What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-11-03 compared with 2022-08-04 · 113 added, 115 removed, 454 unchanged (33% 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 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.

As of September 30, 2022, we had over 10,000 customers in 144 countries, including 46% 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, 2022 or 2021.

Recent Developments

4 unchanged sentences

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 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.

At this point, the extent to which the ongoing 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 and nine months ended

September 30, 2022, we are unable to accurately predict the full impact that COVID-19 will have due to numerous uncertainties, including continued spread and reemergence of the pandemic, including any new variants, the duration of any outbreak, the result of vaccination efforts, 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.

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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.

Our Nexpose, Metasploit and AppSpider 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.

3 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 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.

For the three months ended September 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 92%, respectively, of total revenue.

For the nine months ended September 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.

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 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,

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

2022 2021 2022 2021

2 unchanged sentences

Year-over-year revenue growth 25.6 % 33.1 % 30.4 % 28.6 %

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

Non-GAAP income from operations $ 13,044 $ 5,733 $ 10,908 $ 13,708

Free cash flow $ 9,657 $ 14,327 $ 12,227 $ 37,232

As of June 30,

As of September 30,

(dollars in thousands)

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

Non-GAAP Income (Loss) from Operations .

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

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

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

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

Free Cash Flow .

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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 six months ended June 30, 2022 and 2021:

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

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

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

2022 2021 2022 2021

4 unchanged sentences

Non-GAAP total gross profit $ 129,089 $ 102,838 $ 362,917 $ 280,139

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

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

2022 2021 2022 2021

4 unchanged sentences

Non-GAAP gross profit – products $ 126,974 $ 100,535 $ 358,977 $ 274,028

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

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

2022 2021 2022 2021

3 unchanged sentences

Non-GAAP gross profit – professional services $ 2,115 $ 2,303 $ 3,940 $ 6,111

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,

The following table reconciles GAAP loss from operations to non-GAAP income from operations for the three and nine months ended September 30, 2022 and 2021:

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

2022 2021 2022 2021

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Litigation-related expenses — 105 115 459

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,

Non-GAAP income from operations $ 13,044 $ 5,733 $ 10,908 $ 13,708

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

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

2022 2021 2022 2021

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Induced conversion expense — — — 2,740

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) 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

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

Non-GAAP net income (loss) $ 8,599 $ 3,443 $ (1,122) $ 5,948

Interest expense of convertible senior notes (1) 375 — — —

Numerator for non-GAAP earnings per share calculation $ 8,974 $ 3,443 $ (1,122) $ 5,948

Weighted average shares used in GAAP earnings per share calculation, basic 58,730,651 55,976,671 58,229,872 54,743,538

Dilutive effect of convertible senior notes (1) 5,803,831 — — —

Dilutive effect of employee equity incentive plans (2) 1,063,389 2,400,321 — 2,438,108

Weighted average shares used in non-GAAP earnings per share calculation, diluted 65,597,871 58,376,992 58,229,872 57,181,646

Non-GAAP net income (loss) per share:

Basic $ 0.15 $ 0.06 $ (0.02) $ 0.11

Diluted $ 0.14 $ 0.06 $ (0.02) $ 0.10

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,

(1) We use the if-converted method to compute diluted earnings per share with respect to our convertible senior notes.

There was no add-back of interest expense or additional dilutive shares related to the convertible senior notes where the effect was anti-dilutive.

On an if-converted basis, for the three months ended September 30, 2022, the 2027 convertible senior notes were dilutive and the 2025 convertible senior notes were anti-dilutive.

(2) We use the treasury method to compute the dilutive effect of employee equity incentive plan awards.

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

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

2022 2021 2022 2021

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Adjusted EBITDA $ 17,930 $ 9,911 $ 24,740 $ 25,697

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,

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

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

2022 2021 2022 2021

55 unchanged sentences

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

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

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

2022 2021 2022 2021

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

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

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

2022 2021 2022 2021

6 unchanged sentences

Total stock-based compensation expense $ 30,971 $ 29,196 $ 92,304 $ 73,872

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

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

2022 2021 2022 2021

7 unchanged sentences

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

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

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

2022 2021 2022 2021

19 unchanged sentences

Net loss (16.3) % (26.9) % (22.6) % (26.5) %

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

Three Months Ended June 30, Change

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

Three Months Ended September 30, Change

2022 2021 $ %

3 unchanged sentences

Total revenue $ 175,765 $ 139,894 $ 35,871 25.6 %

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.

Total revenue increased by $35.9 million in the three months ended September 30, 2022 compared to the same period in 2021.

The $35.9 million increase in revenue consisted of a $4.7 million increase in revenue from new customers and a $31.2 million increase in revenue from existing customers.

The $31.2 million increase in revenue from existing customers was due to an increase in revenue from renewals, upsells and cross-sells as a result of the continued growth of our existing customer base.

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

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

The increase in total revenue in the three months ended 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.

The increase in total revenue in the three months ended September 30, 2022 compared to the same period in 2021 was comprised of $25.9 million generated from sales in North America and $10.0 million generated from sales from the rest of the world.

Cost of Revenue

Three Months Ended June 30, Change

Three Months Ended September 30, Change

2022 2021 $ %

8 unchanged sentences

Total gross margin % 69.4 % 68.9 %

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.

Total cost of revenue increased by $10.4 million in the three months ended September 30, 2022 compared to the same period in 2021, primarily due to a $3.7 million increase in cloud computing costs related to growing cloud-based subscription and managed services revenue and a $5.4 million increase in personnel costs, inclusive of a $1.1 million increase in stock-based compensation expense, resulting from an increase in headcount to support our growing customer base.

Our increase in total cost of revenue also included a $1.2 million increase in allocated overhead driven largely by an increase in IT and facilities costs and a $0.1 million increase in other expenses.

Total gross margin percentage increased for the three months ended September 30, 2022 compared to the same period in 2021 primarily due to the change in revenue mix.

Products gross margin for the three months ended September 30, 2022 remained relatively consistent with the same period in 2021.

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

Operating Expenses

Research and Development Expense

Three Months Ended June 30, Change

Three Months Ended September 30, Change

2022 2021 $ %

2 unchanged sentences

% of revenue 27.7 % 31.4 %

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.

Research and development expense increased by $4.7 million in the three months ended September 30, 2022 compared to the same period in 2021, primarily due to a $2.6 million increase in personnel costs, resulting from an increase in headcount, inclusive of a $1.1 million decrease in stock-based compensation expense, a $2.0 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 $1.1 million decrease in stock-based compensation expense was primarily due to $3.1 million of additional expense in the prior period related to the modification of a stock award.

Sales and Marketing Expense

Three Months Ended June 30, Change

Three Months Ended September 30, Change

2022 2021 $ %

2 unchanged sentences

% of revenue 43.2 % 45.1 %

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.

Sales and marketing expense increased by $12.9 million in the three months ended September 30, 2022 compared to the same period in 2021, primarily due to a $5.5 million increase in personnel costs, inclusive of a $1.7 million increase in stock-based compensation expense, resulting from an increase in headcount, a $2.6 million increase in commission expense, a $2.2 million increase in allocated overhead driven largely by an increase in IT and facilities costs, a $1.5 million increase in marketing and advertising costs, a $0.6 million increase in travel and entertainment expense and a $0.5 million increase in other expenses.

General and Administrative Expense

Three Months Ended June 30, Change

Three Months Ended September 30, Change

2022 2021 $ %

2 unchanged sentences

% of revenue 11.7 % 17.0 %

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.

General and administrative expense decreased by $3.3 million in the three months ended September 30, 2022 compared to the same period in 2021, primarily due to a $4.3 million decrease in acquisition-related expenses and other professional consulting fees and a $0.5 million decrease in other expenses.

These decreases were partially offset by a $1.5 million increase in personnel costs due to an increase in headcount, inclusive of a $0.1 million increase in stock-based compensation expense.

Interest Income

Three Months Ended June 30, Change

Three Months Ended September 30, Change

2022 2021 $ %

2 unchanged sentences

% of revenue 0.3 % 0.1 %

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

Interest income increased by $0.4 million in the three months ended September 30, 2022 compared to the same period in 2021 primarily due to an increase in interest rates.

Interest Expense

Three Months Ended June 30, Change

Three Months Ended September 30, Change

2022 2021 $ %

2 unchanged sentences

% of revenue (1.6) % (2.1) %

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.

Interest expense decreased by $0.2 million in the three months ended September 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 partially repurchased in the first quarter of 2021, with the remaining outstanding amount repurchased in the fourth quarter of 2021.

Other Income (Expense), Net

Three Months Ended June 30, Change

Three Months Ended September 30, Change

2022 2021 $ %

2 unchanged sentences

% of revenue (1.3) % (0.2) %

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.

Other income (expense), net increased by $1.9 million in the three months ended September 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 June 30, Change

Three Months Ended September 30, Change

2022 2021 $ %

2 unchanged sentences

% of revenue 0.5 % 0.1 %

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

Provision for income taxes increased by $0.8 million in the three months ended September 30, 2022 compared to the same period in 2021 primarily due to our increased operations in foreign jurisdictions.

Comparison of the Nine Months Ended September 30, 2022 and 2021

Nine Months Ended September 30, Change

2022 2021 $ %

3 unchanged sentences

Total revenue $ 500,604 $ 383,766 $ 116,838 30.4 %

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.

Total revenue increased by $116.8 million in the nine months ended September 30, 2022 compared to the same period in 2021 and consisted of $101.8 million of organic growth and $15.0 million related to the acquisition of IntSights in July 2021.

The $101.8 million increase in revenue related to organic growth consisted of a $7.6 million increase in revenue from new customers and a $94.2 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.

The $94.2 million increase from existing customers was due to an increase in revenue from renewals, upsells and cross-sells as a result of the continued growth of our existing customer base.

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

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

The increase in total revenue in the 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.

The increase in total revenue in the nine months ended September 30, 2022 compared to the same period in 2021 was comprised of $83.6 million generated from sales in North America and $33.2 million generated from sales from the rest of the world.

Cost of Revenue

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

2022 2021 $ %

8 unchanged sentences

Total gross margin % 68.2 % 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.

Total cost of revenue increased by $40.3 million in the nine months ended September 30, 2022 compared to the same period in 2021, primarily due to a $16.0 million increase in personnel costs, inclusive of a $2.6 million increase in stock-based compensation expense, resulting from an increase in headcount to support our growing customer base and $1.5 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 $12.2 million increase in cloud computing costs related to growing cloud-based subscription and managed services revenue, a $5.3 million increase in allocated overhead driven largely by an increase in IT and facilities costs, a $3.6 million increase in amortization expense for acquired intangible assets, a $1.2 million increase in third-party professional service consulting costs, a $1.0 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.

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

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

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

Operating Expenses

Research and Development Expense

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

2022 2021 $ %

2 unchanged sentences

% of revenue 29.4 % 29.3 %

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.

Research and development expense increased by $35.1 million in the nine months ended September 30, 2022 compared to the same period in 2021, primarily due to a $25.5 million increase in personnel costs, a $7.6 million increase in allocated overhead driven largely by an increase in IT and facilities costs, and a $2.0 million increase in other expenses.

The $25.5 million increase in personnel costs was primarily due to a $16.9 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 an $8.6 million increase in stock-based compensation expense, inclusive of an increase of $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 and a decrease of $3.1 million related to the modification of a stock award in the prior year.

Sales and Marketing Expense

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

2022 2021 $ %

2 unchanged sentences

% of revenue 45.8 % 45.4 %

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.

Sales and marketing expense increased by $54.9 million in the nine months ended September 30, 2022 compared to the same period in 2021, primarily due to a $24.2 million increase in personnel costs, a $9.6 million increase in commission expense, a $9.2 million increase in allocated overhead driven largely by an increase in IT and facilities costs, a $6.1 million increase in marketing and advertising costs, a $2.1 million increase in travel and entertainment expense, a $0.7 million increase in amortization expense for acquired intangible assets and a $3.0 million increase in other expenses.

The $24.2 million increase in personnel costs was primarily due to a $19.1 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 $5.1 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

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% of revenue 12.6 % 15.0 %

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.

General and administrative expense increased by $5.4 million in the nine months ended September 30, 2022 compared to the same period in 2021, primarily due to a $7.8 million increase in personnel costs due to an increase in headcount, inclusive of a $2.1 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 $2.2 million increase in other expenses.

These increases were partially offset by a $5.3 million decrease in professional fees primarily due to a decrease in acquisition-related expenses and other professional consulting fees.

Interest Income

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% of revenue 0.2 % 0.1 %

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

Interest income increased by $0.6 million in the nine months ended September 30, 2022 compared to the same period in 2021 primarily due to an increase in interest rates.

Interest Expense

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% of revenue (1.6) % (3.0) %

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.

Interest expense decreased by $3.2 million in the nine months ended September 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 partially repurchased in the first quarter of 2021, with the remaining amount repurchased in the fourth quarter of 2021.

Other Income (Expense), Net

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% of revenue (1.1) % (0.3) %

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.

Other income (expense), net increased by $4.0 million in expense for the nine months ended September 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

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% of revenue 0.5 % 2.6 %

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.

Provision for income taxes decreased by $7.5 million in the nine months ended September 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 $1.5 million due to our increased operations in foreign jurisdictions.

Liquidity and Capital Resources

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.

As of September 30, 2022, we had $168.4 million in cash and cash equivalents, $99.9 million in short- and long-term investments that have maturities ranging from one to twenty months and an accumulated deficit of $849.4 million.

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

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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 six months ended June 30, 2022 and 2021:

Six Months Ended June 30,

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

Nine Months Ended September 30,

(in thousands)

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Operating Activities

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.

Operating activities provided $38.0 million of cash and cash equivalents in the nine months ended September 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 $113.3 million, offset by a decrease in our net operating assets of $21.5 million and non-cash charges of $129.8 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.

The decrease in our net operating assets was primarily due to a $18.3 million increase in deferred revenue, a $21.4 million decrease in accounts receivable due to an increase in collections and an $8.5 million increase in accounts payable, which each had a positive impact on operating cash flow.

These factors were partially offset by a $12.2 million decrease in accrued expenses, primarily as a result of the payout of annual bonuses and year-end commissions, a $5.4 million increase in prepaid expenses, a

$8.0 million increase in deferred contract acquisition and fulfillment costs and a $1.1 million decrease in other liabilities, which each had a negative impact on operating cash flow.

Operating activities provided $49.2 million of cash and cash equivalents in the nine months ended September 30, 2021, which reflects the timing of working capital adjustments and our continued growth in revenue partially offset by our continued investments in our operations.

Cash provided by operating activities reflected our net loss of $101.7 million, offset by a decrease in our net operating assets of $42.3 million and non-cash charges of $108.6 million related primarily to depreciation and amortization, stock-based compensation expense, deferred income taxes, induced conversion expense, amortization of debt issuance costs and other non-cash charges.

The decrease in our net operating assets was primarily due to a $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.

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.

Investing Activities

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.

Investing activities used $34.8 million of cash in the nine months ended September 30, 2022, consisting of $12.6 million for capitalization of internal-use software costs, $13.1 million in capital expenditures to purchase computer equipment and leasehold improvements, $8.1 million of investment purchases, net of sales and maturities, and $1.0 million of other investments.

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.

Financing Activities

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.

Financing activities provided $6.4 million of cash in the nine months ended September 30, 2022, which consisted primarily of $11.9 million in proceeds from the issuance of common stock purchased by employees under the Rapid7, Inc.

2015 Employee Stock Purchase Plan (“ESPP”) and $1.6 million in proceeds from the exercise of stock options, partially offset by $6.7 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.

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 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.

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 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”).

As of September 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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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