Item 8. Financial Statements and Supplementary Data
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm ( KPMG LLP , Boston, MA , Auditor Firm: 185 )
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Consolidated Balance Sheets
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Consolidated Statements of Operations
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Consolidated Statements of Comprehensive Loss
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Consolidated Statements of Changes Stockholders' Equity
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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, 2023 and 2022, 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, 2023, 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, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2023, 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, 2023 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.
Sufficiency of audit evidence over products revenue
As discussed in Note 2 to the consolidated financial statements, the Company derives revenue primarily from product subscriptions revenue which consists of cloud-based subscriptions, managed services, term software licenses, content subscriptions and maintenance and support associated with its software licenses. For the year ended December 31, 2023, the Company recorded revenue of $778 million, which includes product subscriptions revenue of $739 million. The Company has high volumes of transactions and the processing and recording of the related product subscriptions revenue is reliant upon the Company’s information technology (IT) system.
We identified the evaluation of the sufficiency of audit evidence over product subscriptions revenue as a critical audit matter. Subjective auditor judgment was required to determine the nature and extent of procedures performed over the processing and recording of product subscriptions revenue because the revenue recognition process is highly automated. Additionally, specialized skills and knowledge were required to test the IT system used for the processing and recording of product subscriptions revenue.
The following are the primary procedures we performed to address this critical audit matter. We applied auditor judgment to determine the nature and extent of procedures to be performed over the processing and recording of product subscriptions revenue, including the related IT system. We evaluated the design and tested the operating effectiveness of certain internal controls related to the processing and recording of product subscriptions revenue. We involved IT professionals with specialized skills and knowledge, who assisted in evaluating the design and testing the operating effectiveness of certain general IT and application controls. For a sample of product subscriptions revenue transactions, we determined the revenue to be recorded in the current period based on the underlying contract and compared it to the Company's recorded balances. In addition, we evaluated the sufficiency of audit evidence obtained by assessing the results of procedures performed, including the appropriateness of the nature and extent of such evidence.
/s/ KPMG LLP
We have served as the Company's auditor since 2013.
Boston, Massachusetts
February 26, 2024
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RAPID7, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31, 2023 December 31, 2022
Assets
Current assets:
Cash and cash equivalents $ 213,629 $ 207,287
Short-term investments 169,544 84,162
Accounts receivable, net of allowance for credit losses of $ 951 and $ 2,299 at December 31, 2023 and December 31, 2022, respectively
164,862 152,045
Deferred contract acquisition and fulfillment costs, current portion 45,008 34,906
Prepaid expenses and other current assets 41,407 31,907
Total current assets 634,450 510,307
Long-term investments 56,171 9,756
Property and equipment, net 39,642 57,891
Operating lease right-of-use assets 54,693 79,342
Deferred contract acquisition and fulfillment costs, non-current portion 76,601 68,169
Goodwill 536,351 515,631
Intangible assets, net 94,546 101,269
Other assets 12,894 16,626
Total assets $ 1,505,348 $ 1,358,991
Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
Accounts payable $ 15,812 $ 10,255
Accrued expenses 84,489 80,306
Operating lease liabilities, current portion 13,452 12,444
Deferred revenue, current portion 455,503 426,599
Other current liabilities 536 1,663
Total current liabilities 569,792 531,267
Convertible senior notes, net 929,996 815,948
Operating lease liabilities, non-current portion 81,130 85,946
Deferred revenue, non-current portion 32,577 31,040
Other long-term liabilities 10,032 14,864
Total liabilities $ 1,623,527 $ 1,479,065
Stockholders’ deficit:
Preferred stock, $ 0.01 par value per share; 10,000,000 shares authorized at December 31, 2023 and 2022; 0 shares issued and outstanding at December 31, 2023 and 2022
$ — $ —
Common stock, $ 0.01 par value per share; 100,000,000 shares authorized at December 31, 2023 and 2022; 62,283,630 and 60,206,277 shares issued at December 31, 2023 and 2022, respectively; 61,714,051 and 59,719,469 shares outstanding at December 31, 2023 and 2022, respectively
617 597
Treasury stock, at cost, 569,579 and 486,808 shares at December 31, 2023 and December 31, 2022, respectively
( 4,765 ) ( 4,764 )
Additional paid-in-capital 894,630 746,249
Accumulated other comprehensive (loss) income 1,344 ( 1,411 )
Accumulated deficit ( 1,010,005 ) ( 860,745 )
Total stockholders’ deficit ( 118,179 ) ( 120,074 )
Total liabilities and stockholders’ deficit $ 1,505,348 $ 1,358,991
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,
2023 2022 2021
Revenue:
Products $ 740,168 $ 647,535 $ 500,843
Professional services 37,539 37,548 34,561
Total revenue 777,707 685,083 535,404
Cost of revenue:
Products 202,904 182,212 140,773
Professional services 28,837 32,137 28,175
Total cost of revenue 231,741 214,349 168,948
Total gross profit 545,966 470,734 366,456
Operating expenses:
Research and development 176,776 189,970 160,779
Sales and marketing 312,636 307,409 247,453
General and administrative 84,276 84,969 78,289
Impairment of long-lived assets 30,784 — —
Restructuring 22,227 — —
Total operating expenses 626,699 582,348 486,521
Loss from operations ( 80,733 ) ( 111,614 ) ( 120,065 )
Other income (expense), net:
Interest income 10,177 1,813 365
Interest expense ( 64,700 ) ( 10,982 ) ( 14,292 )
Other income (expense), net ( 14,522 ) ( 1,522 ) ( 1,921 )
Loss before income taxes ( 149,778 ) ( 122,305 ) ( 135,913 )
(Benefit from) provision for income taxes ( 518 ) 2,412 10,421
Net loss $ ( 149,260 ) $ ( 124,717 ) $ ( 146,334 )
Net loss per share, basic and diluted $ ( 2.46 ) $ ( 2.13 ) $ ( 2.65 )
Weighted-average common shares outstanding, basic and diluted 60,756,087 58,552,065 55,270,998
See accompanying notes to consolidated financial statements.
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RAPID7, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
Year Ended December 31,
2023 2022 2021
Net loss $ ( 149,260 ) $ ( 124,717 ) $ ( 146,334 )
Other comprehensive income (loss):
Change in fair value of cash flow hedges 797 ( 3,874 ) ( 86 )
Adjustment for net losses realized on cash flow hedges and included in net loss, net of taxes 724 4,053 —
Total change in unrealized gains (losses) on cash flow hedges 1,521 179 ( 86 )
Change unrealized gains (losses) on investments 1,234 ( 778 ) ( 1,043 )
Adjustment for net gains realized and included in net loss — — ( 137 )
Total change in unrealized gains (losses) on investments 1,234 ( 778 ) ( 1,180 )
Total other comprehensive income (loss) 2,755 ( 599 ) ( 1,266 )
Comprehensive loss $ ( 146,505 ) $ ( 125,316 ) $ ( 147,600 )
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
income (loss) Accumulated
deficit Total
stockholders’
equity (deficit)
Shares Amount Shares Amount
Balance, December 31, 2020 52,225 $ 522 487 $ ( 4,764 ) $ 692,603 $ 454 $ ( 617,279 ) $ 71,536
Stock-based compensation expense — — — — 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 income — — — — — ( 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 income — — — — — ( 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 )
Stock-based compensation expense — — — — 107,254 — — 107,254
Issuance of common stock under employee stock purchase plan 330 3 — — 11,320 — — 11,323
Vesting of restricted stock units 1,454 15 — — ( 15 ) — — —
Shares withheld for employee taxes ( 113 ) ( 1 ) — — ( 5,569 ) — — ( 5,570 )
Issuance of common stock upon exercise of stock options 216 2 — — 3,051 — — 3,053
Issuance of common stock related to acquisition 107 1 — — ( 1 ) — — —
Repurchase of common stock issued in related to acquisition — — 83 ( 1 ) 1 — — —
Purchase of capped called related to convertible senior notes — — — — ( 36,570 ) — — ( 36,570 )
Reclassification of equity to derivative assets related to capped calls — — — — 33,029 — — 33,029
Repurchase and inducement of convertible senior notes — — — — 35,881 — — 35,881
Other comprehensive loss — — — — — 2,755 — 2,755
Net loss — — — — — — ( 149,260 ) ( 149,260 )
Balance, December 31, 2023 61,714 $ 617 570 $ ( 4,765 ) $ 894,630 $ 1,344 $ ( 1,010,005 ) $ ( 118,179 )
See accompanying notes to consolidated financial statements.
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RAPID7, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
2023 2022 2021
Cash flows from operating activities:
Net loss $ ( 149,260 ) $ ( 124,717 ) $ ( 146,334 )
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 45,939 41,038 33,501
Amortization of debt discount and issuance costs 4,138 4,085 3,982
Stock-based compensation expense 108,081 119,902 102,579
Impairment of long-lived assets 30,784 — —
Change in fair value of derivative assets 15,511 — —
Deferred income taxes ( 5,624 ) ( 1,440 ) 466
Induced conversion expense 53,889 — 2,740
Other 469 ( 200 ) 1,920
Changes in assets and liabilities:
Accounts receivable ( 14,021 ) ( 9,050 ) ( 25,475 )
Deferred contract acquisition and fulfillment costs ( 18,534 ) ( 15,910 ) ( 22,526 )
Prepaid expenses and other assets ( 4,125 ) ( 2,231 ) ( 3,355 )
Accounts payable 5,449 7,977 ( 2,077 )
Accrued expenses 2,422 3,741 19,205
Deferred revenue 30,472 52,516 85,562
Other liabilities ( 1,312 ) 2,493 3,729
Net cash provided by operating activities 104,278 78,204 53,917
Cash flows from investing activities:
Business acquisitions, net of cash acquired ( 34,841 ) — ( 358,420 )
Purchases of property and equipment ( 4,366 ) ( 20,382 ) ( 9,010 )
Capitalization of internal-use software ( 15,878 ) ( 17,145 ) ( 9,854 )
Purchases of investments ( 276,829 ) ( 122,765 ) ( 93,092 )
Sales and maturities of investments 150,450 121,304 147,998
Other investments 2,710 ( 1,000 ) ( 3,000 )
Net cash used in investing activities ( 178,754 ) ( 39,988 ) ( 325,378 )
Cash flows from financing activities:
Proceeds from issuance of convertible senior notes, net of issuance costs of $ 7,909 and $ 14,976 for the years ended December 31, 2023 and 2021, respectively
292,091 — 585,024
Purchase of capped calls related to convertible senior notes ( 36,570 ) — ( 76,020 )
Payment of debt issuance costs — ( 71 ) ( 300 )
Payments for redemption, repurchase and conversion of convertible senior notes ( 199,998 ) ( 12 ) ( 230,000 )
Payments related to business acquisitions ( 2,250 ) ( 300 ) ( 12,118 )
Proceeds from capped calls settlement 17,518 — —
Taxes paid related to net share settlement of equity awards ( 5,570 ) ( 7,462 ) ( 16,044 )
Proceeds from employee stock purchase plan 11,323 11,943 9,276
Proceeds from stock option exercises 3,053 3,318 4,315
Net cash provided by financing activities 79,597 7,416 264,133
Effect of exchange rate changes on cash ,cash equivalents and restricted cash 1,202 ( 2,845 ) ( 1,272 )
Net increase (decrease) in cash, cash equivalents and restricted cash 6,323 42,787 ( 8,600 )
Cash, cash equivalents and restricted cash, beginning of period 207,804 165,017 173,617
Cash, cash equivalents and restricted cash, end of period $ 214,127 $ 207,804 $ 165,017
Supplemental cash flow information:
Cash paid for interest on convertible senior notes $ 4,605 $ 6,675 $ 7,345
Cash paid for income taxes, net of refunds $ 1,624 $ 1,571 $ 3,305
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents $ 213,629 $ 207,287 $ 164,582
Restricted cash included in prepaid expenses and other assets 498 517 435
Total cash, cash equivalents and restricted cash $ 214,127 $ 207,804 $ 165,017
See accompanying notes to consolidated financial statements.
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RAPID7, INC.
Notes to Consolidated Financial Statements
(1) Nature of Business
Rapid7, Inc. and subsidiaries (“we,” “us” or “our”) are advancing security with visibility, analytics, and automation delivered through our platform solutions. 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) product 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.
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
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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 is transferred to our customers, in an amount that reflects the consideration that we expect to receive in exchange for those products or services.
Product Subscriptions
Product 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.
• Content subscriptions and our maintenance and support services are sold with our 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
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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, 2023, we recognized revenue of $ 406.2 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, 2023 and 2022, unbilled receivables of $ 2.0 million and $ 1.1 million are included in prepaid expenses and other current assets in our consolidated balance sheet. As of December 31, 2023 and 2022, 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 commercial paper, corporate bonds, U.S. Government agencies and agency bonds. We classify our investments as available-for-sale and record these investments at fair value. When the fair value of an investment declines below its amortized cost basis, any portion of that decline attributable to credit losses, to the extent expected to be nonrecoverable before the sale of the security, is recognized in our consolidated statements of operations. When the fair value of the investment declines below its amortized cost basis due to changes in interest rates, such amounts are recorded in accumulated other comprehensive income (loss), and are recognized in our consolidated statement of operations only if we sell or intend to sell the security before recovery of its cost basis. Realized gains and losses are determined based on the specific identification method, and are reflected in our consolidated statements of operations.
Investments with an original maturity of greater than three months at the date of purchase and less than one year from the date of the balance sheet are classified as short-term and those with maturities of more than one year from the date of the balance sheet are classified as long-term in the consolidated balance sheet. We do not invest in any securities with contractual maturities greater than 24 months.
(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 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.
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(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 2023, 2022 or 2021 or accounts receivable as of December 31, 2023 or 2022.
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 weighted average contract length of renewal contracts. 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 is 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.
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
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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 $ 15.9 million, $ 17.1 million and $ 9.9 million of costs related to software developed for internal use in the years ended December 31, 2023, 2022 and 2021, 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 is 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, 2023, we determined that triggering events occurred which indicated that the carrying value of our 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 year ended December 31, 2023, we recorded impairment losses of $ 30.8 million related to these idle office spaces, consisting of $ 22.2 million related to ROU assets and $ 8.6 million related to leasehold improvements associated with these leased office spaces.
(m) 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
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liability accrued but not paid at the end of the reporting period is included within accrued expenses in the condensed consolidated balance sheet.
(n) Business Combinations
We allocate the fair value of purchase consideration to the tangible asset acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair value these identifiable assets and liabilities is recorded as goodwill. Determining the fair value of the tangible assets acquired, liabilities assumed and intangible assets requires management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, cash flows that an asset is expected to generate in the future, technology migration curves, discount rates, and useful lives. While we use our best estimates and judgements, our estimates are inherently uncertain and subject to refinement.
During the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the fair value of these assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the final determination of the fair value of assets acquired or liabilities assumed any subsequent adjustments are recorded to the consolidated statements of operations. Acquisition-related transaction costs are expensed as incurred.
(o) Goodwill
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, 2023, we concluded the fair value of our single reporting unit exceeded its' carrying value and there was no impairment of goodwill.
(p) Foreign Currency
The functional currency of our foreign subsidiaries is the U.S. dollar. We translate all monetary assets and liabilities denominated in foreign currencies into U.S. dollars using the exchange rates in effect at the balance sheet dates and non-monetary assets and liabilities using historical exchange rates. Foreign currency denominated expenses are re-measured using the average exchange rates for the period. Foreign currency transaction and re-measurement gains and losses are included in other income (expense), net in the condensed consolidated statement of operations. In 2023, foreign currency transaction losses and foreign currency re-measurement losses were $ 1.4 million and $ 0.4 million, respectively. In 2022, foreign currency transaction gains were $ 1.4 million and foreign currency re-measurement gains (losses) were not material.
(q) 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.
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As of December 31, 2023 and 2022, our cash flow hedges have contractual maturities of eighteen months or less, and as of December 31, 2023 and 2022, outstanding forward contracts had a total notional value of $ 49.5 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 years ended December 31, 2023 and 2022, all cash flow hedges were considered effective. Refer to Note 6, Fair Value Measurements , for the fair values of our outstanding derivative instruments.
(r) Stock-Based Compensation
Stock-based compensation expense related to our stock options, restricted stock units (“RSUs”), performance-based restricted stock units (“PSUs”) and purchase rights issued under our 2015 Employee Stock Purchase Plan (“ESPP”) is calculated based on the estimated fair value of the award on the grant date.
The fair values of RSUs and PSUs are based on the value of our common stock on the date of grant. The fair values of stock options and ESPP purchase rights are estimated on the grant date using the Black-Scholes option pricing model which requires management to make a number of assumptions, including the expected life of the option, the volatility of the underlying stock, the risk-free interest rate and expected dividends. The assumptions used in our Black-Scholes option-pricing model represent management’s best estimates at the time of grant. These estimates involve a number of variables, uncertainties and assumptions and the application of management’s judgment, as they are inherently subjective. If any assumptions change, our stock-based compensation expense could be materially different in the future.
The fair value is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period of the respective award. The actual number of PSUs earned and eligible to vest are determined based on the performance conditions defined when the awards are granted. We recognize share-based compensation expense for the PSUs on a straight-line basis over the requisite service period for each separately vesting portion of the award when it is probable that the performance conditions will be achieved. We reassess the probability of vesting at each reporting period for awards with performance conditions and adjust stock-based compensation cost based on its probability assessment. We recognize forfeitures as they occur and do not estimate a forfeiture rate when calculating the stock-based compensation expense.
(s) Advertising
Advertising costs are expensed as incurred, and are recorded in sales and marketing expense in our consolidated statement of operations. We incurred $ 22.4 million, $ 22.7 million, and $ 21.3 million in advertising expense in 2023, 2022, and 2021, respectively.
(t) Income Taxes
Income taxes are accounted for using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for differences between the consolidated financial statements carrying amounts of assets and liabilities and their respective income tax bases, and operating loss and tax credit carryforwards using enacted tax rates expected to apply to taxable income in the years in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax assets will not be realized. Significant judgment is required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we consider all available evidence, including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies. In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.
We recognize tax provision from uncertain tax positions if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. Interest and penalties associated with such uncertain tax positions are classified as a component of income tax expense.
(u) Net Income (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 income (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
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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. 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 years ended December 31, 2023, 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.
(v) Recent Accounting Pronouncements
Accounting Pronouncements Not Yet Effective
In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures (“ASU 2023-09”). This new guidance is designed to enhance the transparency and decision usefulness of income tax disclosures. The amendments of this update are related to the rate reconciliation and income taxes paid, requiring (1) consistent categories and greater disaggregation of information in the rate reconciliation and (2) income taxes paid disaggregated by jurisdiction. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024. Early adoption is permitted. We do not plan to early adopt this standard. We are currently evaluating the effect of adopting this standard on our disclosures.
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures (“ASU 2023-07”) , to improve reportable segment disclosure requirements through enhanced disclosures about significant segment expenses on an interim and annual basis. All disclosure requirements of ASU 2023-07 are required for entities with a single reportable segment. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods for the fiscal years beginning after December 15, 2024, and should be applied on a retrospective basis to all periods presented. Early adoption is permitted. We do not plan to early adopt this standard. We are currently evaluating the effect of adopting this standard on our disclosures.
(3) Revenue from Contracts with Customers
The following table summarizes revenue from contracts with customers for the years ended December 31, 2023, 2022, and 2021:
Year Ended December 31,
2023 2022 2021
(in thousands)
Product subscriptions $ 738,819 $ 643,247 $ 492,608
Professional services 37,539 37,548 34,561
Other 1,349 4,288 8,235
Total revenue $ 777,707 $ 685,083 $ 535,404
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, 2023, 2022 and 2021:
Year Ended December 31,
2023 2022 2021
(in thousands)
United States $ 579,025 $ 515,894 $ 414,856
All other 198,682 169,189 120,548
Total revenue $ 777,707 $ 685,083 $ 535,404
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, 2023. The estimated revenues do not include unexercised contract renewals.
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Next Twelve Months Thereafter
(in thousands)
Product subscriptions $ 553,807 $ 285,791
Professional services 17,545 8,066
Other 127 33
Total $ 571,479 $ 293,890
(4) Business Combinations
Minerva Labs Ltd.
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. For the year ended December 31, 2023, we recognized stock-based compensation expense related to such shares in the amount of $ 1.4 million.
The following table summarizes the allocation of purchase price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date (in thousands):
Consideration:
Cash $ 34,977
Estimated purchase price adjustment receivable ( 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 ( 441 )
Intangible asset 12,800
Total identifiable net assets assumed $ 13,892
Goodwill 20,720
Net purchase price $ 34,612
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.
For the year ended December 31, 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 year ended December 31, 2023 was not material.
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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.
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.
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.
(5) Investments
Our investments, which are all classified as available-for-sale, consisted of the following:
As of December 31, 2023
Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair Value
(in thousands)
Description:
U.S government agencies $ 222,820 $ 467 $ ( 65 ) $ 223,222
Agency bonds 2,500 — ( 7 ) 2,493
Total $ 225,320 $ 467 $ ( 72 ) $ 225,715
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
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As of December 31, 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 December 31, 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.
(6) Fair Value Measurements
We measure certain financial assets and liabilities at fair value. Fair value is determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as determined by either the principal market or the most advantageous market. Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy, as follows:
• Level 1 : Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
• Level 2 : Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
• Level 3 : Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the asset or liability.
We consider an active market to be one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis, and consider an inactive market to be one in which there are infrequent or few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers.
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The following table presents our financial assets measured and recorded at fair value on a recurring basis using the above input categories:
As of December 31, 2023
Level 1 Level 2 Level 3 Total
(in thousands)
Description:
Assets:
Money market funds $ 124,506 $ — $ — $ 124,506
U.S. government agencies 223,222 — — 223,222
Agency bonds — 2,493 — 2,493
Foreign currency forward contracts designated as cash flow hedges (prepaid expenses and other current assets and other assets) — 1,322 — 1,322
Total assets $ 347,728 $ 3,815 $ — $ 351,543
Liabilities:
Foreign currency forward contracts designated as cash flow hedges (other current liabilities) — 55 — 55
Total liabilities $ — $ 55 $ — $ 55
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 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) — 1,559 — 1,559
Total liabilities $ — $ 1,559 $ — $ 1,559
As of December 31, 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 11, Debt , was $ 50.5 million, $ 538.9 million and $ 333.4 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.
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(7) Property and Equipment
Property and equipment are recorded at cost and consist of the following:
December 31, December 31,
2023 2022
(in thousands)
Computer equipment and software $ 26,442 $ 24,568
Furniture and fixtures 10,850 11,823
Leasehold improvements (1)
56,151 66,180
Total 93,443 102,571
Less accumulated depreciation ( 53,801 ) ( 44,680 )
Property and equipment, net $ 39,642 $ 57,891
(1) As of December 31, 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 12, Leases, for further details on the impairment of long-lived assets.
We recorded depreciation expense of $ 14.0 million, $ 13.6 million and $ 12.3 million in 2023, 2022 and 2021, respectively.
(8) Goodwill and Intangibles
Goodwill was $ 536.4 million and $ 515.6 million as of December 31, 2023 and December 31, 2022, respectively. There were no goodwill impairment charges in 2023, 2022 or 2021. The following table displays the changes in the gross carrying amount of goodwill:
Amount
(in thousands)
Balance at December 31, 2021 $ 515,258
IntSights acquisition adjustments 373
Balance at December 31, 2022 $ 515,631
Minerva acquisition 20,720
Balance at December 31, 2023 $ 536,351
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, 2023 As of December 31, 2022
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 $ ( 77,031 ) $ 58,324 $ 122,555 $ ( 58,645 ) $ 63,910
Customer relationships 4.5 12,000 ( 7,755 ) 4,245 12,000 ( 5,146 ) 6,854
Trade names 3.1 2,619 ( 2,379 ) 240 2,619 ( 1,874 ) 745
Total acquired intangible assets $ 149,974 $ ( 87,164 ) $ 62,810 $ 137,174 $ ( 65,665 ) $ 71,509
Internal-use software 3.0 55,371 ( 23,635 ) 31,736 43,002 ( 13,242 ) 29,760
Total intangible assets $ 205,345 $ ( 110,799 ) $ 94,546 $ 180,176 $ ( 78,907 ) $ 101,269
Intangible assets are expensed on a straight-line basis over the useful life of the asset. Amortization expense was $ 31.9 million, $ 27.5 million and $ 21.2 million in 2023, 2022 and 2021, respectively.
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Estimated future amortization expense of the acquired identifiable intangible assets and completed capitalized internal-use software costs as of December 31, 2023 was as follows (in thousands):
2024 $ 30,880
2025 26,795
2026 17,220
2027 6,806
2028 1,600
2029 and thereafter 3,531
Total $ 86,832
The table above excludes the impact of $ 7.7 million of capitalized internal-use software costs for projects that have not been completed as of December 31, 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 year ended December 31, 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.
(9) Deferred Contract Acquisitions and Fulfillment Costs
The following table summarizes the activity of the deferred contract acquisition and fulfillment costs for the years ended December 31, 2023 and 2022:
Year Ended December 31,
2023 2022
(in thousands)
Beginning balance $ 103,075 $ 87,165
Capitalization of contract acquisition and fulfillment costs 60,528 51,054
Amortization of deferred contract acquisition and fulfillment costs ( 41,994 ) ( 35,144 )
Ending balance $ 121,609 $ 103,075
(10) Derivative and Hedging Activities
To mitigate our exposure to foreign currency fluctuations resulting from certain expenses denominated in certain foreign currencies, we enter into forward contracts that are designated as cash flow hedging instruments. These forward contracts have contractual maturities of eighteen months or less, and as of December 31, 2023 and December 31, 2022, outstanding forward contracts had a total notional value of $ 49.5 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 years ended December 31, 2023 and 2022, all cash flow hedges were considered effective. Refer to Note 6, Fair Value Measurements , for the fair values of our outstanding derivative instruments.
(11) 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”) 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
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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 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 December 31, 2023, the 2025 Notes, the 2027 Notes and the 2029 Notes were not convertible at the option of the holders.
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 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 2023 Notes
On March 16, 2021, we used a portion of the proceeds from the issuance of the 2027 Notes, together with 2.2 million shares of our common stock, to repurchase and retire $ 182.6 million aggregate principal amount of the 2023 Notes, and paid accrued and unpaid interest thereon (the 2023 Notes Repurchase Transaction). The 2023 Notes Repurchase Transaction was accounted for as an induced conversion in accordance with Accounting Standards Codification 470-20, Debt with Conversion and Other Options (ASC 470-20) . The total fair value of the additional common stock issued to induce the conversion of $ 2.7 million was recognized as an inducement expense and classified as a
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component of interest expense in our consolidated statement of operations. The remaining cash and common stock consideration issued under the original terms of the 2023 Notes was accounted for under the general conversion accounting guidance where the difference between the carrying amount of the 2023 Notes retired, including unamortized debt issuance cost of $ 2.7 million, and the cash consideration paid and the par amount of the common stock issued, was recorded in additional paid-in capital.
During the first quarter of 2021, holders of the 2023 Notes elected to convert Notes with a principal amount of $ 2.0 million. Cash was paid for the principal and the excess conversion spread was paid in 23,123 shares of our common stock.
Redemption of the 2023 Notes
On September 16, 2021, we issued a redemption notice for the remaining $ 45.4 million aggregate principal amount outstanding of the 2023 Notes. Pursuant to the redemption notice, on November 30, 2021 we paid $ 43.4 million in cash and issued 697,262 shares of our common stock to the holders of the 2023 Notes who submitted conversion notices, and the remaining $ 2.0 million of 2023 Notes were redeemed in cash, plus accrued and unpaid interest.
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 December 31, 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 ( 7,909 ) 292,091
Partial repurchase ( 184,000 ) 2,010 ( 181,990 ) — — — — — —
Amortization of debt issuance costs — 1,066 1,066 — 2,487 2,487 — 394 394
Balance at December 31, 2023 $ 45,992 $ ( 404 ) $ 45,588 $ 600,000 $ ( 8,077 ) $ 591,923 $ 300,000 $ ( 7,515 ) $ 292,485
Interest expense related to the Notes was as follows (in thousands):
Year Ended December 31,
2023 2022 2021
2025 Notes 2027 Notes 2029 Notes Total 2025 Notes 2027 Notes Total 2023 Notes 2025 Notes 2027 Notes Total
Contractual interest expense $ 3,795 $ 1,500 $ 1,167 $ 6,462 $ 5,174 $ 1,502 $ 6,676 $ 950 $ 5,175 $ 1,164 $ 7,289
Amortization of debt issuance costs 1,066 2,487 394 3,947 1,425 2,468 3,893 $ 498 $ 1,384 $ 1,948 $ 3,830
Induced conversion expense 53,889 — — 53,889 — — — 2,740 — — 2,740
Total interest expense $ 58,750 $ 3,987 $ 1,561 $ 64,298 $ 6,599 $ 3,970 $ 10,569 $ 4,188 $ 6,559 $ 3,112 $ 13,859
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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 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
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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, 2023, we did not have any outstanding borrowings and we were in compliance with all covenants under the Credit Agreement.
As of December 31, 2023, we had a total of $ 8.8 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.
(12) Leases
Our leases primarily relate to office facilities that have remaining terms of up to 8.3 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:
Year Ended December 31,
2023 2022
(in thousands)
Operating lease costs $ 16,776 $ 19,829
Short-term lease costs 1,259 1,820
Variable lease costs 8,219 8,941
Total lease costs $ 26,254 $ 30,590
Supplemental balance sheet information related to the operating leases was as follows:
As of December 31, 2023 As of December 31, 2022
Weighted average remaining lease term (in years) - operating leases 5.7 6.6
Weighted average discount rate - operating leases 6.4 % 6.2 %
Supplemental cash flow information related to leases was as follows:
Year Ended December 31,
2023 2022
(in thousands)
Cash paid for amounts included in the measurement of lease liabilities $ 19,999 $ 17,572
ROU assets obtained in exchange for new lease obligations $ 8,119 $ 10,327
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Maturities of operating lease liabilities as of December 31, 2023 were as follows (in thousands):
2024 $ 18,714
2025 20,923
2026 18,331
2027 17,543
2028 18,075
2029 and thereafter 19,938
Total lease payments $ 113,524
Less: imputed interest ( 18,942 )
Total $ 94,582
During the year ended December 31, 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 year ended December 31, 2023, we recorded impairment losses of $ 30.8 million, respectively, related to these idle office spaces. consisting of $ 22.2 million, related to ROU assets and $ 8.6 million related to leasehold improvements associated with these leased office spaces.
(13) Stock-Based Compensation
( a) General
In connection with our IPO, our board of directors resolved not to make future grants under our 2011 Stock Option and Grant Plan (the “2011 Plan”). The 2011 Plan will continue to govern outstanding awards granted thereunder. The 2011 Plan provided for the grant of qualified incentive stock options and nonqualified stock options or other awards such as restricted stock awards (“RSAs”) to our employees, officers, directors and outside consultants.
In July 2015, our board of directors adopted and our stockholders approved our 2015 Equity Incentive Plan (the “2015 Plan”). We initially reserved 800,000 shares of our common stock for the issuance of awards under the 2015 Plan plus the number of shares of common stock reserved for issuance under the 2011 Plan at the time the 2015 Plan became effective. The 2015 Plan also provides that (i) any shares subject to awards granted under the 2011 Plan that would have otherwise returned to the 2011 Plan (such as upon the expiration or termination of a stock award prior to vesting) will be added to, and available for issuance under, the 2015 Plan and (ii) the number of shares reserved and available for issuance under the 2015 Plan automatically increases each January 1, beginning on January 1, 2016, by 4 % of the outstanding number of shares of our common stock on the immediately preceding December 31 (known as the “evergreen” provision) or such lesser number of shares as determined by our board of directors. Additionally, on October 8, 2015, our board of directors amended, the 2015 Plan to reserve an additional 1,500,000 shares of our common stock for issuance of inducement awards.
As of December 31, 2023, the shares of common stock authorized to be issued under the 2015 Plan totaled 22,574,131 and there were 5,146,498 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 .
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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,
2023 2022 2021
(in thousands)
Stock-based compensation expense:
Cost of revenue $ 10,700 $ 10,367 $ 6,491
Research and development 38,022 49,940 46,622
Sales and marketing 29,325 31,217 23,828
General and administrative 30,034 28,378 25,638
Total stock-based compensation expense $ 108,081 $ 119,902 $ 102,579
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, 2022 and 2021 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 years ended December 31, 2023, 2022, and 2021 we recognized stock-based compensation expense related to such bonuses in the amount of $ 1.6 million, $ 1.0 million and $ 4.7 million, respectively, based on the probable expected performance against the pre-established corporate financial objectives as of December 31, 2023, 2022 and 2021. 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 dollar value of the actual bonus award payment by the closing price per share of our common stock on the date of grant.
(b) Restricted Stock, Restricted Stock Units and Performance-Based Restricted Stock Units
RSUs and PSUs activity during 2023, 2022, and 2021 was as follows:
Shares Weighted-
Average Grant
Date Fair
Value
Unvested balance as of December 31, 2020 2,941,914 $ 32.43
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
Granted 2,304,140 41.76
Vested ( 1,453,713 ) 71.28
Forfeited ( 1,137,444 ) 67.81
Unvested balance as of December 31, 2023 2,714,426 $ 61.60
As of December 31, 2023, the unrecognized compensation expense related to our unvested RSUs and PSUs was $ 145.1 million. This unrecognized compensation expense will be recognized over an estimated weighted-average amortization period of 2.1 years.
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In February 2023, our Compensation Committee awarded 173,103 PSUs that required the achievement of an annualized recurring revenue (“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 would be capped at a maximum of 200 % of the target level payout and if certain ARR or non-GAAP operating income margin goals were 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. The 2023 targets for these PSUs were not met and therefore no stock-based compensation expense was recorded in 2023 related to these PSUs.
(c) Stock Options
The following tables 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, 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 $ 19,837
Granted — —
Exercised ( 215,856 ) 14.14 $ 6,519
Forfeited/cancelled — —
Outstanding as of December 31, 2023 716,270 12.26 1.97 $ 32,115
Vested and exercisable as of December 31, 2023 716,270 $ 12.26 1.97 $ 32,115
The total fair value of stock options vested in 2022 and 2021 was $ 0.1 million, and $ 0.6 million, respectively. All outstanding stock options were fully vested as of December 31, 2022.
(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 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, 2023, the shares of common stock authorized to be issued under the ESPP totaled 4,752,999 and there were 2,751,211 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 is estimated on the grant date using the Black-Scholes option pricing model. The expected term represents the term from the first day of the offering period to the purchase dates within each offering period. The expected volatility is based on the historical volatilities of our own common stock. The risk-free interest rate is based on U.S. Treasury zero-coupon securities with maturities consistent with the estimated expected term. We have not paid dividends on our common stock nor do we expect to pay dividends in the foreseeable future.
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The following table reflects the assumptions used in the Black-Scholes option pricing model to calculate the expense related to the ESPP:
Year Ended December 31,
2023 2022 2021
Expected term (in years) 0.5 - 1.0
0.5 - 1.0
0.5 - 1.0
Expected volatility 47 - 68 %
37 - 57 %
31 - 48 %
Risk-free interest rate 4.5 – 5.5 %
0.1 – 4.0 %
0.5 – 0.7 %
Expected dividend yield —
—
—
Grant date fair value per share $ 11.70 – $ 20.07
$ 15.50 – $ 29.58
$ 20.32 –$ 34.98
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, 2023, 2022 and 2021:
September 15, 2023 March 15, 2023 September 15, 2022 March 15, 2022 September 15, 2021 March 15, 2021
Common shares issued 152,419 177,886 218,314 80,747 73,676 147,837
Purchase prices $ 33.78 $ 34.71 $ 45.31 $ 67.59 and $ 81.37
$ 52.60 and $ 67.59
$ 28.39 and $ 52.60
Aggregate proceeds $ 5.1 million $ 6.1 million $ 6.2 million $ 5.7 million $ 4.8 million $ 4.5 million
(14) Income Taxes
Loss before income taxes included in the consolidated statements of operations was as follows:
Year Ended December 31,
2023 2022 2021
(in thousands)
United States $ ( 136,637 ) $ ( 109,381 ) $ ( 106,281 )
Foreign ( 13,141 ) ( 12,924 ) ( 29,632 )
Loss before income taxes $ ( 149,778 ) $ ( 122,305 ) $ ( 135,913 )
Income tax expense included in the consolidated statements of operations was as follows:
Year Ended December 31,
2023 2022 2021
(in thousands)
Current:
Federal $ 428 $ 1 $ 124
State and local 1,361 243 177
Foreign 3,317 3,608 9,690
Total current tax expense 5,106 3,852 9,991
Deferred:
Federal 9 10 10
State and local 2 2 2
Foreign ( 5,635 ) ( 1,452 ) 418
Total deferred tax (benefit) expense ( 5,624 ) ( 1,440 ) 430
Income tax expense $ ( 518 ) $ 2,412 $ 10,421
The reconciliation of the federal statutory rate of 21% to the effective income tax rate for the years ended December 31, 2023, 2022 and 2021 was as follows:
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Year Ended December 31,
2023 2022 2021
Federal statutory rate 21.0 % 21.0 % 21.0 %
State taxes, net of federal benefit ( 0.5 ) ( 0.1 ) ( 0.1 )
Permanent differences ( 0.9 ) ( 0.2 ) ( 0.2 )
Stock-based compensation ( 7.0 ) ( 2.4 ) 14.2
Federal research and development credit 0.9 1.4 1.4
Foreign rate differential 0.3 0.1 ( 0.5 )
Change in valuation allowance ( 3.2 ) ( 24.8 ) ( 36.0 )
Excess officers' compensation ( 1.7 ) ( 3.1 ) ( 5.9 )
Tax rate change ( 3.4 ) 7.8 11.2
Induced conversion expense ( 9.5 ) — ( 0.6 )
Tax reserves ( 0.1 ) ( 0.2 ) ( 3.8 )
Prior year true-ups 5.2 ( 0.3 ) ( 0.1 )
Capital gain on sale — — ( 7.0 )
Other ( 0.8 ) ( 1.1 ) ( 1.2 )
Effective income tax rate 0.3 % ( 1.9 ) % ( 7.6 ) %
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,
2023 2022
(in thousands)
Deferred tax assets:
Accruals and reserves $ 335 $ 109
Net operating loss carryforwards 137,706 166,173
Deferred revenue 15,726 9,597
Depreciation 836 3,258
Research and development credits 14,116 11,047
Capitalized research and development 63,234 40,253
Operating lease liabilities 24,012 25,134
Stock-based compensation 9,113 9,072
Tax credits 1,148 1,148
Other 1,170 1,918
Gross deferred tax assets $ 267,396 $ 267,709
Valuation allowance ( 231,661 ) ( 230,205 )
Total deferred tax assets $ 35,735 $ 37,504
Deferred tax liabilities:
Intangible assets $ — $ —
Operating lease ROU assets ( 11,307 ) ( 20,159 )
Convertible senior notes — —
Deferred contract acquisition and fulfillment costs ( 24,251 ) ( 22,664 )
Other ( 65 ) ( 55 )
Total deferred tax liabilities $ ( 35,623 ) $ ( 42,878 )
Net deferred tax liabilities $ 112 $ ( 5,374 )
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 expenses and a 15-year period for foreign expenses. We have included the impact of this provision, which results in
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additional deferred tax assets of approximately $ 63.2 million and $ 37.1 million as of December 31, 2023 and 2022, respectively.
As of December 31, 2023, we have evaluated the need for a valuation allowance on our deferred tax assets. In making this determination, management considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The valuation allowance increased by $ 1.5 million for the year ended December 31, 2023. Due to our history of generating losses, we continue to record a valuation allowance against our net deferred tax assets in the United States and U.K. In addition to the United States, we have recognized valuation allowance against a net deferred tax asset in Israel. Based on our assessment of future profitability in Ireland, we have released a portion of valuation allowance in respect of our deferred tax assets.
As of December 31, 2023, we had federal and state net operating loss (“NOL”) carryforwards in the United States of $ 346.5 million and $ 293.5 million, respectively. Of these amounts, $ 332.7 million of federal and a portion of state NOLs can be carried forward indefinitely. The remaining NOLs expire at various dates beginning in 2024. We had foreign NOL carryforwards of $ 241.6 million that can be carried forward indefinitely. We also had federal, state and foreign research and development credit carryforwards of $ 7.2 million, $ 3.1 million and $ 3.8 million as of December 31, 2023, respectively. These credit carryforwards expire at various dates beginning in 2024.
As of December 31, 2023, our ability to utilize NOLs remains limited under IRC Sections 382 and 383 due to an ownership change we experienced in January 2018. We will not be precluded from realizing the NOL 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 are currently under tax examination in the state of Massachusetts for tax years 2021 through 2022 and 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. Our reserve for unrecognized income tax benefits of $ 5.0 million remained unchanged from December 31, 2022. We recorded $ 0.2 million of interest in 2023 related to uncertain tax positions. During the next twelve months, the Company does not expect any change to its uncertain tax positions other than the accrual of interest in the normal course of business.
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.
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(15) Net Loss Per Share
The following table summarizes the computation of basic and diluted net loss per share of our common stock for the years ended December 31, 2023 and 2022 :
Year Ended December 31,
2023 2022 2021
(in thousands, except share and per share data)
Numerator:
Net loss $ ( 149,260 ) $ ( 124,717 ) $ ( 146,334 )
Denominator:
Weighted-average common shares outstanding, basic and diluted 60,756,087 58,552,065 55,270,998
Net loss per share, basic and diluted $ ( 2.46 ) $ ( 2.13 ) $ ( 2.65 )
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 years ended December 31, 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 11, 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 December 31, 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:
Year Ended December 31,
2023 2022 2021
Options to purchase common stock 716,270 932,126 1,411,387
Unvested restricted stock units 2,983,020 3,001,443 2,778,877
Common stock issued in conjunction to acquisitions 115,051 74,627 273,473
Shares to be issued under ESPP 103,778 106,965 36,831
Convertible senior notes 11,183,611 9,572,955 9,573,087
Total 15,101,730 13,688,116 14,073,655
(16) Commitments and Contingencies
(a) Purchase Obligations
As of December 31, 2023, 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, 2023 (in thousands):
2024 $ 134,329
2025 41,493
2026 6,265
2027 3,613
2028 and thereafter —
Total $ 185,700
(b) Warranty
We provide limited product warranties. Historically, any payments made under these provisions have been immaterial.
(c) 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.
(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.
(17) 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 2023, 2022 and 2021, we made discretionary contributions of $ 4.3 million, $ 4.3 million and $ 3.6 million, respectively, to the plan.
(18) 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,
2023 2022 2021
(in thousands)
United States $ 579,025 $ 515,894 $ 414,856
Other 198,682 169,189 120,548
Total $ 777,707 $ 685,083 $ 535,404
Property and equipment, net by geographic area is presented in the table below:
As of December 31, 2023 As of December 31, 2022
(in thousands)
United States $ 27,609 $ 41,570
Other 12,033 16,321
Total $ 39,642 $ 57,891
(19) 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 16 %.
In 2023, we incurred $ 22.2 million of restructuring charges which were recorded within restructuring in the condensed consolidated statements of operations. In addition, we incurred $ 1.3 million of stock-based compensation expense related to acceleration of share-based awards.
As of December 31, 2023, the restructuring liability accrued but not paid totaled $ 3.8 million, which is included within accrued expenses in the condensed consolidated balance sheets. The execution of the Restructuring Plan was substantially complete as of December 31, 2023 and we expect the remaining restructuring liability to be paid by the end of the first quarter of 2024.
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.
In 2023, we permanently closed certain idle office spaces in Plano, Texas, Los Angeles, California and Toronto, Canada, which resulted in an impairment loss of $ 3.6 million. Refer to Note 12, Leases , for further details on the impairment of long-lived assets.
The following table presents the activity of the restructuring liability for the year ended December 31, 2023:
Restructuring Liability
(in thousands)
Balance at December 31, 2022 $ —
Charges 22,227
Payments ( 18,463 )
Balance at December 31, 2023 $ 3,764
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
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