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, 2021

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 April 30, 2021, there were 55,129,962 shares of the registrant’s common stock, $0.01 par value per share, outstanding.

Table of Contents

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	1
	Consolidated Balance Sheets	1
	Consolidated Statements of Operations	2
	Consolidated Statements of Comprehensive Loss	3
	Consolidated Statements of Changes in Stockholders' Equity (Deficit)	4
	Consolidated Statements of Cash Flows	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	38
PART II.	OTHER INFORMATION	40
Item 1.	Legal Proceedings	40
Item 1A.	Risk Factors	40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	65
Item 3.	Defaults Upon Senior Securities	65
Item 4.	Mine Safety Disclosures	65
Item 5.	Other Information	65
Item 6.	Exhibits	66

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

RAPID7, INC.

Consolidated Balance Sheets (Unaudited)

(in thousands, except share and per share data)

	March 31, 2021		December 31, 2020
Assets
Current assets:
Cash and cash equivalents	$	503,804	$	173,617
Short-term investments	101,996		138,839
Accounts receivable, net of allowance for doubtful accounts of $2,869 and $3,251 at March 31, 2021 and December 31, 2020, respectively	76,714		111,599
Deferred contract acquisition and fulfillment costs, current portion	22,598		21,536
Prepaid expenses and other current assets	28,943		27,844
Total current assets	734,055		473,435
Long-term investments	11,133		10,124
Property and equipment, net	51,141		53,114
Operating lease right-of-use assets	64,965		67,178
Deferred contract acquisition and fulfillment costs, non-current portion	43,997		43,103
Goodwill	253,324		213,601
Intangible assets, net	52,708		44,296
Other assets	11,370		8,271
Total assets	$	1,222,693	$	913,122
Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
Accounts payable	$	4,296	$	3,860
Accrued expenses	47,806		61,677
Operating lease liabilities, current portion	9,261		9,612
Deferred revenue, current portion	282,245		278,585
Other current liabilities	127		—
Total current liabilities	343,735		353,734
Convertible senior notes, net	855,709		378,586
Operating lease liabilities, non-current portion	73,466		75,737
Deferred revenue, non-current portion	28,833		31,365
Other long-term liabilities	2,175		2,164
Total liabilities	1,303,918		841,586
Stockholders’ equity (deficit):
Preferred stock, $0.01 par value per share; 10,000,000 shares authorized at March 31, 2021 and December 31, 2020; 0 shares issued at March 31, 2021 and December 31, 2020	—		—
Common stock, $0.01 par value per share; 100,000,000 shares authorized at March 31, 2021 and December 31, 2020; 55,578,120 and 52,712,084 shares issued at March 31, 2021 and December 31, 2020, respectively; 55,091,312 and 52,225,276 shares outstanding at March 31, 2021 and December 31, 2020, respectively	551		522
Treasury stock, at cost, 486,808 shares at March 31, 2021 and December 31, 2020	(4,764)		(4,764)
Additional paid-in-capital	542,415		692,603
Accumulated other comprehensive loss	112		454
Accumulated deficit	(619,539)		(617,279)
Total stockholders’ equity (deficit)	(81,225)		71,536
Total liabilities and stockholders’ equity (deficit)	$	1,222,693	$	913,122

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

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RAPID7, INC.

Consolidated Statements of Operations (Unaudited)

(in thousands, except share and per share data)

	Three Months Ended March 31,
	2021		2020
Revenue:
Products	$	109,285	$	87,549
Professional services	8,166		6,791
Total revenue	117,451		94,340
Cost of revenue:
Products	29,650		21,256
Professional services	6,639		6,458
Total cost of revenue	36,289		27,714
Total gross profit	81,162		66,626
Operating expenses:
Research and development	33,080		24,202
Sales and marketing	54,978		48,145
General and administrative	16,220		14,099
Total operating expenses	104,278		86,446
Loss from operations	(23,116)		(19,820)
Other income (expense), net:
Interest income	96		1,048
Interest expense	(5,394)		(3,462)
Other income (expense), net	(1,068)		(447)
Loss before income taxes	(29,482)		(22,681)
Provision for income taxes	363		243
Net loss	$	(29,845)	$	(22,924)
Net loss per share, basic and diluted	$	(0.56)	$	(0.46)
Weighted-average common shares outstanding, basic and diluted	52,904,881		50,127,310

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

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RAPID7, INC.

Consolidated Statements of Comprehensive Loss (Unaudited)

(in thousands)

	Three Months Ended March 31,
	2021		2020
Net loss	$	(29,845)	$	(22,924)
Other comprehensive income (loss):
Change in fair value of investments	(9)		(235)
Adjustments for net gains realized and included in net loss	—		(56)
Total change in unrealized losses on investments	(9)		(291)
Change in unrealized losses on cash flow hedges	(129)		—
Adjustments for net gains realized and included in net loss	(204)		—
Total change in unrealized losses on cash flow hedges	(333)		—
Total other comprehensive loss	(342)		(291)
Comprehensive loss	$	(30,187)	$	(23,215)

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

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RAPID7, INC.

Consolidated Statements of Changes in Stockholders' Equity (Deficit) (Unaudited)

(in thousands)

	Common stock			Treasury stock			Additional paid-in-capital		Accumulated other comprehensive gain (loss)		Accumulated deficit		Total stockholders’ equity (deficit)
	Shares	Amount		Shares	Amount
Balance, December 31, 2020	52,225	$	522	487	$	(4,764)	$	692,603	$	454	$	(617,279)	$	71,536
Stock-based compensation expense	—	—		—	—		22,284		—		—		22,284
Issuance of common stock under employee stock purchase plan	148	1		—	—		4,466		—		—		4,467
Vesting of restricted stock units	374	4		—	—		(4)		—		—		—
Shares withheld for employee taxes	(38)	—		—	—		(3,324)		—		—		(3,324)
Issuance of common stock upon exercise of stock options	170	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 notes	2,177	22		—	—		(2,720)		—		—		(2,698)
Issuance of common stock in connection with inducement of convertible senior notes	35	—		—	—		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, 2021	55,091	$	551	487	$	(4,764)	$	542,415	$	112	$	(619,539)	$	(81,225)

	Common stock			Treasury stock			Additional paid-in-capital		Accumulated other comprehensive gain (loss)		Accumulated deficit		Total stockholders’ equity
	Shares	Amount		Shares	Amount
Balance, December 31, 2019	49,911	$	499	487	$	(4,764)	$	605,650	$	213	$	(518,430)	$	83,168
Stock-based compensation expense	—	—		—	—		12,965		—		—		12,965
Issuance of common stock under employee stock purchase plan	102	1		—	—		3,345		—		—		3,346
Vesting of restricted stock units	308	3		—	—		(3)		—		—		—
Shares withheld for employee taxes	(27)	—		—	—		(1,533)		—		—		(1,533)
Issuance of common stock upon exercise of stock options	125	1		—	—		1,568		—		—		1,569
Other comprehensive loss	—	—		—	—		—		(291)		—		(291)
Net loss	—	—		—	—		—		—		(22,924)		(22,924)
Balance, March 31, 2020	50,419	$	504	487	$	(4,764)	$	621,992	$	(78)	$	(541,354)	$	76,300

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

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RAPID7, INC.

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

	Three Months Ended March 31,
	2021		2020
Cash flows from operating activities:
Net loss	$	(29,845)	$	(22,924)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	6,740		4,843
Amortization of debt discount and issuance costs	658		2,743
Stock-based compensation expense	20,862		13,347
Induced conversion expense	2,740		—
Other	1,404		836
Changes in operating assets and liabilities:
Accounts receivable	34,414		22,608
Deferred contract acquisition and fulfillment costs	(1,956)		(516)
Prepaid expenses and other assets	(136)		135
Accounts payable	550		4,010
Accrued expenses	(15,429)		(14,563)
Deferred revenue	987		(16,671)
Other liabilities	(394)		(1,063)
Net cash provided by (used in) operating activities	20,595		(7,215)
Cash flows from investing activities:
Business acquisition, net of cash acquired	(49,720)		—
Purchases of property and equipment	(972)		(2,756)
Capitalization of internal-use software costs	(1,758)		(1,474)
Purchases of investments	(6,394)		(24,272)
Sales/maturities of investments	41,900		113,924
Other	(1,500)		—
Net cash (used in) provided by investing activities	(18,444)		85,422
Cash flows from financing activities:
Proceeds from issuance of convertible senior notes, net of issuance costs paid of $12,900	587,100		—
Purchase of capped calls related to convertible senior notes	(76,020)		—
Payments for repurchase of convertible senior notes	(182,647)		—
Payments related to business acquisition	(2,431)		—
Taxes paid related to net share settlement of equity awards	(3,324)		(1,533)
Proceeds from employee stock purchase plan	4,467		3,346
Proceeds from stock option exercises	1,427		1,561
Net cash provided by financing activities	328,572		3,374
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(500)		(560)
Net increase in cash, cash equivalents and restricted cash	330,223		81,021
Cash, cash equivalents and restricted cash, beginning of period	173,617		123,413
Cash, cash equivalents and restricted cash, end of period	$	503,840	$	204,434
Supplemental cash flow information:
Cash paid for interest on convertible senior notes	$	1,438	$	1,438
Cash paid for income taxes, net of refunds	$	64	$	33
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents	$	503,804	$	204,434
Restricted cash included in prepaid expenses and other current assets	36		$	—
Total cash, cash equivalents and restricted cash	$	503,840	$	204,434

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

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RAPID7, INC.

Notes to Consolidated Financial Statements (Unaudited)

Note 1. Description of Business, Basis of Presentation and Consolidation and Significant Accounting Policies

Description of Business

Rapid7, Inc. and subsidiaries (“we,” “us” or “our”) is 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, 2020 filed with the SEC on February 26, 2021.

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, 2021 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 of allowance for doubtful accounts, 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 first quarter of fiscal 2021, we are unable to accurately predict the extent to which the 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, 2020. There have been no changes to the significant accounting policies during the three-month period ended March 31, 2021.

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Recent Accounting Pronouncements

Accounting Pronouncements Recently Adopted

In August 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06), which simplified the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. We early adopted this standard on January 1, 2021 under the modified retrospective basis. Refer to Note 10, Debt, for further details of the impact the adoption of this standard had on our consolidated balance sheet.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This standard is intended to simplify various aspects related to accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifying certain aspects of the current guidance to promote consistency among reporting entities. We adopted this standard on January 1, 2021 and there was no impact to our consolidated financial statements as a result of the adoption.

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, 2021 and 2020:

	Three Months Ended March 31,
	2021		2020
	(in thousands)
Subscriptions	$	107,167	$	84,548
Perpetual software licenses	2,114		2,770
Professional services	8,166		6,791
Other	4		231
Total revenue	$	117,451	$	94,340

Subscriptions

Subscriptions consists of revenue from our cloud-based subscription, managed services offerings, term software licenses and content subscriptions 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

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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 arrangement as a material right does not exist. For our term software licenses which are not dependent on the continued delivery of content subscriptions, the license is considered distinct from the maintenance and support, and we therefore recognize revenue attributable to the license at the time of delivery.

•Content subscriptions and our maintenance and support services are sold with our perpetual and term software licenses. Revenue related to our content subscriptions associated with our software licenses is recognized ratably over the contractual period. Maintenance and support services are distinct from the perpetual and term software license and revenue attributable to maintenance and support services is recognized ratably over the contractual period.

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.

Other

Other revenue primarily includes revenue from delivery of appliances and other miscellaneous revenue.

Contracts with Multiple Performance Obligations

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, 2021 and 2020, we recognized revenue of $101.9 million and $83.4 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.

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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, 2021 and December 31, 2020, 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, 2021 and December 31, 2020, we had no contract assets recorded on our consolidated balance sheet.

Transaction price allocated to the remaining performance obligations

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied as of March 31, 2021. The estimated revenues do not include unexercised contract renewals.

	Next Twelve Months		Thereafter
	(in thousands)
Subscriptions	$	290,552	$	79,335
Perpetual software licenses	6,880		2,917
Professional services	12,488		1,084

Note 3. Business Combination

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.

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):

Purchase price	$	50,538
Recognized amount of identifiable assets acquired and liabilities assumed:
Cash and cash equivalents	818
Other current assets	163
Deferred tax asset, long-term	2,714
Other assets	208
Accounts payable and other current liabilities	(3,488)
Intangible assets	10,400
Total identifiable net assets assumed	10,815
Goodwill	39,723
Total purchase price allocation	$	50,538

We identified developed technology as the sole acquired intangible asset. The estimated fair value of the developed technology intangible asset was $10.4 million which was based on a valuation using the income approach. The estimated useful life of the developed technology is 6 years.

The excess of the purchase price over the tangible assets acquired, identifiable intangible assets 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 assets were not deductible for tax purposes.

Following the acquisition, certain retained employees of Alcide received an aggregate of 96,127 restricted stock units (RSUs), which will vest over a maximum of three years. The vesting of the RSUs are subject to the employee's continued service with

9

us. Accordingly, stock-based compensation expense associated with the RSUs will be expensed as incurred in our post-acquisition financial statements.

In the three months ended March 31, 2021, we recorded $0.9 million of acquisition-related costs related to the acquisition of Alcide, of which $0.8 million was recorded to general and administrative expense and $0.1 million was recorded to sales and marketing expense.

Proforma results of operations have not been included, as the acquisition of Alcide was not material to our results of operations for any periods presented.

Divvy Cloud Corporation

On May 1, 2020, we acquired Divvy Cloud Corporation (DivvyCloud), a Cloud Security Posture Management (CSPM) company, for a purchase price with an aggregate fair value of $137.8 million.

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 $0.8 million, $115.7 million and $21.2 million, respectively. The goodwill was allocated to our one reporting unit. The acquired goodwill and intangible asset were not deductible for tax purposes.

Pro Forma Financial Information

The unaudited pro forma financial information in the table below summarizes the combined results of our operations and DivvyCloud, on a pro forma basis, as though we had acquired DivvyCloud on January 1, 2019. The unaudited pro forma financial information 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, 2020
	(in thousands)
Revenue	$	97,221
Net loss	$	(27,566)

Note 4. Investments

Our investments, which are all classified as available-for-sale, consisted of the following:

	As of March 31, 2021
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in thousands)
Description:
U.S. government agencies	55,388		5		—		55,393
Commercial paper	27,676		—		—		27,676
Corporate bonds	27,648		16		(7)		27,657
Asset-backed securities	2,403		—		—		2,403
Total	$	113,115	$	21	$	(7)	$	113,129

	As of December 31, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in thousands)
Description:
U.S. government agencies	$	83,596	$	3	$	(12)	$	83,587
Corporate bonds	24,162		31		(1)		24,192
Commercial paper	34,766		—		—		34,766
Agency bonds	3,998		1		—		3,999
Asset-backed securities	2,419		—		—		2,419
Total	$	148,941	$	35	$	(13)	$	148,963

As of March 31, 2021, our available-for-sale investments had maturities ranging from 1 to 13 months. As of December 31, 2020, our available-for-sale investments had maturities ranging from 1 to 19 months.

For all of our investments for which the amortized cost basis was greater than the fair value at March 31, 2021 and December 31, 2020, 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 infrequent or few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers.

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The following table presents our financial assets and liabilities measured and recorded at fair value on a recurring basis using the above input categories:

	As of March 31, 2021
	Level 1		Level 2		Level 3		Total
	(in thousands)
Description:
Assets:
Money market funds	464,176		$	—	$	—	$	464,176
U.S. government agencies	55,393		—		—		55,393
Commercial paper	—		27,676		—		27,676
Corporate bonds	—		27,657		—		27,657
Asset-backed securities	—		2,403		—		2,403
Foreign currency forward contracts designated as cash flow hedges (prepaid expenses and other current assets)	—		226		—		226
Total	$	519,569	$	57,962	$	—	$	577,531
Liabilities:
Foreign currency forward contracts designated as cash flow hedges (other current liabilities)	$	—	$	128	$	—	$	128
Total	$	—	$	128	$	—	$	128

	As of December 31, 2020
	Level 1		Level 2		Level 3		Total
	(in thousands)
Description:
Assets:
Money market funds	$	152,570	$	—	$	—	$	152,570
U.S. government agencies	83,587		—		—		83,587
Commercial paper	—		34,766		—		34,766
Corporate bonds	—		24,192		—		24,192
Agency bonds	—		3,999		—		3,999
Asset-backed securities	—		2,419		—		2,419
Foreign currency forward contracts designated as cash flow hedges (prepaid expenses and other current assets)	—		432		—		432
Total	$	236,157	$	65,808	$	—	$	301,965

As of March 31, 2021, the fair value of our 1.25% , 2.25% and 0.25% convertible senior notes due 2023, 2025 and 2027, as further described in Note 10, Debt, was $86.8 million, $325.9 million and $583.9 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, 2021		As of December 31, 2020
	(in thousands)
Computer equipment and software	$	14,368	$	13,438
Furniture and fixtures	9,655		9,655
Leasehold improvements	50,427		50,336
Total	74,450		73,429
Less accumulated depreciation	(23,309)		(20,315)
Property and equipment, net	$	51,141	$	53,114

Depreciation expense was $3.0 million and $2.7 million for the three months ended March 31, 2021 and 2020, respectively.

Note 7. Goodwill and Intangible Assets

Goodwill was $253.3 million and $213.6 million as of March 31, 2021 and December 31, 2020, respectively. The following table displays the changes in the gross carrying amount of goodwill:

	Amount
	(in thousands)
Balance at December 31, 2020	$	213,601
Alcide acquisition	39,723
Balance at March 31, 2021	$	253,324

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, 2021						As of December 31, 2020
	Weighted- Average Life (years)	Gross Carrying Amount		Accumulated Amortization		Net Book Value		Gross Carrying Amount		Accumulated Amortization		Net Book Value
		(in thousands)
Intangible assets subject to amortization:
Developed technology	5.7	$	64,855	$	(27,521)	$	37,334	$	54,455	$	(24,780)	$	29,675
Customer relationships	6.3	2,700		(1,061)		1,639		2,700		(958)		1,742
Trade names	5.4	1,419		(684)		735		1,419		(639)		780
Total acquired intangible assets		68,974		(29,266)		39,708		58,574		(26,377)		32,197
Internal-use software	3.0	17,760		(4,760)		13,000		16,002		(3,903)		12,099
Total intangible assets		$	86,734	$	(34,026)	$	52,708	$	74,576	$	(30,280)	$	44,296

Amortization expense was $3.7 million and $2.1 million for the three months ended March 31, 2021 and 2020, respectively.

Estimated future amortization expense of the acquired identifiable intangible assets and completed capitalized internal-use software costs as of March 31, 2021 was as follows (in thousands):

2021 (for the remaining nine months)	$	10,929
2022	11,934
2023	9,048
2024	5,605
2025	5,177
2026 and thereafter	2,987
Total	$	45,680

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The table above excludes the impact of $7.0 million of capitalized internal-use software costs for projects that have not been completed as of March 31, 2021, 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, 2021 and 2020:

	Three Months Ended March 31,
	2021		2020
	(in thousands)
Beginning balance	$	64,639	$	51,260
Capitalization of contract acquisition and fulfillment costs	7,865		5,084
Amortization of deferred contract acquisition and fulfillment costs	(5,909)		(4,569)
Ending balance	$	66,595	$	51,775

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 thirteen months or less, and as of March 31, 2021 and December 31, 2020, outstanding forward contracts had a total notional value of $19.9 million and $12.5 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 months ended March 31, 2021, all cash flow hedges were considered effective. Refer to Note 5, Fair Value Measurements, for the fair values of our outstanding derivative instruments.

For the three months ended March 31, 2021, we reclassified realized gains of $0.2 million from accumulated other comprehensive income (loss) on our consolidated balance sheet to the financial statement line item associated with the underlying hedged transaction on our consolidated statement of operations.

Note 10. Debt

Convertible Senior Notes

In August 2018, we issued $230.0 million aggregate principal amount of convertible senior notes due August 1, 2023 (the 2023 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:

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)
2023 Notes	August 1, 2023	1.25	%	February 1, 2019	1.86	%	February 1 and August 1	24.0460	$	41.59	1.1
2025 Notes	May 1, 2025	2.25	%	November 1, 2020	2.88	%	May 1 and November 1	16.3875	$	61.02	3.8
2027 Notes	March 15, 2027	0.25	%	September 15, 2021	0.67	%	March 15 and September 15	9.6734	$	103.38	5.8

The 2023 Notes, 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 2023 Notes, the 2025 Notes and the 2027 Notes offerings, after deducting initial purchase discounts and estimated debt issuance costs, were $223.1 million, $222.8 million and $585.0 million, respectively.

Terms of the Notes

The holders of the Notes may convert their respective Notes at their option at any time prior to the close of business on the business day immediately preceding their respective convertible dates only under the following circumstances:

•during any calendar quarter commencing after the calendar quarter ending on December 31, 2018 for the 2023 Notes, September 30, 2020 for the 2025 Notes and March 20, 2024 for the 2027 Notes (and only during such calendar

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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 2023 Notes and 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, 2021, the conversion feature of the 2023 Notes was triggered as the last reported price of our common stock was greater than or equal to 130% of the conversion price 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 2023 Notes were convertible, in whole or in part, at the option of the holders from April 1, 2021 through June 30, 2021. Whether the 2023 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 2023 Notes in cash, shares of our common stock, or a combination of both, we have continued to classify the 2023 Notes as long-term debt on our consolidated balance sheet as of March 31, 2021. As of March 31, 2021, the 2025 Notes and the 2027 Notes are not convertible at the option of the holder.

As of March 31, 2021, an immaterial principal amount of the 2023 Notes was requested for conversion, which is expected to be settled during the quarter ended June 30, 2021. No additional conversion requests for the 2023 Notes have been received.

The holders may convert the 2023 Notes, the 2025 Notes and the 2027 Notes at any time on or after February 1, 2023, 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.

We may not redeem the 2023 Notes, the 2025 Notes or the 2027 Notes prior to August 6, 2021, May 6, 2023 and March 20, 2024 (Redemption Dates), respectively. On or after the respective Redemption Dates, we may redeem for cash all or any portion of the 2023 Notes, 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 2023 Notes, the 2025 Notes or the 2027 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.

Partial Repurchase of the 2023 Notes

On March 16, 2021, we used a portion of the proceeds from the issuance of the 2027 Notes, together with 2.2 million shares of our common stock, to repurchase and retire $182.6 million aggregate principal amount of the 2023 Notes, and paid accrued and unpaid interest thereon (the 2023 Notes Repurchase Transaction). The 2023 Notes Repurchase Transaction was accounted for as an induced conversion in accordance with Accounting Standards Codification 470-20, Debt with Conversion and Other Options (ASC 470-20). The total fair value of the additional common stock issued to induce the conversion of $2.7 million was recognized as an inducement expense and classified as a component of interest expense in our consolidated statement of operations. The remaining cash and common stock consideration issued under the original terms of the 2023 Notes was accounted for under the general conversion accounting guidance where the difference between the carrying amount of the 2023

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Notes retired, including unamortized debt issuance cost of $2.7 million, and the cash consideration paid and the par amount of the common stock issued, was recorded in additional paid-in capital.

Accounting for the Notes

Prior to the Adoption of ASU 2020-06

Prior to our January 1, 2021 adoption of ASU 2020-06, the 2023 Notes and the 2025 Notes were separated into liability and equity components. The initial carrying amounts of the liability components were calculated by measuring the fair value of similar debt instruments that do not have an associated convertible feature. The initial carrying amounts of the equity components representing the option to convert the 2023 Notes and the 2025 Notes was $53.8 million and $48.3 million, respectively, and were determined by deducting the fair values of the liability components from the par value of the 2023 Notes and 2025 Notes. The equity components were recorded as an increase to additional paid-in capital and were not remeasured as long as they continued to meet the conditions for equity classification. The excess of the principal amount of the 2023 Notes and the 2025 Notes over their respective carrying amount of the liability component, or debt discount, was amortized to interest expense using the effective interest method over the contractual terms of the respective convertible senior notes.

In addition, prior to the adoption of ASU 2020-06, the debt issuance costs of $6.9 million and $7.2 million related to the 2023 Notes and the 2025 Notes, respectively, were allocated to the liability and equity components of the 2023 Notes and 2025 Notes based on their relative values. Debt issuance costs attributable to the liability component were $5.3 million and $5.7 million, for the 2023 Notes and the 2025 Notes, respectively, and were amortized to interest expense using the effective interest method over the contractual term of the 2023 Notes and 2025 Notes, respectively. Debt issuance costs attributable to the equity component of $1.6 million and $1.5 million for the 2023 Notes and the 2025 Notes, respectively, were netted with the equity component in additional paid-in capital.

Impact of the Adoption of ASU 2020-06

On January 1, 2021, we early adopted ASU 2020-06 on a modified retrospective basis. Under ASU 2020-06, we no longer separate the convertible senior notes into liability and equity components. We recognized the cumulative effect of initially applying this new standard as of January 1, 2021. Comparative prior year periods were not adjusted.

As a result of applying the modified retrospective method to adopt this standard, the following adjustments were made to the consolidated balance sheet as of January 1, 2021 (in thousands):

	As Reported		Adjustments									Adjusted Under ASU 2020-06
	December 31, 2020		Transfer Equity Component of the Debt to Liabilities		Reverse Equity Component of Debt Issuance Costs		Reverse Debt Discount Amortization		Record Debt Issuance Costs Amortization		Total	January 1, 2021
Liabilities and Stockholders' Equity:
Convertible senior notes, net	$	378,586	$	102,166	$	(3,140)	$	(28,811)	$	1,226	$