Rapid7, Inc. 10-Q

Item 1. Financial Statements . RAPID7, INC. Condensed Consolidated Balance Sheets (Unaudited) (in thousands, except share and per share data) June 30, 2024 December 31, 2023 Assets Current assets: Cash and cash equivalents $ 236,975 $ 213,629 Short-term investments 205,671 169,544 Accounts receivable, net of allowance for credit losses of $ 1,380 and $ 951 at June 30, 2024 and December 31, 2023, respectively 143,671 164,862 Deferred contract acquisition and fulfillment costs, current portion 48,880 45,008 Prepaid expenses and other current assets 39,194 41,407 Total current assets 674,391 634,450 Long-term investments 51,434 56,171 Property and equipment, net 34,884 39,642 Operating lease right-of-use assets 50,645 54,693 Deferred contract acquisition and fulfillment costs, non-current portion 74,693 76,601 Goodwill 536,351 536,351 Intangible assets, net 84,019 94,546 Other assets 20,176 12,894 Total assets $ 1,526,593 $ 1,505,348 Liabilities and Stockholders’ Deficit Current liabilities: Accounts payable $ 12,820 $ 15,812 Accrued expenses and other current liabilities 67,242 85,025 Convertible senior notes, current portion, net 45,737 — Operating lease liabilities, current portion 15,592 13,452 Deferred revenue, current portion 437,222 455,503 Total current liabilities 578,613 569,792 Convertible senior notes non-current portion, net 886,272 929,996 Operating lease liabilities, non-current portion 73,425 81,130 Deferred revenue, non-current portion 27,512 32,577 Other long-term liabilities 13,691 10,032 Total liabilities $ 1,579,513 $ 1,623,527 Stockholders’ deficit: Preferred stock, $ 0.01 par value per share; 100,000,000 shares authorized at June 30, 2024 and December 31, 2023; 0 shares issued and outstanding at June 30, 2024 and December 31, 2023 $ — $ — Common stock, $ 0.01 par value per share; 100,000,000 shares authorized at June 30, 2024 and December 31, 2023; 63,271,273 and 62,283,630 shares issued at June 30, 2024 and December 31, 2023, respectively; 62,701,694 and 61,714,051 shares outstanding at June 30, 2024 and December 31, 2023, respectively 627 617 Treasury stock, at cost, 569,579 shares at June 30, 2024 and December 31, 2023 ( 4,765 ) ( 4,765 ) Additional paid-in-capital 951,621 894,630 Accumulated other comprehensive (loss) income ( 851 ) 1,344 Accumulated deficit ( 999,552 ) ( 1,010,005 ) Total stockholders’ deficit ( 52,920 ) ( 118,179 ) Total liabilities and stockholders’ deficit $ 1,526,593 $ 1,505,348 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 1 Table of Contents RAPID7, INC. Condensed Consolidated Statements of Operations (Unaudited) (in thousands, except share and per share data) Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Revenue: Product subscriptions $ 200,067 $ 181,701 $ 396,985 $ 355,473 Professional services 7,924 8,721 16,107 18,123 Total revenue 207,991 190,422 413,092 373,596 Cost of revenue: Product subscriptions 54,982 51,148 109,637 99,336 Professional services 5,866 7,016 12,114 14,827 Total cost of revenue 60,848 58,164 121,751 114,163 Total gross profit 147,143 132,258 291,341 259,433 Operating expenses: Research and development 40,056 50,762 81,046 97,108 Sales and marketing 77,795 83,036 150,600 163,623 General and administrative 22,412 22,888 42,247 47,095 Impairment of long-lived assets — 27,231 — 27,231 Total operating expenses 140,263 183,917 273,893 335,057 Income (loss) from operations 6,880 ( 51,659 ) 17,448 ( 75,624 ) Other income (expense), net: Interest income 5,221 1,787 9,941 3,455 Interest expense ( 2,673 ) ( 2,773 ) ( 5,343 ) ( 5,490 ) Other expense, net ( 695 ) ( 13,268 ) ( 2,130 ) ( 13,575 ) Income (loss) before income taxes 8,733 ( 65,913 ) 19,916 ( 91,234 ) Provision for income taxes 538 869 9,463 1,463 Net income (loss) $ 8,195 $ ( 66,782 ) $ 10,453 $ ( 92,697 ) Net income (loss) per share, basic $ 0.13 $ ( 1.10 ) $ 0.17 $ ( 1.54 ) Net income (loss) per share, diluted $ 0.11 $ ( 1.10 ) $ 0.14 $ ( 1.54 ) Weighted-average common shares outstanding, basic 62,496,289 60,470,396 62,201,182 60,180,954 Weighted-average common shares outstanding, diluted 74,250,360 60,470,396 74,135,121 60,180,954 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 2 Table of Contents RAPID7, INC. Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) (in thousands) Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Net income (loss) $ 8,195 $ ( 66,782 ) $ 10,453 $ ( 92,697 ) Other comprehensive income (loss): Change in fair value of cash flow hedges ( 329 ) 447 ( 958 ) 639 Adjustment for net (gains)/losses realized on cash flow hedges and included in net income (loss), net of taxes ( 92 ) ( 61 ) ( 473 ) 580 Total change in unrealized (losses) gains on cash flow hedges ( 421 ) 386 ( 1,431 ) 1,219 Change in unrealized (losses) gains on investments ( 209 ) 64 ( 764 ) 442 Total other comprehensive (loss) income ( 630 ) 450 ( 2,195 ) 1,661 Comprehensive income (loss) $ 7,565 $ ( 66,332 ) $ 8,258 $ ( 91,036 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 Table of Contents RAPID7, INC. Condensed Consolidated Statements of Changes in Stockholders' Deficit (Unaudited) Three Months Ended June 30, 2024 and 2023 (in thousands) Common stock Treasury stock Additional paid-in-capital Accumulated other comprehensive loss Accumulated deficit Total stockholders’ deficit Shares Amount Shares Amount Balance, March 31, 2024 62,269 $ 623 570 $ ( 4,765 ) $ 925,661 $ ( 221 ) $ ( 1,007,747 ) $ ( 86,449 ) Stock-based compensation expense — — — — 27,155 — — 27,155 Vesting of restricted stock units 457 5 — — ( 5 ) — — — Shares withheld for employee taxes ( 33 ) — — — ( 1,326 ) — — ( 1,326 ) Issuance of common stock upon exercise of stock options 9 — — — 135 — — 135 Other comprehensive loss — — — — — ( 630 ) — ( 630 ) Net income — — — — — — 8,195 8,195 Balance, June 30, 2024 62,702 $ 628 570 $ ( 4,765 ) $ 951,620 $ ( 851 ) $ ( 999,552 ) $ ( 52,920 ) Common stock Treasury stock Additional paid-in-capital Accumulated other comprehensive loss Accumulated deficit Total stockholders’ deficit Shares Amount Shares Amount Balance, March 31, 2023 60,322 $ 603 570 $ ( 4,765 ) $ 780,850 $ ( 200 ) $ ( 886,660 ) $ ( 110,172 ) Stock-based compensation expense — — — — 31,276 — — 31,276 Vesting of restricted stock units 442 4 — — ( 4 ) — — — Shares withheld for employee taxes ( 28 ) — — — ( 1,324 ) — — ( 1,324 ) Issuance of common stock upon exercise of stock options 171 2 — — 2,499 — — 2,501 Issuance of common stock in relation to an acquisition 33 — — — — — — — Reclassification of 2023 capped calls from equity to derivative asset — — — — 33,029 — — 33,029 Other comprehensive gain — — — — — 450 — 450 Net loss — — — — — — ( 66,782 ) ( 66,782 ) Balance, June 30, 2023 60,940 $ 609 570 $ ( 4,765 ) $ 846,326 $ 250 $ ( 953,442 ) $ ( 111,022 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 Table of Contents RAPID7, INC. Condensed Consolidated Statements of Changes in Stockholders' Deficit (Unaudited) Six Months Ended June 30, 2024 and 2023 (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, 2023 61,714 $ 617 570 $ ( 4,765 ) $ 894,630 $ 1,344 $ ( 1,010,005 ) $ ( 118,179 ) Stock-based compensation expense — — — — 53,642 — — 53,642 Issuance of common stock under employee stock purchase plan 148 2 — — 5,044 — — 5,046 Vesting of restricted stock units 782 8 — — ( 8 ) — — — Shares withheld for employee taxes ( 62 ) — — — ( 3,090 ) — — ( 3,090 ) Issuance of common stock upon exercise of stock options 120 1 — — 1,402 — — 1,403 Other comprehensive loss — — — — — ( 2,195 ) — ( 2,195 ) Net income — — — — — — 10,453 10,453 Balance, June 30, 2024 62,702 $ 628 570 $ ( 4,765 ) $ 951,620 $ ( 851 ) $ ( 999,552 ) $ ( 52,920 ) 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 — — — — 60,794 — — 60,794 Issuance of common stock under employee stock purchase plan 178 2 — — 6,172 — — 6,174 Vesting of restricted stock units 801 7 — — ( 7 ) — — — Shares withheld for employee taxes ( 53 ) — — — ( 2,591 ) — — ( 2,591 ) Issuance of common stock upon exercise of stock options 187 2 — — 2,680 — — 2,682 Issuance of common stock in relation to an acquisition 107 1 — — ( 1 ) — — — Repurchase of common stock in relation to acquisition — — 83 ( 1 ) 1 — — — Reclassification of 2023 capped calls from equity to derivative asset — — — — 33,029 — — 33,029 Other comprehensive gain — — — — — 1,661 — 1,661 Net loss — — — — — — ( 92,697 ) ( 92,697 ) Balance, June 30, 2023 60,940 $ 609 570 $ ( 4,765 ) $ 846,326 $ 250 $ ( 953,442 ) $ ( 111,022 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 Table of Contents RAPID7, INC. Condensed Consolidated Statements of Cash Flows (Unaudited) (in thousands) Six Months Ended June 30, 2024 2023 Cash flows from operating activities: Net income (loss) $ 10,453 $ ( 92,697 ) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 22,219 22,879 Amortization of debt issuance costs 2,108 2,020 Stock-based compensation expense 52,302 61,068 Impairment of long-lived assets — 27,231 Change in fair value of derivative assets — 12,660 Deferred income taxes 1,840 — Other ( 1,352 ) 4,423 Changes in assets and liabilities: Accounts receivable 19,990 15,110 Deferred contract acquisition and fulfillment costs ( 1,964 ) ( 5,963 ) Prepaid expenses and other assets 430 1,400 Accounts payable ( 3,021 ) ( 1,282 ) Accrued expenses ( 18,391 ) ( 11,968 ) Deferred revenue ( 23,346 ) 1,783 Other liabilities 2,660 483 Net cash provided by operating activities 63,928 37,147 Cash flows from investing activities: Business acquisitions, net of cash acquired — ( 34,841 ) Purchases of property and equipment ( 900 ) ( 3,704 ) Capitalization of internal-use software ( 6,289 ) ( 9,081 ) Purchases of investments ( 157,967 ) ( 80,257 ) Sales and maturities of investments 130,001 65,700 Other investing activities 360 — Net cash used in investing activities ( 34,795 ) ( 62,183 ) Cash flows from financing activities: Payments related to business acquisitions — ( 2,250 ) Taxes paid related to net share settlement of equity awards ( 3,089 ) ( 2,591 ) Proceeds from employee stock purchase plan 5,046 6,174 Proceeds from stock option exercises 1,404 2,682 Net cash provided by financing activities 3,361 4,015 Effect of exchange rate changes on cash ,cash equivalents and restricted cash ( 2,076 ) ( 337 ) Net increase (decrease) in cash, cash equivalents and restricted cash 30,418 ( 21,358 ) Cash, cash equivalents and restricted cash, beginning of period 214,130 207,804 Cash, cash equivalents and restricted cash, end of period $ 244,548 $ 186,446 Supplemental cash flow information: Cash paid for interest on convertible senior notes $ 3,215 $ 3,337 Cash paid for income taxes, net of refunds $ 5,505 $ 1,221 Reconciliation of cash, cash equivalents and restricted cash: Cash and cash equivalents $ 236,975 $ 185,929 Restricted cash included in other assets and prepaid expenses and other current assets 7,573 517 Total cash, cash equivalents and restricted cash $ 244,548 $ 186,446 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 Table of Contents RAPID7, INC. Notes to Condensed 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 platform solutions. 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 condensed 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 condensed 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, 2023 filed with the SEC on February 26, 2024. The consolidated financial statements include our results of operations and those of our wholly-owned subsidiaries and reflect all adjustments (consisting solely of normal, recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods presented. All intercompany transactions and balances have been eliminated in consolidation. The results of operations for the three and six months ended June 30, 2024 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, 2023. Restricted Cash As of June 30, 2024, we had $ 7.6 million of restricted cash recorded on our condensed consolidated balance sheet in prepaid expenses and other current assets and other assets in letters of credit outstanding as collateral for certain office space leases. 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) product 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. 7 Table of Contents Product Subscriptions Product subscriptions consists primarily 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. • Content subscriptions and our maintenance and support services are sold with our term software licenses. Revenue related to our content subscriptions associated with our software licenses 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. The majority of our professional services contracts 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 June 30, 2024 and 2023, we recognized revenue of $ 179.0 million and $ 164.9 million, respectively, and for the six months ended June 30, 2024 and 2023, we recognized $ 310.8 million and $ 288.3 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 June 30, 2024 and December 31, 2023, unbilled receivables of $ 2.4 million and $ 1.1 million, respectively, are included in prepaid expenses and other current assets in our consolidated balance sheet. As of June 30, 2024 and December 31, 2023, we had no contract assets recorded on our condensed 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 June 30, 2024. The estimated revenues do not include unexercised contract renewals. Next Twelve Months Thereafter (in thousands) Product subscriptions $ 560,247 $ 272,911 Professional services 16,155 6,999 Total $ 576,402 $ 279,910 8 Table of Contents Note 3. Business Combinations Minerva Labs Ltd. On March 14, 2023, we acquired Minerva Labs Ltd. (“Minerva”), a leading provider of anti-evasion and ransomware prevention technology, for a purchase price with an aggregate fair value of $ 34.6 million. The purchase consideration consisted of $ 35 million paid in cash at closing and a $( 0.4 ) million receivable for purchase price adjustments. The assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. The excess of the purchase price over the assets acquired and liabilities assumed was recorded as goodwill. The fair value of net assets acquired, goodwill and intangible assets were $ 13.9 million, $ 20.7 million and $ 12.8 million, respectively. The goodwill was allocated to our one reporting unit. The acquired goodwill and intangible assets were not deductible for tax purposes. In the first quarter of 2024, we sold acquired intellectual property through a non-cash intercompany transaction, which for the three and six months ended June 30, 2024 resulted in $ 4.6 million of current tax expense and $ 1.8 million of deferred tax expense in Israel. Note 4. Investments Our investments, which are all classified as available-for-sale, consisted of the following: As of June 30, 2024 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (in thousands) Description: U.S government agencies $ 257,475 $ 3 $ ( 373 ) $ 257,105 Total $ 257,475 $ 3 $ ( 373 ) $ 257,105 As of December 31, 2023 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (in thousands) Description: U.S government agencies $ 222,820 $ 467 $ ( 65 ) $ 223,222 Agency bonds 2,500 — ( 7 ) 2,493 Total $ 225,320 $ 467 $ ( 72 ) $ 225,715 As of June 30, 2024, our available-for-sale investments had maturities ranging fro m 1 to 15 months. As of December 31, 2023, our available-for-sale investments had maturities ranging from 1 to 18 months. For all of our investments for which the amortized cost basis was greater than the fair value at June 30, 2024 and December 31, 2023, 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. 9 Table of Contents • 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 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. 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 June 30, 2024 Level 1 Level 2 Level 3 Total (in thousands) Description: Assets: U.S. government agencies $ 257,105 $ — $ — $ 257,105 Foreign currency forward contracts designated as cash flow hedges (prepaid expenses and other current assets and other assets) — 1,662 — 1,662 Total assets $ 257,105 $ 1,662 $ — $ 258,767 Liabilities: Foreign currency forward contracts designated as cash flow hedges (other current liabilities) — 419 — 419 Total liabilities $ — $ 419 $ — $ 419 As of December 31, 2023 Level 1 Level 2 Level 3 Total (in thousands) Description: Assets: U.S. government agencies $ 223,222 $ — $ — $ 223,222 Agency bonds — 2,493 — 2,493 Foreign currency forward contracts designated as cash flow hedges (prepaid expenses and other current assets and other assets) — 1,322 — 1,322 Total assets $ 223,222 $ 3,815 $ — $ 227,037 Liabilities: Foreign currency forward contracts designated as cash flow hedges (other current liabilities) — 55 — 55 Total liabilities $ — $ 55 $ — $ 55 Cash and cash equivalents are excluded from the table above as carrying amounts reported in our condensed consolidated balance sheet equal or approximate fair value. As of June 30, 2024, the fair value of our 2.25 %, 0.25 % and 1.25 % convertible senior notes due 2025, 2027 and 2029, as further described in Note 10, Debt , was $ 45.1 million, $ 536.2 million and $ 282.9 million, respectively, based upon quoted market prices. We consider the fair value of the Notes (as defined in Note 10, Debt) 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: June 30, December 31, 2024 2023 (in thousands) Computer equipment and software $ 27,355 $ 26,442 Furniture and fixtures 10,823 10,850 Leasehold improvements 56,151 56,151 Total 94,328 93,443 Less accumulated depreciation ( 59,444 ) ( 53,801 ) Property and equipment, net $ 34,884 $ 39,642 Depreciation expense was $ 2.8 million and $ 3.7 million for the three months ended June 30, 2024 and 2023, respectively, and $ 5.7 million and $ 7.6 million for the six months ended June 30, 2024 and 2023, respectively. Note 7. Goodwill and Intangibles Goodwill was $ 536.4 million as of June 30, 2024 and December 31, 2023. The following table presents details of our intangible assets which include acquired identifiable intangible assets and capitalized internal-use software costs: Weighted- Average Estimated Useful Life (years) As of June 30, 2024 As of December 31, 2023 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 $ 135,355 $ ( 85,360 ) $ 49,995 $ 135,355 $ ( 77,031 ) $ 58,324 Customer relationships 4.5 12,000 ( 9,059 ) 2,941 12,000 ( 7,755 ) 4,245 Trade names 3.1 2,619 ( 2,469 ) 150 2,619 ( 2,379 ) 240 Total acquired intangible assets 149,974 ( 96,887 ) 53,087 149,974 ( 87,164 ) 62,810 Internal-use software 3.0 61,380 ( 30,448 ) 30,933 55,371 ( 23,635 ) 31,736 Total intangible assets $ 211,354 $ ( 127,335 ) $ 84,019 $ 205,345 $ ( 110,799 ) $ 94,546 Amortization expense was $ 8.1 million and $ 8.1 million for the three months ended June 30, 2024 and 2023, respectively, and $ 16.5 million and $ 15.3 million for the six months ended June 30, 2024 and 2023, respectively. Estimated future amortization expense of the acquired identifiable intangible assets and completed capitalized internal-use software costs as of June 30, 2024 was as follows (in thousands): 2024 (for the remaining six months) $ 19,373 2025 28,630 2026 18,799 2027 7,163 2028 1,600 2029 and thereafter 3,531 Total $ 79,096 The table above excludes the impact of $ 4.9 million of capitalized internal-use software costs for projects that have not been completed as of June 30, 2024, and therefore, all the costs associated with these projects have not been incurred. 11 Table of Contents Note 8. Deferred Contract Acquisitions and Fulfillment Costs The following table summarizes the activity of the deferred contract acquisition and fulfillment costs for the six months ended June 30, 2024 and 2023: Six Months Ended June 30, 2024 2023 (in thousands) Beginning balance $ 121,609 $ 103,075 Capitalization of contract acquisition and fulfillment costs 27,466 25,480 Amortization of deferred contract acquisition and fulfillment costs ( 25,502 ) ( 19,517 ) Ending balance $ 123,573 $ 109,038 Note 9. Derivative 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 eighteen months or less, and as of June 30, 2024 and December 31, 2023, outstanding forward contracts had a total notional value of $ 42.7 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 and six months ended June 30, 2024, 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”), in March 2021, we issued $ 600.0 million aggregate principal amount of convertible senior notes due March 15, 2027 (the “2027 Notes”), and in September 2023, we issued $ 300.0 million aggregate principal amount of convertible senior notes due March 15, 2029 (the “2029 Notes”) (collectively, the “Notes”). In September 2023, we used $ 201.0 million of the proceeds from the issuance of the 2029 Notes to repurchase and retire $ 184.0 million aggregate principal amount of the 2025 Notes and paid accrued and unpaid interest thereon. 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 0.8 2027 Notes March 15, 2027 0.25 % September 15, 2021 0.67 % March 15 and September 15 9.6734 $ 103.38 5.8 2029 Notes March 15, 2029 1.25 % March 15, 2024 1.69 % March 15 and September 15 15.4213 $ 64.85 4.6 The 2025 Notes, the 2027 Notes and the 2029 Notes are senior unsecured obligations, do not contain any financial covenants and are governed by indentures between the Company, as issuer, and U.S. Trust Company, Bank National Association, as trustee (the “Indentures”). The total net proceeds from the 2025 Notes, the 2027 Notes and the 2029 Notes offerings, after deducting initial purchase discounts and debt issuance costs, were $ 222.8 million, $ 585.0 million and $ 292.0 million, respectively. For additional details on the terms of our Notes, see Note 11, Debt , to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2023. As of June 30, 2024, the 2025 Notes, the 2027 Notes and the 2029 Notes were not convertible at the option of the holders. The holders may convert the 2025 Notes, the 2027 Notes and the 2029 Notes at any time on or after November 1, 2024, December 15, 2026 and December 15, 2028, 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 12 Table of Contents 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. Accounting for the Notes In accounting for the issuance of the Notes, the principal less debt issuance costs are recorded as debt on our condensed 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 June 30, 2024 and December 31, 2023 was as follows (in thousands): 2025 Notes 2027 Notes 2029 Notes Principal Unamortized debt issuance costs Total Principal Unamortized debt issuance costs Total Principal Unamortized debt issuance costs Total Balance at December 31, 2023 $ 45,992 $ ( 404 ) $ 45,588 $ 600,000 $ ( 8,077 ) $ 591,923 $ 300,000 $ ( 7,515 ) $ 292,485 Amortization of debt issuance costs — 148 148 — 1,244 1,244 — 621 621 Balance at June 30, 2024 $ 45,992 $ ( 256 ) $ 45,736 $ 600,000 $ ( 6,833 ) $ 593,167 $ 300,000 $ ( 6,894 ) $ 293,106 Interest expense related to the Notes was as follows (in thousands): Three Months Ended June 30, 2024 2023 2025 Notes 2027 Notes 2029 Notes Total 2025 Notes 2027 Notes Total Contractual interest expense $ 259 $ 375 $ 937 $ 1,571 $ 1,294 $ 375 $ 1,669 Amortization of debt issuance costs 73 624 311 1,008 361 619 980 Total interest expense $ 332 $ 999 $ 1,248 $ 2,579 $ 1,655 $ 994 $ 2,649 Six Months Ended June 30, 2024 2023 2025 Notes 2027 Notes 2029 Notes Total 2025 Notes 2027 Notes Total Contractual interest expense $ 518 $ 750 $ 1,874 $ 3,142 $ 2,588 $ 750 $ 3,338 Amortization of debt issuance costs 148 1,244 621 2,013 701 1,224 1,925 Total interest expense $ 666 $ 1,994 $ 2,495 $ 5,155 $ 3,289 $ 1,974 $ 5,263 Capped Calls In connection with the offering of the 2025 Notes, the 2027 Notes and the 2029 Notes, we entered into privately negotiated capped call transactions with certain counterparties (the “2025 Capped Calls”, “2027 Capped Calls” and “2029 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: 13 Table of Contents 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 Capped Calls Entered into in Connection with the Issuance of the 2029 Notes Initial strike price, subject to certain adjustments $ 61.02 $ 103.38 $ 64.85 Cap price, subject to certain adjustments $ 93.88 $ 159.04 $ 97.88 Total premium paid (in thousands) $ 27,255 $ 76,020 $ 36,570 Expiration dates March 4, 2025 - April 29, 2025 January 1, 2027 - March 11, 2027 February 13, 2029 - March 13, 2029 For accounting purposes, the 2025 Capped Calls, the 2027 Capped Calls and the 2029 Capped Calls are separate transactions, and not part of the terms of the 2025 Notes, the 2027 Notes and the 2029 Notes. The 2025 Capped Calls, 2027 Capped Calls and 2029 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 (as amended, in December 2021) that 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 condensed 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 condensed consolidated statement of operations. The Credit Agreement contains certain financial covenants including a requirement that we maintain specified minimum recurring revenue and liquidity amounts. 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 June 30, 2024, we did not have any outstanding borrowings under the Credit Agreement. Note 11. Stock-Based Compensation ( a) General Stock-based compensation expense for restricted stock units (“RSUs”), performance-based restricted stock units (“PSUs”), stock options and purchase rights issued under our employee stock purchase plan was classified in the accompanying condensed consolidated statements of operations as follows: Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 (in thousands) Stock-based compensation expense: Cost of revenue 3,126 2,984 5,706 5,821 Research and development 8,597 11,634 16,163 22,139 Sales and marketing 7,512 8,138 14,359 15,981 General and administrative 8,174 8,939 16,074 17,127 Total stock-based compensation expense $ 27,409 $ 31,695 $ 52,302 $ 61,068 We recognize compensation cost of all awards on a straight-line basis over the applicable vesting period, which is generally three to four years . Our Compensation Committee adopted and approved the performance goals, targets and payout formulas for our 2024 and 2023 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 each of the three months ended June 30, 2024 and 2023, we recognized stock-based compensation expense related to such bonuses in the amount of $ 0.4 million, and during the six months ended June 30, 2024 and 2023, we recognized stock-based compensation expense in the amount of $ 0.5 million a nd $ 1.1 million, respectively, based on the probable expected performance against the pre-established corporate financial objectives as of June 30, 2024 and 2023. For employees, 14 Table of Contents 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, Restricted Stock Units and Performance-Based Restricted Stock Units RSUs and PSUs activity during the six months ended June 30, 2024 was as follows: Shares Weighted- Average Grant Date Fair Value Unvested balance as of December 31, 2023 2,714,426 $ 63.02 Granted 2,101,535 $ 53.97 Vested ( 781,389 ) $ 60.68 Forfeited ( 389,590 ) $ 61.04 Unvested balance as of June 30, 2024 3,644,982 $ 58.42 As of June 30, 2024, the unrecognized compensation expense related to our unvested RSUs and PSUs was $ 188.9 million. This unrecognized compensation expense will be recognized over an estimated weighted-average amortization period of 2.2 years. In January 2024, our Com pensation Committee awarded 279,570 PSUs that required the achievement of net annualized recurring revenue (“Net ARR”) and Adjusted EBITDA targets for the 2024 full-year to earn any payout. Net ARR is defined as the change in the annual value of all recurring revenue related to contracts in place at year end. In addition, the portion of the PSUs that are earned would be capped at a maximum of 200 % of the target level payout and if certain net ARR or Adjusted EBITDA goals were 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. In the three and six months ended June 30, 2024, we recorded $ 0.9 million and $ 1.8 million, respectively, of stock-based compensation expense related to these PSUs based on estimated achievement of the performance criteria. (c) Stock Options Stock option activity during the six months ended June 30, 2024 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, 2023 716,270 $ 12.26 1.97 $ 32,115 Granted — — Exercised ( 120,322 ) $ 11.66 $ 4,667 Forfeited/cancelled ( 450 ) $ 7.73 Outstanding as of June 30, 2024 595,498 $ 12.39 1.69 $ 18,367 Vested and exercisable as of June 30, 2024 595,498 $ 12.39 1.69 $ 22,146 (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, 2024, we issued shares of common stock to employees, with a purchase price of either $ 33.78 or $ 39.78 per share, for aggregate proceeds of $ 5.0 million. 15 Table of Contents Note 12. Net Income (Loss) per Share The following table summarizes the computation of basic and diluted net income (loss) per share of our common stock for the three months June 30, 2024 and 2023: Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 (in thousands, except share and per share data) Numerator: Net income (loss) $ 8,195 $ ( 66,782 ) $ 10,453 $ ( 92,697 ) Denominator: Weighted-average common shares outstanding, basic 62,496,289 60,470,396 62,201,182 60,180,954 Weighted-average common shares outstanding, diluted 74,250,360 60,470,396 74,135,121 $ 60,180,954 Net income (loss) per share, basic $ 0.13 $ ( 1.10 ) $ 0.17 $ ( 1.54 ) Net income (loss) per share, diluted $ 0.11 $ ( 1.10 ) $ 0.14 ( 1.54 ) We intend to settle any conversion of our 2025 Notes, 2027 Notes and 2029 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 and six months ended June 30, 2024 and 2023, the shares underlying the Notes were not considered in the calculation of diluted net income (loss) per share as the effect would have been anti-dilutive. In connection with the issuance of the 2025 Notes, the 2027 Notes and the 2029 Notes, we entered into the 2025 Capped Calls, 2027 Capped Calls and 2029 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 of June 30, 2024 and 2023, the 2025 Notes, the 2027 Notes and the 2029 Notes were not convertible at the option of the holder. We had not received any conversion notices through the issuance date of our unaudited condensed 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: Three and Six Months Ended June 30, 2024 2023 Options to purchase common stock 595,498 744,262 Unvested restricted stock units 3,644,982 3,838,671 Common stock issued in conjunction to acquisitions 36,923 115,041 Shares to be issued under ESPP 85,855 120,586 Convertible senior notes 11,183,611 9,572,955 Total 15,546,869 14,391,515 Note 13. Commitments and Contingencies (a) Warranty We provide limited product warranties. Historically, any payments made under these provisions have been immaterial. (b) Litigation and Claims 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 16 Table of Contents 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. (d) Income Taxes From time to time, we may receive income tax assessments from taxing authorities asserting additional tax liabilities owed by the Company. During the quarter ended June 30, 2024, we received an initial assessment from the Israel Tax Authority (“ITA”) of approximately 324 million Israeli New Shekels (approximately $ 87 million, based upon current exchange rates between the Israeli New Shekel and the US Dollar) related to fiscal year 2021. Based on our interpretation of the regulations and available case law, we believe that the tax positions we have taken on our filed tax return in Israel are sustainable and we intend to defend our position through all available means. As such, we have not recorded any impact of the ITA assessment in our condensed consolidated financial statements as of, and for the three and six months ended June 30, 2024. We are continuing to monitor developments related to this matter and its impact on our existing income tax reserves for all open years. If we are unsuccessful in sustaining our tax position in this matter, our financial condition and results of operations would be adversely affected. Note 14. 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. Net revenues by geographic area presented based upon the location of the customer are as follows: Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 (in thousands) North America $ 159,322 $ 149,683 $ 316,662 $ 293,564 Rest of world 48,669 40,739 96,430 80,032 Total $ 207,991 $ 190,422 $ 413,092 $ 373,596 Property and equipment, net by geographic area was as follows: As of June 30, 2024 As of December 31, 2023 (in thousands) North America $ 24,220 $ 27,609 Rest of world 10,664 12,033 Total $ 34,884 $ 39,642 17 Table of Contents Note 15. Restructuring On August 7, 2023, our board of directors approved a restructuring plan that was 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 (collectively, the “Restructuring Plan”). The Restructuring Plan included a reduction of the Company’s workforce by approximately 16 %. During the first quarter of 2024, the execution of the Restructuring Plan was completed and we recorded $( 0.2 ) million of restructuring charges within general and administrative expense in the condensed consolidated statements of operations. The following table presents the activity of the restructuring liability for the six months ended June 30, 2024: Restructuring Liability (in thousands) Balance at December 31, 2023 $ 3,764 Charges ( 190 ) Payments ( 3,574 ) Balance at June 30, 2024 $ — Note 16. Subsequent Event On July 3, 2024, we acquired Noetic Cyber, Inc, (“Noetic”) a provider of cyber asset attack surface management, for consideration of approximately $ 39.2 million, subject to customary working capital adjustments as set forth in the merger agreement, including an aggregate value of $ 2.3 million of our common stock to be issued to two key employees of Noetic in three installments over a 36 -month period following the closing date of the transaction, subject to continued employment requirements (the “Closing Consideration”). In addition, subject to the terms of the merger agreement, we may also be required to pay additional contingent consideration of up to $ 20.0 million based on the achievement of certain performance targets (the “Earnout Consideration”), measured annually upon the first, second and third anniversaries of the closing date of the transaction (the “Earnout Period”). If the full $ 20.0 million is realized, approximately $ 6.9 million of the Earnout Consideration will be issued in the form of shares of our common stock subject to continued employment requirements over the Earnout Period, and the remainder will be paid in cash. 18 Table of Contents