Rapid7, Inc. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with (1) our unaudited consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and (2) the audited consolidated financial statements and the related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended December 31, 2021 included in our Annual Report on Form 10-K, filed with the SEC on February 24, 2022. Forward-looking statements in this review are qualified by the cautionary statement included under the next sub-heading, “Special Note Regarding Forward-Looking Statements”. Special Note Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q, including the sections entitled “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Statements that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements. These forward-looking statements include, but are not limited to, statements concerning the following: • our ability to continue to add new customers, maintain existing customers and sell new products and professional services to new and existing customers; • uncertain impacts that the ongoing COVID-19 pandemic may have on our business, strategy, operating results, financial condition and cash flows, as well as changes in overall level of software spending and volatility in the global economy; • the effects of increased competition as well as innovations by new and existing competitors in our market; • our ability to adapt to technological change and effectively enhance, innovate and scale our solutions; • our ability to effectively manage or sustain our growth and to attain and sustain profitability; • our ability to diversify our sources of revenue; • potential acquisitions and integration of complementary business and technologies; • our expected use of proceeds from future issuances of equity or convertible debt securities; • our ability to maintain, or strengthen awareness of, our brand; • perceived or actual security, integrity, reliability, quality or compatibility problems with our solutions, including related to security breaches in our customers; systems, unscheduled downtime or outages; • statements regarding future revenue, hiring plans, expenses, capital expenditures, capital requirements and stock performance; • our ability to meet publicly announced guidance or other expectations about our business, key metrics and future operating results; • our ability to maintain an adequate annualized recurring revenue growth; • our ability to attract and retain qualified employees and key personnel and further expand our overall headcount; • our ability to grow, both domestically and internationally; • our ability to stay abreast of new or modified laws and regulations that currently apply or become applicable to our business both in the United States and internationally; • our ability to maintain, protect and enhance our intellectual property; • costs associated with defending intellectual property infringement and other claims; and • the future trading prices of our common stock and the impact of securities analysts’ reports on these prices. These statements represent the beliefs and assumptions of our management based on information currently available to us. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included under Part II, Item 1A. Furthermore, such forward-looking statements 22 Table of Contents speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances that occur after the date of this report. As used in this report, the terms “Rapid7,” the “company,” “we,” “us,” and “our” mean Rapid7, Inc. and its subsidiaries unless the context indicates otherwise. Overview Rapid7 is 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 misconfigurations and malicious behavior, investigate and shut down attacks, and automate routine tasks. In the over 20 years that Rapid7 has been in business, security companies and trends have come and gone, while broader technology innovation continues to advance rapidly. Every company is now a technology company, and rampant innovation inevitably creates security risk. The migration of businesses to the cloud, more distributed workforces, and ubiquitous connected devices present security teams with an increasingly complex, ever-changing, and unpredictable attack surface. We believe as cybersecurity challenges continue to rise exponentially, two key factors can prevent organizations from effectively managing their growing security exposure. First, the tools to manage complex security problems are often equally complicated to use. Second, there is a scarcity of cybersecurity professionals who are qualified to successfully manage these sophisticated tools. These two factors compound the difficulties that resource-constrained organizations face when attempting to minimize their security exposure, meet security compliance regulations and provide visibility to their leadership. We call the expanding divide between risk created through innovation and risk effectively managed by security teams the security achievement gap. We believe Rapid7 is uniquely positioned to improve how security challenges are addressed. Our solutions and services are built with and supported by the expertise of our dedicated team of security researchers, expert SOC analysts and consultants, who bring knowledge of attacker behavior and emerging vulnerabilities directly to customers. We also continue to invest in further simplifying our technology to improve usability, lowering the barrier for teams and organizations who lack resources to manage their security posture. While our security technology is the foundation of our mission to make successful security accessible to all, technology alone will not solve today’s cybersecurity challenges. Our ongoing commitment to researching and partnering with the technology community helps to curb new security risks born through innovation. We are also investing in under-served, at risk communities, like non-profits and hospitals, to better understand their needs and make security technology and services accessible. By continuously improving our technology, stemming the creation of risk in the community, and making security more usable and accessible, Rapid7 aims to close the security achievement gap. We market and sell our products and professional services to organizations of all sizes globally, including mid-market businesses, enterprises, non-profits, educational institutions and government agencies. Our customers span a wide variety of industries such as technology, energy, financial services, healthcare and life sciences, manufacturing, media and entertainment, retail, education, real estate, transportation, government and professional services. As of September 30, 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 COVID-19 Response Rapid7 remains focused on supporting its customers, partners, employees and communities during the ongoing COVID-19 pandemic. The impact of COVID-19 on the global economy and on our business continues to be a fluid situation. In response to the COVID-19 pandemic, we have taken, and continue to take, a variety of actions to ensure the continued availability and functioning of our business operations, promote the safety and security of our employees and support the communities in which we operate. We will continue to actively monitor the evolving situation related to COVID-19 and may take further actions that alter our business operations, including those that may be required by federal, foreign, state or local authorities, or that we determine are in the best interests of our employees, customers, partners, suppliers, vendors and stockholders. At this point, the extent to which the 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 23 Table of Contents 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. For further discussion of the challenges and risks we confront related to the COVID-19 pandemic, please refer to Part II, Item 1A Risk Factors of this Quarterly Report on Form 10-Q. Our Business Model We have offerings in six key areas: (1) Incident Detection and Response, (2) Cloud Security, (3) Vulnerability Risk Management, (4) Application Security, (5) Threat Intelligence and (6) Security Orchestration and Automation Response. We offer our products through a variety of delivery models to meet the needs of our diverse customer base, including: • Cloud-based subscriptions, which provide our software capabilities to our customers through cloud access and on a subscription basis. Our InsightIDR, InsightCloudSec, InsightVM, InsightAppSec, InsightConnect and Threat Intelligence products are offered as cloud-based subscriptions, generally with a one-year term. • Managed services, through which we operate our products and provide our capabilities on behalf of our customers. Our Managed Vulnerability Management, Managed Application Security and Managed Detection and Response products are offered on a managed service basis, generally pursuant to one-year agreements. • Licensed software consists of term licenses and to a lesser extent perpetual licenses. When a term license is purchased, maintenance and support and content subscriptions, as applicable, are bundled with the license for the term period. Our Nexpose, Metasploit 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. Our maintenance and support provides our customers with telephone and web-based support and ongoing bug fixes and repairs during the term of the maintenance and support agreement, and our customers who purchase our Nexpose and Metasploit products also purchase content subscriptions, which provide them with real-time access to the latest vulnerabilities and exploits. Our maintenance and support and content subscription agreements are typically for one-year terms. We also offer various professional services across all of our offerings, including deployment and training services related to our software and cloud-based products, incident response services, penetration testing and security advisory services. Customers can purchase our professional services together with our product offerings or on a stand-alone basis pursuant to fixed fee or time-and-materials agreements. For the three months ended September 30, 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. 24 Table of Contents Key Metrics 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. We believe that both management and investors benefit from referring to these key metrics as supplemental information in assessing our performance and when planning, forecasting, and analyzing future periods. These key metrics also facilitate management's internal comparisons to our historical performance as well as comparisons to certain competitors' operating results. We believe these key metrics are useful to investors both because they allow for greater transparency with respect to key metrics used by management in 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 September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (dollars in thousands) Total revenue $ 175,765 $ 139,894 $ 500,604 $ 383,766 Year-over-year revenue growth 25.6 % 33.1 % 30.4 % 28.6 % 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 September 30, 2022 2021 (dollars in thousands) Number of customers 10,791 9,909 Year-over-year customer growth 9 % 17 % Annualized recurring revenue (ARR) $ 683,816 $ 550,044 Year-over-year ARR growth 24.3 % 38.0 % Total Revenue and Growth . We are focused on driving continued revenue growth through increased sales of our products and professional services to new and existing customers. We monitor total revenue and believe it is useful to investors as a measure of the overall success of our business. Non-GAAP Income from Operations . We monitor non-GAAP income from operations, a non-GAAP financial measure, to analyze our financial results. We believe non-GAAP income from operations is useful to investors, as a supplement to GAAP measures, in evaluating our ongoing operational performance and enhancing an overall understanding of our past financial performance and allowing for greater transparency with respect to metrics used by our management in its financial and operational decision-making. See Non-GAAP Financial Results below for further information on non-GAAP income from operations and a reconciliation of non-GAAP income from operations to the comparable GAAP financial measure. Free Cash Flow . Free cash flow is a non-GAAP measure that we define as net cash provided by operating activities less purchases of property and equipment and capitalization of internal-use software costs. We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business after necessary capital expenditures. See Non-GAAP Financial Results below for a reconciliation of non-GAAP free cash flow to the comparable GAAP financial measure. Annualized Recurring Revenue and Growth. Annualized Recurring Revenue (“ARR”) is defined as the annual value of all recurring revenue related to contracts in place at the end of the quarter. ARR should be viewed independently of revenue and deferred revenue as ARR is an operating metric and is not intended to be combined with or replace these items. ARR is not a forecast of future revenue, which can be impacted by contract start and end dates and renewal rates and does not include revenue reported as perpetual license or professional services revenue in our consolidated statement of operations. We use ARR and believe it is useful to investors as a measure of the overall success of our business. Number of Customers . We believe that the size of our customer base is an indicator of our global market penetration and that our net customer additions are an indicator of the growth of our business. We define a customer as any entity that has an active Rapid7 recurring revenue contract as of the specified measurement date, excluding InsightOps and Logentries only customers with a contract value less than $2,400 per year. 25 Table of Contents Non-GAAP Financial Results To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide investors with certain non-GAAP financial measures, including non-GAAP gross profit, non-GAAP income (loss) from operations, non-GAAP net income (loss), non-GAAP net income (loss) per share, adjusted EBITDA and free cash flow. The presentation of the non-GAAP financial measures is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. We use these non-GAAP financial measures for financial and operational decision-making purposes and as a means to evaluate period-to-period comparisons, and use certain non-GAAP financial measures as performance measures under our executive bonus plan. We believe that these non-GAAP financial measures provide useful information about our operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to metrics used by our management in its financial and operational decision-making. While our non-GAAP financial measures are an important tool for financial and operational decision-making and for evaluating our own operating results over different periods of time, you should review the reconciliation of our non-GAAP financial measures to the comparable GAAP financial measures included below, and not rely on any single financial measure to evaluate our business. We define non-GAAP gross profit, non-GAAP income (loss) from operations, non-GAAP net income (loss) and non-GAAP net income (loss) per share as the respective GAAP balances excluding the effect of stock-based compensation expense, amortization of acquired intangible assets, amortization of debt issuance costs and certain other items such as acquisition-related expenses, litigation-related expenses and induced conversion expense. Non-GAAP net income (loss) per basic and diluted share is calculated as non-GAAP net income (loss) divided by the weighted average shares used to compute net income (loss) per share, with the number of weighted average shares decreased, when applicable, to reflect the anti-dilutive impact of the capped call transactions entered into in connection with our convertible senior notes. We believe these non-GAAP financial measures are useful to investors in assessing our operating performance due to the following factors: • Stock-based compensation expense. We exclude stock-based compensation expense because of varying available valuation methodologies, subjective assumptions and the variety of equity instruments that can impact our non-cash expense. We believe that providing non-GAAP financial measures that exclude stock-based compensation expense allows for more meaningful comparisons between our operating results from period to period. • Amortization of acquired intangible assets. We believe that excluding the impact of amortization of acquired intangible assets allows for more meaningful comparisons between operating results from period to period as the intangible assets are valued at the time of acquisition and are amortized over several years after the acquisition. • Amortization of debt issuance costs. The expense for the amortization of debt issuance costs related to our convertible senior notes and revolving credit facility is a non-cash item and we believe the exclusion of this interest expense provides a more useful comparison of our operational performance in different periods. • Induced conversion expense. In conjunction with the first quarter of 2021 partial repurchase of our 1.25% convertible senior notes due 2023 (the “2023 Notes”), we incurred an induced conversion expense of $2.7 million. We exclude induced conversion expense because this amount is not indicative of the performance of, or trends in, our business and is neither comparable to the prior period nor predictive of future results. • Litigation-related expenses. We exclude certain litigation-related expenses consisting of professional fees and related costs incurred by us related to significant litigation outside the ordinary course of business. We believe it is useful to exclude such expenses because we do not consider such amounts to be part of our ongoing operations. • Acquisition-related expenses. We exclude acquisition-related expenses that are unrelated to the current operations and neither are comparable to the prior period nor predictive of future results. • Anti-dilutive impact of capped call transaction. Our capped calls transactions are intended to offset potential dilution from the conversion features in our convertible senior notes. Although we cannot reflect the anti-dilutive impact of the capped call transactions under GAAP, we do reflect the anti-dilutive impact of the capped call transactions in non-GAAP net income (loss) per diluted share, when applicable, to provide investors with useful information in evaluating our financial performance on a per share basis. We define adjusted EBITDA as net loss before (1) interest income, (2) interest expense, (3) other income (expense), net, (4) provision for income taxes, (5) depreciation expense, (6) amortization of intangible assets, (7) stock-based compensation expense, and (8) certain other items. We believe that the use of adjusted EBITDA is useful to investors and other users of our 26 Table of Contents financial statements in evaluating our operating performance because it provides them with an additional tool to compare business performance across companies and across periods. Our non-GAAP financial measures may not provide information that is directly comparable to that provided by other companies in our industry, as other companies in our industry may calculate non-GAAP financial results differently, particularly related to non-recurring, unusual items. In addition, there are limitations in using non-GAAP financial measures because the non-GAAP financial measures are not prepared in accordance with GAAP, may be different from non-GAAP financial measures used by other companies and exclude expenses that may have a material impact upon our reported financial results. Further, stock-based compensation expense has been and will continue to be for the foreseeable future a significant recurring expense in our business and an important part of the compensation provided to our employees. The following tables reconcile GAAP gross profit to non-GAAP gross profit for the three and nine months ended September 30, 2022 and 2021: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (in thousands) GAAP total gross profit $ 121,915 $ 96,424 $ 341,190 $ 264,698 Stock-based compensation expense 2,745 1,604 7,610 4,970 Amortization of acquired intangible assets 4,429 4,810 14,117 10,471 Non-GAAP total gross profit $ 129,089 $ 102,838 $ 362,917 $ 280,139 Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (in thousands) GAAP gross profit – products $ 120,539 $ 94,652 $ 339,347 $ 260,266 Stock-based compensation expense 2,006 1,073 5,513 3,291 Amortization of acquired intangible assets 4,429 4,810 14,117 10,471 Non-GAAP gross profit – products $ 126,974 $ 100,535 $ 358,977 $ 274,028 Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (in thousands) GAAP gross profit – professional services $ 1,376 $ 1,772 $ 1,843 $ 4,432 Stock-based compensation expense 739 531 2,097 1,679 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 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 (in thousands) GAAP loss from operations $ (23,236) $ (34,315) $ (98,266) $ (79,358) Stock-based compensation expense 30,971 29,196 92,304 73,872 Amortization of acquired intangible assets 5,309 5,567 16,755 11,524 Acquisition-related expenses — 5,180 — 7,211 Litigation-related expenses — 105 115 459 Non-GAAP income from operations $ 13,044 $ 5,733 $ 10,908 $ 13,708 27 Table of Contents 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 (in thousands, except share and per share data) GAAP net loss $ (28,727) $ (37,700) $ (113,332) $ (101,709) Stock-based compensation expense 30,971 29,196 92,304 73,872 Amortization of acquired intangible assets 5,309 5,567 16,755 11,524 Acquisition-related expenses — 5,180 — 16,176 Litigation-related expenses — 105 115 459 Amortization of debt issuance costs 1,046 1,095 3,036 2,886 Induced conversion expense — — — 2,740 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 (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. 28 Table of Contents 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 (in thousands) GAAP net loss $ (28,727) $ (37,700) $ (113,332) $ (101,709) 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 Provision for income taxes 1,035 208 2,508 10,021 Depreciation expense 3,479 3,155 10,008 9,202 Amortization of intangible assets 6,716 6,590 20,579 14,311 Stock-based compensation expense 30,971 29,196 92,304 73,872 Acquisition-related expenses — 5,180 — 7,211 Litigation-related expenses — 105 115 459 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 nine months ended September 30, 2022 and 2021: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (in thousands) Net cash provided by operating activities $ 20,110 $ 19,448 $ 37,962 $ 49,229 Less: Purchases of property and equipment (5,863) (2,164) (13,087) (4,835) Less: Capitalized internal-use software costs (4,590) (2,957) (12,648) (7,162) Free cash flow $ 9,657 $ 14,327 $ 12,227 $ 37,232 Components of Results of Operations Revenue We generate revenue primarily from selling products and professional services through a variety of delivery models to meet the needs of our diverse customer base. Products We generate products revenue from the sale of (1) cloud-based subscriptions, (2) managed services offerings, which utilize our products and (3) software licenses with related maintenance and support and content subscription, as applicable. Software license revenue consist of revenues from term licenses, and to a lesser extent perpetual licenses. When a term license is purchased, maintenance and support and content subscription, as applicable, is bundled with the license for the term period. When a perpetual license is purchased, a customer typically purchases maintenance and support and content subscription, as applicable. Professional Services We generate professional service revenue from the sale of deployment and training services related to our products, incident response services and security advisory services. Cost of Revenue Our total cost of revenue consists of the costs of products and professional services, as noted below. In addition, cost of revenue includes overhead costs for depreciation, facilities, IT, information security, and recruiting. Our IT overhead costs include IT personnel compensation costs and costs associated with our IT infrastructure. All overhead costs are allocated based on relative headcount. 29 Table of Contents Cost of Products Cost of products consists of personnel and related costs for our content, support, managed service and cloud operations teams, including salaries and other payroll related costs, bonuses, stock-based compensation and allocated overhead costs. Also included in cost of products are software license fees, cloud computing costs and internet connectivity expenses directly related to delivering our products, amortization of contract fulfillment costs, as well as amortization of certain intangible assets including internally developed software. Cost of Professional Services Cost of professional services consists of personnel and related costs for our professional services team, including salaries and other payroll related costs, bonuses, stock-based compensation, costs of contracted third-party vendors, travel and entertainment expenses and allocated overhead costs. We expect our cost of revenue to increase on an absolute dollar basis as we continue to grow our revenue. Gross Margin Gross margin, or gross profit as a percentage of revenue, has been and will continue to be affected by a variety of factors, including the average sales price of our products and services, transaction volume growth, the mix of revenue between software licenses, cloud-based subscriptions, managed services and professional services and changes in cloud computing costs. We expect our gross margins to fluctuate over time depending on the factors described above. Operating Expenses Operating expenses consist of research and development, sales and marketing, and general and administrative expenses. Operating expenses include overhead costs for depreciation, facilities, IT, information security and recruiting. Our IT overhead costs include IT personnel compensation costs and costs associated with our IT infrastructure. All overhead costs are allocated based on relative headcount. Research and Development Expense Research and development expense consists of personnel costs for our research and development team, including salaries and other payroll related costs, bonuses and stock-based compensation. Additional expenses include third-party infrastructure costs, travel and entertainment, consulting and professional fees for third-party development resources as well as allocated overhead costs. We expect research and development expense to increase on an absolute dollar basis in the near term as we continue to increase investments in our products and technology platform innovation, but to remain relatively consistent as a percentage of total revenue. Sales and Marketing Expense Sales and marketing expense consists of personnel costs for our sales and marketing team, including salaries and other payroll related costs, commissions, including amortization of deferred commissions, bonuses and stock-based compensation. Additional expenses include marketing activities and promotional events, travel and entertainment, training costs, amortization of certain intangible assets and allocated overhead costs. We expect sales and marketing expense to increase on an absolute dollar basis in the near term as we continue to increase investments to drive our revenue growth, but to decrease as a percentage of total revenue. General and Administrative Expense General and administrative expense consists of personnel costs for our executive, legal, human resources, and finance and accounting departments, including salaries and other payroll related costs, bonuses and stock-based compensation. Additional expenses include travel and entertainment, professional fees, litigation-related expenses, insurance, acquisition-related expenses, amortization of certain intangible assets and allocated overhead costs. We expect general and administrative expense to increase on an absolute dollar basis in the near term as we continue to increase investments to support our growth, but to remain relatively consistent as a percentage of total revenue. 30 Table of Contents Interest Income Interest income consists primarily of interest income on our cash and cash equivalents and our short and long-term investments. Interest Expense Interest expense consists primarily of contractual interest expense, amortization of debt issuance costs related to our convertible senior notes and revolving credit facility and induced conversion expense. We expect interest expense in the near term to represent contractual interest expense and amortization of debt issuance costs related to our convertible senior notes and revolving credit facility. Other Income (Expense), Net Other income (expense), net consists primarily of unrealized and realized gains and losses related to changes in foreign currency exchange rates. Provision for Income Taxes Provision for income taxes consists of income taxes in foreign jurisdictions where we conduct business, withholding taxes, and state income taxes in the United States. We maintain a full valuation allowance for domestic and certain foreign deferred tax assets, including net operating loss carryforwards and tax credits. Based on our history of losses, we expect to maintain this full valuation allowance for the foreseeable future as it is more likely than not that some or all of those deferred tax assets may not be realized. 31 Table of Contents Results of Operations The following table sets forth our selected consolidated statements of operations data: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (in thousands) Consolidated Statement of Operations Data: 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: (1) 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 Operating expenses: (1) 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) 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) (1) Cost of revenue and operating expenses include stock-based compensation expense and depreciation and amortization expense as follows: Three Months Ended September 30, Nine Months Ended September 30, 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 Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (in thousands) Depreciation and amortization expense: Cost of revenue $ 6,480 $ 6,404 $ 19,808 $ 14,940 Research and development 1,093 925 3,059 2,654 Sales and marketing 1,955 1,801 5,766 4,375 General and administrative 667 615 1,954 1,544 Total depreciation and amortization expense $ 10,195 $ 9,745 $ 30,587 $ 23,513 32 Table of Contents The following table sets forth our selected consolidated statements of operations data expressed as a percentage of revenue: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Consolidated Statement of Operations Data: Revenue: Products 94.7 93.7 % 94.8 % 93.7 % Professional services 5.3 6.3 5.2 6.3 Total revenue 100.0 100.0 100.0 100.0 Cost of revenue: Products 26.1 26.1 27.0 25.9 Professional services 4.5 5.0 4.8 5.1 Total cost of revenue 30.6 31.1 31.8 31.0 Operating expenses: Research and development 27.7 31.4 29.4 29.3 Sales and marketing 43.2 45.1 45.8 45.4 General and administrative 11.7 17.0 12.6 15.0 Total operating expenses 82.6 93.5 87.8 89.7 Loss from operations (13.2) (24.5) (19.6) (20.7) Interest income 0.3 0.1 0.2 0.1 Interest expense (1.6) (2.1) (1.6) (3.0) Other income (expense), net (1.3) (0.2) (1.1) (0.3) Loss before income taxes (15.8) (26.8) (22.1) (23.9) Provision for income taxes 0.5 0.1 0.5 2.6 Net loss (16.3) % (26.9) % (22.6) % (26.5) % Comparison of the Three Months Ended September 30, 2022 and 2021 Revenue Three Months Ended September 30, Change 2022 2021 $ % (dollars in thousands) Revenue: Products $ 166,496 $ 131,149 $ 35,347 27.0 % Professional services 9,269 8,745 524 6.0 % Total revenue $ 175,765 $ 139,894 $ 35,871 25.6 % 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. 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. 33 Table of Contents Cost of Revenue Three Months Ended September 30, Change 2022 2021 $ % (dollars in thousands) Cost of revenue: Products $ 45,957 $ 36,497 $ 9,460 25.9 % Professional services 7,893 6,973 920 13.2 % Total cost of revenue $ 53,850 $ 43,470 $ 10,380 23.9 % Gross margin %: Products 72.4 % 72.2 % Professional services 14.8 % 20.3 % Total gross margin % 69.4 % 68.9 % 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 September 30, Change 2022 2021 $ % (dollars in thousands) Research and development $ 48,622 $ 43,880 $ 4,742 10.8 % % of revenue 27.7 % 31.4 % 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 September 30, Change 2022 2021 $ % (dollars in thousands) Sales and marketing $ 75,968 $ 63,041 $ 12,927 20.5 % % of revenue 43.2 % 45.1 % 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. 34 Table of Contents General and Administrative Expense Three Months Ended September 30, Change 2022 2021 $ % (dollars in thousands) General and administrative $ 20,561 $ 23,818 $ (3,257) (13.7) % % of revenue 11.7 % 17.0 % 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 September 30, Change 2022 2021 $ % (dollars in thousands) Interest income $ 498 $ 84 $ 414 492.9 % % of revenue 0.3 % 0.1 % 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 September 30, Change 2022 2021 $ % (dollars in thousands) Interest expense $ (2,749) $ (2,962) $ 213 (7.2) % % of revenue (1.6) % (2.1) % 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 September 30, Change 2022 2021 $ % (dollars in thousands) Other income (expense), net $ (2,205) $ (299) $ (1,906) 637.5 % % of revenue (1.3) % (0.2) % 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 September 30, Change 2022 2021 $ % (dollars in thousands) Provision for income taxes $ 1,035 $ 208 $ 827 397.6 % % of revenue 0.5 % 0.1 % 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. 35 Table of Contents Comparison of the Nine Months Ended September 30, 2022 and 2021 Revenue Nine Months Ended September 30, Change 2022 2021 $ % (dollars in thousands) Revenue: Products $ 474,643 $ 359,581 $ 115,062 32.0 % Professional services 25,961 24,185 1,776 7.3 % Total revenue $ 500,604 $ 383,766 $ 116,838 30.4 % 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 $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. 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 Nine Months Ended September 30, Change 2022 2021 $ % (dollars in thousands) Cost of revenue: Products $ 135,296 $ 99,315 $ 35,981 36.2 % Professional services 24,118 19,753 4,365 22.1 % Total cost of revenue $ 159,414 $ 119,068 $ 40,346 33.9 % Gross margin %: Products 71.5 % 72.4 % Professional services 7.1 % 18.3 % Total gross margin % 68.2 % 69.0 % 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 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. 36 Table of Contents Operating Expenses Research and Development Expense Nine Months Ended September 30, Change 2022 2021 $ % (dollars in thousands) Research and development $ 147,341 $ 112,265 $ 35,076 31.2 % % of revenue 29.4 % 29.3 % 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 Nine Months Ended September 30, Change 2022 2021 $ % (dollars in thousands) Sales and marketing $ 229,148 $ 174,264 $ 54,884 31.5 % % of revenue 45.8 % 45.4 % 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 Nine Months Ended September 30, Change 2022 2021 $ % (dollars in thousands) General and administrative $ 62,967 $ 57,527 $ 5,440 9.5 % % of revenue 12.6 % 15.0 % 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. 37 Table of Contents Interest Income Nine Months Ended September 30, Change 2022 2021 $ % (dollars in thousands) Interest income $ 853 $ 302 $ 551 182.5 % % of revenue 0.2 % 0.1 % 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 Nine Months Ended September 30, Change 2022 2021 $ % (dollars in thousands) Interest expense $ (8,200) $ (11,415) $ 3,215 (28.2) % % of revenue (1.6) % (3.0) % 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 Nine Months Ended September 30, Change 2022 2021 $ % (dollars in thousands) Other income (expense), net $ (5,211) $ (1,217) $ (3,994) 328.2 % % of revenue (1.1) % (0.3) % 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 Nine Months Ended September 30, Change 2022 2021 $ % (dollars in thousands) Provision for income taxes $ 2,508 $ 10,021 $ (7,513) (75.0) % % of revenue 0.5 % 2.6 % 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. 38 Table of Contents Liquidity and Capital Resources 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. Our principal sources of liquidity are cash and cash equivalents, short and long-term investments and our Credit and Security Agreement, as amended (the “Credit Agreement”). To date, we have financed our operations primarily through private and public equity financings, issuance of convertible senior notes and through cash generated by operating activities. We believe that our existing cash and cash equivalents, our short- and long-term investments, our available borrowings under our Credit Agreement and cash generated by operating activities will be sufficient to meet our operating and capital requirements for at least the next 12 months as well as our longer-term expected future cash requirements and obligations. Our foreseeable cash needs, in addition to our recurring operating expenses, include our expected capital expenditures to support expansion of our infrastructure and workforce, office facilities lease obligations, purchase commitments, including our cloud infrastructure services (including with Amazon Web Services (“AWS”)), potential future acquisitions of technology businesses and any election we make to redeem our convertible senior notes. Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support research and development efforts, the expansion of sales and marketing activities, particularly internationally, the introduction of new and enhanced products and service offerings, the cost of any future acquisitions of technology or businesses and any election we make to redeem our convertible senior notes. In the event that additional financing is required from outside sources, we may be unable to raise the funds on acceptable terms, if at all. If we are unable to raise additional capital on terms satisfactory to us when we require it, our business, operating results and financial condition could be adversely affected. The following table shows a summary of our cash flows for the nine months ended September 30, 2022 and 2021: Nine Months Ended September 30, 2022 2021 (in thousands) Cash, cash equivalents and restricted cash at beginning of period $ 165,017 $ 173,617 Net cash provided by operating activities 37,962 49,229 Net cash used in investing activities (34,842) (307,887) 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) Cash, cash equivalents and restricted cash at end of period $ 168,868 $ 227,530 Uses of Funds Our historical uses of cash have primarily consisted of cash used for operating activities such as expansion of our sales and marketing operations, research and development activities and other working capital needs, as well as cash used for business acquisitions and purchases of property and equipment, including leasehold improvements for our facilities. Operating Activities 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 $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 39 Table of Contents $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 $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 $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 $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 $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 In March 2022, we entered into a new agreement with AWS for cloud infrastructure services. The agreement is for a 36-month period beginning on April 1, 2022 for a total commitment of $300.0 million. As of 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 We do not have any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We do not engage in off-balance sheet financing arrangements. 40 Table of Contents Recent Accounting Pronouncements See Note 1 in the notes to the unaudited consolidated financial statements for a discussion of recent accounting pronouncements. Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The preparation of our consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates. There have been no material changes in our critical accounting policies from those disclosed in our Annual Report. 41 Table of Contents