What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-05-05 compared with 2021-11-04 · 128 added, 254 removed, 338 unchanged (53% of the section changed)

8 unchanged sentences

• 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;

• uncertain impacts that the ongoing 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;

3 unchanged sentences

• potential acquisitions and integration of complementary business and technologies;

• our expected use of proceeds;

• our expected use of proceeds from future issuances of equity or convertible debt securities;

• 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;

• 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;

3 unchanged sentences

• 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 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;

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

11 unchanged sentences

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.

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.

5 unchanged sentences

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

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.

5 unchanged sentences

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.

As of March 31, 2022, we had over 10,400 customers in 141 countries, including 49% of the Fortune 100.

Our revenue was not concentrated with any individual customer and no customer represented more than 1% of our revenue for the three months ended March 31, 2022 or 2021.

Recent Developments

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.

Rapid7 remains focused on supporting its customers, partners, employees and communities during the ongoing 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

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.

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 reopened our offices in a phased approach and continue 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.

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.

While we have not experienced significant disruptions from the COVID-19 pandemic during the three months ended March 31, 2022, 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 II, Item 1A Risk Factors of this Quarterly Report on Form 10-Q.

1 unchanged sentence

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.

(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, InsightConnect, InsightCloudSec (formerly known as DivvyCloud) and Threat Intelligence 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 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.

• 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, are 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.

1 unchanged sentence

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.

For the three months ended March 31, 2022 and 2021, recurring revenue, defined as revenue from term software licenses, content subscriptions, managed services, cloud-based subscriptions and maintenance and support, was 94% and 91%, respectively, of total revenue.

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

2 unchanged sentences

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

Three Months Ended March 31,

(dollars in thousands)

1 unchanged sentence

Year-over-year revenue growth 34.0 % 24.5 %

Non-GAAP income from operations $ 5,733 $ 2,444 $ 13,708 $ 2,776

Non-GAAP (loss) income from operations $ (5,619) $ 1,906

Free cash flow $ 3,828 $ 17,865

As of September 30,

As of March 31,

(dollars in thousands)

3 unchanged sentences

Year-over-year ARR growth 37.6 % 29.9 %

(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 .

1 unchanged sentence

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.

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 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 (loss) from operations and a reconciliation of non-GAAP income (loss) from operations to the comparable GAAP financial measure.

Free Cash Flow .

2 unchanged sentences

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.

1 unchanged sentence

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

revenue reported as perpetual license or professional services revenue in our consolidated statement of operations.

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

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

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.

Non-GAAP Financial Results

4 unchanged sentences

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 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 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:

4 unchanged sentences

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.

• Amortization of debt issuance costs.

The expense for the amortization of 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.

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.

3 unchanged sentences

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-

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.

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.

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.

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.

1 unchanged sentence

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

The following tables reconcile GAAP gross profit to non-GAAP gross profit for the three months ended March 31, 2022 and 2021:

Three Months Ended March 31,

(in thousands)

3 unchanged sentences

Non-GAAP total gross profit $ 113,029 $ 85,457

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

2021 2020 2021 2020

Three Months Ended March 31,

(in thousands)

3 unchanged sentences

Non-GAAP gross profit – products $ 111,892 $ 83,394

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

2021 2020 2021 2020

Three Months Ended March 31,

(in thousands)

2 unchanged sentences

Non-GAAP gross profit – professional services $ 1,137 $ 2,063

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:

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

2021 2020 2021 2020

The following table reconciles GAAP loss from operations to non-GAAP (loss) income from operations for the three months ended March 31, 2022 and 2021:

Three Months Ended March 31,

(in thousands)

4 unchanged sentences

Litigation-related expenses 115 103

Non-GAAP income from operations $ 5,733 $ 2,444 $ 13,708 $ 2,776

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

Non-GAAP (loss) income from operations $ (5,619) $ 1,906

The following table reconciles GAAP net loss to non-GAAP net loss for the three months ended March 31, 2022 and 2021:

Three Months Ended March 31,

(in thousands, except share and per share data)

4 unchanged sentences

Litigation-related expenses 115 103

Amortization of debt discount and issuance costs 1,095 5,206 2,886 12,213

Amortization of debt issuance costs 979 658

Induced conversion expense — 2,740

Non-GAAP net income (loss) $ 3,443 $ 25 $ 5,948 $ (1,474)

Reconciliation of net loss per share, basic:

Non-GAAP net loss $ (9,260) $ (1,425)

Reconciliation of net loss per share, basic and diluted:

GAAP net loss per share, basic $ (0.78) $ (0.56)

Non-GAAP adjustments to net loss 0.62 0.53

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)

Non-GAAP net loss per share, basic and diluted $ (0.16) $ (0.03)

Weighted average shares used in GAAP and non-GAAP per share calculation, basic and diluted 57,724,821 52,904,881

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

The following table reconciles GAAP net loss to adjusted EBITDA for the three months ended March 31, 2022 and 2021:

Three Months Ended March 31,

(in thousands)

10 unchanged sentences

Adjusted EBITDA $ (1,173) $ 5,757

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

The following table reconciles net cash provided by operating activities to free cash flow for the three months ended March 31, 2022 and 2021:

Three Months Ended March 31,

(in thousands)

5 unchanged sentences

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

1 unchanged sentence

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.

15 unchanged sentences

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.

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, but to remain relatively consistent as a percentage of total revenue.

Sales and Marketing Expense

9 unchanged sentences

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.

Interest expense consists primarily of contractual interest expense, amortization of debt 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

6 unchanged sentences

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

Three Months Ended March 31,

(in thousands)

20 unchanged sentences

(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

Three Months Ended March 31,

(in thousands)

5 unchanged sentences

Total stock-based compensation expense $ 28,922 $ 20,862

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

2021 2020 2021 2020

Three Months Ended March 31,

(in thousands)

6 unchanged sentences

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

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

2021 2020 2021 2020

Three Months Ended March 31,

Consolidated Statement of Operations Data:

18 unchanged sentences

Net loss (28.6) % (25.4) %

Comparison of the Three Months Ended September 30, 2021 and 2020

Three Months Ended September 30, Change

2021 2020 $ %

(dollars in thousands)

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.

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

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.

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

Nine Months Ended September 30, Change

Comparison of the Three Months Ended March 31, 2022 and 2021

Three Months Ended March 31, Change

2022 2021 $ %

3 unchanged sentences

Total revenue $ 157,384 $ 117,451 $ 39,933 34.0 %

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.

Total revenue increased by $39.9 million in the three months ended March 31, 2022 compared to the same period in 2021 and consisted of $33.0 million of organic growth and $6.9 million related to the acquisition of IntSights in July 2021.

The $33.0 million increase in revenue related to organic growth was primarily due to an increase in revenue from renewals, upsells and cross-sells as a result of our growing base of existing customers.

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.

The increase in total revenue in the three months ended March 31, 2022 compared to the same period in 2021 was comprised of $28.5 million generated from sales in North America and $11.4 million generated from sales from the rest of the world.

Cost of Revenue

Nine Months Ended September 30, Change

Three Months Ended March 31, Change

2022 2021 $ %

8 unchanged sentences

Total gross margin % 67.4 % 69.1 %

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

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.

Total cost of revenue increased by $15.0 million in the three months ended March 31, 2022 compared to the same period in 2021, primarily due to a $4.9 million increase in cloud computing costs related to growing cloud-based subscription and managed services revenue and a $4.8 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 $0.6 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 allocated overhead driven largely by an increase in IT and facilities costs, a $2.1 million increase in amortization expense for acquired intangible assets, a $0.3 million increase in amortization expense for capitalized internally-developed software, a $0.5 million increase in other expenses.

Total gross margin percentage decreased for the three months ended March 31, 2022 compared to the same period in 2021 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 decrease in professional services gross margin for the three months ended March 31, 2022 was due to an increase in personnel costs.

Operating Expenses

Research and Development Expense

Nine Months Ended September 30, Change

Three Months Ended March 31, Change

2022 2021 $ %

2 unchanged sentences

% of revenue 31.7 % 28.2 %

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.

Research and development expense increased by $16.7 million in the three months ended March 31, 2022 compared to the same period in 2021, primarily due to a $12.8 million increase in personnel costs, a $3.2 million increase in allocated overhead driven largely by an increase in IT and facilities costs, a $0.7 million increase in other expenses.

The $12.8 million increase in personnel costs was primarily due to a $7.6 million increase in salaries and related costs driven by growth in headcount, inclusive of $2.7 million in additional salaries and related costs attributable to the employees acquired in the acquisition of IntSights in July 2021, and a $5.2 million increase in stock-based compensation expense, including $3.3 million of stock-based compensation expense related to the RSUs issued to retained employees and common stock issued to the IntSights founders as part of the acquisition.

Sales and Marketing Expense

Nine Months Ended September 30, Change

Three Months Ended March 31, Change

2022 2021 $ %

2 unchanged sentences

% of revenue 47.7 % 46.8 %

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.

Sales and marketing expense increased by $20.2 million in the three months ended March 31, 2022 compared to the same period in 2021, primarily due to a $8.4 million increase in personnel costs, a $4.0 million increase in allocated overhead driven largely by an increase in IT and facilities costs, a $3.3 million increase in commission expense, a $2.2 million increase in marketing and advertising costs, a $0.6 million increase in in amortization expense for acquired intangible assets and a $1.7

million increase in other expenses.

The $8.4 million increase in personnel costs was primarily due to a $7.4 million increase in salaries and related costs driven by growth in headcount, inclusive of $2.8 million of additional costs attributable to the employees acquired in the IntSights acquisition in July 2021, and a $1.0 million increase in stock-based compensation expense, inclusive of $0.4 million in stock-based compensation expense related to RSUs issued to retained employees acquired in the acquisition of IntSights.

General and Administrative Expense

Nine Months Ended September 30, Change

Three Months Ended March 31, Change

2022 2021 $ %

2 unchanged sentences

% of revenue 13.7 % 13.8 %

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.

General and administrative expense increased by $5.3 million in the three months ended March 31, 2022 compared to the same period in 2021, primarily due to a $3.3 million increase in personnel costs due to an increase in headcount, inclusive of a $1.3 million increase in stock-based compensation expense, a $0.9 million increase in allocated overhead driven largely by an increase in IT and facilities costs and a $1.7 million increase in other expenses.

These increases were partially offset by a $0.6 million decrease in professional fees primarily due to acquisition-related expenses and other professional consulting fees.

Interest Income

Nine Months Ended September 30, Change

Three Months Ended March 31, Change

2022 2021 $ %

2 unchanged sentences

% of revenue 0.1 % 0.1 %

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 income in the three months ended March 31, 2022 remained consistent with the same period in 2021.

Interest Expense

Nine Months Ended September 30, Change

Three Months Ended March 31, Change

2022 2021 $ %

2 unchanged sentences

% of revenue (1.7) % (4.6) %

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.

Interest expense decreased by $2.7 million in the three months ended March 31, 2022 compared to the same period in 2021 primarily due to a $2.7 million decrease of induced conversion expense incurred in conjunction with the partial repurchase of the 2023 Notes in March 2021.

Other Income (Expense), Net

Nine Months Ended September 30, Change

Three Months Ended March 31, Change

2022 2021 $ %

2 unchanged sentences

% of revenue (0.4) % (0.9) %

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.

Other income (expense), net decreased by $0.5 million in the three months ended March 31, 2022 compared to the same period in 2021 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

Three Months Ended March 31, Change

2022 2021 $ %

2 unchanged sentences

% of revenue 0.9 % 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.

Provision for income taxes increased by $1.1 million in the three months ended March 31, 2022 compared to the same period in 2021 primarily due to our increased operations in foreign jurisdictions.

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.

As of March 31, 2022, we had $141.4 million in cash and cash equivalents, $121.5 million in short- and long-term investments that have maturities ranging from one to twenty months and an accumulated deficit of $781.0 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.

Our principal sources of liquidity are cash and cash equivalents, short and long-term investments and our Credit and Security Agreement (the “Credit Agreement”).

To date, we have financed our operations primarily through private and public equity financings, 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 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.

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

The following table shows a summary of our cash flows for the nine months ended September 30, 2021 and 2020:

Nine Months Ended September 30,

The following table shows a summary of our cash flows for the three months ended March 31, 2022 and 2021:

Three Months Ended March 31,

(in thousands)

5 unchanged sentences

Cash, cash equivalents and restricted cash at end of period $ 141,917 $ 503,840

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.

Uses of Funds

1 unchanged sentence

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.

Operating activities provided $10.4 million of cash and cash equivalents in the three months ended March 31, 2022, 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 $45.0 million, offset by a decrease in our net operating assets of $14.8 million and non-cash charges of $40.6 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.

The decrease in our net operating assets was primarily due to a $36.3 million decrease in accounts receivable due to an increase in collections, a $3.8 million increase in deferred revenue and a $8.7 million increase in accounts payable, which each had a positive impact on operating cash flow.

These factors were partially offset by a $24.0 million decrease in accrued expenses, primarily as a result of the payout of annual bonuses and year-end commissions, a

$6.6 million increase in prepaid expenses, a $2.9 million increase in deferred contract acquisition and fulfillment costs and a $0.5 million decrease in other liabilities, which each had a negative impact on operating cash flow.

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

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

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

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

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.

Investing activities used $35.9 million of cash in the three months ended March 31, 2022, consisting of $29.3 million of investment purchases, net of sales and maturities, $3.5 million for capitalization of internal-use software costs and $3.1 million in capital expenditures to purchase computer equipment, furniture and fixtures and leasehold improvements.

Investing activities used $18.4 million of cash in the three months ended March 31, 2021, consisting of $49.7 million of cash paid for the acquisition of Alcide.IO Ltd.

(“Alcide”), net of cash acquired, $1.8 million for capitalization of internal-use software costs, $1.5 million for other investing activities, $1.0 million in capital expenditures to purchase leasehold improvements and computer equipment, partially offset by $35.6 million of investment sales and maturities, net of purchases.

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

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 $3.2 million of cash in the three months ended March 31, 2022, which consisted primarily of $5.7 million in proceeds from the issuance of common stock purchased by employees under the Rapid7, Inc.

2015 Employee Stock Purchase Plan (“ESPP”) and $1.0 million in proceeds from the exercise of stock options, partially offset by $3.5 million in withholding taxes paid for the net share settlement of equity awards.

Financing activities provided $328.6 million of cash in the three months ended March 31, 2021, which consisted primarily of $587.1 million in proceeds from the issuance of the 0.25% convertible senior notes due 2027 (the “2027 Notes”), net of issuance costs paid of $12.9 million, $4.5 million in proceeds from the issuance of common stock purchased by employees under the ESPP and $1.4 million in proceeds from the exercise of stock options, partially offset by $182.6 million for the repurchase and conversion of the 2023 Notes, $76.0 million for the purchase of 2027 Capped Calls, $3.3 million in withholding taxes paid for the net share settlement of equity awards and $2.5 million for payments related to the acquisition of Alcide.

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.

In March 2022, we entered into a new agreement with AWS for cloud infrastructure services.

The agreement is for a 36-month period beginning on April 1, 2022 for a total commitment of $300.0 million.

As of March 31, 2022, there were no additional material changes other than that noted above in our contractual obligations and commitments from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 24, 2022.

Off-Balance Sheet Arrangements

4 unchanged sentences

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (GAAP).

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“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.

4 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis