What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-08-05 compared with 2021-05-07 · 193 added, 103 removed, 390 unchanged (43% of the section changed)

16 unchanged sentences

• our ability to maintain, or strengthen awareness of, our brand;

• perceived or actual security, integrity, reliability, quality or compatibility problems with our solutions, including related to security breaches in our customers;

systems, unscheduled downtime or outages;

• perceived or actual security, integrity, reliability, quality or compatibility problems with our solutions, including related to security breaches in our customers' systems, unscheduled downtime or outages;

• statements regarding future revenue, hiring plans, expenses, capital expenditures, capital requirements and stock performance;

9 unchanged sentences

Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements.

Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included under Part I, Item 1A.

Furthermore, such forward-looking statements

22 unchanged sentences

Our customers span a wide variety of industries such as technology, energy, financial services, healthcare and life sciences, manufacturing, media and entertainment, retail, education, real estate, transportation, government and professional services.

As of March 31, 2021, we had over 8,900 customers in 140 countries, including 41% of the Fortune 100.

Our revenue was not concentrated with any individual customer and no customer represented more than 1% of our revenue for the three months ended March 31, 2021 or 2020.

As of June 30, 2021, we had over 9,300 customers in 144 countries, including 41% of the Fortune 100.

Our revenue was not concentrated with any individual customer and no customer represented more than 1% of our revenue for the three and six months ended June 30, 2021 or 2020.

Recent Developments

Acquisition of Alcide.

On January 28, 2021, we acquired Alcide.IO Ltd.

(Alcide), a leading provider of Kubernetes security, for a purchase price of $50.5 million.

Convertible Senior Notes

On March 16, 2021, we issued $600.0 million aggregate principal amount of convertible senior notes due March 15, 2027 (the 2027 Notes).

The total net proceeds from the offering, after deducting initial purchase discounts and estimated debt issuance costs, were approximately $585.0 million.

The 2027 Notes are unsecured obligations and bear interest at a fixed rate of 0.25% per annum, payable semi-annually in arrears on March 15th and September 15th of each year, commencing on September 15, 2021.

The 2027 Notes will mature on March 15, 2027, unless earlier converted, redeemed or repurchased.

The 2027 Notes do

not contain any financial covenants.

The 2027 Notes are governed by an indenture between the Company, as issuer, and U.S.

Bank National Association, as trustee (the 2027 Indenture).

We used $182.6 million of the net proceeds from the 2027 Notes and issued 2.2 million shares of our common stock to repurchase approximately $182.6 million aggregate principal amount of our outstanding 1.25% convertible senior notes due 2023 (the 2023 Notes) in a privately negotiated transaction concurrently with the issuance of the 2027 Notes.

In connection with the issuance of the 2027 Notes, we entered into capped call transactions with certain counterparties (the 2027 Capped Calls).

We used $76.0 million of the net proceeds from the 2027 Notes to purchase the 2027 Capped Calls.

The 2027 Capped Calls are expected to offset potential dilution to our common stock upon conversion of the 2027 Notes.

The 2027 Capped Calls have an initial cap price of $159.04 per share, subject to certain adjustments.

On July 16, 2021, we acquired IntSights Cyber Intelligence Ltd.

(IntSights), a provider of contextualized external threat intelligence and proactive threat remediation, for consideration of approximately $321.0 million, an aggregate of 206,608 shares of Rapid7's common stock to be issued to the founders of IntSights in three installments over a thirty-month period following the close date, and $5.6 million in deferred cash payments.

As part of the acquisition, we acquired $12.7 million in cash resulting in a net cash outflow of $308.3 million at closing.

On April 12, 2021, we acquired Velocidex Enterprises Pty Ltd (Velocidex), a leading open-source technology and community used for endpoint monitoring, digital forensics, and incident response, for a purchase price of $3.0 million.

COVID-19 Response

1 unchanged sentence

The impact of COVID-19 on the global economy and on our business continues to be a fluid situation.

As a result of the COVID-19 pandemic, we have modified certain aspects of our business, including restricting employee travel, adopting a virtual sales strategy to enable most of our employees to work productively from home, transitioning our employee onboarding and training processes to remote or online programs, and canceling certain events and meetings, among other modifications.

As a result of the

COVID-19 pandemic, we have modified certain aspects of our business, including restricting employee travel, adopting a virtual sales strategy to enable most of our employees to work productively from home, transitioning our employee onboarding and training processes to remote or online programs, and canceling certain events and meetings, among other modifications.

We will continue to actively monitor the at times rapidly evolving situation related to COVID-19 and may take further actions that alter our business operations, including those that may be required by federal, foreign, state or local authorities, or that we determine are in the best interests of our employees, customers, partners, suppliers, vendors and stockholders.

1 unchanged sentence

Furthermore, due to our subscription model, the effect of the COVID-19 pandemic may not be fully reflected in our results of operations until future periods.

While we have not experienced significant disruptions from the COVID-19 pandemic during the first quarter of fiscal 2021, we are unable to accurately predict the full impact that COVID-19 will have due to numerous uncertainties, including the duration of the outbreak, actions that may be taken by governmental authorities, the impact on our business including our sales cycle, sales execution and marketing efforts, and the impact to the business of our customers, vendors and partners.

While we have not experienced significant disruptions from the COVID-19 pandemic during the three and six months ended June 30, 2021, we are unable to accurately predict the full impact that COVID-19 will have due to numerous uncertainties, including the duration of the outbreak, the result of vaccination efforts, resurgence of the virus, actions that may be taken by governmental authorities, the impact on our business including our sales cycle, sales execution and marketing efforts, and the impact to the business of our customers, vendors and partners.

For further discussion of the challenges and risks we confront related to the COVID-19 pandemic, please refer to Part II, Item 1A Risk Factors of this Quarterly Report on Form 10-Q.

13 unchanged sentences

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

For the three months ended March 31, 2021 and 2020, recurring revenue, defined as revenue from term software licenses, content subscriptions, managed services, cloud-based subscriptions and maintenance and support, was 91% and 90%, respectively, of total revenue.

For the three months ended June 30, 2021 and 2020, recurring revenue, defined as revenue from term software licenses, content subscriptions, managed services, cloud-based subscriptions and maintenance and support, was 93% and 91%, respectively, of total revenue.

For the six months ended June 30, 2021 and 2020, recurring revenue was 92% and 90%, respectively, of total revenue.

We monitor the following key metrics to help us measure and evaluate the effectiveness of our operations and as a means to evaluate period-to-period comparisons.

2 unchanged sentences

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

Three Months Ended

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

2021 2020 2021 2020

(dollars in thousands)

1 unchanged sentence

Year-over-year revenue growth 27.8 % 25.3 % 26.2 % 27.0 %

Non-GAAP income (loss) from operations $ 1,906 $ (3,933)

Non-GAAP income from operations $ 6,070 $ 4,265 $ 7,976 $ 332

Free cash flow $ 5,040 $ (2,231) $ 22,905 $ (13,676)

As of March 31,

As of June 30,

(dollars in thousands)

8 unchanged sentences

See the revised definition below.

Prior period number of customers amounts have been revised to conform with the modified definition.

Prior period number of customers have been revised to conform with the modified definition.

Total Revenue and Growth .

1 unchanged sentence

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

Non-GAAP (Loss) Income from Operations .

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

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

Non-GAAP Income from Operations .

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

We believe non-GAAP income from operations is useful to investors, as a supplement to U.S.

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

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

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

Free Cash Flow .

Free cash flow is a non-GAAP measure that we define as net cash provided by (used in) operating activities less purchases of property and equipment and capitalization of internal-use software costs.

We consider free cash flow to be a profitability and liquidity measure that provides useful information to management and investors about the amount of cash generated by the business after necessary capital expenditures.

We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business after necessary capital expenditures.

See Non-GAAP Financial Results below for a reconciliation of non-GAAP free cash flow to the comparable GAAP financial measure.

8 unchanged sentences

Non-GAAP Financial Results

To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide investors with certain non-GAAP financial measures, including non-GAAP gross profit, non-GAAP income (loss) from operations, non-GAAP net income (loss), non-GAAP net income (loss) per share, adjusted EBITDA and free cash flow.

To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide investors with certain non-GAAP financial measures, including non-GAAP gross profit, non-GAAP income from operations, non-GAAP net income (loss), non-GAAP net income (loss) per share, adjusted EBITDA and free cash flow.

The presentation of the non-GAAP financial measures is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP.

2 unchanged sentences

While our non-GAAP financial measures are an important tool for financial and operational decision-making and for evaluating our own operating results over different periods of time, you should review the reconciliation of our non-GAAP financial measures to the comparable GAAP financial measures included below, and not rely on any single financial measure to evaluate our business.

We define non-GAAP gross profit, non-GAAP income (loss) from operations, non-GAAP net income (loss) and non-GAAP net income (loss) per share as the respective GAAP balances excluding the effect of stock-based compensation expense, amortization of acquired intangible assets, amortization of debt discount and issuance costs and certain other items such as acquisition-related expenses, litigation-related expenses and induced conversion expense.

We define non-GAAP gross profit, non-GAAP income from operations, non-GAAP net income (loss) and non-GAAP net income (loss) per share as the respective GAAP balances excluding the effect of stock-based compensation expense, amortization of acquired intangible assets, amortization of debt discount and issuance costs and certain other items such as acquisition-related expenses, litigation-related expenses and induced conversion expense.

Non-GAAP net income (loss) per basic and diluted share is calculated as Non-GAAP net income (loss) divided by the weighted average shares used to compute net income (loss) per share, with the number of weighted average shares decreased to reflect the anti-dilutive impact of the capped call transactions entered into in connection with our convertible senior notes.

15 unchanged sentences

We exclude acquisition-related expenses that are unrelated to the current operations and neither are comparable to the prior period nor predictive of future results.

Our acquisition-related expenses for the three and six months ended June 30, 2021 include $9.0 million of tax expense related to the sale of acquired intellectual property through an intercompany transaction related to the Alcide acquisition.

• Anti-dilutive impact of capped call transaction.

6 unchanged sentences

Further, stock-based compensation expense has been and will continue to be for the foreseeable future a significant recurring expense in our business and an important part of the compensation provided to our employees.

The following tables reconcile GAAP gross profit to non-GAAP gross profit for the three months ended March 31, 2021 and 2020:

Three Months Ended March 31,

The following tables reconcile GAAP gross profit to non-GAAP gross profit for the three and six months ended June 30, 2021 and 2020:

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

2021 2020 2021 2020

(in thousands)

3 unchanged sentences

Non-GAAP total gross profit $ 91,845 $ 73,137 $ 177,302 $ 142,352

Three Months Ended March 31,

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

2021 2020 2021 2020

(in thousands)

3 unchanged sentences

Non-GAAP gross profit – products $ 90,098 $ 72,197 $ 173,492 $ 140,722

Three Months Ended March 31,

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

2021 2020 2021 2020

(in thousands)

2 unchanged sentences

Non-GAAP gross profit – professional services $ 1,747 $ 940 $ 3,810 $ 1,630

The following table reconciles GAAP loss from operations to non-GAAP income (loss) from operations for the three months ended March 31, 2021 and 2020:

Three Months Ended March 31,

The following table reconciles GAAP loss from operations to non-GAAP income from operations for the three and six months ended June 30, 2021 and 2020:

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

2021 2020 2021 2020

(in thousands)

4 unchanged sentences

Litigation-related expenses 251 435 354 978

Non-GAAP income (loss) from operations $ 1,906 $ (3,933)

The following table reconciles GAAP net loss to non-GAAP net loss for the three months ended March 31, 2021 and 2020:

Three Months Ended March 31,

Non-GAAP income from operations $ 6,070 $ 4,265 $ 7,976 $ 332

The following table reconciles GAAP net loss to non-GAAP net income (loss) for the three and six months ended June 30, 2021 and 2020:

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

2021 2020 2021 2020

(in thousands, except share and per share data)

6 unchanged sentences

Induced conversion expense — — 2,740 —

Non-GAAP net loss $ (1,425) $ (4,294)

Reconciliation of net loss per share, basic and diluted:

Non-GAAP net income (loss) $ 3,930 $ 2,795 $ 2,505 $ (1,499)

Reconciliation of net loss per share, basic:

GAAP net loss per share, basic $ (0.62) $ (0.42) $ (1.18) $ (0.88)

Non-GAAP adjustments to net loss 0.69 0.48 1.23 0.85

Non-GAAP net loss per share, basic and diluted $ (0.03) $ (0.09)

Non-GAAP net income (loss) per share, basic $ 0.07 $ 0.06 $ 0.05 $ (0.03)

Reconciliation of net loss per share, diluted:

GAAP net loss per share, diluted $ (0.62) $ (0.42) $ (1.18) $ (0.88)

Non-GAAP adjustments to net loss 0.69 0.47 1.22 0.85

Non-GAAP net income (loss) per share, diluted $ 0.07 $ 0.05 $ 0.04 $ (0.03)

Weighted average shares used in GAAP and non-GAAP per share calculation, basic and diluted 55,392,383 50,695,706 54,169,464 50,411,508

The following table reconciles GAAP net loss to adjusted EBITDA for the three months ended March 31, 2021 and 2020:

Three Months Ended March 31,

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

Basic 55,392,383 50,695,706 54,169,464 50,411,508

Diluted 57,731,694 53,063,261 56,626,465 50,411,508

The following table reconciles GAAP net loss to adjusted EBITDA for the three and six months ended June 30, 2021 and 2020:

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

2021 2020 2021 2020

(in thousands)

10 unchanged sentences

Adjusted EBITDA $ 10,030 $ 7,556 $ 15,787 $ 6,776

The following table reconciles net cash provided by (used in) operating activities to free cash flow for the three months ended March 31, 2021 and 2020:

Three Months Ended March 31,

The following table reconciles net cash provided by (used in) operating activities to free cash flow for the three and six months ended June 30, 2021 and 2020:

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

2021 2020 2021 2020

(in thousands)

52 unchanged sentences

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

Three Months Ended March 31,

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

2021 2020 2021 2020

(in thousands)

20 unchanged sentences

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

Three Months Ended March 31,

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

2021 2020 2021 2020

(in thousands)

5 unchanged sentences

Total stock-based compensation expense $ 23,814 $ 16,446 $ 44,676 $ 29,793

Three Months Ended March 31,

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

2021 2020 2021 2020

(in thousands)

6 unchanged sentences

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

Three Months Ended March 31,

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

2021 2020 2021 2020

Consolidated Statement of Operations Data:

18 unchanged sentences

Net loss (27.0) % (21.7) % (26.2) % (23.0) %

Comparison of the Three Months Ended March 31, 2021 and 2020

Three Months Ended March 31, Change

Comparison of the Three Months Ended June 30, 2021 and 2020

Three Months Ended June 30, Change

2021 2020 $ %

3 unchanged sentences

Total revenue $ 126,421 $ 98,912 $ 27,509 27.8 %

Total revenue increased by $23.1 million in the three months ended March 31, 2021 compared to the same period in 2020.

Total revenue increased by $27.5 million in the three months ended June 30, 2021 compared to the same period in 2020.

The $27.5 million increase in revenue consisted of a $1.2 million increase in revenue from new customers and a $26.3 million increase in revenue from existing customers.

2 unchanged sentences

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

The increase in total revenue in the three months ended March 31, 2021 compared to the same period in 2020 was comprised of $17.7 million generated from sales in North America and $5.4 million generated from sales from the rest of the world.

The increase in total revenue in the three months ended June 30, 2021 compared to the same period in 2020 was comprised of $20.9 million generated from sales in North America and $6.6 million generated from sales from the rest of the world.

Cost of Revenue

Three Months Ended March 31, Change

Three Months Ended June 30, Change

2021 2020 $ %

8 unchanged sentences

Total gross margin % 68.9 % 70.6 %

Total cost of revenue increased by $8.6 million in the three months ended March 31, 2021 compared to the same period in 2020, primarily due to a $4.1 million increase in cloud computing costs related to growing cloud-based subscription revenue and a $3.9 million increase in personnel costs, inclusive of a $0.6 million increase in stock-based compensation expense, resulting from an increase in headcount to support our growing customer base.

The $3.9 million increase in personnel costs included $0.4 million of additional costs attributable to the employees acquired in the DivvyCloud acquisition in May 2020 and the Alcide acquisition in January 2021.

Total cost of revenue increased by $10.2 million in the three months ended June 30, 2021 compared to the same period in 2020, primarily due to a $5.4 million increase in cloud computing costs related to growing cloud-based subscription revenue and a $3.6 million increase in personnel costs, inclusive of a $0.7 million increase in stock-based compensation expense, resulting from an increase in headcount to support our growing customer base.

Our increase in total cost of revenue also included a $0.8 million increase in amortization expense for acquired intangible assets and a $0.4 million increase in other expenses.

Total gross margin percentage decreased for the three months ended June 30, 2021 compared to the same period in 2020.

The decrease in products gross margin for the three months ended June 30, 2021 was primarily due to an increase in revenue from cloud-based subscriptions and managed services, which have lower gross margins than our licensed software products.

The increase in professional services gross margin for the three months ended June 30, 2021 was primarily due to the increase in professional services revenue.

Operating Expenses

Research and Development Expense

Three Months Ended June 30, Change

2021 2020 $ %

(dollars in thousands)

Research and development $ 35,305 $ 26,120 $ 9,185 35.2 %

% of revenue 27.9 % 26.4 %

Research and development expense increased by $9.2 million in the three months ended June 30, 2021 compared to the same period in 2020, primarily due to a $7.3 million increase in personnel costs, a $1.0 million increase in allocated overhead driven largely by an increase in IT and facilities costs, a $0.7 million increase in third-party infrastructure costs, and a $0.2 million increase in other expenses.

The $7.3 million increase in personnel costs was primarily due to a $4.3 million increase in salaries and related costs driven by growth in headcount, inclusive of $3.9 million in additional salaries and related costs attributable to the employees acquired in the acquisition of DivvyCloud in May 2020 and the acquisition of Alcide in January 2021, and a $3.0 million increase in stock-based compensation expense, including $1.4 million of stock-based compensation expense related to employees acquired in the acquisitions of DivvyCloud and Alcide.

Sales and Marketing Expense

Three Months Ended June 30, Change

2021 2020 $ %

(dollars in thousands)

Sales and marketing $ 56,246 $ 44,959 $ 11,287 25.1 %

% of revenue 44.5 % 45.5 %

Sales and marketing expense increased by $11.3 million in the three months ended June 30, 2021 compared to the same period in 2020, primarily due to a $7.4 million increase in personnel costs, a $1.9 million increase in commission expense, a $1.0 million increase in marketing and advertising costs and a $1.0 million increase in other expenses.

The $7.4 million increase in personnel costs was primarily due to a $5.7 million increase in salaries and related costs driven by growth in headcount, inclusive of $0.7 million of additional costs attributable to the employees acquired in the DivvyCloud acquisition in May 2020, and a $1.7 million increase in stock-based compensation expense.

General and Administrative Expense

Three Months Ended June 30, Change

2021 2020 $ %

(dollars in thousands)

General and administrative $ 17,488 $ 14,484 $ 3,004 20.7 %

% of revenue 13.8 % 14.6 %

General and administrative expense increased by $3.0 million in the three months ended June 30, 2021 compared to the same period in 2020, primarily due to a $2.0 million increase in personnel costs related to an increase in stock-based compensation expense, a $0.9 million increase in professional consulting fees and a $0.8 million increase in other expenses.

These increases were partially offset by a $0.7 million decrease in bad debt expense.

Interest Income

Three Months Ended June 30, Change

2021 2020 $ %

(dollars in thousands)

Interest income $ 122 $ 208 $ (86) (41.3) %

% of revenue 0.1 % 0.2 %

Interest income decreased by $0.1 million in the three months ended June 30, 2021 compared to the same period in 2020 primarily due to a decrease in interest rates.

Interest Expense

Three Months Ended June 30, Change

2021 2020 $ %

(dollars in thousands)

Interest expense $ (3,059) $ (5,917) $ 2,858 (48.3) %

% of revenue (2.4) % (6.0) %

Interest expense decreased by $2.9 million in the three months ended June 30, 2021 compared to the same period in 2020 primarily due to a $3.8 million decrease in amortization of debt discount costs as a result of our adoption of ASU 2020-06, partially offset by a $0.7 million increase in amortization of debt issuance costs related to the 2025 Notes issued in May 2020, the 2027 Notes issued in March 2021 and the revolving credit facility issued in April 2020 and a $0.2 million increase in contractual interest.

Other Income (Expense), Net

Three Months Ended June 30, Change

2021 2020 $ %

(dollars in thousands)

Other income (expense), net $ 148 $ 210 $ (62) (29.5) %

% of revenue 0.1 % 0.2 %

Other income (expense), net decreased by $0.1 million in the three months ended June 30, 2021 compared to the same period in 2020 due to realized and unrealized foreign currency losses, primarily related to the euro and British pound sterling.

Provision for Income Taxes

Three Months Ended June 30, Change

2021 2020 $ %

(dollars in thousands)

Provision for income taxes $ 9,449 $ 235 $ 9,214 3,920.9 %

% of revenue 7.5 % 0.2 %

Provision for income taxes increased by $9.2 million in the three months ended June 30, 2021 compared to the same period in 2020 primarily due to $9.0 million of tax expense recorded for an intercompany sale of intellectual property as part of post-acquisition tax planning related to the Alcide acquisition and an increase of $0.2 million due to our increased operations in foreign jurisdictions.

Comparison of the Six Months Ended June 30, 2021 and 2020

Six Months Ended June 30, Change

2021 2020 $ %

(dollars in thousands)

Products $ 228,432 $ 179,979 $ 48,453 26.9 %

Professional services 15,440 13,273 2,167 16.3

Total revenue $ 243,872 $ 193,252 $ 50,620 26.2 %

Total revenue increased by $50.6 million in the six months ended June 30, 2021 compared to the same period in 2020.

The $50.6 million increase in revenue consisted of a $2.3 million increase in revenue from new customers and a $48.3 million increase in revenue from existing customers.

The $48.3 million increase in revenue from existing customers was due to an increase in revenue from renewals, upsells and cross-sells as a result of the continued growth of our customer base.

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

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

The increase in total revenue in the six months ended June 30, 2021 compared to the same period in 2020 was comprised of $38.6 million generated from sales in North America and $12.0 million generated from sales from the rest of the world.

Cost of Revenue

Six Months Ended June 30, Change

2021 2020 $ %

(dollars in thousands)

Cost of revenue:

Products $ 62,819 $ 44,373 $ 18,446 41.6 %

Professional services 12,778 12,422 356 2.9

Total cost of revenue $ 75,597 $ 56,795 $ 18,802 33.1 %

Gross margin %:

Products 72.5 % 75.3 %

Professional services 17.2 6.4

Total gross margin % 69.0 % 70.6 %

Total cost of revenue increased by $18.8 million in the six months ended June 30, 2021 compared to the same period in 2020, primarily due to a $9.5 million increase in cloud computing costs related to growing cloud-based subscription revenue and a $7.5 million increase in personnel costs, inclusive of a $1.3 million increase in stock-based compensation expense, resulting from an increase in headcount to support our growing customer base.

The $7.5 million increase in personnel costs included $0.3 million of additional costs attributable to the employees acquired in the DivvyCloud acquisition in May 2020.

Our increase in total cost of revenue also included a $1.8 million increase in amortization expense for acquired intangible assets.

These increases were partially offset by a $0.5 million decrease in other expenses.

Total gross margin percentage decreased for the three months ended March 31, 2021 compared to the same period in 2020.

The decrease in products gross margin for the three months ended March 31, 2021 was primarily due to an increase in revenue from cloud-based subscriptions and managed services, which have lower gross margins than our licensed software products.

The increase in professional services gross margin for the three months ended March 31, 2021 was primarily due to the increase in professional services revenue.

Total gross margin percentage decreased for the six months ended June 30, 2021 compared to the same period in 2020.

The decrease in products gross margin for the six months ended June 30, 2021 was primarily due to an increase in revenue from cloud-based subscriptions and managed services, which have lower gross margins than our licensed software products.

The increase in professional services gross margin for the six months ended June 30, 2021 was primarily due to the increase in professional services revenue.

Operating Expenses

Research and Development Expense

Three Months Ended March 31, Change

Six Months Ended June 30, Change

2021 2020 $ %

2 unchanged sentences

% of revenue 28.0 % 26.0 %

Research and development expense increased by $8.9 million in the three months ended March 31, 2021 compared to the same period in 2020, primarily due to a $8.3 million increase in personnel costs and a $1.1 million increase in third-party infrastructure costs.

Research and development expense increased by $18.1 million in the six months ended June 30, 2021 compared to the same period in 2020, primarily due to a $15.7 million increase in personnel costs, a $1.8 million increase in third-party infrastructure

costs and a $0.6 million increase in other expenses.

The $15.7 million increase in personnel costs was primarily due to a $9.5 million increase in salaries and related costs driven by growth in headcount, inclusive of $8.7 million in additional salaries and related costs attributable to the employees acquired in the acquisition of DivvyCloud in May 2020 and the acquisition of Alcide in January 2021, and a $6.2 million increase in stock-based compensation expense, including $3.3 million of stock-based compensation expense related to employees acquired in the acquisitions of DivvyCloud and Alcide.

These increases were partially offset by a $0.5 million decrease in other expenses.

Sales and Marketing Expense

Three Months Ended March 31, Change

Six Months Ended June 30, Change

2021 2020 $ %

2 unchanged sentences

% of revenue 45.6 % 48.2 %

Sales and marketing expense increased by $6.8 million in the three months ended March 31, 2021 compared to the same period in 2020, primarily due to a $6.9 million increase in personnel costs, a $1.7 million increase in commission expense, a $0.9 million increase in marketing and advertising costs and a $0.6 million increase in other expenses.

The $6.9 million increase in personnel costs was primarily due to a $4.8 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 DivvyCloud acquisition in May 2020, and a $2.1 million increase in stock-based compensation expense, including $0.7 million in stock-based compensation expense

related to RSUs issued to DivvyCloud and Alcide retained employees.

Sales and marketing expense increased by $18.1 million in the six months ended June 30, 2021 compared to the same period in 2020, primarily due to a $14.2 million increase in personnel costs, a $3.5 million increase in commission expense, a $1.9 million increase in marketing and advertising costs, a $0.7 million increase in professional consulting fees and a $1.0 million increase in other expenses.

The $14.2 million increase in personnel costs was primarily due to a $10.4 million increase in salaries and related costs driven by growth in headcount, inclusive of $1.2 million of additional costs attributable to the employees acquired in the acquisition of DivvyCloud in May 2020, and a $3.8 million increase in stock-based compensation expense.

These increases were partially offset by a $2.0 million decrease in allocated overhead driven by costs related to our global kick-off meeting in the prior year and a $1.2 million decrease in travel and entertainment expenses as a result of reduced travel due to the COVID-19 pandemic.

General and Administrative Expense

Three Months Ended March 31, Change

Six Months Ended June 30, Change

2021 2020 $ %

2 unchanged sentences

% of revenue 13.8 % 14.8 %

General and administrative expense increased by $2.1 million in the three months ended March 31, 2021 compared to the same period in 2020, primarily due to a $2.9 million increase in personnel costs due to an increase in headcount, inclusive of a $1.7 million increase in stock-based compensation expense, and a $0.1 million increase in other expenses.

General and administrative expense increased by $5.1 million in the six months ended June 30, 2021 compared to the same period in 2020, primarily due to a $4.9 million increase in personnel costs due to an increase in headcount, inclusive of a $3.6 million increase in stock-based compensation expense, and a $1.2 million increase in professional fees primarily due to acquisition-related expenses and other professional consulting fees and a $0.4 million increase in other expenses.

These increases were partially offset by a $1.4 million decrease in bad debt expense.

Interest Income

Three Months Ended March 31, Change

Six Months Ended June 30, Change

2021 2020 $ %

2 unchanged sentences

% of revenue 0.1 % 0.6 %

Interest income decreased by $1.0 million in the three months ended March 31, 2021 compared to the same period in 2020 primarily due to a decrease in interest rates.

Interest income decreased by $1.0 million in the six months ended June 30, 2021 compared to the same period in 2020 primarily due to a decrease in interest rates.

Interest Expense

Three Months Ended March 31, Change

Six Months Ended June 30, Change

2021 2020 $ %

2 unchanged sentences

% of revenue (3.5) % (4.9) %

Interest expense increased by $1.9 million in the three months ended March 31, 2021 compared to the same period in 2020 primarily due to $2.7 million of induced conversion expense incurred in conjunction with the partial repurchase of the 2023 Notes, a $1.1 million increase in contractual interest and a $0.6 million increase in amortization of debt issuance costs related to the 2025 Notes issued in May 2020, the 2027 Notes issued in March 2021 and the revolving credit facility issued in April 2020, partially offset by a $2.5 million decrease in amortization of debt discount costs as a result of our adoption of ASU 2020-06.

Interest expense decreased by $0.9 million in the six months ended June 30, 2021 compared to the same period in 2020 primarily due to a $6.3 million decrease in amortization of debt discount costs as a result of our adoption of ASU 2020-06, partially offset by $2.7 million of induced conversion expense incurred in conjunction with the partial repurchase of the 2023 Notes, a $1.6 million increase in contractual interest and a $1.1 million increase in amortization of debt issuance costs related to the 2025 Notes issued in May 2020, the 2027 Notes issued in March 2021 and the revolving credit facility issued in April 2020.

Other Income (Expense), Net

Three Months Ended March 31, Change

Six Months Ended June 30, Change

2021 2020 $ %

2 unchanged sentences

% of revenue (0.4) % (0.1) %

Other income (expense), net increased by $0.6 million in the three months ended March 31, 2021 compared to the same period in 2020 due to realized and unrealized foreign currency losses, primarily related to the euro and British pound sterling.

Other income (expense), net decreased by $0.7 million in the six months ended June 30, 2021 compared to the same period in 2020 due to realized and unrealized foreign currency losses, primarily related to the euro and British pound sterling.

Provision for Income Taxes

Three Months Ended March 31, Change

Six Months Ended June 30, Change

2021 2020 $ %

2 unchanged sentences

% of revenue 4.0 % 0.2 %

Provision for income taxes increased by $0.1 million in the three months ended March 31, 2021 compared to the same period in 2020 primarily due to our increased operations in foreign jurisdictions.

Provision for income taxes increased by $9.3 million in the six months ended June 30, 2021 compared to the same period in 2020 primarily due to $9.0 million of tax expense recorded for an intercompany sale of intellectual property as part of post-acquisition tax planning related to the Alcide acquisition and an increase of $0.3 million due to our increased operations in foreign jurisdictions.

Liquidity and Capital Resources

As of March 31, 2021, we had $503.8 million in cash and cash equivalents, $113.1 million in short- and long-term investments that have maturities ranging from one to thirteen months and an accumulated deficit of $619.5 million.

As of June 30, 2021, we had $493.6 million in cash and cash equivalents, $119.7 million in short- and long-term investments that have maturities ranging from one to thirteen months and an accumulated deficit of $653.7 million.

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

2 unchanged sentences

We believe that our existing cash and cash equivalents, our short and long-term investments and our available borrowings under our Credit Agreement will be sufficient to meet our working capital expenditure requirements for at least the next 12 months.

Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support research and development efforts, the expansion of sales and marketing activities, particularly internationally, the introduction of new and enhanced products and service offerings and the cost of any future acquisitions of technology or businesses.

We expect to repay within a year, in a combination of cash and shares of our common stock, the $45.4 million in outstanding principal of the 1.25% convertible senior notes due 2023 (the 2023 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 three months ended March 31, 2021 and 2020:

Three Months Ended March 31,

The following table shows a summary of our cash flows for the six months ended June 30, 2021 and 2020:

Six Months Ended June 30,

(in thousands)

1 unchanged sentence

Net cash provided by (used in) operating activities 29,781 (6,773)

Net cash (used in) provided by investing activities (18,444) 85,422

Net cash used in investing activities (32,166) (35,334)

Net cash provided by financing activities 322,666 199,621

1 unchanged sentence

Cash, cash equivalents and restricted cash at end of period $ 493,605 $ 280,626

Acquisition of Alcide

On January 28, 2021, we acquired Alcide, a leading provider of Kubernetes security, for a purchase price of $50.5 million.

8 unchanged sentences

Operating Activities

Operating activities provided $20.6 million of cash and cash equivalents in the three months ended March 31, 2021, which reflects the timing of working capital adjustments and our continued growth in revenue partially offset by our continued investments in our operations.

Cash provided by operating activities reflected our net loss of $29.8 million, offset by a decrease in our net operating assets of $18.0 million and non-cash charges of $32.4 million related primarily to depreciation and amortization, stock-based compensation expense, induced conversion expense, amortization of debt issuance costs and other non-cash charges.

The decrease in our net operating assets was primarily due to a $34.4 million decrease in accounts receivable due to the timing of collections, a $1.0 million increase in deferred revenue and a $0.6 million increase in accounts payable, which each had a positive impact on operating cash flow.

These factors were partially offset by a $15.4 million decrease in accrued expenses, primarily as a result of the payout of annual bonuses and year-end commissions, a $2.0 million increase in deferred contract acquisition and fulfillment costs, a $0.1 million increase in prepaid expenses and other assets and a $0.4 million decrease in other liabilities, which each had a negative impact on operating cash flow.

Operating activities used $7.2 million of cash and cash equivalents in the three months ended March 31, 2020, which reflects our growth in revenue offset by investments in our operations and impact of the timing of working capital items.

Cash used in operating activities reflected our net loss of $22.9 million and an increase in our net operating assets and liabilities of $6.1 million, offset by $21.8 million of non-cash charges related primarily to depreciation and amortization, stock-based compensation expense, amortization of debt discount and debt issuance costs and other non-cash charges.

The increase in our net operating assets and liabilities was primarily due to a $16.7 million decrease in deferred revenue as a result of our seasonal decrease in billings compared to the fourth quarter of 2019, a $14.6 million decrease in accrued expenses, primarily as a result of the payout of annual bonuses and year-end commissions, a $1.1 million decrease in other liabilities, a $0.5 million increase in deferred contract acquisition and fulfillment costs, which each had a negative impact on operating cash flow.

These factors were partially offset by a $22.6 million decrease in accounts receivable due to collections, and a $4.0 million increase in accounts payable and a $0.2 million decrease in prepaid expenses and other assets, which each had a positive impact on operating cash flow.

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

Cash provided by operating activities reflected our net loss of $64.0 million, offset by a decrease in our net operating assets of $25.5 million and non-cash charges of $68.3 million related primarily to depreciation and amortization, stock-based compensation expense, deferred income taxes, induced conversion expense, amortization of debt issuance costs and other non-cash charges.

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

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

Operating activities used $6.8 million of cash and cash equivalents in the six months ended June 30, 2020, which reflected our continued growth in revenue offset by continued investments in our operations and impact of the timing of working capital items.

Cash used in operating activities reflected our net loss of $44.4 million and an increase in our net operating assets and liabilities of $10.7 million, offset by $48.3 million of non-cash charges related primarily to depreciation and amortization, stock-based compensation expense, amortization of debt discount and debt issuance costs, provision for doubtful accounts and other non-cash charges.

The increase in our net operating assets and liabilities was primarily due to a $12.0 million decrease in deferred revenue, a $7.4 million decrease in accrued expenses, primarily as a result of the payout of annual bonuses and year-end commissions, a $1.0 million decrease in other liabilities, a $3.0 million increase in deferred contract acquisition and fulfillment costs, which each had a negative impact on operating cash flow.

These factors were partially offset by a $10.8 million decrease in accounts receivable due to an increase in collections, and a $0.1 million increase in accounts payable and a $1.8 million decrease in prepaid expenses and other assets, which each had a positive impact on operating cash flow.

Investing Activities

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, net of cash acquired, $1.8 million for capitalization of internal-use software costs, $1.5 million for other investing activities, $1.0 million in capital expenditures to purchase leasehold improvements and computer equipment, partially offset by $35.6 million of investment sales and maturities, net of purchases.

Investing activities provided $85.4 million of cash in the three months ended March 31, 2020, consisting of $89.7 million of investment sales and maturities, net of purchases, partially offset by $2.8 million in capital expenditures to purchase leasehold improvements, furniture and fixtures and computer equipment and $1.5 million for capitalization of internal-use software costs.

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

Investing activities used $35.3 million of cash in the six months ended June 30, 2020, consisting of $125.8 million of cash paid for the acquisition of DivvyCloud, net of cash acquired of $5.0 million, $4.0 million in capital expenditures to purchase leasehold improvements, furniture and fixtures and computer equipment and $2.9 million for capitalization of internal-use software costs, partially offset by $97.4 million of investment sales and maturities, net of purchases.

Financing Activities

Financing activities provided $328.6 million of cash in the three months ended March 31, 2021, which consisted primarily of $587.1 million in proceeds from the issuance of the 2027 Notes, net of issuance costs paid of $12.9 million, $4.5 million in proceeds from the issuance of common stock purchased by employees under the Rapid7, Inc.

Financing activities provided $322.7 million of cash in the six months ended June 30, 2021, which consisted primarily of $585.4 million in proceeds from the issuance of the 2027 Notes, net of issuance costs paid of $14.6 million, $4.5 million in proceeds from the issuance of common stock purchased by employees under the Rapid7, Inc.

2015 Employee Stock Purchase Plan (ESPP) and $2.5 million in proceeds from the exercise of stock options, partially offset by $184.6 million for the repurchase and conversion of the 2023 Notes, $76.0 million for the purchase of 2027 Capped Calls, $6.7 million in withholding taxes paid for the net share settlement of equity awards and $2.4 million for payments related to the acquisition of Alcide.

Financing activities provided $3.4 million of cash in the three months ended March 31, 2020, which consisted primarily of $1.6 million in proceeds from the exercise of stock options and $3.3 million in proceeds from the issuance of common stock purchased by employees under the ESPP, partially offset by $1.5 million in withholding taxes paid for the net share settlement of equity awards.

Financing activities provided $199.6 million of cash in the six months ended June 30, 2020, which consisted primarily of $223.5 million in proceeds from the issuance of the 2025 Notes, net of issuance costs paid of $6.5 million, $3.7 million in proceeds from the exercise of stock options and $3.3 million in proceeds from the issuance of common stock purchased by employees under the ESPP, partially offset by $27.3 million for the purchase of 2025 Capped Calls, $3.4 million in withholding taxes paid for the net share settlement of equity awards and $0.2 million of payments of debt issuance costs.

Contractual Obligations and Commitments

As of March 31, 2021, there were no material changes in our contractual obligations and commitments from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on February 26, 2021.

As of June 30, 2021, there were no material changes in our contractual obligations and commitments from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on February 26, 2021.

Off-Balance Sheet Arrangements

11 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis