Rapid7, Inc. 10-Q

Item 1. Financial Statements . RAPID7, INC. Condensed Consolidated Balance Sheets (Unaudited) (in thousands, except share and per share data) September 30, 2024 December 31, 2023 Assets Current assets: Cash and cash equivalents $ 222,571 $ 213,629 Short-term investments 221,122 169,544 Accounts receivable, net of allowance for credit losses of $ 1,591 and $ 951 at September 30, 2024 and December 31, 2023, respectively 141,891 164,862 Deferred contract acquisition and fulfillment costs, current portion 49,710 45,008 Prepaid expenses and other current assets 37,328 41,407 Total current assets 672,622 634,450 Long-term investments 60,382 56,171 Property and equipment, net 33,936 39,642 Operating lease right-of-use assets 50,756 54,693 Deferred contract acquisition and fulfillment costs, non-current portion 72,392 76,601 Goodwill 575,165 536,351 Intangible assets, net 90,748 94,546 Other assets 18,530 12,894 Total assets $ 1,574,531 $ 1,505,348 Liabilities and Stockholders’ Deficit Current liabilities: Accounts payable $ 6,005 $ 15,812 Accrued expenses and other current liabilities 82,319 85,025 Convertible senior notes, current portion, net 45,816 — Operating lease liabilities, current portion 15,849 13,452 Deferred revenue, current portion 423,640 455,503 Total current liabilities 573,629 569,792 Convertible senior notes non-current portion, net 887,362 929,996 Operating lease liabilities, non-current portion 72,555 81,130 Deferred revenue, non-current portion 28,239 32,577 Other long-term liabilities 19,050 10,032 Total liabilities $ 1,580,835 $ 1,623,527 Stockholders’ deficit: Preferred stock, $ 0.01 par value per share; 100,000,000 shares authorized at September 30, 2024 and December 31, 2023; 0 shares issued and outstanding at September 30, 2024 and December 31, 2023 $ — $ — Common stock, $ 0.01 par value per share; 100,000,000 shares authorized at September 30, 2024 and December 31, 2023; 63,747,524 and 62,283,630 shares issued at September 30, 2024 and December 31, 2023, respectively; 63,177,945 and 61,714,051 shares outstanding at September 30, 2024 and December 31, 2023, respectively 632 617 Treasury stock, at cost, 569,579 shares at September 30, 2024 and December 31, 2023 ( 4,765 ) ( 4,765 ) Additional paid-in-capital 978,898 894,630 Accumulated other comprehensive income 1,929 1,344 Accumulated deficit ( 982,998 ) ( 1,010,005 ) Total stockholders’ deficit ( 6,304 ) ( 118,179 ) Total liabilities and stockholders’ deficit $ 1,574,531 $ 1,505,348 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 1 Table of Contents RAPID7, INC. Condensed Consolidated Statements of Operations (Unaudited) (in thousands, except share and per share data) Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Revenue: Product subscriptions $ 205,593 $ 189,876 $ 602,578 $ 545,349 Professional services 9,061 8,967 25,168 27,090 Total revenue 214,654 198,843 627,746 572,439 Cost of revenue: Product subscriptions 56,653 51,261 166,290 150,597 Professional services 6,364 6,569 18,478 21,396 Total cost of revenue 63,017 57,830 184,768 171,993 Total gross profit 151,637 141,013 442,978 400,446 Operating expenses: Research and development 44,565 39,940 125,611 137,048 Sales and marketing 74,521 75,699 225,121 239,322 General and administrative 18,590 17,866 60,837 64,961 Impairment of long-lived assets — 3,553 — 30,784 Restructuring — 19,996 — 19,996 Total operating expenses 137,676 157,054 411,569 492,111 Income (loss) from operations 13,961 ( 16,041 ) 31,409 ( 91,665 ) Other income (expense), net: Interest income 5,571 2,545 15,512 6,000 Interest expense ( 2,837 ) ( 56,515 ) ( 8,180 ) ( 62,005 ) Other income (expense), net 2,811 ( 4,518 ) 681 ( 18,093 ) Income (loss) before income taxes 19,506 ( 74,529 ) 39,422 ( 165,763 ) Provision for income taxes 2,952 2,082 12,415 3,545 Net income (loss) $ 16,554 $ ( 76,611 ) $ 27,007 $ ( 169,308 ) Net income (loss) per share, basic $ 0.26 $ ( 1.25 ) $ 0.43 $ ( 2.80 ) Net income (loss) per share, diluted $ 0.22 $ ( 1.25 ) $ 0.36 $ ( 2.80 ) Weighted-average common shares outstanding, basic 62,898,078 61,065,157 62,389,482 60,506,082 Weighted-average common shares outstanding, diluted 74,537,085 61,065,157 74,225,110 60,506,082 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 2 Table of Contents RAPID7, INC. Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) (in thousands) Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Net income (loss) $ 16,554 $ ( 76,611 ) $ 27,007 $ ( 169,308 ) Other comprehensive income (loss): Change in fair value of cash flow hedges 1,840 ( 1,120 ) 882 ( 481 ) Adjustment for net (gains)/losses realized on cash flow hedges and included in net income (loss), net of taxes ( 183 ) ( 49 ) ( 656 ) 531 Total change in unrealized gains (losses) on cash flow hedges 1,657 ( 1,169 ) 226 50 Change in unrealized gains on investments 1,123 97 359 539 Total other comprehensive income (loss) 2,780 ( 1,072 ) 585 589 Comprehensive income (loss) $ 19,334 $ ( 77,683 ) $ 27,592 $ ( 168,719 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 Table of Contents RAPID7, INC. Condensed Consolidated Statements of Changes in Stockholders' Deficit (Unaudited) Three Months Ended September 30, 2024 and 2023 (in thousands) Common stock Treasury stock Additional paid-in-capital Accumulated other comprehensive loss Accumulated deficit Total stockholders’ deficit Shares Amount Shares Amount Balance, June 30, 2024 62,702 $ 628 570 $ ( 4,765 ) $ 951,620 $ ( 851 ) $ ( 999,552 ) $ ( 52,920 ) Stock-based compensation expense — — — — 23,739 — — 23,739 Issuance of common stock under employee stock purchase plan 144 1 4,200 4,201 Vesting of restricted stock units 341 3 — — ( 3 ) — — — Shares withheld for employee taxes ( 21 ) — — — ( 794 ) — — ( 794 ) Issuance of common stock upon exercise of stock options 11 — — — 136 — — 136 Other comprehensive loss — — — — — 2,780 — 2,780 Net income — — — — — — 16,554 16,554 Balance, September 30, 2024 63,177 $ 632 570 $ ( 4,765 ) $ 978,898 $ 1,929 $ ( 982,998 ) $ ( 6,304 ) Common stock Treasury stock Additional paid-in-capital Accumulated other comprehensive loss Accumulated deficit Total stockholders’ deficit Shares Amount Shares Amount Balance, June 30, 2023 60,940 $ 609 570 $ ( 4,765 ) $ 846,326 $ 250 $ ( 953,442 ) $ ( 111,022 ) Stock-based compensation expense — — — — 23,719 — — 23,719 Issuance of common stock under employee stock purchase plan 152 2 — — 5,147 — — 5,149 Vesting of restricted stock units 338 3 — — ( 3 ) — — — Shares withheld for employee taxes ( 29 ) — — — ( 1,421 ) — — ( 1,421 ) Issuance of common stock upon exercise of stock options 21 — — — 302 — — 302 Purchase of capped calls related to convertible senior notes — — — — ( 36,570 ) — — ( 36,570 ) Repurchase and inducement of convertible senior notes — — — — 35,881 — — 35,881 Other comprehensive gain — — — — — ( 1,072 ) — ( 1,072 ) Net loss — — — — — — ( 76,611 ) ( 76,611 ) Balance, September 30, 2023 61,422 $ 614 570 $ ( 4,765 ) $ 873,381 $ ( 822 ) $ ( 1,030,053 ) $ ( 161,645 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 Table of Contents RAPID7, INC. Condensed Consolidated Statements of Changes in Stockholders' Deficit (Unaudited) Nine Months Ended September 30, 2024 and 2023 (in thousands) Common stock Treasury stock Additional paid-in-capital Accumulated other comprehensive loss Accumulated deficit Total stockholders’ deficit Shares Amount Shares Amount Balance, December 31, 2023 61,714 $ 617 570 $ ( 4,765 ) $ 894,630 $ 1,344 $ ( 1,010,005 ) $ ( 118,179 ) Stock-based compensation expense — — — — 77,381 — — 77,381 Issuance of common stock under employee stock purchase plan 292 3 — — 9,243 — — 9,246 Vesting of restricted stock units 1,123 11 — — ( 11 ) — — — Shares withheld for employee taxes ( 83 ) — — — ( 3,883 ) — — ( 3,883 ) Issuance of common stock upon exercise of stock options 131 1 — — 1,538 — — 1,539 Other comprehensive loss — — — — — 585 — 585 Net income — — — — — — 27,007 27,007 Balance, September 30, 2024 63,177 $ 632 570 $ ( 4,765 ) $ 978,898 $ 1,929 $ ( 982,998 ) $ ( 6,304 ) Common stock Treasury stock Additional paid-in-capital Accumulated other comprehensive loss Accumulated deficit Total stockholders’ deficit Shares Amount Shares Amount Balance, December 31, 2022 59,720 $ 597 487 $ ( 4,764 ) $ 746,249 $ ( 1,411 ) $ ( 860,745 ) $ ( 120,074 ) Stock-based compensation expense — — — — 84,513 — — 84,513 Issuance of common stock under employee stock purchase plan 330 4 — — 11,319 — — 11,323 Vesting of restricted stock units 1,139 10 — — ( 10 ) — — — Shares withheld for employee taxes ( 82 ) — — — ( 4,012 ) — — ( 4,012 ) Issuance of common stock upon exercise of stock options 208 2 — — 2,982 — — 2,984 Issuance of common stock in relation to an acquisition 107 1 — — ( 1 ) — — — Repurchase of common stock in relation to acquisition — — 83 ( 1 ) 1 — — — Reclassification of 2023 capped calls from equity to derivative asset — — — — 33,029 — — 33,029 Purchase of capped calls related to convertible senior notes — — — — ( 36,570 ) — — ( 36,570 ) Repurchase and inducement of convertible senior notes — — — — 35,881 — — 35,881 Other comprehensive gain — — — — — 589 — 589 Net loss — — — — — — ( 169,308 ) ( 169,308 ) Balance, September 30, 2023 61,422 $ 614 570 $ ( 4,765 ) $ 873,381 $ ( 822 ) $ ( 1,030,053 ) $ ( 161,645 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 Table of Contents RAPID7, INC. Condensed Consolidated Statements of Cash Flows (Unaudited) (in thousands) Nine Months Ended September 30, 2024 2023 Cash flows from operating activities: Net income (loss) $ 27,007 $ ( 169,308 ) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 33,457 34,528 Amortization of debt issuance costs 3,325 3,061 Stock-based compensation expense 76,896 84,836 Impairment of long-lived assets — 30,784 Change in fair value of derivative assets — 15,511 Deferred income taxes 1,840 — Induced conversion expense — 53,889 Other ( 4,534 ) 5,626 Changes in assets and liabilities: Accounts receivable 22,432 12,428 Deferred contract acquisition and fulfillment costs ( 493 ) ( 9,488 ) Prepaid expenses and other assets 6,062 5,433 Accounts payable ( 10,450 ) ( 1,255 ) Accrued expenses ( 17,413 ) ( 17,968 ) Deferred revenue ( 37,112 ) ( 6,367 ) Other liabilities 6,880 ( 898 ) Net cash provided by operating activities 107,897 40,812 Cash flows from investing activities: Business acquisitions, net of cash acquired ( 37,198 ) ( 34,841 ) Purchases of property and equipment ( 2,242 ) ( 3,999 ) Capitalization of internal-use software ( 10,414 ) ( 13,033 ) Purchases of investments ( 242,494 ) ( 194,013 ) Sales and maturities of investments 192,500 100,700 Other investing activities 360 — Net cash used in investing activities ( 99,488 ) ( 145,186 ) Cash flows from financing activities: Proceeds from issuance of convertible senior notes, net of issuance costs paid of $ 7,200 — 292,800 Purchase of capped calls related to convertible senior notes — ( 36,570 ) Payments for repurchase of convertible senior notes — ( 199,998 ) Payments related to business acquisitions — ( 2,250 ) Proceeds from capped call settlement — 17,518 Taxes paid related to net share settlement of equity awards ( 3,883 ) ( 4,012 ) Proceeds from employee stock purchase plan 9,246 11,323 Proceeds from stock option exercises 1,436 2,984 Net cash provided by financing activities 6,799 81,795 Effect of exchange rate changes on cash ,cash equivalents and restricted cash 770 ( 2,010 ) Net increase (decrease) in cash, cash equivalents and restricted cash 15,978 ( 24,589 ) Cash, cash equivalents and restricted cash, beginning of period 214,130 207,804 Cash, cash equivalents and restricted cash, end of period $ 230,108 $ 183,215 Supplemental cash flow information: Cash paid for interest on convertible senior notes $ 5,840 $ 1,165 Cash paid for income taxes, net of refunds $ 7,073 $ 4,087 Reconciliation of cash, cash equivalents and restricted cash: Cash and cash equivalents $ 222,571 $ 182,727 Restricted cash included in other assets and prepaid expenses and other current assets 7,537 488 Total cash, cash equivalents and restricted cash $ 230,108 $ 183,215 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 Table of Contents RAPID7, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1. Description of Business, Basis of Presentation and Consolidation and Significant Accounting Policies Description of Business Rapid7, Inc. and subsidiaries (“we,” “us” or “our”) are advancing security with visibility, analytics, and automation delivered through our 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. Basis of Presentation and Consolidation The accompanying unaudited condensed consolidated financial statements have been prepared by us in accordance with accounting principles generally accepted in the United States of America (“GAAP”), as well as pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), regarding interim financial reporting. Accordingly, certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on February 26, 2024. The condensed consolidated financial statements include our results of operations and those of our wholly-owned subsidiaries and reflect all adjustments (consisting solely of normal, recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods presented. All intercompany transactions and balances have been eliminated in consolidation. The results of operations for the three and nine months ended September 30, 2024 are not necessarily indicative of the results to be expected for any future period or the entire fiscal year. Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The management estimates include, but are not limited to the determination of standalone selling prices in revenue transactions with multiple performance obligations, the estimated period of benefit for deferred contract acquisition costs, the useful lives and recoverability of long-lived assets, the valuation for credit losses, the valuation of stock-based compensation, the fair value of assets acquired and liabilities assumed in business combinations, the valuation of contingent consideration, the incremental borrowing rate for operating leases and the valuation for deferred tax assets. We base our estimates on historical experience and on various other assumptions that we believe are reasonable. Actual results could differ from those estimates. Significant Accounting Policies Our significant accounting policies are described in Note 2, Summary of Significant Accounting Policies , to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2023. Except for the inclusion of a description of contingent consideration within our Business Combinations policy, as noted below, there have been no changes to the significant accounting policies included in our Annual Report on Form 10-K for the year ended December 31, 2023. 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. 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. 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. 7 Table of Contents Contingent consideration arising from business combinations is recorded at fair value as a liability on the acquisition date and remeasured at each reporting date. Changes in fair value are recorded in general and administrative expense in the consolidated statements of operations. Determining the fair value of the contingent consideration each period requires management to make assumptions and judgments. These estimates involve inherent uncertainties, and if different assumptions had been used, the fair value of contingent consideration could have been materially different from the amounts recorded. Acquisition-related transaction costs are expensed as incurred. Restricted Cash As of September 30, 2024, we had $ 7.5 million of restricted cash recorded on our condensed consolidated balance sheet in prepaid expenses and other current assets and other assets in letters of credit outstanding as collateral for certain office space leases. Recent Accounting Pronouncements Accounting Pronouncements Not Yet Effective In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 FASB issued 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. Note 2. Revenue from Contracts with Customers 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. Product Subscriptions Product subscriptions consists primarily of revenue from our cloud-based subscription, managed services offerings, term software licenses, content subscriptions and maintenance and support associated with our software licenses. • We generate cloud-based subscription revenue primarily from sales of subscriptions to access our cloud platform, together with related support services to our customers. These arrangements do not provide the customer with the right to take possession of our software operating on our cloud platform at any time. Instead, customers are granted continuous access to our cloud platform over the contractual period. Revenue is recognized over time on a ratable basis over the contract term beginning on the date that our service is made available to the customer. Our cloud-based subscription contracts generally have annual or multi-year contractual terms which are billed in advance of the annual subscription period and are non-cancellable. • Managed services offerings consist of fees generated when we operate our software and provide our capabilities on behalf of our customers. Revenue is recognized on a ratable basis over the contract term beginning on the date that our service is made available to the customer. Our managed services offerings generally have annual or multi-year contractual terms which are billed in advance of the annual subscription period and are non-cancellable. • For our term software licenses where the utility to the customer is dependent on the continued delivery of content subscriptions, we recognize the license revenue over the contractual term of the content subscription. 8 Table of Contents • 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. Professional Services All of our professional services are considered distinct performance obligations when sold stand alone or with other products. The majority of our professional services contracts have terms of one year or less. For the majority of these contracts, revenue is recognized over time based upon the proportion of work performed to date. Contract Balances Contract liabilities consist of deferred revenue and include payments received in advance of performance under the contract. Such amounts are recognized as revenue over the contractual period consistent with the above methodology. For the three months ended September 30, 2024 and 2023, we recognized revenue of $ 184.6 million and $ 174.3 million, respectively, and for the nine months ended September 30, 2024 and 2023, we recognized $ 398.3 million and $ 366.5 million, respectively, that was included in the corresponding contract liability balance at the beginning of the periods presented. Deferred revenue that will be realized during the succeeding 12-month period is recorded as current, and the remaining deferred revenue is recorded as non-current. We receive payments from customers based upon contractual billing schedules. Accounts receivable are recorded when the right to consideration becomes unconditional. Unbilled receivables include amounts related to our contractual right to consideration for both completed and partially completed performance obligations that have not been invoiced. If the right to consideration is based on satisfaction of another performance obligation in the contract other than the passage of time, we record a contract asset. As of September 30, 2024 and December 31, 2023, unbilled receivables of $ 3.6 million and $ 2.0 million, respectively, are included in prepaid expenses and other current assets in our consolidated balance sheet. As of September 30, 2024 and December 31, 2023, we had no contract assets recorded on our condensed consolidated balance sheet. Transaction Price Allocated to the Remaining Performance Obligations The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied as of September 30, 2024. The estimated revenues do not include unexercised contract renewals. Next Twelve Months Thereafter (in thousands) Product subscriptions $ 556,284 $ 268,636 Professional services 16,785 6,410 Total $ 573,069 $ 275,046 Note 3. Business Combinations Noetic Cyber, Inc. On July 3, 2024, we acquired Noetic Cyber, Inc, (“Noetic”) a provider of cyber asset attack surface management, to extend Rapid7’s security operations platform by unlocking more accessible and accurate asset inventory in order to provide customers more comprehensive visibility to their attack surface, for a purchase price with an aggregate fair value of $ 51.0 million. The purchase consideration consisted of $ 38.6 million in cash paid at closing, $ 12.1 million of contingent consideration and $ 0.4 million of deferred cash payments. The deferred cash payments will be held by Rapid7 to satisfy certain post-closing purchase price adjustments. Subject to the terms of the merger agreement, we are required to pay consideration of up to $ 20.0 million to Noetic shareholders based on the achievement of certain performance targets (the “Earnout Consideration”), measured annually upon the first, second and third anniversaries of the closing date of the transaction (the “Earnout Period”). If all performance targets are achieved, approximately $ 13.1 million of Earnout Consideration will be paid in cash, and the remaining $ 6.9 million of Earnout Consideration will be issued to certain employees in the form of shares of our common stock subject to continued employment requirements over the Earnout Period. The approximate $ 6.9 million of the Earnout Consideration that is subject to continued employment will be recognized as stock-based compensation expense over the required employment period. The fair value of the portion of the Earnout Consideration that is not subject to continued employment is included as part of purchase consideration at the date of the acquisition. As of July 3, 2024, we determined the fair value of the contingent purchase consideration to be $ 12.1 million. The fair value of the contingent purchase consideration will be reassessed each reporting 9 Table of Contents period and any required adjustment will be recorded to general and administrative expense. As of September 30, 2024 , the fair value of the contingent purchase consideration was $ 12.2 million of which $ 6.8 million was recorded within accrued expenses and other current liabilities and $ 5.4 million was recorded within other liabilities in our condensed consolidated balance sheet. In the three and nine months ended September 30, 2024 , we recorded $ 0.2 million of accretion expense related to the contingent purchase consideration to general and administrative expense. In connection with the acquisition, we expect to issue an aggregate value of $ 2.3 million of our common stock to two key employees of Noetic in three installments over a 36 -month period following the closing date of the transaction, subject to continued employment requirements (the “Key Employee Consideration”) and therefore will be recognized as stock-based compensation expense over the required employment period. The number of shares to be issued at each issuance date for both the Earnout Consideration and the Key Employee Consideration shares will be determined by dividing the aggregate value by the fair market value of our common stock on the issuance date, and therefore will be liability-classified until the final issuance dates. In the three and nine months ended September 30, 2024 , we recognized stock-based compensation expense related to such shares in the amount of $ 0.7 million. The following table summarizes the preliminary allocation of purchase price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date (in thousands): Consideration: Cash $ 38,597 Deferred cash consideration 397 Contingent consideration 12,055 Fair value of total consideration transferred $ 51,049 Recognized amount of identifiable assets acquired and liabilities assumed: Cash and cash equivalents $ 1,296 Accounts receivable 510 Prepaid and other current assets 102 Property and equipment, net 19 Accrued expenses and other current liabilities ( 220 ) Deferred revenue ( 910 ) Other long-term liabilities ( 62 ) Intangible asset 11,500 Total identifiable net assets assumed $ 12,235 Goodwill 38,814 Total purchase price allocation $ 51,049 We identified developed technology as the sole acquired intangible asset. The estimated fair value of the developed technology intangible asset was $ 11.5 million which was based on a valuation using a probability weighted expected return model ( “ PWERM ” ). The estimated useful life of the developed technology is 7 years. The excess of the purchase price over the tangible assets acquired, identifiable intangible asset acquired and assumed liabilities was recorded as goodwill. We believe that the amount of goodwill reflects the expected synergistic benefits of being able to leverage the integration of the technology acquired with our existing product offerings and being able to successfully market and sell these new features to our customer base. The goodwill was allocated to our one reporting unit. The acquired goodwill and intangible asset were not deductible for tax purposes. In the three and nine months ended September 30, 2024, we recorded $ 0.1 million and $ 0.4 million, respectively, of acquisition-related transaction costs related to the acquisition of Noetic to general and administrative expense. Our revenue and net loss attributable to the Noetic business for the three and nine months ended September 30, 2024 was not material. 10 Table of Contents 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 million paid in cash at closing and a $( 0.4 ) million receivable for purchase price adjustments. 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 $ 13.9 million, $ 20.7 million and $ 12.8 million, respectively. The goodwill was allocated to our one reporting unit. The acquired goodwill and intangible assets were not deductible for tax purposes. In the first quarter of 2024, we sold acquired intellectual property through a non-cash intercompany transaction, which for the three and nine months ended September 30, 2024 resulted in $ 4.6 million of current tax expense and $ 1.8 million o f deferred tax expense in Israel. Note 4. Investments Our investments, which are all classified as available-for-sale, consisted of the following: As of September 30, 2024 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (in thousands) Description: U.S government agencies $ 280,757 $ 787 $ ( 40 ) $ 281,504 Total $ 280,757 $ 787 $ ( 40 ) $ 281,504 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 September 30, 2024, our available-for-sale investments had maturities ranging fro m 1 to 20 months. As of December 31, 2023, our available-for-sale investments had maturities ranging from 1 to 18 months. For all of our investments for which the amortized cost basis was greater than the fair value at September 30, 2024 and December 31, 2023, we have concluded that there is no plan to sell the security nor is it more likely than not that we would be required to sell the security before its anticipated maturity. In making the determination as to whether the unrealized loss is other-than-temporary, we considered the length of time and extent the investment has been in an unrealized loss position, the financial condition and near-term prospects of the issuers, the issuers’ credit rating and the time to maturity. Note 5. Fair Value Measurements We measure certain financial assets and liabilities at fair value. Fair value is determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as determined by either the principal market or the most advantageous market. Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy, as follows: • Level 1 : Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. • Level 2 : Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities. • Level 3 : Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the asset or liability. 11 Table of Contents We consider an active market to be one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis, and consider an inactive market to be one in which there are infrequent or few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. The following table presents our financial assets and liabilities measured and recorded at fair value on a recurring basis using the above input categories: As of September 30, 2024 Level 1 Level 2 Level 3 Total (in thousands) Description: Assets: U.S. government agencies $ 281,504 $ — $ — $ 281,504 Foreign currency forward contracts designated as cash flow hedges (prepaid expenses and other current assets and other assets) — 1,559 — 1,559 Total assets $ 281,504 $ 1,559 $ — $ 283,063 Liabilities: Contingent consideration (other current liabilities and other long-term liabilities) — — 12,238 12,238 Foreign currency forward contracts designated as cash flow hedges (other current liabilities and other long-term liabilities) — 66 — 66 Total liabilities $ — $ 66 $ 12,238 $ 12,304 As of December 31, 2023 Level 1 Level 2 Level 3 Total (in thousands) Description: Assets: 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 $ 223,222 $ 3,815 $ — $ 227,037 Liabilities: Foreign currency forward contracts designated as cash flow hedges (other current liabilities) — 55 — 55 Total liabilities $ — $ 55 $ — $ 55 Cash and cash equivalents are excluded from the table above as carrying amounts reported in our condensed consolidated balance sheet equal or approximate fair value. As of September 30, 2024, the fair value of our 2.25 %, 0.25 % and 1.25 % convertible senior notes due 2025, 2027 and 2029, as further described in Note 10, Debt , was $ 45.1 million, $ 547.1 million and $ 281.9 million, respectively, based upon quoted market prices. We consider the fair value of the Notes (as defined in Note 10, Debt) to be a Level 2 measurement due to limited trading activity of the Notes. As of September 30, 2024, the fair value of our contingent consideration, as further described in Note 3, Business Combinations, was $ 12.2 million and is classified as a Level 3 measurement based on inputs not observable in the market. 12 Table of Contents Note 6. Property and Equipment Property and equipment are recorded at cost and consist of the following: September 30, December 31, 2024 2023 (in thousands) Computer equipment and software $ 28,100 $ 26,442 Furniture and fixtures 10,954 10,850 Leasehold improvements 56,878 56,151 Total 95,932 93,443 Less accumulated depreciation ( 61,996 ) ( 53,801 ) Property and equipment, net $ 33,936 $ 39,642 Depreciation expense was $ 2.7 million and $ 3.3 million for the three months ended September 30, 2024 and 2023, respectively, and $ 8.4 million and $ 10.9 million for the nine months ended September 30, 2024 and 2023, respectively. Note 7. Goodwill and Intangibles Goodwill was $ 575.2 million and $ 536.4 million as of September 30, 2024 and December 31, 2023, respectively. The following table displays the changes in the gross carrying amount of goodwill: Amount (in thousands) Balance, December 31, 2023 $ 536,351 Noetic acquisition 38,814 Balance, September 30, 2024 $ 575,165 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 September 30, 2024 As of December 31, 2023 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 6.1 $ 146,855 $ ( 89,770 ) $ 57,085 $ 135,355 $ ( 77,031 ) $ 58,324 Customer relationships 4.5 12,000 ( 9,711 ) 2,289 12,000 ( 7,755 ) 4,245 Trade names 3.1 2,619 ( 2,514 ) 105 2,619 ( 2,379 ) 240 Total acquired intangible assets 161,474 ( 101,995 ) 59,479 149,974 ( 87,164 ) 62,810 Internal-use software 3.0 65,130 ( 33,861 ) 31,269 55,371 ( 23,635 ) 31,736 Total intangible assets $ 226,604 $ ( 135,856 ) $ 90,748 $ 205,345 $ ( 110,799 ) $ 94,546 Amortization expense was $ 8.5 million and $ 8.3 million for the three months ended September 30, 2024 and 2023, respectively, and $ 25.1 million and $ 23.6 million for the nine months ended September 30, 2024 and 2023, respectively. 13 Table of Contents Estimated future amortization expense of the acquired identifiable intangible assets and completed capitalized internal-use software costs as of September 30, 2024 was as follows (in thousands): 2024 (for the remaining three months) $ 8,429 2025 30,900 2026 21,149 2027 9,128 2028 3,243 2029 and thereafter 7,652 Total $ 80,501 The table above excludes the impact of $ 10.2 million of capitalized internal-use software costs for projects that have not been completed as of September 30, 2024, and therefore, all the costs associated with these projects have not been incurred. Note 8. Deferred Contract Acquisitions and Fulfillment Costs Deferred contract acquisition and fulfillment costs, which primarily consist of capitalized sales commissions, for the nine months ended September 30, 2024 and 2023 was as follows: Nine Months Ended September 30, 2024 2023 (in thousands) Beginning balance $ 121,609 $ 103,075 Capitalization of contract acquisition and fulfillment costs 39,850 39,904 Amortization of deferred contract acquisition and fulfillment costs ( 39,357 ) ( 30,416 ) Ending balance $ 122,102 $ 112,563 Note 9. 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 twenty months or less, and as of September 30, 2024 and December 31, 2023, outstanding forward contracts had a total notional value of $ 52.4 million and $ 49.5 million, respectively. The notional value represents the gross amount of foreign currency that will be bought or sold upon maturity of the forward contract. During the three and nine months ended September 30, 2024, all cash flow hedges were considered effective. Refer to Note 5, Fair Value Measurements , for the fair values of our outstanding derivative instruments. Note 10. Debt Convertible Senior Notes In May 2020, we issued $ 230.0 million aggregate principal amount of convertible senior notes due May 1, 2025 (the “2025 Notes”), in March 2021, we issued $ 600.0 million aggregate principal amount of convertible senior notes due March 15, 2027 (the “2027 Notes”), and in September 2023, we issued $ 300.0 million aggregate principal amount of convertible senior notes due March 15, 2029 (the “2029 Notes”) (collectively, the “Notes”). 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. Further details of the Notes are as follows: Issuance Maturity Date Interest Rate First Interest Payment Date Effective Interest Rate Semi-Annual Interest Payment Dates Initial Conversion Rate per $1,000 Principal Initial Conversion Price Number of Shares (in millions) 2025 Notes May 1, 2025 2.25 % November 1, 2020 2.88 % May 1 and November 1 16.3875 $ 61.02 0.8 2027 Notes March 15, 2027 0.25 % September 15, 2021 0.67 % March 15 and September 15 9.6734 $ 103.38 5.8 2029 Notes March 15, 2029 1.25 % March 15, 2024 1.69 % March 15 and September 15 15.4213 $ 64.85 4.6 The 2025 Notes, the 2027 Notes and the 2029 Notes are senior unsecured obligations, do not contain any financial covenants and are governed by indentures between the Company, as issuer, and U.S. Trust Company, Bank National Association, as 14 Table of Contents 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. For additional details on the terms of our Notes, see Note 11, Debt , to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2023. As of September 30, 2024, 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. Accounting for the Notes In accounting for the issuance of the Notes, the principal less debt issuance costs are recorded as debt on our condensed consolidated balance sheet. The debt issuance costs are amortized to interest expense using the effective interest method over the contractual term of the Notes. The net carrying amount of the Notes as of September 30, 2024 and December 31, 2023 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, 2023 $ 45,992 $ ( 404 ) $ 45,588 $ 600,000 $ ( 8,077 ) $ 591,923 $ 300,000 $ ( 7,515 ) $ 292,485 Amortization of debt issuance costs — 228 228 — 1,877 1,877 — 1,077 1,077 Balance at September 30, 2024 $ 45,992 $ ( 176 ) $ 45,816 $ 600,000 $ ( 6,200 ) $ 593,800 $ 300,000 $ ( 6,438 ) $ 293,562 Interest expense related to the Notes was as follows (in thousands): Three Months Ended September 30, 2024 2023 2025 Notes 2027 Notes 2029 Notes Total 2025 Notes 2027 Notes 2029 Notes Total Contractual interest expense $ 258 $ 375 $ 938 $ 1,571 $ 948 $ 375 $ 229 $ 1,552 Amortization of debt issuance costs 79 634 455 1,168 289 631 73 $ 993 Total interest expense $ 337 $ 1,009 $ 1,393 $ 2,739 $ 1,237 $ 1,006 $ 302 $ 2,545 Nine Months Ended September 30, 2024 2023 2025 Notes 2027 Notes 2029 Notes Total 2025 Notes 2027 Notes 2029 Notes Total Contractual interest expense $ 776 $ 1,125 $ 2,812 $ 4,713 $ 3,536 $ 1,125 $ 229 $ 4,890 Amortization of debt issuance costs 228 1,877 1,077 3,182 990 1,855 73 2,918 Total interest expense $ 1,004 $ 3,002 $ 3,889 $ 7,895 $ 4,526 $ 2,980 $ 302 $ 7,808 15 Table of Contents Capped Calls In connection with the offering of the 2025 Notes, the 2027 Notes and the 2029 Notes, we entered into privately negotiated capped call transactions with certain counterparties (the “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 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 $ 61.02 $ 103.38 $ 64.85 Cap price, subject to certain adjustments $ 93.88 $ 159.04 $ 97.88 Total premium paid (in thousands) $ 27,255 $ 76,020 $ 36,570 Expiration dates March 4, 2025 - April 29, 2025 January 1, 2027 - March 11, 2027 February 13, 2029 - March 13, 2029 For additional details on the terms of our Capped Calls, see Note 11, Debt , to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2023. For accounting purposes, the 2025 Capped Calls, the 2027 Capped Calls and the 2029 Capped Calls are separate transactions, and not part of the terms of the 2025 Notes, the 2027 Notes and the 2029 Notes. The 2025 Capped Calls, 2027 Capped Calls and 2029 Capped Calls are recorded in stockholders' equity and are not accounted for as derivatives. Credit Agreement In April 2020, we entered into a Credit and Security Agreement (the Credit Agreement), with KeyBank National Association (as amended, in December 2021) that 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 condensed consolidated balance sheet and are amortized on a straight-line basis over the contractual term of the arrangement. The commitment fee of 0.2 % per annum on the unused portion of the credit facility is expensed as incurred and included within interest expense on the condensed consolidated statement of operations. The Credit Agreement contains certain financial covenants including a requirement that we maintain specified minimum recurring revenue and liquidity amounts. The borrowings under the Credit Agreement bear interest, at our option, at a rate equal to either (i) term SOFR plus a credit spread adjustment of 0.10 % per annum plus a margin of 2.50 % per annum or (ii) the alternate base rate (subject to a floor), plus an applicable margin equal to 0 % per annum. As of September 30, 2024, we did not have any outstanding borrowings under the Credit Agreement. 16 Table of Contents Note 11. Stock-Based Compensation ( a) General 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 condensed consolidated statements of operations as follows: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 (in thousands) Stock-based compensation expense: Cost of revenue $ 3,001 $ 2,527 $ 8,707 $ 8,348 Research and development 9,535 8,436 25,698 30,575 Sales and marketing 6,823 7,106 21,182 23,087 General and administrative 5,235 5,699 21,309 22,826 Total stock-based compensation expense $ 24,594 $ 23,768 $ 76,896 $ 84,836 We recognize compensation cost of all awards on a straight-line basis over the applicable vesting period, which is generally three to four years . Our Compensation Committee adopted and approved the performance goals, targets and payout formulas for our 2024 and 2023 bonus plans, including permitting our executive officers and certain other employees the opportunity to receive payment of their earned bonuses in the form of common stock (in lieu of cash). During the three months ended September 30, 2024 and 2023, we recognized stock-based compensation expense related to such bonuses in the amount of $ 0.2 million and $ 50 thousand, respectively, and during the nine months ended September 30, 2024 and 2023, we recognized stock-based compensation expense in the amount of $ 0.5 million a nd $ 1.1 million, respectively, based on the probable expected performance against the pre-established corporate financial objectives as of September 30, 2024 and 2023. 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 the nine months ended September 30, 2024 was as follows: Shares Weighted- Average Grant Date Fair Value Unvested balance as of December 31, 2023 2,714,426 $ 61.60 Granted 2,338,438 $ 52.37 Vested ( 1,122,737 ) $ 61.36 Forfeited ( 824,443 ) $ 59.99 Unvested balance as of September 30, 2024 3,105,684 $ 56.24 As of September 30, 2024, the unrecognized compensation expense related to our unvested RSUs and PSUs was $ 152.0 million. This unrecognized compensation expense will be recognized over an estimated weighted-average amortization period of 2.0 years. In January 2024, our Com pensation Committee awarded 279,570 PSUs that required the achievement of net annualized recurring revenue (“Net ARR”) and Adjusted EBITDA targets for the 2024 full-year to earn any payout. Net ARR is defined as the change in the annual value of all recurring revenue related to contracts in place at year end. 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 net ARR or Adjusted EBITDA 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 17 Table of Contents each such date. In the three and nine months ended September 30, 2024, we recorded $ 0.4 million and $ 2.2 million, respectively, of stock-based compensation expense related to these PSUs based on estimated achievement of the performance criteria. In July 2024, our Compensation Committee awarded 19,605 PSUs that required the achievement of certain milestones related to the integration of Noetic. The PSUs have three measurement and vesting dates through September 15, 2025, subject to the participant's continuous service as of each such date. If achievement of the milestones are not met, no PSUs will be earned. In the three and nine months ended September 30, 2024, we recorded $ 0.3 million of stock-based compensation expense related to these PSUs based on estimated achievement of the performance criteria. (c) Stock Options Stock option activity during the nine months ended September 30, 2024 was as follows: Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life (in years) Aggregate Intrinsic Value (in thousands) Outstanding as of December 31, 2023 716,270 $ 12.26 1.97 $ 32,115 Granted — — Exercised ( 131,742 ) $ 11.67 $ 4,981 Forfeited/cancelled ( 450 ) $ 7.73 Outstanding as of September 30, 2024 584,078 $ 12.40 1.45 $ 16,056 Vested and exercisable as of September 30, 2024 584,078 $ 12.40 1.45 $ 16,056 (d) Employee Stock Purchase Plan Under the Rapid7, Inc. 2015 Employee Stock Purchase Plan (“ESPP”), employees may set aside up to 15 % of their gross earnings, on an after-tax basis, to purchase our common stock at a discounted price, which is calculated at 85 % of the lesser of: (i) the market value of our common stock at the beginning of each offering period and (ii) the market value of our common stock on the applicable purchase date. On March 15, 2024, we issued 147,445 shares of common stock to employees, with a purchase price of either $ 33.78 or $ 39.78 per share, for aggregate proceeds of $ 5.0 million. On September 13, 2024, we issued 144,445 shares of common stock to employees, with a purchase price of $ 29.08 per share, for aggregate proceeds of $ 4.2 million. Note 12. Net Income (Loss) per Share The following table summarizes the computation of basic and diluted net income (loss) per share of our common stock for the three months September 30, 2024 and 2023: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 (in thousands, except share and per share data) Numerator: Net income (loss) $ 16,554 $ ( 76,611 ) $ 27,007 $ ( 169,308 ) Denominator: Weighted-average common shares outstanding, basic 62,898,078 61,065,157 62,389,482 60,506,082 Weighted-average common shares outstanding, diluted 74,537,085 61,065,157 74,225,110 60,506,082 Net income (loss) per share, basic $ 0.26 $ ( 1.25 ) $ 0.43 $ ( 2.80 ) Net income (loss) per share, diluted $ 0.22 $ ( 1.25 ) $ 0.36 ( 2.80 ) We intend to settle any conversion of our 2025 Notes, 2027 Notes and 2029 Notes in cash, shares, or a combination thereof. The dilutive impact of the Notes for our calculation of diluted net income (loss) per share is considered using the if-converted method. For the three and nine months ended September 30, 2024 and 2023, the shares underlying the Notes were not considered in the calculation of diluted net income (loss) per share as the effect would have been anti-dilutive. 18 Table of Contents In connection with the issuance of the 2025 Notes, the 2027 Notes and the 2029 Notes, we entered into the 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 of September 30, 2024 and 2023, 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 condensed 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: Nine Months Ended September 30, 2024 2023 Options to purchase common stock 584,078 723,632 Unvested restricted stock units 3,105,684 3,126,817 Common stock issued in conjunction to acquisitions 36,923 115,041 Shares to be issued under ESPP 18,332 20,802 Convertible senior notes 11,183,611 11,183,611 Total 14,928,628 15,169,903 Note 13. Commitments and Contingencies (a) Warranty We provide limited product warranties. Historically, any payments made under these provisions have been immaterial. (b) Litigation and Claims From time to time, we may be a party to litigation or subject to claims incident to the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not have a material adverse effect on our business. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors. (c) Indemnification Obligations 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. (d) Income Taxes From time to time, we may receive income tax assessments from taxing authorities asserting additional tax liabilities owed by the Company. During the quarter ended June 30, 2024, we received an initial assessment from the Israel Tax Authority (“ITA”) of approximately 324 million Israeli New Shekels (approximately $ 87 million, based upon the exchange rate between the Israeli New Shekel and the US Dollar as of September 30, 2024) related to fiscal year 2021. Based on our interpretation of the regulations and available case law, we believe that the tax positions we have taken on our filed tax return in Israel are sustainable and we intend to defend our position through all available means. As such, we have not recorded any impact of the ITA assessment in our condensed consolidated financial statements as of and for the three and nine months ended September 30, 2024. We are continuing to monitor developments related to 19 Table of Contents this matter and its impact on our existing income tax reserves for all open years. If we are unsuccessful in sustaining our tax position in this matter, our financial condition and results of operations would be adversely affected. Note 14. Segment Information and Information about Geographic Areas We operate in one segment. Our chief operating decision maker is our Chief Executive Officer, who makes operating decisions, assesses performance and allocates resources on a consolidated basis. Net revenues by geographic area presented based upon the location of the customer are as follows: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 (in thousands) North America $ 163,730 $ 155,190 $ 480,392 $ 448,753 Rest of world 50,924 43,653 147,354 123,686 Total $ 214,654 $ 198,843 $ 627,746 $ 572,439 Property and equipment, net by geographic area was as follows: As of September 30, 2024 As of December 31, 2023 (in thousands) North America $ 23,915 $ 27,609 Rest of world 10,021 12,033 Total $ 33,936 $ 39,642 Note 15. 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 %. During the first quarter of 2024, the execution of the Restructuring Plan was completed and we recorded $( 0.2 ) million of restructuring charges within general and administrative expense in the condensed consolidated statements of operations. Additionally, during the second quarter of 2024, the remaining payments were made, resulting in no remaining restructuring liability. 20 Table of Contents