RAPID7, INC.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
RAPID7, INC.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
RAPID7, INC.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
RAPID7, INC.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
RAPID7, INC.
Note 1. Description of Business, Basis of Presentation and Consolidation and Significant Accounting Policies
Rapid7, Inc. and subsidiaries (“we,” “us” or “our”) is a leading provider ofare 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 securitymalicious behavior, investigate and IT operations solutions that enable organizations to implement an active, analytics-driven approach to cyber securityshut down attacks, and IT operations.automate routine tasks.
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)(“GAAP”), as well as pursuant to the rules and regulations of the Securities and Exchange Commission (SEC)(“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, 20162021 filed with the SEC on March 9, 2017.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, 2017March 31, 2022 are not necessarily indicative of the results to be expected for any future period or the entire fiscal year.
Our investments, which are all classified as available-for-sale, consisted of the following:
For all of our investments for which the amortized cost basis was greater than the fair value at September 30, 2017March 31, 2022 and December 31, 2016,2021, 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 recovery.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.
The following table presents details of our intangible assets, which include acquired identifiable intangible assets and capitalized internal-use software costs:
Estimated future amortization expense of the acquired identifiable intangible assets and completed capitalized internal-use software costs as of September 30, 2017 isMarch 31, 2022 was as follows (in thousands):
We recognize compensation cost of all awards on a straight-line basis over the applicable vesting period, which is generally four years.
Under the Rapid7, Inc. 2015 Employee Stock Purchase Plan (ESPP)(“ESPP”), employees may set aside up to 15% of their gross earnings, on an after-tax basis, to purchase our common sharesstock 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.
We provide limited product warranties. Historically, any payments made under these provisions have been immaterial.
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.
Components of Results of Operations
Revenue
We generate revenue primarily from selling products maintenance and support and professional services through a variety of delivery models to meet the needs of our diverse customer base. We generally bill customers and collect payment for both our products and services up front.
Products
We generate products revenue from the sale of (1) perpetual or term software licenses for our Nexpose, Metasploit and AppSpider products, term licenses for our product offering recently acquired from Komand, as well as associated contentcloud-based subscriptions, for our Nexpose and Metasploit products, (2) managed services forofferings, which utilize our Nexpose, AppSpider and InsightIDR products and (3) cloud-based subscriptions for our InsightVM, InsightIDR, InsightAppSec, InsightOps, AppSpider and Logentries products. We also generate an immaterial amount of appliance revenue that is included in our products revenue and is associated with hardware sold as part of our Nexpose product to certain customers. Revenue for perpetual software licenses andwith related services that are sold along with the software license is deferred on our balance sheet and recognized as revenue on our consolidated statements of operations ratably over the contractual period of the maintenance and support whichand 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 typically one to three years. Revenue for our managed services and cloud-based subscription offerings is recognized on our consolidated statements of operations ratably over the term of the managed service agreement or subscription, provided that all other revenue recognition criteria have been met.
Maintenance and Support
We generatepurchased, maintenance and support revenue when customers purchase or renew agreementsand 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 of their Nexpose, Metasploit and AppSpider software licenses. Substantially all of our customers purchase an agreement for maintenance and support in connection with their purchase of a Nexpose, Metasploit or AppSpider software license. Revenue from maintenance and support is recognized ratably over the term of the applicable agreement.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. Revenue from professional services sold together with our perpetual and term software licenses product offerings is recognized ratably over the term of the applicable agreement. Revenue from professional services sold on a stand-alone basis or with non-software products is recognized as those services are rendered.
Cost of Revenue
Our total cost of revenue consists of the costs of products maintenance and support and professional services, revenue.
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.
Cost of Products
Cost of products consists of personnel and related costs for our content, support, managed service and cloud operations team,teams, including salaries and other payroll related costs, bonuses, stock-based compensation and allocated overhead costs, which consist of IT, information security, recruiting, facilities and depreciation and are allocated based on relative headcount.costs. Also included in cost of products are software license fees, hardware, 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.
Cost of Maintenance and Support
Cost of maintenance and support consists of personnel and related costs for our support team,assets including salaries and other payroll related costs, bonuses, stock-based compensation and allocated overhead.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.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 decrease slightly as we expect revenue from our cloud-based subscriptions and managed services to increase as a percentage of total revenue, each of which generally have a lower gross margin than our software licenses.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 allocated overhead costs for depreciation, facilities, IT, information security and recruiting. Our allocatedIT overhead costs forinclude IT includepersonnel compensation costs for compensation of IT personnel and costs associated with our IT infrastructure. All allocated 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 subcontracting, third-party infrastructure costs,
travel and entertainment, consulting and professional fees for third-party development resources as well as allocated overhead.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 decreaseremain 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.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 administrative,executive, legal, human resources, and finance and accounting teams,departments, including salaries and other payroll related costs, bonuses and stock-based compensation. Additional expenses include travel and entertainment, subcontracting, professional fees, litigation-related expenses, insurance, acquisition-related expenses, amortization of certain intangible assets and allocated overhead.
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 decreaseremain relatively consistent as a percentage of total revenue.
Interest Income (Expense), Net
Interest income (expense), net 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 and realized gains and losses on the sale of investments.rates.
Provision for (Benefit from) Income Taxes
Provision for (benefit from) income taxes relates to U.S. federalconsists of income taxes in foreign jurisdictions where we conduct business, withholding taxes, and state as well as certain foreign jurisdiction, income taxes. Historically, we have generated net lossestaxes in the U.S., U.K and Ireland and recorded a full valuation allowance against our U.S., U.K. and Ireland deferred tax assets.United States. We expect to maintain a full valuation allowance on our U.S., Irelandfor domestic and U.K.certain foreign deferred tax assets, inincluding net operating loss carryforwards and tax credits. Based on our history of losses, we expect to maintain this full valuation allowance for the near term. Realizationforeseeable future as it is more likely than not that some or all of our U.S., Ireland and U.K.those deferred tax assets depends upon future earnings, the timing and amountmay not be realized.
Results of Operations
The following table sets forth our selected consolidated statements of operations data:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| (in thousands) |
Consolidated Statement of Operations Data: | | | |
Revenue: | | | |
Products | $ | 149,025 | | | $ | 109,285 | |
Professional services | 8,359 | | | 8,166 | |
Total revenue | 157,384 | | | 117,451 | |
Cost of revenue:(1) | | | |
Products | 43,472 | | | 29,650 | |
Professional services | 7,817 | | | 6,639 | |
Total cost of revenue | 51,289 | | | 36,289 | |
Operating expenses:(1) | | | |
Research and development | 49,812 | | | 33,080 | |
Sales and marketing | 75,146 | | | 54,978 | |
General and administrative | 21,516 | | | 16,220 | |
Total operating expenses | 146,474 | | | 104,278 | |
Loss from operations | (40,379) | | | (23,116) | |
Interest income | 112 | | | 96 | |
Interest expense | (2,693) | | | (5,394) | |
Other income (expense), net | (603) | | | (1,068) | |
Loss before income taxes | (43,563) | | | (29,482) | |
Provision for income taxes | 1,436 | | | 363 | |
Net loss | $ | (44,999) | | | $ | (29,845) | |
(1)Cost of revenue and operating expenses include stock-based compensation expense and depreciation and amortization expense as follows: | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| (in thousands) |
Stock-based compensation expense: | | | |
Cost of revenue | $ | 2,090 | | | $ | 1,554 | |
Research and development | 13,024 | | | 7,815 | |
Sales and marketing | 6,774 | | | 5,746 | |
General and administrative | 7,034 | | | 5,747 | |
Total stock-based compensation expense | $ | 28,922 | | | $ | 20,862 | |
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| (in thousands) |
Depreciation and amortization expense: | | | |
Cost of revenue | $ | 6,595 | | | $ | 4,151 | |
Research and development | 993 | | | 858 | |
Sales and marketing | 1,934 | | | 1,269 | |
General and administrative | 647 | | | 462 | |
Total depreciation and amortization expense | $ | 10,169 | | | $ | 6,740 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (in thousands) |
Consolidated Statement of Operations Data: | | | | | | | |
Revenue: | | | | | | | |
Products | $ | 29,626 |
| | $ | 23,108 |
| | $ | 82,736 |
| | $ | 64,709 |
|
Maintenance and support | 11,654 |
| | 9,694 |
| | 33,794 |
| | 27,037 |
|
Professional services | 9,241 |
| | 7,537 |
| | 26,679 |
| | 20,657 |
|
Total revenue | 50,521 |
| | 40,339 |
| | 143,209 |
| | 112,403 |
|
Cost of revenue:(1) | | | | | | | |
Products | 6,888 |
| | 3,415 |
| | 17,155 |
| | 8,700 |
|
Maintenance and support | 1,739 |
| | 1,801 |
| | 5,467 |
| | 5,240 |
|
Professional services | 5,740 |
| | 4,822 |
| | 17,088 |
| | 14,103 |
|
Total cost of revenue | 14,367 |
| | 10,038 |
| | 39,710 |
| | 28,043 |
|
Operating expenses:(1) | | | | | | | |
Research and development | 13,570 |
| | 11,616 |
| | 36,836 |
| | 36,890 |
|
Sales and marketing | 28,224 |
| | 21,284 |
| | 80,166 |
| | 65,732 |
|
General and administrative | 7,402 |
| | 7,605 |
| | 21,906 |
| | 20,842 |
|
Total operating expenses | 49,196 |
| | 40,505 |
| | 138,908 |
| | 123,464 |
|
Loss from operations | (13,042 | ) | | (10,204 | ) | | (35,409 | ) | | (39,104 | ) |
Interest income (expense), net | 198 |
| | 44 |
| | 585 |
| | 55 |
|
Other income (expense), net | 235 |
| | 36 |
| | 349 |
| | 184 |
|
Loss before income taxes | (12,609 | ) | | (10,124 | ) | | (34,475 | ) | | (38,865 | ) |
Provision for (benefit from) income taxes | (2,325 | ) | | 70 |
| | (2,009 | ) | | 361 |
|
Net loss | $ | (10,284 | ) | | $ | (10,194 | ) | | $ | (32,466 | ) | | $ | (39,226 | ) |
| |
(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, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (in thousands) |
Stock-based compensation expense: | | | | | | | |
Cost of revenue | $ | 305 |
| | $ | 166 |
| | $ | 815 |
| | $ | 445 |
|
Research and development | 1,986 |
| | 1,600 |
| | 5,188 |
| | 4,617 |
|
Sales and marketing | 1,512 |
| | 1,328 |
| | 4,694 |
| | 5,453 |
|
General and administrative | 1,485 |
| | 1,083 |
| | 4,041 |
| | 2,822 |
|
Total stock-based compensation expense | $ | 5,288 |
| | $ | 4,177 |
| | $ | 14,738 |
| | $ | 13,337 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (in thousands) |
Depreciation and amortization expense: | | | | | | | |
Cost of revenue | 1,067 |
| | 648 |
| | 2,387 |
| | 1,916 |
|
Research and development | 277 |
| | 262 |
| | 782 |
| | 875 |
|
Sales and marketing | 475 |
| | 497 |
| | 1,446 |
| | 1,450 |
|
General and administrative | 248 |
| | 504 |
| | 689 |
| | 1,089 |
|
Total depreciation and amortization expense | $ | 2,067 |
| | $ | 1,911 |
| | $ | 5,304 |
| | $ | 5,330 |
|
The following table sets forth our selected consolidated statements of operations data expressed as a percentage of revenue: | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
Consolidated Statement of Operations Data: | | | |
Revenue: | | | |
Products | 94.7 | % | | 93.0 | % |
Professional services | 5.3 | | | 7.0 | |
Total revenue | 100.0 | | | 100.0 | |
Cost of revenue: | | | |
Products | 27.6 | | | 25.2 | |
Professional services | 5.0 | | | 5.7 | |
Total cost of revenue | 32.6 | | | 30.9 | |
Operating expenses: | | | |
Research and development | 31.7 | | | 28.2 | |
Sales and marketing | 47.7 | | | 46.8 | |
General and administrative | 13.7 | | | 13.8 | |
Total operating expenses | 93.1 | | | 88.8 | |
Loss from operations | (25.7) | | | (19.7) | |
Interest income | 0.1 | | | 0.1 | |
Interest expense | (1.7) | | | (4.6) | |
Other income (expense), net | (0.4) | | | (0.9) | |
Loss before income taxes | (27.7) | | | (25.1) | |
Provision for income taxes | 0.9 | | | 0.3 | |
Net loss | (28.6) | % | | (25.4) | % |
|
| | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Consolidated Statement of Operations Data: | | | | | | | |
Revenue: | | | | | | | |
Products | 58.6 | % | | 57.3 | % | | 57.8 | % | | 57.6 | % |
Maintenance and support | 23.1 |
| | 24.0 |
| | 23.6 |
| | 24.0 |
|
Professional services | 18.3 |
| | 18.7 |
| | 18.6 |
| | 18.4 |
|
Total revenue | 100.0 |
| | 100.0 |
| | 100.0 |
| | 100.0 |
|
Cost of revenue: | | | | | | | |
Products | 13.6 |
| | 8.5 |
| | 12.0 |
| | 7.7 |
|
Maintenance and support | 3.4 |
| | 4.5 |
| | 3.8 |
| | 4.7 |
|
Professional services | 11.4 |
| | 11.9 |
| | 11.9 |
| | 12.5 |
|
Total cost of revenue | 28.4 |
| | 24.9 |
| | 27.7 |
| | 24.9 |
|
Operating expenses: | | | | | | | |
Research and development | 26.9 |
| | 28.8 |
| | 25.7 |
| | 32.8 |
|
Sales and marketing | 55.9 |
| | 52.8 |
| | 56.0 |
| | 58.5 |
|
General and administrative | 14.6 |
| | 18.8 |
| | 15.3 |
| | 18.5 |
|
Total operating expenses | 97.4 |
| | 100.4 |
| | 97.0 |
| | 109.8 |
|
Loss from operations | (25.8 | ) | | (25.3 | ) | | (24.7 | ) | | (34.7 | ) |
Interest income (expense), net | 0.4 |
| | 0.1 |
| | 0.4 |
| | — |
|
Other income (expense), net | 0.5 |
| | 0.1 |
| | 0.2 |
| | 0.1 |
|
Loss before income taxes | (24.9 | ) | | (25.1 | ) | | (24.1 | ) | | (34.6 | ) |
Provision for (benefit from) income taxes | (4.5 | ) | | 0.2 |
| | (1.4 | ) | | 0.3 |
|
Net loss | (20.4 | )% | | (25.3 | )% | | (22.7 | )% | | (34.9 | )% |
Comparison of the Three Months Ended September 30, 2017March 31, 2022 and 20162021
Revenue
|
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Change |
| 2017 | | 2016 | | $ | | % |
| (dollars in thousands) |
Revenue: | | | | | | | |
Products | $ | 29,626 |
| | $ | 23,108 |
| | $ | 6,518 |
| | 28.2 | % |
Maintenance and support | 11,654 |
| | 9,694 |
| | 1,960 |
| | 20.2 |
|
Professional services | 9,241 |
| | 7,537 |
| | 1,704 |
| | 22.6 |
|
Total revenue | $ | 50,521 |
| | $ | 40,339 |
| | $ | 10,182 |
| | 25.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Change |
| 2022 | | 2021 | | $ | | % |
| (dollars in thousands) |
Revenue: | | | | | | | |
Products | $ | 149,025 | | | $ | 109,285 | | | $ | 39,740 | | | 36.4 | % |
Professional services | 8,359 | | | 8,166 | | | 193 | | | 2.4 | |
Total revenue | $ | 157,384 | | | $ | 117,451 | | | $ | 39,933 | | | 34.0 | % |
Total revenue increased by $10.2$39.9 million in the three months ended September 30, 2017March 31, 2022 compared to the same period in 2016.2021 and consisted of $33.0 million of organic growth and $6.9 million related to the acquisition of IntSights in July 2021. The $33.0 million increase in revenue included a $4.2 millionrelated to organic growth was primarily due to an increase in revenue from new customers,renewals, upsells and cross-sells. The increase in new customers revenue included 862 new customers added since September 30, 2016cross-sells as a result of our growing base of existing customers. All renewals, upsells and a full fiscal quarter of revenue related to new customers added in the three months ended September 30, 2016. Revenue also increased in the three months ended September 30, 2017 compared to the same period in 2016 due to $6.0 million in additionalcross-sells are considered revenue from existing customer renewals. customers.
The increase in total revenue in the three months ended September 30, 2017March 31, 2022 compared to the same period in 20162021 was comprised of $8.4$28.5 million generated from sales in North America and $1.8$11.4 million generated from sales from the rest of the world.
Cost of Revenue
|
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Change |
| 2017 | | 2016 | | $ | | % |
| (dollars in thousands) |
Cost of revenue: | | | | | | | |
Products | $ | 6,888 |
| | $ | 3,415 |
| | $ | 3,473 |
| | 101.7 | % |
Maintenance and support | 1,739 |
| | 1,801 |
| | (62 | ) | | (3.4 | ) |
Professional services | 5,740 |
| | 4,822 |
| | 918 |
| | 19.0 |
|
Total cost of revenue | $ | 14,367 |
| | $ | 10,038 |
| | $ | 4,329 |
| | 43.1 | % |
Gross margin %: | | | | | | | |
Products | 76.8 | % | | 85.2 | % | | | | |
Maintenance and support | 85.1 |
| | 81.4 |
| | | | |
Professional services | 37.9 |
| | 36.0 |
| | | | |
Total gross margin % | 71.6 | % | | 75.1 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Change |
| 2022 | | 2021 | | $ | | % |
| (dollars in thousands) |
Cost of revenue: | | | | | | | |
Products | $ | 43,472 | | | $ | 29,650 | | | $ | 13,822 | | | 46.6 | % |
Professional services | 7,817 | | | 6,639 | | | 1,178 | | | 17.7 | |
Total cost of revenue | $ | 51,289 | | | $ | 36,289 | | | $ | 15,000 | | | 41.3 | % |
Gross margin %: | | | | | | | |
Products | 70.8 | % | | 72.9 | % | | | | |
Professional services | 6.5 | | | 18.7 | | | | | |
Total gross margin % | 67.4 | % | | 69.1 | % | | | | |
Total cost of revenue increased by $4.3$15.0 million in the three months ended September 30, 2017March 31, 2022 compared to the same period in 2016,2021, primarily due to a $2.0$4.9 million increase in cloud computing costs related to growing cloud-based subscription and managed services revenue and a $4.8 million increase in personnel costs, inclusive of a $0.1$0.5 million increase in stock-based compensation expense, resulting from an increase in headcount from 160 as of September 30, 2016 to 213 as of September 30, 2017, as well as the timing effect of when our headcount additions were hired in 2017 and 2016, to support our growing customer base.base as well as $0.6 million of additional costs attributable to the employees acquired in the IntSights acquisition in July 2021. Our increase in total cost of revenue also included a $1.2 million increase in cloud computing costs related to growing cloud-based subscription revenue, a $0.5$2.4 million increase in allocated overhead driven largely by an increase in IT and facilities costs, a $0.4$2.1 million increase in amortization expense for acquired intangible assets, amortization primarily due to the Komand acquisition, a $0.2$0.3 million increase in travel and entertainmentamortization expense andfor capitalized internally-developed software, a $0.2$0.5 million increase in third-party professional service consulting costs, partially offset by a decrease of $0.2 million of other expenses.
Total gross margin percentage decreased for the three months ended September 30, 2017March 31, 2022 compared to the same period in 2016,2021 primarily due to the decrease in gross margin for products, partially offset by the increase in gross margin for maintenance and support and professional services. The decrease in products gross margin for the three months ended September 30, 2017 was due to an increase in revenue from cloud-based subscriptions and managed services, which have lower gross margins than our licensed software products. Theproducts as well as an increase in maintenance and support gross marginamortization expense for the three months ended September 30, 2017 was driven by our abilitydeveloped technology acquired intangible asset related to scale as our revenue continues to grow.the acquisition of IntSights. The increasedecrease in professional services gross margin for the three months ended September 30, 2017March 31, 2022 was primarily due to increased demand for our assessment services and strategic services.an increase in personnel costs.
Operating Expenses
Research and Development Expense
|
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Change |
| 2017 | | 2016 | | $ | | % |
| (dollars in thousands) |
Research and development | $ | 13,570 |
| | $ | 11,616 |
| | $ | 1,954 |
| | 16.8 | % |
% of revenue | 26.9 | % | | 28.8 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Change |
| 2022 | | 2021 | | $ | | % |
| (dollars in thousands) |
Research and development | $ | 49,812 | | | $ | 33,080 | | | $ | 16,732 | | | 50.6 | % |
% of revenue | 31.7 | % | | 28.2 | % | | | | |
Research and development expense increased by $2.0$16.7 million in the three months ended September 30, 2017March 31, 2022 compared to the same period in 2016,2021, primarily due to a $0.9$12.8 million increase in personnel costs, an increase of $0.7 million in allocated overhead driven largely by an increase in IT and facilities costs and an increase of $0.4 million in other expenses. The $0.9 million increase in personnel costs was primarily due to a $0.7 million increase in salaries and related costs driven by growth in headcount from 240 as of September 30, 2016 to 250 as of September 30, 2017 which included 12 employees acquired in the Komand acquisition, as well as the timing effect of when our headcount additions were hired in 2017 and 2016, a $0.4 million increase in stock-based compensation expense and the impact of proceeds from a 2016 government grant received in Northern Ireland of $0.5 million. These increases in personnel costs were partially offset by $0.3 million of acquisition-related bonus recorded in the three months ended September 30, 2016 and $0.4 million of personnel costs that were capitalized as internal-use software costs in the three months ended September 30, 2017.
Sales and Marketing Expense
|
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Change |
| 2017 | | 2016 | | $ | | % |
| (dollars in thousands) |
Sales and marketing | $ | 28,224 |
| | $ | 21,284 |
| | $ | 6,940 |
| | 32.6 | % |
% of revenue | 55.9 | % | | 52.8 | % | | | | |
Sales and marketing expense increased by $6.9 million in the three months ended September 30, 2017 compared to the same period in 2016, primarily due to a $3.5 million increase in personnel costs due to an increase in headcount from 350 as of September 30, 2016 to 413 as of September 30, 2017, inclusive of a $0.2 million increase in stock-based compensation expense, as well as the timing effect of when our headcount additions were hired in 2017 and 2016 to drive additional sales of our products and services and higher commissions expense recorded as a result of increased customer orders. Our increase in sales and marketing expense also included a $1.3 million increase in marketing costs resulting from an increase in event marketing including expenses related to our user conference and general advertising costs, a $0.9$3.2 million increase in allocated overhead driven largely by an increase in IT and facilities costs, a $0.7 million increase in travel and entertainment expense and a $0.5other expenses. The $12.8 million increase in other expenses.personnel costs was primarily due to a $7.6 million increase in salaries and related costs driven by growth in headcount, inclusive of $2.7 million in additional salaries and related costs attributable to the employees acquired in the acquisition of IntSights in July 2021, and a $5.2 million increase in stock-based compensation expense, including $3.3 million of stock-based compensation expense related to the RSUs issued to retained employees and common stock issued to the IntSights founders as part of the acquisition.
GeneralSales and AdministrativeMarketing Expense | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Change |
| 2022 | | 2021 | | $ | | % |
| (dollars in thousands) |
Sales and marketing | $ | 75,146 | | | $ | 54,978 | | | $ | 20,168 | | | 36.7 | % |
% of revenue | 47.7 | % | | 46.8 | % | | | | |
|
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Change |
| 2017 | | 2016 | | $ | | % |
| (dollars in thousands) |
General and administrative | $ | 7,402 |
| | $ | 7,605 |
| | $ | (203 | ) | | (2.7 | )% |
% of revenue | 14.6 | % | | 18.8 | % | | | | |
GeneralSales and administrativemarketing expense decreasedincreased by $0.2$20.2 million in the three months ended September 30, 2017March 31, 2022 compared to the same period in 2016,2021, primarily due to a $0.4 million decrease in costs associated with a settlement and licensing agreement with a third party in 2016, a $0.3 million decrease in amortization and a $0.3 million decrease in other expenses. These decreases were partially offset by a $0.6$8.4 million increase in personnel costs, inclusive of a $0.4 million increase in stock-based compensation expense, as a result of an increase in headcount from 118 as of September 30, 2016 to 124 as of September 30, 2017 as well as the timing effect of when our headcount additions were hired in 2017 and 2016, in order to support our overall company growth and a $0.2 million increase in allocated overhead, driven largely by an increase in IT and facilities costs.
Interest Income (Expense), Net
|
| | | | | | | | | | | | | |
| Three Months Ended September 30, | | Change |
| 2017 | | 2016 | | $ | | % |
| (dollars in thousands) |
Interest income (expense), net | $ | 198 |
| | $ | 44 |
| | $ | 154 |
| | NM |
% of revenue | 0.4 | % | | 0.1 | % | | | | |
Interest income (expense), net increased by $0.2 million in the three months ended September 30, 2017 compared to the same period in 2016 primarily due to higher interest income as a result of our investments in higher-yield securities. In the three months ended September 30, 2016, net interest income was partially offset by interest expense due to non-cash interest charges related to the accretion of the liability associated with deferred acquisition payments.
Other Income (Expense), Net
|
| | | | | | | | | | | | | |
| Three Months Ended September 30, | | Change |
| 2017 | | 2016 | | $ | | % |
| (dollars in thousands) |
Other income (expense), net | $ | 235 |
| | $ | 36 |
| | $ | 199 |
| | NM |
% of revenue | 0.5 | % | | 0.1 | % | | | | |
Other income (expense), net increased by $0.2 million in the three months ended September 30, 2017 compared to the same period in 2016 primarily due to changes in realized and unrealized foreign currency gains and losses, specifically related to the euro and British pound sterling.
Provision for (Benefit from) Income Taxes
|
| | | | | | | | | | | | | |
| Three Months Ended September 30, | | Change |
| 2017 | | 2016 | | $ | | % |
| (dollars in thousands) |
Provision for (benefit from) income taxes | $ | (2,325 | ) | | $ | 70 |
| | $ | (2,395 | ) | | NM |
% of revenue | (4.5 | )% | | 0.2 | % | | | | |
Provision for (benefit from) income taxes decreased by $2.4 million in the three months ended September 30, 2017 compared to the same period in 2016 primarily due to a $2.6 million deferred tax benefit resulting from a partial release of our valuation allowance to account for the creation of a deferred tax liability for the developed technology intangible asset acquired in the acquisition of Komand which is not deductible for tax purposes. This deferred tax benefit was partially offset by an increase of $0.2 million provision for income taxes due to our increased operations in foreign jurisdictions.
Comparison of the Nine Months Ended September 30, 2017 and 2016
Revenue
|
| | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Change |
| 2017 | | 2016 | | $ | | % |
| (dollars in thousands) |
Revenue: | | | | | | | |
Products | $ | 82,736 |
| | $ | 64,709 |
| | $ | 18,027 |
| | 27.9 | % |
Maintenance and support | 33,794 |
| | 27,037 |
| | 6,757 |
| | 25.0 |
|
Professional services | 26,679 |
| | 20,657 |
| | 6,022 |
| | 29.2 |
|
Total revenue | $ | 143,209 |
| | $ | 112,403 |
| | $ | 30,806 |
| | 27.4 | % |
Total revenue increased by $30.8 million in the nine months ended September 30, 2017 compared to the same period in 2016. The increase in revenue included a $12.5 million increase from new customers, upsells and cross-sells. The increase in new customers revenue includes 862 new customers added since September 30, 2016 and a full nine months of revenue related to new customers added in the nine months ended September 30, 2016. Revenue also increased in the nine months ended September 30, 2017 compared to the same period in 2016 due to $18.3 million in additional revenue from existing customer renewals. The increase in total revenue in the nine months ended September 30, 2017 compared to the same period in 2016 was comprised of $24.2 million generated from sales in North America and $6.6 million generated from sales from the rest of the world.
Cost of Revenue
|
| | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Change |
| 2017 | | 2016 | | $ | | % |
| (dollars in thousands) |
Cost of revenue: | | | | | | | |
Products | $ | 17,155 |
| | $ | 8,700 |
| | $ | 8,455 |
| | 97.2 | % |
Maintenance and support | 5,467 |
| | 5,240 |
| | 227 |
| | 4.3 |
|
Professional services | 17,088 |
| | 14,103 |
| | 2,985 |
| | 21.2 |
|
Total cost of revenue | $ | 39,710 |
| | $ | 28,043 |
| | $ | 11,667 |
| | 41.6 | % |
Gross margin %: | | | | | | | |
Products | 79.3 | % | | 86.6 | % | | | | |
Maintenance and support | 83.8 |
| | 80.6 |
| | | | |
Professional services | 35.9 |
| | 31.7 |
| | | | |
Total gross margin % | 72.3 | % | | 75.1 | % | | | | |
Total cost of revenue increased by $11.7 million in the nine months ended September 30, 2017 compared to the same period in 2016, primarily due to a $6.3 million increase in personnel costs, inclusive of a $0.4 million increase in stock-based compensation expense, resulting from an increase in headcount from 160 as of September 30, 2016 to 213 as of September 30, 2017, as well as the timing effect of when our headcount additions were hired in 2017 and 2016, to support our growing customer base. Our increase in total cost of revenue also included a $3.9 million increase in cloud computing costs related to growing cloud-based subscription revenue, a $1.2$4.0 million increase in allocated overhead driven largely by an increase in IT and facilities costs, a $0.5$3.3 million increase in travel and entertainmentcommission expense, a $0.4$2.2 million increase in marketing and advertising costs, a $0.6 million increase in in amortization expense for acquired intangible assets amortization primarily due to the Komand acquisition and a $0.2 $1.7
million increase in other expenses, partially offsetexpenses. The $8.4 million increase in personnel costs was primarily due to a $7.4 million increase in salaries and related costs driven by growth in headcount, inclusive of $2.8 million of additional costs attributable to the employees acquired in the IntSights acquisition in July 2021, and a decrease$1.0 million increase in stock-based compensation expense, inclusive of $0.8$0.4 million in third-party professional service consulting costs.stock-based compensation expense related to RSUs issued to retained employees acquired in the acquisition of IntSights.
Total gross margin percentage decreased forGeneral and Administrative Expense | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Change |
| 2022 | | 2021 | | $ | | % |
| (dollars in thousands) |
General and administrative | $ | 21,516 | | | $ | 16,220 | | | $ | 5,296 | | | 32.7 | % |
% of revenue | 13.7 | % | | 13.8 | % | | | | |
General and administrative expense increased by $5.3 million in the ninethree months ended September 30, 2017March 31, 2022 compared to the same period in 2016,2021, primarily due to the decreasea $3.3 million increase in gross margin for products, partially offset by the increases in gross margin for professional services and maintenance and support. The decrease in products gross margin for the nine months ended September 30, 2017 waspersonnel costs due to an increase in revenue from cloud-based subscriptions and managed services, which have lower gross margins than our licensed software products. Theheadcount, inclusive of a $1.3 million increase in maintenance and support gross margin for the nine months ended September 30, 2017 was driven by our ability to scale as our revenue continues to grow. Thestock-based compensation expense, a $0.9 million increase in professional services gross margin for the nine months ended September 30, 2017 was primarily due to increased demand for our assessment services and deployment and training services.
Operating Expenses
Research and Development Expense
|
| | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Change |
| 2017 | | 2016 | | $ | | % |
| (dollars in thousands) |
Research and development | $ | 36,836 |
| | $ | 36,890 |
| | $ | (54 | ) | | (0.1 | )% |
% of revenue | 25.7 | % | | 32.8 | % | | | | |
Research and development expense decreased by $0.1 million in the nine months ended September 30, 2017 compared to the same period in 2016, primarily due to a $1.4 million decrease in personnel costs, partially offset by an increase of $1.1 million in allocated overhead driven largely by an increase in IT and facilities costs and an increase of $0.2 million in other expenses. The $1.4 million decrease in personnel costs was primarily due to a $1.3 million acquisition-related bonus recorded in the nine months ended September 30, 2016, $0.7 million of certain departmental costs in the nine months ended September 30, 2016 that have been eliminated in 2017 and $0.8 million of personnel costs that were capitalized as internal-use software costs in the nine months ended September 30, 2017, partially offset by a $0.9 million increase in personnel costs, inclusive of a $0.6 million increase in stock-based compensation expense, resulting from an increase in headcount from 240 as of September 30, 2016 to 250 as of September 30, 2017 which included 12 employees acquired in the Komand acquisition, as well as the timing effect of when our headcount additions were hired in 2017 and 2016, to support our product innovation and the impact of proceeds from a 2016 government grant received in Northern Ireland of $0.5 million.
Sales and Marketing Expense
|
| | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Change |
| 2017 | | 2016 | | $ | | % |
| (dollars in thousands) |
Sales and marketing | $ | 80,166 |
| | $ | 65,732 |
| | $ | 14,434 |
| | 22.0 | % |
% of revenue | 56.0 | % | | 58.5 | % | | | | |
Sales and marketing expense increased by $14.4 million in the nine months ended September 30, 2017 compared to the same period in 2016, primarily due to a $7.2 million increase in personnel costs due to an increase in headcount from 350 as of September 30, 2016 to 413 as of September 30, 2017 as well as the timing effect of when our headcount additions were hired in 2017 and 2016 to drive additional sales of our products and services and higher commissions expense recorded as a result of increased customer orders. The $7.2 million increase in personnel costs was inclusive of a $0.7 decrease in million in stock-based compensation expense attributable to the Logentries acquisition in the prior period. Our increase in sales and marketing expense also included a $2.6 million increase in marketing costs resulting from an increase in event marketing including expenses related to our user conference and general advertising costs, a $2.3 million increase in allocated overhead driven largely by an increase
in IT and facilities costs, a $1.0 million increase in travel and entertainment expense, a $0.5 million increase in partner referral fees and a $0.8$1.7 million increase in other expenses.
General and Administrative Expense
|
| | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Change |
| 2017 | | 2016 | | $ | | % |
| (dollars in thousands) |
General and administrative | $ | 21,906 |
| | $ | 20,842 |
| | $ | 1,064 |
| | 5.1 | % |
% of revenue | 15.3 | % | | 18.5 | % | | | | |
General and administrative expense increased by $1.1 million in the nine months ended September 30, 2017 compared to the same period in 2016, primarily due to a $1.9 million increase in personnel costs, inclusive of a $1.2 million increase in stock-based compensation expense, as a result of an increase in headcount from 118 as of September 30, 2016 to 124 as of September 30, 2017 as well as the timing effect of when our headcount additions were hired in 2017 and 2016, in order to support our overall company growth. Our increase in general and administrative expense also included a $0.3 million increase in allocated overhead driven largely by an increase in IT and facilities costs. These increases were partially offset by a $0.6 million decrease of $0.5 million of amortization expense, $0.4 million of costs associated with a settlementin professional fees primarily due to acquisition-related expenses and licensing agreement with a third party in 2016 and $0.3 million of other expenses.professional consulting fees.
Interest Income (Expense), Net
|
| | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Change |
| 2017 | | 2016 | | $ | | % |
| (dollars in thousands) |
Interest income (expense), net | $ | 585 |
| | $ | 55 |
| | $ | 530 |
| | NM |
% of revenue | 0.4 | % | | — | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Change |
| 2022 | | 2021 | | $ | | % |
| (dollars in thousands) |
Interest income | $ | 112 | | | $ | 96 | | | $ | 16 | | | 16.7 | % |
% of revenue | 0.1 | % | | 0.1 | % | | | | |
Interest income (expense), net increasedin the three months ended March 31, 2022 remained consistent with the same period in 2021.
Interest Expense | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Change |
| 2022 | | 2021 | | $ | | % |
| (dollars in thousands) |
Interest expense | $ | (2,693) | | | $ | (5,394) | | | $ | 2,701 | | | (50.1) | % |
% of revenue | (1.7) | % | | (4.6) | % | | | | |
Interest expense decreased by $0.5$2.7 million in the ninethree months ended September 30, 2017March 31, 2022 compared to the same period in 2016,2021 primarily due to higher interest income as a result$2.7 million decrease of our investmentsinduced conversion expense incurred in higher-yield securities. Inconjunction with the nine months ended September 30, 2016, net interest income was partially offset by interest expense due to non-cash interest charges related to the accretionpartial repurchase of the liability associated with deferred acquisition payments.2023 Notes in March 2021.
Other Income (Expense), Net
|
| | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Change |
| 2017 | | 2016 | | $ | | % |
| (dollars in thousands) |
Other income (expense), net | $ | 349 |
| | $ | 184 |
| | $ | 165 |
| | 89.7 | % |
% of revenue | 0.2 | % | | 0.1 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Change |
| 2022 | | 2021 | | $ | | % |
| (dollars in thousands) |
Other income (expense), net | $ | (603) | | | $ | (1,068) | | | $ | 465 | | | (43.5) | % |
% of revenue | (0.4) | % | | (0.9) | % | | | | |
Other income (expense), net increaseddecreased by $0.2$0.5 million in the ninethree months ended September 30, 2017March 31, 2022 compared to the same period in 2016 primarily2021 due to changes in realized and unrealized foreign currency gains and losses, specificallyprimarily related to the euro and British pound sterling.
Provision for (Benefit from) Income Taxes
|
| | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Change |
| 2017 | | 2016 | | $ | | % |
| (dollars in thousands) |
Provision for (benefit from) income taxes | $ | (2,009 | ) | | $ | 361 |
| | $ | (2,370 | ) | | NM |
% of revenue | (1.4 | )% | | 0.3 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Change |
| 2022 | | 2021 | | $ | | % |
| (dollars in thousands) |
Provision for income taxes | $ | 1,436 | | | $ | 363 | | | $ | 1,073 | | | 295.6 | % |
% of revenue | 0.9 | % | | 0.3 | % | | | | |
Provision for (benefit from) income taxes decreasedincreased by $2.4$1.1 million in the ninethree months ended September 30, 2017March 31, 2022 compared to the same period in 2016,2021 primarily due to a $2.6 million deferred tax benefit resulting from a partial release of our valuation allowance to account for the creation of a deferred tax liability for the developed technology intangible asset acquired in the
acquisition of Komand which is not deductible for tax purposes. This deferred tax benefit was partially offset by an increase of $0.2 million provision for income taxes due to our increased operations in foreign jurisdictions.
Liquidity and Capital Resources
Our principal sources of liquidity are cash and cash equivalents, investments and collections from our accounts receivable. In connection with our initial public offering, or IPO, and concurrent private placement in July 2015, we received aggregate net proceeds to us of $112.3 million, after deducting underwriting discounts and commissions of $8.3 million and offering expenses of $3.1 million. Prior to our IPO, we funded our operations primarily through issuances of common and redeemable convertible preferred stock and debt, including net proceeds of $93.4 million from the sale of shares of common and preferred stock. As of September 30, 2017,March 31, 2022, we had $49.1$141.4 million in cash and cash equivalents, $35.9$121.5 million in short- and long-term investments that have maturities ranging from 3one to twenty months to 2 years and an accumulated deficit of $421.9$781.0 million. Since our inception, we have generated significant losses and expect to continue to generate losses for the foreseeable future. Our principal sources of liquidity are cash and cash equivalents, short and long-term investments and our Credit and Security Agreement (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, and our short and long-term investments, together withour available borrowings under our Credit Agreement and cash generated from our operationsby operating activities will be sufficient to meet our workingoperating and capital expenditure requirements for at least the next 12 months. 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 professional service offerings, and the cost of any future acquisitions of technology or businesses.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 ninethree months ended September 30, 2017March 31, 2022 and 2016:2021:
| | | | | | | | | Three Months Ended March 31, |
| | Nine Months Ended September 30, | | | 2022 | | 2021 |
| | 2017 | | 2016 | | | (in thousands) |
| | (in thousands) | |
Cash and cash equivalents at beginning of period | | $ | 53,148 |
| | $ | 86,553 |
| |
Cash, cash equivalents and restricted cash at beginning of period | | Cash, cash equivalents and restricted cash at beginning of period | | $ | 165,017 | | | $ | 173,617 | |
Net cash provided by operating activities | | 5,084 |
| | 2,061 |
| Net cash provided by operating activities | | 10,403 | | | 20,595 | |
Net cash used in investing activities | | (16,141 | ) | | (3,307 | ) | Net cash used in investing activities | | (35,911) | | | (18,444) | |
Net cash provided by financing activities | | 6,645 |
| | 2,348 |
| Net cash provided by financing activities | | 3,208 | | | 328,572 | |
Effects of exchange rates on cash and cash equivalents | | 319 |
| | 60 |
| |
Cash and cash equivalents at end of period | | $ | 49,055 |
| | $ | 87,715 |
| |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | | Effect of exchange rate changes on cash, cash equivalents and restricted cash | | (800) | | | (500) | |
Cash, cash equivalents and restricted cash at end of period | | Cash, cash equivalents and restricted cash at end of period | | $ | 141,917 | | | $ | 503,840 | |
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.equipment, including leasehold improvements for our facilities.
Operating Activities
Operating activities provided $5.1$10.4 million of cash and cash equivalents in the ninethree months ended September 30, 2017,March 31, 2022, which reflects the timing of working capital adjustments and our continued growth in revenue partially offset by our continued investments in our operations and timing of working capital items.operations. Cash provided by operating activities reflected our net loss of $32.5$45.0 million, offset by a decrease in our net operating assets and liabilities of $19.8$14.8 million and non-cash charges of $17.7$40.6 million related primarily to depreciation and amortization, stock-based compensation expense, provision for doubtful accounts, deferred income taxes, induced conversion expense, amortization of debt issuance costs and other non-cash charges. The decrease in our net operating assets and liabilities was primarily due to a $19.6$36.3 million decrease in accounts receivable due to an increase in collections, a $3.8 million increase in deferred revenue from sales of our products and services, a $0.8$8.7 million increase in accrued expenses, a $0.6 million decrease in prepaid and other current assets and a $0.1 million decrease in accounts receivable,payable, which each had a positive impact on operating cash flow. These factors were partially offset by a $1.0$24.0 million decrease in accrued expenses, primarily as a result of the payout of annual bonuses and year-end commissions, a
$6.6 million increase in prepaid expenses, a $2.9 million increase in deferred contract acquisition and fulfillment costs and a $0.5 million decrease in other liabilities, and a $0.3 million decrease in accounts payable, which each had a negative impact on operating cash flow.
Operating activities provided $2.1$20.6 million of cash and cash equivalents in the ninethree months ended September 30, 2016.March 31, 2021, which reflects the timing of working capital adjustments and our continued growth in revenue partially offset by our continued investments in our operations. Cash provided by operating activities reflected our net loss of $39.2$29.8 million, offset by a decrease in our net operating assets and liabilities of $22.1$18.0 million and non-cash charges of $19.2$32.4 million related primarily to depreciation and amortization, stock-based compensation expense, provision for doubtful accountsinduced conversion expense, amortization of debt issuance costs and other non-cash interest charges. The decrease in our net operating assets and liabilities was primarily due to
a $19.0$34.4 million decrease in accounts receivable due to the timing of collections, a $1.0 million increase in deferred revenue and a $5.1 million decrease in accounts receivable, a $0.5$0.6 million increase in accounts payable, and a $0.2 million increase in other liabilities, which each had a positive impact on operating cash flow. These factors were partially offset by a $1.6$15.4 million decrease in accrued expenses, which was largely theprimarily as a result of the payout of annual bonusbonuses and increased commission paymentsyear-end commissions, a $2.0 million increase in deferred contract acquisition and fulfillment costs, a $1.1$0.1 million increase in prepaid expenses and other assets and a $0.4 million decrease in other liabilities, which each had a negative impact on operating cash flow.
Investing Activities
Investing activities used $16.1$35.9 million of cash in the ninethree months ended September 30, 2017,March 31, 2022, consisting of $14.7$29.3 million cash paidof investment purchases, net of sales and maturities, $3.5 million for the acquisitioncapitalization of Komand, $3.5internal-use software costs and $3.1 million in capital expenditures to purchase computer equipment, furniture and fixtures and leasehold improvements and $0.8improvements.
Investing activities used $18.4 million of cash in the three months ended March 31, 2021, consisting of $49.7 million of cash paid for the acquisition of Alcide.IO Ltd. (“Alcide”), net of cash acquired, $1.8 million for capitalization of internal-use software costs, $1.5 million for other investing activities, $1.0 million in capital expenditures to purchase leasehold improvements and computer equipment, partially offset by $24.5$35.6 million of investment sales and maturities, less $21.7 million used for purchasesnet of investments.
Investing activities used $3.3 million of cash in the nine months ended September 30, 2016, as a result of capital expenditures to purchase equipment and leasehold improvements.
purchases.
Financing Activities
Financing activities provided $6.6$3.2 million of cash in the ninethree months ended September 30, 2017,March 31, 2022, which consisted primarily of $5.0$5.7 million in proceeds from the issuance of common stock purchased by employees under the Rapid7, Inc. 2015 Employee Stock Purchase Plan (“ESPP”) and $1.0 million in proceeds from the exercise of stock options, and $2.9 million in proceeds from the issuance of common shares purchased by employees under the ESPP, partially offset by a $0.8 million deferred acquisition payment and $0.5$3.5 million in withholding taxes paid for the net share settlement of equity awards.
Financing activities provided $2.3$328.6 million of cash in the ninethree months ended September 30, 2016,March 31, 2021, which consisted primarily of $3.7$587.1 million in proceeds from the issuance of the 0.25% convertible senior notes due 2027 (the “2027 Notes”), net of issuance costs paid of $12.9 million, $4.5 million in proceeds from the issuance of common sharesstock purchased by employees under the ESPP and $2.5$1.4 million in proceeds from the exercise of stock options, partially offset by $3.8$182.6 million for the repurchase and conversion of the 2023 Notes, $76.0 million for the purchase of 2027 Capped Calls, $3.3 million in withholding taxes paid for the net share settlement of equity awards and $0.1$2.5 million for payments related to the acquisition of payments on capital lease obligations.Alcide.
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, 2017,March 31, 2022, there were no additional material changes other than that noted above in our contractual obligations and commitments from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 20162021 filed with the SEC on March 9, 2017.February 24, 2022.
In October 2017, we entered into a lease agreement for a new facility in Austin, Texas pursuant to which we have leased approximately 26,000 square feet. The lease term is 86 months and our total obligation for the rent is approximately $7.6 million over the term of the lease.
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.
Recent Accounting Pronouncements
See Note 1 in the notes to the unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q 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 or GAAP.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 on Form 10-K for the year ended December 31, 20162021 filed with the SEC on March 9, 2017.February 24, 2022.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in interest rates and foreign exchange rates as well as to a lesser extent, inflation. In addition, we do not engage in trading activities involving non-exchange traded contracts. Therefore, we believe that we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.
Foreign Currency Exchange Risk
Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. Substantially allA majority of our customers enter into contracts that are denominated in U.S. dollars. Our expenses are generally denominated in the currencies of the countries where our operations are located, which is primarily in the United States and to a lesser extent in the United Kingdom, other Euro-zone countries within mainland Europe, Canada, Hong Kong,Australia, Israel, Singapore and Australia.Japan. Our results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign currency exchange rates. The effect of a hypothetical 10% adverse change in foreign currency exchange rates on monetary assets and liabilities at September 30, 2017March 31, 2022 would not behave been material to our financial condition or results of operations. To date, we have not engaged inWe enter into forward contracts designated as cash flow hedges to manage the foreign currency exchange rate risk associated with certain of our foreign currency denominated expenditures. The effectiveness of our existing hedging transactions and the availability and effectiveness of any hedging strategies.transactions we may decide to enter into in the future may be limited, and we may not be able to successfully hedge our exposure, which could adversely affect our financial condition and operating results. For further information, see Note 9, Derivatives and Hedging Activities, in the Notes to our Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. As our international operations grow, we will continue to reassess our approach to manage our risk relating to fluctuations in foreign currency rates.
Interest Rate Risk
Our portfolio of cash and cash equivalents and short- and long-term investments is maintained in a variety of securities, including money market funds, commercial paper, corporate bonds, U.S. government agencies and asset-backed securities. Investments are classified as available-for-sale securities and carried at their fair market value with cumulative unrealized gains or losses recorded as a component of accumulated other comprehensive loss within stockholders' equity. A sharp rise in interest rates could have an adverse impact on the fair market value of certain securities in our portfolio. We do not currently hedge our interest rate exposure and do not enter into financial instruments for trading or speculative purposes.
As of September 30, 2017,March 31, 2022, we had cash and cash equivalents of $49.1$141.4 million consisting of bank deposits and money market funds. We also hadfunds and short- and long-term investments of $35.9$121.5 million consisting of U.S. government agencies, commercial paper, corporate bonds and asset-backed securities. Such interest-earning instruments carry a degree of interest rate risk. To date, fluctuations in interest income haveagency bonds. Our investments are made for capital preservation purposes. We do not been significant. A hypothetical 10% changeenter into investments for trading or speculative purposes.
Our cash and cash equivalents and short- and long-term investments are subject to market risk due to changes in interest rates, during anywhich may affect our interest income and the fair value of our investments. Due in part to these factors, our future investment income may fluctuate due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However, because we classify our investments as available-for-sale securities, no gains or losses are recognized due to the changes in interest rates unless securities are sold prior to maturity or declines in fair value are determined to be other-than-temporary.
The fair values of our convertible senior notes are subject to interest rate risk, market risk and other factors due to the conversion features of the periods presentednotes. The fair values of the convertible senior notes may increase or decrease for various reasons, including fluctuations in the market price of our common stock, fluctuations in market interest rates and fluctuations in general economic conditions. The interest and market value changes affect the fair values of the convertible senior notes but does not impact our financial position, cash flows or results of operations due to the fixed nature of the debt obligation. Based upon the quoted market price as of March 31, 2022, the fair values of our 2025 Notes and 2027 Notes were $435.1 million and $669.7 million, respectively.
As of March 31, 2022, the effect of a hypothetical 10% increase or decrease in interest rates would not have had a material impact on our financial statements.
Inflation Risk
We do not believe that inflation had a material effect on our business, financial condition or results of operations in the last three years.operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of the design and operations of our disclosure controls and procedures as of September 30, 2017.March 31, 2022. Based on the evaluation of our disclosure controls and procedures as of September 30, 2017,March 31, 2022, our chief executive officerChief Executive Officer and chief financial officerChief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Inherent Limitations of Internal Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
FromIn 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 beare 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.business, financial condition or results of operations. 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.
Item 1A. Risk Factors.
Our operations and financial results are subject to various risks and uncertainties including those described below. You should consider carefully the risks and uncertainties described below, in addition to other information contained in this Quarterly Report on Form 10-Q as well as our other public filings with the Securities and Exchange Commission, or the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2016,2021, filed with the SEC on March 9, 2017.February 24, 2022. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. Furthermore, the COVID-19 pandemic (including governmental responses, broad economic impacts and market disruptions) has heightened risks discussed in the risk factors described below. If any of the following risks or others not specified below materialize, our business, financial condition and results of operations could be materially adversely affected. In that event, the trading price of our common stock could decline.
Summary of Risk Factors
Our business is subject to numerous risks and uncertainties which include, but are not limited to, the following:
•Our quarterly operating results may vary from period to period, which could result in our failure to meet expectations with respect to operating results and cause the trading price of our stock to decline.
•We are a rapidly growing company, which makes it difficult to evaluate our future operating and financial results and may increase the risk that we will not be successful.
•If we are do not effectively manage our future growth rate, our business and results of operations may be adversely affected.
•The ongoing COVID-19 pandemic could materially and adversely affect our business, results of operations and financial condition, and we could be subject to risks from further health pandemics or epidemics, as well as uncertainty regarding returning to work and re-openings.
•Real or perceived failures, errors or defect in our solutions could adversely affect our brand and reputation, which could have an adverse effect on our business and results of operations.
•Our brand, reputation and ability to attract, retain and serve our customers are dependent in part upon the reliable performance of our products and network infrastructure.
•Our business and growth depend substantially on customers renewing their subscriptions with us. Any decline in our customer renewals or failure to convince customers to expand their use of our subscription offerings could adversely affect our future operating results.
•If we or our third party service providers experience a security breach or unauthorized parties otherwise obtain access to our customers’ data, our reputation may be harmed, demand for our solutions may be reduced and we may incur significant liabilities.
•We face intense competition in our market.
•If we are unable to successfully hire, train, and retain qualified personnel our business may suffer.
•If we fail to continue to effectively scale and manage our operations infrastructure, our customers may experience service outages and/or delays.
•A component of our growth strategy is dependent on our continued international expansion, which adds complexity to our operations.
•Because our products collect and store user and related information, domestic and international privacy and cybersecurity concerns, and other laws and regulations, could have a material adverse effect on our business.
•If our customers are unable to implement our products successfully, customer perceptions of our offerings may be impaired or our reputation and brand may suffer.
•We may fail to meet our publicly announced guidance or other expectations about our business and future operating results, which would cause our stock price to decline.
•If we are not able to maintain and enhance our brand, our business and operating results may be adversely affected.
•Failure to maintain high-quality customer support could have a material adverse effect on our business.
•We rely on third-party software to operate certain functions of our business.
•We use third-party software and data that may be difficult to replace or that may cause errors or failures of our solutions, which could lead to lost customers or harm to our reputation and our operating results.
•Assertions by third parties of infringement or other violations by us of their intellectual property rights, whether or not correct, could result in significant costs and harm our business and operating results.
•Organizations may be reluctant to purchase our cloud-based offerings due to the actual or perceived vulnerability of cloud solutions.
•We have a significant amount of debt that may decrease our business flexibility, access to capital, and/or increase our borrowing costs, and we may still incur additional debt in the future, which may adversely affect our operations and financial results. We may not have sufficient cash flow from our business to pay our substantial debt when due.
•We may require additional capital to support business growth, and this capital might not be available on acceptable terms, if at all.
The summary risk factors described above should be read together with the text of the full risk factors below and our unaudited consolidated financial statements and the related notes, as well as in other documents that we file with the U.S. Securities and Exchange Commission (“SEC”). The risks summarized above or described in full below are not the only risks that we face. Additional risks and uncertainties not precisely known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition, results of operations, and future growth prospects.
Risks Related to Our Business and Industry
Our quarterly operating results may vary from period to period, which could result in our failure to meet expectations with respect to operating results and cause the trading price of our stock to decline.
Our operating results, including the levels of our revenue, ARR, cash flow, deferred revenue and gross margins, have historically varied from period to period, and we expect that they will continue to do so as a result of a number of factors, many of which are outside of our control, including:
•the level of demand for our products and professional services;
•customer renewal rates and ability to attract new customers;
•the extent to which customers purchase additional products or professional services;
•the mix of our products, as well as professional services, sold during a period;
•the ability to successfully grow our sales of our cloud-based solutions;
•the level of perceived threats to organizations’ cybersecurity;
•network outages, security breaches, technical difficulties or interruptions with our products;
•changes in the growth rate of the markets in which we compete;
•sales of our products and professional services due to seasonality and customer demand;
•the timing and success of new product or service introductions by us or our competitors or any other changes in the competitive landscape of our industry, including consolidation among our competitors;
•the introduction or adoption of new technologies that compete with our offerings;
•decisions by potential customers to purchase cybersecurity products or professional services from other vendors;
•the amount and timing of operating costs and capital expenditures related to the operations and expansion of our business;
•price competition;
•our ability to successfully manage and integrate any acquired businesses, including, IntSights Cyber Intelligence Ltd. (“IntSights”), and including without limitation the amount and timing of expenses and potential future charges for impairment of goodwill from acquired companies;
•business disruptions in regions affecting our operations, stemming from actual, imminent or perceived outbreak or reemergence of contagious disease, including the COVID-19 pandemic;
•our ability to increase, retain and incentivize the channel partners that market and sell our products and professional services;
•our continued international expansion and associated exposure to changes in foreign currency exchange rates;
•the amount and timing of operating expenses related to the maintenance and expansion of our business, operations and infrastructure;
•the announcement or adoption of new regulations and policy mandates or changes to existing regulations and policy mandates that impact our business;
•the cost or results of existing or unforeseen litigation and intellectual property infringement;
•the strength of regional, national and global economies;
•the impact of climate change, natural disasters or manmade problems, including terrorism or war (such as the armed conflict between Russia and Ukraine); and
•future accounting pronouncements or changes in our accounting policies or practices.
Each factor above or discussed elsewhere herein or the cumulative effect of some of these factors may result in fluctuations in our operating results. This variability and unpredictability could result in our failure to meet expectations with respect to operating results, or those of securities analysts or investors, for a particular period. If we fail to meet or exceed expectations for our operating results for these or any other reasons, the market price of our stock could fall and we could face costly lawsuits, including securities class action suits.
We are a rapidly growing company, which makes it difficult to evaluate our future prospectsoperating and financial results and may increase the risk that we will not be successful.
We are a rapidly growing company. Our ability to forecast our future operating and financial results is subject to a number of uncertainties, including our ability to plan for and model future growth. We have encountered and will continue to encounter risks and uncertainties frequently experienced by growing companies in rapidly evolving industries. If our assumptions regarding these uncertainties, which we use to plan our business, are incorrect or change in reaction to changes in our markets, or if we do not address these risks successfully, our operating and financial results could differ materially from our expectations, our business could suffer and the trading price of our common stock may decline.
If we are unable to sustaindo not effectively manage our revenuefuture growth, rate, we may not achieve or maintain profitability in the future.our business and results of operations will be adverselyaffected.
From the year ended December 31, 20122017 to the year ended December 31, 2016,2021, our revenue grew from $46.0$200.9 million to $157.4$535.4 million which represents a compounded annual growth rate of approximately 36%.and our headcount grew from 1,079 to 2,353 employees. Although we have experienced rapid growth historically, and currently have high renewal rates, we may not sustain our current growth rates and our investments to support our growth may not be successful. The growth and expansion of our business will require us to invest significant financial and operational resources and will continue to grow as rapidly in theplace significant demands on our management team. Our future and our renewal rates may decline. Any success that we may experience in the future will depend in large part on our ability to manage our growth effectively, which will require us to, among other things:
•maintain and expand our customer base;
•increase revenues from existing customers through increased or broader use of our products and professional services within their organizations;
•improve the performance and capabilities of our products through research and development;
•continue to develop our cloud-based solutions;
•maintain the rate at which customers purchase and renew subscriptions to our cloud-based solutions, content subscriptions, and maintenance and support;support and managed services;
•continue to successfully expand our business domestically and internationally;
•continue to improve our key business applications, processes and IT infrastructure to support our business needs and appropriately documenting such systems and processes;
•continue to effectively attract, integrate and retain a large number of new employees, particularly membersof our salesand marketing and research and development teams;
•enhance our information and communication systems to ensure that our employees and offices around the world are well coordinated and can effectively communicate with each other and our growing base of customers and partners;
•improve our financial, management, and compliance systems and controls; and
•successfully compete with other companies.
If we arefail to achieve these objectives effectively, our ability to manage our expected growth may be impaired and we may be unable to maintain the quality of our offerings, consistent revenue or revenue growth, our stock price could be volatile, and it may be difficult to achieve and maintain profitability. You should not rely on our revenue for any prior quarterly or annual periods performance as any indication of our future revenue or revenue growth.
We have not been profitable historically and may not achieve or maintain profitability in the future.
We have posted a net loss in each year since inception, including net losses of $49.0$146.3 million, $49.9 million, $32.6 million, $32.5$98.8 million and $39.2$53.8 million in the years ended December 31, 2016, 20152021, 2020 and 2014 and the nine months ended September 30, 2017 and 2016,2019, respectively. As of September 30, 2017,March 31, 2022, we had an accumulated deficit of $421.9$781.0 million. While we have experienced significant revenue growth in recent periods, we aremay not certain whether or when we will obtain a high enough volume of sales of
our products and professional services to sustain or increase our growth or achieve or maintain profitability in the future. We also expect our costs to increase in future periods, which could negatively affect our future operating results if our revenue does not increase. In particular, we expect to continue to expend financial and other resources on:
•research and development related to our offerings, including investments in our research and development team;
•sales and marketing, including a significantcontinued expansion of our sales organization, both domestically and internationally;
•continued international expansion of our business;
•strategic acquisitions and expansion of our professional services organization;partner ecosystem; and
•general and administrative expenses as we continue to implement and enhance our administrative, financial and operational systems, procedures and controls.
These investments may not result in increased revenue or growth in our business. If we are unable to increase our revenue at a rate sufficient to offset the expected increase in our costs, our business, financial position and results of operations will be harmed, and we may not be able to achieve or maintain profitability over the long term. Additionally, we may encounter unforeseen operating expenses, difficulties, complications, delays and other unknown factors that may result in losses in future periods. If our revenue growth does not meet our expectations in future periods, our financial performance may be harmed, and we may not achieve or maintain profitability in the future.
IfThe ongoing COVID-19 pandemic could materially and adversely affect our products or professional services fail to detect vulnerabilities or incorrectly detect vulnerabilities, or if our products contain undetected errors or defects, our brandbusiness, results of operations and reputationfinancial condition, and we could be harmed,subject to risks from further health pandemics or epidemics, as well as uncertainty regarding returning to work and re-openings.
Our business could be adversely affected by the effects of health pandemics or epidemics, including the ongoing COVID-19 pandemic, which continues to have a negative impact on the local, regional, national and global scale. We are unable to accurately predict the full impact that the COVID-19 pandemic will have on our results from operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic, the emergence of any new variants, the results of vaccination efforts, vaccine mandate requirements, and containment measures. The implementation of measures to help contain the virus has impacted our day-to-day operations and could have an adverse effect ondisrupt our business and operations, as well as that of our customers, partners, suppliers and others with whom we work, for an indefinite period of time. To support the health and well-being of our employees, customers, partners and communities, a vast majority of our employees began working remotely as of late March 2020, but as of March 31, 2022, we reopened our offices in a phased approach and continue to hold in-person or hybrid meetings, on a voluntary basis, taking into consideration government restrictions and employee safety. In addition, many of our customers and prospective customers are working remotely. The disruptions to our operations caused by the COVID-19 pandemic may negatively impact employee retention and result in
inefficiencies, delays and additional costs in our sales and marketing, professional service and research and development efforts, which cannot be predicted or quantified at this time. To the extent that disruptions occur, we may not be able to fully mitigate any such inefficiencies, delays and additional costs through remote or other alternative work arrangements. In addition, given the economic uncertainty created by COVID-19, we have and may continue to see delays in our sales cycle, failures of customers to renew at all or to renew the anticipated scope their subscriptions with us, requests from customers for payment term deferrals as well as pricing or bundling concessions, which, if significant, could materially and adversely affect our business, results of operations.operations and financial condition.
If our products or professional services fail to detect vulnerabilities in our customers’ cyber security infrastructure, or if our products or professional services fail to identify and respond to new and increasingly complex methods of cyber attacks, our business and reputation may suffer. There is no guarantee that our products or professional services will detect all vulnerabilities, especially in light of the rapidly changing security landscape to which we must respond. Additionally, our products may falsely detect vulnerabilities or threats that do not actually exist. For example, our Metasploit offering relies on information provided by an active community of security researchers who contribute new exploits, attacks and vulnerabilities. If the information from these third parties is inaccurate, the potential for false indications of security vulnerabilities increases. These false positives, while typicalNegative conditions in the industry, may impairgeneral economy both in the perceived reliabilityUnited States and abroad resulting from health pandemics or epidemics, such as the COVID-19 pandemic, could cause a decrease in consumer discretionary spending and business investment and diminish growth expectations in the U.S. economy and abroad. More generally, the COVID-19 pandemic continues to present the possibility of our offeringsan extended global economic downturn and may thereforehas caused volatility in financial markets, which could materially and adversely impact market acceptance ofaffect demand for our products and professional services and could resultmaterially and adversely impact our results and financial condition even after the pandemic is contained. For example, we may be unable to collect receivables from those customers significantly impacted by COVID-19, which may be more pronounced in negative publicity, lossindustry verticals more directly impacted by the COVID-19 pandemic. Also, a decrease in subscriptions and/or renewals in a given period could negatively affect our ARR as well as our revenues in future periods, particularly if experienced on a sustained basis, because a substantial proportion of our software subscriptions yield revenue recognized over time. The pandemic may also have the effect of heightening many of the other risks described in this “Risk Factors” section, including risks associated with our guidance, our customers, our potential customers, our market opportunity, renewals and sales cycle, among others. We will continue to evaluate the nature and increased costs to remedy any problem.extent of the impact of the COVID-19 pandemic on our business.
Our products may also contain undetected errors or defects when first introduced or as new versions are released. We have experienced these errors or defects in the past in connection with new products and product upgrades andAlthough we expect that these errors or defectscurrent cash and cash equivalent balances, including the proceeds of our convertible senior notes offering in March 2021, together with cash flows that are generated from operations and availability under our revolving credit facility, will be found from timesufficient to timemeet our domestic and international working capital needs and other capital and liquidity requirements for at least the next 12 months, if our access to capital is restricted or our borrowing costs increase, our operations and financial condition could be adversely impacted.
The full extent of the COVID-19 pandemic’s impact on our operations and financial performance depends on future developments that are uncertain and unpredictable, including the ultimate duration, spread and reemergence of the pandemic, including any new variants, its impact on capital and financial markets, the timing of economic recovery and any new information that may emerge concerning the severity of the virus, its spread to or reemergence in other geographic regions as well as the actions taken to contain it, including the distribution and acceptance of vaccines, among others. Any of these impacts could have a material adverse impact on our business, results of operations and financial condition and ability to execute and capitalize on our strategies.Due to the current uncertainty regarding the severity and duration of the COVID-19 pandemic, we cannot predict whether our response to date or the actions we may take in the future will be effective in new or enhanced products after commercial release. Defects may cause our products to be vulnerable to attacks, cause them to fail to detect vulnerabilities, or temporarily interrupt customers’ networking traffic. Any errors, defects, disruptions in service or other performance problems with our products may damage our customers’ business and could hurt our reputation. If our products or professional services fail to detect vulnerabilities for any reason, we may incur significant costs,mitigating the attentioneffects of our key personnel could be diverted, our customers may delay or withhold payment to us or elect not to renew or other significant customer relations problems may arise. We may also be subject to liability claims for damages related to errors or defects in our products. A material liability claim or other occurrence that harms our reputation or decreases market acceptance of our products may harmCOVID-19 pandemic on our business, and operating results.
An actualresults of operations or perceived security breach or theft of the sensitive data of one of our customers, regardless of whether the breach is attributable to the failure of our products or professional services, could adversely affect the market’s perception of our offerings and subject us to legal claims.
The market for cyber security data and analytics is new and unproven and may not grow.
We believe our future success will depend in large part on the growth, if any, in the market for cyber security data and analytics. This market is nascent, and as such, it is difficult to predict important market trends, including the potential growth, if any. To date, the majority of enterprise spend on cyber security has been on threat protection products, such as network, endpoint and web security that are designed to stop threats from penetrating corporate networks. Organizations that use these security products may believe that their existing security solutions sufficiently protect access to their sensitive business data. Therefore, they may continue allocating their cyber security budgets to these products and may not adopt our products and professional services in addition to, or in lieu of, such traditional products. Further, sophisticated cyber attackers are skilled at adapting to new technologies and
developing new methods of gaining access to organizations’ sensitive business data, and changes in the nature of advanced cyber threats could result in a shift in IT budgets away from products and professional services such as ours. In addition, while recent high visibility attacks on prominent enterprises and governments have increased market awareness of the problem of cyber attacks, if cyber attacks were to decline, or enterprises or governments perceived that the general level of cyber attacks have declined, our ability to attract new customers and expand our sale to existing customers could be materially and adversely affected. If products and professional services such as ours are not viewed by organizations as necessary, or if customers do not recognize the benefit of our offerings as a critical layer of an effective cyber security strategy, our revenue may not grow as quickly as expected, or may decline, and the trading price of our stock could suffer. It is therefore difficult to predict how large the market will be for our solutions.
In addition, it is difficult to predict customer adoption and renewal rates, customer demand for our products and professional services, the size and growth rate of the market for cyber security data analytics, the entry of competitive products or the success of existing competitive products. Any expansion in our market depends on a number of factors, including the cost, performance and perceived value associated with our offerings and those of our competitors. If these offerings do not achieve widespread adoption or there is a reduction in demand for solutions in our market caused by a lack of customer acceptance, technological challenges, competing technologies and products, decreases in corporate spending, weakening economic conditions, or otherwise, it could result in reduced customer orders, early terminations, reduced renewal rates or decreased revenue, any of which would adversely affect our business operations and financial results. You should consider our business and prospects in light of the risks and difficulties we face in this new and unproven market.
Ifcondition. Accordingly, we are unable at this time to successfully hire, train, manage and retain qualified personnel, especially those in sales and marketing and research and development, our business may suffer.
We continue to be substantially dependentpredict the impact of the COVID-19 pandemic on our sales force to obtain new customersoperations, liquidity, and increase sales with existing customers. Our ability to successfully pursue our growth strategy will also depend on our ability to attract, motivatefinancial results, and, retain our personnel, especially those in sales, marketing and research and development. We face intense competition for these employees from numerous technology, software and other companies, especially in certain geographic areas in which we operate, and we cannot ensure that we will be able to attract, motivate and/or retain sufficient qualified employees in the future. If we are unable to attract new employees and retain our current employees, we may not be able to adequately develop and maintain new products or professional services or market our existing products or professional services at the same levels as our competitors and we may, therefore, lose customers and market share. Our failure to attract and retain personnel, especially those in sales and marketing and research and development positions for which we have historically had a high turnover rate, could have an adverse effect on our ability to execute our business objectives and, as a result, our ability to compete could decrease, our operating results could suffer and our revenue could decrease. Even if we are able to identify and recruit a sufficient number of new hires, these new hires will require significant training before they achieve full productivity and they may not become productive as quickly as we would like or at all.
Our sales cycle may be unpredictable.
The timing of sales of our offerings is difficult to forecast because of the length and unpredictability of our sales cycle, particularly with large enterprises and with respect to certain of our products. We sell our products primarily to IT departments that are managing a growing set of user and compliance demands, which has increased the complexity of customer requirements to be met and confirmed during the sales cycle and prolonged our sales cycle. Further, the length of time that potential customers devote to their testing and evaluation, contract negotiation and budgeting processes varies significantly, depending on the sizemagnitude and duration of the organization and nature of the product or professional service under consideration. In addition, we might devote substantial time and effort to a particular unsuccessful sales effort, and as a result, we could lose other sales opportunities or incur expenses that are not offset by an increase in revenue, which could harm our business.
OrganizationsCOVID-19 pandemic, such impact may be reluctant to purchase cyber security data analytics offerings that are cloud-based due to the actual or perceived vulnerability of cloud solutions.
Some organizations have been reluctant to use cloud solutions for cyber security, such as our InsightIDR, InsightVM, AppSpider, InsightAppSec, InsightOps and Logentries products, because they have concerns regarding the risks associated with the reliability or security of the technology delivery model associated with this solution. If we or other cloud service providers experience security incidents, breaches of customer data, disruptions in service delivery or other problems, the market for cloud solutions may be negatively impacted, which could harm our business.
Our quarterly operating results may vary from period to period, which could result in our failure to meet expectations with respect to operating results and cause the trading price of our stock to decline.
Our operating results, including the levels of our revenue, billings, cash flow and deferred revenue, have historically varied from period to period, and we expect that they will continue to do so as a result of a number of factors, many of which are outside of our control, including:
the level of demand for our products and professional services;
customer renewal rates and ability to attract new customers;
the extent to which customers purchase additional products, including content subscriptions and maintenance and support related to our Nexpose, Metasploit and AppSpider products, or professional services;
the ability to successfully grow our sales of InsightOps, InsightIDR, InsightVM and InsightAppSec;
the level of perceived threats to organizations’ cyber security;
network outages, security breaches, technical difficulties or interruptions with our products;
changes in the growth rate of the markets in which we compete;
variations in our billings and sales of our products and services due to seasonality and customer demand;
the announcement or adoption of new regulations and policy mandates or changes to existing regulations and policy mandates;
the timing and success of new product or professional service introductions by us or our competitors or any other changes in the competitive landscape of our industry, including consolidation among our competitors;
the introduction or adoption of new technologies that compete with our offerings;
the mix of our products and professional services sold during a period;
decisions by potential customers to purchase cyber security products or services from other vendors;
the amount and timing of operating costs and capital expenditures related to the operations and expansion of our business;
the timing of sales commissions relative to the recognition of revenue and the timing of revenue recognition generally;
price competition;
our ability to successfully manage and integrate any future acquisitions of businesses, including without limitation the amount and timing of expenses and potential future charges for impairment of goodwill from acquired companies;
our ability to increase, retain and incentivize the channel partners that market and sell our products and professional services;
our continued international expansion and associated exposure to changes in foreign currency exchange rates, including any fluctuations caused by uncertainties relating to Brexit;
the amount and timing of operating expenses related to the maintenance and expansion of our business, operations and infrastructure;
unforeseen litigation and intellectual property infringement;
the announcement or adoption of new regulations and policy mandates or changes to existing regulations and policy mandates;
the strength of regional, national and global economies;
the impact of natural disasters or manmade problems such as terrorism or war; and
future accounting pronouncements or changes in our accounting policies.
Each factor above or discussed elsewhere in this Quarterly Report on Form 10-Q or the cumulative effect of some of these factors may result in fluctuations in our operating results. This variability and unpredictability could result in our failure to meet expectations with respect to operating results, or those of securities analysts or investors, for a particular period. If we fail to meet or exceed expectations for our operating results for these or any other reasons, the market price of our stock could fall and we could face costly lawsuits, including securities class action suits.
If we do not continue to innovate and offer products and professional services that address the dynamic threat landscape, we may not remain competitive, and our revenue and operating results could suffer.
The cyber security market is characterized by rapid technological advances, changes in customer requirements, frequent new product introductions and enhancements and evolving industry standards. Our success also depends, in part, upon our ability to anticipate industry evolution and introduce or acquire new products and professional services to keep pace with technological developments and market requirements both within our industry and in related industries. While we continue to invest significant resources in research and development in order to ensure that our products continue to address the cyber security risks that our customers face, the introduction of products and services embodying new technologies could render our existing products or services obsolete or less attractive to customers. In addition, developing new products and product enhancements is expensive and time consuming, and there is no assurance that such activities will result in significant cost savings, revenue or other expected benefits. If we spend significant time and effort on research and development and are unable to generate an adequate return on our investment, our business and results of operations may be materially and adversely affected. Further, we may not be able to successfully anticipate or adapt to changing technology or customer requirements or the dynamic threat landscape on a timely basis, in a way that sufficiently differentiates us from competing solutions such that customers choose to purchase our solutions. If any of our competitors implement new technologies before we are able to implement them or better anticipate the innovation opportunities in related industries, those competitors may be able to provide more effective or more cost-effective solutions than ours. In addition, we may experience technical problems and additional costs as we introduce new products and product enhancements, deploy future iterations of our products and integrate new products with existing customer systems. If any of these problems were to arise, our business, financial condition and results of operations could be adversely affected.
To date, we have derived a substantial majority of our revenue from customers using our threat exposure management offerings. If we are unable to renew or increase sales of our threat exposure management offerings, or if we are unable to increase sales of our other offerings, our business and operating results could be adversely affected.
Although we continue to introduce and acquire new products and professional services, we derive and expect to continue to derive a substantial majority of our revenue from customers using certain of our threat exposure management offerings, Nexpose and Metasploit. Greater than half of our revenue was attributable to Nexpose in each of our last three fiscal years. As a result, our operating results could suffer due to:
any decline in demand for our threat exposure management offerings;
failure of our threat exposure management offerings to detect vulnerabilities in our customers’ IT environments;
the introduction of products and technologies that serve as a replacement or substitute for, or represent an improvement over, our threat exposure management offerings;
technological innovations or new standards that our threat exposure management offerings do not address;
sensitivity to current or future prices offered by us or competing solutions; and
our inability to release enhanced versions of our threat exposure management offerings on a timely basis in response to the dynamic threat landscape.
Our inability to renew or increase sales of our threat exposure management offerings, including content subscriptions and maintenance and support, or a decline in prices of our threat exposure management offerings would harm our business and operating results more seriously than if we derived significant revenues from a variety of offerings. In addition, we have introduced several cloud-based subscription products, including InsightOps, InsightIDR, InsightVM and InsightAppSec products. These products are relatively new, and it is uncertain whether they will gain market acceptance. We are also investing in the expansion of our security advisory services offerings, which we believe will help drive demand for our other products in addition to being a stand-alone service. Any factor adversely affecting sales of our products or professional services, including release cycles, market acceptance, competition, performance and reliability, reputation and economic and market conditions, could adversely affect our business and operating results.
material.
Our business and growth depend substantially on customers renewing their content subscriptions and maintenance and support agreements with us. Any decline in our customer renewals or failure to convince customers to expand their use of our subscription offerings could adversely affect our future operating results.
Our maintenance and support agreementssubscription offerings are sold on a term basis. In addition, we also enter into content subscription agreements for our offerings. In order for us to improve our operating results, it is important that our existing customers renew their content subscription agreements, if applicable, and maintenance and support agreementssubscriptions with us when the initial contractexisting subscription term expires.expires, and renew on the same or more favorable terms. Our customers have no obligation to renew their content subscription or maintenance and support agreementssubscriptions with us after the initial terms have expired.and we may not be able to accurately predict customer renewal rates. Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including their satisfaction or dissatisfaction with our new or current product offerings, our pricing, the effects of economic conditions, including due to the global economic uncertainty and financial market conditions caused by the COVID-19 pandemic, competitive
offerings, our customers' perception of their exposure, or alterations or reductions in our customers’their spending levels. If our customers do not renew their agreements with us or renew on terms less favorable to us, our revenues and results of operations may be adversely impacted.
Our future growth is also affected by our ability to sell additional offerings to our existing customers, which depends on a number of factors, including customers’ satisfaction with our products and services and general economic conditions. If Metasploit wereour efforts to cross-sell and upsell to our customers are unsuccessful, the rate at which our business grows might decline.
If our new and existing product offerings and product enhancements do not achieve sufficient market acceptance, our financial results and competitive position will suffer.
Our business substantially depends on, and we expect our business to continue to substantially depend on, sales of our Insight Platform solutions. As such, market acceptance of our Insight Platform is critical to our continued success. Demand for Insight Platform solutions are affected by a number of factors beyond our control, including continued market acceptance of cloud-based offerings, the timing of development and release of new products by our competitors, technological change, and growth or contraction in our market and the economy in general. If we are unable to continue to meet customer demands or to achieve more widespread market acceptance of our Insight Platform solutions, our business operations, financial results and growth prospects will be usedmaterially and adversely affected.
We spend substantial amounts of time and money to research and develop or acquire new offerings and enhanced versions of our existing offerings to incorporate additional features, improve functionality or other enhancements in order to meet our customers’ rapidly evolving demands. In addition, we continue to invest in solutions that can be deployed on top of our platform to target specific use cases and to cultivate our community. When we develop a new or enhanced version of an existing offering, we typically incur expenses and expend resources upfront to market, promote and sell the new offering. Therefore, when we develop or acquire new or enhanced offerings, their introduction must achieve high levels of market acceptance in order to justify the amount of our investment in developing and bringing them to market. For example, if our recent product expansions and offerings, such as our Cloud Security and Threat Intelligence offerings, do not garner widespread market adoption and implementation, our financial results and competitive position could suffer.
Further, we may make changes to our offerings that our customers do not like, find useful or agree with. We may also discontinue certain features, begin to charge for certain features that are currently free or increase fees for any of our features or usage of our offerings.
Our new and existing offerings or product enhancements and changes to our existing offerings could fail to attain sufficient market acceptance for many reasons, including:
•our failure to predict market demand accurately in terms of product functionality and to supply offerings that meet this demand in a timely fashion, including changes in demand as a result of the COVID-19 pandemic;
•real or perceived defect, errors or failures;
•negative publicity about their performance or effectiveness;
•delays in releasing to the market our new offerings or enhancements to our existing offerings;
•introduction or anticipated introduction of competing products by attackersour competitors;
•inability to exploit vulnerabilitiesscale and perform to meet customer demands;
•poor business conditions for our customers, causing them to delay IT purchases, including as a result of the COVID-19 pandemic; and
•reluctance of customers to purchase cloud-based offerings.
If our new or existing offerings or enhancements and changes do not achieve adequate acceptance in the cyber security infrastructures of third parties,market, our reputationcompetitive position will be impaired, and our revenue, business couldand financial results will be harmed.
Although Metasploit is a penetration testing tool that is intended to allow organizations to test the effectiveness of their cyber security programs, Metasploit has in the past andnegatively impacted. The adverse effect on our financial results may in the future be used to exploit vulnerabilities in the cyber security infrastructures of third parties. While we have incorporated certain features into Metasploit to deter misuse, there is no guarantee that these controls will not be circumvented or that Metasploit will only be used defensively or for research purposes. Any actual or perceived security breach, malicious intrusion or theft of sensitive data in which Metasploit is believed to have been used could adversely affect perception of, and demand for, our offerings. Further, the identification of new exploits and vulnerabilities by the Metasploit community may enhance the knowledge base of cyber attackers or enable them to undertake new forms of attacks. If anyparticularly acute because of the foregoing were to occur,significant research, development, marketing, sales and other expenses we could suffer negative publicity and loss of customers and sales, as well as possible legal claims.will have incurred in connection with the new offerings or enhancements.
We face intense competition in our market.
The market for cyber securitySecOps solutions is highly fragmented, intensely competitive and constantly evolving. We compete with an array of established and emerging security software and services vendors. With the introduction of new technologies and market entrants, we expect the competitive environment to remain intense going forward. Our primary competitors include: vulnerability management and assessment vendors, includingin Vulnerability Risk Management include Qualys and Tenable Network Security; diversified security softwareTenable; in Incident Detection and services vendors, including IBMResponse include Splunk, Micro Focus, LogRhythm and HPE; legacy complianceMicrosoft (Sentinel); in Application Security include Micro Focus and monitoring solutions such as SIEM, provided by vendors including LogRhythm, AlienvaultIBM; in Security Orchestration and Sumo Logic; machine data analysis tools such as those provided by Splunk; security services specialists, including Mandiant (a subsidiary of FireEye);Automation Response include Splunk and providers of point solutions that compete with some ofPalo Alto Networks; in Cloud Security include Palo Alto Networks and Check Point Software Technologies; in Threat Intelligence include Recorded Future and Digital Shadows and finally, while the features presentcompetition in our solutions.professional services business is diverse, our competitors include Mandiant, SecureWorks and NCC Group.
Some of our actual and potential competitors have advantages over us, such as longer operating histories, significantly greater financial, technical, marketing or other resources, stronger brand and business user recognition, larger and more mature intellectual property portfolios and broader global distribution and presence. In addition, our industry is evolving rapidly and is becoming increasingly competitive. Larger and more established companies may focus on cyber security operations and could
directly compete with us. Smaller companies could also launch new products and services that we do not offer and that could gain market acceptance quickly.
Our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. With the introduction of new technologies, the evolution of our offerings and new market entrants, we expect competition to intensify in the future. In addition, some of our larger competitors have substantially broader product offerings and can bundle competing products and services with other software offerings. As a result, customers may choose a bundled product offering from our competitors, even if individual products have more limited functionality than our solutions. These competitors may also offer their products at a lower price as part of this larger sale, which could increase pricing pressure on our offerings and cause the average sales price for our offerings to decline. These larger competitors are also often in a better position to withstand any significant reduction in capital spending by customers, and will therefore not be as susceptible to economic downturns.
Furthermore, our current and potential competitors may establish cooperative relationships among themselves or with third parties that may further enhance their resources and product and services offerings in the markets we address. In addition, current or potential competitors may be acquired by third parties with greater available resources. As a result of such relationships and acquisitions, our current or potential competitors might be able to adapt more quickly to new technologies and customer needs, devote greater resources to the promotion or sale of their products and services, initiate or withstand substantial price competition, take advantage of other opportunities more readily or develop and expand their product and service offerings more quickly than we do. For all of these reasons, we may not be able to compete successfully against our current or future competitors, or we may be required to expend significant resources in order to remain competitive. If our competitors are more successful than we are in developing new product and service offerings or in attracting and retaining customers, our business, financial condition and results of operations could be adversely affected.
If we are unable to successfully hire, train, and retain qualified personnel our business may suffer.
We continue to be substantially dependent on our sales force to obtain new customers and increase sales with existing customers. Our ability to successfully pursue our growth strategy will also depend on our ability to attract, motivate and retain our personnel, especially those in sales, marketing and research and development. In addition, in recent years, recruiting, hiring and retaining employees with expertise in the cybersecurity industry has become increasingly difficult as the demand for cybersecurity professionals has increased as a result of the recent cybersecurity attacks on global corporations and governments. We face intense competition for these employees from numerous technology, software and other companies, especially in certain geographic areas in which we operate, and we cannot ensure that we will be able to attract, motivate and/or retain sufficient qualified employees in the future particularly in tight labor markets. If we are unable to attract new employees and retain our current employees, we may not be able to adequately develop and maintain new products or professional services or market our existing products or professional services at the same levels as our competitors and we may, therefore, lose customers and market share. Our failure to attract and retain personnel, especially those in sales and marketing and research and development positions for which we have historically had a high turnover rate, could have an adverse effect on our ability to execute our business objectives and, as a result, our ability to compete could decrease, our operating results could suffer and our revenue could decrease. Even if we are able to identify and recruit a sufficient number of new hires, these new hires will require significant training before they achieve full productivity and they may not become productive as quickly as we would like or at all.
We believe that our corporate culture has been a critical component to our success. We have invested substantial time and resources in building our team. As we grow and mature as a public company, we may find it difficult to maintain our corporate culture. Any failure to preserve our culture could negatively affect our future success, including our ability to attract, motivate and retain personnel and effectively focus on and pursue our business strategy.
Our sales cycle may be unpredictable.
The timing of sales of our offerings is difficult to forecast because of the length and unpredictability of our sales cycle, particularly with large enterprises and with respect to certain of our products. We sell our products primarily to IT departments that are managing a growing set of user and compliance demands, which has increased the complexity of customer requirements to be met and confirmed during the sales cycle and prolonged our sales cycle. Further, the length of time that potential customers devote to their testing and evaluation, contract negotiation and budgeting processes varies significantly, depending on the size of the organization and nature of the product or service under consideration. In addition, we might devote substantial time and effort to a particular unsuccessful sales effort, and as a result, we could lose other sales opportunities or incur expenses that are not offset by an increase in revenue, which could harm our business.
If we fail to continue to effectively scale and manage our operations infrastructure, our customers may experience service outages and/or delays.
Our future growth is dependent upon our ability to continue to meet the expanding needs of our customers and to attract new customers. As existing customers gain more experience with our products, they may broaden their reliance on our products, which will require that we expand our operations infrastructure. We also seek to maintain excess capacity in our operations infrastructure to facilitate the rapid provision of new customer deployments. In addition, we need to properly manage our technological operations infrastructure in order to support changes in hardware and software parameters and the evolution of our products, all of which require significant lead time. If we do not accurately predict our infrastructure requirements, our existing customers may experience service outages that may subject us to financial penalties, financial liabilities and customer losses. If our operations infrastructure fails to keep pace with increased sales, customers may experience delays as we seek to obtain additional capacity, which could adversely affect our reputation and our revenue.
To date, we have derived a significant amount of our revenue from customers using our vulnerability management offerings. If we are unable to renew or increase sales of our vulnerability management offerings, or if we are unable to increase sales of our other offerings, our business and operating results could be adversely affected.
Although we continue to introduce and acquire new products and professional services, we derive and expect to continue to derive a significant amount of our revenue from customers using certain of our vulnerability management offerings (“VM”), InsightVM, Nexpose and Metasploit. Approximately half of our revenue was attributable to InsightVM, Nexpose and Metasploit for the year ended December 31, 2021. As a result, our operating results could suffer due to:
•any decline in demand for our vulnerability management offerings;
•failure of our vulnerability management offerings to detect vulnerabilities in our customers’ IT environments;
•the introduction of products and technologies that serve as a replacement or substitute for, or represent an improvement over, our vulnerability management offerings;
•technological innovations or new standards that our vulnerability management offerings do not address;
•sensitivity to current or future prices offered by us or competing solutions;
•our inability to release enhanced versions of our vulnerability management offerings on a timely basis in response to the dynamic threat landscape; and
•a decline in overall IT spending due to the global economic uncertainty and financial market conditions caused by the COVID-19 pandemic.
Our inability to renew or increase sales of our vulnerability management offerings, including cloud-based subscriptions, content subscriptions, managed services and content and maintenance and support subscriptions, or a decline in prices of our vulnerability management offerings would harm our business and operating results more seriously than if we derived significant revenues from a variety of offerings. In addition, while we have introduced several non-VM subscription products, including InsightAppSec, InsightConnect, InsightCloudSec and Threat Intelligence, these products are relatively new, and it is uncertain whether they will gain the market acceptance we expect. Any factor adversely affecting sales of our non-VM products or professional services, including release cycles, market acceptance, competition, performance and reliability, reputation and economic and market conditions, could adversely affect our business and operating results.
A component of our growth strategy is dependent on our continued international expansion, which adds complexity to our operations.
We market and sell our products and professional services throughout the world and have personnel in many parts of the world. For the ninethree months ended September 30, 2017March 31, 2022 and 2016,2021, operations located outside of North America generated 15%21% and 13%
18%, respectively, of our revenue, respectively.revenue. Our growth strategy is dependent, in part, on our continued international expansion. We expect to conduct a significant amount of our business with organizations that are located outside the United States, particularly in Europe and Asia. We cannot assure you that our expansion efforts into international markets will be successful in creating further demand for our products and professional services or in effectively selling our products and professional services in the international markets that we enter. Our current international operations and future initiatives will involve a variety of risks, including:
•increased management, infrastructure and legal costs associated with having international operations;
•reliance on channel partners;
•trade and foreign exchange restrictions;
•economic or political instability or uncertainty in foreign markets and around the world, such as related to the United Kingdom’s referendum in June 2016 in which voters approved an exit from the European Union, commonly referred to as “Brexit”;world;
•foreign currency exchange rate fluctuations;
•greater difficulty in enforcing contracts, accounts receivable collection and longer collection periods;
•changes in regulatory requirements, including, but not limited to data privacy, data protection and data security regulations;
•difficulties and costs of staffing and managing foreign operations;
•the uncertainty and limitation of protection for intellectual property rights in some countries;
•costs of compliance with foreign laws and regulations and the risks and costs of non-compliance with such laws and regulations;
•costs of compliance with U.S. laws and regulations for foreign operations, including the U.S. Foreign Corrupt Practices Act, import and export control laws, tariffs, trade barriers, economic sanctions and other regulatory or contractual limitations on our ability to sell or provide our solutions in certain foreign markets, and the risks and costs of non-compliance;
•heightened risks of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements that may impact financial results and result in restatements of, and irregularities in, financial statements;
•the potential for political unrest, acts of terrorism, hostilities or war;
•management communication and integration problems resulting from cultural differences and geographic dispersion;
•costs associated with language localization of our products;
•increased exposure to climate change, natural disasters, acts of war (including the armed conflict between Russia and Ukraine), terrorism, epidemics, or pandemics and other health crises, including the ongoing COVID-19 pandemic; and
•costs of compliance with multiple and possibly overlapping tax structures.
Our business, including the sales of our products and professional services by us and our channel partners, may be subject to foreign governmental regulations, which vary substantially from country to country and change from time to time. Our failure, or the failure by our channel partners, to comply with these regulations could adversely affect our business. Further, in many foreign countries it is common for others to engage in business practices that are prohibited by our internal policies and procedures or U.S. regulations applicable to us. Although we have implemented policies and procedures designed to comply with these laws and policies, there can be no assurance that our employees, contractors, channel partners and agents have complied, or will comply, with these laws and policies. Violations of laws or key control policies by our employees, contractors, channel partners or agents could result in delays in revenue recognition, financial reporting misstatements, fines, penalties or the prohibition of the importation or exportation of our products and could have a material adverse effect on our business and results of operations.
Further, in late February 2022, Russian military forces launched a significant military action against Ukraine. While our business and operations have not been significantly impacted, it is not possible to predict the broader or longer-term consequences of this crisis. Consequences of the crisis could include further sanctions, embargoes, regional instability, geopolitical shifts and adverse effects on macroeconomic conditions, security conditions, currency exchange rates and financial markets. There can be no assurance that the armed conflict between Russia and the Ukraine, including any resulting sanctions, export controls or other restrictive actions, will not have a material adverse impact on our future operations and results.
If we are unable to successfully manage the challenges of international expansion and operations, our business and operating results could be adversely affected.
We are also monitoring developments related to Brexit, which could haverecognize a significant implications for our business. Brexit could lead to economic and legal uncertainty, including significant volatility in global stock markets and currency exchange rates, and differing laws and regulations as the United Kingdom determines which European Union laws to replace or replicate. Any of these effects of Brexit, among others, could adversely affect our operations in the United Kingdom and our financial results.
As a cyber security provider, we are a target of cyber attacks that could adversely impact our reputation and operating results.
We sell cyber security and data analytics products. As a result, we have been and will be a target of cyber attacks designed to impede the performance of our products, penetrate our network security or the security of our cloud platform or our internal
systems, or that of our customers, misappropriate proprietary information and/or cause interruptions to our services. For example, because Metasploit serves as an introduction to hacking for many individuals, a successful cyber attack on us may be perceived as a victory for the cyber attacker, thereby increasing the likelihood that we may be a target of cyber attacks, even absent financial motives. Further, if our systems are breached, attackers could learn critical information about how our products operate to help protect our customers’ IT infrastructures from cyber risk, thereby making our customers more vulnerable to cyber attacks. In addition, if actual or perceived breaches of our network security occur, they could adversely affect the market perception of our products, negatively affecting our reputation, and may expose us to the loss of our proprietary information or information belonging to our customers, investigations or litigation and possible liability, including injunctive relief and monetary damages. Such security breaches could also divert the efforts of our technical and management personnel. In addition, such security breaches could impair our ability to operate our business and provide products to our customers. If this happens, our reputation could be harmed, our revenue could decline and our business could suffer.
We are dependent on the continued services and performance of our senior management and other key employees, the loss of any of whom could adversely affect our business, operating results and financial condition.
Our future performance depends on the continued services and contributions of our senior management, particularly Corey Thomas, our President and Chief Executive Officer, and other key employees to execute on our business plan and to identify and pursue new opportunities and product innovations. We maintain key man insurance on Mr. Thomas, but do not do so for any of our other executive officers or key employees. From time to time, there may be changes in our senior management team resulting from the termination or departure of our executive officers and key employees. Our senior management and key employees are generally employed on an at-will basis, which means that they could terminate their employment with us at any time. The loss of the services of our senior management, particularly Mr. Thomas, or other key employees for any reason could significantly delay or prevent our development or the achievement of our strategic objectives and harm our business, financial condition and results of operations.
Our business and operations are experiencing rapid growth, and if we do not appropriately manage our future growth, or are unable to scale our systems and processes, our operating results may be negatively affected.
We are a rapidly growing company. To manage future growth effectively we will need to continue to improve and expand our internal information technology systems, financial infrastructure, and operating and administrative systems and controls, which we may not be able to do efficiently, in a timely manner or at all. Any future growth would add complexity to our organization and require effective coordination across our organization. Failure to manage any future growth effectively could result in increased costs, harm our results of operations and lead to customers or investors losing confidence in our internal systems and processes, which could harm our results of operations and stock price.
We recognize substantially allpercentage of our revenue ratably over the term of our agreements with customers, and as a result, downturns or upturns in sales may not be immediately reflected in our operating results.
We recognize substantially alla significant percentage of our revenue ratably over the various terms of our agreements with customers, which generally occurs over a one to three-year period.customers. As a result, a substantial portion of the revenue that we report in each period will be derived from the recognition of deferred revenue relating to agreements entered into during previous periods. Consequently, a decline in new sales or renewals in any one period may not be immediately reflected in our revenue results for that period. This decline, however, will negatively affect our revenue in future periods. Accordingly, the effect of significant downturns in sales and market acceptance of our products and potential changes in our rate of renewals may not be fully reflected in our results of operations until future periods. Our model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers generally will be recognized over the term of the applicable agreement.term.
We also intend to increase our investment in research and development, sales and marketing, and general and administrative functions and other areas to grow our business. We are likely to recognize the costs associated with these increased investments
earlier than some of the anticipated benefits and the return on these investments may be lower, or may develop more slowly, than we expect, which could adversely affect our operating results.
We may be unable to rapidly and efficiently adjust our cost structure in response to significant revenue declines, which could adversely affect our operating results.
Our brand, reputation and ability to attract, retain and serve our customers are dependent in part upon the reliable performance of our products and network infrastructure.
Our brand, reputation and ability to attract, retain and serve our customers are dependent in part upon the reliable performance of our products and network infrastructure. We have experienced, and may in the future experience, disruptions, outages and other
performance problems due to a variety of factors, including infrastructure changes, human or software errors, capacity constraints and fraud or security attacks. In some instances, we may not be able to identify the cause or causes of these performance problems within an acceptable period of time.
We utilize third-party data centers located in Boston, Massachusetts, in addition to operating and maintaining certain elements of our own network infrastructure. We also utilize Amazon Web Services for our Insight platform infrastructure. Some elements of this complex system are operated by third parties that we do not control and that could require significant time to replace. We expect this dependence on third parties to continue. More specifically, certain of our products, in particular our Managed Vulnerability Management (Nexpose), InsightIDR, InsightVM, InsightAppSec, InsightOps and Logentries products, are hosted on Amazon Web Services, which provides us with computing and storage capacity. Interruptions in our systems or the third-party systems on which we rely, whether due to system failures, computer viruses, physical or electronic break-ins, or other factors, could affect the security or availability of our products, network infrastructure and website.
Prolonged delays or unforeseen difficulties in connection with adding capacity or upgrading our network architecture when required may cause our service quality to suffer. Problems with the reliability or security of our systems could harm our reputation. Damage to our reputation and the cost of remedying these problems could negatively affect our business, financial condition, and operating results.
Additionally, our existing data center facilities and third-party hosting providers have no obligations to renew their agreements with us on commercially reasonable terms or at all, and certain of the agreements governing these relationships may be terminated by either party at any time. If we are unable to maintain or renew our agreements with these providers on commercially reasonable terms or if in the future we add additional data center facilities or third-party hosting providers, we may experience costs or downtime as we transition our operations.
Any disruptions or other performance problems with our products could harm our reputation and business and may damage our customers’ businesses. Interruptions in our service delivery might reduce our revenue, cause us to issue credits to customers, subject us to potential liability and cause customers to not renew their purchases or our products.
If we fail to manage our operations infrastructure, our customers may experience service outages and/or delays.
Our future growth is dependent upon our ability to continue to meet the expanding needs of our customers and to attract new customers. As existing customers gain more experience with our products, they may broaden their reliance on our products, which will require that we expand our operations infrastructure. We also seek to maintain excess capacity in our operations infrastructure to facilitate the rapid provision of new customer deployments. In addition, we need to properly manage our technological operations infrastructure in order to support changes in hardware and software parameters and the evolution of our products, all of which require significant lead time. If we do not accurately predict our infrastructure requirements, our existing customers may experience service outages that may subject us to financial penalties, financial liabilities and customer losses. If our operations infrastructure fails to keep pace with increased sales, customers may experience delays as we seek to obtain additional capacity, which could adversely affect our reputation and our revenue.
If our products fail to help our customers achieve and maintain compliance with regulations and/or industry standards, our revenue and operating results could be harmed.
We generate a portion of our revenue from our threat exposure management offerings that help organizations achieve and maintain compliance with regulations and industry standards both domestically and internationally. For example, many of our customers subscribe to our threat exposure management offerings to help them comply with the security standards developed and maintained by the Payment Card Industry Security Standards Council, or the PCI Council, which apply to companies that process, transmit or store cardholder data. In addition, our threat exposure management offerings are used by customers in the health care industry to help them comply with numerous federal and state laws and regulations related to patient privacy. In particular, the Health Insurance Portability and Accountability Act of 1996, or HIPAA, and the 2009 Health Information Technology for Economic and Clinical Health Act include privacy standards that protect individual privacy by limiting the uses and disclosures of individually identifiable health information and implementing data security standards. The foregoing and other state, federal and international legal and regulatory regimes may affect our customers’ requirements for, and demand for, our products and professional services. Governments and industry organizations, such as the PCI Council, may also adopt new laws, regulations or requirements, or make changes to existing laws or regulations, that could impact the demand for, or value of, our products. If we are unable to adapt our products to changing legal and regulatory standards or other requirements in a timely manner, or if our products fail to assist with, or expedite, our customers’ cyber security defense and compliance efforts, our customers may lose confidence in our products and could switch to products offered by our competitors, or threaten or bring legal actions against us. In addition, if laws, regulations or standards related to data security, vulnerability management and other IT security and compliance requirements are relaxed or
the penalties for non-compliance are changed in a manner that makes them less onerous, our customers may view government and industry regulatory compliance as less critical to their businesses, and our customers may be less willing to purchase our products. In any of these cases, our revenue and operating results could be harmed.
In addition, government and other customers may require our products to comply with certain privacy, security or other certifications and standards. If our products are late in achieving or fail to achieve or maintain compliance with these certifications and standards, or our competitors achieve compliance with these certifications and standards, we may be disqualified from selling our products to such customers, or may otherwise be at a competitive disadvantage, either of which would harm our business, results of operations, and financial condition.
If our customers are unable to implement our products successfully, customer perceptions of our offerings may be impaired or our reputation and brand may suffer.
Our products are deployed in a wide variety of IT environments, including large-scale, complex infrastructures. Some of our customers have experienced difficulties implementing our products in the past and may experience implementation difficulties in the future. If our customers are unable to implement our products successfully, customer perceptions of our offerings may be impaired or our reputation and brand may suffer.
In addition, in order for our products to achieve their functional potential, our products must effectively integrate into our customers’ IT infrastructures, which have different specifications, utilize varied protocol standards, deploy products from multiple different vendors and contain multiple layers of products that have been added over time. Our customers’ IT infrastructures are also dynamic, with a myriad of devices and endpoints entering and exiting the customers’ IT systems on a regular basis, and our products must be able to effectively adapt to and track these changes.
Any failure by our customers to appropriately implement our products or any failure of our products to effectively integrate and operate within our customers’ IT infrastructures could result in customer dissatisfaction, impact the perceived reliability of our products, result in negative press coverage, negatively affect our reputation and harm our financial results.
Future acquisitionsOur success in acquiring and integrating other businesses, products or technologies could disruptimpact our business and harm our financial condition and operating results.position.
In order to remain competitive, we have in the past and may in the future seek to acquire additional businesses, products or technologies. The environment for acquisitions in our industry is very competitive and acquisition candidate purchase prices will likely exceed what we would prefer to pay. We also may not find suitable acquisition candidates, and acquisitions we complete may be unsuccessful.
Achieving the anticipated benefits of past or future acquisitions will depend in part upon whether we can integrate acquired operations, products and technology in a timely and cost-effective manner and successfully market and sell these as new product offerings, including, foror as new features within our existing offerings. For example, the operations, productson July 16, 2021, we acquired IntSights, a provider of contextualized external threat intelligence and technology acquired in connection with our acquisition of Komand in July 2017. The acquisition of Komand’s orchestration and automation technology isproactive threat remediation which were intended to helpextend the cloud security capabilities of our customers automatically identify risks, respond to incidents,Insight Platform. The integration of IntSights and address issues faster and with less human intervention. The process of integrating a new business or technology into our product offerings, such as Komand and its technology, requires, amongany other things, coordination of administrative, sales and marketing, accounting and finance functions, and expansion of information and management systems. Integration of any future acquisition may prove to be difficult due to the necessity of coordinating geographically separate organizations and integrating personnel with disparate business backgrounds and accustomed to different corporate cultures.cultures and business operations and internal systems. We may need to implement or improve controls, procedures, and policies at a business that prior to the acquisition may have lacked sufficiently effective controls, procedures and policies. The acquisition and integration processes are complex, expensive and time consuming, and may cause an interruption of, or loss of momentum in, product development, sales activities and operations of both companies. Further, we may be unable to retain key personnel of an acquired company following the acquisition, including certain employees which we acquired in connection with our acquisition of Komand.acquisition. If we are unable to effectively execute or integrate acquisitions, the anticipated benefits of such acquisition, including sales or growth opportunities or targeted synergies may not be realized, and our business, financial condition and operating results could be adversely affected.
In addition, we may only be able to conduct limited due diligence on an acquired company’s operations or may discover that the products or technology acquired were not as capable as we thought based upon the initial or limited due diligence. Following an acquisition, we may be subject to unforeseen liabilities arising from an acquired company’s past or present operations and these liabilities may be greater than the warranty and indemnity limitations that we negotiate. Any unforeseen liability that is greater than these warranty and indemnity limitations could have a negative impact on our financial condition.
We may fail to meet our publicly announced guidance or other expectations about our business and future operating results, which would cause our stock price to decline.
We have provided and may continue to provide guidance about our business, future operating results and key metrics, including ARR. In developing this guidance, our management must make certain assumptions and judgments about our future performance. Some of those key assumptions relate to the impact of the COVID-19 pandemic and the associated economic uncertainty on our business and the timing and scope of economic recovery globally, which are inherently difficult to predict. While presented with numerical specificity, this guidance is necessarily speculative in nature, and is inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and are based upon specific assumptions with respect to future business decisions or economic conditions, some of which may change. This guidance, which inherently consists of forward-looking statements, is also qualified by, and subject to, assumptions, estimates and expectations as of the date given.Forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements including the risks described in this Risk Factors section and in
the Risk Factors section of any future SEC filings we make. It can be expected that some or all of the assumptions, estimates and expectations of any guidance we furnished will not materialize or will vary significantly from actual results. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release of such guidance.
Furthermore, analysts and investors may develop and publish their own projections of our business, which may form a consensus about our future performance. Our business results may vary significantly from such projections or that consensus due to a number of factors, many of which are outside of our control, including due to the global economic uncertainty and financial market conditions caused by the COVID-19 pandemic and which could adversely affect our operations and operating results. There are no comparable recent events that provide guidance as to the probable effect of the COVID-19 pandemic, and, as a result, the ultimate impact of the COVID-19 outbreak is highly uncertain and subject to change. If we fail to accurately predict the full impact that the COVID-19 pandemic will have on all aspects of our business, the guidance and other forward-looking statements provided may also be incorrect or incomplete. Furthermore, if we make downward revisions of our previously announced guidance, or if our publicly announced guidance of future operating results fails to meet expectations of securities analysts, investors or other interested parties, the price of our common stock would decline.
If we are unable to maintain successful relationships with our channel partners, our business operations, financial results and growth prospects could be adversely affected.
Our success is dependent in part upon establishing and maintaining relationships with a variety of channel partners that we utilize to extend our geographic reach and market penetration. We anticipate that we will continue to rely on these partners in order to help facilitate sales of our offerings as part of larger purchases in the United States and to grow our business internationally. For 2016the years ended December 31, 2021, 2020 and 2015,2019, we derived approximately 37%52%, 47%, and 39%43%, respectively, of our revenue from sales of products and professional services through channel partners, and the percentage of revenue derived from channel partners may increase in future periods. Our agreements with our channel partners are non-exclusive and do not prohibit them from working with our competitors or offering competing solutions, and some of our channel partners may have more established relationships with our competitors. If our channel partners choose to place greater emphasis on products of their own or those offered by our competitors or do not effectively market and sell our products and professional services, our ability to grow our business and sell our products and professional services, particularly in key international markets, may be adversely affected. In addition, our failure to recruit additional channel partners, or any reduction or delay in their sales of our products and professional services or conflicts between channel sales and our direct sales and marketing activities may harm our results of operations. Finally, even if we are successful, our relationships with channel partners may not result in greater customer usage of our products and professional services or increased revenue.
If we are not able to maintain and enhance our brand, our business and operating results may be adversely affected.
We believe that maintaining and enhancing our brand identity is critical to our relationships with our customers and channel partners and to our ability to attract new customers and channel partners. The successful promotion of our brand will depend largely upon our marketing efforts, our ability to continue to offer high-quality offerings and our ability to successfully differentiate our offerings from those of our competitors. Our brand promotion activities may not be successful or yield increased revenues. In addition, independent industry analysts often provide reviews of our offerings, as well as those of our competitors, and perception of our offerings in the marketplace may be significantly influenced by these reviews. If these reviews are negative, or less positive as compared to those of our competitors’ products and professional services, our brand may be adversely affected.
Moreover, it may be difficult to maintain and enhance our brand in connection with sales through channel or strategic partners. The promotion of our brand requires us to make substantial expenditures, and we anticipate that the expenditures will increase as our market becomes more competitive, as we expand into new markets and as more sales are generated through our channel partners. To the extent that these activities yield increased revenues, these revenues may not offset the increased expenses we incur. If we do not successfully maintain and enhance our brand, our business may not grow, we may have reduced pricing power relative to competitors with stronger brands, and we could lose customers and channel partners, all of which would adversely affect our business operations and financial results.
Failure to maintain high-quality customer support could have a material adverse effect on our business.
Once our products are deployed within our customers’ networks, our customers depend on our technical and other customer support services to resolve any issues relating to the implementation and maintenance of our products. If we do not effectively assist our customers in deploying our products, help our customers quickly resolve post-deployment issues or provide effective ongoing support, our ability to renew or sell additional products or professional services to existing customers would be adversely affected and our reputation with potential customers could be damaged. Further, to the extent that we are unsuccessful in hiring, training and retaining adequate technical and customer success personnel, our ability to provide adequate and timely support to our customers will be negatively impacted, and our customers’ satisfaction with our offerings will be adversely affected.
We are dependent on the continued services and performance of our senior management and other key employees, the loss of any of whom could adversely affect our business, operating results and financial condition.
Our future performance depends on the continued services and contributions of our senior management, particularly Corey Thomas, our Chief Executive Officer, and other key employees to execute on our business plan and to identify and pursue new opportunities and product innovations. From time to time, there may be changes in our senior management team resulting from the termination or departure of our executive officers and key employees. Our senior management and key employees are employed on an at-will basis, which means that they could terminate their employment with us at any time. Further, members of our management and other key personnel in critical functions across our organization may be unable to perform their duties or have limited availability due to COVID-19. The temporary or permanent loss of the services of our senior management, particularly Mr. Thomas, or other key employees for any reason could significantly delay or prevent the achievement of our development and strategic objectives and harm our business, financial condition and results of operations.
We rely on third-party software to operate certain functions of our business.
We rely on software vendors to operate certain critical functions of our business, including financial management, customer relationship management and human resource management. If we experience difficulties in implementing new software or if these services become unavailable due to extended outages or interruptions or because they are no longer available on commercially reasonable terms or prices, our expenses could increase, our ability to manage our finances could be interrupted and our processes for managing sales of our solutions and supporting our customers could be impaired until equivalent services, if available, are identified, obtained and integrated, all of which could harm our business.
We use third-party software and data that may be difficult to replace or that may cause errors or failures of our solutions, which could lead to lost customers or harm to our reputation and our operating results.
We license third-party software and security and compliance data from various third parties that are used in our solutions in order to deliver our offerings. In the future, this software or data may not be available to us on commercially reasonable terms, or at all. Any loss of the right to use any of this software or data could result in delays in the provisioning of our offerings until equivalent technology or data is either developed by us, or, if available, is identified, obtained and integrated, which could harm our business. In addition, any errors or defects in or failures of this third-party software could result in errors or defects in our products or cause our products to fail, which could harm our business and be costly to correct. Many of these providers attempt to impose limitations on their liability for such errors, defects or failures, and if enforceable, we may have additional liability to our customers or third-party providers that could harm our reputation and increase our operating costs.
We will need to maintain our relationships with third-party software and data providers, and to obtain software and data from such providers that do not contain errors or defects. Any failure to do so could adversely impact our ability to deliver effective solutions to our customers and could harm our operating results.
Our products contain third-party open source software components, and our failure to comply with the terms of the underlying open source software licenses could restrict our ability to sell our products.
Our products contain software licensed to us by third parties under so-called “open source” licenses, including the GNU General Public License, or GPL, the GNU Lesser General Public License, or LGPL, the BSD License, the Apache License and others. From time to time, there have been claims against companies that distribute or use open source software in their products and services, asserting that such open source software infringes the claimants’ intellectual property rights. We could be subject to suits by parties claiming that what we believe to be licensed open source software infringes their intellectual property rights. Use and distribution of open source software may entail greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. In
addition, certain open source licenses require that source code for software programs that are subject to the license be made available to the public and that any modifications or derivative works to such open source software continue to be licensed under the same terms.
Although we monitor our use of open source software in an effort both to comply with the terms of the applicable open source licenses and to avoid subjecting our products to conditions we do not intend, the terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize our products. The terms of certain open source licenses require us to release the source code of our applications and to make our applications available under those open source licenses if we combine or distribute our applications with open source software in a certain manner. In the event that portions of our applications are determined to be subject to an open source license, we could be required to publicly release the affected portions of our source code, re-engineer all, or a portion of, those applications or otherwise be limited in the licensing of our applications. Disclosing our proprietary source code could allow our competitors to create similar products with lower development effort and time and ultimately, could result in a loss of sales for us. Disclosing the source code of our proprietary software could also make it easier for cyber attackers and other third parties to discover vulnerabilities in or to defeat the protections of our products, which could result in our products failing to provide our customers with the security they expect. Any of these events could have a material adverse effect on our business, operating results and financial condition.
Our technology alliance partnerships expose us to a range of business risks and uncertainties that could have a material adverse impact on our business and financial results.
We have entered, and intend to continue to enter, into technology alliance partnerships with third parties to support our future growth plans, including with certain of our actual or potential competitors. For example, through these technology alliance partnerships, we integrate with certain third-party application program interfaces or APIs,(“APIs”), which enhance our data collection capabilities in our customers’ IT environments. If these third parties no longer allow us to integrate with their APIs, or if we determine not to maintain these integrations, the functionality of our products may be reduced and our products may not be as marketable to certain potential customers. Technology alliance partnerships require significant coordination between the parties involved, particularly if a partner requires that we integrate its products with our products. Further, we have invested and will continue to invest significant time, money and resources to establish and maintain relationships with our technology alliance partners, but we have no assurance that any particular relationship will continue for any specific period of time, result in new offerings that we can effectively commercialize or result in enhancements to our existing offerings. In addition, while we believe that entering into technology alliance partnerships with certain of our actual or potential competitors is currently beneficial to our competitive position in the market, such partnerships may also give our competitors insight into our offerings that they may not otherwise have, thereby allowing them to compete more effectively against us.
If our products fail to help our customers achieve and maintain compliance with regulations and/or industry standards, our revenue and operating results could be harmed.
We generate a portion of our revenue from our vulnerability management offerings that help organizations achieve and maintain compliance with regulations and industry standards both domestically and internationally. For example, many of our customers subscribe to our vulnerability management offerings to help them comply with the security standards developed and maintained by the Payment Card Industry Security Standards Council (the “PCI Council”), which apply to companies that process, transmit or store cardholder data. In addition, our vulnerability management offerings are used by customers in the health care industry to help them comply with numerous federal and state laws and regulations related to patient privacy. In
particular, HIPAA, and the 2009 Health Information Technology for Economic and Clinical Health Act include privacy standards that protect individual privacy by limiting the uses and disclosures of individually identifiable health information and implementing data security standards. The continued utility of Metasploit depends in part on the continued contributions from security researchers.
Our Metasploit product relies on information provided by an active community of security researchers who contribute new exploits, attacksforegoing and vulnerabilities. We expect that the continued contributions from these third parties will both enhance the robustness of Metasploitother state, federal and also supportinternational legal and regulatory regimes may affect our salescustomers’ requirements for, and marketing efforts. However, to the extent that the information provided by these third parties is inaccurate or malicious, the potentialdemand for, false indications of security vulnerabilities and susceptibility to attack increases, which could adversely impact market acceptance of our products and professional servicesservices. Governments and industry organizations, such as the PCI Council, may also adopt new laws, regulations or requirements, or make changes to existing laws or regulations, that could impact the demand for, or value of, our products. If we are unable to adapt our products to changing legal and regulatory standards or other requirements in a timely manner, or if our products fail to assist with, or expedite, our customers’ cybersecurity defense and compliance efforts, our customers may lose confidence in our products and could resultswitch to products offered by our competitors or threaten or bring legal actions against us. In addition, if laws, regulations or standards related to data security, vulnerability management and other IT security and compliance requirements are relaxed or the penalties for non-compliance are changed in negative publicity, lossa manner that makes them less onerous, our customers may view government and industry regulatory compliance as less critical to their businesses, and our customers may be less willing to purchase our products. In any of these cases, our revenue and operating results could be harmed.
In addition, government and other customers may require our products to comply with certain privacy, security or other certifications and salesstandards. If our products are late in achieving or fail to achieve or maintain compliance with these certifications and increased costs to remedy any problem. Further, to the extent thatstandards, or our community of third parties is reduced in size or participants become less active,competitors achieve compliance with these certifications and standards, we may lose valuable insight into the dynamic threat landscapebe disqualified from selling our products to such customers, or may otherwise be at a competitive disadvantage, either of which would harm our business, results of operations, and our ability to quickly respond to new exploits, attacks and vulnerabilities may be reduced.financial condition.
A portion of our revenue is generated by sales to government entities, which are subject to a number of challenges and risks.
Selling to government entities can be highly competitive, expensive and time consuming, and often requires significant upfront time and expense without any assurance that we will win a sale. Government demand and payment for our products and professional services may also be impacted by public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely affecting public sector demand for our offerings. Government entities also have heightened sensitivity surrounding the purchase of cyber securitycybersecurity solutions due to the critical importance of their IT infrastructures, the nature of the information contained within those infrastructures and the fact that they are highly-visible targets for cyber attacks. Accordingly, increasing sales of our products and professional services to government entities may be more challenging than selling to commercial organizations. Further, in the course of providing our products and professional services to government entities, our employees and those of our channel partners may be exposed to sensitive government information. Any failure by us or our channel partners to safeguard and maintain the confidentiality of such information could subject us to liability and reputational harm, which could materially and adversely affect our results of operations and financial performance.
We are exposed to fluctuations in currency exchange rates, which could negatively affect our financial condition and results of operations.
Our reporting currency is the U.S. dollar and we generate a majority of our revenue in U.S. dollars. However, for the ninethree months ended September 30, 2017March 31, 2022 and 2016,2021 we incurred approximately 16%19% and 13%14%, respectively, of our expenses respectively, outside of the United States in foreign currencies, primarily the British pound sterling and euro, principally with respect to salaries and related personnel expenses associated with our sales and research and development operations. Additionally, for the ninethree months ended September 30, 2017March 31, 2022 and 2016, approximately 5%2021, 10% and 9%, respectively, of our revenue was generated in foreign currencies. Accordingly, changes in exchange rates may have an adverse effect on our business, operating results and financial condition. The exchange rate between the U.S. dollar and foreign currencies has fluctuated substantially in recent years and may continue to fluctuate substantially in the future. To date, weFurthermore, a strengthening of the U.S. dollar could increase the cost in local currency of our products and services to customers outside the United States, which could adversely affect our business, results of operations, financial condition and cash flows. We implemented a hedging program during 2020 and have not engagedentered into forward contracts designated as cash flow hedges in anyorder to mitigate our exposure to foreign currency fluctuations resulting from certain operating expenses denominated in certain foreign currencies. These forward contracts and other hedging strategies and any such strategies, such as forward contracts, options and foreign exchange swaps related to transaction exposures that we may implement to mitigate this risk in the future may not eliminate our exposure to foreign exchange fluctuations.
Changes in financial accounting standards may adversely impact our reported results of operations.
A change in accounting standards or practices, in particular with respect to revenue recognition, could harm our operating results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. For example, in May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09 (Topic 606), Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under generally accepted accounting principles in the United States. We will be required to implement this new revenue standard, as amended by accounting standards update No. 2015-14, in the first quarter of fiscal 2018. While we are still evaluating the total impact of the new revenue standard, we believe the adoption of this new standard will have an impact on our consolidated financial statements, including the way we account for perpetual software license arrangements where the software license is deemed dependent on our content subscription arrangements, arrangements involving software licenses that are sold with professional services and the recognition of direct and incremental commission costs to obtain a contract. These and other changes to existing rules or the questioning of current practices may harm our operating results or the way we conduct our business.
We may require additional capital to support business growth, and this capital might not be available on acceptable terms, if at all.
We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new features or enhance our products, improve our operating infrastructure or acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through future issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing that we may secure in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired, and our business may be adversely affected.
Risks Related to Government Regulation, Data Collection, Intellectual Property, Litigation and Catastrophic Events
We are subject to governmental export and import controls that could impair our ability to compete in international markets and/or subject us to liability if we are not in compliance with applicable laws.
Like other U.S.-based IT security products, our products are subject to U.S. export control and import laws and regulations, including the U.S. Export Administration Regulations and various economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Control. Exports of these products must be made in compliance with these laws and regulations. Compliance with these laws and regulations is complex, and if we were to fail to comply with these laws and regulations, we and certain of our employees could be subject to substantial civil and criminal penalties, including fines for our company and responsible employees or managers, and, in extreme cases, incarceration of responsible employees and managers and the possible loss of export privileges. Complying with export control laws and regulations, including obtaining the necessary licenses or authorizations, for a particular sale may be time-consuming, is not guaranteed and may result in the delay or loss of sales opportunities. Changes in export or import laws and regulations, shifts in the enforcement or scope of existing laws and
regulations, or changes in the countries, governments, persons, products or services targeted by such laws and regulations, could also result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers. A decreased use of our products or limitation on our ability to export or sell our products could adversely affect our business, financial condition and results of operations.
We also incorporate encryption technology into our products. These encryption products may be exported outside of the United States only with the required export authorizations, including by a license, a license exception or other appropriate government authorizations, including the filing of a product classification request. In addition, various countries regulate the import and domestic use of certain encryption technology, including through import permitting and licensing requirements, and have enacted laws that could limit our ability to distribute our products or could limit our customers’ ability to implement our products in those countries. Governmental regulation of encryption technology and regulation of imports or exports of encryption products, or our failure to obtain required import or export approval for our products, when applicable, could harm our international sales and adversely affect our revenue. Compliance with applicable laws and regulations regarding the export and import of our products, including with respect to new products or changes in existing products, may create delays in the introduction of our products in international markets, prevent our customers with international operations from deploying our products globally or, in some cases, could prevent the export or import of our products to certain countries, governments, entities or persons altogether.
Further, U.S. export control laws and economic sanctions prohibit the shipment of certain products and services to U.S. embargoed or sanctioned countries, governments or persons. Although we take precautions to prevent our products from being provided to those subject to U.S. sanctions, such measures may be circumvented.
Finally, there are currently multinational efforts underway as part of the Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technologies, or the Wassenaar Arrangement, to impose additional restrictions on certain cyber security products. Such controls have been implemented by many Wassenaar members, but are not currently in effect in the United States and may undergo substantial modification before becoming effective. To implement the controls under the Wassenaar Arrangement in the United States, the U.S. Department of Commerce's Bureau of Industry and Security, or BIS, would have to amend the Export Administration Regulations, or the EAR. Such amendments could include changes that impose new licensing, approval and other requirements on our commercial Metasploit products and thereby put us at a disadvantage in competing for international sales. We are closely monitoring the potential implications of the Wassenaar Arrangement on the commercial versions of Metasploit, and are actively working with BIS and other U.S. government stakeholders in connection with the implementation of the controls under the Wassenaar Arrangement.
Failure to comply with governmental laws and regulations could harm our business.
Our business is subject to regulation by various federal, state, local and foreign governments. In certain jurisdictions, these regulatory requirements may be more stringent than those in the United States. Noncompliance with applicable regulations or requirements could subject us to investigations, sanctions, mandatory product recalls, enforcement actions, disgorgement of profits, fines, damages, civil and criminal penalties, injunctions or other collateral consequences. If any governmental sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, results of operations, and financial condition could be materially adversely affected. In addition, responding to any action will likely result in a significant diversion of management’s attention and resources and an increase in professional fees. Enforcement actions and sanctions could harm our business, reputation, results of operations and financial condition.
Because our products collect and store user and related information, domestic and international privacy and cyber security concerns, and other laws and regulations, could result in additional costs and liabilities to us or inhibit sales of our products.
We, and our customers, are subject to a number of domestic and international laws and regulations that apply to online services and the internet generally. These laws, rules and regulations address a range of issues including data privacy and cyber security, and restrictions or technological requirements regarding the collection, use, storage, protection, retention or transfer of data. The regulatory framework for online services, data privacy and cyber security issues worldwide can vary substantially from jurisdiction to jurisdiction, is rapidly evolving and is likely to remain uncertain for the foreseeable future. Many federal, state and foreign government bodies and agencies have adopted or are considering adopting laws, rules and regulations regarding the collection, use, storage and disclosure of information, web browsing and geolocation data collection, data analytics, cyber security and breach notification procedures. Interpretation of these laws, rules and regulations and their application to our products and professional services in the United States and foreign jurisdictions is ongoing and cannot be fully determined at this time.
In the United States, these include rules and regulations promulgated under the authority of the Federal Trade Commission, the Electronic Communications Privacy Act, Computer Fraud and Abuse Act, HIPAA, the Gramm Leach Bliley Act and state breach notification laws, as well as regulator enforcement positions and expectations reflected in federal and state regulatory actions,
settlements, consent decrees and guidance documents. Internationally, virtually every jurisdiction in which we operate has established its own data security and privacy legal frameworks with which we, or our customers, must comply, including the EU Data Protection Directive 95/46/EC (“Directive”) established in the European Union (“EU”) and local EU Member State legislation implementing the Directive, such as the Data Protection Act in the United Kingdom. In addition, in April 2016, the European Union adopted a new General Data ProtectionGovernment Regulation designed to unify data protection within the European Union under a single law, which may result in significantly greater compliance burdens and costs for companies with users and operations in the European Union. Under the General Data Protection Regulation, fines of up to 20 million euros or up to 4% of the annual global turnover of the infringer, whichever is greater, could be imposed. This government action is typically intended to protect the privacy of personal data that is collected, processed and transmitted in or from the governing jurisdiction. These laws apply not only to third-party transactions, but also to transfers of information between us and our subsidiaries, including employee information. The General Data Protection Regulation will go into effect and apply to us beginning in May 2018. Further, many U.S. federal and state and other foreign government bodies and agencies have introduced, and are currently considering, additional laws and regulations. Non-compliance with these laws could result in penalties or significant legal liability. We could be adversely affected if legislation or regulations are expanded to require changes in our business practices or if governing jurisdictions interpret or implement their legislation or regulations in ways that negatively affect our business, results of operations or financial condition.
In addition, to facilitate the transfer of both customer and personnel data from the European Union to the United States, we signed up to the EU-U.S. Safe Harbor Framework, which required U.S.-based companies to provide assurance that they were adhering to relevant European standards for data protection. On October 6, 2015, the Court of Justice of the European Union, or CJEU, invalidated the EU-U.S. Safe Harbor Framework. In light of CJEU’s decision, we have reviewed our current operations to ensure that our EU-U.S. data transfers comply with EU data protection laws. The available legal basis for such transfers will depend on a number of factors, including, for example, the type of data and the European Economic Area country from which the data is being transferred, and may require that we obtain express consent from the customer or employee whose data is being transferred or include in our agreements with the applicable customer or European Economic Area employing entity the standard contractual clauses that have been approved by the EU Commission or adopt one of the other alternative mechanisms available in order to effect such transfers in compliance with the EU laws (although certain German regulators have expressed concerns in respect of the standard contractual clauses and in October 2017, the Irish High Court referred the question as to whether the standard contractual clauses can be used as a basis for data transfers to the United States to the CJEU). Our compliance actions may involve substantial time and expense; for example, if we enter into the standard contractual clauses with a customer, in some EU countries, including Belgium and Spain, executed clauses need to be lodged with or notified to the country’s data protection authority prior to the transfer of any data, and in other countries, including Austria, France, Ireland, Romania and Slovenia, the clauses need to be approved by the country’s data protection authority prior to use. Non-compliance could result in the EU data protection authorities imposing a number of different sanctions on us until we do, including fines and, ultimately, a prohibition on transfers.
In addition to government regulation, privacy advocates and industry groups may propose new and different self-regulatory standards that either legally or contractually apply to us. Because the interpretation and application of privacy and data protection laws are still uncertain, it is possible that these laws may be interpreted and applied in a manner that is inconsistent with our existing practices or the features of our products. We may also be subject to claims of liability or responsibility for the actions of third parties with whom we interact or upon whom we rely in relation to various services, including but not limited to vendors and business partners. If so, in addition to the possibility of fines, lawsuits and other claims, we could be required to fundamentally change our business activities and practices or modify our products, which could have an adverse effect on our business. Any inability to adequately address privacy concerns, even if unfounded, or comply with applicable privacy or data protection laws, regulations and policies, could result in additional cost and liability to us, damage our reputation, inhibit sales and adversely affect our business.
The costs of compliance with, and other burdens imposed by, the laws, rules, regulations and policies that are applicable to the businesses of our customers may limit the use and adoption of, and reduce the overall demand for, our software. Privacy or cyber security concerns, whether valid or not valid, may inhibit market adoption of our products particularly in certain industries and foreign countries.
Further, there are active legislative discussions regarding the implementation of laws or regulations that could restrict the manner in which security research is conducted and that could restrict or possibly bar the conduct of penetration testing and the use of exploits, which are an essential component of our Metasploit product and our business strategy more generally. Our failure to comply with existing laws, rules or regulations, changes to existing laws or their interpretation, or the imposition of new laws, rules or regulations, could result in additional costs and may necessitate changes to our business practices and divergent operating models, which may have a material and adverse impact on our business, results of operations, and financial condition.
Failure to protect our proprietary technology and intellectual property rights could substantially harm our business and operating results.
Our future success and competitive position depend in part on our ability to protect our intellectual property and proprietary technologies. To safeguard these rights, we rely on a combination of patent, trademark, copyright and trade secret laws and contractual protections in the United States and other jurisdictions, all of which provide only limited protection and may not now or in the future provide us with a competitive advantage.
We cannot assure you that any patents will issue from any patent applications, that patents that issue from such applications will give us the protection that we seek or that any such patents will not be challenged, invalidated, or circumvented. Any patents that may issue in the future from our pending or future patent applications may not provide sufficiently broad protection and may not be enforceable in actions against alleged infringers. We have registered the “Rapid7,” “Nexpose” and “Metasploit” names and logos in the United States and certain other countries. We have registrations and/or pending applications for additional marks in the United States and other countries; however, we cannot assure you that any future trademark registrations will be issued for pending or future applications or that any registered trademarks will be enforceable or provide adequate protection of our proprietary rights. While we have copyrights in our software, we do not typically register such copyrights with the Copyright Office. This failure to register the copyrights in our software may preclude us from obtaining statutory damages for infringement under certain circumstances. We also license software from third parties for integration into our products, including open source software and other software available on commercially reasonable terms. We cannot assure you that such third parties will maintain such software or continue to make it available.
In order to protect our unpatented proprietary technologies and processes, we rely on trade secret laws and confidentiality agreements with our employees, consultants, channel partners, vendors and others. Despite our efforts to protect our proprietary technology and trade secrets, unauthorized parties may attempt to misappropriate, reverse engineer or otherwise obtain and use them. In addition, others may independently discover our trade secrets, in which case we would not be able to assert trade secret rights, or develop similar technologies and processes. Further, the contractual provisions that we enter into may not prevent unauthorized use or disclosure of our proprietary technology or intellectual property rights and may not provide an adequate remedy in the event of unauthorized use or disclosure of our proprietary technology or intellectual property rights. Moreover, policing unauthorized use of our technologies, trade secrets and intellectual property is difficult, expensive and time-consuming, particularly in foreign countries where the laws may not be as protective of intellectual property rights as those in the United States and where mechanisms for enforcement of intellectual property rights may be weak. We may be unable to determine the extent of any unauthorized use or infringement of our solutions, technologies or intellectual property rights.
From time to time, legal action by us may be necessary to enforce our patents and other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the intellectual property rights of others or to defend against claims of infringement or invalidity. Such litigation could result in substantial costs and diversion of resources and could result in impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights. Our failure to secure, protect and enforce our intellectual property rights could negatively affect our brand and adversely impact our business, operating results and financial condition.
Assertions by third parties of infringement or other violations by us of their intellectual property rights, whether or not correct, could result in significant costs and harm our business and operating results.
Patent and other intellectual property disputes are common in our industry. We are currentlyperiodically involved in a lawsuitdisputes brought by a non-practicing entityentities alleging that we have infringed upon a now-expired patent held by such entityinfringement and we may, from time to time, be involved in other such disputes in the ordinary course of our business. Some companies, including some of our competitors, own large numbers of patents, copyrights and trademarks, which they may use to assert claims against us. Many of these companies have the capability to dedicate substantially greater resources to enforce their intellectual property rights. Third parties have in the past and may in the future assert claims of infringement, misappropriation or other violations of intellectual property rights against us. Theyus and we are currently involved in legal proceedings with Finjan, Inc., which has filed a complaint against us and our wholly-owned subsidiary, Rapid7 LLC, in the United States District Court, District of Delaware, alleging patent infringement. Third parties may also assert such claims against our customers or channel partners, whom we typically indemnify against claims that our solutions infringe, misappropriate or otherwise violate the intellectual property rights of third parties. As the numbers of products and competitors in our market increase and overlaps occur, claims of infringement, misappropriation and other violations of intellectual property rights may increase. Any claim of infringement, misappropriation or other violation of intellectual property rights by a third party, even those without merit, could cause us to incur substantial costs defending against the claim and could distract our management from our business.
The patent portfolios of our most significant competitors are larger than ours. This disparity may increase the risk that they may sue us for patent infringement and may limit our ability to counterclaim for patent infringement or settle through patent cross-licenses. In addition, future assertions of patent rights by third parties, and any resulting litigation, may involve patent holding companies or other adverse patent owners who have no relevant product revenues and against whom our own patents may therefore provide little or no deterrence or protection. There can be no assurance that we will not be found to infringe or otherwise violate any third-party intellectual property rights or to have done so in the past.
An adverse outcome of a dispute may require us to:
•pay substantial damages, including treble damages, if we are found to have willfully infringed a third party’s patents or copyrights;
•cease making, licensing or using solutions that are alleged to infringe or misappropriate the intellectual property of others;
•expend additional development resources to attempt to redesign our solutions or otherwise develop non-infringing technology, which may not be successful;
•enter into potentially unfavorable royalty or license agreements in order to obtain the right to use necessary technologies or intellectual property rights; and
•indemnify our partners and other third parties.
In addition, royalty or licensing agreements, if required or desirable, may be unavailable on terms acceptable to us, or at all, and may require significant royalty payments and other expenditures. Some licenses may also be non-exclusive, and therefore, our competitors may have access to the same technology licensed to us.
Any of the foregoing events could seriously harm our business, financial condition and results of operations.
Our intercompany relationshipsproducts contain third-party open source software components, and our failure to comply with the terms of the underlying open source software licenses could restrict our ability to sell our products.
Our products contain software licensed to us by third parties under so-called “open source” licenses, including the GNU General Public License, the GNU Lesser General Public License, the BSD License, the Apache License and others. From time to time, there have been claims against companies that distribute or use open source software in their products and services, asserting that such open source software infringes the claimants’ intellectual property rights. We could be subject to suits by parties claiming that what we believe to be licensed open source software infringes their intellectual property rights. Use and distribution of open source software may entail greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. In addition, certain open source licenses require that source code for software programs that are subject to complex transfer pricing regulations, which maythe license be challengedmade available to the public and that any modifications or derivative works to such open source software continue to be licensed under the same terms.
Although we monitor our use of open source software in an effort both to comply with the terms of the applicable open source licenses and to avoid subjecting our products to conditions we do not intend, the terms of many open source licenses have not been interpreted by taxing authorities.
We generally conductU.S. courts, and there is a risk that these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our international operations through wholly-owned subsidiaries and reportability to commercialize our taxable income in various jurisdictions worldwide based upon our business operations in those jurisdictions. In 2016, we completedproducts. The terms of certain open source licenses require us to release the reorganizationsource code of our corporate structureapplications and intercompany relationships to more closely alignmake our corporate organizationapplications available under those open source licenses if we combine or distribute our applications with open source software in a certain manner. In the expansionevent that portions of our international business activities. Although we anticipate achieving a reduction in our overall effective tax rate in the future as a result of this reorganized corporate structure, we may not realize any benefits. Our intercompany relationshipsapplications are and will continuedetermined to be subject to complex transfer pricing regulations administered by taxing authorities in various jurisdictions. The relevant taxing authorities may disagree with our determinations as to the income and expenses attributable to specific jurisdictions. If such a disagreement were to occur, and our position were not sustained,an open source license, we could be required to pay additional taxes, interestpublicly release the affected portions of our source code, re-engineer all, or a portion of, those applications or otherwise be limited in the licensing of our applications. Disclosing our proprietary source code could allow our competitors to create similar products with lower development effort and penalties,time and ultimately, could result in a loss of sales for us. Disclosing the source code of our proprietary software could also make it easier for cyber attackers and other third parties to discover vulnerabilities in or to defeat the protections of our products, which could result in one-time tax charges, higher effective tax rates, reduced cash flowsour products failing to provide our customers with the security they expect. Likewise, some open source projects have known security and lower overall profitabilityother vulnerabilities and architecture instabilities, or are otherwise subject to security attacks due to their wide availability, and are provided on an “as-is” basis. Any of these events could have a material adverse effect on our operations. In addition,business, operating results and financial condition.
We are subject to governmental export and import controls that could impair our ability to compete in international markets and/or subject us to liability if we are not in compliance with applicable laws.
Like other U.S.-based IT security products, our products are subject to U.S. export control and import laws and regulations, including the intended tax treatment of our reorganized corporate structure is not acceptedU.S. Export Administration Regulations and various economic and trade sanctions regulations administered by the applicable taxing authorities, changesU.S. Treasury Department’s Office of Foreign Assets Control. Exports of these products must be made in tax law negatively impactcompliance with these laws and regulations. Although we take precautions to prevent our products from being provided in violation of these laws, our products could be provided inadvertently in violation of such laws, despite the structure orprecautions we do not operate our business consistenttake. Compliance with the structurethese laws and applicable taxregulations is complex, and if we were to fail to comply with these laws and regulations, we and certain of our employees could be subject to substantial civil and criminal penalties, including fines for our company and responsible employees or managers, and, in extreme cases, incarceration of responsible employees and managers and the possible loss of export privileges. Complying with export control laws and regulations, including obtaining the necessary licenses or authorizations, for a particular sale may failbe time-consuming, is not guaranteed and may result in the delay or loss of sales opportunities. Changes in export or import laws and regulations, shifts in the enforcement or scope of existing laws and regulations, or changes in the countries, governments, persons, products or services targeted by such laws and regulations, could also result in decreased use of our products by, or in our decreased ability to achieve any tax advantagesexport or sell our products to, existing or potential customers. For example, in response to the armed conflict between Russia and Ukraine, countries such as Canada, the
United Kingdom, the European Union, the United States and other countries and organizations have implemented new and stricter sanctions and export controls against officials, individuals, regions, and industries in Russia, Ukraine and Belarus. Each country’s potential response to such sanctions, export controls, tensions, and military actions could damage or disrupt international commerce and the global economy and could have a resultmaterial adverse effect on our business and results of operations or impact our ability to continue to operate in affected regions.
A decreased use of our products or limitation on our ability to export or sell our products could adversely affect our business, financial condition and results of operations.
We also incorporate encryption technology into our products. These encryption products may be exported outside of the reorganized corporate structure,United States only with the required export authorizations, including by a license, a license exception or other appropriate government authorizations, including the filing of a product classification request. In addition, various countries regulate the import and domestic use of certain encryption technology, including through import permitting and licensing requirements, and have enacted laws that could limit our future operating resultsability to distribute our products or could limit our customers’ ability to implement our products in those countries. Governmental regulation of encryption technology and financial conditionregulation of imports or exports of encryption products, or our failure to obtain required import or export approval for our products, when applicable, could harm our international sales and adversely affect our revenue. Compliance with applicable laws and regulations regarding the export and import of our products, including with respect to new products or changes in existing products, may be negatively impacted.create delays in the introduction of our products in international markets, prevent our customers with international operations from deploying our products globally or, in some cases, could prevent the export or import of our products to certain countries, governments, entities or persons altogether.
Our ability to use net operating losses to offset future taxable income may be subject to certain limitations.
As of December 31, 2016,2021, we had federal and state net operating loss carryforwards or NOLs,(“NOLs”), of $93.8$510.3 million and $69.2$400.7 million, respectively, available to offset future taxable income, which expire in various years beginning in 20232022 if not utilized. A lack of future taxable income would adversely affect our ability to utilize these NOLs before they expire. Under the provisions of the Internal Revenue Code of 1986, as amended or the Internal(the “Internal Revenue Code,Code”), substantial changes in our ownership may limit the amount of pre-change NOLs that can be utilized annually in the future to offset taxable income. Section 382 of the Internal Revenue Code imposes limitations on a company’s ability to use NOLs if a company experiences a more-than-50-percentmore-than-50-percentage point ownership change over a three-year testing period. Based upon our historical analysis, as of December 31, 2016, we determined that although a small limitation on our historical NOLs exists, we do not expect this limitation to impair our ability to use our NOLs prior to expiration. However, if changes in our ownership occur in the future, our ability to use our NOLs may be further limited. For these reasons, we may not be able to utilize a material portion of the NOLs, even if we achieve profitability. If we are limited in our ability to use our NOLs in future years in which we have taxable income, we will pay more taxes than if we were able to fully utilize our NOLs. This could adversely affect our operating results, cash balances and the market price of our common stock.
We could be subject to additional tax liabilities.
The enactment of legislation implementing changes in the U.S. taxation of international business activities or the adoption of other tax reform policies could materially impact our financial position and results of operations.
Recent changesWe are subject to U.S. tax laws, including limitations on the ability of taxpayers to claimfederal, state, local and utilize foreign tax credits and the deferral of certain tax deductions until earnings outside ofsales taxes in the United States are repatriated to the United States, as well as changes to U.S. tax laws that may be enactedand foreign income taxes, withholding taxes and transaction taxes in the future, could impact the tax treatment of ournumerous foreign earnings. The U.S. federal government has called for substantial changes to U.S. tax policy and laws which would significantly alter the U.S. tax code if enacted.jurisdictions. We do not currently have sufficient information that would allow us to predict what U.S. tax reform, if any, may be enacted in the future or what impact any such changes would have on our business. Due to expansion ofgenerally conduct our international operations through wholly-owned subsidiaries and report our taxable income in various jurisdictions worldwide based upon our business activities, any changesoperations in the U.S. taxation of such activities may increase our worldwide effective tax ratethose jurisdictions. Our intercompany relationships are and adversely affect our financial condition and operating results. Additionally, changes in foreign tax laws, in particular with regardwill continue to UK tax policy, may adversely impact our worldwide tax rate.
Our operating results may be harmed if we are requiredsubject to collect sales and use or other related taxes for our products and professional services in jurisdictions where we have not historically done so.
Taxing jurisdictions, including state, local and foreigncomplex transfer pricing regulations administered by taxing authorities have differing rules and regulations governing sales and use or other taxes, and these rules and regulations are subject to varying interpretations that may change over time. In particular, significantin various jurisdictions. Significant judgment is required in evaluating our tax positions and our worldwide provision for taxes. While we believe that weDuring the ordinary course of business, there are in material compliancemany activities and transactions for which the ultimate tax determination is uncertain and the relevant taxing authorities may disagree with our obligations under applicable taxing regimes, one or more states, localities or countries may seekdeterminations as to impose additional sales or other tax collection obligations on us, including for past sales. It is possible that we could face sales tax auditsthe income and that such audits could result in tax-related liabilities for which we have not accrued. A successful assertion that we should be collecting additional sales or other taxes on our offerings in jurisdictions where we have not historically done so and do not accrue for sales taxes could result in substantial tax liabilities for past sales, discourage customers from purchasing our offerings or otherwise harm our business and operating results.
expenses attributable to specific jurisdictions. In addition, our tax obligations and effective tax rates could be adversely affected by changes in the relevant tax, accounting and other laws, regulations, principles and interpretations including those relating to income tax nexus, by recognizing tax losses or lower than anticipated earnings in jurisdictions where we have lower statutory rates and higher than anticipated earnings in jurisdictions where we have higher statutory rates, by changes in foreign currency exchange rates, or by changes in the valuation of our deferred tax assets and liabilities. We may be audited in various jurisdictions, and such jurisdictions may assess additional taxes, sales taxes and value-added taxes against us. Although we believe our tax estimates are reasonable, the final determination of any tax audits or litigation could be materially different from our historical tax provisions and accruals, which could have a material adverse effect on our operating results or cash flows in the period or periods for which a determination is made.
Risks Related to Data Privacy and Cybersecurity
Real or perceived failures, errors or defects in our solutions could adversely affect our brand and reputation, which could have an adverse effect on our business and results of operations.
If our products or professional services fail to detect vulnerabilities in our customers’ cybersecurity infrastructure, or if our products or professional services fail to identify and respond to new and increasingly complex methods of cyber attacks, our business and reputation may suffer. There is no guarantee that our products or professional services will detect all vulnerabilities and threats, especially in light of the rapidly changing security landscape to which we must respond, including the constantly evolving techniques used by attackers to access or sabotage data. If we fail to update our solutions in a timely or effective manner to respond to these threats, our customers could experience security breaches. Many federal, state and foreign governments have enacted laws requiring companies to notify individuals of data security breaches involving their personal data. These mandatory disclosures regarding a security breach often lead to widespread negative publicity, and any association of us with such publicity may cause our customers to lose confidence in the effectiveness of our solutions. An actual or perceived security breach or theft of sensitive data of one of our customers, regardless of whether the breach is attributable to the failure of our products or professional services, could adversely affect the market’s perception of our offerings and subject us to legal claims.
Additionally, our products may falsely detect vulnerabilities or threats that do not actually exist. For example, our Metasploit offering relies on information provided by an active community of security researchers who contribute new exploits, attacks and vulnerabilities. We expect that the continued contributions from these third parties will both enhance the robustness of Metasploit and also support our sales and marketing efforts. However, to the extent that the information from these third parties is inaccurate or malicious, the potential for false indications of security vulnerabilities and susceptibility to attack increases. These false positives, while typical in the industry, may impair the perceived reliability of our offerings and may therefore adversely impact market acceptance of our products and professional services and could result in negative publicity, loss of customers and sales and increased costs to remedy any problem. Further, to the extent that our community of third parties is reduced in size or participants become less active, we may lose valuable insight into the dynamic threat landscape and our ability to quickly respond to new exploits, attacks and vulnerabilities may be reduced.
Our products may also contain undetected errors or defects. Errors or defects may be more likely when a product is first introduced or as new versions are released, or when we introduce an acquired company's products. We have experienced these errors or defects in the past in connection with new products, acquired products and product upgrades and we expect that these errors or defects will be found from time to time in the future in new, acquired or enhanced products after commercial release. Defects may cause our products to be vulnerable to attacks, cause them to fail to detect vulnerabilities or threats, or temporarily interrupt customers’ networking traffic. Any errors, defects, disruptions in service or other performance problems with our products may damage our customers’ businesses and could hurt our reputation. If our products or professional services fail to detect vulnerabilities or threats for any reason, we may incur significant costs, the attention of our key personnel could be diverted, our customers may delay or withhold payment to us or elect not to renew or other significant customer relations problems may arise. We may also be subject to liability claims for damages related to errors or defects in our products. A material liability claim or other occurrence that harms our reputation or decreases market acceptance of our products may harm our business and operating results. Limitation of liability provisions in our standard terms and conditions and our other agreements may not adequately or effectively protect us from any claims related to errors or defects in our solutions, including as a result of federal, state or local laws or ordinances or unfavorable judicial decisions in the United States or other countries.
Our brand, reputation and ability to attract, retain and serve our customers are dependent in part upon the reliable performance of our products and network infrastructure.
Our brand, reputation and ability to attract, retain and serve our customers are dependent in part upon the reliable performance of our products and network infrastructure. We have experienced, and may in the future experience, disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes, human or software errors, capacity constraints and fraud or security attacks. In some instances, we may not be able to identify the cause or causes of these performance problems within an acceptable period of time.
We utilize third-party data centers located in North America, Europe, Australia and Asia, in addition to operating and maintaining certain elements of our own network infrastructure. Some elements of our complex infrastructure are operated by third parties that we do not control and that could require significant time to replace. We expect this dependence on third parties to continue. More specifically, certain of our products, in particular our cloud-based products, are hosted on cloud providers such as Amazon Web Services, which provides us with computing and storage capacity. Interruptions in our systems or the third-party systems on which we rely, whether due to system failures, computer viruses, physical or electronic break-ins, or other factors, could affect the security or availability of our products, network infrastructure and website.
Prolonged delays or unforeseen difficulties in connection with adding capacity or upgrading our network architecture when required may cause our service quality to suffer. Problems with the reliability or security of our systems or third-party systems
on which we rely could harm our reputation. Damage to our reputation and the cost of remedying these problems could negatively affect our business, financial condition, and operating results.
Additionally, our existing data center facilities and third-party hosting providers have no obligations to renew their agreements with us on commercially reasonable terms or at all, and certain of the agreements governing these relationships may be terminated by either party at any time. If we are unable to maintain or renew our agreements with these providers on commercially reasonable terms or if in the future we add additional data center facilities or third-party hosting providers, we may experience additional costs or downtime or delays as we transition our operations.
Any disruptions or other performance problems with our products could harm our reputation and business and may damage our customers’ businesses. Interruptions in our service delivery might reduce our revenue, cause us to issue credits to customers, due to our inability to meet stated service level commitments, subject us to potential liability and cause customers to not renew their purchases or our products.
If we or our third party service providers experience a security breach or unauthorized parties otherwise obtain access to our customers’ data, our reputation may be harmed, demand for our solutions may be reduced and we may incur significant liabilities.
We sell cybersecurity and data analytics products. As a result, we have been and will continue to be a target of cyber attacks designed to impede the performance of our products, penetrate our network security or the security of our cloud platform or our internal systems, or that of our customers, misappropriate proprietary information and/or cause interruptions to our services. For example, because Metasploit serves as an introduction to hacking for many individuals, a successful cyber attack on us may be perceived as a victory for the cyber attacker, thereby increasing the likelihood that we may be a target of cyber attacks, even absent financial motives.
We also process, store and transmit our own data as part of our business and operations, including personal, confidential or proprietary information. As many of our customers and employees will continue to work remotely, we expect there will continue to be an increased amount of such information that is stored in our solutions, which increases the exposure and risk of attempted security breaches, cyberattacks and other malicious internet-based activity. Additionally, we make use of third-party technology and systems for a variety of reasons, including, without limitation, encryption and authentication technology, employee email, content delivery to customers, back-office support, credit card processing, customer relationship management, human resources services and other functions.
Computer malware, ransomware, cyber viruses, social engineering (phishing attacks), supply-chain attacks, denial of service or other attacks, employee theft or misuse and increasingly sophisticated network attacks have become more prevalent in our industry, particularly against cloud services. In particular, ransomware attacks, including by organized criminal threat actors, nation-states, and nation-state-supported actors, are becoming increasingly prevalent and severe and can lead to significant interruptions in our operations, loss of data and income, reputational harm, and diversion of funds. While extortion payments may alleviate the negative impact of a ransomware attack, we may be unwilling or unable to make such payments due to, for example, applicable laws or regulations prohibiting such payments. Similarly, supply-chain attacks have increased in frequency and severity, and we cannot guarantee that third parties and infrastructure in our supply chain or our third-party partners’ supply chains have not been compromised or that they do not contain exploitable defects or bugs that could result in a breach of or disruption to our information technology systems (including our products) or the third-party information technology systems that support us and our services. Such attacks may also include exploitation of vulnerabilities in third party or open source software code that may be incorporated into our own or our customers’ or supplier’s systems, such as the vulnerability in the Java logging library known as “log4j” identified in late 2021 that affected many in our industry. Further, if our systems or those of our third-party service providers are breached as a result of third-party action, employee error or misconduct, attackers could learn critical information about how our products operate to help protect our customers’ IT infrastructures from cyber risk, thereby making our customers more vulnerable to cyber attacks. While we maintain measures designed to protect the integrity, confidentiality and security of our data, our security measures could fail and those of our third-party service providers have failed and could fail, any of which could result in unauthorized access to or disclosure, modification, misuse, loss or destruction of such data or financial loss.
Additionally, the growth in state sponsored cyber activity, including those actions taken in connections with the armed conflict in Russia and Ukraine, demonstrates the increasing sophistication and evolution of cyber threats. As a result, we may be unable to anticipate the techniques used or implement adequate measures to prevent an electronic intrusion into our customers through our cloud platform or to prevent breaches and other security incidents affecting our cloud platform, internal networks, systems or data. Further, once identified, we may be unable to remediate or otherwise respond to a breach or other incident in a timely manner. Actual or perceived security breaches of our cloud platform could result in actual or perceived breaches of our customers’ networks and systems.
Since our business is subjectfocused on providing reliable security solutions to our customers, a security breach or other security incident, or the risksperception that one has occurred, could result in a loss of earthquakes, fire, power outages, floods customer confidence in the security of our offerings
and other catastrophic events,damage to our brand, reduce the demand for our offerings, disrupt normal business operations, require us to spend material resources to investigate or correct the breach and to interruption by manmade problems suchprevent future security breaches and incidents, expose us to legal liabilities, including litigation, regulatory enforcement, and indemnity obligations, and adversely affect our revenues and operating results. These risks may increase as terrorism.we continue to grow the number and scale of our cloud services, and process, store, and transmit increasing amounts of data.
A significant natural disaster, suchAdditionally, we cannot be certain that our insurance coverage will be adequate for data security liabilities actually incurred, that insurance will cover any indemnification claims against us relating to any incident, that insurance will continue to be available to us on economically reasonable terms, or at all, or that any insurer will not deny coverage as an earthquake, fireto any future claim. The successful assertion of one or a flood,more large claims against us that exceed available insurance coverage, or a significant power outagethe occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, including our financial condition, operating results, and reputation.
If Metasploit were to be used by attackers to exploit vulnerabilities in the cybersecurity infrastructures of third parties, our reputation and business could be harmed.
Although Metasploit is a penetration testing tool that is intended to allow organizations to test the effectiveness of their cybersecurity programs, Metasploit has in the past and may in the future be used to exploit vulnerabilities in the cybersecurity infrastructures of third parties. While we have incorporated certain features into Metasploit to deter misuse, there is no guarantee that these controls will not be circumvented or that Metasploit will only be used defensively or for research purposes. Any actual or perceived security breach, malicious intrusion or theft of sensitive data in which Metasploit is believed to have been used could adversely affect perception of, and demand for, our offerings. Further, the identification of new exploits and vulnerabilities by the Metasploit community may enhance the knowledge base of cyber attackers or enable them to undertake new forms of attacks. If any of the foregoing were to occur, we could suffer negative publicity and loss of customers and sales, as well as possible legal claims.
Because our products collect and store user and related information, domestic and international privacy and cybersecurity concerns, and other laws and regulations, could have a material adverse effect on our business.
We, and our customers, are subject to a number of stringent and changing obligations in domestic and international laws, regulations, guidance, industry standards, external and internal policies and contracts and other obligationsthat address a range of issues including data privacy and cybersecurity, and restrictions or technological requirements regarding the collection, use, storage, protection, retention or transfer of data. The regulatory framework for online services, data privacy and cybersecurity issues worldwide can vary substantially from jurisdiction to jurisdiction, is rapidly evolving and is likely to remain uncertain for the foreseeable future. This creates some uncertainty as to the effective legal frameworks and our obligations may be subject to differing applications and interpretations, which may be inconsistent or in conflict among jurisdictions. Preparation for and compliance with these obligations requires us to devote significant resources (including, without limitation, financial and time-related resources). These obligations may necessitate changes to our business including our information technologies, systems and practices and to those of any third parties that process personal data on our behalf. Although we strive to comply with all applicable data privacy and security obligations, we may at times fail (or be perceived to have failed) to do so. Moreover, despite our efforts, our personnel or third parties upon whom we rely may fail to comply with such obligations. If we (or third parties upon whom we rely) fail, or are perceived to have failed, to address and comply with data privacy and security obligations, we could face significant consequences. These consequences may include but are not limited to: government enforcement actions (e.g., investigations, fines, penalties, audits, inspections and similar consequences); litigation (including class-related claims); additional reporting requirements and oversight; bans on processing personal data; orders to destroy and not to use personal data; and imprisonment of company officials. Any of these events could have a material adverse effect on our reputation and our business, and financial condition, including but not limited to: loss of customers; interruptions or stoppages in our business or operations; inability to process personal data; inability to operate in specific jurisdictions; limitations in our ability to develop our products and professional services; management's time and other resource expenditures; adverse publicity; and revisions to our operations.
In the United States, federal, state and local governments have enacted numerous data privacy and cybersecurity laws (including data breach notification laws, personal data privacy laws and consumer protection laws). For example, the California Consumer Privacy Act of 2018 (“CCPA”), imposes obligations on businesses to which it applies. These obligations include but are not limited to providing specific disclosures in privacy notices and affording California residents certain rights related to their personal data. The CCPA allows for statutory fines for non-compliance (up to $7,500 per violation). Other states have proposed data privacy laws. If we become subject to new data privacy or security laws, the risk of enforcement action against us could increase because we may become subject to additional obligations, and the number of individuals or entities that can initiate actions against us may increase (including individuals, via a private right of action, and state actors).
Internationally, virtually every jurisdiction in which we operate has established its own data security and cyberprivacy legal frameworks with which we, and/or our customers, must comply, including the European Union's General Data Protection Regulation, 2016/679 (“GDPR”), laws implemented by European Union (“EU”) member states and, following the withdrawal of the United Kingdom (“UK”) from the EU, the so-called ‘UK GDPR’ (“European Data Protection Laws”). The UK’s decision to leave the EU and ongoing developments in the UK have created uncertainty with regard to data protection regulation in the UK. Going forward, there may be an increasing scope for divergence in the application, interpretation and enforcement of data protection laws as between the UK and EU. The European Data Protection Laws present significantly greater risks, compliance burdens and costs for companies with users and operations in the EU and UK. Under the GDPR, fines of up to 20 million euros or up to 4% of the annual global turnover of the infringer, whichever is greater, could be imposed for significant non-compliance and similar levels of fines could also be imposed under the UK GDPR.
The European Data Protection Laws are broad in their application and apply when we do business with EU- and UK-based customers and when our U.S.-based customers collect and use personal data that originates from individuals resident in the EU and UK. They also apply to transfers of personal data between us and our EU- and UK-based subsidiaries, including employee information. Further, many U.S. federal and state and other foreign government bodies and agencies have introduced, and are currently considering, additional laws and regulations. Non-compliance with these laws could result in penalties or significant legal liability. We could be adversely affected if legislation or regulations are expanded to require changes in our business practices or if governing jurisdictions interpret or implement their legislation or regulations in ways that negatively affect our business, results of operations or financial condition.
In addition, certain jurisdictions have enacted data localization laws and cross-border personal data transfer laws. For example, European Data Protection Laws generally prohibit the transfer of personal data from the European Economic Area (“EEA”) and, the UK and Switzerland (collectively, “Europe”), to most other non-European countries unless the parties to the transfer have implemented specific safeguards to protect the transferred personal data. In particular, government regulators in Europe have found that the United States does not provide an adequate level of data privacy and cybersecurity protection and although there are legal mechanisms to allow for the transfer of personal data from Europe to the United States, uncertainty remains about compliance and such mechanisms may not be available or applicable with respect to our personal data processing activities. For example, the “Standard Contractual Clauses” (“SCCs) that are designed to be a valid mechanism by which parties can transfer personal data out of Europe to jurisdictions that are not found to provide an adequate level of protection, must be assessed on a case-by-case basis taking into account the legal regime applicable in the destination country. Specifically, the parties to the cross-border personal data transfer must evaluate the importing jurisdiction’s laws and implement supplemental security measures as necessary to protect the at-issue personal data. It is likely that there will continue to be some uncertainty regarding the mechanisms by which parties transfer personal data out of Europe to jurisdictions such as the United States. At present, there are few if any viable alternatives to the SCCs. If we cannot implement and maintain a valid mechanism for cross-border personal data transfers, we may face increased exposure to regulatory actions, substantial fines and injunctions against processing (including prohibitions on transferring personal data out of the EU and UK). This may also reduce demand for our services from companies subject to European Data Protection Laws. Loss of our ability to import personal data from the EU and UK may also require us to increase our data processing capabilities in the EEA at significant expense.
The costs of compliance with, and other burdens imposed by, the laws, rules, regulations and policies that are applicable to the businesses of our customers may limit the use and adoption of, and reduce the overall demand for, our software. Privacy or cybersecurity concerns, whether valid or not valid, may inhibit market adoption of our products particularly in certain industries and foreign countries.
Further, there are active legislative discussions regarding the implementation of laws or regulations that could restrict the manner in which security research is conducted and that could restrict or possibly bar the conduct of penetration testing and the use of exploits, which are an essential component of our Metasploit product and our business strategy more generally. Our failure to comply with existing laws, rules or regulations, changes to existing laws or their interpretation, or the imposition of new laws, rules or regulations, could result in additional costs and may necessitate changes to our business practices and divergent operating models, which may have a material and adverse impact on our business, operating results of operations, and financial condition. In addition, natural disasters could affect
Organizations may be reluctant to purchase our channel partners’ abilitycloud-based offerings due to perform servicesthe actual or perceived vulnerability of cloud solutions.
Some organizations have been reluctant to use cloud solutions for us on a timely basis. Incybersecurity, such as our InsightVM, InsightIDR, InsightAppSec, InsightConnect, InsightCloudSec and Threat Intelligence, because they have concerns regarding the eventrisks associated with the reliability or security of the technology delivery model associated with this solution. If we or our channel partners are hindered by anyother cloud service providers experience security incidents, breaches of the events discussed above, our ability to provide our products or professional services to customers could be delayed.
In addition, our facilities and those of our third-partycustomer data, centers and hosting providers are vulnerable to damage or interruption from human error, intentional bad acts, pandemics, earthquakes, hurricanes, floods, fires, war, terrorist attacks, power losses, hardware failures, systems failures, telecommunications failures and similar events. The occurrence of a natural disaster, power failure or an act of terrorism, vandalismdisruptions in service delivery or other misconduct,problems, the market for cloud solutions as a decision by a third party to close a facility on which we rely without adequate notice, or other unanticipated problems could result in lengthy interruptions in provision or delivery of our products, potentially leaving our customers vulnerable to cyber attacks. The occurrence of any of the foregoing events could damage our systems and hardware or could cause them to fail completely, and our insurance may not cover such events orwhole may be insufficient to compensate us for the potentially significant losses, including the potentialnegatively impacted, which could harm to the future growthour business.
All of the aforementioned risks may be exacerbated if our disaster recovery plans or the disaster recovery plans established for our third-party data centers and hosting providers prove to be inadequate. To the extent that any of the above results in delayed or reduced customer sales, our business, financial condition and results of operations could be adversely affected.
Risks Related to our Common Stock
The market price of our common stock has been and is likely to continue to be volatile.
The market price of our common stock may be highly volatile and may fluctuate substantially as a result of a variety of factors, some of which are related in complex ways. Since shares of our common stock were sold in our initial public offering or IPO,(“IPO”), in July 2015 at a price of $16.00 per share, our stock price has ranged from an intraday low of $9.05 to an intraday high of $27.45$145.00 through November 1, 2017.April 29, 2022. Factors that may affect the market price of our common stock include:
•actual or anticipated fluctuations in our financial condition and operating results;
•variance in our financial performance from expectations of securities analysts;
•changes in our projected operating and financial results;
•changes in the prices of our products and professional services;
changes in our projected operating and financial results;
•changes in laws or regulations applicable to our products or professional services;
•announcements by us or our competitors of significant business developments, acquisitions or new offerings;
•our involvement in any litigation;litigation or investigations by regulators;
•our sale of our common stock or other securities in the future;
•changes in our board of directors, senior management or key personnel;
•trading volume of our common stock;
•price and volume fluctuations in the overall stock market;
•changes in the anticipated future size and growth rate of our market;
•sales of shares of our common stock by us or our stockholders, including sales and purchases of any common stock issued upon conversion of our convertible senior notes; and
•general economic, regulatory and market conditions.
From time to time,Recently, the stock markets, and in particular the market on which our common stock is listed, have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies.companies due to, among other factors, the actions of market participants or other actions outside of our control, including general market volatility caused by the COVID-19 pandemic. These fluctuations have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry fluctuations, as well as general economic, political, regulatory and market conditions, may negatively impact the market price of our common stock. In the past, companies that have experienced volatility in the market price of their securities have been subject to securities class action litigation. We may be the target of this type of litigation in the future, which could result in substantial costs and divert our management’s attention.
We may fail to meet our publicly announced guidance or other expectations about our business and future operating results, which would cause our stock price to decline.
We have provided and may continue to provide guidance about our business, other business metrics and future operating results. In developing this guidance, our management must make certain assumptions and judgments about our future performance. Furthermore, analysts and investors may develop and publish their own projections of our business, which may form a consensus about our future performance. Our business results may vary significantly from such guidance or that consensus due to a number of factors, many of which are outside of our control, and which could adversely affect our operations and operating results. Furthermore, if we make downward revisions of our previously announced guidance, or if our publicly announced guidance of future operating results fails to meet expectations of securities analysts, investors or other interested parties, the price of our common stock would decline.
If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our stock price and trading volume could decline.
The trading market for our common stock will depend,depends, in part, on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If our financial performance fails to meet analyst estimates or one or more of the analysts who cover us downgrade our shares or change their opinion of our shares, our share price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.
We do not intend to pay dividends for the foreseeable future and, as a result, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.
We have never declared or paid any cash dividends on our common stock and do not intend to pay any cash dividends in the foreseeable future. We anticipate that we will retain all of our future earnings for use in the development of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors.
Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.
Concentration of ownership among our existing directors, executive officers and holders of 10% or more of our outstanding common stock may prevent minority investors from influencing significant corporate decisions.
As of November 1, 2017, our directors, executive officers and holders of more than 10% of our common stock, some of whom are represented on our board of directors, together with their affiliates, beneficially owned 44% of the voting power of our outstanding capital stock. As a result, these stockholders will be able to determine the outcome of matters submitted to our stockholders for approval. This concentration of ownership by itself may have the effect of delaying, deferring or preventing a change in control of our company, impeding a merger, consolidation, takeover or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, which in turn, could materially and adversely affect the market price of our common stock.
Substantial futureFuture sales of our common stock or equity-linked securities in the public market could lower the market price for our common stock and adversely impact the trading price of the Notes.
In the future, we may sell additional shares of our common stock or the perception that these sales may occur, could cause our share priceequity-linked securities to decline.
Sales ofraise capital. In addition, a substantial amountnumber of shares of our common stock is reserved for issuance upon the exercise of stock options, settlement of
other equity incentive awards and upon conversion of the Notes. The indentures for the Notes do not restrict our ability to issue additional common stock or equity-linked securities in the publicfuture. We cannot predict the size of future issuances or the effect, if any, that they may have on the market price for our common stock. The issuance and sale of substantial amounts of common stock or equity-linked securities, or the perception that thesesuch issuances and sales mightmay occur, could depressadversely affect the trading price of the Notes and the market price of our common stock and could impair our ability to raise capital through the sale of additional equity or equity-linked securities. All
Risks Related to our Indebtedness
We have a significant amount of debt that may decrease our business flexibility, access to capital, and/or increase our borrowing costs, and we may still incur additional debt in the future, which may adversely affect our operations and financial results. We may not have sufficient cash flow from our business to pay our substantial debt when due.
In May 2020, we issued $230.0 million aggregate principal amount of 2025 Notes and in March 2021, we issued $600.0 million aggregate principal amount of 2027 Notes (collectively, the (“Notes”). In addition, we may also incur indebtedness under our revolving credit facility. Our indebtedness may:
•limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions or other general business purposes;
•limit our ability to use our cash flow or obtain additional financing for future working capital, capital expenditures, acquisitions or other general business purposes;
•require us to use a substantial portion of our cash flow from operations to make debt service payments;
•limit our flexibility to plan for, or react to, changes in our business and industry;
•place us at a competitive disadvantage compared to our less leveraged competitors; and
•increase our vulnerability to the impact of adverse economic and industry conditions.
Further, the indentures governing the Notes do not restrict our ability to incur additional indebtedness, secure existing or future debt, recapitalize our existing or future debt or take a number of other actions that could intensify the risks discussed above and below. Further, we and our subsidiaries may incur substantial additional indebtedness in the future, subject to the restrictions contained in our revolving credit facility and any future debt instruments existing at the time, some of which may be secured indebtedness. While our revolving credit facility restricts our ability to incur additional indebtedness, if our revolving credit facility is terminated, we may not be subject to such restriction under the terms of such indebtedness.
Our ability to pay our debt when due or to refinance our indebtedness, including the Notes, depends on our future performance, which is subject to economic, financial, competitive, and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. In addition, any required repurchase of the Notes for cash as a result of a fundamental change or voluntary redemption (in each case, pursuant to the terms of the Notes) would lower our current cash on hand such that we would not have that cash available to fund operations. If we are unable to generate sufficient cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring our debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.
In addition, our revolving credit facility contains, and any future additional indebtedness that we may incur may contain, financial and other restrictive covenants that limit our ability to operate our business, raise capital, pay dividends and/or make payments under our other indebtedness. If we fail to comply with these covenants or to make payments under our indebtedness when due, then we would be in default under that indebtedness, which could, in turn, result in that and our other indebtedness becoming immediately payable in full. Any such event of default under our revolving credit facility would give the lenders the right to terminate their commitments to provide additional loans under our revolving credit facility and to declare any and all borrowings outstanding, together with accrued and unpaid interest and fees, to be immediately due and payable. In addition, the lenders under our revolving credit facility would have the right to proceed against the collateral in which we granted a security interest to them, which consists of substantially all our assets. If the debt under our revolving credit facility were to be accelerated, we may not have sufficient cash or be able to borrow sufficient funds to refinance the debt or sell sufficient assets to repay the debt, which could immediately materially and adversely affect our cash flows, business, results of operations, financial condition and our ability to make payments under our indebtedness, including the Notes, when due. Further, the terms of any new or additional financing may be on terms that are more restrictive or on terms that are less desirable to us.
The conditional conversion feature of the Notes, if triggered, may adversely affect our financial condition and operating results.
In the event the conditional conversion feature of the Notes is triggered, holders of the Notes will be entitled to convert their Notes at any time during specified periods at their option. If one or more holders elect to convert their Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation in cash, which could adversely affect our liquidity. As disclosed in Note 10, Debt, to our consolidated financial statements, the conditional conversion features of the 2025 Notes were triggered as of March 31, 2022, and the 2025 Notes are freely tradable without restrictionconvertible at the option of the holders, in whole or in part, between April 1, 2022 and June 30, 2022. Whether the 2025 Notes will be convertible following the fiscal quarter ending June 30, 2022, will depend on the continued satisfaction of this condition or another conversion condition in the future. As of March 31, 2022, the 2027 Notes are not convertible at the option of the holder. In addition, even if holders of Notes do not elect to convert their Notes, we could be required under applicable accounting rules to reclassify all or a portion of the Securities Actoutstanding principal of 1933,the Notes as amended, ora current rather than long-term liability, which would result in a material reduction of our net working capital.
The capped call transactions may affect the Securities Act, except for anyvalue of the Notes and our common stock.
In connection with the issuance of the 2023 Notes, the 2025 Notes and the 2027 Notes, we entered into capped call transactions with certain counterparties (the “Capped Calls”). The Capped Calls cover, subject to customary adjustments, the number of shares of our common stock that may be heldinitially underlying each of the 2023 Notes, the 2025 Notes and the 2027 Notes. The Capped Calls are expected to offset the potential dilution as a result of conversion of such Notes. In connection with establishing their initial hedge of the capped call transactions, the counterparties or acquired bytheir respective affiliates entered into various derivative transactions with respect to our directors, executive officers and other affiliates, as that term is definedcommon stock concurrently with or shortly after the pricings of the respective Notes, including with certain investors in the Securities Act,applicable Notes. The counterparties and/or or their respective affiliates may modify or unwind their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the applicable Notes (and are likely to do so on each exercise date of the capped call transactions, which are subjectscheduled to restrictions underoccur during the Securities Act,applicable observation period relating to any conversion of the 2025 Notes on or after November 1, 2024 or relating to any conversion of the 2027 Notes on or after December 15, 2026, in each case that may be issued under our equity incentive plans subjectis not in connection with a redemption). We redeemed the 2023 Notes in November 2021. As described elsewhere in this Quarterly Report on Form 10-Q, the 2023 capped calls were not redeemed with the redemption of the 2023 Notes. We cannot make any prediction as to vesting requirements. We are unable to predict the direction or magnitude of any potential effect that these sales, particularly sales by our directors, executive officers, and significant stockholders,the transactions described above may have on the prevailingprices of the Notes or the shares of our common stock. Any of these activities could adversely affect the value of the Notes and our common stock.
We are subject to counterparty risk with respect to the capped call transactions.
The option counterparties are financial institutions, and we will be subject to the risk that one or more of the option counterparties may default or otherwise fail to perform, or may exercise certain rights to terminate, their obligations under the Capped Calls. Our exposure to the credit risk of the option counterparties will not be secured by any collateral. Recent global economic conditions have resulted in the actual or perceived failure or financial difficulties of many financial institutions. If an option counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at the time under such transaction. Our exposure will depend on many factors but, generally, our exposure will increase if the market price or the volatility of our common stock increases. In addition, upon a default or other failure to perform, or a termination of obligations, by an option counterparty, we may suffer adverse tax consequences and more dilution than we currently anticipate with respect to our common stock. We can provide no assurances as to the financial stability or viability of the option counterparties.
Provisions in the indentures for the Notes may deter or prevent a business combination that may be favorable to our stockholders.
If a fundamental change occurs prior to the maturity date of the Notes, holders of the Notes, will have the right, at their option, to require us to repurchase all or a portion of their Notes. In addition, if a “make-whole fundamental change” (as defined in the indentures) occurs prior the maturity date, we will in some cases be required to increase the conversion rate of the Notes for a holder that elects to convert its Notes in connection with such make-whole fundamental change.
Furthermore, the indentures governing the Notes prohibit us from engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes our obligations under the Notes. These and other provisions in the indentures could deter or prevent a third party from acquiring us even when the acquisition may be favorable to our stockholders.
Conversion of the Notes will dilute the ownership interest of existing stockholders, including holders who had previously converted their Notes, or may otherwise depress the price of our common stock.
We have filed registration statements on Form S-8 underThe conversion of some or all of the Securities ActNotes will dilute the ownership interests of existing stockholders to register shares of common stock that may be issued under our equity incentive plans from time to time. Shares registered under these registration statements are available for sale in the public market upon issuance subject to vesting arrangements and exercise of options, as well as Rule 144 in the case of our affiliates. We also filed a “shelf” registration statement on Form S-3 under the Securities Act in May 2017 that became effective in June 2017, allowing us, from time to time, to offer up to $50 million of shares of common stock and to cover the resale of up to an aggregate of 18,419,274extent we deliver shares of our common stock by selling stockholdersupon conversion of any of the Notes. As disclosed in Note 10, Debt, to our consolidated financial statements, the conditional conversion features of the 2025 Notes were triggered as of March 31, 2022, and the 2025 Notes are convertible at the option of the holders, in whole or in part, between April 1, 2022 and June 30, 2022. Whether the 2025 Notes will be namedconvertible following the fiscal quarter from April 1, 2022 and June 30, 2022 will depend on the continued satisfaction of the applicable conversion condition or another conversion condition in the applicable prospectus supplement tofuture. As of March 31, 2022, the shelf registration statement, from time to time.
Certain existing holders2027 Notes are not convertible at the option of the holder. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock havestock. In addition, the right, subjectexistence of the Notes may encourage short selling by market participants because the conversion of the Notes could be used to various conditions and limitations, to request we include theirsatisfy short positions, or anticipated conversion of the Notes into shares of our common stock in registration statements we may file relating to our securities. Ifcould depress the offer and sale of these shares are registered, they will be freely tradable without restriction under the Securities Act. In the event such registration rights are exercised and a large number of shares of common stock are sold in the public market, such sales could reduce the trading price of our common stock.
General Risks
Failure to comply with governmental laws and regulations could harm our business.
Our business is subject to regulation by various federal, state, local and foreign governments. In June 2017,certain jurisdictions, these regulatory requirements may be more stringent than those in the United States. Noncompliance with applicable regulations or requirements could subject us to investigations, sanctions, mandatory product recalls, enforcement actions, disgorgement of profits, fines, damages, civil and criminal penalties, injunctions or other collateral consequences. If any governmental sanctions are imposed, or if we fileddo not prevail in any possible civil or criminal litigation, our business, results of operations, and financial condition could be materially adversely affected. In addition, responding to any action will likely result in a prospectus supplement with respectsignificant diversion of management’s attention and resources and an increase in professional fees. Enforcement actions and sanctions could harm our business, reputation, results of operations and financial condition.
Our business is subject to the salerisks of upclimate change, pandemics, earthquakes, fire, power outages, floods and other catastrophic events, and to 2,800,000 shares ofinterruption by manmade problems such as terrorism.
A significant public health crisis, epidemic or pandemic (including the ongoing COVID-19 pandemic), or climate change, or a natural disaster, such as an earthquake, fire or a flood, or a significant power outage could have a material adverse impact on our common stockbusiness, operating results and financial condition. In addition, public health crises, climate change, or natural disasters could affect our channel partners’ ability to perform services for us on a timely basis. In the event we or our channel partners are hindered by two of our significant stockholders, which facilitated the resale by those holders of a portionany of the shares ofevents discussed above, our common stock they hold.ability to provide our products or professional services to customers could be delayed.
In addition, our facilities and those of our third-party data centers and hosting providers are vulnerable to damage or interruption from human error, intentional bad acts, pandemics, earthquakes, hurricanes, floods, fires, war (including the armed conflict between Russia and Ukraine), terrorist attacks, power losses, hardware failures, systems failures, telecommunications failures and similar events. The occurrence of a public health crisis, climate change, natural disaster, power failure or an act of terrorism, vandalism or other misconduct, a decision by a third party to close a facility on which we rely without adequate notice, or other unanticipated problems could result in lengthy interruptions in provision or delivery of our products, potentially leaving our customers vulnerable to cyber attacks. The occurrence of any of the foregoing events could damage our systems and hardware or could cause them to fail completely, and our insurance may not cover such events or may be insufficient to compensate us for the potentially significant losses, including the potential harm to the future we may issue common stock or other securities in connection with a capital raise or acquisitions. The number of new sharesgrowth of our common stock issued in connection with a capital raise or acquisition could constitute a material portion of our then-outstanding shares of our common stock.
We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act. For as long as we qualify as an emerging growth company, we intend to take advantage of certain exemptionsbusiness, that may result from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensationinterruptions in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions and provide reduced disclosure. If some investors find our common stock less attractiveservice as a result thereof system failures.
All of the aforementioned risks may be a less active trading marketexacerbated if our disaster recovery plans or the disaster recovery plans established for our common stockthird-party data centers and hosting providers prove to be inadequate. To the extent that any of the above results in delayed or reduced customer sales, our stock price maybusiness, financial condition and results of operations could be more volatile.
adversely affected.
We are obligated to maintain proper and effective internal controls over financial reporting and any failure to maintain the adequacy of these internal controls may adversely affect investor confidence in our company and, as a result, the value of our common stock.
We have been and are required, pursuant to Section 404 of the Sarbanes-Oxley Act or Section 404,(Section 404), to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting on an annual basis. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective. While we have established certain procedures and control over our financial reporting processes, we cannot assure you that these efforts will prevent restatements of our financial statements in the future.
Our independent registered public accounting firm will not beis also required, pursuant to attestSection 404, to report annually on the effectiveness of our internal control over financial reporting until our first annual reportreporting. This assessment is required to be filed with the SEC following the date we no longer qualify as an “emerging growth company,” as definedinclude disclosure of any material weaknesses identified by our management in the JOBS Act. At such time,our internal control over financial reporting. For future reporting periods, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating. We may not be able to remediate any future material weaknesses, or to complete our evaluation, testing and any required remediation in a timely fashion. We will be required to disclose significant changes made in our internal control procedures on a quarterly basis.
Our compliance with Section 404 will require that we incur substantial accounting expense and expend significant management efforts. We currently do not have an internal audit group, and we may need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge and compile the system and process documentation necessary to perform the evaluation needed to comply with Section 404.
Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition or results of operations. If we are unable to assertconclude that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness ofthat our internal controls when it is required to issue such opinion, weover financial reporting are effective, investors could lose investor confidence in the accuracy and completeness of our financial reports, which could cause the market price of our common stock couldto decline, and we could be subject to sanctions or investigations by the NASDAQ Stock Market,regulatory authorities, including the SEC or other regulatory authorities.and Nasdaq. Failure to remedyremediate any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.
Changes in financial accounting standards may adversely impact our reported results of operations.
A change in accounting standards or practices could adversely affect our operating results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our operating results.
We may require additional capital to support business growth, and this capital might not be available on acceptable terms, if at all.
We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new features or enhance our products, improve our operating infrastructure or acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through future issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing that we may secure in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may not be able to obtain additional financing on terms favorable to us, if at all. For example, while the potential impact and duration of the COVID-19 pandemic on the global economy and our business in particular may be difficult to assess or predict, the pandemic has resulted in, and may continue to result in significant disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity. Although we expect that current cash and cash equivalent balances and cash flows that are generated from operations will be sufficient to meet our domestic and international working capital needs and other capital and liquidity requirements for at least the next 12 months, if we are unable to obtain adequate financing or financing on terms satisfactory to us if and when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired, and our business may be adversely affected.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our common stock.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing a change in control or changes in our management. Among other things, our amended and restated certificate of incorporation and amended and restated bylaws include provisions that:
•authorize our board of directors to issue preferred stock without further stockholder action and with voting liquidation, dividend and other rights superior to our common stock;
•require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent, and limit the ability of our stockholders to call special meetings;
•establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for director nominees;
•establish that directors elected prior to our board of directors is divided into three classes, with directors in each class serving2021 annual meeting serve three-year staggered terms;terms and subsequent to the 2023 annual meeting, each director will hold office for a term of one year;
•(i) prior to June 30, 2022 require the approval of holders of two-thirds of the shares entitled to vote at an election of directors and (ii) on or following June 30, 2022, require the approval of the holders of a majority of the voting power of all of the then-outstanding shares of capital stock of the Company entitled to vote generally at an election of
directors, voting together as a single class, to adopt, amend or repeal our amended and restated bylaws or amend or repeal the provisions of our amended and restated certificate of incorporation regarding the election and removal of directors and the ability of stockholders to take action by written consent or call a special meeting;
•prohibit cumulative voting in the election of directors; and
•provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum.
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, who are responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder. Any of the foregoing provisions could limit could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our common stock.
Our amended and restated certificate of incorporation designates the Court of Chancery of the State of Delaware as the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.
Pursuant to our amended and restated certificate of incorporation, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware is the sole and exclusive forum for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (3) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated bylaws or (4) any action asserting a claim governed by the internal affairs doctrine. Our amended and restated certificate of incorporation further provides that any person or entity purchasing or otherwise acquiring any interest in shares of our common stock is deemed to have notice of and consented to the foregoing provision. The forum selection clause in our amended and restated certificate of incorporation may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) Recent Sales of Unregistered Equity Securities
None.
(b) Use of Proceeds from Initial Public Offering of Common Stock
Our initial public offering of common stock was effected through the filing of a Registration Statement on Form S-1 (File No. 333-204874), which was declared or became effective on July 16, 2015. There has been no material change in the use of proceeds from our initial public offering as described in our final prospectus filed with the SEC pursuant to Rule 424(b) and other periodic reports previously filed with the SEC.None.
(c) Issuer Purchases of Equity Securities
None.
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| | | | | | | | | | | | | |
| | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (dollars in thousands) |
July 1, 2017 to July 31, 2017 | | 6,610 |
| | $ | 17.28 |
| | — |
| | — |
|
August 1, 2017 to August 31, 2017 | | — |
| | — |
| | — |
| | — |
|
September 1, 2017 to September 30, 2017 | | — |
| | — |
| | — |
| | — |
|
Total | | 6,610 |
| | $ | 17.28 |
| | — |
| | — |
|
| |
(1) | Represents the total number of shares of our common stock delivered to us by an employee to satisfy the statutory tax withholding obligations owed in connection with the vesting of restricted stock awards granted to such employee under the Rapid7, Inc. 2015 Equity Incentive Plan, as amended. |
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
|
| | | | |
Exhibit Number | Description |
| Amended and Restated Certificate of Incorporation of Rapid7, Inc. (filed as Exhibit 3.1 to the Registrant’s CurrentQuarterly Report on Form 8-K10-Q (File No. 001-37496), filed with the Securities and Exchange Commission on July 22, 2015,August 10, 2020, and incorporated herein by reference). |
| Amended and Restated Bylaws of Rapid7, Inc. (filed as Exhibit 3.2 to the Registrant’s CurrentQuarterly Report on Form 8-K10-Q (File No. 001-37496), filed with the Securities and Exchange Commission on July 22, 2015,August 10, 2020, and incorporated herein by reference). |
| Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data file because its XBRL tags are embedded within the inline XBRL document |
101.SCH | Inline XBRL Taxonomy Extension Schema Document |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 | Cover Page Interactive Data file (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101) |
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** | This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | |
| RAPID7, INC. |
| | | |
Date: May 5, 2022 | RAPID7, INC. |
By: | | | |
Date: November 8, 2017 | By: | | /s/ Corey E. Thomas |
| | | Name: Corey E. Thomas |
| | | Title: President and Chief Executive Officer |
| | | (Principal Executive Officer) |
| | |
Date: November 8, 2017May 5, 2022 | By: | | /s/ Jeff KalowskiTim Adams |
| | | Name:Jeff Kalowski Tim Adams |
| | | Title: Chief Financial Officer |
| | | (Principal Financial Officer and Principal Accounting Officer) |