from customers based upon contractual billing schedules. Accounts receivable are recorded when the right to consideration becomes unconditional. Unbilled receivables include amounts related to our contractual right to consideration for both completed and partially completed performance obligations that have not been invoiced. If the right to 9 Table of Contents consideration is based on satisfaction of another performance obligation in the contract other than the passage of time, we record a contract asset. As of June 30, 2021 and December 31, 2020, unbilled receivables of $ 0.9 million and $ 1.2 million, respectively, are included in prepaid expenses and other current assets in our consolidated balance sheet. As of June 30, 2021 and December 31, 2020, we had no contract assets recorded on our consolidated balance sheet. Transaction price allocated to the remaining performance obligations The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied as of June 30, 2021. The estimated revenues do not include unexercised contract renewals. Next Twelve Months Thereafter (in thousands) Subscriptions $ 314,471 $ 91,750 Perpetual software licenses 5,981 1,813 Professional services 14,101 1,142 Note 3. Business Combinations Velocidex On April 12, 2021, we acquired Velocidex Enterprises Pty Ltd (Velocidex), a leading open-source technology and community used for endpoint monitoring, digital forensics, and incident response. The purchase price consisted of $ 2.7 million paid in cash and $ 0.3 million in deferred cash payments. The purchase price was allocated to developed technology intangible asset which has an estimated useful life of 6 years. Alcide.IO Ltd. On January 28, 2021, we acquired Alcide.IO Ltd. (Alcide), a leading provider of Kubernetes security, for a purchase consideration of $ 50.5 million, which was funded in cash. 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): Purchase price $ 50,538 Recognized amount of identifiable assets acquired and liabilities assumed: Cash and cash equivalents 818 Other current assets 163 Deferred tax asset, long-term 1,621 Other assets 208 Accounts payable and other current liabilities ( 3,489 ) Intangible assets 10,400 Total identifiable net assets assumed 9,721 Goodwill 40,817 Total purchase price allocation $ 50,538 10 Table of Contents We identified developed technology as the sole acquired intangible asset. The estimated fair value of the developed technology intangible asset was $ 10.4 million which was based on a valuation using the income approach. The estimated useful life of the developed technology is 6 years. The excess of the purchase price over the tangible assets acquired, identifiable intangible assets 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 being able to successfully market and sell these new features to our customer base. The goodwill was allocated to our one reporting unit. The acquired goodwill and intangible assets were not deductible for tax purposes. Following the acquisition, certain retained employees of Alcide received an aggregate of 96,127 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. In the six months ended June 30, 2021, we recorded $ 0.9 million of acquisition-related costs related to the acquisition of Alcide, of which $ 0.8 million was recorded to general and administrative expense and $ 0.1 million was recorded to sales and marketing expense. During the three months ended June 30, 2021, we sold acquired intellectual property through an intercompany transaction, which resulted in $ 5.0 million of current tax expense and $ 3.9 million of deferred tax expense in Israel. Pro forma results of operations have not been included, as the acquisition of Alcide was not material to our results of operations for any periods presented. Divvy Cloud Corporation On May 1, 2020, we acquired Divvy Cloud Corporation (DivvyCloud), a Cloud Security Posture Management (CSPM) company, for a purchase price with an aggregate fair value of $ 137.8 million. The assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. The excess of the purchase price over the assets acquired and liabilities assumed was recorded as goodwill. The fair value of net assets acquired, goodwill and intangible assets were $ 0.8 million, $ 115.7 million and $ 21.2 million, respectively. The goodwill was allocated to our one reporting unit. The acquired goodwill and intangible asset were not deductible for tax purposes. 11 Table of Contents Note 4. Investments Our investments, which are all classified as available-for-sale, consisted of the following: As of June 30, 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (in thousands) Description: U.S. government agencies 35,204 2 — 35,206 Commercial paper 55,227 — — 55,227 Corporate bonds 29,218 11 ( 1 ) 29,228 Total $ 119,649 $ 13 $ ( 1 ) $ 119,661 As of December 31, 2020 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (in thousands) Description: U.S. 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 June 30, 2021, our available-for-sale investments had maturities ranging from 1 to 18 months. As of December 31, 2020, our available-for-sale investments had maturities ranging from 1 to 16 months. For all of our investments for which the amortized cost basis was greater than the fair value at June 30, 2021 and December 31, 2020, we have concluded that there is no plan to sell the security nor is it more likely than not that we would be required to sell the security before its anticipated maturity. In making the determination as to whether the unrealized loss is other-than-temporary, we considered the length of time and extent the investment has been in an unrealized loss position, the financial condition and near-term prospects of the issuers, the issuers’ credit rating and the time to maturity. Note 5. Fair Value Measurements We measure certain financial assets and liabilities at fair value. Fair value is determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as determined by either the principal market or the most advantageous market. Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy, as follows: Level 1 : Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 : Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 : Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the asset or liability. We consider an active market to be one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis, and we consider an inactive market to be one in which there are infrequent or few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. 12 Table of Contents The following table presents our financial assets and liabilities measured and recorded at fair value on a recurring basis using the above input categories: As of June 30, 2021 Level 1 Level 2 Level 3 Total (in thousands) Description: Assets: Money market funds 442,636 $ — $ — $ 442,636 U.S. government agencies 35,206 — — 35,206 Commercial paper — 55,227 — 55,227 Corporate bonds — 29,228 — 29,228 Foreign currency forward contracts designated as cash flow hedges (prepaid expenses and other current assets) — 159 — 159 Total $ 477,842 $ 84,614 $ — $ 562,456 Liabilities: Foreign currency forward contracts designated as cash flow hedges (other current liabilities) $ — $ 307 $ — $ 307 Total $ — $ 307 $ — $ 307 As of December 31, 2020 Level 1 Level 2 Level 3 Total (in thousands) Description: Assets: Money market funds $ 152,570 $ — $ — $ 152,570 U.S. 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 (prepaid expenses and other current assets) — 432 — 432 Total $ 236,157 $ 65,808 $ — $ 301,965 As of June 30, 2021, the fair value of our 1.25 %, 2.25 % and 0.25 % convertible senior notes due 2023, 2025 and 2027, as further described in Note 10, Debt , was $ 102.7 million, $ 381.7 million and $ 665.6 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. 13 Table of Contents Note 6. Property and Equipment Property and equipment are recorded at cost and consist of the following: As of June 30, 2021 As of December 31, 2020 (in thousands) Computer equipment and software $ 14,576 $ 13,438 Furniture and fixtures 9,567 9,655 Leasehold improvements 50,584 50,336 Total 74,727 73,429 Less accumulated depreciation ( 25,296 ) ( 20,315 ) Property and equipment, net $ 49,431 $ 53,114 Depreciation expense was $ 3.1 million and $ 2.7 million for the three months ended June 30, 2021 and 2020, respectively, and $ 6.0 million and $ 5.4 million for the six months ended June 30, 2021 and 2020, respectively. Note 7. Goodwill and Intangible Assets Goodwill was $ 254.4 million and $ 213.6 million as of June 30, 2021 and December 31, 2020, respectively. The following table displays the changes in the gross carrying amount of goodwill: Amount (in thousands) Balance at December 31, 2020 $ 213,601 Alcide acquisition 40,817 Balance at June 30, 2021 $ 254,418 The following table presents details of our intangible assets, which include acquired identifiable intangible assets and capitalized internal-use software costs: As of June 30, 2021 As of December 31, 2020 Weighted- Average Life (years) Gross Carrying Amount Accumulated Amortization Net Book Value Gross Carrying Amount Accumulated Amortization Net Book Value (in thousands) Intangible assets subject to amortization: Developed technology 5.7 $ 67,855 $ ( 30,441 ) $ 37,414 $ 54,455 $ ( 24,780 ) $ 29,675 Customer relationships 6.3 2,700 ( 1,164 ) 1,536 2,700 ( 958 ) 1,742 Trade names 5.4 1,419 ( 729 ) 690 1,419 ( 639 ) 780 Total acquired intangible assets 71,974 ( 32,334 ) 39,640 58,574 ( 26,377 ) 32,197 Internal-use software 3.0 20,207 ( 5,668 ) 14,539 16,002 ( 3,903 ) 12,099 Total intangible assets $ 92,181 $ ( 38,002 ) $ 54,179 $ 74,576 $ ( 30,280 ) $ 44,296 Amortization expense was $ 4.0 million and $ 2.8 million for the three months ended June 30, 2021 and 2020, respectively, and $ 7.7 million and $ 5.0 million for the six months ended June 30, 2021 and 2020, respectively. 14 Table of Contents Estimated future amortization expense of the acquired identifiable intangible assets and completed capitalized internal-use software costs as of June 30, 2021 was as follows (in thousands): 2021 (for the remaining six months) $ 7,551 2022 12,792 2023 9,906 2024 6,223 2025 5,677 2026 and thereafter 3,629 Total $ 45,778 The table above excludes the impact of $ 8.4 million of capitalized internal-use software costs for projects that have not been completed as of June 30, 2021, and therefore, we have not determined the useful life of the software, nor have all the costs associated with these projects been incurred. Note 8. Deferred Contract Acquisition and Fulfillment Costs The following table summarizes the activity of the deferred contract acquisition and fulfillment costs for the six months ended June 30, 2021 and 2020: Six Months Ended June 30, 2021 2020 (in thousands) Beginning balance $ 64,639 $ 51,260 Capitalization of contract acquisition and fulfillment costs 17,587 12,378 Amortization of deferred contract acquisition and fulfillment costs ( 12,134 ) ( 9,384 ) Ending balance $ 70,092 $ 54,254 Note 9. 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 eighteen months or less, and as of June 30, 2021 and December 31, 2020, outstanding forward contracts had a total notional value of $ 23.4 million and $ 12.5 million, respectively. The notional value represents the gross amount of foreign currency that will be bought or sold upon maturity of the forward contract. During the three months ended June 30, 2021, all cash flow hedges were considered effective. Refer to Note 5, Fair Value Measurements , for the fair values of our outstanding derivative instruments. For the three and six months ended June 30, 2021, we reclassified realized gains of $ 0.2 million and $ 0.4 million, respectively, 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. Note 10. Debt Convertible Senior Notes In August 2018, we issued $ 230.0 million aggregate principal amount of convertible senior notes due August 1, 2023 (the 2023 Notes), in May 2020, we issued $ 230.0 million aggregate principal amount of convertible senior notes due May 1, 2025 (the 2025 Notes) and in March 2021, we issued $ 600.0 million aggregate principal amount of convertible senior notes due March 15, 2027 (the 2027 Notes) (collectively, the Notes). Further details of the Notes are as follows: 15 Table of Contents Issuance Maturity Date Interest Rate First Interest Payment Date Effective Interest Rate Semi-Annual Interest Payment Dates Initial Conversion Rate per $1,000 Principal Initial Conversion Price Number of Shares (in millions) 2023 Notes August 1, 2023 1.25 % February 1, 2019 1.86 % February 1 and August 1 24.0460 $ 41.59 1.1 2025 Notes May 1, 2025 2.25 % November 1, 2020 2.88 % May 1 and November 1 16.3875 $ 61.02 3.8 2027 Notes March 15, 2027 0.25 % September 15, 2021 0.67 % March 15 and September 15 9.6734 $ 103.38 5.8 The 2023 Notes, the 2025 Notes and the 2027 Notes are senior unsecured obligations, do not contain any financial covenants and are governed by indentures between the Company, as issuer, and U.S. Bank National Association, as trustee (the Indentures). The total net proceeds from the 2023 Notes, the 2025 Notes and the 2027 Notes offerings, after deducting initial purchase discounts and estimated debt issuance costs, were $ 223.1 million, $ 222.8 million and $ 585.0 million, respectively. Terms of the 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, September 30, 2020 for the 2025 Notes and March 20, 2024 for the 2027 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 for the 2023 Notes and the 2025 Notes and any ten consecutive trading day period for the 2027 Notes (measurement periods) in which the trading price (as defined in the Indentures) per $1,000 principal amount of the applicable series of Notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of our common stock and the conversion rate of the respective Notes on each such trading day; • if we call any or all of the respective Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the respective redemption date; or • upon the occurrence of specified corporate events (as set forth in the Indentures). As of June 30, 2021, the conversion features of the 2023 Notes and the 2025 Notes were triggered as the last reported price of our common stock was greater than or equal to 130 % of the conversion prices 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 and the 2025 Notes were convertible, in whole or in part, at the option of the holders from July 1, 2021 through September 30, 2021. Whether the 2023 Notes or the 2025 Notes will be convertible following such period will depend on the continued satisfaction of this condition or another conversion condition in the future. Since we may elect to repay the 2025 Notes in cash, shares of our common stock, or a combination of both, we have continued to classify the 2025 Notes as long-term debt on our consolidated balance sheet as of June 30, 2021. We have classified the 2023 Notes as a current liability on our consolidated balance sheet as of June 30, 2021 as we expect to repay these 2023 Notes in a combination of cash and shares of our common stock within a year. As of June 30, 2021, the 2027 Notes are not convertible at the option of the holder. The holders may convert the 2023 Notes, the 2025 Notes and the 2027 Notes at any time on or after February 1, 2023, November 1, 2024 and December 15, 2026, respectively, until the close of business on the second scheduled trading day immediately preceding the maturity date, regardless of the circumstances set forth above. 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 Indentures. 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. 16 Table of Contents We may not redeem the 2023 Notes, the 2025 Notes or the 2027 Notes prior to August 6, 2021, May 6, 2023 and March 20, 2024 (Redemption Dates), respectively. On or after the respective Redemption Dates, we may redeem for cash all or any portion of the 2023 Notes, the 2025 Notes or the 2027 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, the 2025 Notes or the 2027 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. Partial Repurchase and Conversion of the 2023 Notes On March 16, 2021, we used a portion of the proceeds from the issuance of the 2027 Notes, together with 2.2 million shares of our common stock, to repurchase and retire $ 182.6 million aggregate principal amount of the 2023 Notes, and paid accrued and unpaid interest thereon (the 2023 Notes Repurchase Transaction). The 2023 Notes Repurchase Transaction was accounted for as an induced conversion in accordance with Accounting Standards Codification 470-20, Debt with Conversion and Other Options (ASC 470-20). The total fair value of the additional common stock issued to induce the conversion of $ 2.7 million was recognized as an inducement expense and classified as a component of interest expense in our consolidated statement of operations. The remaining cash and common stock consideration issued under the original terms of the 2023 Notes was accounted for under the general conversion accounting guidance where the difference between the carrying amount of the 2023 Notes retired, including unamortized debt issuance cost of $ 2.7 million, and the cash consideration paid and the par amount of the common stock issued, was recorded in additional paid-in capital. During the first quarter of 2021, holders of the 2023 Notes elected to convert Notes with a principal amount of $ 2.0 million. Cash was paid for the principal and the excess conversion spread was paid in 23,123 shares of our common stock. Accounting for the Notes Prior to the Adoption of ASU 2020-06 Prior to our January 1, 2021 adoption of ASU 2020-06, the 2023 Notes and the 2025 Notes were 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 2023 Notes and the 2025 Notes was $ 53.8 million and $ 48.3 million, 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 were not remeasured as long as they continued 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, was amortized to interest expense using the effective interest method over the contractual terms of the respective convertible senior notes. In addition, prior to the adoption of ASU 2020-06, the debt issuance costs of $ 6.9 million and $ 7.2 million related to the 2023 Notes and the 2025 Notes, respectively, were allocated to the liability and equity components of the 2023 Notes and 2025 Notes based on their relative values. Debt 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 were amortized to interest expense using the effective interest method over the contractual term of the 2023 Notes and 2025 Notes, respectively. Debt 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. Impact of the Adoption of ASU 2020-06 On January 1, 2021, we early adopted ASU 2020-06 on a modified retrospective basis. Under ASU 2020-06, we no longer separate the convertible senior notes into liability and equity components. We recognized the cumulative effect of initially applying this new standard as of January 1, 2021. Comparative prior year periods were not adjusted. 17 Table of Contents As a result of applying the modified retrospective method to adopt this standard, the following adjustments were made to the consolidated balance sheet as of January 1, 2021 (in thousands): As Reported Adjustments Adjusted Under ASU 2020-06 December 31, 2020 Transfer Equity Component of the Debt to Liabilities Reverse Equity Component of Debt Issuance Costs Reverse Debt Discount Amortization Record Debt Issuance Costs Amortization Total January 1, 2021 Liabilities and Stockholders' Equity: Convertible senior notes, net $ 378,586 $ 102,166 $ ( 3,140 ) $ ( 28,811 ) $ 1,226 $ 71,441 $ 450,027 Total liabilities $ 841,586 $ 102,166 $ ( 3,140 ) $ ( 28,811 ) $ 1,226 $ 71,441 $ 913,027 Stockholders' Equity: Additional paid-in capital $ 692,603 $ ( 102,166 ) $ 3,140 $ — $ — $ ( 99,026 ) $ 593,577 Accumulated deficit $ ( 617,279 ) $ — $ — $ 28,811 $ ( 1,226 ) $ 27,585 $ ( 589,694 ) Total stockholders' equity $ 71,536 $ ( 102,166 ) $ 3,140 $ 28,811 $ ( 1,226 ) $ ( 71,441 ) $ 95 Total liabilities and stockholders' equity $ 913,122 $ — $ — $ — $ — $ — $ 913,122 Post Adoption of ASU 2020-06 In accounting for the issuance of the 2027 Notes, the principal of $ 600.0 million less estimated debt issuance costs of $ 15.0 million was recorded as long-term debt on our consolidated balance sheet. The debt issuance costs are amortized to interest expense using the effective interest method over the contractual term of the 2027 Notes. The net carrying amount of the Notes as of June 30, 2021 and December 31, 2020 was as follows (in thousands): As of June 30, 2021 As of December 31, 2020 2023 Notes 2025 Notes 2027 Notes Total 2023 Notes 2025 Notes Total Principal $ 45,351 $ 230,000 $ 600,000 $ 875,351 $ 230,000 $ 230,000 $ 460,000 Unamortized debt discount — — — — ( 30,425 ) ( 42,930 ) ( 73,355 ) Unamortized debt issuance costs ( 621 ) ( 5,629 ) ( 14,278 ) ( 20,528 ) ( 3,009 ) ( 5,050 ) ( 8,059 ) Net carrying amount $ 44,730 $ 224,371 $ 585,722 $ 854,823 $ 196,566 $ 182,020 $ 378,586 Interest expense related to the Notes was as follows (in thousands): Three Months Ended June 30, 2021 2020 2023 Notes 2025 Notes 2027 Notes Total 2023 Notes 2025 Notes Total Contractual interest expense $ 148 $ 1,294 $ 375 $ 1,817 $ 719 $ 863 $ 1,582 Amortization of debt discount — — — — 2,543 1,293 3,836 Amortization of debt issuance costs 153 341 602 1,096 251 152 403 Total interest expense $ 301 $ 1,635 $ 977 $ 2,913 $ 3,513 $ 2,308 $ 5,821 Six Months Ended June 30, 2021 2020 2023 Notes 2025 Notes 2027 Notes Total 2023 Notes 2025 Notes Total Contractual interest expense $ 706 $ 2,588 $ 425 $ 3,719 $ 1,438 $ 863 $ 2,301 Amortization of debt discount — — — — 5,039 1,293 6,332 Amortization of debt issuance costs 374 660 682 1,716 498 152 650 Induced conversion expense 2,740 — — 2,740 — — — Total interest expense $ 3,820 $ 3,248 $ 1,107 $ 8,175 $ 6,975 $ 2,308 $ 9,283 18 Table of Contents Capped Calls In connection with the offering of the 2023 Notes, the 2025 Notes and the 2027 Notes, we entered into privately negotiated capped call transactions with certain counterparties (the 2023 Capped Calls, 2025 Capped Calls and 2027 Capped Calls). The initial strike prices for the 2023 Capped Calls, the 2025 Capped Calls and the 2027 Capped Calls are $ 41.59 , $ 61.02 and $ 103.38 per share, respectively, subject to certain adjustments, which correspond to the initial conversion price of the 2023 Notes, the 2025 Notes and the 2027 Notes. The initial cap prices for the 2023 Capped Calls, the 2025 Capped Calls and the 2027 Capped Calls are $ 63.98 , $ 93.88 and $ 159.04 per share, respectively, subject to certain adjustments. The 2023 Capped Calls, the 2025 Capped Calls and the 2027 Capped Calls are expected to offset potential dilution to our common stock upon conversion of the respective 2023 Notes, the 2025 Notes or the 2027 Notes, with such offset subject to a cap based on the cap price. For accounting purposes, the 2023 Capped Calls, the 2025 Capped Calls and the 2027 Capped Calls are separate transactions, and not part of the terms of the 2023 Notes, the 2025 Notes and the 2027 Notes. The 2023 Capped Calls, the 2025 Capped Calls and the 2027 Capped Calls are recorded in stockholders' equity and are not accounted for as derivatives. Accordingly, the cost of $ 26.9 million, $ 27.3 million and $ 76.0 million, respectively, for the 2023 Capped Calls, the 2025 Capped Calls and the 2027 Capped Calls was recorded as a reduction to additional paid-in capital at the time of each transaction. Credit Agreement In April 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. In May 2020, we utilized the accordion feature to increase the credit facility to $ 50.0 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. 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 June 30, 2021, we did not have any outstanding borrowings and we were in compliance with all covenants under the Credit Agreement. As of June 30, 2021, we had a total of $ 7.6 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. Note 11. Leases Our leases primarily relate to office facilities that have remaining terms of up to 9.4 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 6.2 years. All of our leases are classified as operating leases. The components of lease expense were as follows: Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 (in thousands) Operating lease cost $ 3,779 $ 3,881 $ 7,545 $ 7,252 Short-term lease costs 154 224 319 514 Variable lease costs 1,317 1,367 2,780 2,289 Total lease costs $ 5,250 $ 5,472 $ 10,644 $ 10,055 Supplemental balance sheet information related to the operating leases was as follows: As of June 30, 2021 As of December 31, 2020 Weighted average remaining lease term (in years) - operating leases 7.5 7.9 Weighted average discount rate - operating leases 7.6 % 7.7 % 19 Table of Contents Supplemental cash flow information related to leases was as follows: Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 (in thousands) Cash paid for amounts included in the measurement of lease liabilities $ 4,177 $ 2,524 $ 8,324 $ 6,360 ROU assets obtained in exchange for new lease obligations $ 909 $ 11,607 $ 1,061 $ 15,597 Maturities of operating lease liabilities as of June 30, 2021 were as follows (in thousands): 2021 (for the remaining six months) $ 7,469 2022 14,538 2023 14,220 2024 13,481 2025 12,564 2026 and thereafter 41,697 Total lease payments $ 103,969 Less: imputed interest ( 22,993 ) Total $ 80,976 Note 12. Stock-Based Compensation Expense (a) General Stock-based compensation expense for restricted stock units (RSUs), performance-based restricted stock units (PSUs), stock options and issuances of common stock pursuant to our employee stock purchase plan was classified in the accompanying consolidated statements of operations as follows: Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 (in thousands) Stock-based compensation expense: Cost of revenue $ 1,812 $ 1,131 $ 3,366 $ 2,062 Research and development 9,420 6,389 17,235 11,034 Sales and marketing 6,038 4,345 11,784 8,023 General and administrative 6,544 4,581 12,291 8,674 Total stock-based compensation expense $ 23,814 $ 16,446 $ 44,676 $ 29,793 We recognize compensation cost of all awards on a straight-line basis over the applicable vesting period, which is generally four years . Our Compensation Committee adopted and approved the performance goals, targets and payout formulas for our 2021 and 2020 bonus plans, including permitting our executive officers and certain other employees the opportunity to receive payment of their earned bonuses in the form of common stock (in lieu of cash). During the three months ended June 30, 2021 and 2020, we recognized stock-based compensation expense related to such bonuses in the amount of $ 1.3 million and $ 0.4 million, respectively, and during the six months ended June 30, 2021 and 2020, we recognized stock-based compensation expense related to such bonuses in the amount of $ 2.3 million and $ 0.8 million, respectively, based on the probable expected performance against the pre-established corporate financial objectives as of June 30, 2021 and 2020. For all employees, including executive officers, who elect to receive their 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 the following year pursuant to our 2015 Equity Incentive Plan, as amended. The number of shares underlying such awards is 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. 20 Table of Contents (b) Restricted Stock Units and Performance-Based Restricted Stock Units RSUs and PSUs activity during the six months ended June 30, 2021 was as follows: Shares Weighted-Average Grant Date Fair Value Unvested balance as of December 31, 2020 2,941,914 $ 45.86 Granted 1,596,786 88.11 Vested ( 874,164 ) 42.46 Forfeited ( 176,261 ) 59.86 Unvested balance as of June 30, 2021 3,488,275 $ 65.34 As of June 30, 2021, the unrecognized compensation expense related to our unvested RSUs and PSUs was $ 213.4 million. This unrecognized compensation expense will be recognized over an estimated weighted-average amortization period of 2.7 years. (c) Stock Options Stock option activity during the six months ended June 30, 2021 was as follows: Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life (in years) Aggregate Intrinsic Value (in thousands) Outstanding as of December 31, 2020 1,933,013 $ 10.07 Granted — — Exercised ( 278,816 ) 9.04 $ 20,586 Forfeited/cancelled ( 300 ) 7.73 Outstanding as of June 30, 2021 1,653,897 $ 10.24 3.6 $ 139,567 Vested and exercisable as of June 30, 2021 1,634,425 $ 10.09 3.6 $ 138,180 As of June 30, 2021, the unrecognized compensation expense related to our unvested stock options was $ 0.2 million. This unrecognized compensation expense will be recognized over an estimated weighted-average amortization period of 0.6 years. The total fair value of stock options vested in the six months ended June 30, 2021 was $ 0.5 million. (d) Employee Stock Purchase Plan Under the Rapid7, Inc. 2015 Employee Stock Purchase Plan (ESPP), employees may set aside up to 15 % of their gross earnings, on an after-tax basis, to purchase our common stock at a discounted price, which is calculated at 85 % of the lesser of: (i) the market value of our common stock at the beginning of each offering period and (ii) the market value of our common stock on the applicable purchase date. On March 15, 2021, we issued 147,837 shares of common stock to employees, with purchase prices of $ 28.39 or $ 52.60 per share, for aggregate proceeds of $ 4.5 million. 21 Table of Contents Note 13. Net Loss per Share The following table summarizes the computation of basic and diluted net loss per share of our common stock for the three and six months ended June 30, 2021 and 2020: Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 (in thousands, except share and per share data) Numerator: Net loss $ ( 34,164 ) $ ( 21,466 ) $ ( 64,009 ) $ ( 44,390 ) Denominator: Weighted-average common shares outstanding, basic and diluted 55,392,383 50,695,706 54,169,464 50,411,508 Net loss per share, basic and diluted $ ( 0.62 ) $ ( 0.42 ) $ ( 1.18 ) $ ( 0.88 ) We intend to settle any conversion of our 2023 Notes, 2025 Notes and 2027 Notes in cash, shares, or a combination thereof. As a result of our adoption of ASU 2020-06 on January 1, 2021, the dilutive impact of the Notes for our calculation of diluted net income (loss) per share is considered using the if-converted method. For periods prior to our January 1, 2021 adoption of ASU 2020-06, we considered the impact of the Notes on our diluted net income (loss) per share calculation based on applying the treasury stock method as we had the ability, and intent, to settle any conversions of the Notes solely in cash at that time. For the three and six months ended June 30, 2021 and 2020, the shares underlying the Notes were not considered in the calculation of diluted net loss per share as the effect would have been anti-dilutive under each respective method. In connection with the issuance of the 2023 Notes, the 2025 Notes and the 2027 Notes, we entered into 2023 Capped Calls, 2025 Capped Calls and 2027 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 following potentially dilutive securities outstanding have been excluded from the computation of diluted weighted-average shares outstanding for the respective periods below because they would have been anti-dilutive: Three and Six Months Ended June 30, 2021 2020 Options to purchase common stock 1,653,897 2,404,012 Unvested restricted stock units 3,488,275 3,639,708 Common shares to be issued to DivvyCloud founders 133,730 200,596 Shares to be issued under ESPP 50,382 77,926 Convertible senior notes 10,663,519 9,299,432 Total 15,989,803 15,621,674 Note 14. Commitments and Contingencies (a) Warranty We provide limited product warranties. Historically, any payments made under these provisions have been immaterial. (b) Litigation and Claims In October 2018, Finjan, Inc. (Finjan) filed a complaint against us and our wholly-owned subsidiary, Rapid7 LLC, in the United States District Court, District of Delaware, alleging patent infringement of seven patents held by them. In the complaint, Finjan sought unspecified damages, attorneys' fees and injunctive relief. We intend to vigorously contest Finjan's claims. The final outcome, including our liability, if any, with respect to Finjan's claims, is uncertain. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors. In addition, from time to time, we may be a party to litigation or subject to claims incident to the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not have a material adverse effect on our business. 22 Table of Contents Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors. (c) Indemnification Obligations We agree to standard indemnification provisions in the ordinary course of business. Pursuant to these provisions, we agree to indemnify, hold harmless and reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally our customers, in connection with any United States patent, copyright or other intellectual property infringement claim by any third party arising from the use of our products or services in accordance with the agreement or arising from our gross negligence, willful misconduct or violation of the law (provided that there is not gross or willful misconduct on the part of the other party) with respect to our products or services. The term of these indemnification provisions is generally perpetual from the time of execution of the agreement. We carry insurance that covers certain third-party claims relating to our services and limits our exposure. We have never incurred costs to defend lawsuits or settle claims related to these indemnification provisions. As permitted under Delaware law, we have entered into indemnification agreements with our officers and directors, indemnifying them for certain events or occurrences while they serve as officers or directors of the company. Note 15. Segment Information and Information about Geographic Areas We operate in one segment. Our chief operating decision maker is our Chief Executive Officer, who makes operating decisions, assesses performance and allocates resources on a consolidated basis. Net revenues by geographic area presented based upon the location of the customer were as follows: Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 (in thousands) United States $ 99,256 $ 79,457 $ 191,765 $ 155,295 Other 27,165 19,455 52,107 37,957 Total $ 126,421 $ 98,912 $ 243,872 $ 193,252 Property and equipment, net by geographic area was as follows: As of June 30, 2021 As of December 31, 2020 (in thousands) United States $ 37,180 $ 40,101 Other 12,251 13,013 Total $ 49,431 $ 53,114 Note 16. Subsequent Event On July 16, 2021, we acquired all of the issued capital of IntSights Cyber Intelligence Ltd., a provider of contextualized external threat intelligence and proactive threat remediation, for consideration of approximately $ 321.0 million, an aggregate of 206,608 shares of Rapid7's common stock to be issued to the founders of IntSights in three installments over a thirty-month period following the close date and $ 5.6 million in deferred cash payments. As part of the acquisition, we acquired $ 12.7 million in cash resulting in a net cash outflow of $ 308.3 million at closing. 23 Table of Contents