What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-04 compared with 2021-08-05 · 123 added, 114 removed, 469 unchanged (34% of the section changed)

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

As of June 30, 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.

As of September 30, 2021, we had over 9,900 customers in 144 countries, including 39% of the Fortune 100.

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

Recent Developments

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.

(IntSights), a provider of contextualized external threat intelligence and proactive threat remediation, for a purchase price with an aggregate fair value of $322.2 million.

The purchase consideration consisted of $319.2 million in cash paid at closing, $5.6 million in deferred cash payments and a $2.6 million receivable for estimated purchase price adjustments.

The deferred cash payments will be held by us to satisfy indemnification obligations and certain post-closing purchase price adjustments payable within eighteen months of the acquisition date.

Additionally, we issued an aggregate of 206,608 shares of our common stock to the founders of IntSights in satisfaction of 30% of their portion of the purchase consideration.

COVID-19 Response

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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 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.

While we have not experienced significant disruptions from the COVID-19 pandemic during the three and nine months ended September 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.

Our Business Model

We have offerings in five key areas:

(1) Vulnerability Risk Management, (2) Incident Detection and Response, (3) Application Security and (4) Cloud Security and (5) Security Orchestration and Automation Response.

We have offerings in six key areas:

(1) Vulnerability Risk Management, (2) Incident Detection and Response, (3) Application Security, (4) Cloud Security, (5) Security Orchestration and Automation Response and (6) Threat Intelligence.

We offer our products through a variety of delivery models to meet the needs of our diverse customer base, including:

• Cloud-based subscriptions, which provide our software capabilities to our customers through cloud access and on a subscription basis.

Our InsightIDR, InsightVM, InsightAppSec and InsightConnect products are offered as cloud-based subscriptions, generally with a one-year term.

Our InsightIDR, InsightVM, InsightAppSec, InsightConnect, InsightCloudSec (formerly known as DivvyCloud) and Threat Intelligence products are offered as cloud-based subscriptions, generally with a one-year term.

• Managed services, through which we operate our products and provide our capabilities on behalf of our customers.

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• Licensed software, including both term and perpetual licenses, and the simultaneous sale of maintenance and support.

Our Nexpose, Metasploit, AppSpider and DivvyCloud products are offered through term or perpetual software licenses.

Our Nexpose, Metasploit, AppSpider and InsightCloudSec products are offered through term or perpetual software licenses.

Our customers who purchase software licenses also purchase maintenance and support, which provides our customers with telephone and web-based support and ongoing bug fixes and repairs during the term of the maintenance and support agreement, and our customers who purchase our Nexpose and Metasploit products also purchase content subscriptions, which provide them with real-time access to the latest vulnerabilities and exploits.

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

For the three months ended June 30, 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.

For the three months ended September 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 92% and 91%, respectively, of total revenue.

For the nine months ended September 30, 2021 and 2020, recurring revenue was 92% and 91%, 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.

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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 June 30, Six Months Ended June 30,

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

2021 2020 2021 2020

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Free cash flow $ 14,327 $ 6,449 $ 37,232 $ (7,227)

As of June 30,

As of September 30,

(dollars in thousands)

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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.

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

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

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ARR should be viewed independently of revenue and deferred revenue as ARR is an operating metric and is not intended to be combined with or replace these items.

ARR is not a forecast of future revenue, which can be impacted by contract start and end dates and renewal rates and does not include revenue reported as perpetual license or professional services revenue in our consolidated statement of operations.

ARR is not a forecast of future revenue, which can be impacted by contract start and end dates and renewal rates and does not include

revenue reported as perpetual license or professional services revenue in our consolidated statement of operations.

We use ARR and believe it is useful to investors as a measure of the overall success of our business.

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 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 (loss) from operations, non-GAAP net income (loss), non-GAAP net income (loss) per share, adjusted EBITDA and free cash flow.

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

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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 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 (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.

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.

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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.

Our acquisition-related expenses for the three and nine months ended September 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.

Our capped calls transactions are intended to offset potential dilution from the conversion features in our convertible senior notes.

Although we cannot reflect the anti-dilutive impact of the capped call transactions under GAAP, we do reflect the anti-dilutive impact of the capped call transactions in non-GAAP net income (loss) per diluted share to provide investors with useful information in evaluating our financial performance on a per share basis.

Although we cannot reflect the anti-dilutive impact of the capped call transactions under GAAP, we do reflect the anti-dilutive impact of the capped call transactions in non-

GAAP net income (loss) per diluted share, when applicable, to provide investors with useful information in evaluating our financial performance on a per share basis.

We define adjusted EBITDA as net loss before (1) interest income, (2) interest expense, (3) other income (expense), net, (4) provision for income taxes, (5) depreciation expense, (6) amortization of intangible assets, (7) stock-based compensation expense, and (8) certain other items.

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

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

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

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

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

2021 2020 2021 2020

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Non-GAAP total gross profit $ 102,838 $ 77,613 $ 280,139 $ 219,965

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

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

2021 2020 2021 2020

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Non-GAAP gross profit – products $ 100,535 $ 76,527 $ 274,028 $ 217,249

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

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

2021 2020 2021 2020

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Non-GAAP gross profit – professional services $ 2,303 $ 1,086 $ 6,111 $ 2,716

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,

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

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

2021 2020 2021 2020

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Non-GAAP income from operations $ 5,733 $ 2,444 $ 13,708 $ 2,776

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,

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

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

2021 2020 2021 2020

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Diluted 58,376,992 53,894,202 57,181,646 50,707,553

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,

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

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

2021 2020 2021 2020

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Adjusted EBITDA $ 9,911 $ 5,791 $ 25,697 $ 12,567

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,

The following table reconciles net cash provided by operating activities to free cash flow for the three and nine months ended September 30, 2021 and 2020:

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

2021 2020 2021 2020

(in thousands)

Net cash provided by (used in) operating activities $ 9,186 $ 442 $ 29,781 $ (6,773)

Net cash provided by operating activities $ 19,448 $ 11,078 $ 49,229 $ 4,305

Purchases of property and equipment (2,164) (3,170) (4,835) (7,125)

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

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

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

2021 2020 2021 2020

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

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

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

2021 2020 2021 2020

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Total stock-based compensation expense $ 29,196 $ 17,128 $ 73,872 $ 46,921

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

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

2021 2020 2021 2020

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

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

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

2021 2020 2021 2020

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Net loss (26.9) % (24.3) % (26.5) % (23.4) %

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

Three Months Ended June 30, Change

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

Three Months Ended September 30, Change

2021 2020 $ %

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Total revenue $ 139,894 $ 105,075 $ 34,819 33.1 %

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.

The $26.3 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.

Total revenue increased by $34.8 million in the three months ended September 30, 2021 compared to the same period in 2020 and consisted of $31.0 million of organic growth and $3.8 million related to IntSights.

The $31.0 million increase in revenue related to organic growth consisted of a $3.4 million increase in revenue from new customers and a $27.6 million increase in revenue from existing customers.

The $27.6 million increase in revenue from existing customers was due to an increase in revenue from renewals, upsells and cross-sells as a result of our larger base of existing customers.

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

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

The increase in total revenue in the three months ended June 30, 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.

The increase in total revenue in the three months ended September 30, 2021 compared to the same period in 2020 was comprised of $24.7 million generated from sales in North America and $10.1 million generated from sales from the rest of the world.

Cost of Revenue

Three Months Ended June 30, Change

Three Months Ended September 30, Change

2021 2020 $ %

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Total gross margin % 68.9 % 70.5 %

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.

Total cost of revenue increased by $12.4 million in the three months ended September 30, 2021 compared to the same period in 2020, primarily due to a $4.9 million increase in cloud computing costs related to growing cloud-based subscription and managed services revenue and a $3.1 million increase in personnel costs, inclusive of a $0.5 million increase in stock-based compensation expense, resulting from an increase in headcount to support our growing customer base as well as $0.4 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 $2.4 million increase in amortization expense for acquired intangible assets, a $0.7 million increase in third-party professional service consulting costs and a $1.3 million increase in other expenses.

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

The decrease in products gross margin for the three months ended September 30, 2021 was primarily due to an increase in amortization expense for the developed technology acquired intangible asset related to the acquisition of IntSights.

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

Operating Expenses

Research and Development Expense

Three Months Ended June 30, Change

Three Months Ended September 30, Change

2021 2020 $ %

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% of revenue 31.4 % 27.1 %

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.

Research and development expense increased by $15.4 million in the three months ended September 30, 2021 compared to the same period in 2020, primarily due to a $13.2 million increase in personnel costs, a $1.3 million increase in allocated overhead driven largely by an increase in IT and facilities costs, a $0.3 million increase in third-party infrastructure costs, and a $0.6 million increase in other expenses.

The $13.2 million increase in personnel costs was primarily due to a $5.5 million increase in salaries and related costs driven by growth in headcount, inclusive of $5.4 million in additional salaries and related costs attributable to the employees acquired in the acquisition of IntSights in July 2021, and a $7.7 million increase in stock-based compensation expense, including $3.1 million of stock-based compensation expense related to the modification of a stock award and $2.8 million of stock-based compensation expense related to RSUs issued to retained employees and common stock issued to the founders as part of the acquisition of IntSights.

Sales and Marketing Expense

Three Months Ended June 30, Change

Three Months Ended September 30, Change

2021 2020 $ %

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% of revenue 45.1 % 46.1 %

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.

Sales and marketing expense increased by $14.6 million in the three months ended September 30, 2021 compared to the same period in 2020, primarily due to a $9.4 million increase in personnel costs, a $2.3 million increase in commission expense, a $1.1 million increase in marketing and advertising costs, a $1.5 million increase in allocated overhead driven largely by an increase in IT and facilities costs and a $0.3 million increase in other expenses.

The $9.4 million increase in 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 of additional costs attributable to the employees acquired in the IntSights acquisition in July 2021, and a $1.8 million increase in stock-based compensation expense, inclusive of $0.3 million in stock-based compensation expense related to RSUs issued to retained employees acquired in the acquisition of IntSights.

General and Administrative Expense

Three Months Ended June 30, Change

Three Months Ended September 30, Change

2021 2020 $ %

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% of revenue 17.0 % 14.3 %

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.

General and administrative expense increased by $8.8 million in the three months ended September 30, 2021 compared to the same period in 2020, primarily due to a $5.5 million increase in professional fees primarily due to acquisition-related expenses and other professional consulting fees, a $3.1 million increase in personnel costs due to an increase in headcount, inclusive of a $2.0 million increase in stock-based compensation expense and a $1.1 million increase in other expenses.

These increases were partially offset by a $0.9 million decrease in bad debt expense.

Interest Income

Three Months Ended June 30, Change

Three Months Ended September 30, Change

2021 2020 $ %

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% of revenue 0.1 % 0.1 %

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 income in the three months ended September 30, 2021 remained consistent with the same period in 2020.

Interest Expense

Three Months Ended June 30, Change

Three Months Ended September 30, Change

2021 2020 $ %

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% of revenue (2.1) % (7.0) %

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.

Interest expense decreased by $4.4 million in the three months ended September 30, 2021 compared to the same period in 2020 primarily due to a $4.7 million decrease in amortization of debt discount costs as a result of our adoption of ASU 2020-06 and a $0.2 million decrease in contractual interest expense, partially offset by a $0.5 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 June 30, Change

Three Months Ended September 30, Change

2021 2020 $ %

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% of revenue (0.2) % 0.1 %

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.

Other income (expense), net decreased by $0.4 million in the three months ended September 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

Three Months Ended September 30, Change

2021 2020 $ %

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% of revenue 0.1 % 0.5 %

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

Provision for income taxes decreased by $0.3 million in the three months ended September 30, 2021 compared to the same period in 2020 primarily due to the taxable losses of IntSights.

Comparison of the Nine Months Ended September 30, 2021 and 2020

Nine Months Ended September 30, Change

2021 2020 $ %

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Total revenue $ 383,766 $ 298,327 $ 85,439 28.6 %

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.

Total revenue increased by $85.4 million in the nine months ended September 30, 2021 compared to the same period in 2020 and consisted of $81.6 million of organic growth and $3.8 million related to IntSights.

The $81.6 million increase in revenue related to organic growth consisted of a $5.8 million increase in revenue from new customers and a $75.8 million increase in revenue from existing customers.

The $75.8 million increase in revenue from existing customers was due to an increase in revenue from renewals, upsells and cross-sells as a result of our larger base of existing customers.

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.

The increase in total revenue in the nine months ended September 30, 2021 compared to the same period in 2020 was comprised of $63.3 million generated from sales in North America and $22.1 million generated from sales from the rest of the world.

Cost of Revenue

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

2021 2020 $ %

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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.

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.

Total cost of revenue increased by $31.2 million in the nine months ended September 30, 2021 compared to the same period in 2020, primarily due to a $14.3 million increase in cloud computing costs related to growing cloud-based subscription and managed services revenue and a $10.6 million increase in personnel costs, inclusive of a $1.8 million increase in stock-based compensation expense, resulting from an increase in headcount to support our growing customer base, as well as $0.8 million of additional costs attributable to the employees acquired in the IntSights acquisition in July 2021 and the DivvyCloud acquisition in May 2020.

Our increase in total cost of revenue also included a $4.2 million increase in amortization expense for acquired intangible assets, a $1.1 million increase in amortization expense for capitalized internally-developed software and a $1.0 million increase in third-party professional service consulting costs.

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

The decrease in products gross margin for the nine months ended September 30, 2021 was primarily due to an increase in

amortization expense for the developed technology acquired intangible asset related to the acquisition of IntSights.

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

Operating Expenses

Research and Development Expense

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

2021 2020 $ %

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% of revenue 29.3 % 26.4 %

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.

Research and development expense increased by $33.4 million in the nine months ended September 30, 2021 compared to the same period in 2020, primarily due to a $28.9 million increase in personnel costs, a $2.2 million increase in third-party infrastructure costs, a $2.2 million increase in allocated overhead driven largely by an increase in IT and facilities costs and a $0.1 million increase in other expenses.

The $28.9 million increase in personnel costs was primarily due to a $15.0 million increase in salaries and related costs driven by growth in headcount, inclusive of $8.0 million in additional salaries and related costs attributable to the employees acquired in the acquisitions of IntSights in July 2021, Alcide in January 2021 and DivvyCloud in May 2020, and a $13.9 million increase in stock-based compensation expense.

The $13.9 million increase in stock-based compensation expense includes $8.0 million of stock-based compensation for employees acquired in the acquisitions of IntSights, DivvyCloud and Alcide, inclusive of $3.1 million of stock-based compensation expense related to the modification of a stock award.

Sales and Marketing Expense

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

2021 2020 $ %

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% of revenue 45.4 % 47.5 %

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.

Sales and marketing expense increased by $32.7 million in the nine months ended September 30, 2021 compared to the same period in 2020, primarily due to a $23.7 million increase in personnel costs, a $5.8 million increase in commission expense, a $3.0 million increase in marketing and advertising costs, a $0.7 million increase in amortization of acquired intangible assets and a $1.6 million increase in other expenses.

The $23.7 million increase in personnel costs was primarily due to a $18.1 million increase in salaries and related costs driven by growth in headcount, inclusive of $5.2 million of additional costs attributable to the employees acquired in the acquisitions of IntSights in July 2021, Alcide in January 2021 and DivvyCloud in May 2020, and a $5.6 million increase in stock-based compensation expense.

These increases were partially offset by a $1.1 million decrease in allocated overhead driven by costs related to our global kick-off meeting in the prior year and a $1.0 million decrease in travel and entertainment expenses as a result of reduced travel due to the COVID-19 pandemic.

General and Administrative Expense

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

2021 2020 $ %

2 unchanged sentences

% of revenue 15.0 % 14.6 %

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.

General and administrative expense increased by $13.9 million in the nine months ended September 30, 2021 compared to the same period in 2020, primarily due to a $8.0 million increase in personnel costs due to an increase in headcount, inclusive of a $5.6 million increase in stock-based compensation expense, a $6.4 million increase in professional fees primarily due to acquisition-related expenses and other professional consulting fees and a $1.8 million increase in other expenses.

These increases were partially offset by a $2.3 million decrease in bad debt expense.

Interest Income

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

2021 2020 $ %

2 unchanged sentences

% of revenue 0.1 % 0.5 %

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

Interest Expense

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

2021 2020 $ %

2 unchanged sentences

% of revenue (3.0) % (5.7) %

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.

Interest expense decreased by $5.3 million in the nine months ended September 30, 2021 compared to the same period in 2020 primarily due to a $11.0 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 $1.2 million increase in contractual interest and a $1.8 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

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

2021 2020 $ %

2 unchanged sentences

% of revenue (0.3) % — %

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.

Other income (expense), net decreased by $1.1 million in the nine months ended September 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

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

2021 2020 $ %

2 unchanged sentences

% of revenue 2.6 % 0.3 %

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.

Provision for income taxes increased by $9.0 million in the nine months ended September 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.

Liquidity and Capital Resources

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.

As of September 30, 2021, we had $227.1 million in cash and cash equivalents, $82.5 million in short- and long-term investments that have maturities ranging from one to fifteen months and an accumulated deficit of $691.4 million.

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

1 unchanged sentence

To date, we have financed our operations primarily through private and public equity financings and issuance of convertible senior notes and through cash generated by operating activities.

We believe that our existing cash and cash equivalents, our short and long-term investments 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.

We believe that our existing cash and cash equivalents, our short and long-term investments, our available borrowings under our Credit Agreement and cash generated by operating activities will be sufficient to meet our 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 and any election we make to redeem our convertible senior notes.

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 six months ended June 30, 2021 and 2020:

Six Months Ended June 30,

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

Nine Months Ended September 30,

(in thousands)

Cash, cash equivalents and restricted cash at beginning of period $ 173,617 $ 123,413

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

Net cash provided by operating activities 49,229 4,305

Net cash used in investing activities (307,887) (90,469)

2 unchanged sentences

Cash, cash equivalents and restricted cash at end of period $ 227,530 $ 239,709

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

(IntSights), a provider of contextualized external threat intelligence and proactive threat remediation, for a purchase price with an aggregate fair value of $322.2 million.

The purchase consideration consisted of $319.2 million in cash paid at closing, $5.6 million in deferred cash payments and a $2.6 million receivable for estimated purchase price adjustments.

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

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

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

We expect to redeem the $45.4 million in outstanding principal of the 1.25% convertible senior notes due 2023 (the 2023 Notes), plus accrued and unpaid interest, by the redemption date of November 30, 2021.

Uses of Funds

1 unchanged sentence

Operating Activities

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.

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

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

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

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

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.

The decrease in our net operating assets was primarily due to a $24.4 million increase in deferred revenue due to increased billings, a $23.5 million decrease in accounts receivable due to an increase in collections, a $3.6 million increase in other liabilities, a $3.1 million decrease in prepaid expenses and other assets and a $2.1 million increase in accounts payable, which each had a positive impact on operating cash flow.

These factors were partially offset by a $4.6 million decrease in accrued expenses, primarily as a result of the payout of annual bonuses and year-end commissions and a $9.8 million increase in deferred contract acquisition and fulfillment costs, which each had a negative impact on operating cash flow.

Operating activities provided $4.3 million of cash and cash equivalents in the nine months ended September 30, 2020, which reflects our continued growth in revenue offset by continued investments in our operations and impact of the timing of working capital items.

Cash provided by operating activities reflected our net loss of $69.9 million and an increase in our net operating assets of $3.2 million, offset by $77.4 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 was primarily due to a $10.5 million decrease in deferred revenue, a $5.3 million increase in deferred contract acquisition and fulfillment costs, a $3.1 million decrease in accrued expenses, primarily as a result of the payout of annual bonuses and year-end commissions, and a $0.9 million decrease in other liabilities, which each had a negative impact on operating cash flow.

These factors were partially offset by a $13.2 million decrease in accounts receivable due to an increase in collections, and a $1.9 million increase in accounts payable and a $1.4 million decrease in prepaid expenses and other assets, which each had a positive impact on operating cash flow.

Investing Activities

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.

Investing activities used $307.9 million of cash in the nine months ended September 30, 2021, consisting of $358.4 million of cash paid for the acquisitions of IntSights, Alcide and Velocidex, net of cash acquired, $7.2 million for capitalization of internal-use software costs, $3.0 million for other investing activities, $4.8 million in capital expenditures to purchase computer equipment, furniture and fixtures and leasehold improvements, partially offset by $65.5 million of investment sales and maturities, net of purchases.

Investing activities used $90.5 million of cash in the nine months ended September 30, 2020, consisting of $125.8 million of cash paid for the acquisition of DivvyCloud, net of cash acquired of $5.0 million, $7.1 million in capital expenditures to purchase leasehold improvements, furniture and fixtures and computer equipment and $4.4 million for capitalization of internal-use software costs, partially offset by $46.8 million of investment sales and maturities, net of purchases.

Financing Activities

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 $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.

Financing activities provided $313.4 million of cash in the nine months ended September 30, 2021, which consisted primarily of $585.0 million in proceeds from the issuance of the 2027 Notes, net of issuance costs paid of $15.0 million, $9.3 million in proceeds from the issuance of common stock purchased by employees under the Rapid7, Inc.

2015 Employee Stock Purchase Plan (ESPP) and $3.3 million in proceeds from the exercise of stock options, partially offset by $184.6 million for the repurchase and conversion of the 2023 Notes, $76.0 million for the purchase of 2027 Capped Calls, $11.5 million in withholding taxes paid for the net share settlement of equity awards and $12.1 million for payments related to the acquisitions of DivvyCloud, Alcide and IntSights.

Financing activities provided $202.3 million of cash in the nine months ended September 30, 2020, which consisted primarily of $222.8 million in proceeds from the issuance of the 2025 Notes, net of issuance costs paid of $7.2 million, $6.2 million in proceeds from the exercise of stock options and $7.1 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, $5.9 million in withholding

taxes paid for the net share settlement of equity awards, $0.4 million of payments of debt issuance costs and $0.2 million of deferred consideration payments.

Contractual Obligations and Commitments

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.

As of September 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

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis