Item 8. Financial Statements and Supplementary Data
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm ( KPMG LLP , Boston, MA , Auditor Firm: 185 )
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Consolidated Balance Sheets
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Consolidated Statements of Operations
65
Consolidated Statements of Comprehensive Loss
66
Consolidated Statements of Changes Stockholders' Equity
67
Consolidated Statements of Cash Flows
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Notes to Consolidated Financial Statements
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Rapid7, Inc.:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Rapid7, Inc. and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission .
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for convertible notes as of January 1, 2021 due to the adoption of Accounting Standards Update 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).
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
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 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
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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.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
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 $500.8 million and professional services revenue of $34.6 million for the year ended December 31, 2021. The Company allocates value to each distinct performance obligation on a relative standalone selling price basis. The Company determines standalone selling price based on pricing objectives, taking into consideration market conditions and other factors, including the geographic locations of customers, negotiated discounts from price lists and selling method.
We identified the evaluation of standalone selling prices for the Company’s products and services as a critical audit matter. 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 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.
/s/ KPMG LLP
We have served as the Company's auditor since 2013.
Boston, Massachusetts
February 24, 2022
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RAPID7, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31, 2021 December 31, 2020
Assets
Current assets:
Cash and cash equivalents $ 164,582 $ 173,617
Short-term investments 58,850 138,839
Accounts receivable, net of allowance for credit losses of $ 1,978 and $ 3,251 at December 31, 2021 and 2020, respectively
146,094 111,599
Deferred contract acquisition and fulfillment costs, current portion 29,974 21,536
Prepaid expenses and other current assets 33,236 27,844
Total current assets 432,736 473,435
Long-term investments 34,068 10,124
Property and equipment, net 50,225 53,114
Operating lease right-of-use assets 83,751 67,178
Deferred contract acquisition and fulfillment costs, non-current portion 57,191 43,103
Goodwill 515,258 213,601
Intangible assets, net 111,591 44,296
Other assets 11,191 8,271
Total assets $ 1,296,011 $ 913,122
Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
Accounts payable $ 3,521 $ 3,860
Accrued expenses 82,620 61,677
Operating lease liabilities, current portion 9,630 9,612
Deferred revenue, current portion 372,067 278,585
Other current liabilities 842 —
Total current liabilities 468,680 353,734
Convertible senior notes, net 812,063 378,586
Operating lease liabilities, non-current portion 90,865 75,737
Deferred revenue, non-current portion 33,056 31,365
Other long-term liabilities 17,342 2,164
Total liabilities 1,422,006 841,586
Stockholders’ equity (deficit):
Preferred stock, $ 0.01 par value per share; 10,000,000 shares authorized at December 31, 2021 and 2020; 0 shares issued and outstanding at December 31, 2021 and 2020
— —
Common stock, $ 0.01 par value per share; 100,000,000 shares authorized at December 31, 2021 and 2020; 58,181,816 and 52,712,084 shares issued at December 31, 2021 and 2020, respectively; 57,695,008 and 52,225,276 shares outstanding at December 31, 2021 and 2020, respectively
577 522
Treasury stock, at cost, 486,808 shares at December 31, 2021 and 2020
( 4,764 ) ( 4,764 )
Additional paid-in-capital 615,032 692,603
Accumulated other comprehensive (loss) income ( 812 ) 454
Accumulated deficit ( 736,028 ) ( 617,279 )
Total stockholders’ equity (deficit) ( 125,995 ) 71,536
Total liabilities and stockholders’ equity (deficit) $ 1,296,011 $ 913,122
See accompanying notes to consolidated financial statements.
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RAPID7, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
Year Ended December 31,
2021 2020 2019
Revenue:
Products $ 500,843 $ 382,922 $ 297,897
Professional services 34,561 28,564 29,050
Total revenue 535,404 411,486 326,947
Cost of revenue:
Products 140,773 96,864 68,179
Professional services 28,175 24,653 22,967
Total cost of revenue 168,948 121,517 91,146
Total gross profit 366,456 289,969 235,801
Operating expenses:
Research and development 160,779 108,568 79,364
Sales and marketing 247,453 195,981 157,722
General and administrative 78,289 59,519 44,710
Total operating expenses 486,521 364,068 281,796
Loss from operations ( 120,065 ) ( 74,099 ) ( 45,995 )
Other income (expense), net:
Interest income 365 1,454 6,014
Interest expense ( 14,292 ) ( 24,137 ) ( 13,389 )
Other income (expense), net ( 1,921 ) ( 81 ) ( 433 )
Loss before income taxes ( 135,913 ) ( 96,863 ) ( 53,803 )
Provision for income taxes 10,421 1,986 42
Net loss $ ( 146,334 ) $ ( 98,849 ) $ ( 53,845 )
Net loss per share, basic and diluted $ ( 2.65 ) $ ( 1.94 ) $ ( 1.10 )
Weighted-average common shares outstanding, basic and diluted 55,270,998 51,036,824 48,731,791
See accompanying notes to consolidated financial statements.
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RAPID7, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
Year Ended December 31,
2021 2020 2019
Net loss $ ( 146,334 ) $ ( 98,849 ) $ ( 53,845 )
Other comprehensive income (loss):
Change in fair value of investments ( 86 ) ( 170 ) 244
Adjustment for net losses (gains) realized and included in net loss — ( 21 ) —
Total change in unrealized gains (losses) on investments ( 86 ) ( 191 ) 244
Change in fair value of cash flow hedges ( 1,043 ) 432 —
Adjustment for net gains realized and included in net loss ( 137 ) — —
Total change in unrealized (gains)/losses on cash flow hedges ( 1,180 ) 432 —
Total other comprehensive (loss) income ( 1,266 ) 241 244
Comprehensive loss $ ( 147,600 ) $ ( 98,608 ) $ ( 53,601 )
See accompanying notes to consolidated financial statements.
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RAPID7, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands)
Common stock Treasury stock Additional
paid-in-capital Accumulated
other
comprehensive
loss Accumulated
deficit Total
stockholders’
equity (deficit)
Shares Amount Shares Amount
Balance, December 31, 2018 47,600 $ 476 487 $ ( 4,764 ) $ 556,223 $ ( 31 ) $ ( 464,585 ) $ 87,319
Stock-based compensation expense — — — — 40,664 — — 40,664
Issuance of common stock under employee stock purchase plan 185 2 — — 5,519 — — 5,521
Vesting of restricted stock units 1,292 13 — — ( 13 ) — — —
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
Other comprehensive income — — — — — 244 — 244
Net loss — — — — — — ( 53,845 ) ( 53,845 )
Balance, December 31, 2019 49,911 $ 499 487 $ ( 4,764 ) $ 605,650 $ 213 $ ( 518,430 ) $ 83,168
Stock-based compensation expense — — — — 61,419 — — 61,419
Issuance of common stock under employee stock purchase plan 233 2 — — 7,080 — — 7,082
Vesting of restricted stock units 1,451 15 — — ( 15 ) — — —
Shares withheld for employee taxes ( 154 ) ( 2 ) — — ( 8,919 ) — — ( 8,921 )
Issuance of common stock upon exercise of stock options 784 8 — — 7,811 — — 7,819
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 )
Balance, December 31, 2020 52,225 $ 522 487 $ ( 4,764 ) $ 692,603 $ 454 $ ( 617,279 ) $ 71,536
Stock-based compensation expense — — — — 100,317 — — 100,317
Issuance of common stock under employee stock purchase plan 222 2 — — 9,274 — — 9,276
Vesting of restricted stock units 1,611 16 — — ( 16 ) — — —
Shares withheld for employee taxes ( 157 ) ( 2 ) — — ( 16,042 ) — — ( 16,044 )
Issuance of common stock upon exercise of stock options 521 6 — — 4,300 — — 4,306
Purchase of capped calls related to convertible senior notes — — — — ( 76,020 ) — — ( 76,020 )
Issuance of common stock in connection with redemption, repurchase and conversion of convertible senior notes 2,897 29 — — ( 3,094 ) — — ( 3,065 )
Issuance of common stock in connection with inducement of convertible senior notes 35 — — — 2,740 — — 2,740
Issuance of common stock related to acquisition 341 4 — — ( 4 ) — — —
Cumulative-effect adjustment for the adoption of ASU 2020-06 — — — — ( 99,026 ) — 27,585 ( 71,441 )
Other comprehensive loss — — — — — ( 1,266 ) — ( 1,266 )
Net loss — — — — — — ( 146,334 ) ( 146,334 )
Balance, December 31, 2021 57,695 $ 577 487 $ ( 4,764 ) $ 615,032 $ ( 812 ) $ ( 736,028 ) $ ( 125,995 )
See accompanying notes to consolidated financial statements.
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RAPID7, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
2021 2020 2019
Cash flows from operating activities:
Net loss $ ( 146,334 ) $ ( 98,849 ) $ ( 53,845 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization 33,501 22,631 16,528
Amortization of debt discount and issuance costs 3,982 17,518 10,513
Stock-based compensation expense 102,579 63,888 40,664
Deferred income taxes 466 737 ( 645 )
Induced conversion expense 2,740 — —
Other 1,920 2,428 607
Changes in assets and liabilities:
Accounts receivable ( 25,475 ) ( 24,380 ) ( 14,800 )
Deferred contract acquisition and fulfillment costs ( 22,526 ) ( 13,379 ) ( 11,306 )
Prepaid expenses and other assets ( 3,355 ) ( 8,956 ) ( 13,691 )
Accounts payable ( 2,077 ) ( 2,394 ) 92
Accrued expenses 19,205 8,640 4,759
Deferred revenue 85,562 37,428 18,686
Other liabilities 3,729 ( 425 ) 1,018
Net cash provided by (used in) operating activities 53,917 4,887 ( 1,420 )
Cash flows from investing activities:
Business acquisitions, net of cash acquired ( 358,420 ) ( 125,826 ) ( 14,607 )
Purchases of property and equipment ( 9,010 ) ( 13,802 ) ( 29,428 )
Capitalization of internal-use software ( 9,854 ) ( 6,130 ) ( 6,087 )
Purchases of investments ( 93,092 ) ( 177,053 ) ( 148,047 )
Sales and maturities of investments 147,998 166,524 214,980
Other investments ( 3,000 ) — —
Net cash (used in) provided by investing activities ( 325,378 ) ( 156,287 ) 16,811
Cash flows from financing activities:
Proceeds from issuance of convertible senior notes, net of issuance costs of $ 14,976 and $ 7,201 for the year ended December 31, 2021 and 2020, respectively
585,024 222,799 —
Purchase of capped calls related to convertible senior notes ( 76,020 ) ( 27,255 ) —
Payment of debt issuance costs ( 300 ) ( 440 ) —
Payments for redemption, repurchase and conversion of convertible senior notes ( 230,000 ) — —
Payments related to business acquisitions ( 12,118 ) ( 150 ) —
Taxes paid related to net share settlement of equity awards ( 16,044 ) ( 8,921 ) ( 6,952 )
Proceeds from employee stock purchase plan 9,276 7,082 5,521
Proceeds from stock option exercises 4,315 7,810 10,219
Net cash provided by financing activities 264,133 200,925 8,788
Effect of exchange rate changes on cash ,cash equivalents and restricted cash ( 1,272 ) 679 ( 331 )
Net (decrease) increase in cash, cash equivalents and restricted cash ( 8,600 ) 50,204 23,848
Cash, cash equivalents and restricted cash, beginning of period 173,617 123,413 99,565
Cash, cash equivalents and restricted cash, end of period $ 165,017 $ 173,617 $ 123,413
Supplemental cash flow information:
Cash paid for interest on convertible senior notes $ 7,345 $ 5,463 $ 2,779
Cash paid for income taxes, net of refunds $ 3,305 $ 312 $ 400
Non-cash investing activities:
Leasehold improvements acquired through tenant improvement allowance $ — $ — $ 14,016
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents $ 164,582 $ 173,617 $ 123,413
Restricted cash included in prepaid expenses and other assets 435 — —
Total cash, cash equivalents and restricted cash $ 165,017 $ 173,617 $ 123,413
See accompanying notes to consolidated financial statements.
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RAPID7, INC.
Notes to Consolidated Financial Statements
(1) Nature of the Business
Rapid7, Inc. and subsidiaries (“we,” “us” or “our”) are 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.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation and 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. 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 for credit losses, 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 year ended December 31, 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.
(c) Revenue Recognition
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.
We recognize revenue when a customer obtains control of promised products or services. The amount of revenue recognized reflects the consideration that we expect to be entitled to receive in exchange for these products or services. To achieve the core principle of this standard, we apply the following four steps:
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1) Identify the contract with a customer
We consider the terms and conditions of the contracts and our customary business practices in identifying our contracts. We determine we have a contract with a customer when the contract is approved, we can identify each party’s rights regarding the services to be transferred, we can identify the payment terms for the services, and we have determined the customer has the ability and intent to pay and the contract has commercial substance. We apply judgment in determining the customer’s ability and intent to pay, which is based on a variety of factors, including the customer’s historical payment experience or, in the case of a new customer, credit and financial information pertaining to the customer.
2) Identify the performance obligations in the contract
Performance obligations promised in a contract are identified based on the products and services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the product or service either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the products or services is separately identifiable from other promises in the contract.
3) Determine the transaction price
The transaction price is determined based on the consideration to which we expect to be entitled in exchange for transferring products or services to the customer. Variable consideration is included in the transaction price if, in our judgment, it is probable that no significant future reversal of cumulative revenue under the contract will occur.
In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to receive financing from our customers or to provide customers with financing. Examples include invoicing at the beginning of a subscription term with revenue recognized ratably over the contract period.
Sales through our channel network of distributors and resellers are generally discounted as compared to the price that we would sell to an end user. Revenue for sales through our channel network is recorded net of any distributor or reseller margin.
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. 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.
4) Recognize revenue when or as we satisfy a performance obligation
Revenue is recognized at the time the related performance obligation is satisfied by transferring the promised product or service to a customer. Revenue is recognized when control of the products or services are transferred to our customers, in an amount that reflects the consideration that we expect to receive in exchange for those products or services.
Subscriptions
Subscriptions consists of revenue from our cloud-based subscription, term software licenses, managed services offerings, content subscriptions and 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
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platform at any time. Instead, customers are granted continuous access to our cloud platform over the contractual period. Revenue is recognized over time on a ratable basis over the contract term beginning on the date that our service is made available to the customer. Our cloud-based subscription contracts generally have annual or multi-year contractual terms which are billed in advance of the annual subscription period and are non-cancellable.
• Managed services offerings consist of fees generated when we operate our software and provide our capabilities on behalf of our customers. Revenue is recognized on a ratable basis over the contract term beginning on the date that our service is made available to the customer. Our managed services offerings generally have annual or multi-year contractual terms which are billed in advance of the annual subscription period and are non-cancellable.
• 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 content subscription. 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 term and perpetual software licenses which are not dependent on the continued delivery of content subscriptions, the license is considered distinct from the maintenance and support, and we therefore recognize revenue attributable to the license at the time of delivery.
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 arrangements, revenue is recognized over time based upon the proportion of work performed to date.
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 year ended December 31, 2021, we recognized revenue of $ 269.6 million that was included in the corresponding contract liability balance at the beginning of the period presented. Deferred revenue that will be realized during the succeeding 12-month period is recorded as current, and the remaining deferred revenue is recorded as non-current.
We receive payments from customers based upon contractual billing schedules. Accounts receivable are recorded when the right to consideration becomes unconditional. Unbilled receivables include amounts related to our contractual right to consideration for both completed and partially completed performance obligations that have not been invoiced. If the right to consideration is based on satisfaction of another performance obligation in the contract other than the passage of time, we would record a contract asset. As of December 31, 2021 and 2020, unbilled receivables of $ 1.2 million are included in prepaid expenses and other current assets in our consolidated balance sheet. As of December 31, 2021 and 2020, we have no contract assets recorded on our consolidated balance sheet.
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(d) 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.
(e) Restricted Cash
As of December 31, 2021, we had $ 0.4 million of restricted cash on our balance sheet in other assets, which is related to collateral for an office space lease.
(f) Investments
Our investments consist of commercial paper, corporate bonds, U.S. Government agencies and agency bonds. 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.
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. We do not invest in any securities with contractual maturities greater than 24 months.
(g) Accounts Receivable and Allowance for Credit Losses
Accounts receivable are recorded at the invoiced amount, net of allowances for credit losses for any potential uncollectible amounts. We maintain an allowance 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 credit losses after all means of collection have been exhausted and the potential for recovery is considered remote. Additions to the allowance for credit losses are recorded in general and administrative expense in the consolidated statement of operations. We do not have any off-balance sheet credit exposure related to our customers.
(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, 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 provide credit to customers in the normal course of business. Collateral is not required for accounts receivable, but ongoing credit evaluations of customers’ financial condition are performed. We maintain reserves for potential credit losses. No single customer, including channel partners, accounted for 10% or more of our total revenues in 2021, 2020 or 2019 or accounts receivable as of December 31, 2021 or 2020.
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 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. Costs to obtain a contract for a new customer, upsell or cross-sell are
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amortized on a straight-line basis over an estimated period of benefit of five years as sales commissions on initial sales are not commensurate with sales commissions on contract renewals. 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. 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.
We capitalize costs incurred to fulfill our contracts that relate directly to the contract, are expected to generate resources that will be used to satisfy our performance obligations and are expected to be recovered through revenue generated under the contract. 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.
(j) Property and Equipment
Property and equipment are recorded at cost and depreciated over their estimated useful lives using the straight-line method. The following table presents the useful lives of our property and equipment:
Useful Lives
Computer equipment and software 3 years
Furniture and fixtures 3 - 5 years
Leasehold improvements Shorter of the useful life of the asset or the lease term
Repairs and maintenance costs are expensed as incurred.
(k) Software Development Costs
Software development costs associated with the development of products for sale are recorded to research and development expense until technological feasibility has been established for the product. 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 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.
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 estimated useful life of 3 years. We capitalized $ 9.9 million, $ 6.1 million and $ 6.1 million of costs related to software developed for internal use in the years ended December 31, 2021, 2020 and 2019, respectively. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
(l) Leases
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 represent our right to use an underlying asset for the lease term. Operating lease liabilities represent our obligation to make payments arising from the lease. 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. The
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determination of our incremental borrowing rate requires judgment. 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 and initial direct costs, offset by lease incentives. Certain of our leases include options to extend or terminate the lease. An option to extend the lease is considered in connection with determining the ROU asset and lease liability when it is reasonably certain we will exercise that option. An option to terminate is considered unless it is reasonably certain we will not exercise the option.
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. When such events or changes in circumstances occur, recoverability of these assets is measured by a comparison of the carrying value of the assets to the future net undiscounted cash flows directly associated with the assets. 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, 2021, there was no impairment of our long-lived assets.
(n) Business Combinations
We allocate the fair value of purchase consideration to the tangible asset acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair value these identifiable assets and liabilities is recorded as goodwill. Determining the fair value of the tangible assets acquired, liabilities assumed and intangible assets requires management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, cash flows that an asset is expected to generate in the future, technology migration curves, discount rates, and useful lives. While we use our best estimates and judgements, our estimates are inherently uncertain and subject to refinement. 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.
(o) Goodwill
Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. 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 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. To test goodwill impairment, we perform a single-step goodwill impairment test to identify potential goodwill impairment. The single-step impairment test begins with an estimation of the fair value of a reporting unit. 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. Based upon our assessment performed as of December 31, 2021, we concluded the fair value of our single reporting unit exceeded its' carrying value and there was no impairment of goodwill.
(p) Foreign Currency
The functional currency of our foreign subsidiaries is the U.S. dollar. We translate all monetary assets and liabilities denominated in foreign currencies into U.S. dollars using the exchange rates in effect at the balance sheet dates and non-monetary assets and liabilities using historical exchange rates. Foreign currency denominated expenses are re-measured using the average exchange rates for the period. Foreign currency transaction and re-measurement gains and losses are included in other income (expense), net. In 2021, foreign currency transaction losses and foreign currency re-measurement losses were $ 0.3 million and $ 1.7 million,
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respectively. In 2020 and 2019, foreign currency transaction 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.
Our cash flow hedges have contractual maturities of eighteen months or less, and as of December 31, 2021, outstanding forward contracts had a total notional value of $ 34.7 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, 2021, all cash flow hedges were considered effective. Refer to Note 6, Fair Value Measurements, for the fair values of our outstanding derivative instruments.
(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. 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.
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 $ 21.3 million, $ 16.4 million and $ 12.8 million in advertising expense in 2021, 2020 and 2019, respectively.
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(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 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.
(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, RSUs, PSUs, the impact of our ESPP, common shares issued in connection with acquisitions and the impact of our convertible senior notes (Notes). We intend to settle any conversion of our 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 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 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. 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.
(v) 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 October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers , which clarified the accounting for acquired revenue contracts with customers in a business combination. ASU 2021-08 requires acquirers to measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 606. As a result, it is generally expected that an acquirer will recognize and measure contract assets and liabilities in a manner consistent with how they were recognized by the acquiree in its preacquisition financial statements. This standard is effective for interim and annual periods beginning after December 15, 2022, with early adoption permitted. We plan to early adopt this standard on January 1, 2022. This guidance will be applied prospectively to all business combinations that occur on or after January 1, 2022.
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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.
(3) Revenue from Contracts with Customers
The following table summarizes revenue from contracts with customers for the years ended December 31, 2021, 2020 and 2019:
Year Ended December 31,
2021 2020 2019
(in thousands)
Subscriptions $ 492,608 $ 371,975 $ 284,956
Perpetual software licenses 7,658 10,288 11,342
Professional services 34,561 28,564 29,050
Other 577 659 1,599
Total revenue $ 535,404 $ 411,486 $ 326,947
The following table summarizes the revenue by region based on the shipping address of customers who have contracted to use our product or service for the years ended December 31, 2021, 2020 and 2019:
Year Ended December 31,
2021 2020 2019
(in thousands)
United States $ 414,856 $ 329,753 $ 264,852
All other 120,548 81,733 62,095
Total revenue $ 535,404 $ 411,486 $ 326,947
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 December 31, 2021. The estimated revenues do not include unexercised contract renewals.
Next Twelve Months Thereafter
(in thousands)
Subscriptions $ 399,209 $ 128,290
Perpetual software licenses 3,693 585
Professional services 15,828 1,877
Total $ 418,730 $ 130,752
(4) Business Combinations
IntSights Cyber Intelligence Ltd.
On July 16, 2021, we acquired IntSights Cyber Intelligence Ltd. (IntSights), a provider of contextualized external threat intelligence and proactive threat remediation, for a purchase price with an aggregate fair value of $ 322.2 million. The purchase consideration consisted of $ 319.2 million in cash paid at closing, $ 5.6 million in deferred cash payments and a $ 2.6 million receivable for estimated purchase price adjustments. The deferred cash payments will be held by us to satisfy indemnification obligations and certain post-closing purchase price adjustments payable within eighteen months of the acquisition date. Additionally, we issued an aggregate of 206,608 shares of our common stock to the founders of IntSights with a fair value of $ 21.0 million. The 206,608 shares of common stock will be accounted for as stock-based compensation expense over a 30-month period as continued service was required. In the year ended December 31, 2021, we recognized stock-based compensation expense related to such shares in the amount of $ 3.9 million.
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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 $ 319,194
Deferred cash consideration 5,575
Estimated purchase price adjustment receivable $ ( 2,595 )
Fair value of total consideration transferred $ 322,174
Recognized amount of identifiable assets acquired and liabilities assumed:
Cash, cash equivalents and restricted cash 13,194
Accounts receivable 6,197
Prepaid and other current assets 1,272
Operating lease right-of-use assets 1,261
Property and equipment, net 565
Other assets 268
Accounts payable and other current liabilities ( 9,069 )
Operating lease liabilities ( 1,261 )
Deferred revenue ( 9,469 )
Deferred tax liabilities ( 6,858 )
Intangible assets 65,200
Total identifiable net assets assumed 61,300
Goodwill 260,874
Net purchase price $ 322,174
These preliminary amounts are subject to subsequent adjustment as we obtain additional information to finalize certain components of working capital and deferred income taxes.
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
(in thousands) (in years)
Developed technology $ 54,700 6
Customer relationships 9,300 4
Trade name 1,200 2
Total identifiable intangible assets $ 65,200
The excess of the purchase price over the tangible assets acquired, identifiable intangible assets acquired and assumed liabilities was recorded as goodwill. We believe the goodwill is attributable to expanded product offerings resulting from the integration of the technology acquired with our existing product offerings and increased opportunities to successfully market and sell these new products and features to our customer base. The goodwill was allocated to our one reporting unit. The acquired goodwill and intangible assets were not deductible for tax purposes.
Following the acquisition, we granted to certain retained employees of IntSights restricted stock units (RSUs) for an aggregate of 194,466 shares of our common stock, which will vest over a maximum three-year period subject to such employees' continued service with us. The RSUs are expensed as stock-based compensation expense over the required service periods, assuming the service conditions are achieved.
In the year ended December 31, 2021, we recorded acquisition-related transaction costs of $ 5.9 million related to the acquisition of IntSights to general and administrative expense.
Our revenue and net loss attributable to the IntSights business in the year ended December 31, 2021 was $ 9.5 million and $ 23.0 million, respectively.
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Pro Forma Financial Information
The unaudited pro forma financial information in the table below summarizes the combined results of our operations and IntSights, on a pro forma basis, as though we had acquired IntSights on January 1, 2020. 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,
2021 2020
(in thousands)
Revenue $ 553,190 $ 427,670
Net loss $ ( 162,462 ) $ ( 151,003 )
Velocidex Enterprises Pty Ltd
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 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 1,655
Other assets 208
Accounts payable and other current liabilities ( 3,489 )
Intangible assets 10,400
Total identifiable net assets assumed 9,755
Goodwill 40,783
Total purchase price allocation $ 50,538
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 RSUs, which will vest over a maximum of three-year period, subject to such employees' continued service with us. The RSUs are expensed as stock-based compensation expense over the required service periods, assuming the service conditions are achieved.
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In the year ended December 31, 2021, we recorded $ 0.8 million of acquisition-related transaction costs related to the acquisition of Alcide to general and administrative expense.
In the year ended December 31, 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 $ 0.9 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.
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 assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. The excess of the purchase price over the assets acquired and liabilities assumed was recorded as goodwill. The fair value of net assets acquired, goodwill and intangible assets were $ 0.6 million, $ 9.4 million and $ 6.1 million, respectively. The goodwill was allocated to our one reporting unit. The acquired goodwill and intangible asset will not be deductible for tax purposes. Accordingly, a $ 0.8 million deferred tax benefit was recorded resulting from a partial release of our valuation allowance to account for the creation of a deferred tax liability for the developed technology intangible asset acquired.
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(5) Investments
Our investments, which are all classified as available-for-sale, consisted of the following:
As of December 31, 2021
Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair Value
(in thousands)
Description:
Commercial paper $ 37,778 $ — $ — $ 37,778
Corporate bonds 32,059 — ( 32 ) 32,027
U.S. Government agencies 22,396 — ( 31 ) 22,365
Agency bonds 749 — ( 1 ) 748
Total $ 92,982 $ — $ ( 64 ) $ 92,918
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
Commercial paper 34,766 — — 34,766
Corporate bonds 24,162 31 ( 1 ) 24,192
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, 2021 and 2020, our available-for-sale investments had maturities ranging from 2 to 23 months.
For all of our investments for which the amortized cost basis was greater than the fair value at December 31, 2021 and 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 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. 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 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.
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The following table presents our financial assets measured and recorded at fair value on a recurring basis using the above input categories:
As of December 31, 2021
Level 1 Level 2 Level 3 Total
(in thousands)
Description:
Assets:
Money market funds $ 86,835 $ — $ — $ 86,835
Commercial paper — 37,778 — 37,778
Corporate bonds — 32,027 — 32,027
U.S. Government agencies — 22,365 — 22,365
Agency bonds — 748 — 748
Foreign currency forward contracts designated as cash flow hedges (prepaid expenses and other current assets) — 73 — 73
Total assets $ 86,835 $ 92,991 $ — $ 179,826
Liabilities:
Foreign currency forward contracts designated as cash flow hedges (other current liabilities) $ — $ 843 $ — $ 843
Total liabilities $ — $ 843 $ — $ 843
As of December 31, 2020
Level 1 Level 2 Level 3 Total
(in thousands)
Description:
Assets:
Money market funds $ 152,570 $ — $ — $ 152,570
Corporate bonds 83,587 — — 83,587
U.S. Government agencies — 34,766 — 34,766
Commercial paper — 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 assets $ 236,157 $ 65,808 $ — $ 301,965
As of December 31, 2021, the fair value of our 2.25 % and 0.25 % convertible senior notes due 2025 and 2027, respectively, as further described in Note 10, Debt, was $ 460.5 million and $ 773.3 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, 2021 and 2020.
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(7) Property and Equipment
Property and equipment are recorded at cost and consist of the following:
As of December 31,
2021 2020
(in thousands)
Computer equipment and software $ 19,879 $ 13,438
Furniture and fixtures 10,360 9,655
Leasehold improvements 51,983 50,336
Total 82,222 73,429
Less accumulated depreciation ( 31,997 ) ( 20,315 )
Property and equipment, net $ 50,225 $ 53,114
We recorded depreciation expense of $ 12.3 million, $ 11.0 million and $ 9.0 million in 2021, 2020 and 2019, respectively.
(8) Goodwill and Intangible Assets
Goodwill was $ 515.3 million and $ 213.6 million as of December 31, 2021 and 2020, respectively. There were no goodwill impairment charges in 2021, 2020 or 2019. The following table displays the changes in the gross carrying amount of goodwill:
Amount
(in thousands)
Balance at December 31, 2019 $ 97,866
DivvyCloud acquisition 115,735
Balance at December 31, 2020 $ 213,601
Alcide acquisition 40,783
IntSights acquisition 260,874
Balance at December 31, 2021 $ 515,258
The following table presents details of our intangible assets which include acquired identifiable intangible assets and capitalized internal-use software costs:
Weighted-
Average Estimated Useful Life (years) As of December 31, 2021 As of December 31, 2020
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 5.2 $ 122,555 $ ( 40,152 ) $ 82,403 $ 54,455 $ ( 24,780 ) $ 29,675
Customer relationships 4.5 12,000 ( 2,436 ) 9,564 2,700 ( 958 ) 1,742
Trade names 3.1 2,619 ( 1,094 ) 1,525 1,419 ( 639 ) 780
Total acquired intangible assets 137,214 ( 43,722 ) 93,492 58,614 ( 26,417 ) 32,197
Internal-use software 3.0 25,857 ( 7,758 ) 18,099 16,002 ( 3,903 ) 12,099
Total intangible assets $ 163,071 $ ( 51,480 ) $ 111,591 $ 74,616 $ ( 30,320 ) $ 44,296
Intangible assets are expensed on a straight-line basis over the useful life of the asset. Amortization expense was $ 21.2 million, $ 11.6 million and $ 7.5 million in 2021, 2020 and 2019, respectively.
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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, 2021 was as follows (in thousands):
2022 $ 25,943
2023 22,777
2024 18,406
2025 16,053
2026 12,478
2027 and thereafter 5,206
Total $ 100,863
The table above excludes the impact of $ 10.7 million of capitalized internal-use software costs for projects that have not been completed as of December 31, 2021, and therefore, we have not determined the useful life of the software, nor have all the costs associated with these projects been incurred.
(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, 2021 and 2020:
Year Ended December 31,
2021 2020
(in thousands)
Beginning balance $ 64,639 $ 51,260
Capitalization of contract acquisition and fulfillment costs 48,951 33,525
Amortization of deferred contract acquisition and fulfillment costs ( 26,425 ) ( 20,146 )
Ending balance $ 87,165 $ 64,639
(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:
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
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;
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• 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 December 31, 2021, the conversion features of 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 2025 Notes were convertible, in whole or in part, at the option of the holders from January 1, 2022 through March 31, 2022.
Whether 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 December 31, 2021. As of December 31, 2021, the 2027 Notes are not convertible at the option of the holder.
The holders may convert the 2025 Notes and the 2027 Notes at any time on or after 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.
The 2025 Notes and the 2027 Notes are redeemable after 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 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 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.
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Redemption of the 2023 Notes
On September 16, 2021, we issued a redemption notice for the remaining $ 45.4 million aggregate principal amount outstanding of the 2023 Notes. Pursuant to the redemption notice, on November 30, 2021 we paid $ 43.4 million in cash and issued 697,262 shares of our common stock to the holders of the 2023 Notes who submitted conversion notices, and the remaining $ 2.0 million of 2023 Notes were redeemed in cash, plus accrued and unpaid interest.
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.
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 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 December 31, 2021 and 2020 was as follows (in thousands):
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As of December 31, 2021 As of December 31, 2020
2025 Notes 2027 Notes Total 2023 Notes 2025 Notes Total
Principal $ 230,000 $ 600,000 $ 830,000 $ 230,000 $ 230,000 $ 460,000
Unamortized debt discount — — — ( 30,425 ) ( 42,930 ) ( 73,355 )
Unamortized debt issuance costs ( 4,905 ) ( 13,032 ) ( 17,937 ) ( 3,009 ) ( 5,050 ) ( 8,059 )
Net carrying amount $ 225,095 $ 586,968 $ 812,063 $ 196,566 $ 182,020 $ 378,586
Interest expense related to the Notes was as follows (in thousands):
Year Ended December 31,
2021 2020
2023 Notes 2025 Notes 2027 Notes Total 2023 Notes 2025 Notes Total
Contractual interest expense $ 950 $ 5,175 $ 1,164 $ 7,289 $ 2,875 $ 3,450 $ 6,325
Amortization of debt discount — — — — 10,342 5,417 15,759
Amortization of debt issuance costs 498 1,384 1,948 3,830 1,023 637 1,660
Induced conversion expense 2,740 — — 2,740 — — —
Total interest expense $ 4,188 $ 6,559 $ 3,112 $ 13,859 $ 14,240 $ 9,504 $ 23,744
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 2025 Capped Calls and the 2027 Capped Calls are expected to offset potential dilution to our common stock upon conversion of the respective 2025 Notes or the 2027 Notes, with such offset subject to a cap based on the cap price. The 2023 Capped Calls were not redeemed with the redemption of the 2023 Notes. 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 provided 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 could 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.
In December 2021, we entered into an Amendment Agreement (the Amendment) in respect of our Credit and Security Agreement (as amended, the Credit Agreement), with KeyBank National Association, to, among other things, increase the credit facility from $ 50.0 million to $ 100.0 million and extend the maturity date to December 22, 2024. The Credit Agreement provides for a $ 100.0 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 $ 150.0 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 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 (i) term SOFR plus a credit spread adjustment of 0.10 % per annum plus a margin of 2.50 % per annum or (ii) the alternate base rate (subject to a floor), plus an applicable margin equal to 0 % per annum.
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As of December 31, 2021, we did not have any outstanding borrowings and we were in compliance with all covenants under the Credit Agreement.
As of December 31, 2021, we had a total of $ 9.3 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.
(11) Leases
Our leases primarily relate to office facilities that have remaining terms of up to 8.8 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 5.7 years. All of our leases are classified as operating leases.
The components of lease expense were as follows:
Year Ended December 31,
2021 2020
(in thousands)
Operating lease costs $ 16,475 $ 14,881
Short-term lease costs 773 1,033
Variable lease costs 5,982 4,870
Total lease costs $ 23,230 $ 20,784
Supplemental balance sheet information related to the operating leases was as follows:
As of December 31,
2021 2020
(in thousands, except lease term and discount rate)
Operating ROU assets $ 83,751 $ 67,178
Operating lease liabilities, current portion $ 9,630 $ 9,612
Operating lease liabilities, non-current portion 90,865 75,737
Total operating lease liabilities $ 100,495 $ 85,349
Weighted average remaining lease terms (in years) - operating leases 7.2 7.9
Weighted average discount rate - operating leases 6.2 % 7.7 %
Supplemental cash flow information related to leases was as follows:
As of December 31,
2021 2020
(in thousands)
Cash paid for amounts included in the measurement of lease liabilities $ 17,967 $ 16,159
ROU assets obtained in exchange for new lease obligations $ 27,331 $ 15,838
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Maturities of operating lease liabilities as of December 31, 2021 were as follows (in thousands):
2022 $ 15,518
2023 16,186
2024 17,776
2025 16,911
2026 15,518
2027 and thereafter 44,112
Total lease payments $ 126,021
Less: imputed interest ( 25,526 )
Total $ 100,495
(12) Stock-Based Compensation
( a) General
In connection with our IPO, our board of directors resolved not to make future grants under our 2011 Stock Option and Grant Plan (the 2011 Plan). 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 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). We initially reserved 800,000 shares of our common stock for the issuance of awards under the 2015 Plan plus the number of shares of common stock reserved for issuance under the 2011 Plan at the time the 2015 Plan became effective. 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.
As of December 31, 2021, the shares of common stock authorized to be issued under the 2015 Plan totaled 17,877,553 and there were 3,102,969 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 (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,
2021 2020 2019
(in thousands)
Stock-based compensation expense:
Cost of revenue $ 6,491 $ 4,298 $ 2,580
Research and development 46,622 24,423 15,670
Sales and marketing 23,828 16,826 11,883
General and administrative 25,638 18,341 10,531
Total stock-based compensation expense $ 102,579 $ 63,888 $ 40,664
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). For the
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years ended December 31, 2021 and 2020, we recognized stock-based compensation expense related to such bonuses in the amount of $ 4.7 million and $ 2.5 million, respectively, based on the probable expected performance against the pre-established corporate financial objectives as of December 31, 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.
In 2021, we accelerated the vesting of a stock award which was deemed a modification of the original award resulting in $ 6.9 million of incremental stock-based compensation which we recorded in the year ended December 31, 2021.
(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 2021, 2020 and 2019 was as follows:
Restricted Stock RSUs and PSUs
Shares Weighted-
Average Grant
Date Fair
Value Shares Weighted-
Average
Grant Date
Fair Value
Unvested balance as of December 31, 2018 21,677 $ 10.88 2,773,773 $ 21.21
Granted — — 1,740,299 43.34
Vested ( 21,677 ) 10.88 ( 1,291,932 ) 24.42
Forfeited — — ( 285,216 ) 26.14
Unvested balance as of December 31, 2019 — — 2,936,924 32.43
Granted — — 1,725,531 57.57
Vested — — ( 1,451,618 ) 33.66
Forfeited — — ( 268,923 ) 40.56
Unvested balance as of December 31, 2020 — — 2,941,914 45.86
Granted — — 1,957,794 92.74
Vested — — ( 1,610,517 ) 47.00
Forfeited — — ( 510,314 ) 66.67
Unvested balance as of December 31, 2021 — $ — 2,778,877 $ 74.40
As of December 31, 2021, the unrecognized compensation cost related to shares of unvested RSUs and PSUs expected to vest was $ 188.6 million. This unrecognized compensation will be recognized over an estimated weighted-average amortization period of 2.5 years.
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(c) Stock Options
The following table summarizes information about stock option activity during the reporting periods:
Shares Weighted
Average
Exercise
Price Weighted
Average
Remaining
Contractual Life
(in years) Aggregate
Intrinsic
Value
(in thousands)
Outstanding as of December 31, 2018 3,713,179 $ 10.32
Granted — —
Exercised ( 968,057 ) 10.55 $ 39,526
Forfeited/cancelled ( 9,730 ) 13.53
Outstanding as of December 31, 2019 2,735,392 10.10
Granted — —
Exercised ( 783,645 ) 9.98 $ 39,095
Forfeited/cancelled ( 18,734 ) 17.87
Outstanding as of December 31, 2020 1,933,013 10.07
Granted — —
Exercised ( 521,326 ) 8.26 $ 49,522
Forfeited/cancelled ( 300 ) 7.73
Outstanding as of December 31, 2021 1,411,387 $ 10.74 3.36 $ 150,951
Vested and exercisable as of December 31, 2021 1,405,646 $ 10.68 3.35 $ 150,414
As of December 31, 2021, the unrecognized compensation cost related to our unvested stock options expected to vest was not material and will be recognized over an estimated weighted-average amortization period of 0.1 years.
The total fair value of stock options vested in 2021, 2020 and 2019 was $ 0.6 million, $ 2.2 million and $ 3.7 million, respectively.
(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). The number of shares reserved and available for issuance under the ESPP automatically increases each January 1, beginning on January 1, 2016, by 1 % 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. As of December 31, 2021, the shares of common stock authorized to be issued under the ESPP totaled 3,578,855 and there were 2,125,686 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 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.
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The following table reflects the assumptions used in the Black-Scholes option pricing model to calculate the expense related to the ESPP:
Year Ended December 31,
2021 2020 2019
Expected term (in years) 0.5 - 1.0
0.5 - 1.0
0.5 - 1.0
Expected volatility 31 - 48 %
47 - 53 %
44 %
Risk-free interest rate 0.5 – 0.7 %
0.1 – 0.3 %
1.9 – 2.5 %
Expected dividend yield — — —
Grant date fair value per share $ 20.32 – 34.98
$ 9.63 – 22.3
$ 14.17 – 17.94
The following table provides the number of common shares issued to employees, the purchase prices and aggregate proceeds for the purchase dates in the years ended December 31, 2021, 2020 and 2019:
September 15, 2021 March 15, 2021 September 15, 2020 March 15, 2020 September 15, 2019 March 15, 2019
Common shares issued 73,676 147,837 131,585 101,806 74,221 110,822
Purchase prices $ 52.60 and $ 67.59
$ 28.39 and $ 52.60
$ 28.39
$ 32.87
$ 30.46 and $ 42.22
$ 30.46 and $ 21.96
Aggregate proceeds $ 4.8 million $ 4.5 million $ 3.7 million $ 3.3 million $ 2.9 million $ 2.6 million
(13) Income Taxes
Loss before income taxes included in the consolidated statements of operations was as follows:
Year Ended December 31,
2021 2020 2019
(in thousands)
United States $ ( 106,281 ) $ ( 72,846 ) $ ( 41,111 )
Foreign ( 29,632 ) ( 24,017 ) ( 12,692 )
Loss before income taxes $ ( 135,913 ) $ ( 96,863 ) $ ( 53,803 )
Income tax expense included in the consolidated statements of operations was as follows:
Year Ended December 31,
2021 2020 2019
(in thousands)
Current:
Federal $ 124 $ 8 $ 260
State and local 177 122 109
Foreign 9,690 1,149 255
Total current tax expense 9,991 1,279 624
Deferred:
Federal 10 9 9
State and local 2 2 2
Foreign 418 696 ( 593 )
Total deferred tax expense (benefit) 430 707 ( 582 )
Income tax expense $ 10,421 $ 1,986 $ 42
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The reconciliation of the federal statutory rate of 21% to the effective income tax rate for the years ended December 31, 2021, 2020 and 2019 was as follows:
Year Ended December 31,
2021 2020 2019
Federal statutory rate 21.0 % 21.0 % 21.0 %
State taxes, net of federal benefit ( 0.1 ) ( 0.1 ) ( 0.2 )
Permanent differences ( 0.2 ) ( 0.7 ) ( 0.6 )
Stock-based compensation 14.2 12.1 22.3
Federal research and development credit 1.4 1.1 1.3
Foreign rate differential ( 0.5 ) ( 1.4 ) ( 1.4 )
Change in valuation allowance ( 36.7 ) ( 30.0 ) ( 41.0 )
Excess officers' compensation ( 5.9 ) ( 3.3 ) ( 2.2 )
Tax rate change 11.2 — —
Tax reserves ( 3.8 ) — —
Capital gain on sale ( 7.0 ) — —
Other ( 1.2 ) ( 0.8 ) 0.7
Effective income tax rate ( 7.6 ) % ( 2.1 ) % ( 0.1 ) %
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:
As of December 31,
2021 2020
(in thousands)
Deferred tax assets:
Accruals and reserves $ 157 $ 1,272
Net operating loss carryforwards 176,417 117,478
Deferred revenue 9,518 7,951
Depreciation 3,808 3,330
Research and development credits 8,950 6,201
Operating lease liabilities 25,235 20,967
Stock-based compensation 7,497 4,755
Tax credits 1,148 1,148
Other 3,439 2,105
Gross deferred tax assets 236,169 165,207
Valuation allowance ( 187,397 ) ( 110,350 )
Total deferred tax assets 48,772 54,857
Deferred tax liabilities:
Intangible assets ( 15,957 ) ( 5,717 )
Operating lease ROU assets ( 20,921 ) ( 16,233 )
Convertible senior notes — ( 17,961 )
Deferred contract acquisition and fulfillment costs ( 18,278 ) ( 15,908 )
Other ( 636 ) ( 543 )
Total deferred tax liabilities ( 55,792 ) ( 56,362 )
Net deferred tax liabilities $ ( 7,020 ) $ ( 1,505 )
As of December 31, 2021, we have evaluated the need for a valuation allowance on deferred tax assets. In assessing whether the deferred tax assets are realized, management considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Due to our history of generating losses in the United States, the United Kingdom and Ireland, we continue to record a full valuation allowance against our deferred tax assets in
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these jurisdictions. If we achieve future profitability, a significant portion of these deferred tax assets could be available to offset future income taxes.
The valuation allowance increased by $ 77.0 million for the year ended December 31, 2021, primarily due to additional operating losses generated during the year.
We plan to permanently reinvest the undistributed earnings of our foreign subsidiaries. If we repatriate these earnings, we may be required to pay U.S. state and local taxes, as well as foreign withholding taxes.
As of December 31, 2021, we had federal and state net operating loss carryforwards of $ 510.3 million and $ 400.7 million, respectively. Of our federal net operating losses, $ 386.8 million will carry forward indefinitely. The remaining federal and state net operating loss carryforwards expire at various dates beginning in 2022. As of December 31, 2021, we had foreign net operating loss carryforwards of $ 231.7 million that can be carried forward indefinitely. We also had federal, state and international research and development credit carryforwards of $ 6.2 million, $ 2.5 million and $ 0.2 million as of December 31, 2021, respectively. These credit carryforwards expire at various dates beginning in 2023.
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. 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 currently are under examination in Israel for tax years 2016 through 2019.
We have established reserves to provide for additional income taxes that management believes will more likely than not be due in future years. The reserves have been established based upon our assessment of the potential exposure. Changes in our reserve for unrecognized income tax benefits for the year ended December 31, 2021 was as follows (in thousands):
Balance as of December 31, 2020 $ —
Additions based on current year tax positions 5,041
Balance as of December 31, 2021 $ 5,041
We recorded $ 0.1 million of interest in 2021 related to uncertain tax positions. During the next twelve months, the Company does not expect any change to its uncertain tax positions other than the accrual of interest in the normal course of business.
(14) Net Loss Per Share
The following table summarizes the computation of basic and diluted net loss per share of our common stock for 2021, 2020 and 2019:
Year Ended December 31,
2021 2020 2019
(in thousands, except share and per share data)
Numerator:
Net loss $ ( 146,334 ) $ ( 98,849 ) $ ( 53,845 )
Denominator:
Weighted-average common shares outstanding, basic and diluted 55,270,998 51,036,824 48,731,791
Net loss per share, basic and diluted $ ( 2.65 ) $ ( 1.94 ) $ ( 1.10 )
We intend to settle any conversion of our 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
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the Notes solely in cash at that time. For the years ended December 31, 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. As further described in Note 10, Debt, t he 2023 Capped Calls were not redeemed with the redemption of the 2023 Notes.
As of December 31, 2021, the conversion features of the 2025 Notes was 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 2025 Notes were convertible, in whole or in part, at the option of the holders from January 1, 2022 through March 31, 2022. We had not received any conversion notices through the issuance date of our audited consolidated financial statements. For disclosure purposes, we have calculated the potentially dilutive effect of the conversion spread, which is included in the table below.
The following potentially dilutive securities outstanding, prior to the use of the treasury stock method, 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,
2021 2020 2019
Options to purchase common stock 1,411,387 1,933,013 2,705,458
Unvested restricted stock units 2,778,877 2,941,914 2,936,924
Common stock to be issued to DivvyCloud founders 66,865 200,596 —
Common stock issued to IntSights founders 206,608 — —
Shares to be issued under ESPP 36,831 101,658 53,167
Convertible senior notes 9,573,087 9,299,432 5,530,176
Total 14,073,655 14,476,613 11,225,725
(15) Commitments and Contingencies
(a) Purchase Obligations
As of December 31, 2021, 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, 2021 (in thousands):
2022 $ 58,862
2023 5,805
2024 450
2025 61
2026 and thereafter 16
Total $ 65,194
(b) Warranty
We provide limited product warranties. Historically, any payments made under these provisions have been immaterial.
(c) 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
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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. 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.
(d) 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.
(16) Employee Benefit Plan
In December 2008, we established a discretionary 401(k) plan in which all full-time U.S. employees above the age 18 are eligible to participate after they have been employed for us for 90 days following the applicable date of hire. Matching contributions to the 401(k) plan can be made at our discretion. In 2021, 2020 and 2019, we made discretionary contributions of $ 3.6 million, $ 2.9 million and $ 2.8 million, respectively, to the plan.
(17) 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 are as follows:
Year Ended December 31,
2021 2020 2019
(in thousands)
United States $ 414,856 $ 329,753 $ 264,852
Other 120,548 81,733 62,095
Total $ 535,404 $ 411,486 $ 326,947
Property and equipment, net by geographic area as of December 31, 2021 and 2020 is presented in the table below:
As of December 31,
2021 2020
(in thousands)
United States $ 37,682 $ 40,101
Other 12,543 13,013
Total $ 50,225 $ 53,114
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
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