10-Q 1 rp-20220331.htm 10-Q rp-20220331
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-37496
 
RAPID7, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 35-2423994
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)
120 Causeway Street 
Boston,MA02114
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (617247-1717
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each classTrading symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par value per shareRPDThe Nasdaq Global Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large Accelerated Filer
Accelerated Filer
Non-accelerated Filer
Small Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes     No  
As of April 29, 2022, there were 58,264,489 shares of the registrant’s common stock, $0.01 par value per share, outstanding.



Table of Contents

i

PART I—FINANCIAL INFORMATION
Item 1.Financial Statements.

RAPID7, INC.
Consolidated Balance Sheets (Unaudited)
(in thousands, except share and per share data) 
March 31, 2022December 31, 2021
Assets
Current assets:
Cash and cash equivalents$141,365 $164,582 
Short-term investments93,155 58,850 
Accounts receivable, net of allowance for credit losses of $1,879 and $1,978 at March 31, 2022 and December 31, 2021, respectively
107,320 146,094 
Deferred contract acquisition and fulfillment costs, current portion30,984 29,974 
Prepaid expenses and other current assets38,051 33,236 
Total current assets410,875 432,736 
Long-term investments28,295 34,068 
Property and equipment, net49,804 50,225 
Operating lease right-of-use assets89,196 83,751 
Deferred contract acquisition and fulfillment costs, non-current portion59,121 57,191 
Goodwill515,333 515,258 
Intangible assets, net108,246 111,591 
Other assets13,000 11,191 
Total assets$1,273,870 $1,296,011 
Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
Accounts payable$12,163 $3,521 
Accrued expenses56,502 82,620 
Operating lease liabilities, current portion11,336 9,630 
Deferred revenue, current portion378,338 372,067 
Other current liabilities1,264 842 
Total current liabilities459,603 468,680 
Convertible senior notes, non-current portion, net812,995 812,063 
Operating lease liabilities, non-current portion93,954 90,865 
Deferred revenue, non-current portion30,616 33,056 
Other long-term liabilities13,253 17,342 
Total liabilities1,410,421 1,422,006 
Stockholders’ equity (deficit):
Preferred stock, $0.01 par value per share; 10,000,000 shares authorized at March 31, 2022 and December 31, 2021; 0 shares issued at March 31, 2022 and December 31, 2021
  
Common stock, $0.01 par value per share; 100,000,000 shares authorized at March 31, 2022 and December 31, 2021; 58,728,035 and 58,181,816 shares issued at March 31, 2022 and December 31, 2021, respectively; 58,241,227 and 57,695,008 shares outstanding at March 31, 2022 and December 31, 2021, respectively
582 577 
Treasury stock, at cost, 486,808 shares at March 31, 2022 and December 31, 2021
(4,764)(4,764)
Additional paid-in-capital650,710 615,032 
Accumulated other comprehensive loss(2,052)(812)
Accumulated deficit(781,027)(736,028)
Total stockholders’ equity (deficit)(136,551)(125,995)
Total liabilities and stockholders’ equity (deficit)$1,273,870 $1,296,011 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
1

RAPID7, INC.
Consolidated Statements of Operations (Unaudited)
(in thousands, except share and per share data)
 
 Three Months Ended March 31,
 20222021
Revenue:
Products$149,025 $109,285 
Professional services8,359 8,166 
Total revenue157,384 117,451 
Cost of revenue:
Products43,472 29,650 
Professional services7,817 6,639 
Total cost of revenue51,289 36,289 
Total gross profit106,095 81,162 
Operating expenses:
Research and development49,812 33,080 
Sales and marketing75,146 54,978 
General and administrative21,516 16,220 
Total operating expenses146,474 104,278 
Loss from operations(40,379)(23,116)
Other income (expense), net:
Interest income112 96 
Interest expense(2,693)(5,394)
Other income (expense), net(603)(1,068)
Loss before income taxes(43,563)(29,482)
Provision for income taxes1,436 363 
Net loss$(44,999)$(29,845)
Net loss per share, basic and diluted$(0.78)$(0.56)
Weighted-average common shares outstanding, basic and diluted57,724,821 52,904,881 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

2

RAPID7, INC.
Consolidated Statements of Comprehensive Loss (Unaudited)
(in thousands)
 Three Months Ended March 31,
 20222021
Net loss$(44,999)$(29,845)
Other comprehensive income (loss):
Change in fair value of cash flow hedges(898)(129)
Adjustments for net gains (losses) realized and included in net loss316 (204)
Total change in unrealized losses on cash flow hedges(582)(333)
Change in unrealized (losses) gains on investments(658)(9)
Total other comprehensive loss(1,240)(342)
Comprehensive loss$(46,239)$(30,187)

The accompanying notes are an integral part of these unaudited consolidated financial statements.


3

RAPID7, INC.
Consolidated Statements of Changes in Stockholders' Equity (Deficit) (Unaudited)
(in thousands)
 Common stockTreasury stockAdditional
paid-in-capital
Accumulated
other
comprehensive
gain (loss)
Accumulated
deficit
Total
stockholders’
(deficit)
 SharesAmountSharesAmount
Balance, December 31, 202157,695 $577 487 $(4,764)$615,032 $(812)$(736,028)$(125,995)
Stock-based compensation expense— — — — 32,475 — — 32,475 
Issuance of common stock under employee stock purchase plan81 1 — — 5,709 — — 5,710 
Vesting of restricted stock units402 4 — — (4)— —  
Shares withheld for employee taxes(35)(1)— — (3,460)— — (3,461)
Issuance of common stock upon exercise of stock options99 1 — — 958 — — 959 
Other comprehensive loss— — — — — (1,240)— (1,240)
Net loss— — — — — — (44,999)(44,999)
Balance, March 31, 202258,242 $582 487 $(4,764)$650,710 $(2,052)$(781,027)$(136,551)
 Common stockTreasury stockAdditional
paid-in-capital
Accumulated
other
comprehensive
gain (loss)
Accumulated
deficit
Total
stockholders’
equity (deficit)
 SharesAmountSharesAmount
Balance, December 31, 202052,225 $522 487 $(4,764)$692,603 $454 $(617,279)$71,536 
Stock-based compensation expense— — — — 22,284 — — 22,284 
Issuance of common stock under employee stock purchase plan148 1 — — 4,466 — — 4,467 
Vesting of restricted stock units374 4 — — (4)— —  
Shares withheld for employee taxes(38)— — — (3,324)— — (3,324)
Issuance of common stock upon exercise of stock options170 2 — — 1,416 — — 1,418 
Purchase of capped calls related to convertible senior notes— — — — (76,020)— — (76,020)
Issuance of common stock in connection with repurchase of convertible senior notes2,177 22 — — (2,720)— — (2,698)
Issuance of common stock in connection with inducement of convertible senior notes35 — — — 2,740 — — 2,740 
Cumulative-effect adjustment for the adoption of ASU 2020-06— — — — (99,026)— 27,585 (71,441)
Other comprehensive loss— — — — — (342)— (342)
Net loss— — — — — — (29,845)(29,845)
Balance, March 31, 202155,091 $551 487 $(4,764)$542,415 $112 $(619,539)$(81,225)

The accompanying notes are an integral part of these unaudited consolidated financial statements.
4

RAPID7, INC.
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 Three Months Ended March 31,
 20222021
Cash flows from operating activities:
Net loss$(44,999)$(29,845)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization10,169 6,740 
Amortization of debt issuance costs979 658 
Stock-based compensation expense28,922 20,862 
Induced conversion expense 2,740 
Other526 1,404 
Changes in operating assets and liabilities:
Accounts receivable36,327 34,414 
Deferred contract acquisition and fulfillment costs(2,939)(1,956)
Prepaid expenses and other assets(6,556)(136)
Accounts payable8,673 550 
Accrued expenses(24,048)(15,429)
Deferred revenue3,830 987 
Other liabilities(481)(394)
Net cash provided by operating activities10,403 20,595 
Cash flows from investing activities:
Business acquisition, net of cash acquired (49,720)
Purchases of property and equipment(3,053)(972)
Capitalization of internal-use software costs(3,522)(1,758)
Purchases of investments(32,136)(6,394)
Sales/maturities of investments2,800 41,900 
Other investments (1,500)
Net cash used in investing activities(35,911)(18,444)
Cash flows from financing activities:
Proceeds from issuance of convertible senior notes, net of issuance costs paid of $12,900 for the three months ended March 31, 2021
 587,100 
Purchase of capped calls related to convertible senior notes (76,020)
Payments for repurchase and conversion of convertible senior notes (182,647)
Payments related to business acquisitions (2,431)
Taxes paid related to net share settlement of equity awards(3,461)(3,324)
Proceeds from employee stock purchase plan5,710 4,467 
Proceeds from stock option exercises959 1,427 
Net cash provided by financing activities3,208 328,572 
Effect of exchange rate changes on cash, cash equivalents and restricted cash(800)(500)
Net (decrease) increase in cash, cash equivalents and restricted cash(23,100)330,223 
Cash, cash equivalents and restricted cash, beginning of period165,017 173,617 
Cash, cash equivalents and restricted cash, end of period$141,917 $503,840 
Supplemental cash flow information:
Cash paid for interest on convertible senior notes$750 $1,438 
Cash paid for income taxes, net of refunds$15 $64 
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents$141,365 $503,804 
Restricted cash included in prepaid expenses and other assets552 $36 
Total cash, cash equivalents and restricted cash$141,917 $503,840 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5

RAPID7, INC.
Notes to Consolidated Financial Statements (Unaudited)
Note 1. Description of Business, Basis of Presentation and Consolidation and Significant Accounting Policies
Description of Business
Rapid7, Inc. and subsidiaries (“we,” “us” or “our”) are advancing security with visibility, analytics, and automation delivered through our Insight Platform. Our solutions simplify the complex, allowing security teams to work more effectively with IT and development to reduce vulnerabilities, monitor for malicious behavior, investigate and shut down attacks, and automate routine tasks.
Basis of Presentation and Consolidation
The accompanying unaudited consolidated financial statements have been prepared by us in accordance with accounting principles generally accepted in the United States of America (“GAAP”), as well as pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), regarding interim financial reporting. Accordingly, certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 24, 2022.
The consolidated financial statements include our results of operations and those of our wholly-owned subsidiaries and reflect all adjustments (consisting solely of normal, recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods presented. All intercompany transactions and balances have been eliminated in consolidation. The results of operations for the three months ended March 31, 2022 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 the estimated economic life of perpetual licenses for revenue recognition, the determination of standalone selling prices in revenue transactions with multiple performance obligations, the estimated period of benefit for deferred contract acquisition and fulfillment costs, the useful lives and recoverability of long-lived assets, the valuation for credit losses, the valuation of stock-based compensation, the fair value of assets acquired and liabilities assumed in business combinations, the incremental borrowing rate for operating leases and the valuation for deferred tax assets. We base our estimates on historical experience and on various other assumptions that we believe are reasonable. Actual results could differ from those estimates.
The COVID-19 pandemic has resulted in a sustained global slowdown of economic activity that has decreased demand for a broad variety of goods and services, including from our customers. While we have not experienced significant disruptions from the COVID-19 pandemic during the three months ended March 31, 2022, we are unable to accurately predict the extent to which the ongoing COVID-19 pandemic may impact our business, results of operations and financial condition going forward. Estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require the exercise of judgment. As of the date of issuance of these financial statements, we are not aware of any specific event or circumstance that would require us to update our estimates, assumptions and judgments or revise the carrying value of our assets or liabilities. These estimates may change as new events occur and additional information is obtained and will be recognized in the consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to our financial statements.
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, 2021. There have been no changes to the significant accounting policies during the three-month period ended March 31, 2022.
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Recent Accounting Pronouncements
Accounting Pronouncements Recently Adopted
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which clarified the accounting for acquired revenue contracts with customers in a business combination. ASU 2021-08 requires acquirers to measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 606. As a result, it is generally expected that an acquirer will recognize and measure contract assets and liabilities in a manner consistent with how they were recognized by the acquiree in its preacquisition financial statements. This standard is effective for interim and annual periods beginning after December 15, 2022, with early adoption permitted. We early adopted this standard on January 1, 2022. This guidance will be applied prospectively to all business combinations that occur on or after January 1, 2022.
Accounting Pronouncements Not Yet Effective
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional expedients and exceptions to GAAP guidance on contract modifications to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) to alternative reference rates. We may elect to apply the amendments prospectively through December 31, 2022. The impact to our consolidated financial statements from the adoption of this standard is expected to be immaterial.
Note 2. Revenue from Contracts with Customers
We generate revenue primarily from: (1) subscriptions from the sale of cloud-based subscriptions, managed services, term software licenses, content subscriptions and maintenance and support associated with our software licenses, (2) perpetual software licenses, and (3) professional services from the sale of our deployment and training services related to our solutions, incident response services, penetration testing and security advisory services.
The following table summarizes revenue from contracts with customers for the three months ended March 31, 2022 and 2021:
Three Months Ended March 31,
20222021
(in thousands)
Subscriptions$147,467 $107,167 
Perpetual software licenses1,361 2,114 
Professional services8,359 8,166 
Other197 4 
Total revenue$157,384 $117,451 
Subscriptions
Subscriptions consists of revenue from our cloud-based subscription, managed services offerings, term software licenses, content subscriptions and maintenance and support associated with our software licenses.
We generate cloud-based subscription revenue primarily from sales of subscriptions to access our cloud platform, together with related support services to our customers. These arrangements do not provide the customer with the right to take possession of our software operating on our cloud platform at any time. Instead, customers are granted continuous access to our cloud platform over the contractual period. Revenue is recognized over time on a ratable basis over the contract term beginning on the date that our service is made available to the customer. Our cloud-based subscription contracts generally have annual or multi-year contractual terms which are billed in advance of the annual subscription period and are non-cancellable.
Managed services offerings consist of fees generated when we operate our software and provide our capabilities on behalf of our customers. Revenue is recognized on a ratable basis over the contract term beginning on the date that our service is made available to the customer. Our managed services offerings generally have annual or multi-year contractual terms which are billed in advance of the annual subscription period and are non-cancellable.
For our term software licenses where the utility to the customer is dependent on the continued delivery of content subscriptions, we recognize the license revenue over the contractual term of the content subscription. For our term software licenses which are not dependent on the continued delivery of content subscriptions, the license is considered
7

distinct from the maintenance and support, and we therefore recognize revenue attributable to the license at the time of delivery.
Content subscriptions and our maintenance and support services are sold with our perpetual and term software licenses. Revenue related to our content subscriptions associated with our software licenses is recognized ratably over the contractual period. Maintenance and support services are distinct from the perpetual and term software license and revenue attributable to maintenance and support services is recognized ratably over the contractual period.
Perpetual Software Licenses
For our perpetual software licenses where the utility to the customer is dependent on the continued delivery of content subscriptions, the content subscription renewal options result in a material right with respect to the perpetual software license. As a result, the revenue attributable to the perpetual software license is recognized ratably over the customer’s estimated economic life of five years, which represents a longer period of time in comparison to the initial contractual period of maintenance and support. The estimated economic life of five years represents the period which the customer is expected to benefit from the material right. We estimated this period of benefit by taking into consideration several factors, including the terms and conditions of our customer contracts and renewals and the expected useful life of our technology.
For our perpetual software licenses which are not dependent on the continued delivery of content subscriptions, the license is considered distinct from the maintenance and support, and we therefore recognize revenue attributable to the license at the time of delivery.
Professional Services
All of our professional services are considered distinct performance obligations when sold stand alone or with other products. These contracts generally have terms of one year or less. For the majority of these contracts, revenue is recognized over time based upon the proportion of work performed to date.
Contracts with Multiple Performance Obligations
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.
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 March 31, 2022 and 2021, we recognized revenue of $137.3 million and $101.9 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 March 31, 2022 and December 31, 2021, unbilled receivables of $1.1 million and $1.2 million, respectively, are included in prepaid expenses and other current assets in our consolidated balance sheet. As of March 31, 2022 and December 31, 2021, we had no contract assets recorded on our consolidated balance sheet.
8

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 March 31, 2022. The estimated revenues do not include unexercised contract renewals.
Next Twelve MonthsThereafter
 (in thousands)
Subscriptions$409,985 $127,809 
Perpetual software licenses2,522 405 
Professional services15,603 1,651 
Total$428,110 $129,865 
Note 3. Business Combinations
IntSights
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 will be held by us to satisfy indemnification obligations payable within eighteen months of the acquisition date.
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 $61.3 million, $260.9 million and $65.2 million, respectively. These preliminary amounts are subject to subsequent adjustment as we obtain additional information to finalize certain components of working capital and deferred income taxes. The goodwill was allocated to our one reporting unit. The acquired goodwill and intangible assets were not deductible for tax purposes.
Our revenue and net loss attributable to the IntSights business for the three months ended March 31, 2022 was $6.9 million and $10.9 million, respectively.
Pro Forma Financial Information
The unaudited pro forma financial information in the table below summarizes the combined results of our operations and IntSights, on a pro forma basis, as though we had acquired IntSights on January 1, 2020. The unaudited pro forma financial information for all periods presented also includes the effects of business combination accounting resulting from the acquisition, including an adjustment to revenue for the deferred revenue fair value adjustment, amortization expense from acquired intangibles assets, reversal of acquisition-related expenses and the stock-compensation expense recorded to retain certain employees.
Three Months Ended March 31, 2021
(in thousands)
Revenue$123,430 
Net loss(41,020)
Velocidex Enterprises Pty Ltd
On April 12, 2021, we acquired Velocidex Enterprises Pty Ltd (“Velocidex”), a leading open-source technology and community used for endpoint monitoring, digital forensics, and incident response. The purchase price consisted of $2.7 million paid in cash and $0.3 million in deferred cash payments. The purchase price was allocated to developed technology intangible asset which has an estimated useful life of 6 years.
Alcide.IO Ltd.
On January 28, 2021, we acquired Alcide.IO Ltd. (“Alcide”), a leading provider of Kubernetes security, for a purchase consideration of $50.5 million, which was funded in cash.
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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 asset were not deductible for tax purposes.
Note 4. Investments
Our investments, which are all classified as available-for-sale, consisted of the following:
 As of March 31, 2022
 Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value
 (in thousands)
Description:
U.S. government agencies$51,912 $ $(433)$51,479 
Commercial paper34,997   34,997 
Corporate bonds34,513  (270)34,243 
Agency bonds$750 $ $(19)$731 
Total$122,172 $ $(722)$121,450 
 As of December 31, 2021
 Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value
 (in thousands)
Description:
Commercial paper$37,778 $ $ $37,778 
Corporate bonds32,059  (32)32,027 
U.S government agencies22,396  (31)22,365 
Agency bonds749  (1)748 
Total$92,982 $ $(64)$92,918 
As of March 31, 2022, our available-for-sale investments had maturities ranging from 1 to 20 months. As of December 31, 2021, our available-for-sale investments had maturities ranging from 2 to 23 months.
For all of our investments for which the amortized cost basis was greater than the fair value at March 31, 2022 and December 31, 2021, 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.
We consider an active market to be one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis, and we consider an inactive market to be one in which there are
10

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 March 31, 2022
 Level 1Level 2Level 3Total
 (in thousands)
Description:
Assets:
Money market funds$49,136 $ $ $49,136 
U.S. Government agencies51,479   51,479 
Commercial paper 34,997  34,997 
Corporate bonds 34,243  34,243 
Agency bonds 731  731 
Foreign currency forward contracts designated as cash flow hedges (prepaid expenses and other current assets) 13  13 
Total$100,615 $69,984 $ $170,599 
Liabilities:
Foreign currency forward contracts designated as cash flow hedges (other current liabilities and other liabilities)$ $1,345 $ $1,345 
Total$ $1,345 $ $1,345 

 As of December 31, 2021
 Level 1Level 2Level 3Total
 (in thousands)
Description:
Assets:
Money market funds$86,835 $ $ $86,835 
Commercial paper 37,778  37,778 
Corporate bonds 32,027  32,027 
U.S. Government agencies22,365   22,365 
Agency bonds 748  748 
Foreign currency forward contracts designated as cash flow hedges (prepaid expenses and other current assets) 73  73 
Total assets$109,200 $70,626 $ $179,826 
Liabilities:
Foreign currency forward contracts designated as cash flow hedges (other current liabilities and other liabilities)$ $843 $ $843 
Total liabilities$ $843 $ $843 
As of March 31, 2022, the fair value of our 2.25% and 0.25% convertible senior notes due 2025 and 2027, as further described in Note 10, Debt, was $435.1 million and $669.7 million, respectively, based upon quoted market prices. We consider the fair value of the Notes to be a Level 2 measurement due to limited trading activity of the Notes.
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Note 6. Property and Equipment
Property and equipment are recorded at cost and consist of the following:
As of March 31, 2022As of December 31, 2021
 (in thousands)
Computer equipment and software$21,818 $19,879 
Furniture and fixtures10,629 10,360 
Leasehold improvements 52,552 51,983 
Total84,999 82,222 
Less accumulated depreciation(35,195)(31,997)
Property and equipment, net$49,804 $50,225 
Depreciation expense was $3.3 million and $3.0 million for the three months ended March 31, 2022 and 2021, respectively.
Note 7. Goodwill and Intangible Assets
Goodwill was $515.3 million as of March 31, 2022 and December 31, 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 purchase receivable adjustment75 
Balance at March 31, 2022$515,333 
The following table presents details of our intangible assets, which include acquired identifiable intangible assets and capitalized internal-use software costs:
  As of March 31, 2022As of December 31, 2021
 Weighted-
Average
Life (years)
Gross Carrying
Amount
Accumulated
Amortization
Net Book ValueGross Carrying
Amount
Accumulated
Amortization
Net Book Value
  (in thousands)
Intangible assets subject to amortization:
Developed technology5.2$122,555 $(44,996)$77,559 $122,555 $(40,152)$82,403 
Customer relationships4.512,000 (3,120)8,880 12,000 (2,436)9,564 
Trade names3.12,619 (1,289)1,330 2,619 (1,094)1,525 
Total acquired intangible assets137,174 (49,405)87,769 137,174 (43,682)93,492 
Internal-use software3.029,378 (8,901)20,477 25,857 (7,758)18,099 
Total intangible assets$166,552 $(58,306)$108,246 $163,031 $(51,440)$111,591 
Amortization expense was $6.9 million and $3.7 million for the three months ended March 31, 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 March 31, 2022 was as follows (in thousands):
2022 (for the remaining nine months)$19,395 
202323,111 
202418,587 
202516,076 
202612,478 
2027 and thereafter5,206 
Total$94,853 
The table above excludes the impact of $13.4 million of capitalized internal-use software costs for projects that have not been completed as of March 31, 2022, and therefore, we have not determined the useful life of the software, nor have all the costs associated with these projects been incurred.
Note 8. Deferred Contract Acquisition and Fulfillment Costs
The following table summarizes the activity of the deferred contract acquisition and fulfillment costs for the three months ended March 31, 2022 and 2021:
Three Months Ended March 31,
20222021
 (in thousands)
Beginning balance$87,165 $64,639 
Capitalization of contract acquisition and fulfillment costs11,248 7,865 
Amortization of deferred contract acquisition and fulfillment costs(8,309)(5,909)
Ending balance$90,104 $66,595 

Note 9. Derivatives and Hedging Activities
To mitigate our exposure to foreign currency fluctuations resulting from certain expenses denominated in certain foreign currencies, we enter into forward contracts that are designated as cash flow hedging instruments. These forward contracts have contractual maturities of nineteen months or less, and as of March 31, 2022 and December 31, 2021, outstanding forward contracts had a total notional value of $48.2 million and $34.7 million, respectively. The notional value represents the gross amount of foreign currency that will be bought or sold upon maturity of the forward contract. During the three months ended March 31, 2022, 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”) and in March 2021, we issued $600.0 million aggregate principal amount of convertible senior notes due March 15, 2027 (the “2027 Notes”) (collectively, the “Notes”). Further details of the Notes are as follows:
IssuanceMaturity DateInterest RateFirst Interest Payment DateEffective Interest RateSemi-Annual Interest Payment DatesInitial Conversion Rate per $1,000 PrincipalInitial Conversion PriceNumber of Shares (in millions)
2025 NotesMay 1, 20252.25 %November 1, 20202.88 %May 1 and November 116.3875$61.02 3.8 
2027 NotesMarch 15, 20270.25 %September 15, 20210.67 %March 15 and September 159.6734$103.38 5.8 
The 2025 Notes and the 2027 Notes are senior unsecured obligations, do not contain any financial covenants and are governed by indentures between the Company, as issuer, and U.S. Bank National Association, as trustee (the “Indentures”). The total net proceeds from the 2025 Notes and the 2027 Notes offerings, after deducting initial purchase discounts and estimated debt issuance costs, were $222.8 million and $585.0 million, respectively.
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Terms of the Notes
The holders of the Notes may convert their respective Notes at their option at any time prior to the close of business on the business day immediately preceding their respective convertible dates only under the following circumstances:
during any calendar quarter commencing after the calendar quarter ending on September 30, 2020 for the 2025 Notes and March 20, 2024 for the 2027 Notes (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price of the respective Notes on each applicable trading day;
during the five business day period after any five consecutive trading day period for the 2025 Notes and any ten consecutive trading day period for the 2027 Notes (“measurement periods”) in which the trading price (as defined in the Indentures) per $1,000 principal amount of the applicable series of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate of the respective Notes on each such trading day;
if we call any or all of the respective Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the respective redemption date; or
upon the occurrence of specified corporate events (as set forth in the Indentures).
As of March 31, 2022, the conversion features of the 2025 Notes were triggered as the last reported price of our common stock was greater than or equal to 130% of the conversion prices for at least 20 trading days in the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter, and therefore the 2025 Notes were convertible, in whole or in part, at the option of the holders from April 1, 2022 through June 30, 2022.
Whether the 2025 Notes will be convertible following such period will depend on the continued satisfaction of this condition or another conversion condition in the future. Since we may elect to repay the 2025 Notes in cash, shares of our common stock, or a combination of both, we have continued to classify the 2025 Notes as long-term debt on our consolidated balance sheet as of March 31, 2022. As of March 31, 2022, the 2027 Notes are not convertible at the option of the holder.
As of March 31, 2022, an immaterial principal amount of the 2025 Notes was requested for conversion, which is expected to be settled during the quarter ended June 30, 2022. No additional conversion requests for the Notes have been received.
The holders may convert the 2025 Notes and the 2027 Notes at any time on or after November 1, 2024 and December 15, 2026, respectively, until the close of business on the second scheduled trading day immediately preceding the maturity date, regardless of the circumstances set forth above. Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election, in the manner and subject to the terms and conditions provided in the Indentures.
If we undergo a fundamental change (as set forth in the Indentures) at any time prior to the maturity date, holders of the Notes will have the right, at their option, to require us to repurchase for cash all or any portion of their Notes at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, following certain corporate events that occur prior to the maturity date or following our issuance of a notice of redemption, in each case as described in the Indentures, we will increase the conversion rate for a holder of the Notes who elects to convert its Notes in connection with such a corporate event or during the related redemption period in certain circumstances.
The 2025 Notes and the 2027 Notes are redeemable after May 6, 2023 and March 20, 2024 (the “Redemption Dates”), respectively. On or after the respective Redemption Dates, we may redeem for cash all or any portion of the 2025 Notes or the 2027 Notes, at our option, if the last reported sale price of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including the trading day immediately preceding, the date on which we provide the redemption notice at a redemption price equal to 100% principal amount of the 2025 Notes or the 2027 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
Accounting for the Notes
In accounting for the issuance of the Notes, the principal less debt issuance costs are recorded as debt on our consolidated balance sheet. The debt issuance costs are amortized to interest expense using the effective interest method over the contractual term of the Notes.
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The net carrying amount of the Notes as of March 31, 2022 and December 31, 2021 was as follows (in thousands):
2025 Notes2027 Notes
PrincipalUnamortized debt issuance costsTotalPrincipalUnamortized debt issuance costsTotal
Net Carrying Amount at December 31, 2021$230,000 $(4,905)$225,095 $600,000 $(13,032)$586,968 
Amortization of debt issuance costs— 330 330 — 602 602 
Net Carrying Amount at March, 31, 2022$230,000 $(4,575)$225,425 $600,000 $(12,430)$587,570 
Interest expense related to the Notes was as follows (in thousands):
Three Months Ended March 31,
20222021
2025 Notes2027 NotesTotal2023 Notes2025 Notes2027 NotesTotal
Contractual interest expense$