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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 September 30, 2024
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, | MA | | 02114 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (617) 247-1717
| | | | | | | | |
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934: |
| | |
Title of each class | Trading symbol(s) | Name of each exchange on which registered |
Common Stock, $0.01 par value per share | RPD | The 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 October 31, 2024, there were 63,206,602 shares of the registrant’s common stock, $0.01 par value per share, outstanding.
Table of Contents
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| | Page |
PART I. | | |
Item 1. | | |
| | |
| | |
| | |
| | |
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| | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
PART II. | | |
Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
Item 5. | | |
Item 6. | | |
| | |
PART I—FINANCIAL INFORMATION
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.
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.
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.
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.
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.
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.
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.
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.
•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
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.
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 of 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 from 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.
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.
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.
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
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 | | | | | | | | | |
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.
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:
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| 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 and $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:
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| Shares | | Weighted- Average Grant Date Fair Value |
| | | |
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Unvested balance as of December 31, 2023 | 2,714,426 | | | $ | 61.60 | |
Granted | 2,338,438 | | | $ | 52.37 | |
Vested | (1,122,737) | | | $ | 61.36 | |
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