What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-24 compared with 2021-02-26 · 151 added, 151 removed, 443 unchanged (41% of the section changed)

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

In the over 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.

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.

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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.

All of our solutions and services are built with and supported by the expertise of our dedicated team of security researchers, expert SOC analysts 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.

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Recent Developments

Acquisition of Alcide.IO Ltd.

On January 28, 2021, we acquired Alcide.IO Ltd., a leading provider of Kubernetes security for a total purchase price of approximately $50 million in cash, 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 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.

Our operational and financial performance were negatively impacted by the slowdown in activity associated with the COVID-19 pandemic for the year ending December 31, 2020 and we expect that to continue going forward.

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 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 have begun to selectively reopen certain offices in a phased approach and to hold in-person or hybrid meetings, on a voluntary basis, taking into consideration government restrictions and employee safety.

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.

At this point, the

extent to which the COVID-19 pandemic may impact our business, results of operations and financial condition is uncertain.

While we have not experienced significant disruptions from the COVID-19 pandemic during the years ended December 31, 2021 and 2020, 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.

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

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

Our Business Model

We have offerings in five key areas:

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

We have offerings in six key areas:

(1) Incident Detection and Response, (2) Cloud Security, (3) Vulnerability Risk Management, (4) Application Security, (5) Threat Intelligence and (6) 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 subscription basis.

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

Our InsightIDR, InsightCloudSec, InsightVM, InsightAppSec, InsightConnect 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 DivvyCloud 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.

• Licensed software consists of term licenses and to a lesser extent perpetual licenses.

When a term license is purchased, maintenance and support and content subscriptions, as applicable, is bundled with the license for the term period.

Our Nexpose, Metasploit, AppSpider and InsightCloudSec products are offered through term software licenses.

When a perpetual license is purchased, a customer typically purchases maintenance and support and content subscriptions, as applicable.

Our maintenance and support 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.

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In 2021, 2020 and 2019 recurring revenue, defined as revenue from term software licenses, content subscriptions, managed services, cloud-based subscriptions and maintenance and support, was 92%, 90% and 87%, respectively, of total revenue.

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 and Logentries, in a trailing 12-month period by the dollar value of the corresponding customer agreements.

Our renewal rate was 103%, 108% and 119% for the quarters ended December 31, 2020, 2019 and 2018, respectively.

For the quarter ended December 31, 2018, our renewal rate was adjusted from the previously disclosed 120% to 119%, based on a reclassification of certain upsells and cross-sells.

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.

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Year-over-year growth 30.1 % 25.9 % 33.9 %

Non-GAAP income (loss) from operations $ 2,032 $ 2,404 $ (26,273)

Operating cash flow $ 4,887 $ (1,420) $ 6,066

Non-GAAP income from operations $ 7,599 $ 2,032 $ 2,404

Free cash flow $ 35,053 $ (15,045) $ (36,935)

As of December 31,

(dollars in thousands)

Number of customers 9,736 9,022

Year-over-year growth 7.9 % 15.5 %

Annualized recurring revenue (ARR) 599,020 432,946

Year-over-year growth 38.4 % 27.8 %

Number of customers (1)

Year-over-year growth 18.0 % 9.3 %

(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 .

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

Non-GAAP Income (Loss) from Operations .

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

We believe non-GAAP income (loss) 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 allow for greater transparency with respect to metrics used by our management in its financial and operational decision-making.

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

Operating Cash Flow .

We monitor our operating cash flow and believe it is a useful to investors 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 significantly impacted by the timing of commission and bonus payments, accounts payable payments and collections of accounts receivable.

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;

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.

Annualized Recurring Revenue and Growth.

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

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.

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 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 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.

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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, follow-on public offering costs and litigation-related expenses.

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 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, 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, when applicable, 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:

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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 is neither comparable to the prior period nor predictive of future results.

• Litigation-related expenses.

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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 and follow-on public offering costs.

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

• 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 year ended December 31, 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-GAAP net income (loss) per diluted share to provide investors with useful information in evaluating our financial performance on a per share basis.

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, 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.

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Non-GAAP gross profit – professional services $ 8,520 $ 5,469 $ 7,258

The following table reconciles GAAP loss from operations to non-GAAP income (loss) from operations for the years ended December 31, 2020, 2019 and 2018:

The following table reconciles GAAP loss from operations to non-GAAP income from operations for the years ended December 31, 2021, 2020 and 2019:

Year Ended December 31,

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Acquisition-related expenses 7,211 1,343 514

Follow-on public offering costs — — 205

Litigation-related expenses 569 1,762 742

Non-GAAP income (loss) from operations $ 2,032 $ 2,404 $ (20,381)

The following table reconciles GAAP net loss to non-GAAP net income (loss) for the years ended December 31, 2020, 2019 and 2018:

Non-GAAP income from operations $ 7,599 $ 2,032 $ 2,404

The following table reconciles GAAP net loss to non-GAAP net (loss) income for the years ended December 31, 2021, 2020 and 2019:

Year Ended December 31,

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Acquisition-related expenses 16,176 1343 514

Follow-on public offering costs — — 205

Litigation-related expenses 569 1,762 742

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

Induced conversion expense 2,740 — (761)

Amortization of debt discount and issuance costs 3,982 17,518 10,513

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Acquisition-related expenses 7,211 1,343 514

Follow-on public offering costs — — 205

Litigation-related expenses 569 1,762 742

Adjusted EBITDA $ 23,795 $ 15,525 $ 12,453

The following table reconciles net cash provided by (used in) operating activities to free cash flow for the years ended December 31, 2021, 2020 and 2019:

Year Ended December 31,

2021 2020 2019

(in thousands)

Net cash provided by (used in) operating activities $ 53,917 $ 4,887 $ (1,420)

Purchases of property and equipment (9,010) (13,802) (29,428)

Capitalized internal-use software costs (9,854) (6,130) (6,087)

Free cash flow $ 35,053 $ (15,045) $ (36,935)

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, (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.

We generate products revenue from the sale of (1) cloud-based subscriptions, (2) managed services offerings, which utilize our products and (3) software licenses with related maintenance and support and content subscription, as applicable.

Software license revenue consist of revenues from term licenses, and to a lesser extent perpetual licenses.

When a term license is purchased, maintenance and support and content subscription, as applicable, is bundled with the license for the term period.

When a perpetual license is purchased, a customer typically purchases maintenance and support and content subscription, as applicable.

Professional Services

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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 total cost of revenue consists of the costs of products and professional services, as noted below.

In addition, 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.

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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.

Additional expenses include third-party infrastructure costs, 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.

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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.

We expect interest expense in the near term to represent contractual interest expense and amortization of debt issuance costs related to our convertible senior notes and revolving credit facility.

Other Income (Expense), Net

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Total revenue $ 535,404 $ 411,486 $ 123,918 30.1 %

Total revenue increased by $84.5 million in 2020 compared to 2019 which included $6.3 million of revenue attributable to the DivvyCloud acquisition in May 2020.

The remainder of the increase in revenue was primarily from existing customers as a result of the continued growth of our customer base.

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

Total revenue increased by $123.9 million in 2021 compared to 2020 and consisted of $114.8 million of organic growth and $9.1 million related to the acquisition of IntSights in July 2021.

The $114.8 million increase in revenue related to organic growth consisted of a $3.4 million increase in revenue from new customers and a $111.4 million increase in revenue from existing customers.

The $111.4 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 growing 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 2021 was comprised of $90.5 million generated from sales in North America and $33.4 million generated from sales from the rest of the world.

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(dollars in thousands)

Cost of revenue:

Products $ 140,773 $ 96,864 $ 43,909 45.3 %

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Total gross margin % 68.4 % 70.5 %

Total cost of revenue increased by $30.4 million in 2020 compared to 2019, primarily due to a $14.3 million increase in personnel costs, inclusive of a $1.7 million increase in stock-based compensation expense, resulting from an increase in headcount to support our growing customer base, and a $11.4 million increase in cloud computing costs related to growing cloud-based subscription revenue.

The $14.3 million increase in personnel costs included $1.2 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 $2.6 million increase in allocated overhead driven largely by an increase in IT and facilities costs, a $2.4 million increase in amortization expense for acquired intangible assets and a $1.4 million increase in amortization expense for capitalized internally-developed software.

These increases were partially offset by a $1.7 million decrease in other expenses.

Total cost of revenue increased by $47.4 million in 2021 compared to 2020, primarily due to a $19.7 million increase in cloud computing costs related to growing cloud-based subscription and managed services revenue and a $16.8 million increase in personnel costs, inclusive of a $2.2 million increase in stock-based compensation expense, resulting from an increase in headcount to support our growing customer base, as well as $1.7 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 $6.7 million increase in amortization expense for acquired intangible assets, a $1.9 million increase in third-party professional service consulting costs, a $1.4 million increase in amortization expense for capitalized internally-developed software and a $0.9 million increase in other expenses.

Total gross margin percentage decreased in 2021 compared to 2020.

The decrease in products gross margin 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 was primarily due to a reduction in professional services revenue as customers delayed scheduling the delivery of services in response to the COVID-19 pandemic.

The decrease in products gross margin was primarily due to an increase in revenue from cloud-based subscriptions and managed services, which have lower margins than our licensed software products as well as 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 was primarily due to the increase in professional services revenue.

Operating Expenses

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% of revenue 30.0 % 26.4 %

Research and development expense increased by $29.2 million in 2020 compared to 2019, primarily due to a $22.9 million increase in personnel costs, a $5.1 million increase in allocated overhead driven by costs related to our global kick-off meeting and an increase in IT and facilities costs, and a $1.7 million increase in third-party infrastructure costs.

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

The $22.9 million increase in personnel costs was primarily due to a $14.1 million increase in salaries and related costs driven by growth in headcount, including $5.3 million in additional salaries and related costs attributable to the employees acquired in the acquisition of DivvyCloud in May 2020, and a $8.8 million increase in stock-based compensation expense, including $4.2 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.

Research and development expense increased by $52.2 million in 2021 compared to 2020, primarily due to a $44.5 million increase in personnel costs, a $4.4 million increase in allocated overhead driven largely by an increase in IT and facilities costs, a $2.5 million increase in third-party infrastructure costs and a $0.8 million increase in other expenses.

The $44.5 million increase in personnel costs was primarily due to a $22.3 million increase in salaries and related costs driven by growth in headcount, inclusive of $13.7 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 $22.2 million increase in stock-based compensation expense.

The $22.2 million increase in stock-based compensation expense includes $16.4 million of stock-based compensation for employees acquired in the acquisitions of IntSights, DivvyCloud and Alcide, inclusive of $6.9 million of stock-based compensation expense related to accelerated vesting of a stock award which was deemed a modification of the original award.

Sales and Marketing Expense

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% of revenue 46.2 % 47.6 %

Sales and marketing expense increased by $38.3 million in 2020 compared to 2019, primarily due to a $26.8 million increase in personnel costs, a $6.5 million increase in commission expense, a $5.0 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 $4.0 million increase in marketing and

advertising costs and a $0.9 million increase in other expenses.

The $26.8 million increase in personnel costs was primarily due a $21.9 million increase in salaries and related costs driven by growth in headcount, including $6.1 million of additional costs attributable to the employees acquired in the DivvyCloud acquisition in May 2020, and a $4.9 million increase in stock-based compensation expense, including $1.5 million in stock-based compensation expense related to RSUs issued to DivvyCloud retained employees.

These increases were partially offset by a $4.9 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 $51.5 million in 2021 compared to 2020, primarily due to a $32.9 million increase in personnel costs, an $8.4 million increase in commission expense, a $6.1 million increase in marketing and advertising costs, a $1.2 million increase in amortization of acquired intangible asset and a $2.9 million increase in other expenses.

The $32.9 million increase in personnel costs was primarily due to a $25.9 million increase in salaries and related costs driven by growth in headcount, inclusive of $7.0 million of additional costs attributable to the employees acquired in the acquisitions of IntSights in July 2021 and DivvyCloud in May 2020, and a $7.0 million increase in stock-based compensation expense.

General and Administrative Expense

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% of revenue 14.6 % 14.5 %

General and administrative expense increased by $14.8 million in 2020 compared to 2019, primarily due to a $10.7 million increase in personnel costs due to an increase in headcount, inclusive of a $7.8 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 $0.6 million increase in allocated overhead driven by costs related to our global kick-off meeting as well as an increase in IT costs, a $0.6 million increase in other office expenses and a $0.8 million increase in other expenses.

General and administrative expense increased by $18.8 million in 2021 compared to 2020, primarily due to a $11.8 million increase in personnel costs due to an increase in headcount, inclusive of a $7.3 million increase in stock-based compensation expense, a $6.8 million increase in professional fees primarily due to acquisition-related expenses and other professional consulting fees and a $3.0 million increase in other expenses.

These increases were partially offset by a $2.8 million decrease in bad debt expense.

Interest Income

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% of revenue (2.7) % (5.9) %

Interest expense increased by $10.7 million in 2020 compared to 2019 primarily due to contractual interest and amortization of debt discount and issuance costs related to the 2025 Notes issued in May 2020.

Interest expense decreased by $9.8 million in 2021 compared to 2020 primarily due to primarily due to a $15.8 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 in March 2021, a $1.0 million increase in contractual interest and a $2.3 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 and amended in December 2021.

Other Income (Expense), Net

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(dollars in thousands)

Other income (expense), net $ (81) $ (433) $ 352 (81.3) %

Other income (expense), net $ (1,921) $ (81) $ (1,840) NM

% of revenue (0.4) % 0.0 %

Other income (expense), net reflected a $0.4 million decrease in expense in 2020 compared to 2019 due to realized and unrealized foreign currency gains and losses, primarily related to the euro and British pound sterling.

Other income (expense), net reflected a $1.8 million decrease in expense in 2021 compared to 2020 due to realized and unrealized foreign currency losses, primarily related to the euro and British pound sterling.

Provision for Income Taxes

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% of revenue 1.9 % 0.5 %

Provision for income taxes increased by $1.9 million in 2020 compared to 2019 primarily due to a $1.1 million increase in foreign income and withholding taxes and a $0.8 million deferred tax benefit in 2019.

The $0.8 million deferred tax benefit 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 is not deductible for tax purposes.

Provision for income taxes increased by $8.4 million in 2021 compared to 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.

Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019

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Total revenue $ 411,486 $ 326,947 $ 84,539 25.9 %

(1) Prior to the fiscal year beginning January 1, 2020, we presented revenue on our consolidated statement of operations as products, maintenance and support and professional services revenue.

For the year ended December 31, 2020, we combined products and maintenance and support revenue as products revenue on our consolidated statement of operations as our customers continue to migrate from our on-premise products to our SaaS Insight Platform.

Given this continued migration, we believe it is more relevant to categorize maintenance and support revenue together as products revenue.

Prior periods have been adjusted to conform with this presentation.

Total revenue increased by $82.9 million in 2019 compared to 2018.

The increase in revenue consisted of a $19.0 million increase in revenue from new customers and $63.9 million increase in revenue from existing customers.

The $63.9 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.

Total revenue increased by $84.5 million in 2020 compared to 2019 which included $6.3 million of revenue attributable to the DivvyCloud acquisition in May 2020.

The remainder of the increase in revenue was primarily from existing customers as a result of the continued growth of our customer base.

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

The increase in total revenue in 2020 was comprised of $68.1 million generated from sales in North America and $16.4 million generated from sales from the rest of the world.

The $4.2 million decrease in professional services revenue in 2019 compared to 2018 was primarily due to a reduction in professional services bookings resulting from our continued shift to selling more strategic professional services.

Cost of Revenue

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(dollars in thousands)

Cost of revenue:

Products $ 96,864 $ 68,179 $ 28,685 42.1 %

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Total gross margin % 70.5 % 72.1 %

Total cost of revenue increased by $20.1 million in 2019 compared to 2018, primarily due to $10.8 million increase in cloud computing costs related to growing cloud-based subscription revenue, a $3.4 million increase in allocated overhead driven

largely by an increase in IT and facilities costs, primarily as a result of our increased office space, and a $3.0 million increase in personnel costs, inclusive of a $0.9 million increase in stock-based compensation expense, as a result of an increase in headcount to support our growing customer base.

Our increase in total cost of revenue also included a $2.3 million increase in amortization of intangible assets primarily due our acquisition of NetFort in April 2019 and tCell in October 2018, and a $0.6 million increase in amortization expense for capitalized internally-developed software.

Total gross margin percentage increased in 2019 compared to 2018.

The decrease in products gross margin was due to the continued transition of our Nexpose customers to our subscription-based InsightVM product.

The decrease in professional services gross margin was primarily due to a reduction in professional services revenue.

The $14.3 million increase in personnel costs included $1.2 million of additional costs attributable to the employees acquired in the DivvyCloud acquisition in May 2020.

These increases were partially offset by a $1.7 million decrease in other expenses.

Total gross margin percentage decreased in 2020 compared to 2019.

Operating Expenses

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% of revenue 26.4 % 24.3 %

Research and development expense increased by $11.6 million in 2019 compared to 2018 primarily due to a $9.5 million increase in personnel costs and a $4.4 million increase in allocated overhead driven largely by an increase in IT and facilities costs, primarily as a result of our increased office space.

These increases were partially offset by a $0.5 million write-off of a capitalized internal-use software project in the prior year, a $0.4 million decrease in third-party cloud infrastructure costs, a $0.3 million increase in research and development tax credits, a $0.3 million decrease in travel expenses and a $0.8 million decrease in other expenses.

The $9.5 million increase in personnel costs was primarily due to a $7.5 million increase in salaries and related costs driven by growth in headcount and a $4.8 million increase in stock-based compensation expense, partially offset by a $2.8 million increase in personnel costs that were capitalized as internal-use software costs.

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

Sales and Marketing Expense

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% of revenue 47.6 % 48.2 %

Sales and marketing expense increased by $34.4 million in 2019 compared to 2018 primarily due to a $13.5 million increase in personnel costs, inclusive of a $4.3 million increase in stock-based compensation expense, as a result of an increase in headcount to drive additional sales.

Our increase in sales and marketing expense also included a $8.9 million increase in allocated overhead driven largely by an increase in IT and facilities costs, primarily as a result of our increased office space, a $6.0 million increase in commission expense, a $3.6 million increase in marketing and advertising costs, a $0.6 million increase in travel expenses and a $1.8 million increase in other expenses.

These increases were partially offset by a $4.9 million decrease in travel and entertainment expenses as a result of reduced travel due to the COVID-19 pandemic.

General and Administrative Expense

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% of revenue 14.5 % 13.7 %

General and administrative expense increased by $9.7 million in 2019 compared to 2018 primarily due to a $5.3 million increase in personnel costs, inclusive of a $3.0 million increase in stock-based compensation expense, as a result of an increase in headcount to support our overall company growth, a $1.6 million increase in professional fees primarily due to acquisition and litigation-related expenses and other professional consulting fees, a $1.5 million increase in bad debt expense, a $0.5 million increase in allocated overhead driven largely by an increase in facilities costs, primarily as a result of our increased office space, and a $1.3 million increase in other expenses.

Interest Income

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% of revenue 0.4 % 1.8 %

Interest income increased by $2.8 million in 2019 compared to 2018 primarily due to higher interest income as a result of an increase in cash and cash equivalents and investments due to the issuance of the Notes in August 2018.

Interest income decreased by $4.6 million in 2020 compared to 2019 primarily due to a decrease in interest rates.

Interest Expense

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% of revenue (5.9) % (4.1) %

Interest expense increased by $8.5 million in 2019 compared to 2018 primarily due to contractual interest and amortization of debt discount and issuance costs related to the issuance of the Notes.

Other Income (Expense), Net

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% of revenue — % (0.1) %

Other income (expense), net reflected a $0.1 million increase in expense in 2019 compared to 2018 due to realized and unrealized foreign currency losses, primarily related to the euro and British pound sterling.

Provision for Income Taxes

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% of revenue 0.5 % — %

Provision for income taxes decreased by $0.4 million in 2019 compared to 2018 primarily due to a $0.8 million deferred tax benefit in 2019, partially offset by a $0.2 million release of a tax reserve in the prior year and a one-time $0.2 million tax benefit recognized as a result of tax reform in 2018.

Liquidity and Capital Resources

As of December 31, 2020, we had $173.6 million in cash and cash equivalents, $149.0 million of short- and long-term investments that have maturities ranging from 1 to 16 months.

As of December 31, 2021, we had $164.6 million in cash and cash equivalents and $92.9 million of short- and long-term investments that have maturities ranging from 2 to 23 months.

Since our inception, we have generated significant losses and expect to continue to generate losses for the foreseeable future and as of December 31, 2021 have an accumulated deficit of $736.0 million.

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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 and our available borrowings under our Credit Agreement 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

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 operating and capital requirements for at least the next 12 months as well as our longer-term expected future cash requirements and obligations.

Our foreseeable cash needs, in addition to our recurring operating expenses, include our expected capital expenditures to support expansion of our infrastructure and workforce, office facilities lease obligations, purchase commitments, including our cloud infrastructure services (including with Amazon Web Services (AWS)), potential future acquisitions of technology businesses and any election we make to redeem our convertible senior notes.

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, 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.

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Cash, cash equivalents and restricted cash at end of period $ 165,017 $ 173,617 $ 123,413

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 $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.

On September 16, 2021, we issued a redemption notice for the remaining $45.4 million aggregate principal amount outstanding of the 2023 Notes.

Pursuant to the redemption notice, on November 30, 2021 we paid $43.4 million in cash and issued 697,262 shares of our common stock to the holders of the 2023 Notes who submitted conversion notices, and the remaining $2.0 million of 2023 Notes were redeemed in cash, plus accrued and unpaid interest.

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 investing activities such as business acquisitions and purchases of property and equipment.

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 $53.9 million of cash in 2021, 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 $98.8 million and an increase in our net operating assets and liabilities of $3.5 million, offset by $106.7 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, deferred income taxes and other non-cash charges.

Cash provided by operating activities reflected our net loss of $146.3 million, offset by a decrease in our net operating assets of $55.0 million and non-cash charges of $145.2 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 $85.6 million increase in deferred revenue due to increased billings, a $19.2 million increase in accrued expenses and a $3.7 million increase in other liabilities, which each had a positive impact on operating cash flow.

These factors were partially offset by a $25.5 million increase in accounts receivable, a $22.5 million increase in deferred contract acquisition and fulfillment costs, a $3.4 million increase in prepaid expenses and other assets and a $2.1 million decrease in accounts payable, which each had a negative impact on operating cash flow.

Operating activities provided $4.9 million of cash in 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 $98.8 million and an increase in our net operating assets and liabilities of $3.5 million, offset by $106.7 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, deferred income taxes and other non-cash charges.

The increase in our net operating assets and liabilities was primarily due to a $24.4 million increase in accounts receivable, a $13.4 million increase in deferred contract acquisition and fulfillment costs, a $8.9 million increase in prepaid expenses and other assets, a $2.4 million decrease in accounts payable and a $0.4 million decrease in other liabilities, which each had a negative impact on operating cash flow.

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These factors were partially offset by a $18.7 million increase in deferred revenue from sales of our products and services, a $4.7 million increase in accrued expenses, a $1.1 million increase in other liabilities, and a $0.1 million increase in accounts payable, which each had a positive impact on operating cash flow.

Operating activities provided $6.1 million of cash in 2018.

Cash provided by operating activities reflected our net loss of $55.5 million, offset by a decrease in our net operating assets and liabilities of $18.2 million and non-cash charges of $43.4 million related primarily to depreciation and amortization, stock-based compensation expense, amortization of debt discount and issuance costs, provision for doubtful accounts, and other non-cash charges.

The decrease in our net operating assets and liabilities was primarily due to a $18.7 million increase in deferred revenue from sales of our products and services, a $6.0 million increase in accrued expenses, a $3.7 million increase in accounts payable, and a $0.4 million increase in other liabilities, which each had a positive impact on operating cash flow.

These factors were offset by a $12.8 million increase in deferred contract acquisition and fulfillment costs, a $1.7 million increase in accounts receivable and a $0.3 million increase in prepaid expenses and other assets, which each had a negative impact on operating cash flow.

Investing Activities

furniture and fixtures and computer equipment, $10.6 million for purchases of investments, net of sales and maturities, and $6.1 million for capitalization of internal-use software costs.

Investing activities used $325.4 million of cash in 2021, consisting of $358.4 million of cash paid for the acquisitions of IntSights, Alcide and Velocidex, net of cash acquired, $9.9 million for capitalization of internal-use software costs, $9.0 million in capital expenditures to purchase computer equipment, furniture and fixtures and leasehold improvements, $3.0 million for other investing activities, partially offset by $54.9 million of investment sales and maturities, net of purchases.

Investing activities used $156.3 million of cash in 2020, consisting of $125.8 million of cash paid for the acquisition of DivvyCloud, net of cash acquired of $5.0 million, $13.8 million in capital expenditures to purchase leasehold improvements, furniture and fixtures and computer equipment, $10.6 million for purchases of investments, net of sales and maturities, and $6.1 million for capitalization of internal-use software costs.

Investing activities provided $16.8 million of cash in 2019, consisting of $66.9 million for investment sales and maturities, net of purchases, $29.4 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 $6.1 million for capitalization of internal-use software costs.

Investing activities used $193.7 million of cash in 2018, consisting of $163.1 million for purchases of investments, net of sales and maturities, $14.5 million of cash paid for the acquisition of tCell, $12.8 million in capital expenditures to purchase computer equipment and leasehold improvements and $3.3 million for the capitalization of internal-use software costs.

Financing Activities

2015 Employee Stock Purchase Plan (ESPP), partially offset by $27.3 million for the purchase of 2025 Capped Calls, $8.9 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 $264.1 million of cash in 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 $4.3 million in proceeds from the exercise of stock options, partially offset by $230.0 million for the redemption, repurchase and conversion of the 2023 Notes, $76.0 million for the purchase of 2027 Capped Calls, $16.0 million in withholding taxes paid for the net share settlement of equity awards, $12.1 million for payments related to the acquisitions of DivvyCloud, Alcide and IntSights, and $0.3 million for payments of debt issuance costs.

Financing activities provided $200.9 million of cash in 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, $7.8 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, $8.9 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 $8.8 million of cash in 2019, which consisted primarily of $10.2 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 $6.9 million in withholding taxes paid for the net share settlement of equity awards.

Financing activities provided $236.2 million of cash in 2018, which consisted primarily of $223.1 million in net proceeds from the issuance of the 2023 Notes, $30.9 million in net proceeds from a secondary public offering in January 2018, $7.6 million in proceeds from the exercise of stock options and $3.6 million in proceeds from the issuance of common stock purchased by employees under the ESPP, partially offset by $26.9 million for the purchase of 2023 Capped Calls related to the 2023 Notes and $2.1 million in withholding taxes paid for the net share settlement of equity awards.

Contractual Obligations and Commitments

The following table summarizes our commitments to settle contractual obligations as of December 31, 2020:

1 Year 1 to 3

Years More than

5 Years Total

(in thousands)

Convertible senior notes principal $ — $ 230,000 $ 230,000 $ — $ 460,000

Convertible senior notes interest 8,050 21,275 2,588 — 31,913

Operating leases 15,035 41,528 34,031 20,480 111,074

Non-cancellable purchase obligations 45,545 92,727 77 — 138,349

Total $ 68,630 $ 385,530 $ 266,696 $ 20,480 $ 741,336

The commitment amounts in the table above are associated with agreements that are enforceable and legally binding.

The table does not include obligations under agreements that we can cancel without a significant penalty.

We lease our office facilities under non-cancellable operating leases.

As of December 31, 2020, we have leases that expire at various dates through 2030.

Certain of our operating leases require real estate taxes, common area maintenance and insurance payments, which are expensed when incurred and not included in the commitments table noted above.

The non-cancellable purchase obligations in the table above include cloud infrastructure services, including with Amazon Web Services (AWS) and software subscriptions.

Off-Balance Sheet Arrangements

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We generate revenue primarily from:

(1) subscription revenue from the sale of cloud-based subscriptions, managed services and content subscriptions associated with our software licenses, (2) term and perpetual software licenses, (3) maintenance and support associated with the purchase of software licenses and (4) professional services from the sale of our deployment and training services related to our solutions, incident response services, penetration testing and security advisory services.

(1) subscriptions from the sale of cloud-based subscriptions, managed services, term software licenses, content subscriptions and maintenance and support associated with our software licenses, (2) perpetual software licenses and (3) professional services from the sale of our deployment and training services related to our solutions, incident response services, penetration testing and security advisory services.

The majority of our contracts with customers contain multiple performance obligations.

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We capitalize commission expenses paid to internal sales personnel and partner referral fees that are incremental costs to obtaining customer contracts.

Costs to obtain a contract for a new customer, up-sell or cross-sell are amortized on a straight-line basis over an estimated period of benefit of five years as sales commissions on initial sales are not commensurate with sales commissions on contract renewals.

Costs to obtain a contract for a new customer, upsell or cross-sell are amortized on a straight-line basis over an estimated period of benefit of five years as sales commissions on initial sales are not commensurate with sales commissions on contract renewals.

We determined the estimated period of benefit by taking into consideration the contractual term and expected renewals of customer contracts, our technology and other factors, including the fact that commissions paid on renewals are not commensurate with commissions paid on initial sales transactions.

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Business Combinations

We account for business combinations by recognizing the fair value of acquired assets and liabilities.

The excess of the purchase price for acquisitions over the fair value of the net assets acquired, including other intangible assets, is recorded as goodwill.

Determining the fair value of assets and liabilities assumed requires management to make significant estimates and assumptions, especially with respect to intangible assets.

While we use our best estimates and assumptions as part of the

purchase price allocation to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement.

We allocate the fair value of purchase consideration to the tangible asset acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values.

The excess of the fair value of purchase consideration over the fair value of these identifiable net assets and liabilities is recorded as goodwill.

Determining the fair value of the tangible assets acquired, liabilities assumed and intangible assets requires management to make significant estimates and assumptions, especially with respect to intangible assets.

Significant estimates in valuing certain intangible assets include, but are not limited to, cash flows that an asset is expected to generate in the future, technology migration curves, discount rates, and useful lives.

While we use our best estimates and judgements, our estimates are inherently uncertain and subject to refinement.

Recent Accounting Pronouncements

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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-K

Item 7. Management’s Discussion and Analysis