Rapid7, Inc. 10-Q

Item 1. Financial Statements. RAPID7, INC. Consolidated Balance Sheets (Unaudited) (in thousands, except share and per share data) September 30, 2022 December 31, 2021 Assets Current assets: Cash and cash equivalents $ 168,353 $ 164,582 Short-term investments 83,231 58,850 Accounts receivable, net of allowance for credit losses of $ 2,241 and $ 1,978 at September 30, 2022 and December 31, 2021, respectively 121,017 146,094 Deferred contract acquisition and fulfillment costs, current portion 33,307 29,974 Prepaid expenses and other current assets 33,402 33,236 Total current assets 439,310 432,736 Long-term investments 16,707 34,068 Property and equipment, net 55,002 50,225 Operating lease right-of-use assets 85,250 83,751 Deferred contract acquisition and fulfillment costs, non-current portion 61,857 57,191 Goodwill 515,631 515,258 Intangible assets, net 103,660 111,591 Other assets 18,132 11,191 Total assets $ 1,295,549 $ 1,296,011 Liabilities and Stockholders’ Equity (Deficit) Current liabilities: Accounts payable $ 13,864 $ 3,521 Accrued expenses 64,427 82,620 Operating lease liabilities, current portion 11,858 9,630 Deferred revenue, current portion 391,761 372,067 Other current liabilities 5,254 842 Total current liabilities 487,164 468,680 Convertible senior notes, non-current portion, net 814,947 812,063 Operating lease liabilities, non-current portion 90,427 90,865 Deferred revenue, non-current portion 31,659 33,056 Other long-term liabilities 13,636 17,342 Total liabilities 1,437,833 1,422,006 Stockholders’ equity (deficit): Preferred stock, $ 0.01 par value per share; 10,000,000 shares authorized at September 30, 2022 and December 31, 2021; 0 shares issued at September 30, 2022 and December 31, 2021 — — Common stock, $ 0.01 par value per share; 100,000,000 shares authorized at September 30, 2022 and December 31, 2021; 59,690,872 and 58,181,816 shares issued at September 30, 2022 and December 31, 2021, respectively; 59,204,064 and 57,695,008 shares outstanding at September 30, 2022 and December 31, 2021, respectively 592 577 Treasury stock, at cost, 486,808 shares at September 30, 2022 and December 31, 2021 ( 4,764 ) ( 4,764 ) Additional paid-in-capital 717,946 615,032 Accumulated other comprehensive loss ( 6,698 ) ( 812 ) Accumulated deficit ( 849,360 ) ( 736,028 ) Total stockholders’ equity (deficit) ( 142,284 ) ( 125,995 ) Total liabilities and stockholders’ equity (deficit) $ 1,295,549 $ 1,296,011 The accompanying notes are an integral part of these unaudited consolidated financial statements. 1 Table of Contents RAPID7, INC. Consolidated Statements of Operations (Unaudited) (in thousands, except share and per share data) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Revenue: Products $ 166,496 $ 131,149 $ 474,643 $ 359,581 Professional services 9,269 8,745 25,961 24,185 Total revenue 175,765 139,894 500,604 383,766 Cost of revenue: Products 45,957 36,497 135,296 99,315 Professional services 7,893 6,973 24,118 19,753 Total cost of revenue 53,850 43,470 159,414 119,068 Total gross profit 121,915 96,424 341,190 264,698 Operating expenses: Research and development 48,622 43,880 147,341 112,265 Sales and marketing 75,968 63,041 229,148 174,264 General and administrative 20,561 23,818 62,967 57,527 Total operating expenses 145,151 130,739 439,456 344,056 Loss from operations ( 23,236 ) ( 34,315 ) ( 98,266 ) ( 79,358 ) Other income (expense), net: Interest income 498 84 853 302 Interest expense ( 2,749 ) ( 2,962 ) ( 8,200 ) ( 11,415 ) Other income (expense), net ( 2,205 ) ( 299 ) ( 5,211 ) ( 1,217 ) Loss before income taxes ( 27,692 ) ( 37,492 ) ( 110,824 ) ( 91,688 ) Provision for income taxes 1,035 208 2,508 10,021 Net loss $ ( 28,727 ) $ ( 37,700 ) $ ( 113,332 ) $ ( 101,709 ) Net loss per share, basic and diluted $ ( 0.49 ) $ ( 0.67 ) $ ( 1.95 ) $ ( 1.86 ) Weighted-average common shares outstanding, basic and diluted 58,730,651 55,976,671 58,229,872 54,743,538 The accompanying notes are an integral part of these unaudited consolidated financial statements. 2 Table of Contents RAPID7, INC. Consolidated Statements of Comprehensive Loss (Unaudited) (in thousands) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net loss $ ( 28,727 ) $ ( 37,700 ) $ ( 113,332 ) $ ( 101,709 ) Other comprehensive income (loss): Change in fair value of cash flow hedges ( 3,355 ) ( 774 ) ( 7,280 ) ( 975 ) Adjustments for net losses (gains) realized on cash flow hedges and included in net loss 1,361 ( 8 ) 2,438 ( 386 ) Total change in unrealized losses on cash flow hedges ( 1,994 ) ( 782 ) ( 4,842 ) ( 1,361 ) Change in unrealized losses on investments ( 166 ) ( 10 ) ( 1,044 ) ( 22 ) Total other comprehensive loss ( 2,160 ) ( 792 ) ( 5,886 ) ( 1,383 ) Comprehensive loss $ ( 30,887 ) $ ( 38,492 ) $ ( 119,218 ) $ ( 103,092 ) The accompanying notes are an integral part of these unaudited consolidated financial statements. 3 Table of Contents RAPID7, INC. Consolidated Statements of Changes in Stockholders' Equity (Deficit) (Unaudited) (in thousands) Common stock Treasury stock Additional paid-in-capital Accumulated other comprehensive loss Accumulated deficit Total stockholders’ (deficit) Shares Amount Shares Amount Balance, June 30, 2022 58,636 $ 586 487 $ ( 4,764 ) $ 681,194 $ ( 4,538 ) $ ( 820,633 ) $ ( 148,155 ) Stock-based compensation expense — — — — 31,746 — — 31,746 Issuance of common stock under employee stock purchase plan 137 1 — — 6,232 — — 6,233 Vesting of restricted stock units 381 4 — — ( 4 ) — — — Shares withheld for employee taxes ( 23 ) — — — ( 1,637 ) — — ( 1,637 ) Issuance of common stock upon exercise of stock options 73 1 — — 415 — — 416 Other comprehensive loss — — — — — ( 2,160 ) — ( 2,160 ) Net loss — — — — — — ( 28,727 ) ( 28,727 ) Balance, September 30, 2022 59,204 $ 592 487 $ ( 4,764 ) $ 717,946 $ ( 6,698 ) $ ( 849,360 ) $ ( 142,284 ) Common stock Treasury stock Additional paid-in-capital Accumulated other comprehensive loss Accumulated deficit Total stockholders’ (deficit) Shares Amount Shares Amount Balance, June 30, 2021 55,748 $ 557 487 $ ( 4,764 ) $ 562,652 $ ( 137 ) $ ( 653,703 ) $ ( 95,395 ) Stock-based compensation expense — — — — 27,929 — — 27,929 Issuance of common stock under employee stock purchase plan 74 1 — — 4,808 — — 4,809 Vesting of restricted stock units 377 4 — — ( 4 ) — — — Shares withheld for employee taxes ( 42 ) ( 1 ) — — ( 4,700 ) — — ( 4,701 ) Issuance of common stock upon exercise of stock options 77 1 — — 846 — — 847 Issuance of common stock related to acquisition 207 2 — — ( 2 ) — — — Other comprehensive loss — — — — — ( 792 ) — ( 792 ) Net loss — — — — — — ( 37,700 ) ( 37,700 ) Balance, September 30, 2021 56,441 $ 564 487 $ ( 4,764 ) $ 591,529 $ ( 929 ) $ ( 691,403 ) $ ( 105,003 ) 4 Table of Contents RAPID7, INC. Consolidated Statements of Changes in Stockholders' Equity (Deficit) (Unaudited) (in thousands) Common stock Treasury stock Additional paid-in-capital Accumulated other comprehensive loss Accumulated deficit Total stockholders’ (deficit) Shares Amount Shares Amount Balance, December 31, 2021 57,695 $ 577 487 $ ( 4,764 ) $ 615,032 $ ( 812 ) $ ( 736,028 ) $ ( 125,995 ) Stock-based compensation expense — — — — 96,111 — — 96,111 Issuance of common stock under employee stock purchase plan 218 2 — — 11,941 — — 11,943 Vesting of restricted stock units 1,147 11 — — ( 11 ) — — — Shares withheld for employee taxes ( 82 ) — — — ( 6,743 ) — — ( 6,743 ) Issuance of common stock upon exercise of stock options 193 2 — — 1,619 — — 1,621 Issuance of common stock in connection with conversion of convertible senior notes — — — — ( 3 ) — — ( 3 ) Issuance of common stock related to acquisition 33 — — — — — — — Other comprehensive loss — — — — — ( 5,886 ) — ( 5,886 ) Net loss — — — — — — ( 113,332 ) ( 113,332 ) Balance, September 30, 2022 59,204 $ 592 487 $ ( 4,764 ) $ 717,946 $ ( 6,698 ) $ ( 849,360 ) $ ( 142,284 ) Common stock Treasury stock Additional paid-in-capital Accumulated other comprehensive gain (loss) Accumulated deficit Total stockholders’ equity (deficit) Shares Amount Shares Amount Balance, December 31, 2020 52,225 $ 522 487 $ ( 4,764 ) $ 692,603 $ 454 $ ( 617,279 ) $ 71,536 Stock-based compensation expense — — — — 72,700 — — 72,700 Issuance of common stock under employee stock purchase plan 222 2 — — 9,274 — — 9,276 Vesting of restricted stock units 1,251 13 — — ( 13 ) — — — Shares withheld for employee taxes ( 122 ) ( 2 ) — — ( 11,370 ) — — ( 11,372 ) Issuance of common stock upon exercise of stock options 356 4 — — 3,364 — — 3,368 Purchase of capped calls related to convertible senior notes — — — — ( 76,020 ) — — ( 76,020 ) Issuance of common stock in connection with repurchase and conversion of convertible senior notes 2,200 22 — — ( 2,720 ) — — ( 2,698 ) Issuance of common stock in connection with inducement of convertible senior notes 35 — — — 2,740 — — 2,740 Issuance of common stock related to acquisition 274 3 — — ( 3 ) — — — Cumulative-effect adjustment for the adoption of ASU 2020-06 — — — — ( 99,026 ) — 27,585 ( 71,441 ) Other comprehensive loss — — — — — ( 1,383 ) — ( 1,383 ) Net loss — — — — — — ( 101,709 ) ( 101,709 ) Balance, September 30, 2021 56,441 $ 564 487 $ ( 4,764 ) $ 591,529 $ ( 929 ) $ ( 691,403 ) $ ( 105,003 ) The accompanying notes are an integral part of these unaudited consolidated financial statements. 5 Table of Contents RAPID7, INC. Consolidated Statements of Cash Flows (Unaudited) (in thousands) Nine Months Ended September 30, 2022 2021 Cash flows from operating activities: Net loss $ ( 113,332 ) $ ( 101,709 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 30,587 23,513 Amortization of debt issuance costs 3,036 2,886 Stock-based compensation expense 92,304 73,872 Deferred income taxes — 3,924 Induced conversion expense — 2,740 Other 3,828 1,655 Changes in operating assets and liabilities: Accounts receivable 21,425 23,522 Deferred contract acquisition and fulfillment costs ( 7,999 ) ( 9,772 ) Prepaid expenses and other assets ( 5,303 ) 3,091 Accounts payable 8,504 2,079 Accrued expenses ( 12,241 ) ( 4,554 ) Deferred revenue 18,297 24,389 Other liabilities ( 1,144 ) 3,593 Net cash provided by operating activities 37,962 49,229 Cash flows from investing activities: Business acquisition, net of cash acquired — ( 358,420 ) Purchases of property and equipment ( 13,087 ) ( 4,835 ) Capitalization of internal-use software costs ( 12,648 ) ( 7,162 ) Purchases of investments ( 94,486 ) ( 59,308 ) Sales/maturities of investments 86,379 124,838 Other investments ( 1,000 ) ( 3,000 ) Net cash used in investing activities ( 34,842 ) ( 307,887 ) Cash flows from financing activities: Proceeds from issuance of convertible senior notes, net of issuance costs paid of $ 14,976 for the nine months ended September 30, 2021 — 585,024 Purchase of capped calls related to convertible senior notes — ( 76,020 ) Payments of debt issuance costs ( 71 ) — Payments for repurchase and conversion of convertible senior notes ( 12 ) ( 184,649 ) Payments related to business acquisitions ( 300 ) ( 12,118 ) Taxes paid related to net share settlement of equity awards ( 6,743 ) ( 11,372 ) Proceeds from employee stock purchase plan 11,943 9,276 Proceeds from stock option exercises 1,621 3,279 Net cash provided by financing activities 6,438 313,420 Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 5,707 ) ( 849 ) Net increase in cash, cash equivalents and restricted cash 3,851 53,913 Cash, cash equivalents and restricted cash, beginning of period 165,017 173,617 Cash, cash equivalents and restricted cash, end of period $ 168,868 $ 227,530 Supplemental cash flow information: Cash paid for interest on convertible senior notes $ 4,087 $ 4,758 Cash paid for income taxes, net of refunds $ 1,503 $ 824 Reconciliation of cash, cash equivalents and restricted cash: Cash and cash equivalents $ 168,353 $ 227,104 Restricted cash included in prepaid expenses and other assets 515 $ 426 Total cash, cash equivalents and restricted cash $ 168,868 $ 227,530 The accompanying notes are an integral part of these unaudited consolidated financial statements. 6 Table of Contents RAPID7, INC. Notes to Consolidated Financial Statements (Unaudited) Note 1. Description of Business, Basis of Presentation and Consolidation and Significant Accounting Policies Description of Business Rapid7, Inc. and subsidiaries (“we,” “us” or “our”) are advancing security with visibility, analytics, and automation delivered through our Insight Platform. Our solutions simplify the complex, allowing security teams to work more effectively with IT and development to reduce vulnerabilities, monitor for malicious behavior, investigate and shut down attacks, and automate routine tasks. Basis of Presentation and Consolidation The accompanying unaudited consolidated financial statements have been prepared by us in accordance with accounting principles generally accepted in the United States of America (“GAAP”), as well as pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), regarding interim financial reporting. Accordingly, certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 24, 2022. The consolidated financial statements include our results of operations and those of our wholly-owned subsidiaries and reflect all adjustments (consisting solely of normal, recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods presented. All intercompany transactions and balances have been eliminated in consolidation. The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for any future period or the entire fiscal year. Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The management estimates include, but are not limited to the determination of the estimated economic life of perpetual licenses for revenue recognition, the determination of standalone selling prices in revenue transactions with multiple performance obligations, the estimated period of benefit for deferred contract acquisition and fulfillment costs, the useful lives and recoverability of long-lived assets, the valuation for credit losses, the valuation of stock-based compensation, the fair value of assets acquired and liabilities assumed in business combinations, the incremental borrowing rate for operating leases and the valuation for deferred tax assets. We base our estimates on historical experience and on various other assumptions that we believe are reasonable. Actual results could differ from those estimates. The COVID-19 pandemic has resulted in a sustained global slowdown of economic activity that has decreased demand for a broad variety of goods and services, including from our customers. 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 extent to which the ongoing COVID-19 pandemic may impact our business, results of operations and financial condition going forward. Estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require the exercise of judgment. As of the date of issuance of these financial statements, we are not aware of any specific event or circumstance that would require us to update our estimates, assumptions and judgments or revise the carrying value of our assets or liabilities. These estimates may change as new events occur and additional information is obtained and will be recognized in the consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to our financial statements. Significant Accounting Policies Our significant accounting policies are described in Note 2, Summary of Significant Accounting Policies , to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021. There have been no changes to the significant accounting policies during the three and nine-month periods ended September 30, 2022. 7 Table of Contents Recent Accounting Pronouncements Accounting Pronouncements Recently Adopted In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers , which clarified the accounting for acquired revenue contracts with customers in a business combination. ASU 2021-08 requires acquirers to measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 606. As a result, it is generally expected that an acquirer will recognize and measure contract assets and liabilities in a manner consistent with how they were recognized by the acquiree in its preacquisition financial statements. This standard is effective for interim and annual periods beginning after December 15, 2022, with early adoption permitted. We early adopted this standard on January 1, 2022. This guidance will be applied prospectively to all business combinations that occur on or after January 1, 2022. Note 2. Revenue from Contracts with Customers We generate revenue primarily from: (1) subscriptions from the sale of cloud-based subscriptions, managed services, term software licenses, content subscriptions and maintenance and support associated with our software licenses, (2) perpetual software licenses, and (3) professional services from the sale of our deployment and training services related to our solutions, incident response services, penetration testing and security advisory services. The following table summarizes revenue from contracts with customers 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 (in thousands) Subscriptions $ 165,687 $ 129,157 $ 470,925 $ 353,338 Perpetual software licenses 759 1,840 3,226 5,990 Professional services 9,269 8,745 25,961 24,185 Other 50 152 492 253 Total revenue $ 175,765 $ 139,894 $ 500,604 $ 383,766 Subscriptions Subscriptions consists of revenue from our cloud-based subscription, managed services offerings, term software licenses, content subscriptions and maintenance and support associated with our software licenses. • We generate cloud-based subscription revenue primarily from sales of subscriptions to access our cloud platform, together with related support services to our customers. These arrangements do not provide the customer with the right to take possession of our software operating on our cloud platform at any time. Instead, customers are granted continuous access to our cloud platform over the contractual period. Revenue is recognized over time on a ratable basis over the contract term beginning on the date that our service is made available to the customer. Our cloud-based subscription contracts generally have annual or multi-year contractual terms which are billed in advance of the annual subscription period and are non-cancellable. • Managed services offerings consist of fees generated when we operate our software and provide our capabilities on behalf of our customers. Revenue is recognized on a ratable basis over the contract term beginning on the date that our service is made available to the customer. Our managed services offerings generally have annual or multi-year contractual terms which are billed in advance of the annual subscription period and are non-cancellable. • For our term software licenses where the utility to the customer is dependent on the continued delivery of content subscriptions, we recognize the license revenue over the contractual term of the content subscription. For our term software licenses which are not dependent on the continued delivery of content subscriptions, the license is considered distinct from the maintenance and support, and we therefore recognize revenue attributable to the license at the time of delivery. • Content subscriptions and our maintenance and support services are sold with our perpetual and term software licenses. Revenue related to our content subscriptions associated with our software licenses is recognized ratably over the contractual period. Maintenance and support services are distinct from the perpetual and term software license and revenue attributable to maintenance and support services is recognized ratably over the contractual period. 8 Table of Contents Perpetual Software Licenses For our perpetual software licenses where the utility to the customer is dependent on the continued delivery of content subscriptions, the content subscription renewal options result in a material right with respect to the perpetual software license. As a result, the revenue attributable to the perpetual software license is recognized ratably over the customer’s estimated economic life of five years , which represents a longer period of time in comparison to the initial contractual period of maintenance and support. The estimated economic life of five years represents the period which the customer is expected to benefit from the material right. We estimated this period of benefit by taking into consideration several factors, including the terms and conditions of our customer contracts and renewals and the expected useful life of our technology. For our perpetual software licenses which are not dependent on the continued delivery of content subscriptions, the license is considered distinct from the maintenance and support, and we therefore recognize revenue attributable to the license at the time of delivery. Professional Services All of our professional services are considered distinct performance obligations when sold stand alone or with other products. These contracts generally have terms of one year or less. For the majority of these contracts, revenue is recognized over time based upon the proportion of work performed to date. Contracts with Multiple Performance Obligations If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. The majority of our contracts with customers contain multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price (“SSP”) basis. We determine SSP of our products and services based on our overall pricing objectives using all information reasonably available to us, taking into consideration market conditions and other factors, including the geographic locations of our customers, negotiated discounts from price lists and selling method (i.e., partner or direct). When available, we use directly observable stand-alone transactions to determine SSP. When not regularly sold on a stand-alone basis, we estimate SSP for our products and services utilizing historical sales data, including discounts from list price. The historical data is aggregated and analyzed by geographic location and selling method to establish a median or average price. Once SSP is established it is applied consistently to all transactions including that product or service utilizing a portfolio approach. Contract Balances Contract liabilities consist of deferred revenue and include payments received in advance of performance under the contract. Such amounts are recognized as revenue over the contractual period consistent with the above methodology. For the three months ended September 30, 2022 and 2021, we recognized revenue of $ 153.8 million and $ 117.5 million, respectively, and for the nine months ended September 30, 2022 and 2021, we recognized $ 308.3 million and $ 237.5 million, respectively, that was included in the corresponding contract liability balance at the beginning of the periods presented. Deferred revenue that will be realized during the succeeding 12-month period is recorded as current, and the remaining deferred revenue is recorded as non-current. We receive payments from customers based upon contractual billing schedules. Accounts receivable are recorded when the right to consideration becomes unconditional. Unbilled receivables include amounts related to our contractual right to consideration for both completed and partially completed performance obligations that have not been invoiced. If the right to consideration is based on satisfaction of another performance obligation in the contract other than the passage of time, we record a contract asset. As of September 30, 2022 and December 31, 2021, unbilled receivables of $ 1.2 million are included in prepaid expenses and other current assets in our consolidated balance sheet. As of September 30, 2022 and December 31, 2021, we had no contract assets recorded on our consolidated balance sheet. 9 Table of Contents Transaction price allocated to the remaining performance obligations The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied as of September 30, 2022. The estimated revenues do not include unexercised contract renewals. Next Twelve Months Thereafter (in thousands) Subscriptions $ 434,495 $ 158,385 Perpetual software licenses 878 184 Professional services 19,406 3,371 Total $ 454,779 $ 161,940 Note 3. Business Combinations IntSights On July 16, 2021, we acquired IntSights Cyber Intelligence Ltd. (“IntSights”), a provider of contextualized external threat intelligence and proactive threat remediation, for a purchase price with an aggregate fair value of $ 322.3 million. The purchase consideration consisted of $ 319.2 million in cash paid at closing, $ 3.4 million in deferred cash payments and a $ 0.3 million receivable for purchase price adjustments. The deferred cash payments will be held by us to satisfy indemnification obligations payable within eighteen months of the acquisition date. The assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. The excess of the purchase price over the assets acquired and liabilities assumed was recorded as goodwill. The fair value of net assets acquired, goodwill and intangible assets were $ 61.1 million, $ 260.9 million and $ 65.2 million, respectively. The goodwill was allocated to our one reporting unit. The acquired goodwill and intangible assets were not deductible for tax purposes. Velocidex Enterprises Pty Ltd On April 12, 2021, we acquired Velocidex Enterprises Pty Ltd (“Velocidex”), a leading open-source technology and community used for endpoint monitoring, digital forensics, and incident response. The purchase price consisted of $ 2.7 million paid in cash and $ 0.3 million in deferred cash payments. The purchase price was allocated to a developed technology intangible asset which has an estimated useful life of 6 years. Alcide.IO Ltd. On January 28, 2021, we acquired Alcide.IO Ltd. (“Alcide”), a leading provider of Kubernetes security, for a purchase consideration of $ 50.5 million, which was funded in cash. The assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. The excess of the purchase price over the assets acquired and liabilities assumed was recorded as goodwill. The fair value of net assets acquired, goodwill and intangible assets were $( 0.7 ) million, $ 40.8 million and $ 10.4 million, respectively. The goodwill was allocated to our one reporting unit. The acquired goodwill and intangible assets were not deductible for tax purposes. 10 Table of Contents Note 4. Investments Our investments, which are all classified as available-for-sale, consisted of the following: As of September 30, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (in thousands) Description: U.S. government agencies $ 70,556 $ 2 $ ( 718 ) $ 69,840 Corporate bonds 16,891 — ( 334 ) 16,557 Commercial paper 7,630 — — 7,630 Agency bonds 5,969 — ( 58 ) 5,911 Total $ 101,046 $ 2 $ ( 1,110 ) $ 99,938 As of December 31, 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (in thousands) Description: Commercial paper $ 37,778 $ — $ — $ 37,778 Corporate bonds 32,059 — ( 32 ) 32,027 U.S government agencies 22,396 — ( 31 ) 22,365 Agency bonds 749 — ( 1 ) 748 Total $ 92,982 $ — $ ( 64 ) $ 92,918 As of September 30, 2022, our available-for-sale investments had maturities ranging from 1 to 22 months. As of December 31, 2021, our available-for-sale investments had maturities ranging from 2 to 23 months. For all of our investments for which the amortized cost basis was greater than the fair value at September 30, 2022 and December 31, 2021, we have concluded that there is no plan to sell the security nor is it more likely than not that we would be required to sell the security before its anticipated maturity. In making the determination as to whether the unrealized loss is other-than-temporary, we considered the length of time and extent the investment has been in an unrealized loss position, the financial condition and near-term prospects of the issuers, the issuers’ credit rating and the time to maturity. Note 5. Fair Value Measurements We measure certain financial assets and liabilities at fair value. Fair value is determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as determined by either the principal market or the most advantageous market. Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy, as follows: Level 1 : Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 : Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 : Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the asset or liability. We consider an active market to be one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis, and we consider an inactive market to be one in which there are infrequent or few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. The following table presents our financial assets and liabilities measured and recorded at fair value on a recurring basis using the above input categories: 11 Table of Contents As of September 30, 2022 Level 1 Level 2 Level 3 Total (in thousands) Description: Assets: U.S. Government agencies $ 69,840 $ — $ — $ 69,840 Money market funds 67,749 — — 67,749 Corporate bonds — 16,557 — 16,557 Commercial paper — 7,630 — 7,630 Agency bonds — 5,911 — 5,911 Foreign currency forward contracts designated as cash flow hedges (prepaid expenses and other current assets) — 124 — 124 Total $ 137,589 $ 30,222 $ — $ 167,811 Liabilities: Foreign currency forward contracts designated as cash flow hedges (other current liabilities and other liabilities) $ — $ 5,716 $ — $ 5,716 Total $ — $ 5,716 $ — $ 5,716 As of December 31, 2021 Level 1 Level 2 Level 3 Total (in thousands) Description: Assets: Money market funds $ 86,835 $ — $ — $ 86,835 Commercial paper — 37,778 — 37,778 Corporate bonds — 32,027 — 32,027 U.S. Government agencies 22,365 — — 22,365 Agency bonds — 748 — 748 Foreign currency forward contracts designated as cash flow hedges (prepaid expenses and other current assets) — 73 — 73 Total assets $ 109,200 $ 70,626 $ — $ 179,826 Liabilities: Foreign currency forward contracts designated as cash flow hedges (other current liabilities and other liabilities) $ — $ 823 $ — $ 823 Total liabilities $ — $ 823 $ — $ 823 As of September 30, 2022, the fair value of our 2.25 % and 0.25 % convertible senior notes due 2025 and 2027, as further described in Note 10, Debt , was $ 229.9 million and $ 455.2 million, respectively, based upon quoted market prices. We consider the fair value of the Notes to be a Level 2 measurement due to limited trading activity of the Notes. 12 Table of Contents Note 6. Property and Equipment Property and equipment are recorded at cost and consist of the following: As of September 30, 2022 As of December 31, 2021 (in thousands) Computer equipment and software $ 23,769 $ 19,879 Furniture and fixtures 11,032 10,360 Leasehold improvements 61,318 51,983 Total 96,119 82,222 Less accumulated depreciation ( 41,117 ) ( 31,997 ) Property and equipment, net $ 55,002 $ 50,225 Depreciation expense was $ 3.5 million and $ 3.2 million for the three months ended September 30, 2022 and 2021, respectively, and $ 10.0 million and $ 9.2 million for the nine months ended September 30, 2022 and 2021, respectively . Note 7. Goodwill and Intangible Assets Goodwill was $ 515.6 million and $ 515.3 million as of September 30, 2022 and December 31, 2021, respectively. The following table displays the changes in the gross carrying amount of goodwill: Amount (in thousands) Balance at December 31, 2021 $ 515,258 IntSights acquisition adjustments 373 Balance at September 30, 2022 $ 515,631 The following table presents details of our intangible assets, which include acquired identifiable intangible assets and capitalized internal-use software costs: As of September 30, 2022 As of December 31, 2021 Weighted- Average Life (years) Gross Carrying Amount Accumulated Amortization Net Book Value Gross Carrying Amount Accumulated Amortization Net Book Value (in thousands) Intangible assets subject to amortization: Developed technology 5.2 $ 122,555 $ ( 54,270 ) $ 68,285 $ 122,555 $ ( 40,152 ) $ 82,403 Customer relationships 4.5 12,000 ( 4,489 ) 7,511 12,000 ( 2,436 ) 9,564 Trade names 3.1 2,619 ( 1,679 ) 940 2,619 ( 1,094 ) 1,525 Total acquired intangible assets 137,174 ( 60,438 ) 76,736 137,174 ( 43,682 ) 93,492 Internal-use software 3.0 38,505 ( 11,581 ) 26,924 25,857 ( 7,758 ) 18,099 Total intangible assets $ 175,679 $ ( 72,019 ) $ 103,660 $ 163,031 $ ( 51,440 ) $ 111,591 Amortization expense was $ 6.7 million and $ 6.6 million for the three months ended September 30, 2022 and 2021, respectively, and $ 20.6 million and $ 14.3 million for the nine months ended September 30, 2022 and 2021, respectively. 13 Table of Contents Estimated future amortization expense of the acquired identifiable intangible assets and completed capitalized internal-use software costs as of September 30, 2022 was as follows (in thousands): 2022 (for the remaining three months) $ 6,637 2023 24,937 2024 20,538 2025 16,932 2026 12,477 2027 and thereafter 5,206 Total $ 86,727 The table above excludes the impact of $ 16.9 million of capitalized internal-use software costs for projects that have not been completed as of September 30, 2022, and therefore, we have not determined the useful life of the software, nor have all the costs associated with these projects been incurred. Note 8. Deferred Contract Acquisition and Fulfillment Costs The following table summarizes the activity of the deferred contract acquisition and fulfillment costs for the nine months ended September 30, 2022 and 2021: Nine Months Ended September 30, 2022 2021 (in thousands) Beginning balance $ 87,165 $ 64,639 Capitalization of contract acquisition and fulfillment costs 33,948 28,623 Amortization of deferred contract acquisition and fulfillment costs ( 25,949 ) ( 18,851 ) Ending balance $ 95,164 $ 74,411 Note 9. Derivatives and Hedging Activities To mitigate our exposure to foreign currency fluctuations resulting from certain expenses denominated in certain foreign currencies, we enter into forward contracts that are designated as cash flow hedging instruments. These forward contracts have contractual maturities of nineteen months or less, and as of September 30, 2022 and December 31, 2021, outstanding forward contracts had a total notional value of $ 51.8 million and $ 34.7 million, respectively. The notional value represents the gross amount of foreign currency that will be bought or sold upon maturity of the forward contract. During the three and nine months ended September 30, 2022, all cash flow hedges were considered effective. Refer to Note 5, Fair Value Measurements , for the fair values of our outstanding derivative instruments. Note 10. Debt Convertible Senior Notes In May 2020, we issued $ 230.0 million aggregate principal amount of convertible senior notes due May 1, 2025 (the “2025 Notes”) and in March 2021, we issued $ 600.0 million aggregate principal amount of convertible senior notes due March 15, 2027 (the “2027 Notes”) (collectively, the “Notes”). Further details of the Notes are as follows: Issuance Maturity Date Interest Rate First Interest Payment Date Effective Interest Rate Semi-Annual Interest Payment Dates Initial Conversion Rate per $1,000 Principal Initial Conversion Price Number of Shares (in millions) 2025 Notes May 1, 2025 2.25 % November 1, 2020 2.88 % May 1 and November 1 16.3875 $ 61.02 3.8 2027 Notes March 15, 2027 0.25 % September 15, 2021 0.67 % March 15 and September 15 9.6734 $ 103.38 5.8 The 2025 Notes and the 2027 Notes are senior unsecured obligations, do not contain any financial covenants and are governed by indentures between the Company, as issuer, and U.S. Bank National Association, as trustee (the “Indentures”). The total net proceeds from the 2025 Notes and the 2027 Notes offerings, after deducting initial purchase discounts and estimated debt issuance costs, were $ 222.8 million and $ 585.0 million, respectively. 14 Table of Contents Terms of the Notes The holders of the Notes may convert their respective Notes at their option at any time prior to the close of business on the business day immediately preceding their respective convertible dates only under the following circumstances: • during any calendar quarter commencing after the calendar quarter ending on September 30, 2020 for the 2025 Notes and March 20, 2024 for the 2027 Notes (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the conversion price of the respective Notes on each applicable trading day; • during the five business day period after any five consecutive trading day period for the 2025 Notes and any ten consecutive trading day period for the 2027 Notes (the “measurement periods”) in which the trading price (as defined in the Indentures) per $1,000 principal amount of the applicable series of Notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of our common stock and the conversion rate of the respective Notes on each such trading day; • if we call any or all of the respective Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the respective redemption date; or • upon the occurrence of specified corporate events (as set forth in the Indentures). During the six months ended June 30, 2022, the 2025 Notes were convertible at the option of the holders. During this period an immaterial principal amount of the 2025 Notes were requested for conversion and settled in cash. As of September 30, 2022, the 2025 Notes and 2027 Notes were not convertible at the option of the holder. The holders may convert the 2025 Notes and the 2027 Notes at any time on or after November 1, 2024 and December 15, 2026, respectively, until the close of business on the second scheduled trading day immediately preceding the maturity date, regardless of the circumstances set forth above. Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election, in the manner and subject to the terms and conditions provided in the Indentures. If we undergo a fundamental change (as set forth in the Indentures) at any time prior to the maturity date, holders of the Notes will have the right, at their option, to require us to repurchase for cash all or any portion of their Notes at a repurchase price equal to 100 % of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, following certain corporate events that occur prior to the maturity date or following our issuance of a notice of redemption, in each case as described in the Indentures, we will increase the conversion rate for a holder of the Notes who elects to convert its Notes in connection with such a corporate event or during the related redemption period in certain circumstances. The 2025 Notes and the 2027 Notes are redeemable after May 6, 2023 and March 20, 2024 (the “Redemption Dates”), respectively. On or after the respective Redemption Dates, we may redeem for cash all or any portion of the 2025 Notes or the 2027 Notes, at our option, if the last reported sale price of our common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including the trading day immediately preceding, the date on which we provide the redemption notice at a redemption price equal to 100 % principal amount of the 2025 Notes or the 2027 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. Accounting for the Notes In accounting for the issuance of the Notes, the principal less debt issuance costs are recorded as debt on our consolidated balance sheet. The debt issuance costs are amortized to interest expense using the effective interest method over the contractual term of the Notes. 15 Table of Contents The net carrying amount of the Notes as of September 30, 2022 and December 31, 2021 was as follows (in thousands): 2025 Notes 2027 Notes Principal Unamortized debt issuance costs Total Principal Unamortized debt issuance costs Total Balance at December 31, 2021 $ 230,000 $ ( 4,905 ) $ 225,095 $ 600,000 $ ( 13,032 ) $ 586,968 Amortization of debt issuance costs — 1,052 1,052 — 1,840 1,840 Conversion of Notes ( 8 ) — ( 8 ) — — — Balance at September, 30, 2022 $ 229,992 $ ( 3,853 ) $ 226,139 $ 600,000 $ ( 11,192 ) $ 588,808 Interest expense related to the Notes was as follows (in thousands): Three Months Ended September 30, 2022 2021 2025 Notes 2027 Notes Total 2023 Notes 2025 Notes 2027 Notes Total Contractual interest expense $ 1,292 $ 377 $ 1,669 $ 146 $ 1,293 $ 375 $ 1,814 Amortization of debt issuance costs 371 626 997 75 361 620 1,056 Total interest expense $ 1,663 $ 1,003 $ 2,666 $ 221 $ 1,654 $ 995 $ 2,870 Nine Months Ended September 30, 2022 2021 2025 Notes 2027 Notes Total 2023 Notes 2025 Notes 2027 Notes Total Contractual interest expense $ 3,880 $ 1,127 $ 5,007 $ 852 $ 3,881 $ 800 $ 5,533 Amortization of debt issuance costs 1,052 1,840 2,892 449 1,021 1,302 2,772 Induced conversion expense — — — 2,740 — — 2,740 Total interest expense $ 4,932 $ 2,967 $ 7,899 $ 4,041 $ 4,902 $ 2,102 $ 11,045 During the first quarter of 2021, we used a portion of the proceeds from the issuance of the 2027 Notes, together with 2.2 million shares of our common stock, to repurchase and retire $ 182.6 million aggregate principal amount of the convertible senior notes due August 1, 2023 (the “2023 Notes”), and paid accrued and unpaid interest thereon. In addition, during the first quarter of 2021, holders of the 2023 Notes elected to convert Notes with a principal amount of $ 2.0 million. Cash was paid for the principal and the excess conversion spread was paid in 23,123 shares of our common stock. During the fourth quarter of 2021, we redeemed the remaining $ 45.4 million aggregate principal amount outstanding of the 2023 Notes. We paid $ 43.4 million in cash and issued 697,262 shares of our common stock to the holders of the 2023 Notes who submitted conversion notices, and the remaining $ 2.0 million of 2023 Notes were redeemed in cash, plus accrued and unpaid interest. Capped Calls In connection with the offering of the 2023 Notes, the 2025 Notes and the 2027 Notes, we entered into privately negotiated capped call transactions with certain counterparties (the “2023 Capped Calls, “2025 Capped Calls” and “2027 Capped Calls”) (collectively, the “Capped Calls”). The Capped Calls are expected to reduce potential dilution to our common stock upon conversion of a given series of notes and/or offset any cash payments that we are required to make in excess of the principal amount of converted notes of such series, as the case may be, with such reduction and/or offset subject to a cap. The Capped Calls are subject to adjustment upon the occurrence of certain specified extraordinary events affecting us, including merger events, tender offers and announcement events. In addition, the Capped Calls are subject to certain specified additional disruption events that may give rise to a termination of the Capped Calls, including nationalization, insolvency or delisting, changes in law, failures to deliver, insolvency filings and hedging disruptions. 16 Table of Contents The following table sets forth other key terms and premiums paid for the Capped Calls related to each series of Notes: Capped Calls Entered into in Connection with the Issuance of the 2023 Notes Capped Calls Entered into in Connection with the Issuance of the 2025 Notes Capped Calls Entered into in Connection with the Issuance of the 2027 Notes Initial strike price, subject to certain adjustments $ 41.59 $ 61.02 $ 103.38 Cap price, subject to certain adjustments $ 63.98 $ 93.88 $ 159.04 Total premium paid (in thousands) $ 26,910 $ 27,255 $ 76,020 The 2023 Capped Calls were not redeemed with the repayment of the 2023 Notes and remain outstanding. For accounting purposes, the 2023 Capped Calls, the 2025 Capped Calls and the 2027 Capped Calls are separate transactions, and not part of the terms of the 2023 Notes, the 2025 Notes and the 2027 Notes. The 2023 Capped Calls, the 2025 Capped Calls and the 2027 Capped Calls are recorded in stockholders' equity and are not accounted for as derivatives. Credit Agreement In April 2020, we entered into a Credit and Security Agreement (the “Credit Agreement”), with KeyBank National Association that provides for a $ 30.0 million revolving credit facility, with a letter of credit sublimit of $ 15.0 million and an accordion feature under which we could increase the credit facility to up to $ 70.0 million. In May 2020, we utilized the accordion feature to increase the credit facility to $ 50.0 million. In December 2021, we entered into an amendment (the “Amendment”) in respect of our Credit and Security Agreement (as amended by the Amendment, the “Credit Agreement”), with KeyBank National Association, to, among other things, increase the credit facility from $ 50.0 million to $ 100.0 million and extend the maturity date to December 22, 2024. The Credit Agreement provides for a $ 100.0 million revolving credit facility, with a letter of credit sublimit of $ 15.0 million, and an accordion feature under which we can increase the credit facility to up to $ 150.0 million. We incurred fees of $ 0.4 million in connection with entering into the Credit Agreement. The fees are recorded in other current assets on the consolidated balance sheet and are amortized on a straight-line basis over the contractual term of the arrangement. The commitment fee of 0.2 % per annum on the unused portion of the credit facility is expensed as incurred and included within interest expense on the consolidated statement of operations. The Credit Agreement contains certain financial covenants including a requirement that we maintain specified minimum recurring revenue and liquidity amounts. The borrowings under the Credit Agreement bear interest, at our option, at a rate equal to either (i) term SOFR plus a credit spread adjustment of 0.10 % per annum plus a margin of 2.50 % per annum or (ii) the alternate base rate (subject to a floor), plus an applicable margin equal to 0 % per annum. As of September 30, 2022, we did not have any outstanding borrowings and we were in compliance with all covenants under the Credit Agreement. As of September 30, 2022, we had a total of $ 9.8 million in letters of credit outstanding as collateral for certain office space leases and corporate credit card programs which reduce the amount of borrowing available under our Credit Agreement. Note 11. Leases Our leases primarily relate to office facilities that have remaining terms of up to 9.5 years, some of which include one or more options to renew with renewal terms of up to 7 years and some of which include options to terminate the leases within the next 7 years. All of our leases are classified as operating leases. The components of lease expense were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (in thousands) Operating lease cost $ 4,997 $ 3,956 $ 15,240 $ 11,501 Short-term lease costs 461 160 1,315 479 Variable lease costs 2,184 1,652 6,716 4,432 Total lease costs $ 7,642 $ 5,768 $ 23,271 $ 16,412 17 Table of Contents Supplemental balance sheet information related to the operating leases was as follows: As of September 30, 2022 As of December 31, 2021 Weighted average remaining lease term (in years) - operating leases 6.8 7.2 Weighted average discount rate - operating leases 6.3 % 6.2 % Supplemental cash flow information related to leases was as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (in thousands) Cash paid for amounts included in the measurement of lease liabilities $ 3,057 $ 4,304 $ 11,093 $ 12,628 ROU assets obtained in exchange for new lease obligations $ 3,811 $ 1,290 $ 12,675 $ 2,351 Maturities of operating lease liabilities as of September 30, 2022 were as follows (in thousands): 2022 (for the remaining three months) $ 4,039 2023 17,220 2024 19,320 2025 18,509 2026 17,161 2027 and thereafter 50,207 Total lease payments $ 126,456 Less: imputed interest ( 24,171 ) Total $ 102,285 Note 12. Stock-Based Compensation Expense (a) General Stock-based compensation expense for RSUs, performance-based PSUs, stock options and issuances of common stock pursuant to our employee stock purchase plan was classified in the accompanying consolidated statements of operations as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (in thousands) Stock-based compensation expense: Cost of revenue $ 2,745 $ 1,604 $ 7,610 $ 4,970 Research and development 13,400 14,549 40,349 31,784 Sales and marketing 8,047 6,348 23,251 18,132 General and administrative 6,779 6,695 21,094 18,986 Total stock-based compensation expense $ 30,971 $ 29,196 $ 92,304 $ 73,872 We recognize compensation cost of all awards on a straight-line basis over the applicable vesting period, which is generally four years . Our Compensation Committee adopted and approved the performance goals, targets and payout formulas for our 2022 and 2021 bonus plans, including permitting our executive officers and certain other employees the opportunity to receive payment of their earned bonuses in the form of common stock (in lieu of cash). During the three months ended September 30, 2022 and 2021, we recognized stock-based compensation expense related to such bonuses in the amount of $( 0.8 ) million and $ 1.3 million, and during the nine months ended September 30, 2022 and 2021, we recognized stock-based compensation expense related to such bonuses in the amount of $ 0.8 million and $ 3.6 million, based on the probable expected performance against the pre-established corporate 18 Table of Contents financial objectives as of September 30, 2022 and 2021. For all employees, including executive officers, who elect to receive their bonuses in the form of common stock (in lieu of cash), the payouts are expected to be made in the form of fully vested stock awards in the first quarter of the following year pursuant to our 2015 Equity Incentive Plan, as amended. The number of shares underlying such awards is determined by dividing the dollar value of the actual bonus award payment by the closing price per share of our common stock on the date of grant. During the three months ended September 30, 2021, we accelerated the vesting of a stock award. The accelerated vesting was deemed a modification of the original award resulting in $ 6.9 million of incremental stock-based compensation expense. In the three and nine months ended September 30, 2021, we recorded $ 3.1 million of stock-based compensation expense related to this modification. (b) Restricted Stock Units and Performance-Based Restricted Stock Units RSUs and PSUs activity during the nine months ended September 30, 2022 was as follows: Shares Weighted-Average Grant Date Fair Value Unvested balance as of December 31, 2021 2,778,877 $ 74.40 Granted 2,053,128 93.41 Vested ( 1,146,570 ) 67.20 Forfeited ( 405,534 ) 84.39 Unvested balance as of September 30, 2022 3,279,901 $ 87.58 As of September 30, 2022, the unrecognized compensation expense related to our unvested RSUs and PSUs was $ 266.3 million. This unrecognized compensation expense will be recognized over an estimated weighted-average amortization period of 2.7 years. (c) Stock Options Stock option activity during the nine months ended September 30, 2022 was as follows: Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life (in years) Aggregate Intrinsic Value (in thousands) Outstanding as of December 31, 2021 1,411,387 $ 10.74 3.4 $ 150,951 Granted — — Exercised ( 192,559 ) 8.42 $ 13,148 Forfeited/cancelled ( 38 ) 21.15 Outstanding as of September 30, 2022 1,218,790 $ 11.10 2.7 $ 38,753 Vested and exercisable as of September 30, 2022 1,218,790 $ 11.10 2.7 $ 38,753 The total fair value of stock options vested in the nine months ended September 30, 2022 was $ 0.1 million. (d) Employee Stock Purchase Plan Under the Rapid7, Inc. 2015 Employee Stock Purchase Plan (“ESPP”), employees may set aside up to 15 % of their gross earnings, on an after-tax basis, to purchase our common stock at a discounted price, which is calculated at 85 % of the lesser of: (i) the market value of our common stock at the beginning of each offering period and (ii) the market value of our common stock on the applicable purchase date. On March 15, 2022, we issued 80,747 shares of common stock to employees, with purchase prices of $ 67.59 or $ 81.37 per share, for aggregate proceeds of $ 5.7 million. On September 15, 2022, we issued 137,567 shares of common stock to employees, with a purchase prices of $ 45.31 per share, for aggregate proceeds of $ 6.2 million. 19 Table of Contents Note 13. Net Loss per Share The following table summarizes the computation of basic and diluted net loss per share of our common stock 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 (in thousands, except share and per share data) Numerator: Net loss $ ( 28,727 ) $ ( 37,700 ) $ ( 113,332 ) $ ( 101,709 ) Denominator: Weighted-average common shares outstanding, basic and diluted 58,730,651 55,976,671 58,229,872 54,743,538 Net loss per share, basic and diluted $ ( 0.49 ) $ ( 0.67 ) $ ( 1.95 ) $ ( 1.86 ) We intend to settle any conversion of our 2025 Notes and 2027 Notes in cash, shares, or a combination thereof. The dilutive impact of the Notes for our calculation of diluted net income (loss) per share is considered using the if-converted method. For the three and nine months ended September 30, 2022 and 2021, the shares underlying the Notes were not considered in the calculation of diluted net loss per share as the effect would have been anti-dilutive. In connection with the issuance of the 2023 Notes, the 2025 Notes and the 2027 Notes, we entered into 2023 Capped Calls, 2025 Capped Calls and 2027 Capped Calls, which were not included for the purpose of calculating the number of diluted shares outstanding, as their effect would have been anti-dilutive. As further described in Note 10, Debt , the 2023 Capped Calls were not redeemed with the redemption of the 2023 Notes. The following potentially dilutive securities outstanding have been excluded from the computation of diluted weighted-average shares outstanding for the respective periods below because they would have been anti-dilutive: Three and Nine Months Ended September 30, 2022 2021 Options to purchase common stock 1,218,790 1,577,125 Unvested restricted stock units 3,279,901 3,240,668 Common stock to be issued to DivvyCloud founders 33,433 133,730 Common stock issued to IntSights founders 206,608 206,608 Shares to be issued under ESPP 30,501 10,084 Convertible senior notes 9,572,955 10,663,519 Total 14,342,188 15,831,734 Note 14. Commitments and Contingencies (a) Warranty We provide limited product warranties. Historically, any payments made under these provisions have been immaterial. (b) Litigation and Claims In October 2018, Finjan, Inc. (“Finjan”) filed a complaint against us and our wholly-owned subsidiary, Rapid7 LLC, in the United States District Court, District of Delaware, alleging patent infringement of seven patents held by them. In the complaint, Finjan sought unspecified damages, attorneys' fees and injunctive relief. We intend to vigorously contest Finjan's claims. The final outcome, including our liability, if any, with respect to Finjan's claims, is uncertain. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors. In addition, from time to time, we may be a party to litigation or subject to claims incident to the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not have a material adverse effect on our business. 20 Table of Contents Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors. (c) Indemnification Obligations We agree to standard indemnification provisions in the ordinary course of business. Pursuant to these provisions, we agree to indemnify, hold harmless and reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally our customers, in connection with any United States patent, copyright or other intellectual property infringement claim by any third party arising from the use of our products or services in accordance with the agreement or arising from our gross negligence, willful misconduct or violation of the law (provided that there is not gross or willful misconduct on the part of the other party) with respect to our products or services. The term of these indemnification provisions is generally perpetual from the time of execution of the agreement. We carry insurance that covers certain third-party claims relating to our services and limits our exposure. We have never incurred costs to defend lawsuits or settle claims related to these indemnification provisions. As permitted under Delaware law, we have entered into indemnification agreements with our officers and directors, indemnifying them for certain events or occurrences while they serve as officers or directors of the company. Note 15. Segment Information and Information about Geographic Areas We operate in one segment. Our chief operating decision maker is our Chief Executive Officer, who makes operating decisions, assesses performance and allocates resources on a consolidated basis. Net revenues by geographic area presented based upon the location of the customer were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (in thousands) United States $ 131,628 $ 107,513 $ 376,752 $ 299,279 Other 44,137 32,381 123,852 84,487 Total $ 175,765 $ 139,894 $ 500,604 $ 383,766 Property and equipment, net by geographic area was as follows: As of September 30, 2022 As of December 31, 2021 (in thousands) United States $ 39,295 $ 37,682 Other 15,707 12,543 Total $ 55,002 $ 50,225 21 Table of Contents