Rapid7, Inc. 10-Q

Item 2. 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 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; and • 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 II, Item 1A. Furthermore, such forward-looking statements 25 Table of Contents 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. Overview 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 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, 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. First, the tools to manage complex security problems are often equally complicated to use. Second, there is a scarcity of cybersecurity professionals who are qualified to successfully manage these sophisticated tools. 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. 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. 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 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. Our ongoing commitment to researching and partnering with the technology community helps to curb new security risks born through innovation. We are also investing in under-served, at risk communities, like non-profits and hospitals, to better understand their needs and make security technology and services accessible. By continuously improving our technology, stemming the creation of risk in the community, and making security more usable and accessible, Rapid7 aims to close the Security Achievement Gap. We market and sell our products and professional services to organizations of all sizes globally, including mid-market businesses, enterprises, non-profits, educational institutions and government agencies. 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, 2021, we had over 9,900 customers in 144 countries, including 39% 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, 2021 or 2020. Recent Developments Acquisition On July 16, 2021, we acquired IntSights Cyber Intelligence Ltd. (IntSights), a provider of contextualized external threat intelligence and proactive threat remediation, for a purchase price with an aggregate fair value of $322.2 million. The purchase consideration consisted of $319.2 million in cash paid at closing, $5.6 million in deferred cash payments and a $2.6 million receivable for estimated purchase price adjustments. The deferred cash payments will be held by us to satisfy indemnification obligations and certain post-closing purchase price adjustments payable within eighteen months of the acquisition date. Additionally, we issued an aggregate of 206,608 shares of our common stock to the founders of IntSights in satisfaction of 30% of their portion of the purchase consideration. COVID-19 Response Rapid7 remains focused on supporting its customers, partners, employees and communities during the COVID-19 pandemic. The impact of COVID-19 on the global economy and on our business continues to be a fluid situation. As a result of the 26 Table of Contents 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. At this point, the extent to which the COVID-19 pandemic may impact our business, results of operations and financial condition is uncertain. 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 three and nine months ended September 30, 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, the result of vaccination efforts, resurgence of the virus, 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 six key areas: (1) Vulnerability Risk Management, (2) Incident Detection and Response, (3) Application Security, (4) Cloud Security, (5) Security Orchestration and Automation Response and (6) Threat Intelligence. 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 subscription basis. Our InsightIDR, InsightVM, InsightAppSec, InsightConnect, InsightCloudSec (formerly known as DivvyCloud) and Threat Intelligence products are offered as cloud-based subscriptions, generally with a one-year term. • Managed services, through which we operate our products and provide our capabilities on behalf of our customers. Our Managed Vulnerability Management, Managed Application Security and Managed Detection and Response products are offered on a managed service basis, generally pursuant to one-year agreements. • Licensed software, including both term and perpetual licenses, and the simultaneous sale of maintenance and support. Our Nexpose, Metasploit, AppSpider and InsightCloudSec products are offered through term or perpetual software licenses. Our customers who purchase software licenses also purchase maintenance and support, which provides our customers with telephone and web-based support and ongoing bug fixes and repairs during the term of the maintenance and support agreement, and our customers who purchase our Nexpose and Metasploit products also purchase content subscriptions, which provide them with real-time access to the latest vulnerabilities and exploits. Our maintenance and support and content subscription agreements are typically for one-year terms. 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. 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 September 30, 2021 and 2020, recurring revenue, defined as revenue from term software licenses, content subscriptions, managed services, cloud-based subscriptions and maintenance and support, was 92% and 91%, respectively, of total revenue. For the nine months ended September 30, 2021 and 2020, recurring revenue was 92% and 91%, respectively, of total revenue. 27 Table of Contents Key Metrics 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 September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (dollars in thousands) Total revenue $ 139,894 $ 105,075 $ 383,766 $ 298,327 Year-over-year revenue growth 33.1 % 26.4 % 28.6 % 26.8 % Non-GAAP income from operations $ 5,733 $ 2,444 $ 13,708 $ 2,776 Free cash flow $ 14,327 $ 6,449 $ 37,232 $ (7,227) As of September 30, 2021 2020 (dollars in thousands) Number of customers (1) 9,909 8,442 Year-over-year customer growth 17 % 9 % Annualized recurring revenue (ARR) $ 550,044 $ 398,725 Year-over-year ARR growth 38.0 % 29.0 % (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 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. We monitor total revenue and believe it is useful to investors as a measure of the overall success of our business. 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. 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. Free Cash Flow . Free cash flow is a non-GAAP measure that we define as net cash provided by operating activities less purchases of property and equipment and capitalization of internal-use software costs. We consider free cash flow to be a 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 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. Annualized Recurring Revenue (ARR) is defined as the annual value of all recurring revenue related to contracts in place at the end of the quarter. ARR should be viewed independently of revenue and deferred revenue as ARR is an operating metric and is not intended to be combined with or replace these items. 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 28 Table of Contents 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, 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 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 (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. We believe these non-GAAP financial measures are useful to investors in assessing our operating performance due to the following factors: • Stock-based compensation expense. We exclude stock-based compensation expense because of varying available valuation methodologies, subjective assumptions and the variety of equity instruments that can impact our non-cash expense. We believe that providing non-GAAP financial measures that exclude stock-based compensation expense allows for more meaningful comparisons between our operating results from period to period. • Amortization of acquired intangible assets. We believe that excluding the impact of amortization of acquired intangible assets allows for more meaningful comparisons between operating results from period to period as the intangible assets are valued at the time of acquisition and are amortized over several years after the acquisition. • Amortization of debt discount and issuance costs. 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. We exclude certain litigation-related expenses consisting of professional fees and related costs incurred by us related to significant litigation outside the ordinary course of business. We believe it is useful to exclude such expenses because we do not consider such amounts to be part of our ongoing operations. • Acquisition-related expenses. 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. Our acquisition-related expenses for the three and nine months ended September 30, 2021 include $9.0 million of tax expense related to the sale of acquired intellectual property through an intercompany transaction related to the Alcide acquisition. • Anti-dilutive impact of capped call transaction. Our capped calls transactions are intended to offset potential dilution from the conversion features in our convertible senior notes. 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- 29 Table of Contents GAAP net income (loss) per diluted share, when applicable, to provide investors with useful information in evaluating our financial performance on a per share basis. 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 results. 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, 2021 and 2020: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (in thousands) GAAP total gross profit $ 96,424 $ 74,047 $ 264,698 $ 210,504 Stock-based compensation expense 1,604 1,132 4,970 3,194 Amortization of acquired intangible assets 4,810 2,434 10,471 6,267 Non-GAAP total gross profit $ 102,838 $ 77,613 $ 280,139 $ 219,965 Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (in thousands) GAAP gross profit – products $ 94,652 $ 73,363 $ 260,266 $ 208,969 Stock-based compensation expense 1,073 730 3,291 2,013 Amortization of acquired intangible assets 4,810 2,434 10,471 6,267 Non-GAAP gross profit – products $ 100,535 $ 76,527 $ 274,028 $ 217,249 Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (in thousands) GAAP gross profit – professional services $ 1,772 $ 684 $ 4,432 $ 1,535 Stock-based compensation expense 531 402 1,679 1,181 Non-GAAP gross profit – professional services $ 2,303 $ 1,086 $ 6,111 $ 2,716 The following table reconciles GAAP loss from operations to non-GAAP income from operations for the three and nine months ended September 30, 2021 and 2020: 30 Table of Contents Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (in thousands) GAAP loss from operations $ (34,315) $ (17,916) $ (79,358) $ (53,468) Stock-based compensation expense 29,196 17,128 73,872 46,921 Amortization of acquired intangible assets 5,567 2,581 11,524 6,556 Acquisition-related expenses 5,180 — 7,211 1,138 Litigation-related expenses 105 651 459 1,629 Non-GAAP income from operations $ 5,733 $ 2,444 $ 13,708 $ 2,776 31 Table of Contents The following table reconciles GAAP net loss to non-GAAP net income (loss) for the three and nine months ended September 30, 2021 and 2020: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (in thousands, except share and per share data) GAAP net loss $ (37,700) $ (25,541) $ (101,709) $ (69,931) Stock-based compensation expense 29,196 17,128 73,872 46,921 Amortization of acquired intangible assets 5,567 2,581 11,524 6,556 Acquisition-related expenses 5,180 — 16,176 1,138 Litigation-related expenses 105 651 459 1,629 Amortization of debt discount and issuance costs 1,095 5,206 2,886 12,213 Induced conversion expense — — 2,740 — Non-GAAP net income (loss) $ 3,443 $ 25 $ 5,948 $ (1,474) Reconciliation of net loss per share, basic: GAAP net loss per share, basic $ (0.67) $ (0.50) $ (1.86) $ (1.38) Non-GAAP adjustments to net loss 0.73 0.50 1.97 1.35 Non-GAAP net income (loss) per share, basic $ 0.06 $ 0.00 $ 0.11 $ (0.03) Reconciliation of net loss per share, diluted: GAAP net loss per share, diluted $ (0.67) $ (0.50) $ (1.86) $ (1.38) Non-GAAP adjustments to net loss 0.73 0.50 1.96 1.35 Non-GAAP net income (loss) per share, diluted $ 0.06 $ 0.00 $ 0.10 $ (0.03) Weighted average shares used in GAAP and non-GAAP per share calculation, basic and diluted 55,976,671 51,293,210 54,743,538 50,707,553 Weighted average shares used in GAAP and non-GAAP per share calculation: Basic 55,976,671 51,293,210 54,743,538 50,707,553 Diluted 58,376,992 53,894,202 57,181,646 50,707,553 The following table reconciles GAAP net loss to adjusted EBITDA for the three and nine months ended September 30, 2021 and 2020: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (in thousands) GAAP net loss $ (37,700) $ (25,541) $ (101,709) $ (69,931) Interest income (84) (87) (302) (1,343) Interest expense 2,962 7,328 11,415 16,707 Other (income) expense, net 299 (143) 1,217 94 Provision for income taxes 208 527 10,021 1,005 Depreciation expense 3,155 2,706 9,202 8,121 Amortization of intangible assets 6,590 3,222 14,311 8,226 Stock-based compensation expense 29,196 17,128 73,872 46,921 Acquisition-related expenses 5,180 — 7,211 1,138 Litigation-related expenses 105 651 459 1,629 Adjusted EBITDA $ 9,911 $ 5,791 $ 25,697 $ 12,567 32 Table of Contents The following table reconciles net cash provided by operating activities to free cash flow for the three and nine months ended September 30, 2021 and 2020: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (in thousands) Net cash provided by operating activities $ 19,448 $ 11,078 $ 49,229 $ 4,305 Purchases of property and equipment (2,164) (3,170) (4,835) (7,125) Capitalized internal-use software costs (2,957) (1,459) (7,162) (4,407) Free cash flow $ 14,327 $ 6,449 $ 37,232 $ (7,227) Components of Results of Operations Revenue 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. Products 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 We generate professional service revenue from the sale of deployment and training services related to our products, incident response services and security advisory services. Cost of Revenue Our total cost of revenue consists of the costs of products and professional services. Cost of revenue includes overhead costs for depreciation, facilities, IT, information security, and recruiting. Our IT overhead costs include IT personnel compensation costs and costs associated with our IT infrastructure. All overhead costs are allocated based on relative headcount. Cost of Products Cost of products consists of personnel and related costs for our content, support, managed service and cloud operations teams, including salaries and other payroll related costs, bonuses, stock-based compensation and allocated overhead costs. Also included in cost of products are software license fees, cloud computing costs and internet connectivity expenses directly related to delivering our products, amortization of contract fulfillment costs, as well as amortization of certain intangible assets including internally developed software. Cost of Professional Services Cost of professional services consists of personnel and related costs for our professional services team, including salaries and other payroll related costs, bonuses, stock-based compensation, costs of contracted third-party vendors, travel and entertainment expenses and allocated overhead costs. We expect our cost of revenue to increase on an absolute dollar basis as we continue to grow our revenue. Gross Margin Gross margin, or gross profit as a percentage of revenue, has been and will continue to be affected by a variety of factors, including the average sales price of our products and services, transaction volume growth, the mix of revenue between software licenses, cloud-based subscriptions, managed services and professional services and changes in cloud computing costs. We expect our gross margins to fluctuate over time depending on the factors described above. 33 Table of Contents Operating Expenses Operating expenses consist of research and development, sales and marketing, and general and administrative expenses. Operating expenses include overhead costs for depreciation, facilities, IT, information security and recruiting. Our IT overhead costs include IT personnel compensation costs and costs associated with our IT infrastructure. All overhead costs are allocated based on relative headcount. Research and Development Expense Research and development expense consists of personnel costs for our research and development team, including salaries and other payroll related costs, bonuses and stock-based compensation. 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 and to increase slightly as a percentage of total revenue. Sales and Marketing Expense Sales and marketing expense consists of personnel costs for our sales and marketing team, including salaries and other payroll related costs, commissions, including amortization of deferred commissions, bonuses and stock-based compensation. Additional expenses include marketing activities and promotional events, travel and entertainment, training costs, amortization of certain intangible assets and allocated overhead costs. We expect sales and marketing expense to increase on an absolute dollar basis in the near term as we continue to increase investments to drive our revenue growth, but to decrease as a percentage of total revenue. General and Administrative Expense General and administrative expense consists of personnel costs for our executive, legal, human resources, and finance and accounting departments, including salaries and other payroll related costs, bonuses and stock-based compensation. Additional expenses include travel and entertainment, professional fees, litigation-related expenses, insurance, acquisition-related expenses, amortization of certain intangible assets and allocated overhead costs. We expect general and administrative expense to increase on an absolute dollar basis in the near term as we continue to increase investments to support our growth, but to remain relatively consistent as a percentage of total revenue. Interest Income Interest income consists primarily of interest income on our cash and cash equivalents and our short and long-term investments. Interest Expense 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. Provision for Income Taxes 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. 34 Table of Contents 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, 2021 2020 2021 2020 (in thousands) Consolidated Statement of Operations Data: Revenue: Products $ 131,149 $ 98,559 $ 359,581 $ 278,538 Professional services 8,745 6,516 24,185 19,789 Total revenue 139,894 105,075 383,766 298,327 Cost of revenue: (1) Products 36,497 25,196 99,315 69,569 Professional services 6,973 5,832 19,753 18,254 Total cost of revenue 43,470 31,028 119,068 87,823 Operating expenses: (1) Research and development 43,880 28,509 112,265 78,831 Sales and marketing 63,041 48,448 174,264 141,552 General and administrative 23,818 15,006 57,527 43,589 Total operating expenses 130,739 91,963 344,056 263,972 Loss from operations (34,315) (17,916) (79,358) (53,468) Interest income 84 87 302 1,343 Interest expense (2,962) (7,328) (11,415) (16,707) Other income (expense), net (299) 143 (1,217) (94) Loss before income taxes (37,492) (25,014) (91,688) (68,926) Provision for income taxes 208 527 10,021 1,005 Net loss $ (37,700) $ (25,541) $ (101,709) $ (69,931) (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, 2021 2020 2021 2020 (in thousands) Stock-based compensation expense: Cost of revenue $ 1,604 $ 1,132 $ 4,970 $ 3,194 Research and development 14,549 6,818 31,784 17,852 Sales and marketing 6,348 4,506 18,132 12,529 General and administrative 6,695 4,672 18,986 13,346 Total stock-based compensation expense $ 29,196 $ 17,128 $ 73,872 $ 46,921 Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (in thousands) Depreciation and amortization expense: Cost of revenue $ 6,404 $ 3,589 $ 14,940 $ 9,450 Research and development 925 693 2,654 2,045 Sales and marketing 1,801 1,139 4,375 3,529 General and administrative 615 507 1,544 1,323 Total depreciation and amortization expense $ 9,745 $ 5,928 $ 23,513 $ 16,347 35 Table of Contents 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, 2021 2020 2021 2020 Consolidated Statement of Operations Data: Revenue: Products 93.7 % 93.8 % 93.7 % 93.4 % Professional services 6.3 6.2 6.3 6.6 Total revenue 100.0 100.0 100.0 100.0 Cost of revenue: Products 26.1 24.0 25.9 23.3 Professional services 5.0 5.5 5.1 6.1 Total cost of revenue 31.1 29.5 31.0 29.4 Operating expenses: Research and development 31.4 27.1 29.3 26.4 Sales and marketing 45.1 46.1 45.4 47.5 General and administrative 17.0 14.3 15.0 14.6 Total operating expenses 93.5 87.5 89.7 88.5 Loss from operations (24.6) (17.0) (20.7) (17.9) Interest income 0.1 0.1 0.1 0.5 Interest expense (2.1) (7.0) (3.0) (5.7) Other income (expense), net (0.2) 0.1 (0.3) — Loss before income taxes (26.8) (23.8) (23.9) (23.1) Provision for income taxes 0.1 0.5 2.6 0.3 Net loss (26.9) % (24.3) % (26.5) % (23.4) % Comparison of the Three Months Ended September 30, 2021 and 2020 Revenue Three Months Ended September 30, Change 2021 2020 $ % (dollars in thousands) Revenue: Products $ 131,149 $ 98,559 $ 32,590 33.1 % Professional services 8,745 6,516 2,229 34.2 Total revenue $ 139,894 $ 105,075 $ 34,819 33.1 % Total revenue increased by $34.8 million in the three months ended September 30, 2021 compared to the same period in 2020 and consisted of $31.0 million of organic growth and $3.8 million related to IntSights. The $31.0 million increase in revenue related to organic growth consisted of a $3.4 million increase in revenue from new customers and a $27.6 million increase in revenue from existing customers. The $27.6 million increase in revenue from existing customers was due to an increase in revenue from renewals, upsells and cross-sells as a result of our larger base of existing customers. 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, 2021 compared to the same period in 2020 was comprised of $24.7 million generated from sales in North America and $10.1 million generated from sales from the rest of the world. 36 Table of Contents Cost of Revenue Three Months Ended September 30, Change 2021 2020 $ % (dollars in thousands) Cost of revenue: Products $ 36,497 $ 25,196 $ 11,301 44.9 % Professional services 6,973 5,832 1,141 19.6 Total cost of revenue $ 43,470 $ 31,028 $ 12,442 40.1 % Gross margin %: Products 72.2 % 74.4 % Professional services 20.3 10.5 Total gross margin % 68.9 % 70.5 % Total cost of revenue increased by $12.4 million in the three months ended September 30, 2021 compared to the same period in 2020, primarily due to a $4.9 million increase in cloud computing costs related to growing cloud-based subscription and managed services revenue and a $3.1 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 as well as $0.4 million of additional costs attributable to the employees acquired in the IntSights acquisition in July 2021. Our increase in total cost of revenue also included a $2.4 million increase in amortization expense for acquired intangible assets, a $0.7 million increase in third-party professional service consulting costs and a $1.3 million increase in other expenses. Total gross margin percentage decreased for the three months ended September 30, 2021 compared to the same period in 2020. The decrease in products gross margin for the three months ended September 30, 2021 was primarily due to an increase in amortization expense for the developed technology acquired intangible asset related to the acquisition of IntSights. The increase in professional services gross margin for the three months ended September 30, 2021 was primarily due to the increase in professional services revenue. Operating Expenses Research and Development Expense Three Months Ended September 30, Change 2021 2020 $ % (dollars in thousands) Research and development $ 43,880 $ 28,509 $ 15,371 53.9 % % of revenue 31.4 % 27.1 % Research and development expense increased by $15.4 million in the three months ended September 30, 2021 compared to the same period in 2020, primarily due to a $13.2 million increase in personnel costs, a $1.3 million increase in allocated overhead driven largely by an increase in IT and facilities costs, a $0.3 million increase in third-party infrastructure costs, and a $0.6 million increase in other expenses. The $13.2 million increase in personnel costs was primarily due to a $5.5 million increase in salaries and related costs driven by growth in headcount, inclusive of $5.4 million in additional salaries and related costs attributable to the employees acquired in the acquisition of IntSights in July 2021, and a $7.7 million increase in stock-based compensation expense, including $3.1 million of stock-based compensation expense related to the modification of a stock award and $2.8 million of stock-based compensation expense related to RSUs issued to retained employees and common stock issued to the founders as part of the acquisition of IntSights. Sales and Marketing Expense Three Months Ended September 30, Change 2021 2020 $ % (dollars in thousands) Sales and marketing $ 63,041 $ 48,448 $ 14,593 30.1 % % of revenue 45.1 % 46.1 % Sales and marketing expense increased by $14.6 million in the three months ended September 30, 2021 compared to the same period in 2020, primarily due to a $9.4 million increase in personnel costs, a $2.3 million increase in commission expense, a $1.1 million increase in marketing and advertising costs, a $1.5 million increase in allocated overhead driven largely by an increase in IT and facilities costs and a $0.3 million increase in other expenses. The $9.4 million increase in personnel costs was 37 Table of Contents primarily due to a $7.6 million increase in salaries and related costs driven by growth in headcount, inclusive of $2.7 million of additional costs attributable to the employees acquired in the IntSights acquisition in July 2021, and a $1.8 million increase in stock-based compensation expense, inclusive of $0.3 million in stock-based compensation expense related to RSUs issued to retained employees acquired in the acquisition of IntSights. General and Administrative Expense Three Months Ended September 30, Change 2021 2020 $ % (dollars in thousands) General and administrative $ 23,818 $ 15,006 $ 8,812 58.7 % % of revenue 17.0 % 14.3 % General and administrative expense increased by $8.8 million in the three months ended September 30, 2021 compared to the same period in 2020, primarily due to a $5.5 million increase in professional fees primarily due to acquisition-related expenses and other professional consulting fees, a $3.1 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 $1.1 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 2021 2020 $ % (dollars in thousands) Interest income $ 84 $ 87 $ (3) (3.4) % % of revenue 0.1 % 0.1 % Interest income in the three months ended September 30, 2021 remained consistent with the same period in 2020. Interest Expense Three Months Ended September 30, Change 2021 2020 $ % (dollars in thousands) Interest expense $ (2,962) $ (7,328) $ 4,366 (59.6) % % of revenue (2.1) % (7.0) % Interest expense decreased by $4.4 million in the three months ended September 30, 2021 compared to the same period in 2020 primarily due to a $4.7 million decrease in amortization of debt discount costs as a result of our adoption of ASU 2020-06 and a $0.2 million decrease in contractual interest expense, partially offset by a $0.5 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. Other Income (Expense), Net Three Months Ended September 30, Change 2021 2020 $ % (dollars in thousands) Other income (expense), net $ (299) $ 143 $ (442) (309.1) % % of revenue (0.2) % 0.1 % Other income (expense), net decreased by $0.4 million in the three months ended September 30, 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. 38 Table of Contents Provision for Income Taxes Three Months Ended September 30, Change 2021 2020 $ % (dollars in thousands) Provision for income taxes $ 208 $ 527 $ (319) (60.5) % % of revenue 0.1 % 0.5 % Provision for income taxes decreased by $0.3 million in the three months ended September 30, 2021 compared to the same period in 2020 primarily due to the taxable losses of IntSights. Comparison of the Nine Months Ended September 30, 2021 and 2020 Revenue Nine Months Ended September 30, Change 2021 2020 $ % (dollars in thousands) Revenue: Products $ 359,581 $ 278,538 $ 81,043 29.1 % Professional services 24,185 19,789 4,396 22.2 Total revenue $ 383,766 $ 298,327 $ 85,439 28.6 % Total revenue increased by $85.4 million in the nine months ended September 30, 2021 compared to the same period in 2020 and consisted of $81.6 million of organic growth and $3.8 million related to IntSights. The $81.6 million increase in revenue related to organic growth consisted of a $5.8 million increase in revenue from new customers and a $75.8 million increase in revenue from existing customers. The $75.8 million increase in revenue from existing customers was due to an increase in revenue from renewals, upsells and cross-sells as a result of our larger base of existing customers. 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 nine months ended September 30, 2021 compared to the same period in 2020 was comprised of $63.3 million generated from sales in North America and $22.1 million generated from sales from the rest of the world. Cost of Revenue Nine Months Ended September 30, Change 2021 2020 $ % (dollars in thousands) Cost of revenue: Products $ 99,315 $ 69,569 $ 29,746 42.8 % Professional services 19,753 18,254 1,499 8.2 Total cost of revenue $ 119,068 $ 87,823 $ 31,245 35.6 % Gross margin %: Products 72.4 % 75.0 % Professional services 18.3 7.8 Total gross margin % 69.0 % 70.6 % Total cost of revenue increased by $31.2 million in the nine months ended September 30, 2021 compared to the same period in 2020, primarily due to a $14.3 million increase in cloud computing costs related to growing cloud-based subscription and managed services revenue and a $10.6 million increase in personnel costs, inclusive of a $1.8 million increase in stock-based compensation expense, resulting from an increase in headcount to support our growing customer base, as well as $0.8 million of additional costs attributable to the employees acquired in the IntSights acquisition in July 2021 and the DivvyCloud acquisition in May 2020. Our increase in total cost of revenue also included a $4.2 million increase in amortization expense for acquired intangible assets, a $1.1 million increase in amortization expense for capitalized internally-developed software and a $1.0 million increase in third-party professional service consulting costs. Total gross margin percentage decreased for the nine months ended September 30, 2021 compared to the same period in 2020. The decrease in products gross margin for the nine months ended September 30, 2021 was primarily due to an increase in 39 Table of Contents amortization expense for the developed technology acquired intangible asset related to the acquisition of IntSights. The increase in professional services gross margin for the nine months ended September 30, 2021 was primarily due to the increase in professional services revenue. Operating Expenses Research and Development Expense Nine Months Ended September 30, Change 2021 2020 $ % (dollars in thousands) Research and development $ 112,265 $ 78,831 $ 33,434 42.4 % % of revenue 29.3 % 26.4 % Research and development expense increased by $33.4 million in the nine months ended September 30, 2021 compared to the same period in 2020, primarily due to a $28.9 million increase in personnel costs, a $2.2 million increase in third-party infrastructure costs, a $2.2 million increase in allocated overhead driven largely by an increase in IT and facilities costs and a $0.1 million increase in other expenses. The $28.9 million increase in personnel costs was primarily due to a $15.0 million increase in salaries and related costs driven by growth in headcount, inclusive of $8.0 million in additional salaries and related costs attributable to the employees acquired in the acquisitions of IntSights in July 2021, Alcide in January 2021 and DivvyCloud in May 2020, and a $13.9 million increase in stock-based compensation expense. The $13.9 million increase in stock-based compensation expense includes $8.0 million of stock-based compensation for employees acquired in the acquisitions of IntSights, DivvyCloud and Alcide, inclusive of $3.1 million of stock-based compensation expense related to the modification of a stock award. Sales and Marketing Expense Nine Months Ended September 30, Change 2021 2020 $ % (dollars in thousands) Sales and marketing $ 174,264 $ 141,552 $ 32,712 23.1 % % of revenue 45.4 % 47.5 % Sales and marketing expense increased by $32.7 million in the nine months ended September 30, 2021 compared to the same period in 2020, primarily due to a $23.7 million increase in personnel costs, a $5.8 million increase in commission expense, a $3.0 million increase in marketing and advertising costs, a $0.7 million increase in amortization of acquired intangible assets and a $1.6 million increase in other expenses. The $23.7 million increase in personnel costs was primarily due to a $18.1 million increase in salaries and related costs driven by growth in headcount, inclusive of $5.2 million of additional costs attributable to the employees acquired in the acquisitions of IntSights in July 2021, Alcide in January 2021 and DivvyCloud in May 2020, and a $5.6 million increase in stock-based compensation expense. These increases were partially offset by a $1.1 million decrease in allocated overhead driven by costs related to our global kick-off meeting in the prior year and a $1.0 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 2021 2020 $ % (dollars in thousands) General and administrative $ 57,527 $ 43,589 $ 13,938 32.0 % % of revenue 15.0 % 14.6 % General and administrative expense increased by $13.9 million in the nine months ended September 30, 2021 compared to the same period in 2020, primarily due to a $8.0 million increase in personnel costs due to an increase in headcount, inclusive of a $5.6 million increase in stock-based compensation expense, a $6.4 million increase in professional fees primarily due to acquisition-related expenses and other professional consulting fees and a $1.8 million increase in other expenses. These increases were partially offset by a $2.3 million decrease in bad debt expense. 40 Table of Contents Interest Income Nine Months Ended September 30, Change 2021 2020 $ % (dollars in thousands) Interest income $ 302 $ 1,343 $ (1,041) (77.5) % % of revenue 0.1 % 0.5 % Interest income decreased by $1.0 million in the nine months ended September 30, 2021 compared to the same period in 2020 primarily due to a decrease in interest rates. Interest Expense Nine Months Ended September 30, Change 2021 2020 $ % (dollars in thousands) Interest expense $ (11,415) $ (16,707) $ 5,292 (31.7) % % of revenue (3.0) % (5.7) % Interest expense decreased by $5.3 million in the nine months ended September 30, 2021 compared to the same period in 2020 primarily due to a $11.0 million decrease in amortization of debt discount costs as a result of our adoption of ASU 2020-06, partially offset by $2.7 million of induced conversion expense incurred in conjunction with the partial repurchase of the 2023 Notes, a $1.2 million increase in contractual interest and a $1.8 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. Other Income (Expense), Net Nine Months Ended September 30, Change 2021 2020 $ % (dollars in thousands) Other income (expense), net $ (1,217) $ (94) $ (1,123) 1,194.7 % % of revenue (0.3) % — % Other income (expense), net decreased by $1.1 million in the nine months ended September 30, 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 Nine Months Ended September 30, Change 2021 2020 $ % (dollars in thousands) Provision for income taxes $ 10,021 $ 1,005 $ 9,016 897.1 % % of revenue 2.6 % 0.3 % Provision for income taxes increased by $9.0 million in the nine months ended September 30, 2021 compared to the same period in 2020 primarily due to $9.0 million of tax expense recorded for an intercompany sale of intellectual property as part of post-acquisition tax planning related to the Alcide acquisition. 41 Table of Contents Liquidity and Capital Resources As of September 30, 2021, we had $227.1 million in cash and cash equivalents, $82.5 million in short- and long-term investments that have maturities ranging from one to fifteen months and an accumulated deficit of $691.4 million. Since our inception, we have generated significant losses and expect to continue to generate losses for the foreseeable future. Our principal sources of liquidity are cash and cash equivalents, short and long-term investments and our Credit and Security Agreement (Credit Agreement). To date, we have financed our operations primarily through private and public equity financings and issuance of convertible senior notes and through cash generated by operating activities. We believe that our existing cash and cash equivalents, our short and long-term investments, our available borrowings under our Credit Agreement and cash generated by operating activities will be sufficient to meet our working capital expenditure requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support research and development efforts, the expansion of sales and marketing activities, particularly internationally, the introduction of new and enhanced products and service offerings and the cost of any future acquisitions of technology or businesses and any election we make to redeem our convertible senior notes. In the event that additional financing is required from outside sources, we may be unable to raise the funds on acceptable terms, if at all. 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. Cash Flows The following table shows a summary of our cash flows for the nine months ended September 30, 2021 and 2020: Nine Months Ended September 30, 2021 2020 (in thousands) Cash, cash equivalents and restricted cash at beginning of period $ 173,617 $ 123,413 Net cash provided by operating activities 49,229 4,305 Net cash used in investing activities (307,887) (90,469) Net cash provided by financing activities 313,420 202,300 Effect of exchange rate changes on cash, cash equivalents and restricted cash (849) 160 Cash, cash equivalents and restricted cash at end of period $ 227,530 $ 239,709 Acquisitions On July 16, 2021, we acquired IntSights Cyber Intelligence Ltd. (IntSights), a provider of contextualized external threat intelligence and proactive threat remediation, for a purchase price with an aggregate fair value of $322.2 million. The purchase consideration consisted of $319.2 million in cash paid at closing, $5.6 million in deferred cash payments and a $2.6 million receivable for estimated purchase price adjustments. On April 12, 2021, we acquired Velocidex Enterprises Pty Ltd (Velocidex), a leading open-source technology and community used for endpoint monitoring, digital forensics, and incident response, for a purchase price of $3.0 million. 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 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. We expect to redeem the $45.4 million in outstanding principal of the 1.25% convertible senior notes due 2023 (the 2023 Notes), plus accrued and unpaid interest, by the redemption date of November 30, 2021. 42 Table of Contents Uses of Funds Our historical uses of cash have primarily consisted of cash used for operating activities such as expansion of our sales and marketing operations, research and development activities and other working capital needs, as well as cash used for business acquisitions and purchases of property and equipment, including leasehold improvements for our facilities. Operating Activities Operating activities provided $49.2 million of cash and cash equivalents in the nine months ended September 30, 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 $101.7 million, offset by a decrease in our net operating assets of $42.3 million and non-cash charges of $108.6 million related primarily to depreciation and amortization, stock-based compensation expense, deferred income taxes, 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 $24.4 million increase in deferred revenue due to increased billings, a $23.5 million decrease in accounts receivable due to an increase in collections, a $3.6 million increase in other liabilities, a $3.1 million decrease in prepaid expenses and other assets and a $2.1 million increase in accounts payable, which each had a positive impact on operating cash flow. These factors were partially offset by a $4.6 million decrease in accrued expenses, primarily as a result of the payout of annual bonuses and year-end commissions and a $9.8 million increase in deferred contract acquisition and fulfillment costs, which each had a negative impact on operating cash flow. 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 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 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. Investing Activities Investing activities used $307.9 million of cash in the nine months ended September 30, 2021, consisting of $358.4 million of cash paid for the acquisitions of IntSights, Alcide and Velocidex, net of cash acquired, $7.2 million for capitalization of internal-use software costs, $3.0 million for other investing activities, $4.8 million in capital expenditures to purchase computer equipment, furniture and fixtures and leasehold improvements, partially offset by $65.5 million of investment sales and maturities, net of purchases. 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. Financing Activities Financing activities provided $313.4 million of cash in the nine months ended September 30, 2021, which consisted primarily of $585.0 million in proceeds from the issuance of the 2027 Notes, net of issuance costs paid of $15.0 million, $9.3 million in proceeds from the issuance of common stock purchased by employees under the Rapid7, Inc. 2015 Employee Stock Purchase Plan (ESPP) and $3.3 million in proceeds from the exercise of stock options, partially offset by $184.6 million for the repurchase and conversion of the 2023 Notes, $76.0 million for the purchase of 2027 Capped Calls, $11.5 million in withholding taxes paid for the net share settlement of equity awards and $12.1 million for payments related to the acquisitions of DivvyCloud, Alcide and IntSights. 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 ESPP, partially offset by $27.3 million for the purchase of 2025 Capped Calls, $5.9 million in withholding 43 Table of Contents 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. Contractual Obligations and Commitments As of September 30, 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 We do not have any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We do not engage in off-balance sheet financing arrangements. 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 Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (GAAP). The preparation of our consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. 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, 2020 filed with the SEC on February 26, 2021. 44 Table of Contents