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
63
Consolidated Statements of Operations
64
Consolidated Statements of Comprehensive Loss
65
Consolidated Statements of Changes Stockholders' Equity (Deficit)
66
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, 2022 and 2021, the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2022, 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, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, 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, 2022 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
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 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.
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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 Notes 2 and 3 to the consolidated financial statements, the Company recognized products revenue of $647.5 million and professional services revenue of $37.6 million for the year ended December 31, 2022. 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, 2023
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RAPID7, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31, 2022 December 31, 2021
Assets
Current assets:
Cash and cash equivalents $ 207,287 $ 164,582
Short-term investments 84,162 58,850
Accounts receivable, net of allowance for credit losses of $ 2,299 and $ 1,978 at December 31, 2022 and 2021, respectively
152,045 146,094
Deferred contract acquisition and fulfillment costs, current portion 34,906 29,974
Prepaid expenses and other current assets 31,907 33,236
Total current assets 510,307 432,736
Long-term investments 9,756 34,068
Property and equipment, net 57,891 50,225
Operating lease right-of-use assets 79,342 83,751
Deferred contract acquisition and fulfillment costs, non-current portion 68,169 57,191
Goodwill 515,631 515,258
Intangible assets, net 101,269 111,591
Other assets 16,626 11,191
Total assets $ 1,358,991 $ 1,296,011
Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
Accounts payable $ 10,255 $ 3,521
Accrued expenses 80,306 82,620
Operating lease liabilities, current portion 12,444 9,630
Deferred revenue, current portion 426,599 372,067
Other current liabilities 1,663 842
Total current liabilities 531,267 468,680
Convertible senior notes, net 815,948 812,063
Operating lease liabilities, non-current portion 85,946 90,865
Deferred revenue, non-current portion 31,040 33,056
Other long-term liabilities 14,864 17,342
Total liabilities 1,479,065 1,422,006
Stockholders’ equity (deficit):
Preferred stock, $ 0.01 par value per share; 10,000,000 shares authorized at December 31, 2022 and 2021; 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, 2022 and 2021; 60,206,277 and 58,181,816 shares issued at December 31, 2022 and 2021, respectively; 59,719,469 and 57,695,008 shares outstanding at December 31, 2022 and 2021, respectively
597 577
Treasury stock, at cost, 486,808 shares at December 31, 2022 and 2021
( 4,764 ) ( 4,764 )
Additional paid-in-capital 746,249 615,032
Accumulated other comprehensive loss ( 1,411 ) ( 812 )
Accumulated deficit ( 860,745 ) ( 736,028 )
Total stockholders’ equity (deficit) ( 120,074 ) ( 125,995 )
Total liabilities and stockholders’ equity (deficit) $ 1,358,991 $ 1,296,011
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,
2022 2021 2020
Revenue:
Products $ 647,535 $ 500,843 $ 382,922
Professional services 37,548 34,561 28,564
Total revenue 685,083 535,404 411,486
Cost of revenue:
Products 182,212 140,773 96,864
Professional services 32,137 28,175 24,653
Total cost of revenue 214,349 168,948 121,517
Total gross profit 470,734 366,456 289,969
Operating expenses:
Research and development 189,970 160,779 108,568
Sales and marketing 307,409 247,453 195,981
General and administrative 84,969 78,289 59,519
Total operating expenses 582,348 486,521 364,068
Loss from operations ( 111,614 ) ( 120,065 ) ( 74,099 )
Other income (expense), net:
Interest income 1,813 365 1,454
Interest expense ( 10,982 ) ( 14,292 ) ( 24,137 )
Other income (expense), net ( 1,522 ) ( 1,921 ) ( 81 )
Loss before income taxes ( 122,305 ) ( 135,913 ) ( 96,863 )
Provision for income taxes 2,412 10,421 1,986
Net loss $ ( 124,717 ) $ ( 146,334 ) $ ( 98,849 )
Net loss per share, basic and diluted $ ( 2.13 ) $ ( 2.65 ) $ ( 1.94 )
Weighted-average common shares outstanding, basic and diluted 58,552,065 55,270,998 51,036,824
See accompanying notes to consolidated financial statements.
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RAPID7, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
Year Ended December 31,
2022 2021 2020
Net loss $ ( 124,717 ) $ ( 146,334 ) $ ( 98,849 )
Other comprehensive (loss) income:
Change in fair value of cash flow hedges ( 3,874 ) ( 86 ) ( 170 )
Adjustment for net losses (gains) realized on cash flow hedges and included in net loss 4,053 — ( 21 )
Total change in unrealized gains (losses) on cash flow hedges 179 ( 86 ) ( 191 )
Change in unrealized (losses) gains on investments ( 778 ) ( 1,043 ) 432
Adjustment for net gains realized and included in net loss — ( 137 ) —
Total change in unrealized (losses) gains on investments ( 778 ) ( 1,180 ) 432
Total other comprehensive (loss) income ( 599 ) ( 1,266 ) 241
Comprehensive loss $ ( 125,316 ) $ ( 147,600 ) $ ( 98,608 )
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, 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 )
Stock-based compensation expense — — — — 123,441 — — 123,441
Issuance of common stock under employee stock purchase plan 218 2 — — 11,941 — — 11,943
Vesting of restricted stock units 1,482 15 — — ( 15 ) — — —
Shares withheld for employee taxes ( 105 ) ( 1 ) — — ( 7,461 ) — — ( 7,462 )
Issuance of common stock upon exercise of stock options 480 5 — — 3,313 — — 3,318
Issuance of common stock in connection with conversion of convertible senior notes — — — — ( 3 ) — — ( 3 )
Issuance of common stock related to acquisition 33 — — — — — — —
Repurchase of common stock issued in relation to acquisition ( 83 ) ( 1 ) — — 1 — — —
Other comprehensive loss — — — — — ( 599 ) — ( 599 )
Net loss — — — — — — ( 124,717 ) ( 124,717 )
Balance, December 31, 2022 59,720 $ 597 487 $ ( 4,764 ) $ 746,249 $ ( 1,411 ) $ ( 860,745 ) $ ( 120,074 )
See accompanying notes to consolidated financial statements.
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RAPID7, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
2022 2021 2020
Cash flows from operating activities:
Net loss $ ( 124,717 ) $ ( 146,334 ) $ ( 98,849 )
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 41,038 33,501 22,631
Amortization of debt discount and issuance costs 4,085 3,982 17,518
Stock-based compensation expense 119,902 102,579 63,888
Deferred income taxes ( 1,440 ) 466 737
Induced conversion expense — 2,740 —
Other ( 200 ) 1,920 2,428
Changes in assets and liabilities:
Accounts receivable ( 9,050 ) ( 25,475 ) ( 24,380 )
Deferred contract acquisition and fulfillment costs ( 15,910 ) ( 22,526 ) ( 13,379 )
Prepaid expenses and other assets ( 2,231 ) ( 3,355 ) ( 8,956 )
Accounts payable 7,977 ( 2,077 ) ( 2,394 )
Accrued expenses 3,741 19,205 8,640
Deferred revenue 52,516 85,562 37,428
Other liabilities 2,493 3,729 ( 425 )
Net cash provided by operating activities 78,204 53,917 4,887
Cash flows from investing activities:
Business acquisitions, net of cash acquired — ( 358,420 ) ( 125,826 )
Purchases of property and equipment ( 20,382 ) ( 9,010 ) ( 13,802 )
Capitalization of internal-use software ( 17,145 ) ( 9,854 ) ( 6,130 )
Purchases of investments ( 122,765 ) ( 93,092 ) ( 177,053 )
Sales and maturities of investments 121,304 147,998 166,524
Other investments ( 1,000 ) ( 3,000 ) —
Net cash used in by investing activities ( 39,988 ) ( 325,378 ) ( 156,287 )
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 ( 71 ) ( 300 ) ( 440 )
Payments for redemption, repurchase and conversion of convertible senior notes ( 12 ) ( 230,000 ) —
Payments related to business acquisitions ( 300 ) ( 12,118 ) ( 150 )
Taxes paid related to net share settlement of equity awards ( 7,462 ) ( 16,044 ) ( 8,921 )
Proceeds from employee stock purchase plan 11,943 9,276 7,082
Proceeds from stock option exercises 3,318 4,315 7,810
Net cash provided by financing activities 7,416 264,133 200,925
Effect of exchange rate changes on cash ,cash equivalents and restricted cash ( 2,845 ) ( 1,272 ) 679
Net increase (decrease) in cash, cash equivalents and restricted cash 42,787 ( 8,600 ) 50,204
Cash, cash equivalents and restricted cash, beginning of period 165,017 173,617 123,413
Cash, cash equivalents and restricted cash, end of period $ 207,804 $ 165,017 $ 173,617
Supplemental cash flow information:
Cash paid for interest on convertible senior notes $ 6,675 $ 7,345 $ 5,463
Cash paid for income taxes, net of refunds $ 1,571 $ 3,305 $ 312
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents $ 207,287 $ 164,582 $ 173,617
Restricted cash included in prepaid expenses and other assets 517 435 —
Total cash, cash equivalents and restricted cash $ 207,804 $ 165,017 $ 173,617
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 standalone selling prices in revenue transactions with multiple performance obligations, the estimated period of benefit for deferred contract acquisition 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.
(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 and (2) 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:
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.
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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 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.
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• 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.
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, 2022, we recognized revenue of $ 400.5 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, 2022 and 2021, unbilled receivables of $ 1.1 million and $ 1.2 million, respectively, are included in prepaid expenses and other current assets in our consolidated balance sheet. As of December 31, 2022 and 2021, we have no contract assets recorded on our consolidated balance sheet.
(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) Investments
Our investments consist of U.S. government agencies, corporate bonds, commercial paper 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.
(f) 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 for credit loss 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. Additions to the allowance for credit losses are recorded in general and administrative expense in the consolidated statement
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of operations. Accounts receivable deemed uncollectible are charged against the allowance for credit losses. We do not have any off-balance sheet credit exposure related to our customers.
(g) Concentration of Credit Risk
Financial instruments that potentially expose us to concentrations of credit risk consist primarily of cash and cash equivalents, accounts receivable, investments and derivative financial instruments.
We invest only in high-quality credit instruments and our cash and cash equivalents and available for sale investments consist primarily of fixed income securities. 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 2022, 2021 or 2020 or accounts receivable as of December 31, 2022 or 2021.
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.
(h) Deferred Contract Acquisition Costs
We defer contract costs that are recoverable and incremental to obtaining customer contracts. Contract costs, which primarily consist of sales commissions, are amortized on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the asset relates. Contract costs for a new customer, upsell or cross-sell are 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 sales commissions paid on renewals are not commensurate with commissions paid on initial sales transactions. Contract costs relating to contract renewals are deferred and amortized on a straight-line basis over the related renewal period. Contract costs 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 classify deferred contract costs as short-term or long-term based on when we expect to recognize the expense. Amortization expense associated with deferred contract acquisition costs is recorded to sales and marketing expense in our consolidated statements of operations. 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.
(i) 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.
(j) 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.
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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 $ 17.1 million, $ 9.9 million and $ 6.1 million of costs related to software developed for internal use in the years ended December 31, 2022, 2021 and 2020, 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.
(k) Leases
We determine whether an arrangement is or contains a lease at inception. 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. 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. Operating lease cost is recognized on a straight-line basis over the lease term.
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 account for lease and non-lease components as a single lease component and do not recognize operating lease ROU assets and lease liabilities for leases with a term of one year or less.
(l) 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 or asset groups 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 or asset groups are considered to be impaired, the impairment recognized is the amount by which the carrying value exceeds the fair value of the assets or asset groups. For the year ended December 31, 2022, there was no material impairment of our long-lived assets.
(m) 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.
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(n) Goodwill
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, 2022, we concluded the fair value of our single reporting unit exceeded its' carrying value and there was no impairment of goodwill.
(o) 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 2022, foreign currency transaction losses were $ 1.4 million and foreign currency re-measurement gains (losses) were not material. In 2021, foreign currency transaction losses and foreign currency re-measurement losses were $ 0.3 million and $ 1.7 million, respectively.
(p) Derivative and Hedging Activities
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.
Our 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 earnings. If it becomes probable that the hedged transaction will not occur, the cumulative unrealized gain or loss is reclassified immediately from accumulated other comprehensive income (loss) into the financial statement line item associated with the underlying hedged transaction in our consolidated statement of operations. Derivatives designated as cash flow hedges are classified in our consolidated statements of cash flow in the same manner as the underlying hedged transaction, primarily within cash flow from operating activities.
As of December 31, 2022 and 2021, our cash flow hedges had contractual maturities of eighteen months or less, and as of December 31, 2022 and 2021, outstanding forward contracts had a total notional value of $ 44.9 million and $ 34.7 million, respectively. The notional value represents the gross amount of foreign currency that will be bought or sold upon maturity of the forward contract. During the years ended December 31, 2022 and 2021, all cash flow hedges were considered effective. Refer to Note 6, Fair Value Measurements, for the fair values of our outstanding derivative instruments.
(q) 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.
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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.
(r) Advertising
Advertising costs are expensed as incurred, and are recorded in sales and marketing expense in our consolidated statement of operations. We incurred $ 22.7 million, $ 21.3 million and $ 16.4 million in advertising expense in 2022, 2021 and 2020, respectively.
(s) 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.
(t) 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 Financial Accounting Standards Board (“FASB”) Accounting Standard Update (“ASU”) 2020-06 (“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.
(u) Recent Accounting Pronouncements
Accounting Pronouncements Recently Adopted
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”), which requires companies to apply revenue guidance to recognize and measure contract assets and contract liabilities from contracts with customers acquired in a business combination on the acquisition date, instead of measuring them at fair value. This standard is effective for interim and annual periods beginning after December 15, 2022, with early adoption permitted. We early adopted 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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(3) Revenue from Contracts with Customers
The following table summarizes revenue from contracts with customers for the years ended December 31, 2022, 2021 and 2020:
Year Ended December 31,
2022 2021 2020
(in thousands)
Subscriptions $ 643,247 $ 492,608 $ 371,975
Professional services 37,548 34,561 28,564
Other 4,288 8,235 10,947
Total revenue $ 685,083 $ 535,404 $ 411,486
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, 2022, 2021 and 2020:
Year Ended December 31,
2022 2021 2020
(in thousands)
United States $ 515,894 $ 414,856 $ 329,753
All other 169,189 120,548 81,733
Total revenue $ 685,083 $ 535,404 $ 411,486
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, 2022. The estimated revenues do not include unexercised contract renewals.
Next Twelve Months Thereafter
(in thousands)
Subscriptions $ 478,174 $ 191,817
Professional services 17,404 4,496
Other 462 131
Total $ 496,040 $ 196,444
(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 $ 322.3 million. The purchase consideration consisted of $ 319.2 million in cash paid at closing, $ 3.4 million in deferred cash payments and a $ 0.3 million receivable for purchase price adjustments. The deferred cash payments were held by us to satisfy indemnification obligations and certain post-closing purchase price adjustments for a period of eighteen months from the acquisition date and were paid in January 2023.
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 $ 61.1 million, $ 260.9 million and $ 65.2 million, respectively. The goodwill was allocated to our one reporting unit. The acquired goodwill and intangible assets were not deductible for tax purposes.
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 paid in April 2022. The purchase price was allocated to developed technology intangible asset which has an estimated useful life of 6 years.
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Alcide.IO Ltd.
On January 28, 2021, we acquired Alcide.IO Ltd. (“Alcide”), a leading provider of Kubernetes security, for a purchase price of $ 50.5 million, which was funded in cash.
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 $( 0.7 ) million, $ 40.8 million and $ 10.4 million, respectively. The goodwill was allocated to our one reporting unit. The acquired goodwill and intangible assets were not deductible for tax purposes.
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 .
(5) Investments
Our investments, which are all classified as available-for-sale, consisted of the following:
As of December 31, 2022
Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair Value
(in thousands)
Description:
U.S. Government agencies $ 66,234 $ 4 $ ( 545 ) $ 65,693
Corporate bonds 14,351 — ( 230 ) 14,121
Commercial paper 7,944 — — 7,944
Agency bonds 6,231 — ( 71 ) 6,160
Total $ 94,760 $ 4 $ ( 846 ) $ 93,918
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, 2022 and 2021, our available-for-sale investments had maturities ranging from 2 to 19 months and from 2 to 23 months, respectively.
Unrealized losses related to our available-for-sale investments are due to interest rate fluctuations as opposed to credit quality. We do not intend to sell any of the securities in an unrealized loss position and it is not likely that we would be required to sell these securities before recovery of their amortized cost basis, which may be at maturity. We did not recognize any credit losses related to our available-for-sale investments during the years ended December 31, 2022 and 2021.
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(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.
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, 2022
Level 1 Level 2 Level 3 Total
(in thousands)
Description:
Assets:
Money market funds $ 88,039 $ — $ — $ 88,039
Corporate bonds — 14,121 — 14,121
Commercial paper — 7,944 — 7,944
U.S. Government agencies 65,693 — — 65,693
Agency bonds — 6,160 — 6,160
Foreign currency forward contracts designated as cash flow hedges (prepaid expenses and other current assets and other assets) — 988 — 988
Total assets $ 153,732 $ 29,213 $ — $ 182,945
Liabilities:
Foreign currency forward contracts designated as cash flow hedges (other current liabilities and other long term liabilities) $ — $ 1,559 $ — $ 1,559
Total liabilities $ — $ 1,559 $ — $ 1,559
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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 and other assets) — 73 — 73
Total assets $ 109,200 $ 70,626 $ — $ 179,826
Liabilities:
Foreign currency forward contracts designated as cash flow hedges (other current liabilities and other long-term liabilities) 823 823
Total liabilities $ — $ 823 $ — $ 823
As of December 31, 2022, 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 $ 220.3 million and $ 468.6 million, respectively, based upon quoted market prices. We consider the fair value of the notes to be a Level 2 measurement due to limited trading activity of the notes.
(7) Property and Equipment
Property and equipment are recorded at cost and consist of the following:
As of December 31,
2022 2021
(in thousands)
Computer equipment and software $ 24,568 $ 19,879
Furniture and fixtures 11,823 10,360
Leasehold improvements 66,180 51,983
Total property and equipment, gross 102,571 82,222
Less accumulated depreciation ( 44,680 ) ( 31,997 )
Total property and equipment, net $ 57,891 $ 50,225
We recorded depreciation expense of $ 13.6 million, $ 12.3 million and $ 11.0 million in 2022, 2021 and 2020, respectively.
(8) Goodwill and Intangible Assets
Goodwill was $ 515.6 million and $ 515.3 million as of December 31, 2022 and 2021, respectively. There were no goodwill impairment charges in 2022, 2021 or 2020. The following table displays the changes in the gross carrying amount of goodwill:
Amount
(in thousands)
Balance at December 31, 2020 $ 213,601
Alcide acquisition 40,783
IntSights acquisition 260,874
Balance at December 31, 2021 515,258
IntSights acquisition adjustments 373
Balance at December 31, 2022 $ 515,631
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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, 2022 As of December 31, 2021
Gross Carrying
Amount Accumulated
Amortization Net Carrying Value Gross Carrying
Amount Accumulated
Amortization Net Carrying Value
(in thousands)
Intangible assets subject to amortization:
Developed technology 5.2 $ 122,555 $ ( 58,645 ) $ 63,910 $ 122,555 $ ( 40,152 ) $ 82,403
Customer relationships 4.5 12,000 ( 5,146 ) 6,854 12,000 ( 2,436 ) 9,564
Trade names 3.1 2,619 ( 1,874 ) 745 2,619 ( 1,094 ) 1,525
Total acquired intangible assets $ 137,174 $ ( 65,665 ) $ 71,509 $ 137,174 $ ( 43,682 ) $ 93,492
Internal-use software 3.0 43,002 ( 13,242 ) 29,760 25,857 ( 7,758 ) 18,099
Total intangible assets $ 180,176 $ ( 78,907 ) $ 101,269 $ 163,031 $ ( 51,440 ) $ 111,591
Intangible assets are expensed on a straight-line basis over the useful life of the asset. Amortization expense was $ 27.5 million, $ 21.2 million and $ 11.6 million in 2022, 2021 and 2020, respectively.
Estimated future amortization expense of the acquired identifiable intangible assets and completed capitalized internal-use software costs as of December 31, 2022 was as follows (in thousands):
2023 $ 25,988
2024 21,283
2025 17,283
2026 12,492
2027 5,206
Total $ 82,252
The table above excludes the impact of $ 19.0 million of capitalized internal-use software costs for projects that have not been completed as of December 31, 2022, 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, 2022 and 2021:
Year Ended December 31,
2022 2021
(in thousands)
Beginning balance $ 87,165 $ 64,639
Capitalization of contract acquisition and fulfillment costs 51,054 48,951
Amortization of deferred contract acquisition and fulfillment costs ( 35,144 ) ( 26,425 )
Ending balance $ 103,075 $ 87,165
(10) Debt
Convertible Senior 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:
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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)
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 September 30, 2020 for the 2025 Notes and March 20, 2024 for the 2027 Notes (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the conversion price of the respective Notes on each applicable trading day;
• during the five business day period after any five consecutive trading day period for the 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).
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.
Accounting for the Notes
In accounting for the issuance of the Notes, the principal less debt issuance costs are recorded as 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 Notes.
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The net carrying amount of the Notes as of December 31, 2022 and 2021 was as follows (in thousands):
2025 Notes 2027 Notes
Principal Unamortized debt issuance costs Total Principal Unamortized debt issuance costs Total
Balance at December 31, 2021 $ 230,000 $ ( 4,905 ) $ 225,095 $ 600,000 $ ( 13,032 ) $ 586,968
Amortization of debt issuance costs — 1,425 1,425 — 2,468 2,468
Conversion of Notes ( 8 ) — ( 8 ) — — —
Balance at December 31.2022 $ 229,992 $ ( 3,480 ) $ 226,512 $ 600,000 $ ( 10,564 ) $ 589,436
During the six months ended June 30, 2022, the 2025 Notes were convertible at the option of the holders. During this period an immaterial principal amount of the 2025 Notes were requested for conversion and settled in cash. As of December 31, 2022, the 2025 Notes and 2027 Notes were not convertible at the option of the holder.
Interest expense related to the Notes was as follows (in thousands):
Year Ended December 31,
2022 2021 2020
2025 Notes 2027 Notes Total 2023 Notes 2025 Notes 2027 Notes Total 2023 Notes 2025 Notes Total
Contractual interest expense $ 5,174 $ 1,502 $ 6,676 $ 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 1,425 2,468 3,893 498 1,384 1,948 3,830 1,023 637 1,660
Induced conversion expense — — — 2,740 — — 2,740 — — —
Total interest expense $ 6,599 $ 3,970 $ 10,569 $ 4,188 $ 6,559 $ 3,112 $ 13,859 $ 14,240 $ 9,504 $ 23,744
During the first quarter of 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 convertible senior notes due August 1, 2023 (the “2023 Notes”), and paid accrued and unpaid interest thereon. The 2023 Notes repurchase 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. In addition, 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. During the fourth quarter of 2021, we redeemed the remaining $ 45.4 million aggregate principal amount outstanding of the 2023 Notes. 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.
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”) (collectively, the “Capped Calls”).
The Capped Calls are expected to reduce potential dilution to our common stock upon conversion of a given series of notes and/or offset any cash payments that we are required to make in excess of the principal amount of converted notes of such series, as the case may be, with such reduction and/or offset subject to a cap. The Capped Calls are subject to adjustment upon the occurrence of certain specified extraordinary events affecting us, including merger events, tender offers and announcement events. In addition, the Capped Calls are subject to certain specified additional disruption events that may give rise to a termination of the Capped Calls, including nationalization, insolvency or delisting, changes in law, failures to deliver, insolvency filings and hedging disruptions.
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The following table sets forth other key terms and premiums paid for the Capped Calls related to each series of Notes:
Capped Calls Entered into in Connection with the Issuance of the 2023 Notes Capped Calls Entered into in Connection with the Issuance of the 2025 Notes Capped Calls Entered into in Connection with the Issuance of the 2027 Notes
Initial strike price, subject to certain adjustments $ 41.59 $ 61.02 $ 103.38
Cap price, subject to certain adjustments $ 63.98 $ 93.88 $ 159.04
Total premium paid (in thousands) $ 26,910 $ 27,255 $ 76,020
Expiration dates June 2, 2023 - July 28, 2023 March 4, 2025 - April 29, 2025 January 1, 2027 - March 11, 2027
The 2023 Capped Calls were not redeemed with the repayment of the 2023 Notes and remain outstanding.
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.
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.
As of December 31, 2022, we did not have any outstanding borrowings and we were in compliance with all covenants under the Credit Agreement.
As of December 31, 2022, we had a total of $ 9.8 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.
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(11) Leases
Our leases primarily relate to office facilities that have remaining terms of up to 9.3 years, some of which include one or more options to renew with renewal terms of up to 7 years and some of which include options to terminate the leases within the next 6.8 years. All of our leases are classified as operating leases.
The components of lease expense were as follows:
Year Ended December 31,
2022 2021
(in thousands)
Operating lease costs $ 19,829 $ 16,475
Short-term lease costs 1,820 773
Variable lease costs 8,941 5,982
Total lease costs $ 30,590 $ 23,230
Supplemental balance sheet information related to the operating leases was as follows:
As of December 31,
2022 2021
Weighted average remaining lease terms (in years) - operating leases 6.6 7.2
Weighted average discount rate - operating leases 6.2 % 6.2 %
Supplemental cash flow information related to leases was as follows:
As of December 31,
2022 2021
(in thousands)
Cash paid for amounts included in the measurement of lease liabilities $ 17,572 $ 17,967
ROU assets obtained in exchange for new lease obligations $ 10,327 $ 27,331
Maturities of operating lease liabilities as of December 31, 2022 were as follows (in thousands):
2023 $ 16,665
2024 18,856
2025 18,091
2026 16,721
2027 15,908
2028 and thereafter 34,782
Total lease payments $ 121,023
Less: imputed interest ( 22,633 )
Total $ 98,390
(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
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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, the 2015 Plan to reserve an additional 1,500,000 shares of our common stock for issuance of inducement awards.
As of December 31, 2022, the shares of common stock authorized to be issued under the 2015 Plan totaled 20,185,353 and there were 3,811,978 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 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,
2022 2021 2020
(in thousands)
Stock-based compensation expense:
Cost of revenue $ 10,367 $ 6,491 $ 4,298
Research and development 49,940 46,622 24,423
Sales and marketing 31,217 23,828 16,826
General and administrative 28,378 25,638 18,341
Total stock-based compensation expense $ 119,902 $ 102,579 $ 63,888
Our Compensation Committee approved the performance goals, targets and payout formulas for our 2022, 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 years ended December 31, 2022 2021, and 2020 we recognized stock-based compensation expense related to such bonuses in the amount of $ 1.0 million , $ 4.7 million and $ 2.5 million, respectively, based on the performance against the pre-established corporate financial objectives as of December 31, 2022, 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 $ 6.1 million of incremental stock-based compensation which we recorded in the year ended December 31, 2021.
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(b) Restricted Stock Units and Performance-Based Restricted Stock Units
RSUs and PSUs activity during 2022, 2021 and 2020 was as follows:
Shares Weighted-
Average
Grant Date
Fair Value
Unvested balance as of December 31, 2019 2,936,924 $ 32.43
Granted 1,725,531 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
Granted 2,327,216 86.78
Vested ( 1,481,333 ) 69.80
Forfeited ( 623,317 ) 85.93
Unvested balance as of December 31, 2022 3,001,443 $ 83.88
As of December 31, 2022, the unrecognized compensation cost related to shares of unvested RSUs and PSUs expected to vest was $ 231.0 million. This unrecognized compensation will be recognized over an estimated weighted-average amortization period of 2.7 years.
(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, 2019 2,735,392 $ 10.10 $ 124,007
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 $ 154,816
Granted — —
Exercised ( 521,326 ) 8.26 $ 49,522
Forfeited/cancelled ( 300 ) 7.73
Outstanding as of December 31, 2021 1,411,387 10.74 $ 150,951
Granted — —
Exercised ( 479,223 ) 6.92 $ 20,764
Forfeited/cancelled ( 38 ) 21.15
Outstanding as of December 31, 2022 932,126 $ 12.70 3.19 $ 19,837
Vested and exercisable as of December 31, 2022 932,126 3.19 $ 19,837
The total fair value of stock options vested in 2022, 2021 and 2020 was $ 0.1 million, $ 0.6 million and $ 2.2 million, respectively.
(d) Employee Stock Purchase Plan
The number of shares reserved and available for issuance under our 2015 Employee Stock Purchase Plan (“ESPP”) automatically increases each January 1, beginning on January 1, 2016, by 1 % of the outstanding
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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, 2022, the shares of common stock authorized to be issued under the ESPP totaled 4,155,805 and there were 2,484,322 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.
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,
2022 2021 2020
Expected term (in years) 0.5 - 1.0
0.5 - 1.0
0.5 - 1.0
Expected volatility 37 - 57 %
31 - 48 %
47 % - 53 %
Risk-free interest rate 0.1 – 4.0 %
0.5 – 0.7 %
0.1 – 0.3 %
Expected dividend yield — — —
Grant date fair value per share $ 15.50 – $ 29.58
$ 20.32 –$ 34.98
$ 9.63 – $ 22.30
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, 2022, 2021 and 2020:
September 15, 2022 March 15, 2022 September 15, 2021 March 15, 2021 September 15, 2020 March 15, 2020
Common shares issued 218,314 80,747 73,676 147,837 131,585 101,806
Purchase prices $ 45.31
$ 67.59 and $ 81.37
$ 52.60 and $ 67.59
$ 28.39 and $ 52.60
$ 28.39
$ 32.87
Aggregate proceeds $ 6.2 million $ 5.7 million $ 4.8 million $ 4.5 million $ 3.7 million $ 3.3 million
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(13) Income Taxes
Loss before income taxes included in the consolidated statements of operations was as follows:
Year Ended December 31,
2022 2021 2020
(in thousands)
United States $ ( 109,381 ) $ ( 106,281 ) $ ( 72,846 )
Foreign ( 12,924 ) ( 29,632 ) ( 24,017 )
Loss before income taxes $ ( 122,305 ) $ ( 135,913 ) $ ( 96,863 )
Income tax expense included in the consolidated statements of operations was as follows:
Year Ended December 31,
2022 2021 2020
(in thousands)
Current:
Federal $ 1 $ 124 $ 8
State and local 243 177 122
Foreign 3,608 9,690 1,149
Total current tax expense 3,852 9,991 1,279
Deferred:
Federal 10 10 9
State and local 2 2 2
Foreign ( 1,452 ) 418 696
Total deferred tax expense (benefit) ( 1,440 ) 430 707
Income tax expense $ 2,412 $ 10,421 $ 1,986
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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, 2022, 2021 and 2020 was as follows:
Year Ended December 31,
2022 2021 2020
Federal statutory rate 21.0 % 21.0 % 21.0 %
State taxes, net of federal benefit ( 0.1 ) ( 0.1 ) ( 0.1 )
Permanent differences ( 0.2 ) ( 0.2 ) ( 0.7 )
Stock-based compensation ( 2.4 ) 14.2 12.1
Federal research and development credit 1.4 1.4 1.1
Foreign rate differential 0.1 ( 0.5 ) ( 1.4 )
Change in valuation allowance ( 24.8 ) ( 36.7 ) ( 30.0 )
Excess officers' compensation ( 3.1 ) ( 5.9 ) ( 3.3 )
Tax rate change 7.8 11.2 —
Tax reserves ( 0.2 ) ( 3.8 ) —
Capital gain on sale — ( 7.0 ) —
Other ( 1.4 ) ( 1.2 ) ( 0.8 )
Effective income tax rate ( 1.9 ) % ( 7.6 ) % ( 2.1 ) %
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,
2022 2021
(in thousands)
Deferred tax assets:
Accruals and reserves $ 109 $ 157
Net operating loss carryforwards 166,173 176,417
Deferred revenue 9,597 9,518
Depreciation 3,258 3,808
Research and development credits 11,047 8,950
Capitalized research and development 40,253 —
Operating lease liabilities 25,134 25,235
Stock-based compensation 9,072 7,497
Tax credits 1,148 1,148
Other 1,918 3,439
Gross deferred tax assets 267,709 236,169
Valuation allowance ( 230,205 ) ( 187,397 )
Total deferred tax assets 37,504 48,772
Deferred tax liabilities:
Intangible assets — ( 15,957 )
Operating lease ROU assets ( 20,159 ) ( 20,921 )
Deferred contract acquisition and fulfillment costs ( 22,664 ) ( 18,278 )
Other ( 55 ) ( 636 )
Total deferred tax liabilities ( 42,878 ) ( 55,792 )
Net deferred tax liabilities $ ( 5,374 ) $ ( 7,020 )
Beginning January 1, 2022, the Tax Cuts and Jobs Act (the "Tax Act”) eliminated the option to deduct research and development expenditures in the current year and requires taxpayers to capitalize such expenses pursuant to Internal Revenue Code (“IRC”) Section 174. The capitalized expenses are amortized over a 5-year period for domestic
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expenses and a 15-year period for foreign expenses. We have included the impact of this provision, which results in additional deferred tax assets of approximately $ 37.1 million as of December 31, 2022.
As of December 31, 2022, 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 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 $ 42.8 million for the year ended December 31, 2022, primarily due to additional deferred tax assets established in the United States related to Section 174 R&D Capitalization.
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, 2022, we had federal and state net operating loss carryforwards of $ 450.5 million and $ 345.4 million, respectively. Of our federal net operating losses, $ 389.7 million will carry forward indefinitely. The remaining federal and state net operating loss carryforwards expire at various dates beginning in 2023. As of December 31, 2022, we had foreign net operating loss carryforwards of $ 246.3 million that can be carried forward indefinitely. We also had federal, state and international research and development credit carryforwards of $ 7.7 million, $ 3.1 million and $ 0.2 million as of December 31, 2022, respectively. These credit carryforwards expire at various dates beginning in 2023.
A U.S. corporation’s ability to utilize its net operating loss carryforwards is limited under Section 382 of the Internal Revenue Code of 1986, as amended, if the corporation undergoes an ownership change by which one or more stockholders or groups of stockholders that own at least 5% of the company’s stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. We experienced an ownership change, as defined in Section 382, in January 2018. As such, 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 years ended December 31, 2022 was as follows (in thousands):
Balance at December 31, 2021 $ 5,041
Additions based on current year tax provisions —
Balance at December 31, 2022 $ 5,041
We recorded $ 0.2 million of interest in 2022 related to uncertain tax positions. During the next twelve months, we do not expect any change to our uncertain tax positions other than the accrual of interest in the normal course of business.
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(14) Net Loss Per Share
The following table summarizes the computation of basic and diluted net loss per share of our common stock for 2022, 2021 and 2020:
Year Ended December 31,
2022 2021 2020
(in thousands, except share and per share data)
Numerator:
Net loss $ ( 124,717 ) $ ( 146,334 ) $ ( 98,849 )
Denominator:
Weighted-average common shares outstanding, basic and diluted 58,552,065 55,270,998 51,036,824
Net loss per share, basic and diluted $ ( 2.13 ) $ ( 2.65 ) $ ( 1.94 )
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 the Notes solely in cash at that time. For the years ended December 31, 2022 and 2021, 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, the 2023 Capped Calls were not redeemed with the redemption of the 2023 Notes.
As of December 31, 2022, the 2025 Notes and 2027 Notes were not convertible at the option of the holder. 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,
2022 2021 2020
Options to purchase common stock 932,126 1,411,387 1,933,013
Unvested restricted stock units 3,001,443 2,778,877 2,941,914
Common stock to be issued to DivvyCloud founders 33,433 66,865 200,596
Common stock issued to IntSights founders 41,194 206,608 —
Shares to be issued under ESPP 106,965 36,831 101,658
Convertible senior notes 9,572,955 9,573,087 9,299,432
Total 13,688,116 14,073,655 14,476,613
(15) Commitments and Contingencies
(a) Purchase Obligations
As of December 31, 2022, we have non-cancellable firm purchase commitments relating to cloud infrastructure services, including with Amazon Web Services (“AWS”), and software subscriptions.
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The following table presents details of the future non-cancellable purchase commitments under these agreements as of December 31, 2022 (in thousands):
2023 $ 113,953
2024 131,538
2025 39,107
2026 6,265
2027 and thereafter 3,613
Total $ 294,476
(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 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 2022, 2021 and 2020, we made discretionary contributions of $ 4.3 million, $ 3.6 million and $ 2.9 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.
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Net revenues by geographic area presented based upon the location of the customer are as follows:
Year Ended December 31,
2022 2021 2020
(in thousands)
United States $ 515,894 $ 414,856 $ 329,753
Other 169,189 120,548 81,733
Total $ 685,083 $ 535,404 $ 411,486
Property and equipment, net by geographic area as of December 31, 2022 and 2021 is presented in the table below:
As of December 31,
2022 2021
(in thousands)
United States $ 41,570 $ 37,682
Other 16,321 12,543
Total $ 57,891 $ 50,225
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.