What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-09 compared with 2023-05-10 · 202 added, 78 removed, 387 unchanged (42% of the section changed)

9 unchanged sentences

• uncertain impacts that changes in overall level of software spending and ongoing volatility in the global economy as well as effects of inflation and increased interest rates may have on our business, strategy, operating results, financial condition and cash flows;

• the benefits and efficiencies we expect to derive from our restructuring plan and other cost-saving initiatives, including reducing our global office footprint and any challenges or delays in the execution of these restructuring efforts;

• the effects of increased competition as well as innovations by new and existing competitors in our market;

43 unchanged sentences

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

As of March 31, 2023, we had over 11,000 customers in 147 countries, including 42% of the Fortune 100.

Our revenue was not concentrated with any individual customer and no customer represented more than 1% of our revenue for the three months ended March 31, 2023 or 2022.

As of June 30, 2023, we had over 11,000 customers in 149 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, 2023 or 2022.

Recent Developments

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.

Restructuring Plan

In August 2023, we announced a restructuring plan designed to improve operational efficiencies, reduce operating costs and better align the Company’s workforce with current business needs, top strategic priorities, and key growth opportunities (the “Restructuring Plan”).

The Restructuring Plan includes a reduction of our workforce and office space reductions within certain

The actions associated with the Restructuring Plan are expected to be completed by the end of fiscal 2023, subject to local law and consultation requirements.

Settlement of 2023 Capped Call

In August 2023, we received $17.5 million in cash from the settlement of the capped call option related to the 1.25% convertible senior notes due 2023.

Our Business Model

12 unchanged sentences

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

For the three months ended March 31, 2023 and 2022, recurring revenue, defined as revenue from term software licenses, content subscriptions, managed services, cloud-based subscriptions and maintenance and support, was 95% and 94%, respectively, of total revenue.

For the three and six months ended June 30, 2023 and 2022, recurring revenue, defined as revenue from term software licenses, content subscriptions, managed services, cloud-based subscriptions and maintenance and support, was 95% and 94%, respectively, of total revenue.

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

2 unchanged sentences

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

Three Months Ended March 31,

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

2023 2022 2023 2022

(dollars in thousands)

1 unchanged sentence

Year-over-year revenue growth 13.7 % 32.5 % 15.0 % 33.2 %

Non-GAAP income from operations $ 10,993 $ (5,619)

Non-GAAP income (loss) from operations $ 12,957 $ 3,483 $ 23,950 $ (2,136)

Non-GAAP operating margin 6.8 % 2.1 % 6.4 % (0.7 %)

Free cash flow $ 25,581 $ (1,258) $ 24,362 $ 2,570

As of March 31,

As of June 30,

(dollars in thousands)

24 unchanged sentences

We believe that the size of our customer base is an indicator of our global market penetration and that our net customer additions are an indicator of the growth of our business.

We define a customer as any entity that has an

active Rapid7 recurring revenue contract as of the specified measurement date, excluding InsightOps and Logentries only customers with a contract value less than $2,400 per year.

We define a customer as any entity that has an active Rapid7 recurring revenue contract as of the specified measurement date, excluding InsightOps and Logentries only customers with a contract value less than $2,400 per year.

ARR per Customer .

6 unchanged sentences

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

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

compensation expense, amortization of acquired intangible assets, amortization of debt issuance costs and certain other items such as acquisition-related expenses, impairment of long-lived assets, change in the fair value of derivative assets and litigation-related expenses.

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

12 unchanged sentences

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

• Change in fair value of derivative assets.

The change in fair value of derivative assets related to our capped calls settlement is a non-cash item and we believe the exclusion of this other income (expense) provides a more useful comparison of our operational performance in different periods.

• Impairment of long-lived assets.

Impairment of long-lived assets consists of impairment charges allocated to the carrying amount of certain operating right-of-use assets and the associated leasehold improvements when the carrying amounts exceed their respective fair values and we believe the exclusion of the impairment charges provides a more useful comparison of our operational performance in different periods.

• Anti-dilutive impact of capped call transaction.

1 unchanged sentence

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.

expense, (8) acquisition-related expenses and (9) litigation-related expenses.

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, (8) acquisition-related expenses, (9) litigation-related expenses and (10) impairment of long-lived assets.

We believe that the use of adjusted EBITDA is useful to investors and other users of our financial statements in evaluating our operating performance because it provides them with an additional tool to compare business performance across companies and across periods.

2 unchanged sentences

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

The following tables reconcile GAAP gross profit to non-GAAP gross profit for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31,

The following tables reconcile GAAP gross profit to non-GAAP gross profit for the three and six months ended June 30, 2023 and 2022:

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

2023 2022 2023 2022

(in thousands)

3 unchanged sentences

Non-GAAP total gross profit $ 140,085 $ 120,799 $ 274,472 $ 233,828

Three Months Ended March 31,

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

2023 2022 2023 2022

(in thousands)

3 unchanged sentences

Non-GAAP gross profit – products $ 137,665 $ 120,111 $ 269,747 $ 232,003

Three Months Ended March 31,

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

2023 2022 2023 2022

(in thousands)

2 unchanged sentences

Non-GAAP gross profit – professional services $ 2,420 $ 688 $ 4,725 $ 1,825

The following table reconciles GAAP loss from operations to non-GAAP income from operations for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31,

The following table reconciles GAAP loss from operations to non-GAAP income (loss) from operations for the three and six months ended June 30, 2023 and 2022:

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

2023 2022 2023 2022

(in thousands)

4 unchanged sentences

Litigation-related expenses — — — 115

Non-GAAP income from operations $ 10,993 $ (5,619)

The following table reconciles GAAP net loss to non-GAAP net income (loss) for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31,

Impairment of long-lived assets 27,231 — 27,231 —

Non-GAAP income (loss) from operations $ 12,957 $ 3,483 $ 23,950 $ (2,136)

The following table reconciles GAAP net loss to non-GAAP net income (loss) for the three and six months ended June 30, 2023 and 2022:

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

2023 2022 2023 2022

(in thousands, except share and per share data)

5 unchanged sentences

Amortization of debt issuance costs 1,026 1,011 2,020 1,990

Change in fair value of derivative assets 12,660 — 12,660 —

Impairment of long-lived assets 27,231 — 27,231 —

Non-GAAP net income (loss) $ 11,520 $ (461) $ 21,557 $ (9,721)

10 unchanged sentences

There was no add-back of interest expense or additional dilutive shares related to the convertible senior notes where the effect was anti-dilutive.

On an if-converted basis, for the three months ended March 31, 2023, the 2027 convertible senior notes were dilutive and the 2025 convertible senior notes were anti-dilutive.

On an if-converted basis, for the three and six months ended June 30, 2023, the 2027 convertible senior notes were dilutive and the 2025 convertible senior notes were anti-dilutive.

(2) We use the treasury method to compute the dilutive effect of employee equity incentive plan awards.

The following table reconciles GAAP net loss to adjusted EBITDA for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31,

The following table reconciles GAAP net loss to adjusted EBITDA for the three and six months ended June 30, 2023 and 2022:

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

2023 2022 2023 2022

(in thousands)

9 unchanged sentences

Litigation-related expenses — — — 115

Impairment of long-lived assets 27,231 — 27,231 —

Adjusted EBITDA $ 19,096 $ 7,983 $ 35,917 $ 6,810

The following table reconciles net cash provided by operating activities to free cash flow for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31,

The following table reconciles net cash provided by operating activities to free cash flow for the three and six months ended June 30, 2023 and 2022:

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

2023 2022 2023 2022

(in thousands)

31 unchanged sentences

Additional expenses include third-party infrastructure costs, travel and entertainment, consulting and professional fees for third-party development resources as well as allocated overhead costs.

We expect research and development expense to increase on an absolute dollar basis in the near term as we continue to increase investments in our products and technology platform innovation, but to decrease as a percentage of total revenue.

We expect research and development expense to decrease as a percentage of total revenue in the second half of 2023.

Sales and Marketing Expense

1 unchanged sentence

Additional expenses include marketing activities and promotional events, travel and entertainment, training costs, amortization of certain intangible assets and allocated overhead costs.

We expect sales and marketing expense to increase on an absolute dollar basis in the near term as we continue to increase investments to drive our revenue growth, but to decrease as a percentage of total revenue.

We expect sales and marketing expense to decrease as a percentage of total revenue in the second half of 2023.

General and Administrative Expense

1 unchanged sentence

Additional expenses include travel and entertainment, professional fees, litigation-related expenses, insurance, acquisition-related expenses, amortization of certain intangible assets and allocated overhead costs.

We expect general and administrative expense to increase on an absolute dollar basis in the near term as we continue to increase investments to support our growth, but to remain relatively consistent as a percentage of total revenue.

We expect general and administrative expense to decrease as a percentage of total revenue in the second half of 2023.

Impairment of Long-Lived Assets

Interest Income

1 unchanged sentence

Interest Expense

Interest expense consists primarily of contractual interest expense, amortization of debt issuance costs related to our convertible senior notes and revolving credit facility and induced conversion expense.

Interest expense consists primarily of contractual interest expense and amortization of debt issuance costs related to our convertible senior notes and revolving credit facility.

We expect interest expense in the near term to represent contractual interest expense and amortization of debt issuance costs related to our convertible senior notes and revolving credit facility.

Other Income (Expense), Net

Other income (expense), net consists primarily of unrealized and realized gains and losses related to changes in foreign currency exchange rates.

Other income (expense), net consists primarily of the change in fair value of derivative assets and unrealized and realized gains and losses related to changes in foreign currency exchange rates.

Provision for Income Taxes

4 unchanged sentences

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

Three Months Ended March 31,

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

2023 2022 2023 2022

(in thousands)

11 unchanged sentences

General and administrative 22,888 20,890 47,095 42,406

Impairment of long-lived assets 27,231 — 27,231 —

Total operating expenses 183,917 147,831 335,057 294,305

7 unchanged sentences

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

Three Months Ended March 31,

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

2023 2022 2023 2022

(in thousands)

5 unchanged sentences

Total stock-based compensation expense $ 31,695 $ 32,411 $ 61,068 $ 61,333

Three Months Ended March 31,

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

2023 2022 2023 2022

(in thousands)

6 unchanged sentences

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

Three Months Ended March 31,

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

2023 2022 2023 2022

Consolidated Statement of Operations Data:

10 unchanged sentences

General and administrative 12.0 12.5 12.6 13.1

Impairment of long-lived assets 14.3 — 7.3 —

Total operating expenses 96.6 88.3 89.7 90.6

6 unchanged sentences

Net loss (35.1) % (23.7) % (24.8) % (26.0) %

Comparison of the Three Months Ended March 31, 2023 and 2022

Three Months Ended March 31, Change

Comparison of the Three Months Ended June 30, 2023 and 2022

Three Months Ended June 30, Change

2023 2022 $ %

3 unchanged sentences

Total revenue $ 190,422 $ 167,455 $ 22,967 13.7 %

Total revenue increased by $25.8 million in the three months ended March 31, 2023 compared to the same period in 2022.

Total revenue increased by $23.0 million in the three months ended June 30, 2023 compared to the same period in 2022.

The $23.0 million increase in revenue consisted of a $0.9 million increase in revenue from new customers and a $22.1 million increase in revenue from existing customers.

1 unchanged sentence

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

The increase in total revenue in the three months ended March 31, 2023 compared to the same period in 2022 was comprised of $19.0 million generated from sales in North America and $6.8 million generated from sales from the rest of the world.

The increase in total revenue in the three months ended June 30, 2023 compared to the same period in 2022 was comprised of $17.0 million generated from sales in North America and $6.0 million generated from sales from the rest of the world.

Cost of Revenue

Three Months Ended March 31, Change

Three Months Ended June 30, Change

2023 2022 $ %

8 unchanged sentences

Total gross margin % 69.5 % 67.6 %

Total cost of revenue increased by $4.7 million in the three months ended March 31, 2023 compared to the same period in 2022, primarily due to 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 $1.4 million increase in cloud computing costs related to growing cloud-based subscription and managed services revenue.

Total cost of revenue increased by $3.9 million in the three months ended June 30, 2023 compared to the same period in 2022, primarily due to a $2.4 million increase in cloud computing costs related to growing cloud-based subscription and managed services revenue and a $1.1 million increase in amortization expense for capitalized internally-developed software.

Our increase in total cost of revenue also included a $0.8 million increase in personnel costs, inclusive of a $0.2 million increase in stock-based compensation expense, resulting from an increase in headcount to support our growing customer base.

These increases were partially offset by a $0.4 million decrease in other expenses.

Total gross margin percentage increased for the three months ended March 31, 2023 compared to the same period in 2022.

Total gross margin percentage increased for the three months ended June 30, 2023 compared to the same period in 2022.

The increase in products gross margin was driven by our ability to scale as our revenue continues to grow.

The increase in professional services gross margin for the three months ended March 31, 2023 was primarily due to an increase in revenue.

The increase in professional services gross margin for the three months ended June 30, 2023 was primarily due to a decrease in personnel costs.

Operating Expenses

Research and Development Expense

Three Months Ended March 31, Change

Three Months Ended June 30, Change

2023 2022 $ %

2 unchanged sentences

% of revenue 26.7 % 29.2 %

Research and development expense decreased by $3.5 million in the three months ended March 31, 2023 compared to the same period in 2022, primarily due to a $2.6 million decrease in stock-based compensation expense and a $0.9 million decrease in other expenses.

Research and development expense increased by $1.9 million in the three months ended June 30, 2023 compared to the same period in 2022, primarily due to a $3.2 million write-off of a capitalized internal-use software project and a $1.0 million increase in other expenses.

These increases were partially offset by a $2.3 million decrease in stock-based compensation expense.

Sales and Marketing Expense

Three Months Ended March 31, Change

Three Months Ended June 30, Change

2023 2022 $ %

2 unchanged sentences

% of revenue 43.6 % 46.6 %

Sales and marketing expense increased by $5.4 million in the three months ended March 31, 2023 compared to the same period in 2022, primarily due to a $7.3 million increase in personnel costs, inclusive of a $1.1 million increase in stock-based compensation expense, resulting from an increase in headcount.

Sales and marketing expense increased by $5.0 million in the three months ended June 30, 2023 compared to the same period in 2022, primarily due to a $4.4 million increase in personnel costs resulting from an increase in headcount and a $0.6 million increase in other expenses.

General and Administrative Expense

Three Months Ended June 30, Change

2023 2022 $ %

(dollars in thousands)

General and administrative $ 22,888 $ 20,890 $ 1,998 9.6 %

% of revenue 12.0 % 12.5 %

General and administrative expense increased by $2.0 million in the three months ended June 30, 2023 compared to the same period in 2022, primarily due to a $2.0 million increase in professional fees.

Impairment of Long-Lived Assets

Three Months Ended June 30, Change

2023 2022 $ %

(dollars in thousands)

Impairment of long-lived assets $ 27,231 $ — $ 27,231 100.0 %

% of revenue 14.3 % — %

Impairment of long-lived assets expense increased by $27.2 million in the three months ended June 30, 2023 compared to the same period in 2022, due to an impairment charge recorded after a triggering event related to a change in usage of certain idle office space at our corporate headquarters in Boston, Massachusetts indicated that the carrying value of our right of use and other lease-related assets may not be fully recoverable.

Interest Income

Three Months Ended June 30, Change

2023 2022 $ %

(dollars in thousands)

Interest income $ 1,787 $ 243 $ 1,544 635.4 %

% of revenue 0.9 % 0.1 %

Interest income increased by $1.5 million in the three months ended June 30, 2023 compared to the same period in 2022 primarily due to an increase in interest rates.

Interest Expense

Three Months Ended June 30, Change

2023 2022 $ %

(dollars in thousands)

Interest expense $ (2,773) $ (2,758) $ (15) 0.5 %

% of revenue (1.5) % (1.7) %

Interest expense remained consistent in the three months ended June 30, 2023 compared to the same period in 2022.

Other Income (Expense), Net

Three Months Ended June 30, Change

2023 2022 $ %

(dollars in thousands)

Other income (expense), net $ (13,268) $ (2,403) $ (10,865) 452.1 %

% of revenue (7.0) % (1.4) %

Other income (expense), net increased by $10.9 million in the three months ended June 30, 2023 compared to the same period in 2022 due to a $12.7 million expense for the change in fair value on derivative assets related to our 2023 capped calls settlement as well as increases in realized and unrealized foreign currency gains, primarily related to the euro and British pound sterling.

Provision for Income Taxes

Three Months Ended June 30, Change

2023 2022 $ %

(dollars in thousands)

Provision for income taxes $ 869 $ 37 $ 832 2,248.6 %

% of revenue 0.5 % — %

Provision for income taxes increased by $0.8 million in the three months ended June 30, 2023 compared to the same period in 2022 primarily due to an increase in foreign tax expense.

Comparison of the Six Months Ended June 30, 2023 and 2022

Six Months Ended June 30, Change

2023 2022 $ %

(dollars in thousands)

Products $ 355,473 $ 308,147 $ 47,326 15.4 %

Professional services 18,123 16,692 1,431 8.6 %

Total revenue $ 373,596 $ 324,839 $ 48,757 15.0 %

Total revenue increased by $48.8 million in the six months ended June 30, 2023 compared to the same period in 2022.

The $48.8 million increase in revenue consisted of a $4.3 million increase in revenue from new customers and a $44.5 million increase in revenue from existing customers.

The $44.5 million increase in revenue from existing customers was due to an increase in revenue from renewals, upsells and cross-sells as a result of the continued growth of our existing customer base.

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

The increase in total revenue in the six months ended June 30, 2023 compared to the same period in 2022 was comprised of $36.0 million generated from sales in North America and $12.8 million generated from sales from the rest of the world.

Cost of Revenue

Six Months Ended June 30, Change

2023 2022 $ %

(dollars in thousands)

Cost of revenue:

Products $ 99,336 $ 89,339 $ 9,997 11.2 %

Professional services 14,827 16,225 (1,398) (8.6 %)

Total cost of revenue $ 114,163 $ 105,564 $ 8,599 8.1 %

Gross margin %:

Products 72.1 % 71.0 %

Professional services 18.2 % 2.8 %

Total gross margin % 69.4 % 67.5 %

Total cost of revenue increased by $8.6 million in the six months ended June 30, 2023 compared to the same period in 2022, primarily due to a $4.4 million increase in personnel costs, inclusive of a $1.0 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 $3.8 million increase in cloud computing costs related to growing cloud-based subscription and managed services revenue and a $2.0 million increase in in amortization expense for capitalized internally-developed software.

These increases were partially offset by a $1.6 million decrease in other expenses.

Total gross margin percentage increased for the six months ended June 30, 2023 compared to the same period in 2022.

The increase in products gross margin was driven by our ability to scale as our revenue continues to grow.

The increase in professional services gross margin for the six months ended June 30, 2023 was primarily due to an increase in revenue.

Operating Expenses

Research and Development Expense

Six Months Ended June 30, Change

2023 2022 $ %

(dollars in thousands)

Research and development $ 97,108 $ 98,719 $ (1,611) (1.6 %)

% of revenue 26.0 % 30.4 %

Research and development expense decreased by $1.6 million in the three months ended June 30, 2023 compared to the same period in 2022, primarily due to a $4.8 million decrease in stock-based compensation expense, partially offset by a $3.2 million write-off of a capitalized internal-use software project.

Sales and Marketing Expense

Six Months Ended June 30, Change

2023 2022 $ %

(dollars in thousands)

Sales and marketing $ 163,623 $ 153,180 $ 10,443 6.8 %

% of revenue 43.8 % 47.1 %

Sales and marketing expense increased by $10.4 million in the six months ended June 30, 2023 compared to the same period in 2022, primarily due to a $11.4 million increase in personnel costs, inclusive of a $0.8 million increase in stock-based compensation expense, resulting from an increase in headcount.

These increases were partially offset by a decrease of $1.0 million in other expenses.

General and Administrative Expense

Three Months Ended March 31, Change

Six Months Ended June 30, Change

2023 2022 $ %

2 unchanged sentences

% of revenue 12.6 % 13.1 %

General and administrative expense increased by $2.7 million in the three months ended March 31, 2023 compared to the same period in 2022, primarily due to a $2.3 million increase in personnel costs due to an increase in headcount, inclusive of a $1.2 million increase in stock-based compensation expense, and a $0.4 million increase in other expenses.

General and administrative expense increased by $4.7 million in the six months ended June 30, 2023 compared to the same period in 2022, primarily due to a $2.8 million increase in stock-based compensation expense and a $2.5 million increase in professional fees.

These increases were partially offset by a $0.6 million decrease in other expenses.

Impairment of Long-Lived Assets

Six Months Ended June 30, Change

2023 2022 $ %

(dollars in thousands)

Impairment of long-lived assets $ 27,231 $ — $ 27,231 100.0 %

% of revenue 7.3 % — %

Impairment of long-lived assets expense increased by $27.2 million in the six months ended June 30, 2023 compared to the same period in 2022, due to an impairment charge recorded after a triggering event related to a change in usage of certain idle office space at our corporate headquarters in Boston, Massachusetts indicated that the carrying value of our right of use and other lease-related assets may not be fully recoverable.

Interest Income

Three Months Ended March 31, Change

Six Months Ended June 30, Change

2023 2022 $ %

2 unchanged sentences

% of revenue 0.9 % 0.1 %

Interest income increased by $1.6 million in the three months ended March 31, 2023 compared to the same period in 2022 primarily due to an increase in interest rates.

Interest income increased by $3.1 million in the six months ended June 30, 2023 compared to the same period in 2022 primarily due to an increase in interest rates.

Interest Expense

Three Months Ended March 31, Change

Six Months Ended June 30, Change

2023 2022 $ %

2 unchanged sentences

% of revenue (1.5) % (1.6) %

Interest expense remained consistent in the three months ended March 31, 2023 compared to the same period in 2022.

Interest expense remained consistent in the six months ended June 30, 2023 compared to the same period in 2022.

Other Income (Expense), Net

Three Months Ended March 31, Change

Six Months Ended June 30, Change

2023 2022 $ %

2 unchanged sentences

% of revenue (3.6) % (0.9) %

Other income (expense), net decreased by $0.3 million in the three months ended March 31, 2023 compared to the same period in 2022 due to realized and unrealized foreign currency losses, primarily related to the euro and British pound sterling.

Other income (expense), net increased by $10.6 million in the six months ended June 30, 2023 compared to the same period in 2022 due to a $12.7 million expense for the change in fair value of derivative assets related to our 2023 capped calls settlement and an increase in realized and unrealized foreign currency gains, primarily related to the euro and British pound sterling.

Provision for Income Taxes

Three Months Ended March 31, Change

Six Months Ended June 30, Change

2023 2022 $ %

2 unchanged sentences

% of revenue 0.4 % 0.5 %

Provision for income taxes decreased by $0.8 million in the three months ended March 31, 2023 compared to the same period in 2022 primarily due to a decrease in foreign tax expense.

Provision for income taxes remained consistent in the six months ended June 30, 2023 compared to the same period in 2022.

Liquidity and Capital Resources

As of March 31, 2023, we had $205.8 million in cash and cash equivalents, $63.8 million in investments that have maturities ranging from one to sixteen months and an accumulated deficit of $886.7 million.

As of June 30, 2023, we had $185.9 million in cash and cash equivalents, $110.0 million in investments that have maturities ranging from one to thirteen months and an accumulated deficit of $953.4 million.

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

2 unchanged sentences

We believe that our existing cash and cash equivalents, our investments, our available borrowings under our Credit Agreement and cash generated by operating activities will be sufficient to meet our operating and capital requirements for at least the next 12 months as well as our longer-term expected future cash requirements and obligations.

Our foreseeable cash needs, in addition to our recurring operating expenses, include our expected capital expenditures to support expansion of our infrastructure and workforce, office facilities lease obligations, purchase commitments, including our cloud infrastructure services (including with Amazon Web Services (“AWS”)), potential future acquisitions of technology businesses and any election we make to redeem our convertible senior notes.

Our foreseeable cash needs, in addition to our recurring operating expenses, include our expected capital expenditures to support expansion of our infrastructure and workforce, office facilities lease obligations, purchase commitments, including our cloud infrastructure services (including with Amazon Web Services (“AWS”)), restructuring expenses, potential future acquisitions of technology businesses and any election we make to redeem our convertible senior notes.

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

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If we are unable to raise additional capital on terms satisfactory to us when we require it, our business, operating results and financial condition could be adversely affected.

The following table shows a summary of our cash flows for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31,

The following table shows a summary of our cash flows for the six months ended June 30, 2023 and 2022:

Six Months Ended June 30,

(in thousands)

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Operating Activities

Operating activities provided $5.8 million of cash and cash equivalents in the three months ended March 31, 2023, which reflects continued growth in revenue partially offset by our continued investments in our operations and the timing of working capital adjustments.

Cash provided by operating activities reflected our net loss of $25.9 million and a decrease in our net operating assets and liabilities of $10.7 million, offset by non-cash charges of $42.4 million related primarily to depreciation and amortization, stock-based compensation expense, amortization of debt issuance costs and other non-cash charges.

The change in our net operating assets and liabilities was primarily due to a $24.0 million decrease in accrued expenses, primarily as a result of the payout of annual bonuses and year-end commissions, a $12.1 million decrease in deferred revenue, a $2.7 million decrease in accounts payable, a $5.6 million increase in prepaid expenses and a $2.2 million increase in deferred contract acquisition and fulfillment costs, which each had a negative impact on operating cash flow.

These factors were offset by a $35.8

million decrease in accounts receivable due to an increase in collections and a $0.1 million increase in other liabilities, which each had a positive impact on operating cash flow.

Operating activities provided $10.4 million of cash and cash equivalents in the three months ended March 31, 2022, which reflects continued growth in revenue and the timing of working capital adjustments, partially offset by our continued investments in our operations.

Cash provided by operating activities reflected our net loss of $45.0 million, offset by a decrease in our net operating assets of $14.8 million and non-cash charges of $40.6 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 $36.3 million decrease in accounts receivable due to an increase in collections, a $3.8 million increase in deferred revenue and a $8.7 million increase in accounts payable, which each had a positive impact on operating cash flow.

Operating activities provided $37.1 million of cash and cash equivalents in the six months ended June 30, 2023, which reflects continued growth in revenue partially offset by our continued investments in our operations and the timing of working capital adjustments.

Cash provided by operating activities reflected our net loss of $92.7 million and a decrease in our net operating assets and liabilities of $0.4 million, offset by non-cash charges of $130.3 million related primarily to depreciation and amortization, stock-based compensation expense, impairment of long-lived assets, change in fair value of derivative assets, amortization of debt issuance costs and other non-cash charges.

The change in our net operating assets and liabilities was primarily due to a $12.0 million decrease in accrued expenses, primarily as a result of the payout of annual bonuses and year-end commissions, a $1.3 million decrease in accounts payable and a $6.0 million increase in deferred contract acquisition and fulfillment costs, which each had a negative impact on operating cash flow.

These factors were offset by a $15.1 million decrease in accounts receivable due to an increase in collections, a $1.4 million decrease in prepaid expenses, a $1.8 million

increase in deferred revenue and a $0.5 million increase in other liabilities, which each had a positive impact on operating cash flow.

Operating activities provided $17.9 million of cash and cash equivalents in the six months ended June 30, 2022, which reflects the timing of working capital adjustments and our continued growth in revenue partially offset by our continued investments in our operations.

Cash provided by operating activities reflected our net loss of $84.6 million, offset by a decrease in our net operating assets of $16.5 million and non-cash charges of $86.0 million related primarily to depreciation and amortization, stock-based compensation expense, amortization of debt issuance costs and other non-cash charges.

The decrease in our net operating assets was primarily due to a $23.2 million increase in deferred revenue, a $18.1 million decrease in accounts receivable due to an increase in collections and a $3.6 million increase in accounts payable, which each had a positive impact on operating cash flow.

These factors were partially offset by a $12.5 million decrease in accrued expenses, primarily as a result of the payout of annual bonuses and year-end commissions, a $10.5 million increase in prepaid expenses, a $5.1 million increase in deferred contract acquisition and fulfillment costs and a $0.3 million decrease in other liabilities, which each had a negative impact on operating cash flow.

Investing Activities

Investing activities used $10.2 million of cash in the three months ended March 31, 2023, consisting of $34.0 million of cash paid for the acquisition of Minerva, $4.8 million for capitalization of internal-use software costs, $2.3 million in capital expenditures to purchase computer equipment and leasehold improvements, partially offset by $30.9 million of investment sales and maturities, net of purchases.

Investing activities used $35.9 million of cash in the three months ended March 31, 2022, consisting of $29.3 million of investment purchases, net of sales and maturities, $3.5 million for capitalization of internal-use software costs and $3.1 million in capital expenditures to purchase computer equipment, furniture and fixtures and leasehold improvements.

Investing activities used $62.2 million of cash in the six months ended June 30, 2023, consisting of $34.8 million of cash paid for the acquisition of Minerva, $9.1 million for capitalization of internal-use software costs, $3.7 million in capital expenditures to purchase computer equipment and leasehold improvements, partially offset by $14.6 million in purchases of investments, net of sales and maturities.

Investing activities used $14.5 million of cash in the six months ended June 30, 2022, consisting of $8.1 million for capitalization of internal-use software costs, $7.2 million in capital expenditures to purchase computer equipment and leasehold improvements and $0.5 million of other investments, partially offset by $1.3 million of investment sales and maturities, net of purchases.

Financing Activities

Financing activities provided $2.8 million of cash in the three months ended March 31, 2023, which consisted primarily of $6.2 million in proceeds from the issuance of common stock purchased by employees under the Rapid7, Inc.

Financing activities provided $4.0 million of cash in the six months ended June 30, 2023, which consisted primarily of $6.2 million in proceeds from the issuance of common stock purchased by employees under the Rapid7, Inc.

2015 Employee Stock Purchase Plan (“ESPP”) and $2.7 million in proceeds from the exercise of stock options, partially offset by $2.3 million in payments related to the acquisition of IntSights and $2.6 million in withholding taxes paid for the net share settlement of equity awards.

Financing activities provided $3.2 million of cash in the three months ended March 31, 2022, which consisted primarily of $5.7 million in proceeds from the issuance of common stock purchased by employees under the ESPP and $1.0 million in proceeds from the exercise of stock options, partially offset by $3.5 million in withholding taxes paid for the net share settlement of equity awards.

Financing activities provided $1.4 million of cash in the six months ended June 30, 2022, which consisted primarily of $5.7 million in proceeds from the issuance of common stock purchased by employees under the ESPP and $1.2 million in proceeds from the exercise of stock options, partially offset by $5.1 million in withholding taxes paid for the net share settlement of equity awards, $0.3 million in payments related to the acquisition of Velocidex Enterprises Pty Ltd.

and $0.1 million in payments of debt issuance costs.

Contractual Obligations and Commitments

As of March 31, 2023, there were no additional material changes from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on February 24, 2023 (the “Annual Report”).

As of June 30, 2023, there were no additional material changes from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on February 24, 2023 (the “Annual Report”).

Off-Balance Sheet Arrangements

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The preparation of our consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses.

estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances.

We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances.

We evaluate our estimates and assumptions on an ongoing basis.

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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