Item 1. Financial Statements
Item 1. Financial Statements.
RAPID7, INC.
Consolidated Balance Sheets (Unaudited)
(in thousands, except share and per share data)
September 30, 2023 December 31, 2022
Assets
Current assets:
Cash and cash equivalents $ 182,727 $ 207,287
Short-term investments 139,434 84,162
Accounts receivable, net of allowance for credit losses of $ 789 and $ 2,299 at September 30, 2023 and December 31, 2022, respectively
137,690 152,045
Deferred contract acquisition and fulfillment costs, current portion 40,909 34,906
Prepaid expenses and other current assets 35,087 31,907
Total current assets 535,847 510,307
Long-term investments 50,603 9,756
Property and equipment, net 42,449 57,891
Operating lease right-of-use assets 53,275 79,342
Deferred contract acquisition and fulfillment costs, non-current portion 71,654 68,169
Goodwill 536,305 515,631
Intangible assets, net 99,993 101,269
Other assets 9,174 16,626
Total assets $ 1,399,300 $ 1,358,991
Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable $ 8,951 $ 10,255
Accrued expenses 63,388 80,306
Operating lease liabilities, current portion 12,472 12,444
Deferred revenue, current portion 421,898 426,599
Other current liabilities 888 1,663
Total current liabilities 507,597 531,267
Convertible senior notes, non-current portion, net 928,892 815,948
Operating lease liabilities, non-current portion 81,065 85,946
Deferred revenue, non-current portion 29,344 31,040
Other long-term liabilities 14,047 14,864
Total liabilities 1,560,945 1,479,065
Stockholders’ deficit:
Preferred stock, $ 0.01 par value per share; 10,000,000 shares authorized at September 30, 2023 and December 31, 2022; 0 shares issued at September 30, 2023 and December 31, 2022
— —
Common stock, $ 0.01 par value per share; 100,000,000 shares authorized at September 30, 2023 and December 31, 2022; 61,991,937 and 60,206,277 shares issued at September 30, 2023 and December 31, 2022, respectively; 61,422,358 and 59,719,469 shares outstanding at September 30. 2023 and December 31, 2022, respectively
614 597
Treasury stock, at cost, 569,579 and 486,808 shares at September 30, 2023 and December 31, 2022, respectively
( 4,765 ) ( 4,764 )
Additional paid-in-capital 873,381 746,249
Accumulated other comprehensive loss ( 822 ) ( 1,411 )
Accumulated deficit ( 1,030,053 ) ( 860,745 )
Total stockholders’ deficit ( 161,645 ) ( 120,074 )
Total liabilities and stockholders’ deficit $ 1,399,300 $ 1,358,991
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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RAPID7, INC.
Consolidated Statements of Operations (Unaudited)
(in thousands, except share and per share data)
Three Months Ended September 30, Nine Months Ended September 30,
2023 2022 2023 2022
Revenue:
Products $ 189,876 $ 166,496 $ 545,349 $ 474,643
Professional services 8,967 9,269 27,090 25,961
Total revenue 198,843 175,765 572,439 500,604
Cost of revenue:
Products 51,261 45,957 150,597 135,296
Professional services 6,569 7,893 21,396 24,118
Total cost of revenue 57,830 53,850 171,993 159,414
Total gross profit 141,013 121,915 400,446 341,190
Operating expenses:
Research and development 39,940 48,622 137,048 147,341
Sales and marketing 75,699 75,968 239,322 229,148
General and administrative 17,866 20,561 64,961 62,967
Impairment of long-lived assets 3,553 — 30,784 —
Restructuring 19,996 — 19,996 —
Total operating expenses 157,054 145,151 492,111 439,456
Loss from operations ( 16,041 ) ( 23,236 ) ( 91,665 ) ( 98,266 )
Other income (expense), net:
Interest income 2,545 498 6,000 853
Interest expense ( 56,515 ) ( 2,749 ) ( 62,005 ) ( 8,200 )
Other income (expense), net ( 4,518 ) ( 2,205 ) ( 18,093 ) ( 5,211 )
Loss before income taxes ( 74,529 ) ( 27,692 ) ( 165,763 ) ( 110,824 )
Provision for income taxes 2,082 1,035 3,545 2,508
Net loss $ ( 76,611 ) $ ( 28,727 ) $ ( 169,308 ) $ ( 113,332 )
Net loss per share, basic and diluted $ ( 1.25 ) $ ( 0.49 ) $ ( 2.80 ) $ ( 1.95 )
Weighted-average common shares outstanding, basic and diluted 61,065,157 58,730,651 60,506,082 58,229,872
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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RAPID7, INC.
Consolidated Statements of Comprehensive Loss (Unaudited)
(in thousands)
Three Months Ended September 30, Nine Months Ended September 30,
2023 2022 2023 2022
Net loss $ ( 76,611 ) $ ( 28,727 ) $ ( 169,308 ) $ ( 113,332 )
Other comprehensive income (loss):
Change in fair value of cash flow hedges ( 1,120 ) ( 3,355 ) ( 481 ) ( 7,280 )
Adjustments for net (gains) losses realized on cash flow hedges and included in net loss ( 49 ) 1,361 531 2,438
Total change in unrealized (losses) gains on cash flow hedges ( 1,169 ) ( 1,994 ) 50 ( 4,842 )
Change in unrealized gains (losses) on investments 97 ( 166 ) 539 ( 1,044 )
Total other comprehensive (loss) income ( 1,072 ) ( 2,160 ) 589 ( 5,886 )
Comprehensive loss $ ( 77,683 ) $ ( 30,887 ) $ ( 168,719 ) $ ( 119,218 )
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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RAPID7, INC.
Consolidated Statements of Changes in Stockholders' Deficit (Unaudited)
(in thousands)
Common stock Treasury stock Additional
paid-in-capital Accumulated
other
comprehensive
loss Accumulated
deficit Total
stockholders’
deficit
Shares Amount Shares Amount
Balance, June 30, 2023 60,940 $ 609 570 $ ( 4,765 ) $ 846,326 $ 250 $ ( 953,442 ) $ ( 111,022 )
Stock-based compensation expense — — — — 23,719 — — 23,719
Issuance of common stock under employee stock purchase plan 152 2 — — 5,147 — — 5,149
Vesting of restricted stock units 338 3 — — ( 3 ) — — —
Shares withheld for employee taxes ( 29 ) — — — ( 1,421 ) — — ( 1,421 )
Issuance of common stock upon exercise of stock options 21 — — — 302 — — 302
Purchase of capped calls related to convertible senior notes — — — — ( 36,570 ) — — ( 36,570 )
Repurchase and inducement of convertible senior notes — — — — 35,881 — — 35,881
Other comprehensive loss — — — — — ( 1,072 ) — ( 1,072 )
Net loss — — — — — — ( 76,611 ) ( 76,611 )
Balance, September 30, 2023 61,422 $ 614 570 $ ( 4,765 ) $ 873,381 $ ( 822 ) $ ( 1,030,053 ) $ ( 161,645 )
Common stock Treasury stock Additional
paid-in-capital Accumulated
other
comprehensive
loss Accumulated
deficit Total
stockholders’
deficit
Shares Amount Shares Amount
Balance, June 30, 2022 58,636 $ 586 487 $ ( 4,764 ) $ 681,194 $ ( 4,538 ) $ ( 820,633 ) $ ( 148,155 )
Stock-based compensation expense — — — — 31,746 — — 31,746
Issuance of common stock under employee stock purchase plan 137 1 — — 6,232 — — 6,233
Vesting of restricted stock units 381 4 — — ( 4 ) — — —
Shares withheld for employee taxes ( 23 ) — — — ( 1,637 ) — — ( 1,637 )
Issuance of common stock upon exercise of stock options 73 1 — — 415 — — 416
Other comprehensive loss — — — — — ( 2,160 ) — ( 2,160 )
Net loss — — — — — — ( 28,727 ) ( 28,727 )
Balance, September 30, 2022 59,204 $ 592 487 $ ( 4,764 ) $ 717,946 $ ( 6,698 ) $ ( 849,360 ) $ ( 142,284 )
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Common stock Treasury stock Additional
paid-in-capital Accumulated
other
comprehensive
loss Accumulated
deficit Total
stockholders’
deficit
Shares Amount Shares Amount
Balance, December 31, 2022 59,720 $ 597 487 $ ( 4,764 ) $ 746,249 $ ( 1,411 ) $ ( 860,745 ) $ ( 120,074 )
Stock-based compensation expense — — — — 84,513 — — 84,513
Issuance of common stock under employee stock purchase plan 330 4 — — 11,319 — — 11,323
Vesting of restricted stock units 1,139 10 — — ( 10 ) — — —
Shares withheld for employee taxes ( 82 ) — — — ( 4,012 ) — — ( 4,012 )
Issuance of common stock upon exercise of stock options 208 2 — — 2,982 — — 2,984
Issuance of common stock in relation to an acquisition 107 1 — — ( 1 ) — — —
Repurchase of common stock in relation to acquisition — — 83 ( 1 ) 1 — — —
Reclassification of 2023 capped calls from equity to derivative asset — — — — 33,029 — — 33,029
Purchase of capped calls related to convertible senior notes — — — — ( 36,570 ) — — ( 36,570 )
Repurchase and inducement of convertible senior notes — — — — 35,881 — — 35,881
Other comprehensive gain — — — — — 589 — 589
Net loss — — — — — — ( 169,308 ) ( 169,308 )
Balance, September 30, 2023 61,422 $ 614 570 $ ( 4,765 ) $ 873,381 $ ( 822 ) $ ( 1,030,053 ) $ ( 161,645 )
Common stock Treasury stock Additional
paid-in-capital Accumulated
other
comprehensive
loss Accumulated
deficit Total
stockholders’
deficit
Shares Amount Shares Amount
Balance, December 31, 2021 57,695 $ 577 487 $ ( 4,764 ) $ 615,032 $ ( 812 ) $ ( 736,028 ) $ ( 125,995 )
Stock-based compensation expense — — — — 96,111 — — 96,111
Issuance of common stock under employee stock purchase plan 218 2 — — 11,941 — — 11,943
Vesting of restricted stock units 1,147 11 — — ( 11 ) — — —
Shares withheld for employee taxes ( 82 ) — — — ( 6,743 ) — — ( 6,743 )
Issuance of common stock upon exercise of stock options 193 2 — — 1,619 — — 1,621
Issuance of common stock in connection with conversion of convertible senior notes — — — — ( 3 ) — — ( 3 )
Issuance of common stock related to acquisition 33 — — — — — — —
Other comprehensive loss — — — — — ( 5,886 ) — ( 5,886 )
Net loss — — — — — — ( 113,332 ) ( 113,332 )
Balance, September 30, 2022 59,204 $ 592 487 $ ( 4,764 ) $ 717,946 $ ( 6,698 ) $ ( 849,360 ) $ ( 142,284 )
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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RAPID7, INC.
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
Nine Months Ended September 30,
2023 2022
Cash flows from operating activities:
Net loss $ ( 169,308 ) $ ( 113,332 )
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 34,528 30,587
Amortization of debt issuance costs 3,061 3,036
Stock-based compensation expense 84,836 92,304
Impairment of long-lived assets 30,784 —
Change in fair value of derivative assets 15,511 —
Induced conversion expense 53,889 —
Other 5,626 3,828
Changes in operating assets and liabilities:
Accounts receivable 12,428 21,425
Deferred contract acquisition and fulfillment costs ( 9,488 ) ( 7,999 )
Prepaid expenses and other assets 5,433 ( 5,303 )
Accounts payable ( 1,255 ) 8,504
Accrued expenses ( 17,968 ) ( 12,241 )
Deferred revenue ( 6,367 ) 18,297
Other liabilities ( 898 ) ( 1,144 )
Net cash provided by operating activities 40,812 37,962
Cash flows from investing activities:
Business acquisition, net of cash acquired ( 34,841 ) —
Purchases of property and equipment ( 3,999 ) ( 13,087 )
Capitalization of internal-use software costs ( 13,033 ) ( 12,648 )
Purchases of investments ( 194,013 ) ( 94,486 )
Sales/maturities of investments 100,700 86,379
Other investments — ( 1,000 )
Net cash used in investing activities ( 145,186 ) ( 34,842 )
Cash flows from financing activities:
Proceeds from issuance of convertible senior notes, net of issuance costs paid of $ 7,200
292,800 —
Purchase of capped calls related to convertible senior notes ( 36,570 ) —
Payments of debt issuance costs — ( 71 )
Payments for repurchase of convertible senior notes ( 199,998 ) ( 12 )
Payments related to business acquisitions ( 2,250 ) ( 300 )
Proceeds from capped call settlement 17,518 —
Taxes paid related to net share settlement of equity awards ( 4,012 ) ( 6,743 )
Proceeds from employee stock purchase plan 11,323 11,943
Proceeds from stock option exercises 2,984 1,621
Net cash provided by financing activities 81,795 6,438
Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 2,010 ) ( 5,707 )
Net (decrease) increase in cash, cash equivalents and restricted cash ( 24,589 ) 3,851
Cash, cash equivalents and restricted cash, beginning of period 207,804 165,017
Cash, cash equivalents and restricted cash, end of period $ 183,215 $ 168,868
Supplemental cash flow information:
Cash paid for interest on convertible senior notes $ 4,087 $ 4,087
Cash paid for income taxes, net of refunds $ 1,165 $ 1,503
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents $ 182,727 $ 168,353
Restricted cash included in prepaid expenses and other assets 488 $ 515
Total cash, cash equivalents and restricted cash $ 183,215 $ 168,868
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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RAPID7, INC.
Notes to Consolidated Financial Statements (Unaudited)
Note 1. Description of Business, Basis of Presentation and Consolidation and Significant Accounting Policies
Description of Business
Rapid7, Inc. and subsidiaries (“we,” “us” or “our”) 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.
Basis of Presentation and Consolidation
The accompanying unaudited consolidated financial statements have been prepared by us in accordance with accounting principles generally accepted in the United States of America (“GAAP”), as well as pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), regarding interim financial reporting. Accordingly, certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on February 24, 2023.
The consolidated financial statements include our results of operations and those of our wholly-owned subsidiaries and reflect all adjustments (consisting solely of normal, recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods presented. All intercompany transactions and balances have been eliminated in consolidation. The results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of the results to be expected for any future period or the entire fiscal year.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.
The management estimates include, but are not limited to the determination of 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.
Significant Accounting Policies
Our significant accounting policies are described in Note 2, Summary of Significant Accounting Policies , to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022. There have been no changes to the significant accounting policies, other than restructuring expense noted below, during the three and nine-month periods ended September 30, 2023.
Restructuring Expense
We record restructuring expense when management commits to and approves a restructuring plan, the restructuring plan identifies all significant actions, the period of time to complete the restructuring plan indicates that significant changes to the restructuring plan are not likely to occur, and employees who are impacted have been notified of the pending involuntary termination. A restructuring plan generally includes significant actions involving employee-related severance charges, employee-related benefits, and other charges associated with the restructuring (collectively, “restructuring expense”). Restructuring expense is recorded within restructuring in the condensed consolidated statement of operations. The restructuring liability accrued but not paid at the end of the reporting period is included within accrued expenses in the condensed consolidated balance sheet.
Recent Accounting Pronouncements
We have not identified any recently issued accounting pronouncements that would have a material impact to our consolidated financial statements.
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Note 2. Revenue from Contracts with Customers
We generate revenue primarily from: (1) subscriptions from the sale of cloud-based subscriptions, managed services, term software licenses, content subscriptions and maintenance and support associated with our software licenses 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.
The following table summarizes revenue from contracts with customers for the three and nine months ended September 30, 2023 and 2022:
Three Months Ended September 30, Nine Months Ended September 30,
2023 2022 2023 2022
(in thousands)
Subscriptions $ 189,596 $ 165,687 $ 544,391 $ 470,925
Professional services 8,967 9,269 27,090 25,961
Other 280 809 958 3,718
Total revenue $ 198,843 $ 175,765 $ 572,439 $ 500,604
Subscriptions
Subscriptions consists of revenue from our cloud-based subscription, managed services offerings, term software licenses, 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.
• 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 contracts, 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 three months ended September 30, 2023 and 2022, we recognized revenu e of $ 174.3 million and $ 153.8 million, respectively, and for the nine months ended September 30, 2023 and 2022, we recognized $ 366.5 million a nd $ 308.3 million, respectively, that was included in the corresponding contract liability balance at the beginning of the periods presented. Deferred revenue that will be
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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 record a contract asset. As of September 30, 2023 and December 31, 2022, unbilled receivables of $ 2.4 million and $ 1.1 million, respectively, are included in prepaid expenses and other current assets in our consolidated balance sheet. As of September 30, 2023 and December 31, 2022, we had no contract assets recorded on our consolidated balance sheet.
Transaction price allocated to the remaining performance obligations
The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied as of September 30, 2023. The estimated revenues do not include unexercised contract renewals.
Next Twelve Months Thereafter
(in thousands)
Subscriptions $ 507,807 $ 234,563
Professional services 19,729 7,520
Other 1,255 428
Total $ 528,791 $ 242,511
Note 3. Business Combinations
On March 14, 2023, we acquired Minerva Labs Ltd. (“Minerva”), a leading provider of anti-evasion and ransomware prevention technology, for a purchase price with an aggregate fair value of $ 34.6 million. The purchase consideration consisted of $ 35.0 million paid in cash at closing and a $ 0.4 million receivable for purchase price adjustments. Additionally, we issued an aggregate of 73,846 shares of our common stock to the founders of Minerva with a fair value of $ 3.6 million. The 73,846 shares of common stock will be accounted for as stock-based compensation expense over a 24-month period as continued service is required for the founders to receive their full amount of common stock. In the three and nine months ended September 30, 2023, we recognized stock-based compensation expense related to such shares in the amount of $ 0.4 million and $ 1.0 million, respectively.
The following table summarizes the preliminary allocation of purchase price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date (in thousands):
Consideration
Cash $ 34,977
Estimated purchase price receivable adjustment ( 365 )
Fair value of total consideration transferred $ 34,612
Recognized amount of identifiable assets acquired and liabilities assumed:
Cash and cash equivalents $ 136
Other current assets 1,792
Other assets 43
Accounts payable and other current liabilities ( 438 )
Other long-term liabilities ( 395 )
Intangible asset 12,800
Total identifiable net assets assumed $ 13,938
Goodwill 20,674
Total purchase price allocation $ 34,612
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These preliminary amounts are subject to subsequent adjustment as we obtain additional information to finalize certain components of working capital and deferred income taxes.
We identified developed technology as the sole acquired intangible asset. The estimated fair value of the developed technology intangible asset was $ 12.8 million which was based on a valuation using the income approach. The estimated useful life of the developed technology is 8 years.
The excess of the purchase price over the tangible assets acquired, the identifiable intangible asset acquired and assumed liabilities was recorded as goodwill. We believe that the amount of goodwill reflects the expected synergistic benefits of being able to leverage the integration of the technology acquired with our existing product offerings and being able to successfully market and sell these new features to our customer base. The goodwill was allocated to our one reporting unit. The acquired goodwill and intangible asset were not deductible for tax purposes.
In the nine months ended September 30, 2023, we recorded $ 0.4 million of acquisition-related transaction costs related to the acquisition of Minerva to general and administrative expense.
Our revenue and net loss attributable to the Minerva business for the three and nine months ended September 30, 2023 was not material.
Pro forma results of operations have not been included, as the acquisition of Minerva was not material to our results of operations for any periods presented.
Note 4. Investments
Our investments, which are all classified as available-for-sale, consisted of the following:
As of September 30, 2023
Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value
(in thousands)
Description:
U.S. government agencies $ 185,587 $ — $ ( 265 ) $ 185,322
Corporate bonds 1,501 — ( 10 ) 1,491
Agency bonds 3,250 — ( 26 ) 3,224
Total $ 190,338 $ — $ ( 301 ) $ 190,037
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 September 30, 2023, our available-for-sale investments had maturities ranging from 1 to 18 months. As of December 31, 2022, our available-for-sale investments had maturities ranging from 2 to 19 months.
For all of our investments for which the amortized cost basis was greater than the fair value at September 30, 2023 and December 31, 2022, we have concluded that there is no plan to sell the security nor is it more likely than not that we would be required to sell the security before its anticipated maturity. In making the determination as to whether the unrealized loss is other-than-temporary, we considered the length of time and extent the investment has been in an unrealized loss position, the financial condition and near-term prospects of the issuers, the issuers’ credit rating and the time to maturity.
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Note 5. Fair Value Measurements
We measure certain financial assets and liabilities at fair value. Fair value is determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as determined by either the principal market or the most advantageous market. Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy, as follows:
Level 1 : Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 : Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 : Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the asset or liability.
We consider an active market to be one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis, and we consider an inactive market to be one in which there are infrequent or few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers.
The following table presents our financial assets and liabilities measured and recorded at fair value on a recurring basis using the above input categories:
As of September 30, 2023
Level 1 Level 2 Level 3 Total
(in thousands)
Description:
Assets:
U.S. Government agencies $ 185,322 $ — $ — $ 185,322
Money market funds 65,592 — — 65,592
Agency bonds — 3,224 — 3,224
Corporate bonds — 1,491 — 1,491
Total $ 250,914 $ 4,715 $ — $ 255,629
Liabilities:
Foreign currency forward contracts designated as cash flow hedges (other current liabilities and other liabilities) $ — $ 817 $ — $ 817
Total $ — $ 817 $ — $ 817
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As of December 31, 2022
Level 1 Level 2 Level 3 Total
(in thousands)
Description:
Assets:
Money market funds $ 88,039 $ — $ — $ 88,039
U.S. Government agencies 65,693 — — 65,693
Corporate bonds — 14,121 — 14,121
Commercial paper — 7,944 — 7,944
Agency bonds — 6,160 — 6,160
Foreign currency forward contracts designated as cash flow hedges (prepaid expenses and other current 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 liabilities) $ — $ 1,559 $ — $ 1,559
Total liabilities $ — $ 1,559 $ — $ 1,559
As of September 30, 2023, the fair value of our 2.25 %, 0.25 % and 1.25 % convertible senior notes due 2025, 2027 and 2029, as further described in Note 10, Debt , was $ 47.1 million, $ 511.1 million and $ 290.7 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.
Note 6. Property and Equipment
Property and equipment are recorded at cost and consist of the following:
As of September 30, 2023 As of December 31, 2022
(in thousands)
Computer equipment and software $ 26,103 $ 24,568
Furniture and fixtures 11,090 11,823
Leasehold improvements (1)
56,037 66,180
Total 93,230 102,571
Less accumulated depreciation ( 50,781 ) ( 44,680 )
Property and equipment, net $ 42,449 $ 57,891
(1) As of September 30, 2023, leasehold improvements with a net book value of $ 8.6 million were recorded as an impairment of long-lived assets related to certain idle office space at our corporate headquarters in Boston, Massachusetts and idle office space in Los Angeles, California, and Toronto, Canada. Refer to Note 11, Leases, for further details on the impairment of long-lived assets.
Depreciation expense was $ 3.3 million and $ 3.5 million for the three months ended September 30, 2023 and 2022, respectively, and $ 10.9 million and $ 10.0 million for the nine months ended September 30, 2023 and 2022, respectively.
Note 7. Goodwill and Intangible Assets
Goodwill was $ 536.3 million and $ 515.6 million as of September 30, 2023 and December 31, 2022, respectively. The following table displays the changes in the gross carrying amount of goodwill:
Amount
(in thousands)
Balance at December 31, 2022 $ 515,631
Minerva acquisition 20,674
Balance at September 30, 2023 $ 536,305
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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:
As of September 30, 2023 As of December 31, 2022
Weighted-
Average
Life (years) Gross Carrying
Amount Accumulated
Amortization Net Book Value Gross Carrying
Amount Accumulated
Amortization Net Book Value
(in thousands)
Intangible assets subject to amortization:
Developed technology 5.4 $ 135,355 $ ( 72,638 ) $ 62,717 $ 122,555 $ ( 58,645 ) $ 63,910
Customer relationships 4.5 12,000 ( 7,102 ) 4,898 12,000 ( 5,146 ) 6,854
Trade names 3.1 2,619 ( 2,334 ) 285 2,619 ( 1,874 ) 745
Total acquired intangible assets 149,974 ( 82,074 ) 67,900 137,174 ( 65,665 ) 71,509
Internal-use software 3.0 52,525 ( 20,432 ) 32,093 43,002 ( 13,242 ) 29,760
Total intangible assets $ 202,499 $ ( 102,506 ) $ 99,993 $ 180,176 $ ( 78,907 ) $ 101,269
Amortization expense was $ 8.3 million and $ 6.7 million for the three months ended September 30, 2023 and 2022, respectively and $ 23.6 million and $ 20.6 million for the nine months ended September 30, 2023 and 2022, respectively.
Estimated future amortization expense of the acquired identifiable intangible assets and completed capitalized internal-use software costs as of September 30, 2023 was as follows (in thousands):
2023 (for the remaining three months) $ 7,777
2024 28,913
2025 24,940
2026 15,903
2027 6,806
2028 and thereafter 5,131
Total $ 89,470
The table above excludes the impact of $ 10.5 million of capitalized internal-use software costs for projects that have not been completed as of September 30, 2023, and therefore, we have not determined the useful life of the software, nor have all the costs associated with these projects been incurred. For the nine months ended September 30, 2023, we recorded a $ 3.5 million impairment of capitalized internal-use software costs to research and development expense in our consolidated statement of operations for projects that have been discontinued and will not be placed into service.
Note 8. Deferred Contract Acquisition and Fulfillment Costs
The following table summarizes the activity of the deferred contract acquisition and fulfillment costs for the nine months ended September 30, 2023 and 2022:
Nine Months Ended September 30,
2023 2022
(in thousands)
Beginning balance $ 103,075 $ 87,165
Capitalization of contract acquisition and fulfillment costs 39,904 33,948
Amortization of deferred contract acquisition and fulfillment costs ( 30,416 ) ( 25,949 )
Ending balance $ 112,563 $ 95,164
Note 9. Derivatives and Hedging Activities
To mitigate our exposure to foreign currency fluctuations resulting from certain expenses denominated in certain foreign currencies, we enter into forward contracts that are designated as cash flow hedging instruments. These forward contracts have contractual maturities of nineteen months or less, and as of September 30, 2023 and December 31, 2022, outstanding forward contracts had a total notional value of $ 50.3 million and $ 44.9 million, respectively. The notional value represents the gross amount of foreign currency that will be bought or sold upon maturity of the forward contract. During the three and nine months ended September 30, 2023, all cash flow hedges were considered effective.
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Refer to Note 5, Fair Value Measurements , for the fair values of our outstanding derivative instruments.
Note 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”), in March 2021, we issued $ 600.0 million aggregate principal amount of convertible senior notes due March 15, 2027 (the “2027 Notes”) and in September 2023, we issued $ 300.0 million aggregate principal amount of convertible senior notes due March 15, 2029 (the “2029 Notes”) (collectively, the “Notes”). Further details of the Notes are as follows:
Issuance Maturity Date Interest Rate First Interest Payment Date Effective Interest Rate Semi-Annual Interest Payment Dates Initial Conversion Rate per $1,000 Principal Initial Conversion Price Number of Shares (in millions)
2025 Notes May 1, 2025 2.25 % November 1, 2020 2.88 % May 1 and November 1 16.3875 $ 61.02 0.8
2027 Notes March 15, 2027 0.25 % September 15, 2021 0.67 % March 15 and September 15 9.6734 $ 103.38 5.8
2029 Notes March 15, 2029 1.25 % March 15, 2024 1.69 % March 15 and September 15 15.4213 $ 64.85 4.6
The 2025 Notes, the 2027 Notes and the 2029 Notes are senior unsecured obligations, do not contain any financial covenants and are governed by indentures between the Company, as issuer, and U.S. Trust Company, Bank National Association, as trustee (the “Indentures”). The total net proceeds from the 2025 Notes, the 2027 Notes and the 2029 Notes offerings, after deducting initial purchase discounts and estimated debt issuance costs, were $ 222.8 million, $ 585.0 million and $ 292.0 million, respectively.
Terms of the Notes
The holders of the Notes may convert their respective Notes at their option at any time prior to the close of business on the business day immediately preceding their respective convertible dates only under the following circumstances:
• during any calendar quarter commencing after the calendar quarter ending on September 30, 2020 for the 2025 Notes, March 20, 2024 for the 2027 Notes and September 21, 2026 for the 2029 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 and the 2029 Notes (the “measurement periods”) in which the trading price (as defined in the Indentures) per $1,000 principal amount of the applicable series of Notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of our common stock and the conversion rate of the respective Notes on each such trading day;
• if we call any or all of the respective Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the respective redemption date; or
• upon the occurrence of specified corporate events (as set forth in the Indentures).
As of September 30, 2023, the 2025 Notes, the 2027 Notes and the 2029 Notes were not convertible at the option of the holder.
The holders may convert the 2025 Notes, the 2027 Notes and the 2029 Notes at any time on or after November 1, 2024, December 15, 2026 and December 15, 2028, 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
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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, the 2027 Notes and the 2029 Notes are redeemable after May 6, 2023, March 20, 2024 and September 21, 2026 (the “Redemption Dates”), respectively. On or after the respective Redemption Dates, we may redeem for cash all or any portion of the 2025 Notes, the 2027 Notes or the 2029 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, the 2027 Notes or the 2029 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
Partial Repurchase and Conversion of the 2025 Notes
In September 2023, we used $ 201.0 million of the proceeds from the issuance of the 2029 Notes to repurchase and retire $ 184.0 million aggregate principal amount of the 2025 Notes and paid accrued and unpaid interest thereon. As a result of the induced conversion, we recorded $ 53.9 million in non-cash induced conversion expense which is included in interest expense in our consolidated statement of operations. The induced conversion expense represents the fair value of the consideration issued upon conversion in excess of the fair value of the securities issuable under the original terms of the 2025 Notes.
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.
The net carrying amount of the Notes as of September 30, 2023 and December 31, 2022 was as follows (in thousands):
2025 Notes 2027 Notes 2029 Notes
Principal Unamortized debt issuance costs Total Principal Unamortized debt issuance costs Total Principal Unamortized debt issuance costs Total
Balance at December 31, 2022 $ 229,992 $ ( 3,480 ) $ 226,512 $ 600,000 $ ( 10,564 ) $ 589,436 $ — $ — $ —
Issuance — — — — — — 300,000 ( 7,984 ) $ 292,016
Partial repurchase ( 184,000 ) 2,010 ( 181,990 ) — — — — —
Amortization of debt issuance costs — 990 990 — 1,855 1,855 — 73 73
Balance at September 30, 2023 $ 45,992 $ ( 480 ) $ 45,512 $ 600,000 $ ( 8,709 ) $ 591,291 $ 300,000 $ ( 7,911 ) $ 292,089
Interest expense related to the Notes was as follows (in thousands):
Three Months Ended September 30,
2023 2022
2025 Notes 2027 Notes 2029 Notes Total 2025 Notes 2027 Notes Total
Contractual interest expense $ 948 $ 375 $ 229 $ 1,552 $ 1,292 $ 377 $ 1,669
Amortization of debt issuance costs 289 631 73 993 371 626 997
Total interest expense $ 1,237 $ 1,006 $ 302 $ 2,545 $ 1,663 $ 1,003 $ 2,666
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Nine Months Ended September 30,
2023 2022
2025 Notes 2027 Notes 2029 Notes Total 2025 Notes 2027 Notes Total
Contractual interest expense $ 3,536 $ 1,125 $ 229 $ 4,890 $ 3,880 $ 1,127 $ 5,007
Amortization of debt issuance costs 990 1,855 73 2,918 1,052 1,840 2,892
Total interest expense $ 4,526 $ 2,980 $ 302 $ 7,808 $ 4,932 $ 2,967 $ 7,899
Capped Calls
In connection with the offering of the 1.25 % convertible senior notes due 2023 (the “2023 Notes”), the 2025 Notes, the 2027 Notes and the 2029 Notes, we entered into privately negotiated capped call transactions with certain counterparties (the “2023 Capped Calls, “2025 Capped Calls”, “2027 Capped Calls” and “2029 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.
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 Capped Calls Entered into in Connection with the Issuance of the 2029 Notes
Initial strike price, subject to certain adjustments $ 41.59 $ 61.02 $ 103.38 $ 64.85
Cap price, subject to certain adjustments $ 63.98 $ 93.88 $ 159.04 $ 97.88
Total premium paid (in thousands) $ 26,910 $ 27,255 $ 76,020 $ 36,570
Expiration dates June 2, 2023 - August 1, 2023 March 4, 2025 - April 29, 2025 January 1, 2027 - March 11, 2027 February 13, 2029 - March 13, 2029
For accounting purposes, the 2023 Capped Calls, the 2025 Capped Calls, the 2027 Capped Calls and the 2029 Capped Calls are separate transactions, and not part of the terms of the 2023 Notes, the 2025 Notes, the 2027 Notes and the 2029 Notes. The 2023 Notes, 2025 Capped Calls, 2027 Capped Calls and 2029 Capped Calls are recorded in stockholders' equity and are not accounted for as derivatives.
The 2025 Capped Calls were not redeemed with the partial repurchase of the 2025 Notes and remain outstanding.
The 2023 Capped Calls were not redeemed with the repayment of the 2023 Notes in 2021. In accordance with the terms of the Capped Calls agreements, we elected to cash-settle the 2023 Capped Calls via written notice provided to the counterparties on May 31, 2023 (the “Notice Date”). The 2023 Capped Calls were settled over a 40 -day trading period from June 2, 2023 to August 1, 2023, with a settlement date of August 3, 2023. Since cash settlement was elected, pursuant to ASC 815, the 2023 Capped Calls were deemed to meet the definition of a derivative instrument, requiring reclassification from stockholder's equity to a derivative asset at the fair value on the Notice Date, with subsequent changes in fair value to be recorded to earnings through the settlement date. The fair value on the Notice Date of $ 33.0 million was reclassified from stockholders' equity (additional paid-in capital) to derivative assets. The change in fair value of the derivative asset from the Notice Date to September 30, 2023 was $ 15.5 million and recorded to other income (expense) on our consolidated statement of operations. On August 3, 2023, we received $ 17.5 million in cash from the settlement of the 2023 Capped Calls.
Credit Agreement
In April 2020, we entered into a Credit and Security Agreement (the “Credit Agreement”), with KeyBank National Association that provides for a $ 30.0 million revolving credit facility, with a letter of credit sublimit of $ 15.0 million and an accordion
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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 (the “Amendment”) in respect of our Credit and Security Agreement (as amended by the Amendment, 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 September 30, 2023, we did not have any outstanding borrowings and we were in compliance with all covenants under the Credit Agreement.
As of September 30, 2023, we had a total of $ 9.0 million in letters of credit outstanding as collateral for certain office space leases and corporate credit card programs which reduce the amount of borrowing available under our Credit Agreement.
Note 11. Leases
Our leases primarily relate to office facilities that have remaining terms of up to 8.5 years, some of which include one or more options to renew with renewal terms of up to 5 years and some of which include options to terminate the leases within 4 years. All of our leases are classified as operating leases.
The components of lease expense were as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2023 2022 2023 2022
(in thousands)
Operating lease cost $ 3,799 $ 4,997 $ 12,716 $ 15,240
Short-term lease costs 322 461 959 1,315
Variable lease costs 1,681 2,184 6,141 6,716
Total lease costs $ 5,802 $ 7,642 $ 19,816 $ 23,271
Supplemental balance sheet information related to the operating leases was as follows:
As of September 30, 2023 As of December 31, 2022
Weighted average remaining lease term (in years) - operating leases 6.0 6.6
Weighted average discount rate - operating leases 6.3 % 6.2 %
Supplemental cash flow information related to leases was as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2023 2022 2023 2022
(in thousands)
Cash paid for amounts included in the measurement of lease liabilities $ 4,897 $ 3,057 $ 16,444 $ 11,093
ROU assets obtained in exchange for new lease obligations $ 620 $ 3,811 $ 4,457 $ 12,675
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Maturities of operating lease liabilities as of September 30, 2023 were as follows (in thousands):
2023 (for the remaining three months) $ 3,469
2024 19,995
2025 18,851
2026 17,494
2027 16,699
2028 and thereafter 36,262
Total lease payments $ 112,770
Less: imputed interest ( 19,233 )
Total $ 93,537
During the nine months ended September 30, 2023, we determined that triggering events occurred which indicated that the carrying value of our right-of-use (“ROU”) and other lease-related assets related to a change in usage of certain idle office space at our corporate headquarters in Boston, Massachusetts as well as idle office spaces located in Plano, Texas, Los Angeles, California, and Toronto, Canada may not be fully recoverable. As a result, we utilized discounted cash flow models to estimate the fair value of the asset groups taking into consideration the time period it will take to obtain sublessees, the applicable discount rate and the anticipated sublease income and calculated the corresponding impairment loss. We used prices and other relevant information generated by recent market transactions involving similar or comparable assets, as well as our historical experience in real estate transactions. In the three and nine months ended September 30, 2023, we recorded impairment losses of $ 3.6 million and $ 30.8 million, respectively, related to these idle office spaces. In the three and nine months ended September 30, 2023, the impairment losses consisted of $ 2.0 million and $ 22.2 million, respectively, related to ROU assets and $ 1.6 million and $ 8.6 million, respectively, related to leasehold improvements associated with these leased office spaces.
Note 12. Stock-Based Compensation Expense
(a) General
Stock-based compensation expense for restricted stock units (“RSUs”), performance-based restricted stock units (“PSUs”), stock options and issuances of common stock pursuant to our employee stock purchase plan was classified in the accompanying consolidated statements of operations as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2023 2022 2023 2022
(in thousands)
Stock-based compensation expense:
Cost of revenue $ 2,527 $ 2,745 $ 8,348 $ 7,610
Research and development 8,436 13,400 30,575 40,349
Sales and marketing 7,106 8,047 23,087 23,251
General and administrative 5,699 6,779 22,826 21,094
Total stock-based compensation expense $ 23,768 $ 30,971 $ 84,836 $ 92,304
We recognize compensation cost of all awards on a straight-line basis over the applicable vesting period, which is generally four years .
Our Compensation Committee adopted and approved the performance goals, targets and payout formulas for our 2023 and 2022 bonus plans, including permitting our executive officers and certain other employees the opportunity to receive payment of their earned bonuses in the form of common stock (in lieu of cash). During the three months ended September 30, 2023 and 2022, we recognized stock-based compensation expense related to such bonuses in the amount of $ 50 thousand and $( 0.8 ) million, respectively, and during the nine months ended based September 30, 2023 and 2022, we recognized stock-based compensation expense related to such bonuses in the amount of $ 1.1 million and $ 0.8 million, respectively, on the probable expected performance against the pre-established corporate financial objectives as of September 30, 2023 and 2022. For 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
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dollar value of the actual bonus award payment by the closing price per share of our common stock on the date of grant.
(b) Restricted Stock Units and Performance-Based Restricted Stock Units
RSUs and PSUs activity during the nine months ended September 30, 2023 was as follows:
Shares Weighted-Average
Grant Date
Fair Value
Unvested balance as of December 31, 2022 3,001,443 $ 83.88
Granted 2,232,289 41.54
Vested ( 1,139,340 ) 72.49
Forfeited ( 967,575 ) 67.85
Unvested balance as of September 30, 2023 3,126,817 $ 62.79
As of September 30, 2023, the unrecognized compensation expense related to our unvested RSUs and PSUs was $ 265.8 million. This unrecognized compensation expense will be recognized over an estimated weighted-average amortization period of 2.3 years.
In February 2023, our Compensation Committee awarded 173,103 PSUs that require the achievement of an ARR target for the 2023 full-year to earn any payout and include a non-GAAP operating income margin modifier. In addition, the portion of the PSUs that are earned will be capped at a maximum of 200 % of the target level payout and if certain ARR or non-GAAP operating income margin goals are not met, no PSUs will be earned. The PSUs have a performance period of one year and the earned PSUs will vest in three equal installments following each of the first, second and third anniversary of the vesting commencement date, subject to the participant’s continuous service as of each such date. Stock-based compensation expense related to these PSUs will be adjusted over the one-year performance period based on interim estimates of performance against the identified targets.
(c) Stock Options
Stock option activity during the nine months ended September 30, 2023 was as follows:
Shares Weighted
Average
Exercise
Price Weighted
Average
Remaining
Contractual Life
(in years) Aggregate
Intrinsic
Value
(in thousands)
Outstanding as of December 31, 2022 932,126 $ 12.70 3.2 $ 19,837
Granted — —
Exercised ( 208,494 ) 14.31 $ 6,204
Forfeited/cancelled — —
Outstanding as of September 30, 2023 723,632 $ 12.23 2.4 $ 24,276
Vested and exercisable as of September 30, 2023 723,632 $ 12.23 2.4 $ 24,276
(d) Employee Stock Purchase Plan
Under the Rapid7, Inc. 2015 Employee Stock Purchase Plan (“ESPP”), employees may set aside up to 15 % of their gross earnings, on an after-tax basis, to purchase our common stock at a discounted price, which is calculated at 85 % of the lesser of: (i) the market value of our common stock at the beginning of each offering period and (ii) the market value of our common stock on the applicable purchase date.
On March 15, 2023, we issued 177,886 shares of common stock to employees, with a purchase price of $ 34.71 per share, for aggregate proceeds of $ 6.2 million.
On September 15, 2023, we issued 152,419 shares of common stock to employees, with a purchase price of $ 33.78 per share, for aggregate proceeds of $ 5.1 million.
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Note 13. Net Loss per Share
The following table summarizes the computation of basic and diluted net loss per share of our common stock for the three and nine months ended September 30, 2023 and 2022:
Three Months Ended September 30, Nine Months Ended September 30,
2023 2022 2023 2022
(in thousands, except share and per share data)
Numerator:
Net loss $ ( 76,611 ) $ ( 28,727 ) $ ( 169,308 ) $ ( 113,332 )
Denominator:
Weighted-average common shares outstanding, basic and diluted 61,065,157 58,730,651 60,506,082 58,229,872
Net loss per share, basic and diluted $ ( 1.25 ) $ ( 0.49 ) $ ( 2.80 ) $ ( 1.95 )
We intend to settle any conversion of our 2025 Notes, 2027 Notes and 2029 Notes in cash, shares, or a combination thereof. The dilutive impact of the Notes for our calculation of diluted net income (loss) per share is considered using the if-converted method. For the three and nine months ended September 30, 2023 and 2022, 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.
In connection with the issuance of the 2023 Notes, the 2025 Notes, the 2027 Notes and the 2029 Notes, we entered into 2023 Capped Calls, 2025 Capped Calls, 2027 Capped Calls and 2029 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. The 2025 Capped Calls were not redeemed with the partial repurchase of the 2025 Notes and remain outstanding.
As of September 30, 2023 and 2022, the 2025 Notes, the 2027 Notes and the 2029 Notes were not convertible at the option of the holder. We had not received any conversion notices through the issuance date of our unaudited 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 have been excluded from the computation of diluted weighted-average shares outstanding for the respective periods below because they would have been anti-dilutive:
Three and Nine Months Ended September 30,
2023 2022
Options to purchase common stock 723,632 1,218,790
Unvested restricted stock units 3,126,817 3,279,901
Common stock issued in conjunction with acquisitions 115,041 240,041
Shares to be issued under ESPP 20,802 30,501
Convertible senior notes 11,183,611 9,572,955
Total 15,169,903 14,342,188
Note 14. Commitments and Contingencies
(a) Warranty
We provide limited product warranties. Historically, any payments made under these provisions have been immaterial.
(b) Litigation and Claims
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.
(c) Indemnification Obligations
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We agree to standard indemnification provisions in the ordinary course of business. Pursuant to these provisions, we agree to indemnify, hold harmless and reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally our customers, in connection with any United States patent, copyright or other intellectual property infringement claim by any third party arising from the use of our products or services in accordance with the agreement or arising from our gross negligence, willful misconduct or violation of the law (provided that there is not gross or willful misconduct on the part of the other party) with respect to our products or services. The term of these indemnification provisions is generally perpetual from the time of execution of the agreement. We carry insurance that covers certain third-party claims relating to our services and limits our exposure. We have never incurred costs to defend lawsuits or settle claims related to these indemnification provisions.
As permitted under Delaware law, we have entered into indemnification agreements with our officers and directors, indemnifying them for certain events or occurrences while they serve as officers or directors of the company.
Note 15. Segment Information and Information about Geographic Areas
We operate in one segment. Our chief operating decision maker is our Chief Executive Officer, who makes operating decisions, assesses performance and allocates resources on a consolidated basis.
Net revenues by geographic area presented based upon the location of the customer were as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2023 2022 2023 2022
(in thousands)
United States $ 147,929 $ 131,628 $ 427,629 $ 376,752
Other 50,914 44,137 144,810 123,852
Total $ 198,843 $ 175,765 $ 572,439 $ 500,604
Property and equipment, net by geographic area was as follows:
As of September 30, 2023 As of December 31, 2022
(in thousands)
United States $ 29,709 $ 41,570
Other 12,740 16,321
Total $ 42,449 $ 57,891
Note 16. Restructuring
On August 7, 2023, our board of directors approved a restructuring plan that was designed to improve operational efficiencies, reduce operating costs and better align the Company’s workforce with current business needs, top strategic priorities and key growth opportunities (collectively, the “Restructuring Plan”). The Restructuring Plan included a reduction of the Company’s workforce by approximately 17 %.
During the three months ended September 30, 2023, we incurred $ 20.0 million of restructuring charges which were recorded within restructuring in the condensed consolidated statements of operations. In addition, we incurred $ 1.2 million of stock-based compensation expense related to acceleration of share-based awards.
As of September 30, 2023, the restructuring liability accrued but not paid totaled $ 4.7 million, which is included within accrued expenses in the condensed consolidated balance sheets. We expect the remainder of the restructuring charges of approximately $ 3.5 million to be incurred in the fourth quarter of 2023 and the execution of the Restructuring Plan to be substantially complete by the end of the fourth quarter of 2023.
Potential position eliminations in each country are subject to local law and consultation requirements, which may extend this process beyond the fourth quarter of 2023 in certain countries. The charges that we expect to incur are subject to a number of assumptions, including local law requirements in various jurisdictions, and actual expenses may differ materially from the estimates disclosed above.
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We permanently closed certain idle office spaces in Plano, Texas, Los Angeles, California and Toronto, Canada, which resulted in an impairment loss in the three months ended September 30, 2023 of $ 3.6 million. Refer to Note 11, Leases, for further details on the impairment of long-lived assets.
The following table presents the activity of the restructuring liability for the three months ended September 30, 2023:
Restructuring Liability
(in thousands)
Balance at December 31, 2022 $ —
Charges 19,996
Payments ( 15,318 )
Balance at September 30, 2023 $ 4,678
22
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