Rapid7, Inc. 10-Q

Item 1. Financial Statements. RAPID7, INC. Consolidated Balance Sheets (Unaudited) (in thousands, except share and per share data) March 31, 2023 December 31, 2022 Assets Current assets: Cash and cash equivalents $ 205,757 $ 207,287 Short-term investments 56,483 84,162 Accounts receivable, net of allowance for credit losses of $ 2,320 and $ 2,299 at March 31, 2023 and December 31, 2022, respectively 116,683 152,045 Deferred contract acquisition and fulfillment costs, current portion 36,171 34,906 Prepaid expenses and other current assets 39,527 31,907 Total current assets 454,621 510,307 Long-term investments 7,343 9,756 Property and equipment, net 56,638 57,891 Operating lease right-of-use assets 77,420 79,342 Deferred contract acquisition and fulfillment costs, non-current portion 69,144 68,169 Goodwill 538,037 515,631 Intangible assets, net 111,432 101,269 Other assets 14,824 16,626 Total assets $ 1,329,459 $ 1,358,991 Liabilities and Stockholders’ Equity (Deficit) Current liabilities: Accounts payable $ 8,475 $ 10,255 Accrued expenses 57,545 80,306 Operating lease liabilities, current portion 12,853 12,444 Deferred revenue, current portion 413,992 426,599 Other current liabilities 809 1,663 Total current liabilities 493,674 531,267 Convertible senior notes, non-current portion, net 816,894 815,948 Operating lease liabilities, non-current portion 84,114 85,946 Deferred revenue, non-current portion 31,585 31,040 Other long-term liabilities 13,364 14,864 Total liabilities 1,439,631 1,479,065 Stockholders’ deficit: Preferred stock, $ 0.01 par value per share; 10,000,000 shares authorized at March 31, 2023 and December 31, 2022; 0 shares issued at March 31, 2023 and December 31, 2022 — — Common stock, $ 0.01 par value per share; 100,000,000 shares authorized at March 31, 2023 and December 31, 2022; 60,891,488 and 60,206,277 shares issued at March 31, 2023 and December 31, 2022, respectively; 60,321,909 and 59,719,469 shares outstanding at March 31, 2023 and December 31, 2022, respectively 603 597 Treasury stock, at cost, 569,579 and 486,808 shares at March 31, 2023 and December 31, 2022, respectively ( 4,765 ) ( 4,764 ) Additional paid-in-capital 780,850 746,249 Accumulated other comprehensive loss ( 200 ) ( 1,411 ) Accumulated deficit ( 886,660 ) ( 860,745 ) Total stockholders’ deficit ( 110,172 ) ( 120,074 ) Total liabilities and stockholders’ deficit $ 1,329,459 $ 1,358,991 The accompanying notes are an integral part of these unaudited consolidated financial statements. 1 Table of Contents RAPID7, INC. Consolidated Statements of Operations (Unaudited) (in thousands, except share and per share data) Three Months Ended March 31, 2023 2022 Revenue: Products $ 173,772 $ 149,025 Professional services 9,402 8,359 Total revenue 183,174 157,384 Cost of revenue: Products 48,188 43,472 Professional services 7,811 7,817 Total cost of revenue 55,999 51,289 Total gross profit 127,175 106,095 Operating expenses: Research and development 46,346 49,812 Sales and marketing 80,587 75,146 General and administrative 24,207 21,516 Total operating expenses 151,140 146,474 Loss from operations ( 23,965 ) ( 40,379 ) Other income (expense), net: Interest income 1,668 112 Interest expense ( 2,717 ) ( 2,693 ) Other income (expense), net ( 307 ) ( 603 ) Loss before income taxes ( 25,321 ) ( 43,563 ) Provision for income taxes 594 1,436 Net loss $ ( 25,915 ) $ ( 44,999 ) Net loss per share, basic and diluted $ ( 0.43 ) $ ( 0.78 ) Weighted-average common shares outstanding, basic and diluted 59,888,119 57,724,821 The accompanying notes are an integral part of these unaudited consolidated financial statements. 2 Table of Contents RAPID7, INC. Consolidated Statements of Comprehensive Loss (Unaudited) (in thousands) Three Months Ended March 31, 2023 2022 Net loss $ ( 25,915 ) $ ( 44,999 ) Other comprehensive income (loss): Change in fair value of cash flow hedges 192 ( 898 ) Adjustments for net losses realized on cash flow hedges and included in net loss 641 316 Total change in unrealized gains (losses) on cash flow hedges 833 ( 582 ) Change in unrealized gains (losses) on investments 378 ( 658 ) Total other comprehensive income (loss) 1,211 ( 1,240 ) Comprehensive loss $ ( 24,704 ) $ ( 46,239 ) The accompanying notes are an integral part of these unaudited consolidated financial statements. 3 Table of Contents RAPID7, INC. Consolidated Statements of Changes in Stockholders' Deficit (Unaudited) (in thousands) Common stock Treasury stock Additional paid-in-capital Accumulated other comprehensive loss Accumulated deficit Total stockholders’ deficit Shares Amount Shares Amount Balance, December 31, 2022 59,720 $ 597 487 $ ( 4,764 ) $ 746,249 $ ( 1,411 ) $ ( 860,745 ) $ ( 120,074 ) Stock-based compensation expense — — — — 29,518 — — 29,518 Issuance of common stock under employee stock purchase plan 178 2 — — 6,172 — — 6,174 Vesting of restricted stock units 359 3 — — ( 3 ) — — — Shares withheld for employee taxes ( 25 ) — — — ( 1,267 ) — — ( 1,267 ) Issuance of common stock upon exercise of stock options 16 — — — 181 — — 181 Issuance of common stock in relation to an acquisition 74 1 — — ( 1 ) — — — Repurchase of common stock issued in relation to acquisition — — 83 ( 1 ) 1 — — — Other comprehensive gain — — — — — 1,211 — 1,211 Net loss — — — — — — ( 25,915 ) ( 25,915 ) Balance, March 31, 2023 60,322 $ 603 570 $ ( 4,765 ) $ 780,850 $ ( 200 ) $ ( 886,660 ) $ ( 110,172 ) Common stock Treasury stock Additional paid-in-capital Accumulated other comprehensive loss Accumulated deficit Total stockholders’ deficit Shares Amount Shares Amount Balance, December 31, 2021 57,695 $ 577 487 $ ( 4,764 ) $ 615,032 $ ( 812 ) $ ( 736,028 ) $ ( 125,995 ) Stock-based compensation expense — — — — 32,475 — — 32,475 Issuance of common stock under employee stock purchase plan 81 1 — — 5,709 — — 5,710 Vesting of restricted stock units 402 4 — — ( 4 ) — — — Shares withheld for employee taxes ( 35 ) ( 1 ) — — ( 3,460 ) — — ( 3,461 ) Issuance of common stock upon exercise of stock options 99 1 — — 958 — — 959 Other comprehensive loss — — — — — ( 1,240 ) — ( 1,240 ) Net loss — — — — — — ( 44,999 ) ( 44,999 ) Balance, March 31, 2022 58,242 $ 582 487 $ ( 4,764 ) $ 650,710 $ ( 2,052 ) $ ( 781,027 ) $ ( 136,551 ) The accompanying notes are an integral part of these unaudited consolidated financial statements. 4 Table of Contents RAPID7, INC. Consolidated Statements of Cash Flows (Unaudited) (in thousands) Three Months Ended March 31, 2023 2022 Cash flows from operating activities: Net loss $ ( 25,915 ) $ ( 44,999 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 11,050 10,169 Amortization of debt issuance costs 994 979 Stock-based compensation expense 29,373 28,922 Other 995 526 Changes in operating assets and liabilities: Accounts receivable 35,805 36,327 Deferred contract acquisition and fulfillment costs ( 2,240 ) ( 2,939 ) Prepaid expenses and other assets ( 5,567 ) ( 6,556 ) Accounts payable ( 2,744 ) 8,673 Accrued expenses ( 23,951 ) ( 24,048 ) Deferred revenue ( 12,062 ) 3,830 Other liabilities 104 ( 481 ) Net cash provided by operating activities 5,842 10,403 Cash flows from investing activities: Business acquisition, net of cash acquired ( 34,033 ) — Purchases of property and equipment ( 2,285 ) ( 3,053 ) Capitalization of internal-use software costs ( 4,776 ) ( 3,522 ) Purchases of investments ( 4,883 ) ( 32,136 ) Sales/maturities of investments 35,800 2,800 Net cash used in investing activities ( 10,177 ) ( 35,911 ) Cash flows from financing activities: Payments related to business acquisitions ( 2,250 ) — Taxes paid related to net share settlement of equity awards ( 1,267 ) ( 3,461 ) Proceeds from employee stock purchase plan 6,174 5,710 Proceeds from stock option exercises 181 959 Net cash provided by financing activities 2,838 3,208 Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 33 ) ( 800 ) Net decrease in cash, cash equivalents and restricted cash ( 1,530 ) ( 23,100 ) Cash, cash equivalents and restricted cash, beginning of period 207,804 165,017 Cash, cash equivalents and restricted cash, end of period $ 206,274 $ 141,917 Supplemental cash flow information: Cash paid for interest on convertible senior notes $ 750 $ 750 Cash paid for income taxes, net of refunds $ 166 $ 15 Reconciliation of cash, cash equivalents and restricted cash: Cash and cash equivalents $ 205,757 $ 141,365 Restricted cash included in prepaid expenses and other assets 517 $ 552 Total cash, cash equivalents and restricted cash $ 206,274 $ 141,917 The accompanying notes are an integral part of these unaudited consolidated financial statements. 5 Table of Contents RAPID7, INC. Notes to Consolidated Financial Statements (Unaudited) Note 1. Description of Business, Basis of Presentation and Consolidation and Significant Accounting Policies Description of Business Rapid7, Inc. and subsidiaries (“we,” “us” or “our”) are advancing security with visibility, analytics, and automation delivered through our Insight Platform. Our solutions simplify the complex, allowing security teams to work more effectively with IT and development to reduce vulnerabilities, monitor for malicious behavior, investigate and shut down attacks, and automate routine tasks. Basis of Presentation and Consolidation The accompanying unaudited consolidated financial statements have been prepared by us in accordance with accounting principles generally accepted in the United States of America (“GAAP”), as well as pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), regarding interim financial reporting. Accordingly, certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on February 24, 2023. The consolidated financial statements include our results of operations and those of our wholly-owned subsidiaries and reflect all adjustments (consisting solely of normal, recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods presented. All intercompany transactions and balances have been eliminated in consolidation. The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results to be expected for any future period or the entire fiscal year. Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The management estimates include, but are not limited to the determination of standalone selling prices in revenue transactions with multiple performance obligations, the estimated period of benefit for deferred contract acquisition costs, the useful lives and recoverability of long-lived assets, the valuation for credit losses, the valuation of stock-based compensation, the fair value of assets acquired and liabilities assumed in business combinations, the incremental borrowing rate for operating leases and the valuation for deferred tax assets. We base our estimates on historical experience and on various other assumptions that we believe are reasonable. Actual results could differ from those estimates. Significant Accounting Policies Our significant accounting policies are described in Note 2, Summary of Significant Accounting Policies , to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022. There have been no changes to the significant accounting policies during the three-month period ended March 31, 2023. Recent Accounting Pronouncements We have not identified any recently issued accounting pronouncements that would have a material impact to our consolidated financial statements. Note 2. Revenue from Contracts with Customers We generate revenue primarily from: (1) subscriptions from the sale of cloud-based subscriptions, managed services, term software licenses, content subscriptions and maintenance and support associated with our software licenses and (2) professional services from the sale of our deployment and training services related to our solutions, incident response services, penetration testing and security advisory services. 6 Table of Contents The following table summarizes revenue from contracts with customers for the three months ended March 31, 2023 and 2022: Three Months Ended March 31, 2023 2022 (in thousands) Subscriptions $ 173,390 $ 147,467 Professional services 9,402 8,359 Other 382 1,558 Total revenue $ 183,174 $ 157,384 Subscriptions Subscriptions consists of revenue from our cloud-based subscription, managed services offerings, term software licenses, content subscriptions and maintenance and support associated with our software licenses. • We generate cloud-based subscription revenue primarily from sales of subscriptions to access our cloud platform, together with related support services to our customers. These arrangements do not provide the customer with the right to take possession of our software operating on our cloud platform at any time. Instead, customers are granted continuous access to our cloud platform over the contractual period. Revenue is recognized over time on a ratable basis over the contract term beginning on the date that our service is made available to the customer. Our cloud-based subscription contracts generally have annual or multi-year contractual terms which are billed in advance of the annual subscription period and are non-cancellable. • Managed services offerings consist of fees generated when we operate our software and provide our capabilities on behalf of our customers. Revenue is recognized on a ratable basis over the contract term beginning on the date that our service is made available to the customer. Our managed services offerings generally have annual or multi-year contractual terms which are billed in advance of the annual subscription period and are non-cancellable. • For our term software licenses where the utility to the customer is dependent on the continued delivery of content subscriptions, we recognize the license revenue over the contractual term of the content subscription. For our term software licenses which are not dependent on the continued delivery of content subscriptions, the license is considered distinct from the maintenance and support, and we therefore recognize revenue attributable to the license at the time of delivery. • Content subscriptions and our maintenance and support services are sold with our perpetual and term software licenses. Revenue related to our content subscriptions associated with our software licenses is recognized ratably over the contractual period. Maintenance and support services are distinct from the perpetual and term software license and revenue attributable to maintenance and support services is recognized ratably over the contractual period. Professional Services All of our professional services are considered distinct performance obligations when sold stand alone or with other products. These contracts generally have terms of one year or less. For the majority of these contracts, revenue is recognized over time based upon the proportion of work performed to date. Contract Balances Contract liabilities consist of deferred revenue and include payments received in advance of performance under the contract. Such amounts are recognized as revenue over the contractual period consistent with the above methodology. For the three months ended March 31, 2023 and 2022, we recognized revenue of $ 163.4 million and $ 137.3 million, respectively, that was included in the corresponding contract liability balance at the beginning of the periods presented. Deferred revenue that will be realized during the succeeding 12-month period is recorded as current, and the remaining deferred revenue is recorded as non-current. We receive payments from customers based upon contractual billing schedules. Accounts receivable are recorded when the right to consideration becomes unconditional. Unbilled receivables include amounts related to our contractual right to consideration for both completed and partially completed performance obligations that have not been invoiced. If the right to consideration is based on satisfaction of another performance obligation in the contract other than the passage of time, we record a contract asset. As of March 31, 2023 and December 31, 2022, unbilled receivables of $ 1.1 million and $ 1.2 million, 7 Table of Contents respectively, are included in prepaid expenses and other current assets in our consolidated balance sheet. As of March 31, 2023 and December 31, 2022, we had no contract assets recorded on our consolidated balance sheet. Transaction price allocated to the remaining performance obligations The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied as of March 31, 2023. The estimated revenues do not include unexercised contract renewals. Next Twelve Months Thereafter (in thousands) Subscriptions $ 481,320 $ 198,798 Professional services 15,484 5,195 Other 307 133 Total $ 497,111 $ 204,126 Note 3. Business Combinations On March 14, 2023, we acquired Minerva Labs Ltd. (“Minerva”), a leading provider of anti-evasion and ransomware prevention technology, for a purchase consideration of $ 35.0 million, which was funded in cash. Additionally, we issued an aggregate of 73,846 shares of our common stock to the founders of Minerva with a fair value of $ 3.6 million. The 73,846 shares of common stock will be accounted for as stock-based compensation expense over a 24-month period as continued service is required for the founders to receive their full amount of common stock. In the three months ended March 31, 2023, we recognized stock-based compensation expense related to such shares in the amount of $ 0.1 million. The following table summarizes the preliminary allocation of purchase price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date (in thousands): Purchase price $ 34,977 Recognized amount of identifiable assets acquired and liabilities assumed: Cash and cash equivalents $ 136 Other current assets 600 Other assets 43 Accounts payable and other current liabilities ( 413 ) Other long-term liabilities ( 395 ) Intangible asset 12,600 Total identifiable net assets assumed $ 12,571 Goodwill 22,406 Total purchase price allocation $ 34,977 We identified developed technology as the sole acquired intangible asset. The estimated fair value of the developed technology intangible asset was $ 12.6 million which was based on a valuation using the income approach. The estimated useful life of the developed technology is 8 years. The excess of the purchase price over the tangible assets acquired, identifiable intangible asset acquired and assumed liabilities was recorded as goodwill. We believe that the amount of goodwill reflects the expected synergistic benefits of being able to leverage the integration of the technology acquired with our existing product offerings and being able to successfully market and sell these new features to our customer base. The goodwill was allocated to our one reporting unit. The acquired goodwill and intangible asset were not deductible for tax purposes. In the three months ended March 31, 2023, we recorded $ 0.4 million of acquisition-related transaction costs related to the acquisition of Minerva to general and administrative expense. Our revenue and net loss attributable to the Minerva business for the three months ended March 31, 2023 was not material. 8 Table of Contents Pro forma results of operations have not been included, as the acquisition of Minerva was not material to our results of operations for any periods presented. Note 4. Investments Our investments, which are all classified as available-for-sale, consisted of the following: As of March 31, 2023 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (in thousands) Description: U.S. government agencies $ 49,516 $ 2 $ ( 304 ) $ 49,214 Corporate bonds 11,524 — ( 111 ) 11,413 Agency bonds 3,250 — ( 51 ) 3,199 Total $ 64,290 $ 2 $ ( 466 ) $ 63,826 As of December 31, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (in thousands) Description: U.S government agencies $ 66,234 $ 4 $ ( 545 ) $ 65,693 Corporate bonds 14,351 — ( 230 ) 14,121 Commercial paper 7,944 — — 7,944 Agency bonds 6,231 — ( 71 ) 6,160 Total $ 94,760 $ 4 $ ( 846 ) $ 93,918 As of March 31, 2023, our available-for-sale investments had maturities ranging from 1 to 16 months. As of December 31, 2022, our available-for-sale investments had maturities ranging from 2 to 19 months. For all of our investments for which the amortized cost basis was greater than the fair value at March 31, 2023 and December 31, 2022, we have concluded that there is no plan to sell the security nor is it more likely than not that we would be required to sell the security before its anticipated maturity. In making the determination as to whether the unrealized loss is other-than-temporary, we considered the length of time and extent the investment has been in an unrealized loss position, the financial condition and near-term prospects of the issuers, the issuers’ credit rating and the time to maturity. Note 5. Fair Value Measurements We measure certain financial assets and liabilities at fair value. Fair value is determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as determined by either the principal market or the most advantageous market. Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy, as follows: Level 1 : Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 : Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 : Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the asset or liability. We consider an active market to be one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis, and we consider an inactive market to be one in which there are infrequent or few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. 9 Table of Contents The following table presents our financial assets and liabilities measured and recorded at fair value on a recurring basis using the above input categories: As of March 31, 2023 Level 1 Level 2 Level 3 Total (in thousands) Description: Assets: Money market funds $ 62,390 $ — $ — $ 62,390 U.S. Government agencies 49,214 — — 49,214 Corporate bonds — 11,413 — 11,413 Agency bonds — 3,199 — 3,199 Foreign currency forward contracts designated as cash flow hedges (prepaid expenses and other current assets) — 1,221 — 1,221 Total $ 111,604 $ 15,833 $ — $ 127,437 Liabilities: Foreign currency forward contracts designated as cash flow hedges (other current liabilities and other liabilities) $ — $ 959 $ — $ 959 Total $ — $ 959 $ — $ 959 As of December 31, 2022 Level 1 Level 2 Level 3 Total (in thousands) Description: Assets: Money market funds $ 88,039 $ — $ — $ 88,039 U.S. Government agencies 65,693 — — 65,693 Commercial paper — 14,121 — 14,121 Corporate bonds — 7,944 — 7,944 Agency bonds — 6,160 — 6,160 Foreign currency forward contracts designated as cash flow hedges (prepaid expenses and other current assets) — 988 — 988 Total assets $ 153,732 $ 29,213 $ — $ 182,945 Liabilities: Foreign currency forward contracts designated as cash flow hedges (other current liabilities and other liabilities) $ — $ 1,559 $ — $ 1,559 Total liabilities $ — $ 1,559 $ — $ 1,559 As of March 31, 2023, the fair value of our 2.25 % and 0.25 % convertible senior notes due 2025 and 2027, as further described in Note 10, Debt , was $ 235.4 million and $ 521.1 million, respectively, based upon quoted market prices. We consider the fair value of the Notes to be a Level 2 measurement due to limited trading activity of the Notes. 10 Table of Contents Note 6. Property and Equipment Property and equipment are recorded at cost and consist of the following: As of March 31, 2023 As of December 31, 2022 (in thousands) Computer equipment and software $ 25,143 $ 24,568 Furniture and fixtures 11,788 11,823 Leasehold improvements 68,209 66,180 Total 105,140 102,571 Less accumulated depreciation ( 48,502 ) ( 44,680 ) Property and equipment, net $ 56,638 $ 57,891 Depreciation expense was $ 3.8 million and $ 3.3 million for the three months ended March 31, 2023 and 2022, respectively . Note 7. Goodwill and Intangible Assets Goodwill was $ 538.0 million and $ 515.6 million as of March 31, 2023 and December 31, 2022, respectively. The following table displays the changes in the gross carrying amount of goodwill: Amount (in thousands) Balance at December 31, 2022 $ 515,631 Minerva acquisition 22,406 Balance at March 31, 2023 $ 538,037 The following table presents details of our intangible assets, which include acquired identifiable intangible assets and capitalized internal-use software costs: As of March 31, 2023 As of December 31, 2022 Weighted- Average Life (years) Gross Carrying Amount Accumulated Amortization Net Book Value Gross Carrying Amount Accumulated Amortization Net Book Value (in thousands) Intangible assets subject to amortization: Developed technology 5.4 $ 135,155 $ ( 63,019 ) $ 72,136 $ 122,555 $ ( 58,645 ) $ 63,910 Customer relationships 4.5 12,000 ( 5,798 ) 6,202 12,000 ( 5,146 ) 6,854 Trade names 3.1 2,619 ( 2,069 ) 550 2,619 ( 1,874 ) 745 Total acquired intangible assets 149,774 ( 70,886 ) 78,888 137,174 ( 65,665 ) 71,509 Internal-use software 3.0 47,778 ( 15,234 ) 32,544 43,002 ( 13,242 ) 29,760 Total intangible assets $ 197,552 $ ( 86,120 ) $ 111,432 $ 180,176 $ ( 78,907 ) $ 101,269 Amortization expense was $ 7.2 million and $ 6.9 million for the three months ended March 31, 2023 and 2022, respectively. 11 Table of Contents Estimated future amortization expense of the acquired identifiable intangible assets and completed capitalized internal-use software costs as of March 31, 2023 was as follows (in thousands): 2023 (for the remaining nine months) $ 21,698 2024 24,963 2025 21,098 2026 14,199 2027 6,781 2028 and thereafter 5,119 Total $ 93,858 The table above excludes the impact of $ 17.6 million of capitalized internal-use software costs for projects that have not been completed as of March 31, 2023, and therefore, we have not determined the useful life of the software, nor have all the costs associated with these projects been incurred. Note 8. Deferred Contract Acquisition and Fulfillment Costs The following table summarizes the activity of the deferred contract acquisition and fulfillment costs for the three months ended March 31, 2023 and 2022: Three Months Ended March 31, 2023 2022 (in thousands) Beginning balance $ 103,075 $ 87,165 Capitalization of contract acquisition and fulfillment costs 11,666 11,248 Amortization of deferred contract acquisition and fulfillment costs ( 9,426 ) ( 8,309 ) Ending balance $ 105,315 $ 90,104 Note 9. Derivatives and Hedging Activities To mitigate our exposure to foreign currency fluctuations resulting from certain expenses denominated in certain foreign currencies, we enter into forward contracts that are designated as cash flow hedging instruments. These forward contracts have contractual maturities of nineteen months or less, and as of March 31, 2023 and December 31, 2022, outstanding forward contracts had a total notional value of $ 55.2 million and $ 44.9 million, respectively. The notional value represents the gross amount of foreign currency that will be bought or sold upon maturity of the forward contract. During the three months ended March 31, 2023, all cash flow hedges were considered effective. Refer to Note 5, Fair Value Measurements , for the fair values of our outstanding derivative instruments. Note 10. Debt Convertible Senior Notes In May 2020, we issued $ 230.0 million aggregate principal amount of convertible senior notes due May 1, 2025 (the “2025 Notes”) and in March 2021, we issued $ 600.0 million aggregate principal amount of convertible senior notes due March 15, 2027 (the “2027 Notes”) (collectively, the “Notes”). Further details of the Notes are as follows: Issuance Maturity Date Interest Rate First Interest Payment Date Effective Interest Rate Semi-Annual Interest Payment Dates Initial Conversion Rate per $1,000 Principal Initial Conversion Price Number of Shares (in millions) 2025 Notes May 1, 2025 2.25 % November 1, 2020 2.88 % May 1 and November 1 16.3875 $ 61.02 3.8 2027 Notes March 15, 2027 0.25 % September 15, 2021 0.67 % March 15 and September 15 9.6734 $ 103.38 5.8 The 2025 Notes and the 2027 Notes are senior unsecured obligations, do not contain any financial covenants and are governed by indentures between the Company, as issuer, and U.S. Bank National Association, as trustee (the “Indentures”). The total net proceeds from the 2025 Notes and the 2027 Notes offerings, after deducting initial purchase discounts and estimated debt issuance costs, were $ 222.8 million and $ 585.0 million, respectively. 12 Table of Contents Terms of the Notes The holders of the Notes may convert their respective Notes at their option at any time prior to the close of business on the business day immediately preceding their respective convertible dates only under the following circumstances: • during any calendar quarter commencing after the calendar quarter ending on September 30, 2020 for the 2025 Notes and March 20, 2024 for the 2027 Notes (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the conversion price of the respective Notes on each applicable trading day; • during the five business day period after any five consecutive trading day period for the 2025 Notes and any ten consecutive trading day period for the 2027 Notes (the “measurement periods”) in which the trading price (as defined in the Indentures) per $1,000 principal amount of the applicable series of Notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of our common stock and the conversion rate of the respective Notes on each such trading day; • if we call any or all of the respective Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the respective redemption date; or • upon the occurrence of specified corporate events (as set forth in the Indentures). As of March 31, 2023, the 2025 Notes and 2027 Notes were not convertible at the option of the holder. The holders may convert the 2025 Notes and the 2027 Notes at any time on or after November 1, 2024 and December 15, 2026, respectively, until the close of business on the second scheduled trading day immediately preceding the maturity date, regardless of the circumstances set forth above. Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election, in the manner and subject to the terms and conditions provided in the Indentures. If we undergo a fundamental change (as set forth in the Indentures) at any time prior to the maturity date, holders of the Notes will have the right, at their option, to require us to repurchase for cash all or any portion of their Notes at a repurchase price equal to 100 % of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, following certain corporate events that occur prior to the maturity date or following our issuance of a notice of redemption, in each case as described in the Indentures, we will increase the conversion rate for a holder of the Notes who elects to convert its Notes in connection with such a corporate event or during the related redemption period in certain circumstances. The 2025 Notes and the 2027 Notes are redeemable after May 6, 2023 and March 20, 2024 (the “Redemption Dates”), respectively. On or after the respective Redemption Dates, we may redeem for cash all or any portion of the 2025 Notes or the 2027 Notes, at our option, if the last reported sale price of our common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including the trading day immediately preceding, the date on which we provide the redemption notice at a redemption price equal to 100 % principal amount of the 2025 Notes or the 2027 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. Accounting for the Notes In accounting for the issuance of the Notes, the principal less debt issuance costs are recorded as debt on our consolidated balance sheet. The debt issuance costs are amortized to interest expense using the effective interest method over the contractual term of the Notes. The net carrying amount of the Notes as of March 31, 2023 and December 31, 2022 was as follows (in thousands): 2025 Notes 2027 Notes Principal Unamortized debt issuance costs Total Principal Unamortized debt issuance costs Total Balance at December 31, 2022 $ 229,992 $ ( 3,480 ) $ 226,512 $ 600,000 $ ( 10,564 ) $ 589,436 Amortization of debt issuance costs — 340 340 — 606 606 Balance at March 31, 2023 $ 229,992 $ ( 3,140 ) $ 226,852 $ 600,000 $ ( 9,958 ) $ 590,042 13 Table of Contents Interest expense related to the Notes was as follows (in thousands): Three Months Ended March 31, 2023 2022 2025 Notes 2027 Notes Total 2025 Notes 2027 Notes Total Contractual interest expense $ 1,294 $ 375 $ 1,669 $ 1,294 $ 375 $ 1,669 Amortization of debt issuance costs 340 606 946 330 602 932 Total interest expense $ 1,634 $ 981 $ 2,615 $ 1,624 $ 977 $ 2,601 Capped Calls In connection with the offering of the 2023 Notes, the 2025 Notes and the 2027 Notes, we entered into privately negotiated capped call transactions with certain counterparties (the “2023 Capped Calls, “2025 Capped Calls” and “2027 Capped Calls”) (collectively, the “Capped Calls”). The Capped Calls are expected to reduce potential dilution to our common stock upon conversion of a given series of notes and/or offset any cash payments that we are required to make in excess of the principal amount of converted notes of such series, as the case may be, with such reduction and/or offset subject to a cap. The Capped Calls are subject to adjustment upon the occurrence of certain specified extraordinary events affecting us, including merger events, tender offers and announcement events. In addition, the Capped Calls are subject to certain specified additional disruption events that may give rise to a termination of the Capped Calls, including nationalization, insolvency or delisting, changes in law, failures to deliver, insolvency filings and hedging disruptions. The following table sets forth other key terms and premiums paid for the Capped Calls related to each series of Notes: Capped Calls Entered into in Connection with the Issuance of the 2023 Notes Capped Calls Entered into in Connection with the Issuance of the 2025 Notes Capped Calls Entered into in Connection with the Issuance of the 2027 Notes Initial strike price, subject to certain adjustments $ 41.59 $ 61.02 $ 103.38 Cap price, subject to certain adjustments $ 63.98 $ 93.88 $ 159.04 Total premium paid (in thousands) $ 26,910 $ 27,255 $ 76,020 Expiration dates June 2, 2023 - July 28, 2023 March 4, 2025 - April 29, 2025 January 1, 2027 - March 11, 2027 The 2023 Capped Calls were not redeemed with the repayment of the 2023 Notes and remain outstanding. For accounting purposes, the 2023 Capped Calls, the 2025 Capped Calls and the 2027 Capped Calls are separate transactions, and not part of the terms of the 2023 Notes, the 2025 Notes and the 2027 Notes. The 2023 Capped Calls, the 2025 Capped Calls and the 2027 Capped Calls are recorded in stockholders' equity and are not accounted for as derivatives. Credit Agreement In April 2020, we entered into a Credit and Security Agreement (the “Credit Agreement”), with KeyBank National Association that provides for a $ 30.0 million revolving credit facility, with a letter of credit sublimit of $ 15.0 million and an accordion feature under which we could increase the credit facility to up to $ 70.0 million. In May 2020, we utilized the accordion feature to increase the credit facility to $ 50.0 million. In December 2021, we entered into an amendment (the “Amendment”) in respect of our Credit and Security Agreement (as amended by the Amendment, the “Credit Agreement”), with KeyBank National Association, to, among other things, increase the credit facility from $ 50.0 million to $ 100.0 million and extend the maturity date to December 22, 2024. The Credit Agreement provides for a $ 100.0 million revolving credit facility, with a letter of credit sublimit of $ 15.0 million, and an accordion feature under which we can increase the credit facility to up to $ 150.0 million. We incurred fees of $ 0.4 million in connection with entering into the Credit Agreement. The fees are recorded in other current assets on the consolidated balance sheet and are amortized on a straight-line basis over the contractual term of the arrangement. The commitment fee of 0.2 % per annum on the unused portion of the credit facility is expensed as incurred and included within interest expense on the consolidated statement of operations. The Credit Agreement contains certain financial covenants including a requirement that we maintain specified minimum recurring revenue and liquidity amounts. 14 Table of Contents The borrowings under the Credit Agreement bear interest, at our option, at a rate equal to either (i) term SOFR plus a credit spread adjustment of 0.10 % per annum plus a margin of 2.50 % per annum or (ii) the alternate base rate (subject to a floor), plus an applicable margin equal to 0 % per annum. As of March 31, 2023, we did not have any outstanding borrowings and we were in compliance with all covenants under the Credit Agreement. As of March 31, 2023, we had a total of $ 9.8 million in letters of credit outstanding as collateral for certain office space leases and corporate credit card programs which reduce the amount of borrowing available under our Credit Agreement. Note 11. Leases Our leases primarily relate to office facilities that have remaining terms of up to 9.3 years, some of which include one or more options to renew with renewal terms of up to 5 years and some of which include options to terminate the leases within 1 year. All of our leases are classified as operating leases. The components of lease expense were as follows: Three Months Ended March 31, 2023 2022 (in thousands) Operating lease cost $ 4,381 $ 5,013 Short-term lease costs 324 391 Variable lease costs 2,289 2,385 Total lease costs $ 6,994 $ 7,789 Supplemental balance sheet information related to the operating leases was as follows: As of March 31, 2023 As of December 31, 2022 Weighted average remaining lease term (in years) - operating leases 6.4 6.6 Weighted average discount rate - operating leases 6.2 % 6.2 % Supplemental cash flow information related to leases was as follows: Three Months Ended March 31, 2023 2022 (in thousands) Cash paid for amounts included in the measurement of lease liabilities $ 6,689 $ 4,659 ROU assets obtained in exchange for new lease obligations $ 1,151 $ 8,864 Maturities of operating lease liabilities as of March 31, 2023 were as follows (in thousands): 2023 (for the remaining nine months) $ 13,309 2024 19,067 2025 18,159 2026 16,782 2027 15,952 2028 and thereafter 34,955 Total lease payments $ 118,224 Less: imputed interest ( 21,257 ) Total $ 96,967 15 Table of Contents Note 12. Stock-Based Compensation Expense (a) General Stock-based compensation expense for restricted stock units (“RSUs”), performance-based restricted stock units (“PSUs”), stock options and issuances of common stock pursuant to our employee stock purchase plan was classified in the accompanying consolidated statements of operations as follows: Three Months Ended March 31, 2023 2022 (in thousands) Stock-based compensation expense: Cost of revenue $ 2,837 $ 2,090 Research and development 10,505 13,024 Sales and marketing 7,843 6,774 General and administrative 8,188 7,034 Total stock-based compensation expense $ 29,373 $ 28,922 We recognize compensation cost of all awards on a straight-line basis over the applicable vesting period, which is generally four years . Our Compensation Committee adopted and approved the performance goals, targets and payout formulas for our 2023 and 2022 bonus plans, including permitting our executive officers and certain other employees the opportunity to receive payment of their earned bonuses in the form of common stock (in lieu of cash). During the three months ended March 31, 2023 and 2022, we recognized stock-based compensation expense related to such bonuses in the amount of $ 0.7 million and $ 1.0 million, based on the probable expected performance against the pre-established corporate financial objectives as of March 31, 2023 and 2022. For all employees, including executive officers, who elect to receive their bonuses in the form of common stock (in lieu of cash), the payouts are expected to be made in the form of fully vested stock awards in the first quarter of the following year pursuant to our 2015 Equity Incentive Plan, as amended. The number of shares underlying such awards is determined by dividing the dollar value of the actual bonus award payment by the closing price per share of our common stock on the date of grant. (b) Restricted Stock Units and Performance-Based Restricted Stock Units RSUs and PSUs activity during the three months ended March 31, 2023 was as follows: Shares Weighted-Average Grant Date Fair Value Unvested balance as of December 31, 2022 3,001,443 $ 83.88 Granted 1,782,446 40.58 Vested ( 359,043 ) 76.91 Forfeited ( 178,587 ) 75.10 Unvested balance as of March 31, 2023 4,246,259 $ 66.66 As of March 31, 2023, the unrecognized compensation expense related to our unvested RSUs and PSUs was $ 263.7 million. This unrecognized compensation expense will be recognized over an estimated weighted-average amortization period of 2.7 years. In February 2023, our Compensation Committee awarded 173,103 PSUs that require the achievement of an ARR target for the 2023 full-year to earn any payout and also include a non-GAAP operating income margin modifier. In addition, the portion of the PSUs that are earned will be capped at a maximum of 200 % of the target level payout and if certain ARR or non-GAAP operating income margin goals are not met, no PSUs will be earned. The PSUs have a performance period of one year and the earned PSUs will vest in three equal installments following each of the first, second and third anniversary of the vesting commencement date, subject to the participant’s continuous service as of each such date. Stock-based compensation expense related to these PSUs will be adjusted over the one-year performance period based on interim estimates of performance against the identified targets. 16 Table of Contents (c) Stock Options Stock option activity during the three months ended March 31, 2023 was as follows: Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life (in years) Aggregate Intrinsic Value (in thousands) Outstanding as of December 31, 2022 932,126 $ 12.70 3.2 $ 19,837 Granted — — Exercised ( 16,812 ) 10.74 $ 568 Forfeited/cancelled — — Outstanding as of March 31, 2023 915,314 $ 12.73 — $ 30,366 Vested and exercisable as of March 31, 2023 915,314 $ 12.73 — $ 30,366 (d) Employee Stock Purchase Plan Under the Rapid7, Inc. 2015 Employee Stock Purchase Plan (“ESPP”), employees may set aside up to 15 % of their gross earnings, on an after-tax basis, to purchase our common stock at a discounted price, which is calculated at 85 % of the lesser of: (i) the market value of our common stock at the beginning of each offering period and (ii) the market value of our common stock on the applicable purchase date. On March 15, 2023, we issued 177,886 shares of common stock to employees, with a purchase prices of $ 34.71 per share, for aggregate proceeds of $ 6.2 million. Note 13. Net Loss per Share The following table summarizes the computation of basic and diluted net loss per share of our common stock for the three months ended March 31, 2023 and 2022: Three Months Ended March 31, 2023 2022 (in thousands, except share and per share data) Numerator: Net loss $ ( 25,915 ) $ ( 44,999 ) Denominator: Weighted-average common shares outstanding, basic and diluted 59,888,119 57,724,821 Net loss per share, basic and diluted $ ( 0.43 ) $ ( 0.78 ) We intend to settle any conversion of our 2025 Notes and 2027 Notes in cash, shares, or a combination thereof. The dilutive impact of the Notes for our calculation of diluted net income (loss) per share is considered using the if-converted method. For the three months ended March 31, 2023 and 2022, the shares underlying the Notes were not considered in the calculation of diluted net loss per share as the effect would have been anti-dilutive. In connection with the issuance of the 2023 Notes, the 2025 Notes and the 2027 Notes, we entered into 2023 Capped Calls, 2025 Capped Calls and 2027 Capped Calls, which were not included for the purpose of calculating the number of diluted shares outstanding, as their effect would have been anti-dilutive. As further described in Note 10, Debt, the 2023 Capped Calls were not redeemed with the redemption of the 2023 Notes. As of March 31, 2023 and 2022, the 2025 Notes and 2027 Notes were not convertible at the option of the holder. We had not received any conversion notices through the issuance date of our audited consolidated financial statements. For disclosure purposes, we have calculated the potentially dilutive effect of the conversion spread, which is included in the table below. The following potentially dilutive securities outstanding have been excluded from the computation of diluted weighted-average shares outstanding for the respective periods below because they would have been anti-dilutive: 17 Table of Contents Three Months Ended March 31, 2023 2022 Options to purchase common stock 915,314 1,312,604 Unvested restricted stock units 4,246,259 3,947,377 Common stock to be issued to DivvyCloud founders 33,433 66,865 Common stock issued to IntSights founders 41,194 206,608 Common stock issued to Minerva founders 73,846 — Shares to be issued under ESPP 31,793 15,742 Convertible senior notes 9,572,955 9,573,087 Total 14,914,794 15,122,283 Note 14. Commitments and Contingencies (a) Warranty We provide limited product warranties. Historically, any payments made under these provisions have been immaterial. (b) Litigation and Claims In October 2018, Finjan, Inc. (“Finjan”) filed a complaint against us and our wholly-owned subsidiary, Rapid7 LLC, in the United States District Court, District of Delaware, alleging patent infringement of seven patents held by them. In the complaint, Finjan sought unspecified damages, attorneys' fees and injunctive relief. During the first quarter of 2023, we settled with Finjan for an immaterial amount. On April 5, 2023, the joint motion to dismiss the case was accepted by the court and this matter is now closed. In addition, from time to time, we may be a party to litigation or subject to claims incident to the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not have a material adverse effect on our business. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors. (c) Indemnification Obligations We agree to standard indemnification provisions in the ordinary course of business. Pursuant to these provisions, we agree to indemnify, hold harmless and reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally our customers, in connection with any United States patent, copyright or other intellectual property infringement claim by any third party arising from the use of our products or services in accordance with the agreement or arising from our gross negligence, willful misconduct or violation of the law (provided that there is not gross or willful misconduct on the part of the other party) with respect to our products or services. The term of these indemnification provisions is generally perpetual from the time of execution of the agreement. We carry insurance that covers certain third-party claims relating to our services and limits our exposure. We have never incurred costs to defend lawsuits or settle claims related to these indemnification provisions. As permitted under Delaware law, we have entered into indemnification agreements with our officers and directors, indemnifying them for certain events or occurrences while they serve as officers or directors of the company. Note 15. Segment Information and Information about Geographic Areas We operate in one segment. Our chief operating decision maker is our Chief Executive Officer, who makes operating decisions, assesses performance and allocates resources on a consolidated basis. 18 Table of Contents Net revenues by geographic area presented based upon the location of the customer were as follows: Three Months Ended March 31, 2023 2022 (in thousands) United States $ 137,111 $ 119,123 Other 46,063 38,261 Total $ 183,174 $ 157,384 Property and equipment, net by geographic area was as follows: As of March 31, 2023 As of December 31, 2022 (in thousands) United States $ 41,247 $ 41,570 Other 15,391 16,321 Total $ 56,638 $ 57,891 19 Table of Contents