What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-08-04 compared with 2022-05-05 · 182 added, 79 removed, 387 unchanged (40% of the section changed)

54 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 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.

As of June 30, 2022, we had over 10,000 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 and six months ended June 30, 2022 or 2021.

Recent Developments

2 unchanged sentences

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 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.

In response to the COVID-19 pandemic, we have taken, and continue to take, a variety of actions to ensure the continued availability and functioning of our business operations, promote the safety and security of our employees and support the communities in which we operate.

We will continue to actively monitor the 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.

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.

While we have not experienced significant disruptions from the COVID-19 pandemic during the three and six months ended June 30, 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, the spread and reemergence of the pandemic, including any new variants, 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.

16 unchanged sentences

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

For the three months ended March 31, 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.

For the three months ended June 30, 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 93%, respectively, of total revenue.

For the six months ended June 30, 2022 and 2021, recurring revenue was 94% and 92%, 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.

1 unchanged sentence

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

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

Three Months Ended March 31,

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 their 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 June 30, Six Months Ended June 30,

2022 2021 2022 2021

(dollars in thousands)

1 unchanged sentence

Year-over-year revenue growth 32.5 % 27.8 % 33.2 % 26.2 %

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

Non-GAAP income (loss) from operations $ 3,483 $ 6,070 $ (2,136) $ 7,976

Free cash flow $ (1,258) $ 5,040 $ 2,570 $ 22,905

As of March 31,

As of June 30,

(dollars in thousands)

39 unchanged sentences

• 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.

In conjunction with the first quarter of 2021 partial repurchase of our 1.25% convertible senior notes due 2023 (the “2023 Notes”), 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.

13 unchanged sentences

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 months ended March 31, 2022 and 2021:

Three Months Ended March 31,

The following tables reconcile GAAP gross profit to non-GAAP gross profit for the three and six months ended June 30, 2022 and 2021:

Three Months Ended June 30, Six Months Ended June 30,

2022 2021 2022 2021

(in thousands)

3 unchanged sentences

Non-GAAP total gross profit $ 120,799 $ 91,845 $ 233,828 $ 177,302

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2022 2021 2022 2021

(in thousands)

3 unchanged sentences

Non-GAAP gross profit – products $ 120,111 $ 90,098 $ 232,003 $ 173,492

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2022 2021 2022 2021

(in thousands)

2 unchanged sentences

Non-GAAP gross profit – professional services $ 688 $ 1,747 $ 1,825 $ 3,810

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,

The following table reconciles GAAP loss from operations to non-GAAP income (loss) from operations for the three and six months ended June 30, 2022 and 2021:

Three Months Ended June 30, Six Months Ended June 30,

2022 2021 2022 2021

(in thousands)

4 unchanged sentences

Litigation-related expenses — 251 115 354

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,

Non-GAAP income (loss) from operations $ 3,483 $ 6,070 $ (2,136) $ 7,976

The following table reconciles GAAP net loss to non-GAAP net (loss) income for the three and six months ended June 30, 2022 and 2021:

Three Months Ended June 30, Six Months Ended June 30,

2022 2021 2022 2021

(in thousands, except share and per share data)

6 unchanged sentences

Induced conversion expense — — — 2,740

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

Reconciliation of net loss per share, basic and diluted:

Non-GAAP net (loss) income $ (461) $ 3,930 $ (9,721) $ 2,505

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

GAAP net loss per share, basic $ (0.68) $ (0.62) $ (1.46) $ (1.18)

Non-GAAP adjustments to net loss 0.67 0.69 1.29 1.23

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

Non-GAAP net (loss) income per share, basic $ (0.01) $ 0.07 $ (0.17) $ 0.05

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

GAAP net loss per share, diluted $ (0.68) $ (0.62) $ (1.46) $ (1.18)

Non-GAAP adjustments to net loss 0.67 0.69 1.29 1.22

Non-GAAP net (loss) income per share, diluted $ (0.01) $ 0.07 $ (0.17) $ 0.04

Weighted average shares used in GAAP and non-GAAP per share calculation, basic and diluted 58,239,958 55,392,383 57,983,790 54,169,464

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,

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

Basic 58,239,958 55,392,383 57,983,790 54,169,464

Diluted 58,239,958 57,731,694 57,983,790 56,626,465

The following table reconciles GAAP net loss to adjusted EBITDA for the three and six months ended June 30, 2022 and 2021:

Three Months Ended June 30, Six Months Ended June 30,

2022 2021 2022 2021

(in thousands)

10 unchanged sentences

Adjusted EBITDA $ 7,983 $ 10,030 $ 6,810 $ 15,787

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,

The following table reconciles net cash provided by operating activities to free cash flow for the three and six months ended June 30, 2022 and 2021:

Three Months Ended June 30, Six Months Ended June 30,

2022 2021 2022 2021

(in thousands)

31 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 third-party infrastructure costs,

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

20 unchanged sentences

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

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2022 2021 2022 2021

(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 March 31,

Three Months Ended June 30, Six Months Ended June 30,

2022 2021 2022 2021

(in thousands)

5 unchanged sentences

Total stock-based compensation expense $ 32,411 $ 23,814 $ 61,333 $ 44,676

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2022 2021 2022 2021

(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 March 31,

Three Months Ended June 30, Six Months Ended June 30,

2022 2021 2022 2021

Consolidated Statement of Operations Data:

18 unchanged sentences

Net loss (23.7) % (27.0) % (26.0) % (26.2) %

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

Three Months Ended March 31, Change

Comparison of the Three Months Ended June 30, 2022 and 2021

Three Months Ended June 30, Change

2022 2021 $ %

3 unchanged sentences

Total revenue $ 167,455 $ 126,421 $ 41,034 32.5 %

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.

Total revenue increased by $41.0 million in the three months ended June 30, 2022 compared to the same period in 2021 and consisted of $32.9 million of organic growth and $8.1 million related to the acquisition of IntSights in July 2021.

The $32.9 million increase in revenue related to organic growth consisted of a $1.2 million increase in revenue from new customers and a $31.7 million increase in revenue from existing customers.

The $31.7 million increase 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 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.

The increase in total revenue in the three months ended June 30, 2022 compared to the same period in 2021 was comprised of $29.1 million generated from sales in North America and $11.9 million generated from sales from the rest of the world.

Cost of Revenue

Three Months Ended March 31, Change

Three Months Ended June 30, Change

2022 2021 $ %

8 unchanged sentences

Total gross margin % 67.6 % 68.9 %

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.

Total cost of revenue increased by $15.0 million in the three months ended June 30, 2022 compared to the same period in 2021, primarily due to a $3.6 million increase in cloud computing costs related to growing cloud-based subscription and managed services revenue and a $5.9 million increase in personnel costs, inclusive of a $1.0 million increase in stock-based compensation expense, resulting from an increase in headcount to support our growing customer base and $0.9 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 $1.9 million increase in amortization expense for acquired intangible assets, a $1.7 million increase in allocated overhead driven largely by an increase in IT and facilities costs, a $0.9 million increase in third-party professional service consulting costs, a $0.4 million increase in amortization expense for capitalized internally-developed software, and a $0.6 million increase in other expenses.

Total gross margin percentage decreased for the three months ended June 30, 2022 compared to the same period in 2021.

The decrease in products gross margin was primarily due to 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 June 30, 2022 was due to an increase in personnel costs.

Operating Expenses

Research and Development Expense

Three Months Ended March 31, Change

Three Months Ended June 30, Change

2022 2021 $ %

2 unchanged sentences

% of revenue 29.2 % 27.9 %

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.

Research and development expense increased by $13.6 million in the three months ended June 30, 2022 compared to the same period in 2021, primarily due to a $10.1 million increase in personnel costs, a $2.4 million increase in allocated overhead driven largely by an increase in IT and facilities costs, and a $1.1 million increase in other expenses.

The $10.1 million increase in personnel costs was primarily due to a $5.6 million increase in salaries and related costs driven by growth in headcount, inclusive of $2.9 million in additional salaries and related costs attributable to the employees acquired in the acquisition of IntSights in July 2021, and a $4.5 million increase in stock-based compensation expense, including $3.7 million of stock-based compensation expense related to the restricted stock units (“RSUs”) issued to retained employees and common stock issued to the IntSights founders as part of the acquisition.

Sales and Marketing Expense

Three Months Ended June 30, Change

2022 2021 $ %

(dollars in thousands)

Sales and marketing $ 78,034 $ 56,246 $ 21,788 38.7 %

% of revenue 46.6 % 44.5 %

Sales and marketing expense increased by $21.8 million in the three months ended June 30, 2022 compared to the same period in 2021, primarily due to a $10.3 million increase in personnel costs, a $3.6 million increase in commission expense, a $3.3 million increase in allocated overhead driven largely by an increase in IT and facilities costs, a $2.4 million increase in marketing and advertising costs, a $1.0 million increase in travel and entertainment expense and a $1.2 million increase in other

The $10.3 million increase in personnel costs was primarily due to a $7.9 million increase in salaries and related costs driven by growth in headcount, inclusive of $2.6 million of additional costs attributable to the employees acquired in the IntSights acquisition in July 2021, and a $2.4 million increase in stock-based compensation expense, inclusive of $0.5 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 June 30, Change

2022 2021 $ %

(dollars in thousands)

General and administrative $ 20,890 $ 17,488 $ 3,402 19.5 %

% of revenue 12.5 % 13.8 %

General and administrative expense increased by $3.4 million in the three months ended June 30, 2022 compared to the same period in 2021, primarily due to a $3.0 million increase in personnel costs due to an increase in headcount, inclusive of a $0.7 million increase in stock-based compensation expense, and a $1.3 million increase in other expenses.

These increases were partially offset by a $0.9 million decrease in professional fees primarily due to acquisition-related expenses and other professional consulting fees.

Interest Income

Three Months Ended June 30, Change

2022 2021 $ %

(dollars in thousands)

Interest income $ 243 $ 122 $ 121 99.2 %

% of revenue 0.1 % 0.1 %

Interest income in the three months ended June 30, 2022 remained consistent with the same period in 2021.

Interest Expense

Three Months Ended June 30, Change

2022 2021 $ %

(dollars in thousands)

Interest expense $ (2,758) $ (3,059) $ 301 (9.8) %

% of revenue (1.7) % (2.4) %

Interest expense decreased by $0.3 million in the three months ended June 30, 2022 compared to the same period in 2021 primarily due to a decrease in contractual interest and amortization of debt issuance costs related to the 2023 Notes which were repurchased in the first quarter of 2021.

Other Income (Expense), Net

Three Months Ended June 30, Change

2022 2021 $ %

(dollars in thousands)

Other income (expense), net $ (2,403) $ 148 $ (2,551) (1,723.6) %

% of revenue (1.4) % 0.1 %

Other income (expense), net changed from $0.1 million of other income in the three months ended June 30, 2021 to $2.4 million of other expense in the three months ended June 30, 2022 due to realized and unrealized foreign currency losses, primarily related to the euro and British pound sterling.

Provision for Income Taxes

Three Months Ended June 30, Change

2022 2021 $ %

(dollars in thousands)

Provision for income taxes $ 37 $ 9,449 $ (9,412) (99.6) %

% of revenue — % 7.5 %

Provision for income taxes decreased by $9.4 million in the three months ended June 30, 2022 compared to the same period in 2021 primarily due to $9.0 million of tax expense recorded in the prior period for the 2021 intercompany sale of intellectual property as part of post-acquisition tax planning related to the Alcide acquisition.

Comparison of the Six Months Ended June 30, 2022 and 2021

Six Months Ended June 30, Change

2022 2021 $ %

(dollars in thousands)

Products $ 308,147 $ 228,432 $ 79,715 34.9 %

Professional services 16,692 15,440 1,252 8.1

Total revenue $ 324,839 $ 243,872 $ 80,967 33.2 %

Total revenue increased by $81.0 million in the six months ended June 30, 2022 compared to the same period in 2021 and consisted of $66.0 million of organic growth and $15.0 million related to the acquisition of IntSights in July 2021.

The $66.0 million increase in revenue related to organic growth consisted of a $2.9 million increase in revenue from new customers and a $63.1 million increase in revenue from existing customers.

The $63.1 million increase 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 the six months ended June 30, 2022 compared to the same period in 2021 was comprised of $57.7 million generated from sales in North America and $23.3 million generated from sales from the rest of the world.

Cost of Revenue

Six Months Ended June 30, Change

2022 2021 $ %

(dollars in thousands)

Cost of revenue:

Products $ 89,339 $ 62,819 $ 26,520 42.2 %

Professional services 16,225 12,778 3,447 27.0

Total cost of revenue $ 105,564 $ 75,597 $ 29,967 39.6 %

Gross margin %:

Products 71.0 % 72.5 %

Professional services 2.8 17.2

Total gross margin % 67.5 % 69.0 %

Total cost of revenue increased by $30.0 million in the six months ended June 30, 2022 compared to the same period in 2021, primarily due to a $10.7 million increase in personnel costs, inclusive of a $1.5 million increase in stock-based compensation expense, resulting from an increase in headcount to support our growing customer base and $1.6 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 an $8.5 million increase in cloud computing costs related to growing cloud-based subscription and managed services revenue, a $4.1 million increase in allocated overhead driven largely by an increase in IT and facilities costs, a $4.0 million increase in amortization expense for acquired intangible assets, a $1.0 million increase in third-party professional service consulting costs, a $0.7 million increase in amortization expense for capitalized internally-developed software, and a $1.0 million increase in other expenses.

Total gross margin percentage decreased for the six months ended June 30, 2022 compared to the same period in 2021.

The decrease in products gross margin was primarily due to an increase in amortization expense for the developed technology acquired intangible asset related to the acquisition of IntSights and an increase in stock-based compensation expense.

The decrease in professional services gross margin for the six months ended June 30, 2022 was due to an increase in personnel costs.

Operating Expenses

Research and Development Expense

Six Months Ended June 30, Change

2022 2021 $ %

(dollars in thousands)

Research and development $ 98,719 $ 68,385 $ 30,334 44.4 %

% of revenue 30.4 % 28.0 %

Research and development expense increased by $30.3 million in the six months ended June 30, 2022 compared to the same period in 2021, primarily due to a $22.9 million increase in personnel costs, a $5.6 million increase in allocated overhead driven largely by an increase in IT and facilities costs, and a $1.8 million increase in other expenses.

The $22.9 million increase in personnel costs was primarily due to a $13.2 million increase in salaries and related costs driven by growth in headcount, inclusive of $5.6 million in additional salaries and related costs attributable to the employees acquired in the acquisition of IntSights in July 2021, and a $9.7 million increase in stock-based compensation expense, including $7.0 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

Three Months Ended March 31, Change

Six Months Ended June 30, Change

2022 2021 $ %

2 unchanged sentences

% of revenue 47.1 % 45.6 %

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.

Sales and marketing expense increased by $42.0 million in the six months ended June 30, 2022 compared to the same period in 2021, primarily due to a $18.7 million increase in personnel costs, a $7.4 million increase in allocated overhead driven largely by an increase in IT and facilities costs, a $6.9 million increase in commission expense, a $4.6 million increase in marketing and advertising costs, a $1.5 million increase in travel and entertainment expense, a $0.6 million increase in amortization expense for acquired intangible assets and a $2.3 million increase in other expenses.

The $18.7 million increase in personnel costs was primarily due to a $15.3 million increase in salaries and related costs driven by growth in headcount, inclusive of $5.1 million of additional costs attributable to the employees acquired in the IntSights acquisition in July 2021, and a $3.4 million increase in stock-based compensation expense, inclusive of $0.9 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 March 31, Change

Six Months Ended June 30, Change

2022 2021 $ %

2 unchanged sentences

% of revenue 13.1 % 13.8 %

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.

General and administrative expense increased by $8.7 million in the six months ended June 30, 2022 compared to the same period in 2021, primarily due to a $6.3 million increase in personnel costs due to an increase in headcount, inclusive of a $2.0 million increase in stock-based compensation expense, a $0.7 million increase in allocated overhead driven largely by an increase in IT and facilities costs and a $3.2 million increase in other expenses.

These increases were partially offset by a $1.5 million decrease in professional fees primarily due to acquisition-related expenses and other professional consulting fees.

Interest Income

Three Months Ended March 31, Change

Six Months Ended June 30, Change

2022 2021 $ %

2 unchanged sentences

% of revenue 0.1 % 0.1 %

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

Interest income in the six months ended June 30, 2022 remained consistent with the same period in 2021.

Interest Expense

Three Months Ended March 31, Change

Six Months Ended June 30, Change

2022 2021 $ %

2 unchanged sentences

% of revenue (1.7) % (3.5) %

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.

Interest expense decreased by $3.0 million in the six months ended June 30, 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 as well as a decrease in contractual interest expense related to the 2023 Notes which were repurchased in the first quarter of 2021.

Other Income (Expense), Net

Three Months Ended March 31, Change

Six Months Ended June 30, Change

2022 2021 $ %

2 unchanged sentences

% of revenue (0.9) % (0.4) %

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.

Other income (expense), net increased by $2.1 million in expense for the six months ended June 30, 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

Three Months Ended March 31, Change

Six Months Ended June 30, Change

2022 2021 $ %

2 unchanged sentences

% of revenue 0.5 % 4.0 %

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.

Provision for income taxes decreased by $8.3 million in the six months ended June 30, 2022 compared to the same period in 2021 primarily due to $9.0 million of tax expense recorded in the prior period for the 2021 intercompany sale of intellectual property as part of post-acquisition tax planning related to the Alcide acquisition, partially offset by an increase of $0.7 million due to our increased operations in foreign jurisdictions.

Liquidity and Capital Resources

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.

As of June 30, 2022, we had $163.5 million in cash and cash equivalents, $90.6 million in short- and long-term investments that have maturities ranging from one to twenty months and an accumulated deficit of $820.6 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 (the “Credit Agreement”).

Our principal sources of liquidity are cash and cash equivalents, short and long-term investments and our Credit and Security Agreement, as amended (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.

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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 three months ended March 31, 2022 and 2021:

Three Months Ended March 31,

The following table shows a summary of our cash flows for the six months ended June 30, 2022 and 2021:

Six Months Ended June 30,

(in thousands)

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Operating Activities

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.

Operating activities provided $17.9 million of cash and cash equivalents in the six months ended June 30, 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 $84.6 million, offset by a decrease in our net operating assets of $16.5 million and non-cash charges of $86.0 million related primarily to depreciation and amortization, stock-based compensation expense, amortization of debt issuance costs and other non-cash charges.

The decrease in our net operating assets was primarily due to a $23.2 million increase in deferred revenue, a $18.1 million decrease in accounts receivable due to an increase in collections and a $3.6 million increase in accounts payable, which each had a positive impact on operating cash flow.

These factors were partially offset by a $12.5 million decrease in accrued expenses, primarily as a result of the payout of annual bonuses and year-end commissions, a $10.5 million increase in prepaid expenses, a $5.1 million

increase in deferred contract acquisition and fulfillment costs and a $0.3 million decrease in other liabilities, which each had a negative impact on operating cash flow.

Operating activities provided $29.8 million of cash and cash equivalents in the six months ended June 30, 2021, which reflects the timing of working capital adjustments and our continued growth in revenue partially offset by our continued investments in our operations.

Cash provided by operating activities reflected our net loss of $64.0 million, offset by a decrease in our net operating assets of $25.5 million and non-cash charges of $68.3 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 $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.

The decrease in our net operating assets was primarily due to a $22.2 million increase in deferred revenue due to increased billings, a $12.8 million decrease in accounts receivable due to an increase in collections, a $4.4 million increase in other liabilities and a $0.4 million decrease in prepaid expenses and other assets, which each had a positive impact on operating cash flow.

These factors were partially offset by a $7.6 million decrease in accrued expenses, primarily as a result of the payout of annual bonuses and year-end commissions, a $5.5 million increase in deferred contract acquisition and fulfillment costs, and a $1.3 million decrease in accounts payable, which each had a negative impact on operating cash flow.

Investing Activities

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.

Investing activities used $14.5 million of cash in the six months ended June 30, 2022, consisting of $8.1 million for capitalization of internal-use software costs, $7.2 million in capital expenditures to purchase computer equipment and leasehold improvements and $0.5 million of other investments, partially offset by $1.3 million of investment sales and maturities, net of purchases.

Investing activities used $32.2 million of cash in the six months ended June 30, 2021, consisting of $52.4 million of cash paid for the acquisitions of Alcide and Velocidex, net of cash acquired, $4.2 million for capitalization of internal-use software costs, $1.5 million for other investing activities, $2.7 million in capital expenditures to purchase computer equipment, furniture and fixtures and leasehold improvements, partially offset by $28.6 million of investment sales and maturities, net of purchases.

Financing Activities

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.

Financing activities provided $1.4 million of cash in the six months ended June 30, 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 $1.2 million in proceeds from the exercise of stock options, partially offset by $5.1 million in withholding taxes paid for the net share settlement of equity awards, $0.3 million in payments related to the acquisition of Velocidex and $0.1 million in payments of debt issuance costs.

Financing activities provided $322.7 million of cash in the six months ended June 30, 2021, which consisted primarily of $585.4 million in proceeds from the issuance of the 2027 Notes, net of issuance costs paid of $14.6 million, $4.5 million in proceeds from the issuance of common stock purchased by employees under the ESPP and $2.5 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, $6.7 million in withholding taxes paid for the net share settlement of equity awards and $2.4 million for payments related to the acquisition of Alcide.

Contractual Obligations and Commitments

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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.

As of June 30, 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 (the “Annual Report”).

Off-Balance Sheet Arrangements

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Our actual results may differ from these estimates.

There have been no material changes in our critical accounting policies from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 24, 2022.

There have been no material changes in our critical accounting policies from those disclosed in our Annual Report.

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