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Item 2. Management’s Discussion and Analysis

2021-05-07 compared with 2020-11-05 · 201 added, 259 removed, 292 unchanged (61% of the section changed)

Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with (1) our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and (2) the audited consolidated financial statements and the related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended December 31, 2019 included in our Annual Report on Form 10-K, filed with the SEC on February 28, 2020.

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.

These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “will,” “would” or the negative or plural of these words or similar expressions or variations and such forward-looking statements include, but are not limited to, statements with respect to the impact of new accounting standards;

deferred revenue;

our business strategy, plans and objectives for future operations;

our future financial and business performance and the uncertain negative impacts that COVID-19 may have on our business, financial condition, results of operations and the global economy.

The events described in these forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements.

Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled “Risk Factors,” set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q and in our other SEC filings.

You should not rely upon forward-looking statements as predictions of future events.

Furthermore, such forward-looking statements speak only as of the date of this report.

Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with (1) our unaudited consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and (2) the audited consolidated financial statements and the related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended December 31, 2020 included in our Annual Report on Form 10-K, filed with the SEC on February 26, 2021.

Forward-looking statements in this review are qualified by the cautionary statement included under the next sub-heading, “Special Note Regarding Forward-Looking Statements”.

Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q, including the sections entitled “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements.

Statements that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements.

These forward-looking statements include, but are not limited to, statements concerning the following:

• our ability to continue to add new customers, maintain existing customers and sell new products and professional services to new and existing customers;

• uncertain impacts that the COVID-19 pandemic may have on our business, strategy, operating results, financial condition and cash flows, as well as changes in overall level of software spending and volatility in the global economy;

• the effects of increased competition as well as innovations by new and existing competitors in our market;

• our ability to adapt to technological change and effectively enhance, innovate and scale our solutions;

• our ability to effectively manage or sustain our growth and to attain and sustain profitability;

• our ability to diversify our sources of revenue;

• potential acquisitions and integration of complementary business and technologies;

• our expected use of proceeds;

• our ability to maintain, or strengthen awareness of, our brand;

• perceived or actual security, integrity, reliability, quality or compatibility problems with our solutions, including related to security breaches in our customers;

systems, unscheduled downtime or outages;

• statements regarding future revenue, hiring plans, expenses, capital expenditures, capital requirements and stock performance;

• our ability to meet publicly announced guidance or other expectations about our business, key metrics and future operating results;

• our ability to maintain an adequate annualized recurring revenue growth;

• our ability to attract and retain qualified employees and key personnel and further expand our overall headcount;

• our ability to grow, both domestically and internationally;

• our ability to stay abreast of new or modified laws and regulations that currently apply or become applicable to our business both in the United States and internationally including laws and regulations related to export compliance;

• our ability to maintain, protect and enhance our intellectual property;

• costs associated with defending intellectual property infringement and other claims;

• the future trading prices of our common stock and the impact of securities analysts’ reports on these prices.

These statements represent the beliefs and assumptions of our management based on information currently available to us.

Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements.

Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included under Part I, Item 1A.

Furthermore, such forward-looking statements

speak only as of the date of this report.

Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances that occur after the date of this report.

As used in this report, the terms “Rapid7,” the “company,” “we,” “us,” and “our” mean Rapid7, Inc.

and its subsidiaries unless the context indicates otherwise.

Rapid7 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.

In the nearly 20 years that Rapid7 has been in business, security companies and trends have come and gone, while broader technology innovation continues to advance rapidly.

Our solutions simplify the complex, allowing security teams to work more effectively with IT and development to reduce vulnerabilities, monitor for misconfigurations and malicious behavior, investigate and shut down attacks, and automate routine tasks.

In the more than 20 years that Rapid7 has been in business, security companies and trends have come and gone, while broader technology innovation continues to advance rapidly.

Every company is now a technology company, and rampant innovation inevitably creates security risk.

The migration of businesses to the cloud and ubiquitous connected devices present security teams with an increasingly complex, ever-changing, and unpredictable attack surface.

The migration of businesses to the cloud, more distributed workforces and ubiquitous connected devices present security teams with an increasingly complex, ever-changing, and unpredictable attack surface.

We believe as cybersecurity challenges continue to rise exponentially, two key factors can prevent organizations from effectively managing their growing security exposure.

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These two factors compound the difficulties that resource-constrained organizations face when attempting to minimize their security exposure, meet security compliance regulations and provide visibility to their leadership.

The expanding divide between risk created through innovation and risk managed by security teams is called the Security Achievement Gap.

We call the expanding divide between risk created through innovation and risk effectively managed by security teams the Security Achievement Gap.

We believe Rapid7 is uniquely positioned to improve how customer security challenges are addressed.

Our solutions simplify the complex, allowing teams to more effectively reduce vulnerabilities, monitor malicious behavior, investigate and shut down attacks, and automate routine tasks.

All of our solutions and services are built with and supported by the expertise of our dedicated team of security researchers and consultants, who bring knowledge of attacker behavior and emerging vulnerabilities directly to customers.

We also continue to invest in further simplifying our technology to improve usability, lowering the barrier to managing security for teams and organizations who lack resources.

We also continue to invest in further simplifying our technology to improve usability, lowering the barrier for teams and organizations who lack resources to manage their security posture.

While our security technology is the foundation of our mission to make successful security accessible to all, technology alone will not solve today’s cybersecurity challenges.

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Our customers span a wide variety of industries such as technology, energy, financial services, healthcare and life sciences, manufacturing, media and entertainment, retail, education, real estate, transportation, government and professional services.

As of September 30, 2020, we had over 9,300 customers in 130 countries, including 48% of the Fortune 100.

Our revenue was not concentrated with any individual

customer and no customer represented more than 1% of our revenue for the three and nine months ended September 30, 2020 or 2019.

We sell our products and professional services through direct inside and field sales teams and indirect channel partner relationships.

Our sales teams focus on both new customer acquisition as well as up-selling and cross-selling additional offerings to our existing customers.

Our sales teams are organized by geography, consisting of the Americas;

Europe, the Middle East and Africa (EMEA);

and Asia Pacific (APAC), as well as by target organization size.

Our highly technical sales engineers help define customer use cases, manage solution evaluations and train channel partners.

In addition, we maintain a global channel partner network that complements our sales organization, particularly in EMEA, APAC and Latin America.

As of March 31, 2021, we had over 8,900 customers in 140 countries, including 41% of the Fortune 100.

Our revenue was not concentrated with any individual customer and no customer represented more than 1% of our revenue for the three months ended March 31, 2021 or 2020.

Recent Developments

Acquisition of Alcide.

On January 28, 2021, we acquired Alcide.IO Ltd.

(Alcide), a leading provider of Kubernetes security, for a purchase price of $50.5 million.

Convertible Senior Notes

On March 16, 2021, we issued $600.0 million aggregate principal amount of convertible senior notes due March 15, 2027 (the 2027 Notes).

The total net proceeds from the offering, after deducting initial purchase discounts and estimated debt issuance costs, were approximately $585.0 million.

The 2027 Notes are unsecured obligations and bear interest at a fixed rate of 0.25% per annum, payable semi-annually in arrears on March 15th and September 15th of each year, commencing on September 15, 2021.

The 2027 Notes will mature on March 15, 2027, unless earlier converted, redeemed or repurchased.

The 2027 Notes do

not contain any financial covenants.

The 2027 Notes are governed by an indenture between the Company, as issuer, and U.S.

Bank National Association, as trustee (the 2027 Indenture).

We used $182.6 million of the net proceeds from the 2027 Notes and issued 2.2 million shares of our common stock to repurchase approximately $182.6 million aggregate principal amount of our outstanding 1.25% convertible senior notes due 2023 (the 2023 Notes) in a privately negotiated transaction concurrently with the issuance of the 2027 Notes.

In connection with the issuance of the 2027 Notes, we entered into capped call transactions with certain counterparties (the 2027 Capped Calls).

We used $76.0 million of the net proceeds from the 2027 Notes to purchase the 2027 Capped Calls.

The 2027 Capped Calls are expected to offset potential dilution to our common stock upon conversion of the 2027 Notes.

The 2027 Capped Calls have an initial cap price of $159.04 per share, subject to certain adjustments.

COVID-19 Response

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The impact of COVID-19 on the global economy and on our business continues to be a fluid situation.

We responded quickly to adopt a virtual sales strategy to enable most of our employees to work productively from home, continued our focus on customers and new customers and worked to guard the health and safety of our team, support our customers and partners, mitigate risk, and maximize our financial performance.

We are focused on ensuring continuity for our customers and partners.

During the third quarter of 2020, we slowed hiring and reduced discretionary spending from what was initially anticipated at the beginning of the fiscal year 2020.

In addition, we continue to realize savings that naturally accrue from less travel and virtual rather than in-person events.

The continuing COVID-19 pandemic is expected to result in a sustained global slowdown of economic activity that is likely to decrease demand for a broad variety of goods and services, including from our customers.

We currently expect our operational and financial performance to be negatively impacted by the slowdown in activity associated with the COVID-19 pandemic for the year ending December 31, 2020 and beyond.

The extent of the impact of the COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the disease, its impact on industry events, and its effect on our customers, partners, suppliers and vendors and other parties with whom we do business, all of which are uncertain and cannot be predicted at this time.

To the extent possible, we are conducting business as usual, with necessary or advisable modifications to employee travel, employee work locations, and cancellation of Rapid7 in-person marketing events.

As a result of the COVID-19 pandemic, we have modified certain aspects of our business, including restricting employee travel, adopting a virtual sales strategy to enable most of our employees to work productively from home, transitioning our employee onboarding and training processes to remote or online programs, and canceling certain events and meetings, among other modifications.

We will continue to actively monitor the at times rapidly evolving situation related to COVID-19 and may take further actions that alter our business operations, including those that may be required by federal, foreign, state or local authorities, or that we determine are in the best interests of our employees, customers, partners, suppliers, vendors and stockholders.

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Furthermore, due to our subscription model, the effect of the COVID-19 pandemic may not be fully reflected in our results of operations until future periods.

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 full impact that COVID-19 will have due to numerous uncertainties, including the duration of the outbreak, actions that may be taken by governmental authorities, the impact on our business including our sales cycle, sales execution and marketing efforts, and the impact to the business of our customers, vendors and partners.

For further discussion of the challenges and risks we confront related to the COVID-19 pandemic, please refer to Part II, Item 1A Risk Factors of this Quarterly Report on Form 10-Q.

Our Business Model

We have offerings in five key areas:

(1) Vulnerability Risk Management, (2) Incident Detection and Response, (3) Application Security, (4) Cloud Security and (5) Security Orchestration and Automation Response.

(1) Vulnerability Risk Management, (2) Incident Detection and Response, (3) Application Security and (4) Cloud Security and (5) Security Orchestration and Automation Response.

We offer our products through a variety of delivery models to meet the needs of our diverse customer base, including:

• Cloud-based subscriptions, which provide our software capabilities to our customers through cloud access and on a SaaS basis.

• Cloud-based subscriptions, which provide our software capabilities to our customers through cloud access and on a subscription basis.

Our InsightIDR, InsightVM, InsightAppSec and InsightConnect products are offered as cloud-based subscriptions, generally with a one-year term.

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We also offer various professional services across all of our offerings, including deployment and training services related to our software and cloud-based products, incident response services, penetration testing and security advisory services.

can purchase our professional services together with our product offerings or on a stand-alone basis pursuant to fixed fee or time-and-materials agreements.

For the three months ended September 30, 2020 and 2019, recurring revenue, defined as revenue from term software licenses, content subscriptions, managed services, cloud-based subscriptions and maintenance and support, was 91% and 88%, respectively, of total revenue.

For the nine months ended September 30, 2020 and 2019, recurring revenue was 91% and 87%, respectively, of total revenue.

Our renewal rate was 103% and 111% for the three months ended September 30, 2020 and 2019, respectively.

We calculate our renewal rate by dividing the dollar value of renewed customer agreements, including upsells and cross-sells of additional products, but excluding professional services, in a trailing 12-month period by the dollar value of the corresponding customer agreements.

We monitor the following key metrics to help us measure and evaluate the effectiveness of our operations:

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Customers can purchase our professional services together with our product offerings or on a stand-alone basis pursuant to fixed fee or time-and-materials agreements.

For the three months ended March 31, 2021 and 2020, recurring revenue, defined as revenue from term software licenses, content subscriptions, managed services, cloud-based subscriptions and maintenance and support, was 91% and 90%, respectively, of total revenue.

We monitor the following key metrics to help us measure and evaluate the effectiveness of our operations and as a means to evaluate period-to-period comparisons.

We believe that both management and investors benefit from referring to these key metrics as supplemental information in assessing our performance and when planning, forecasting, and analyzing future periods.

These key metrics also facilitate management's internal comparisons to our historical performance as well as comparisons to certain competitors' operating results.

We believe these key metrics are useful to investors both because they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making and also because they are used by institutional investors and the analyst community to help evaluate the health of our business:

Three Months Ended

(dollars in thousands)

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Year-over-year revenue growth 24.5 % 28.9 %

Non-GAAP income from operations $ 2,444 $ 542 $ 2,776 $ 1,619

Operating cash flow $ 11,078 $ 1,839 $ 4,305 $ (9,244)

As of September 30,

Non-GAAP income (loss) from operations $ 1,906 $ (3,933)

Free cash flow $ 17,865 $ (11,445)

As of March 31,

(dollars in thousands)

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Year-over-year ARR growth 29.9 % 30.8 %

(1) In 2021, we modified our definition of a customer in order to better align the calculation of our number of customers with ARR.

We previously defined a customer as any entity that has (1) an active Rapid7 contract or a contract that expired within 90 days or less of the applicable measurement date;

and for Logentries products, those customers with a contract value equal to or greater than $2,400 per year, or (2) purchased Rapid7 professional services within the 12 months preceding the applicable measurement date.

We have eliminated the 90-day expiration period and removed professional services-only customers and low-value InsightOps customers.

See the revised definition below.

Prior period number of customers amounts have been revised to conform with the modified definition.

Total Revenue and Growth .

We are focused on driving continued revenue growth through increased sales of our products and professional services to new and existing customers.

Non-GAAP Income from Operations .

We monitor non-GAAP income from operations, a non-GAAP financial measure, to analyze our financial results.

We believe non-GAAP income from operations is useful to investors, as a supplement to U.S.

We monitor total revenue and believe it is useful to investors as a measure of the overall success of our business.

Non-GAAP (Loss) Income from Operations .

We monitor non-GAAP (loss) income from operations, a non-GAAP financial measure, to analyze our financial results.

We believe non-GAAP (loss) income from operations is useful to investors, as a supplement to U.S.

GAAP measures, in evaluating our ongoing operational performance and enhancing an overall understanding of our past financial performance and allowing for greater transparency with respect to metrics used by our management in its financial and operational decision-making.

See Non-GAAP Financial Results below for further information on non-GAAP income from operations and a reconciliation of non-GAAP income from operations to the comparable GAAP financial measure.

Operating Cash Flow .

We monitor our operating cash flow as a measure of our overall business performance, which enables us to analyze our financial performance without the effects of certain non-cash items such as stock-based compensation expenses and depreciation and amortization.

Additionally, operating cash flow takes into account the increase in deferred revenue as a result of increases in sales of products and services, which reflects the receipt of cash payment for products before they are recognized into revenue.

Our operating cash flow is impacted by the timing of commission and bonus payments, accounts payable payments and collections of accounts receivable.

See Non-GAAP Financial Results below for further information on non-GAAP (loss) income from operations and a reconciliation of non-GAAP (loss) income from operations to the comparable GAAP financial measure.

Free Cash Flow .

Free cash flow is a non-GAAP measure that we define as net cash provided by (used in) operating activities less purchases of property and equipment and capitalization of internal-use software costs.

We consider free cash flow to be a profitability and liquidity measure that provides useful information to management and investors about the amount of cash generated by the business after necessary capital expenditures.

See Non-GAAP Financial Results below for a reconciliation of non-GAAP free cash flow to the comparable GAAP financial measure.

Number of Customers .

We believe that the size of our customer base is an indicator of our global market penetration and that our net customer additions are an indicator of the growth of our business.

We define a customer as any entity that has (1) an active Rapid7 contract or a contract that expired within 90 days or less of the applicable measurement date;

We define a customer as any entity that has an active Rapid7 recurring revenue contract as of the specified measurement date, excluding InsightOps and Logentries only customers with a contract value less than $2,400 per year.

Annualized Recurring Revenue and Growth.

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ARR is not a forecast of future revenue, which can be impacted by contract start and end dates and renewal rates and does not include revenue reported as perpetual license or professional services revenue in our consolidated statement of operations.

We use ARR and believe it is useful to investors as a measure of the overall success of our business.

Non-GAAP Financial Results

To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide investors with certain non-GAAP financial measures and key metrics, including non-GAAP gross profit, non-GAAP income from operations, non-GAAP net income (loss), non-GAAP net income (loss) per share and adjusted EBITDA.

To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide investors with certain non-GAAP financial measures, including non-GAAP gross profit, non-GAAP income (loss) from operations, non-GAAP net income (loss), non-GAAP net income (loss) per share, adjusted EBITDA and free cash flow.

The presentation of the non-GAAP financial measures is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP.

We use these non-GAAP financial measures and key metrics for financial and operational decision-making purposes and as a means to evaluate period-to-period comparisons, and use certain non-GAAP financial measures as performance measures under our executive bonus plan.

We believe that these non-GAAP financial measures and key metrics provide useful information about our operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to metrics used by our management in its financial and operational decision-making.

We use these non-GAAP financial measures for financial and operational decision-making purposes and as a means to evaluate period-to-period comparisons, and use certain non-GAAP financial measures as performance measures under our executive bonus plan.

We believe that these non-GAAP financial measures provide useful information about our operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to metrics used by our management in its financial and operational decision-making.

While our non-GAAP financial measures are an important tool for financial and operational decision-making and for evaluating our own operating results over different periods of time, you should review the reconciliation of our non-GAAP financial measures to the comparable GAAP financial measures included below, and not rely on any single financial measure to evaluate our business.

We define non-GAAP gross profit, non-GAAP income from operations, non-GAAP net income (loss) and non-GAAP net income (loss) per share as the respective GAAP balances excluding the effect of stock-based compensation expense, amortization of acquired intangible assets, amortization of debt discount and issuance costs, and certain other items such as acquisition-related expenses and litigation-related expenses.

We define non-GAAP gross profit, non-GAAP income (loss) from operations, non-GAAP net income (loss) and non-GAAP net income (loss) per share as the respective GAAP balances excluding the effect of stock-based compensation expense, amortization of acquired intangible assets, amortization of debt discount and issuance costs and certain other items such as acquisition-related expenses, litigation-related expenses and induced conversion expense.

Non-GAAP net income (loss) per basic and diluted share is calculated as Non-GAAP net income (loss) divided by the weighted average shares used to compute net income (loss) per share, with the number of weighted average shares decreased to reflect the anti-dilutive impact of the capped call transactions entered into in connection with our convertible senior notes.

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The expense for the amortization of debt discount and debt issuance costs related to our convertible senior notes and revolving credit facility is a non-cash item and we believe the exclusion of this interest expense provides a more useful comparison of our operational performance in different periods.

• Induced conversion expense.

In conjunction with the first quarter of 2021 partial repurchase of our 1.25% convertible senior notes due 2023, we incurred an induced conversion expense of $2.7 million.

We exclude induced conversion expense because this amount is not indicative of the performance of, or trends in, our business and neither is comparable to the prior period nor predictive of future results.

• Litigation-related expenses.

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• Acquisition-related expenses.

We exclude acquisition-related expenses as costs that are unrelated to the current operations and neither are comparable to the prior period nor predictive of future results.

We exclude acquisition-related expenses that are unrelated to the current operations and neither are comparable to the prior period nor predictive of future results.

• Anti-dilutive impact of capped call transaction.

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Although we cannot reflect the anti-dilutive impact of the capped call transactions under GAAP, we do reflect the anti-dilutive impact of the capped call transactions in non-GAAP net income (loss) per diluted share to provide investors with useful information in evaluating our financial performance on a per share basis.

Adjusted EBITDA.

We define adjusted EBITDA as net loss before (1) interest income, (2) interest expense, (3) other income (expense), net, (4) provision for (benefit from) income taxes, (5) depreciation expense, (6) amortization of intangible assets, (7) stock-based compensation expense, and (8) certain other items.

We define adjusted EBITDA as net loss before (1) interest income, (2) interest expense, (3) other income (expense), net, (4) provision for income taxes, (5) depreciation expense, (6) amortization of intangible assets, (7) stock-based compensation expense, and (8) certain other items.

We believe that the use of adjusted EBITDA is useful to investors and other users of our financial statements in evaluating our operating performance because it provides them with an additional tool to compare business performance across companies and across periods.

Our non-GAAP financial measures may not provide information that is directly comparable to that provided by other companies in our industry, as other companies in our industry may calculate non-GAAP financial results differently, particularly related to non-recurring, unusual items.

In addition, there are limitations in using non-GAAP financial measures because the non-GAAP financial measures are not prepared in accordance with GAAP, may be different from non-GAAP financial measures used by other companies and exclude expenses that may have a material impact upon our reported financial

Further, stock-based compensation expense has been and will continue to be for the foreseeable future a significant recurring expense in our business and an important part of the compensation provided to our employees.

The following tables reconcile GAAP gross profit to non-GAAP gross profit for the three and nine months ended September 30, 2020 and 2019:

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

The following tables reconcile GAAP gross profit to non-GAAP gross profit for the three months ended March 31, 2021 and 2020:

Three Months Ended March 31,

(in thousands)

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Non-GAAP total gross profit $ 85,457 $ 69,215

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Three Months Ended March 31,

(in thousands)

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Non-GAAP gross profit – products $ 83,394 $ 68,524

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Three Months Ended March 31,

(in thousands)

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Non-GAAP gross profit – professional services $ 2,063 $ 691

The following table reconciles GAAP loss from operations to non-GAAP income from operations for the three and nine months ended September 30, 2020 and 2019:

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

The following table reconciles GAAP loss from operations to non-GAAP income (loss) from operations for the three months ended March 31, 2021 and 2020:

Three Months Ended March 31,

(in thousands)

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Litigation-related expenses 103 543

Non-GAAP income from operations $ 2,444 $ 542 $ 2,776 $ 1,619

The following table reconciles GAAP net loss to non-GAAP net income (loss) and GAAP net loss per share to non-GAAP net income (loss) per share for the three and nine months ended September 30, 2020 and 2019:

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Non-GAAP income (loss) from operations $ 1,906 $ (3,933)

The following table reconciles GAAP net loss to non-GAAP net loss for the three months ended March 31, 2021 and 2020:

Three Months Ended March 31,

(in thousands, except share and per share data)

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Amortization of debt discount and issuance costs 658 2,743

Release of valuation allowance, acquisition-related — — — (761)

Non-GAAP net income (loss) $ 25 $ 571 $ (1,474) $ 2,822

Reconciliation of net income (loss) per share, basic:

Induced conversion expense 2,740 —

Non-GAAP net loss $ (1,425) $ (4,294)

Reconciliation of net loss per share, basic and diluted:

GAAP net loss per share, basic $ (0.56) $ (0.46)

Non-GAAP adjustments to net loss 0.53 0.37

Non-GAAP net income (loss) per share, basic $ 0.00 $ 0.01 $ (0.03) $ 0.06

Reconciliation of net income (loss) per share, diluted:

GAAP net loss per share, diluted $ (0.50) $ (0.29) $ (1.38) $ (0.82)

Non-GAAP adjustments to net loss 0.50 0.30 1.35 0.87

Non-GAAP net income (loss) per share, diluted $ 0.00 $ 0.01 $ (0.03) $ 0.05

Weighted average shares used in GAAP per share calculation, basic and diluted 51,293,210 49,020,449 50,707,553 48,437,686

Weighted average shares used in non-GAAP per share calculation:

Basic 51,293,210 49,020,449 50,707,553 48,437,686

Diluted 53,894,202 52,404,657 50,707,553 51,879,345

The following table reconciles GAAP net loss to adjusted EBITDA for the three and nine months ended September 30, 2020 and 2019:

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Non-GAAP net loss per share, basic and diluted $ (0.03) $ (0.09)

Weighted average shares used in GAAP and non-GAAP per share calculation, basic and diluted 52,904,881 50,127,310

The following table reconciles GAAP net loss to adjusted EBITDA for the three months ended March 31, 2021 and 2020:

Three Months Ended March 31,

(in thousands)

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Other (income) expense, net 1,068 447

Provision for (benefit from) income taxes 527 207 1,005 (87)

Provision for income taxes 363 243

Depreciation expense 2,994 2,675

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Adjusted EBITDA $ 5,757 $ (780)

The following table reconciles net cash provided by (used in) operating activities to free cash flow for the three months ended March 31, 2021 and 2020:

Three Months Ended March 31,

(in thousands)

Net cash provided by (used in) operating activities $ 20,595 $ (7,215)

Purchases of property and equipment (972) (2,756)

Capitalized internal-use software costs (1,758) (1,474)

Free cash flow $ 17,865 $ (11,445)

Components of Results of Operations

We generate revenue primarily from selling products and professional services through a variety of delivery models to meet the needs of our diverse customer base.

We generate products revenue from the sale of (1) cloud-based subscriptions for our InsightVM, InsightIDR, InsightAppSec and InsightConnect products, (2) managed services offerings, which utilize our products and (3) term or perpetual software licenses for our Nexpose, Metasploit, AppSpider and DivvyCloud products, as well as associated content subscriptions for our Nexpose and Metasploit products.

We also generate revenue when customers purchase or renew agreements for maintenance and support of their Nexpose, Metasploit and AppSpider software licenses.

Substantially all of our customers purchase an agreement for maintenance and support in connection with their purchase of a Nexpose, Metasploit or AppSpider software license.

We generate products revenue from the sale of (1) cloud-based subscriptions, (2) managed services offerings, which utilize our products and (3) term or perpetual software licenses for our products, as well as associated content subscriptions.

We also generate revenue when customers purchase or renew agreements for maintenance and support of their software licenses.

Substantially all of our customers purchase an agreement for maintenance and support in connection with their purchase of a software license.

Professional Services

21 unchanged sentences

Additional expenses include travel and entertainment, consulting and professional fees for third-party development resources as well as allocated overhead costs.

We expect research and development expense to increase on an absolute dollar basis in the near term as we continue to increase investments in our products and technology platform innovation, but to remain relatively consistent as a percentage of total revenue.

We expect research and development expense to increase on an absolute dollar basis in the near term as we continue to increase investments in our products and technology platform innovation and to increase slightly as a percentage of total revenue.

Sales and Marketing Expense

9 unchanged sentences

Interest Expense

Interest expense consists primarily of contractual interest expense, as well as amortization of debt discount and issuance costs related to our convertible senior notes and revolving credit facility.

Interest expense consists primarily of contractual interest expense, amortization of debt discount and issuance costs related to our convertible senior notes and revolving credit facility and induced conversion expense.

Other Income (Expense), Net

Other income (expense), net consists primarily of unrealized and realized gains and losses related to changes in foreign currency exchange rates and realized gains and losses on the sale of investments.

Other income (expense), net consists primarily of unrealized and realized gains and losses related to changes in foreign currency exchange rates.

Provision for Income Taxes

Provision for income taxes relates to U.S.

federal and state, as well as certain foreign jurisdiction, income taxes.

Historically, we have generated net losses in the U.S., U.K and Ireland and recorded a full valuation allowance against our U.S., U.K.

and Ireland deferred tax assets.

We expect to maintain a full valuation allowance on our U.S., Ireland and U.K.

deferred tax assets in the near term.

Realization of our U.S., Ireland and U.K.

deferred tax assets depends upon future earnings, the timing and amount of which are uncertain.

Provision for income taxes consists of income taxes in foreign jurisdictions where we conduct business, withholding taxes, and state income taxes in the United States.

We maintain a full valuation allowance for domestic and certain foreign deferred tax assets, including net operating loss carryforwards and tax credits.

Based on our history of losses, we expect to maintain this full valuation allowance for the foreseeable future as it is more likely than not that some or all of those deferred tax assets may not be realized.

Results of Operations

The following table sets forth our selected consolidated statements of operations data:

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Three Months Ended March 31,

(in thousands)

17 unchanged sentences

Loss before income taxes (29,482) (22,681)

Provision for (benefit from) income taxes 527 207 1,005 (87)

Provision for income taxes 363 243

Net loss $ (29,845) $ (22,924)

(1) Cost of revenue and operating expenses include stock-based compensation expense and depreciation and amortization expense as follows:

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Three Months Ended March 31,

(in thousands)

5 unchanged sentences

Total stock-based compensation expense $ 20,862 $ 13,347

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Three Months Ended March 31,

(in thousands)

6 unchanged sentences

The following table sets forth our selected consolidated statements of operations data expressed as a percentage of revenue:

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Three Months Ended March 31,

Consolidated Statement of Operations Data:

16 unchanged sentences

Loss before income taxes (25.1) (24.0)

Provision for (benefit from) income taxes 0.5 0.2 0.3 —

Provision for income taxes 0.3 0.3

Net loss (25.4) % (24.3) %

Comparison of the Three Months Ended September 30, 2020 and 2019

Three Months Ended September 30, Change

Comparison of the Three Months Ended March 31, 2021 and 2020

Three Months Ended March 31, Change

2021 2020 $ %

3 unchanged sentences

Total revenue $ 117,451 $ 94,340 $ 23,111 24.5 %

Total revenue increased by $21.9 million in the three months ended September 30, 2020 compared to the same period in 2019.

The $21.9 million increase in revenue was primarily from existing customers and was due to an increase in revenue from renewals, upsells and cross-sells as a result of the continued growth of our customer base.

Total revenue increased by $23.1 million in the three months ended March 31, 2021 compared to the same period in 2020.

The $23.1 million increase in revenue consisted of a $1.2 million increase in revenue from new customers and a $21.9 million increase in revenue from existing customers.

The $21.9 million increase in revenue from existing customers was due to an increase in revenue from renewals, upsells and cross-sells as a result of the continued growth of our customer base.

Revenue from new customers represents the revenue recognized from the customer's initial purchase.

All renewals, upsells and cross-sells are considered revenue from existing customers.

The increase in total revenue in the three months ended September 30, 2020 compared to the same period in 2019 was comprised of $17.7 million generated from sales in North America and $4.2 million generated from sales from the rest of the world.

The increase in total revenue in the three months ended March 31, 2021 compared to the same period in 2020 was comprised of $17.7 million generated from sales in North America and $5.4 million generated from sales from the rest of the world.

Cost of Revenue

Three Months Ended September 30, Change

Three Months Ended March 31, Change

2021 2020 $ %

8 unchanged sentences

Total gross margin % 69.1 % 70.6 %

Total cost of revenue increased by $7.4 million in the three months ended September 30, 2020 compared to the same period in 2019, primarily due to a $4.0 million increase in personnel costs, inclusive of a $0.5 million increase in stock-based compensation expense, resulting from an increase in headcount to support our growing customer base, and a $2.9 million increase in cloud computing costs related to growing cloud-based subscription revenue.

The $4.0 million increase in personnel costs included $0.3 million of additional costs attributable to the employees acquired in the DivvyCloud acquisition in May 2020.

Our increase in total cost of revenue also included a $0.8 million increase in amortization expense for acquired intangible assets, a $0.3 million increase in amortization expense for capitalized internally-developed software and a $0.3 million increase in allocated overhead driven largely by an increase in IT and facilities costs.

These increases were partially offset by a $0.4 million decrease in third-party professional service consulting costs and a $0.5 million decrease in other expenses.

Total gross margin percentage decreased for the three months ended September 30, 2020 compared to the same period in 2019.

The decrease in products gross margin for the three months ended September 30, 2020 was primarily due to an increase in revenue from cloud-based subscriptions and managed services, which have lower gross margins than our licensed software products.

Total cost of revenue increased by $8.6 million in the three months ended March 31, 2021 compared to the same period in 2020, primarily due to a $4.1 million increase in cloud computing costs related to growing cloud-based subscription revenue and a $3.9 million increase in personnel costs, inclusive of a $0.6 million increase in stock-based compensation expense, resulting from an increase in headcount to support our growing customer base.

The $3.9 million increase in personnel costs included $0.4 million of additional costs attributable to the employees acquired in the DivvyCloud acquisition in May 2020 and the Alcide acquisition in January 2021.

Our increase in total cost of revenue also included a $1.1 million increase in amortization expense for acquired intangible assets.

These increases were partially offset by a $0.5 million decrease in other expenses.

Total gross margin percentage decreased for the three months ended March 31, 2021 compared to the same period in 2020.

The decrease in products gross margin for the three months ended March 31, 2021 was primarily due to an increase in revenue from cloud-based subscriptions and managed services, which have lower gross margins than our licensed software products.

The increase in professional services gross margin for the three months ended March 31, 2021 was primarily due to the increase in professional services revenue.

Operating Expenses

Research and Development Expense

Three Months Ended September 30, Change

Three Months Ended March 31, Change

2021 2020 $ %

2 unchanged sentences

% of revenue 28.2 % 25.7 %

Research and development expense increased by $8.4 million in the three months ended September 30, 2020 compared to the same period in 2019, primarily due to a $7.1 million increase in personnel costs and an increase of $0.7 million in allocated overhead driven largely by an increase in IT and facilities costs and a $0.6 million increase in other expenses.

The $7.1 million increase in personnel costs was primarily due to a $4.3 million increase in salaries and related costs driven by growth in headcount, including $2.2 million in additional salaries and related costs attributable to the employees acquired in the acquisition of DivvyCloud in May 2020, and a $2.8 million increase in stock-based compensation expense, including $1.6 million of stock-based compensation expense related to restricted stock units (RSUs) issued to retained employees and common stock to be issued to the founders as part of the acquisition of DivvyCloud.

Research and development expense increased by $8.9 million in the three months ended March 31, 2021 compared to the same period in 2020, primarily due to a $8.3 million increase in personnel costs and a $1.1 million increase in third-party infrastructure costs.

The $8.3 million increase in personnel costs was primarily due to a $5.1 million increase in salaries and related costs driven by growth in headcount, inclusive of $4.7 million in additional salaries and related costs attributable to the employees acquired in the acquisition of DivvyCloud in May 2020 and the acquisition of Alcide in January 2021, and a $3.2 million increase in stock-based compensation expense, including $1.9 million of stock-based compensation expense related to employees acquired in the acquisitions of DivvyCloud and Alcide.

These increases were partially offset by a $0.5 million decrease in other expenses.

Sales and Marketing Expense

Three Months Ended September 30, Change

Three Months Ended March 31, Change

2021 2020 $ %

2 unchanged sentences

% of revenue 46.8 % 51.0 %

Sales and marketing expense increased by $8.5 million in the three months ended September 30, 2020 compared to the same period in 2019, primarily due to a $6.8 million increase in personnel costs, a $1.4 million increase in marketing and advertising costs, a $1.6 million increase in commission expense and a $0.1 million increase in other expenses.

The $6.8 million increase in personnel costs was primarily due a $5.3 million increase in salaries and related costs driven by growth in headcount, including $2.2 million of additional costs attributable to the employees acquired in the DivvyCloud acquisition in May 2020, and a $1.5 million increase in stock-based compensation expense, including $0.6 million in stock-based compensation expense related to

RSUs issued to DivvyCloud retained employees.

These increases were partially offset by a $1.4 million decrease in travel and entertainment expenses as a result of reduced travel due to the COVID-19 pandemic.

Sales and marketing expense increased by $6.8 million in the three months ended March 31, 2021 compared to the same period in 2020, primarily due to a $6.9 million increase in personnel costs, a $1.7 million increase in commission expense, a $0.9 million increase in marketing and advertising costs and a $0.6 million increase in other expenses.

The $6.9 million increase in personnel costs was primarily due to a $4.8 million increase in salaries and related costs driven by growth in headcount, inclusive of $2.8 million of additional costs attributable to the employees acquired in the DivvyCloud acquisition in May 2020, and a $2.1 million increase in stock-based compensation expense, including $0.7 million in stock-based compensation expense

related to RSUs issued to DivvyCloud and Alcide retained employees.

These increases were partially offset by a $2.0 million decrease in allocated overhead driven by costs related to our global kick-off meeting in the prior year and a $1.3 million decrease in travel and entertainment expenses as a result of reduced travel due to the COVID-19 pandemic.

General and Administrative Expense

Three Months Ended September 30, Change

Three Months Ended March 31, Change

2021 2020 $ %

2 unchanged sentences

% of revenue 13.8 % 14.9 %

General and administrative expense increased by $3.8 million in the three months ended September 30, 2020 compared to the same period in 2019, primarily due to a $2.5 million increase in personnel costs due to an increase in headcount, inclusive of a $2.0 million increase in stock-based compensation expense, and a $0.4 million increase in professional fees primarily due to litigation expenses and other professional consulting fees, a $0.4 million increase in other office expenses and a $0.5 million increase in other expenses.

General and administrative expense increased by $2.1 million in the three months ended March 31, 2021 compared to the same period in 2020, primarily due to a $2.9 million increase in personnel costs due to an increase in headcount, inclusive of a $1.7 million increase in stock-based compensation expense, and a $0.1 million increase in other expenses.

These increases were partially offset by a $0.9 million decrease in bad debt expense.

Interest Income

Three Months Ended September 30, Change

Three Months Ended March 31, Change

2021 2020 $ %

2 unchanged sentences

% of revenue 0.1 % 1.1 %

Interest income decreased by $1.4 million in the three months ended September 30, 2020 compared to the same period in 2019 primarily due to a decrease in interest rates.

Interest income decreased by $1.0 million in the three months ended March 31, 2021 compared to the same period in 2020 primarily due to a decrease in interest rates.

Interest Expense

Three Months Ended September 30, Change

Three Months Ended March 31, Change

2021 2020 $ %

2 unchanged sentences

% of revenue (4.6) % (3.7) %

Interest expense increased by $3.9 million in the three months ended September 30, 2020 compared to the same period in 2019 primarily due to an increase in interest expense and amortization of debt discount and issuance costs related to the 2025 Notes.

Interest expense increased by $1.9 million in the three months ended March 31, 2021 compared to the same period in 2020 primarily due to $2.7 million of induced conversion expense incurred in conjunction with the partial repurchase of the 2023 Notes, a $1.1 million increase in contractual interest and a $0.6 million increase in amortization of debt issuance costs related to the 2025 Notes issued in May 2020, the 2027 Notes issued in March 2021 and the revolving credit facility issued in April 2020, partially offset by a $2.5 million decrease in amortization of debt discount costs as a result of our adoption of ASU 2020-06.

Other Income (Expense), Net

Three Months Ended September 30, Change

Three Months Ended March 31, Change

2021 2020 $ %

2 unchanged sentences

% of revenue (0.9) % (0.5) %

Other income (expense), net changed from other expense of $0.5 million in the three months ended September 30, 2019 to other income of $0.1 million in the three months ended September 30, 2020 due to realized and unrealized foreign currency gains and losses, primarily related to the euro and British pound sterling.

Other income (expense), net increased by $0.6 million in the three months ended March 31, 2021 compared to the same period in 2020 due to realized and unrealized foreign currency losses, primarily related to the euro and British pound sterling.

Provision for Income Taxes

Three Months Ended September 30, Change

Three Months Ended March 31, Change

2021 2020 $ %

2 unchanged sentences

% of revenue 0.3 % 0.3 %

Provision for income taxes increased by $0.3 million in the three months ended September 30, 2020 compared to the same period in 2019 due to an increase in our operations in foreign jurisdictions.

Comparison of the Nine Months Ended September 30, 2020 and 2019

Nine Months Ended September 30, Change

2020 2019 $ %

(dollars in thousands)

Products $ 278,538 $ 214,900 $ 63,638 29.6 %

Professional services 19,789 20,399 (610) (3.0)

Total revenue $ 298,327 $ 235,299 $ 63,028 26.8 %

Total revenue increased by $63.0 million in the nine months ended September 30, 2020 compared to the same period in 2019.

The $63.0 million increase in revenue was primarily from existing customers and was due to an increase in revenue from renewals, upsells and cross-sells.

All renewals, upsells and cross-sells are considered revenue from existing customers.

The increase in total revenue in the nine months ended September 30, 2020 compared to the same period in 2019 was comprised of $50.6 million generated from sales in North America and $12.4 million generated from sales from the rest of the world.

The $0.6 million decrease in professional services revenue in the nine months ended September 30, 2020 compared to the same period in 2019 was primarily due to a decline in services as customers delayed the scheduling of services in response to the COVID-19 pandemic.

Cost of Revenue

Nine Months Ended September 30, Change

2020 2019 $ %

(dollars in thousands)

Cost of revenue:

Products 69,569 48,709 $ 20,860 42.8 %

Professional services 18,254 17,075 1,179 6.9

Total cost of revenue $ 87,823 $ 65,784 $ 22,039 33.5 %

Gross margin %:

Products 75.0 % 77.3 %

Professional services 7.8 16.3

Total gross margin % 70.6 % 72.0 %

Total cost of revenue increased by $22.0 million in the nine months ended September 30, 2020 compared to the same period in 2019, primarily due to a $10.4 million increase in personnel costs, inclusive of a $1.2 million increase in stock-based compensation expense, resulting from an increase in headcount to support our growing customer base, and a $8.1 million increase in cloud computing costs related to growing cloud-based subscription revenue.

The $10.4 million increase in personnel costs included $0.8 million of additional costs attributable to the employees acquired in the May 2020 DivvyCloud acquisition.

Our increase in total cost of revenue also included a $2.3 million increase in allocated overhead driven by costs related to our global kick-off meeting as well as an increase in IT and facilities costs, a $1.6 million increase in amortization expense for acquired intangible assets and a $0.9 million increase in amortization expense for capitalized internally-developed software.

These increases were partially offset by a $1.3 million decrease in other expenses.

Total gross margin percentage decreased for the nine months ended September 30, 2020 compared to the same period in 2019.

The decrease in products gross margin for the nine months ended September 30, 2020 was primarily due to an increase in revenue from cloud-based subscriptions and managed services, which have lower gross margins than our licensed software products.

The decrease in professional services gross margin for the nine months ended September 30, 2020 was primarily due to a reduction in professional services revenue as customers rescheduled services in response to the COVID-19 pandemic.

Operating Expenses

Research and Development Expense

Nine Months Ended September 30, Change

2020 2019 $ %

(dollars in thousands)

Research and development $ 78,831 $ 57,645 $ 21,186 36.8 %

% of revenue 26.4 % 24.5 %

Research and development expense increased by $21.2 million in the nine months ended September 30, 2020 compared to the same period in 2019, primarily due to a $16.5 million increase in personnel costs and an increase of $4.3 million in allocated overhead driven by costs related to our global kick-off meeting and an increase in IT and facilities costs, and an increase of $0.4 million in other expenses.

The $16.5 million increase in personnel costs was primarily due to a $9.9 million increase in salaries and related costs driven by growth in headcount, including $3.0 million in additional salaries and related costs attributable to the employees acquired in the acquisition of DivvyCloud in May 2020, and a $6.6 million increase in stock-based compensation expense including, $2.6 million of stock-based compensation expense related to RSUs issued to retained employees and common stock to be issued to the founders as part of the acquisition of DivvyCloud.

Sales and Marketing Expense

Nine Months Ended September 30, Change

2020 2019 $ %

(dollars in thousands)

Sales and marketing $ 141,552 $ 113,214 $ 28,338 25.0 %

% of revenue 47.5 % 48.1 %

Sales and marketing expense increased by $28.3 million in the nine months ended September 30, 2020 compared to the same period in 2019, primarily due to a $20.3 million increase in personnel costs, a $5.2 million increase in allocated overhead driven by costs related to our global kick-off meeting as well as an increase in IT and facilities costs, a $4.6 million increase in commission expense, a $1.1 million increase in marketing and advertising costs and a $0.3 million increase in other expenses.

The $20.3 million increase in personnel costs was primarily due a $16.2 million increase in salaries and related costs driven by growth in headcount, including $3.5 million of additional costs attributable to the employees acquired in the DivvyCloud acquisition in May 2020, and a $4.1 million increase in stock-based compensation expense, including $1.0 million in stock-based compensation expense related to RSUs issued to DivvyCloud retained employees.

These increases were partially offset by a $3.2 million decrease in travel and entertainment expenses as a result of reduced travel due to the COVID-19 pandemic.

General and Administrative Expense

Nine Months Ended September 30, Change

2020 2019 $ %

(dollars in thousands)

General and administrative $ 43,589 $ 32,336 $ 11,253 34.8 %

% of revenue 14.6 % 13.7 %

General and administrative expense increased by $11.3 million in the nine months ended September 30, 2020 compared to the same period in 2019, primarily due to a $7.6 million increase in personnel costs due to an increase in headcount, inclusive of a $5.5 million increase in stock-based compensation expense, a $2.1 million increase in professional fees primarily due to litigation and acquisition-related expenses and other professional consulting fees, a $0.4 million increase in allocated overhead driven by costs related to our global kick-off meeting as well as an increase in IT and facilities costs, a $0.5 million increase in other office expenses and a $0.7 million increase in other expenses.

Interest Income

Nine Months Ended September 30, Change

2020 2019 $ %

(dollars in thousands)

Interest income $ 1,343 $ 4,761 $ (3,418) (71.8) %

% of revenue 0.5 % 2.0 %

Interest income decreased by $3.4 million in the nine months ended September 30, 2020 compared to the same period in 2019 primarily due to a decrease in interest rates.

Interest Expense

Nine Months Ended September 30, Change

2020 2019 $ %

(dollars in thousands)

Interest expense $ (16,707) $ (9,940) $ (6,767) 68.1 %

% of revenue (5.7) % (4.2) %

Interest expense increased by $6.8 million in the nine months ended September 30, 2020 compared to the same period in 2019 primarily due to an increase in interest expense and amortization of debt discount and issuance costs related to the 2025 Notes.

Other Income (Expense), Net

Nine Months Ended September 30, Change

2020 2019 $ %

(dollars in thousands)

Other income (expense), net $ (94) $ (727) $ 633 (87.1) %

% of revenue — % (0.3) %

Other income (expense), net decreased by $0.6 million in the nine months ended September 30, 2020 compared to the same period in 2019 due to realized and unrealized foreign currency gains and losses, primarily related to the euro and British pound sterling.

Provision for (Benefit from) Income Taxes

Nine Months Ended September 30, Change

2020 2019 $ %

(dollars in thousands)

Provision for (benefit from) income taxes $ 1,005 $ (87) $ 1,092 NM

% of revenue 0.3 % — %

Provision for (benefit from) income taxes changed from a benefit of $0.1 million in the nine months ended September 30, 2019 to an expense of $1.0 million in the nine months ended September 30, 2020 primarily due to a $0.8 million deferred tax benefit in the prior period which resulted from a partial release of our valuation allowance to account for the creation of a deferred tax liability for the developed technology intangible asset acquired in the acquisition of NetFort, which was not deductible for tax purposes, and a $0.3 million increase in our operations in foreign jurisdictions.

Provision for income taxes increased by $0.1 million in the three months ended March 31, 2021 compared to the same period in 2020 primarily due to our increased operations in foreign jurisdictions.

Liquidity and Capital Resources

As of September 30, 2020, we had $239.4 million in cash and cash equivalents, $92.0 million in short- and long-term investments that have maturities ranging from one to nineteen months and an accumulated deficit of $588.4 million.

As of March 31, 2021, we had $503.8 million in cash and cash equivalents, $113.1 million in short- and long-term investments that have maturities ranging from one to thirteen months and an accumulated deficit of $619.5 million.

Since our inception, we have generated significant losses and expect to continue to generate losses for the foreseeable future.

5 unchanged sentences

If we are unable to raise additional capital on terms satisfactory to us when we require it, our business, operating results and financial condition could be adversely affected.

The following table shows a summary of our cash flows for the nine months ended September 30, 2020 and 2019:

Nine Months Ended September 30,

The following table shows a summary of our cash flows for the three months ended March 31, 2021 and 2020:

Three Months Ended March 31,

(in thousands)

5 unchanged sentences

Cash, cash equivalents and restricted cash at end of period $ 503,840 $ 204,434

Acquisition of Alcide

On January 28, 2021, we acquired Alcide, a leading provider of Kubernetes security, for a purchase price of $50.5 million.

Convertible Senior Notes

In March 2021, we issued $600.0 million aggregate principal amount of 0.25% convertible senior notes due 2027 (the 2027 Notes).

The total net proceeds from the offering, after deducting initial purchase discounts and estimated debt issuance costs, were approximately $585.0 million.

We used $182.6 million of the net proceeds from the 2027 Notes and issued 2.2 million shares of our common stock to repurchase approximately $182.6 million aggregate principal amount of our outstanding 1.25% convertible senior notes due 2023 in a privately negotiated transaction concurrently with the issuance of the 2027 Notes.

In connection with the issuance of the 2027 Notes, we entered into capped call transactions with certain counterparties (the 2027 Capped Calls).

We used $76.0 million of the net proceeds from the 2027 Notes to purchase the 2027 Capped Calls.

Uses of Funds

1 unchanged sentence

Operating Activities

Operating activities provided $4.3 million of cash and cash equivalents in the nine months ended September 30, 2020, which reflects our continued growth in revenue offset by continued investments in our operations and impact of the timing of working capital items.

Cash provided by operating activities reflected our net loss of $69.9 million and an increase in our net operating assets and liabilities of $3.2 million, offset by $77.4 million of non-cash charges related primarily to depreciation and amortization, stock-based compensation expense, amortization of debt discount and debt issuance costs, provision for doubtful accounts and other non-cash charges.

The increase in our net operating assets and liabilities was primarily due to a $10.5 million decrease in deferred revenue, a $5.3 million increase in deferred contract acquisition and fulfillment costs, a $3.1 million decrease in accrued expenses, primarily as a result of the payout of annual bonuses and year-end commissions, and a $0.9 million decrease in other liabilities, which each had a negative impact on operating cash flow.

These factors were partially offset by a $13.2 million decrease in accounts receivable due to an increase in collections, and a $1.9 million increase in accounts payable and a $1.4 million decrease in prepaid expenses and other assets, which each had a positive impact on operating cash flow.

Operating activities used $9.2 million of cash and cash equivalents in the nine months ended September 30, 2019, which reflects our continued growth in revenue offset by continued investments in our operations and impact of the timing of working capital items.

Cash used in operating activities reflected our net loss of $39.5 million and an increase in our net operating assets and liabilities of $18.9 million, offset by $49.2 million of non-cash charges related primarily to depreciation and amortization, stock-based compensation expense, amortization of debt discount and debt issuance costs, provision for doubtful accounts and other non-cash charges.

The increase in our net operating assets and liabilities was primarily due to a $5.3 million decrease in accrued expenses, a $12.1 million decrease in deferred revenue, a $5.4 million increase in deferred contract acquisition and

fulfillment costs, and a $9.9 million increase in prepaid expenses and other assets, which each had a negative impact on operating cash flow.

These factors were partially offset by a $10.9 million decrease in accounts receivable due to collections, a $1.3 million increase in other liabilities and a $1.1 million increase in accounts payable, which each had a positive impact on operating cash flow.

Operating activities provided $20.6 million of cash and cash equivalents in the three months ended March 31, 2021, which reflects the timing of working capital adjustments and our continued growth in revenue partially offset by our continued investments in our operations.

Cash provided by operating activities reflected our net loss of $29.8 million, offset by a decrease in our net operating assets of $18.0 million and non-cash charges of $32.4 million related primarily to depreciation and amortization, stock-based compensation expense, induced conversion expense, amortization of debt issuance costs and other non-cash charges.

The decrease in our net operating assets was primarily due to a $34.4 million decrease in accounts receivable due to the timing of collections, a $1.0 million increase in deferred revenue and a $0.6 million increase in accounts payable, which each had a positive impact on operating cash flow.

These factors were partially offset by a $15.4 million decrease in accrued expenses, primarily as a result of the payout of annual bonuses and year-end commissions, a $2.0 million increase in deferred contract acquisition and fulfillment costs, a $0.1 million increase in prepaid expenses and other assets and a $0.4 million decrease in other liabilities, which each had a negative impact on operating cash flow.

Operating activities used $7.2 million of cash and cash equivalents in the three months ended March 31, 2020, which reflects our growth in revenue offset by investments in our operations and impact of the timing of working capital items.

Cash used in operating activities reflected our net loss of $22.9 million and an increase in our net operating assets and liabilities of $6.1 million, offset by $21.8 million of non-cash charges related primarily to depreciation and amortization, stock-based compensation expense, amortization of debt discount and debt issuance costs and other non-cash charges.

The increase in our net operating assets and liabilities was primarily due to a $16.7 million decrease in deferred revenue as a result of our seasonal decrease in billings compared to the fourth quarter of 2019, a $14.6 million decrease in accrued expenses, primarily as a result of the payout of annual bonuses and year-end commissions, a $1.1 million decrease in other liabilities, a $0.5 million increase in deferred contract acquisition and fulfillment costs, which each had a negative impact on operating cash flow.

These factors were partially offset by a $22.6 million decrease in accounts receivable due to collections, and a $4.0 million increase in accounts payable and a $0.2 million decrease in prepaid expenses and other assets, which each had a positive impact on operating cash flow.

Investing Activities

Investing activities used $90.5 million of cash in the nine months ended September 30, 2020, consisting of $125.8 million of cash paid for the acquisition of DivvyCloud, net of cash acquired of $5.0 million, $7.1 million in capital expenditures to purchase leasehold improvements, furniture and fixtures and computer equipment and $4.4 million for capitalization of internal-use software costs, partially offset by $46.8 million of investment sales and maturities, net of purchases.

Investing activities provided $16.7 million of cash in the nine months ended September 30, 2019, consisting of $63.1 million of investment sales and maturities, net of purchases, partially offset by $27.1 million in capital expenditures to purchase leasehold improvements and furniture and fixtures, primarily related to office space build-outs including our new corporate headquarters and computer equipment, $14.6 million of cash paid for the acquisition of NetFort and $4.7 million for capitalization of internal-use software costs.

Investing activities used $18.4 million of cash in the three months ended March 31, 2021, consisting of $49.7 million of cash paid for the acquisition of Alcide, net of cash acquired, $1.8 million for capitalization of internal-use software costs, $1.5 million for other investing activities, $1.0 million in capital expenditures to purchase leasehold improvements and computer equipment, partially offset by $35.6 million of investment sales and maturities, net of purchases.

Investing activities provided $85.4 million of cash in the three months ended March 31, 2020, consisting of $89.7 million of investment sales and maturities, net of purchases, partially offset by $2.8 million in capital expenditures to purchase leasehold improvements, furniture and fixtures and computer equipment and $1.5 million for capitalization of internal-use software costs.

Financing Activities

Financing activities provided $202.3 million of cash in the nine months ended September 30, 2020, which consisted primarily of $222.8 million in proceeds from the issuance of the 2025 Notes, net of issuance costs paid of $7.2 million, $6.2 million in proceeds from the exercise of stock options and $7.1 million in proceeds from the issuance of common stock purchased by employees under the Rapid7, Inc.

2015 Employee Stock Purchase Plan (ESPP), partially offset by $27.3 million for the purchase of 2025 Capped Calls, $5.9 million in withholding taxes paid for the net share settlement of equity awards, $0.4 million of payments of debt issuance costs and $0.2 million of deferred consideration payments.

Financing activities provided $8.5 million of cash in the nine months ended September 30, 2019, which consisted primarily of $7.9 million in proceeds from the exercise of stock options and $5.5 million in proceeds from the issuance of common stock purchased by employees under the ESPP, partially offset by $4.9 million in withholding taxes paid for the net share settlement of equity awards.

Financing activities provided $328.6 million of cash in the three months ended March 31, 2021, which consisted primarily of $587.1 million in proceeds from the issuance of the 2027 Notes, net of issuance costs paid of $12.9 million, $4.5 million in proceeds from the issuance of common stock purchased by employees under the Rapid7, Inc.

2015 Employee Stock Purchase Plan (ESPP) and $1.4 million in proceeds from the exercise of stock options, partially offset by $182.6 million for the repurchase and conversion of the 2023 Notes, $76.0 million for the purchase of 2027 Capped Calls, $3.3 million in withholding taxes paid for the net share settlement of equity awards and $2.5 million for payments related to the acquisition of Alcide.

Financing activities provided $3.4 million of cash in the three months ended March 31, 2020, which consisted primarily of $1.6 million in proceeds from the exercise of stock options and $3.3 million in proceeds from the issuance of common stock purchased by employees under the ESPP, partially offset by $1.5 million in withholding taxes paid for the net share settlement of equity awards.

Contractual Obligations and Commitments

In May 2020, we issued $230.0 million aggregate principal amount of convertible senior notes.

The 2025 Notes are unsecured obligations and bear interest at a fixed rate of 2.25% per annum, payable semi-annually in arrears on May 1 and November 1 of each year, commencing on November 1, 2020.

The 2025 Notes will mature on May 1, 2025, unless earlier converted, redeemed or repurchased.

In January 2020, we amended our contract with Amazon Web Services (AWS) which increased our total purchase obligation by $15.0 million, $40.0 million and $50.0 million in 2021, 2022 and 2023, respectively, for a total additional obligation of $105.0 million.

As of September 30, 2020, other than the items noted above, there were no material changes in our contractual obligations and commitments from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on February 28, 2020.

As of March 31, 2021, there were no material changes in our contractual obligations and commitments from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on February 26, 2021.

Off-Balance Sheet Arrangements

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Recent Accounting Pronouncements

See Note 1 in the notes to the consolidated financial statements for a discussion of recent accounting pronouncements.

See Note 1 in the notes to the unaudited consolidated financial statements for a discussion of recent accounting pronouncements.

Critical Accounting Policies and Estimates

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Our actual results may differ from these estimates.

There have been no

material changes in our critical accounting policies from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on February 28, 2020.

There have been no material changes in our critical accounting policies from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on February 26, 2021.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis