UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-37496

RAPID7, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware	35-2423994
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
100 Summer Street Boston, MA	02110
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (617) 247-1717

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐  (Do not check if a small reporting company)	Small reporting company	☐
Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of August 1, 2018, there were 46,845,430 shares of the registrant’s common stock, $0.01 par value per share, outstanding.

Table of Contents

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	1
	Consolidated Balance Sheets	1
	Consolidated Statements of Operations	2
	Consolidated Statements of Comprehensive Loss	3
	Consolidated Statements of Cash Flows	4
	Notes to Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	38
PART II.	OTHER INFORMATION	40
Item 1.	Legal Proceedings	40
Item 1A.	Risk Factors	40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	61
Item 3.	Defaults Upon Senior Securities	61
Item 4.	Mine Safety Disclosures	61
Item 5.	Other Information	61
Item 6.	Exhibits	62

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

RAPID7, INC.

Consolidated Balance Sheets (Unaudited)

(in thousands, except share and per share data)

	June 30, 2018			December 31, 2017
Assets
Current assets:
Cash and cash equivalents	$	100,731		$	51,562
Short-term investments	13,983			39,178
Accounts receivable, net of allowance for doubtful accounts of $1,475 and $1,478 at June 30, 2018 and December 31, 2017, respectively	48,476			73,661
Deferred contract acquisition and fulfillment costs, current portion	9,481			—
Prepaid expenses and other current assets	13,212			8,877
Total current assets	185,883			173,278
Long-term investments	3,929			1,102
Property and equipment, net	11,184			8,589
Goodwill	83,164			83,164
Intangible assets, net	16,002			16,640
Deferred contract acquisition and fulfillment costs, non-current portion	22,214			—
Other assets	1,395			1,363
Total assets	$	323,771		$	284,136
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	4,612		$	2,240
Accrued expenses	21,832			29,728
Deferred revenue, current portion	153,634			155,811
Other current liabilities	1,079			1,706
Total current liabilities	181,157			189,485
Deferred revenue, non-current portion	70,766			68,689
Other long-term liabilities	2,305			1,809
Total liabilities	254,228			259,983
Stockholders’ equity:
Preferred stock, $0.01 par value per share; 10,000,000 shares authorized at June 30, 2018 and December 31, 2017; 0 shares issued at June 30, 2018 and December 31, 2017	—			—
Common stock, $0.01 par value per share; 100,000,000 shares authorized at June 30, 2018 and December 31, 2017; 47,225,844 and 44,540,544 shares issued at June 30, 2018 and December 31, 2017, respectively; 46,739,036 and 44,053,736 shares outstanding at June 30, 2018 and December 31, 2017, respectively	467			441
Treasury stock, at cost, 486,808 shares at June 30, 2018 and December 31, 2017	(4,764		)	(4,764		)
Additional paid-in-capital	513,598			463,428
Accumulated other comprehensive loss	(24		)	(39		)
Accumulated deficit	(439,734		)	(434,913		)
Total stockholders’ equity	69,543			24,153
Total liabilities and stockholders’ equity	$	323,771		$	284,136

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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RAPID7, INC.

Consolidated Statements of Operations (Unaudited)

(in thousands, except share and per share data)

	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Revenue:
Products	$	39,043		$	27,168		$	74,322		$	53,110
Maintenance and support	10,610			11,338			21,363			22,140
Professional services	8,788			8,937			17,271			17,438
Total revenue	58,441			47,443			112,956			92,688
Cost of revenue:
Products	9,650			5,557			18,086			10,267
Maintenance and support	2,007			1,850			3,856			3,728
Professional services	5,736			5,672			12,045			11,348
Total cost of revenue	17,393			13,079			33,987			25,343
Total gross profit	41,048			34,364			78,969			67,345
Operating expenses:
Research and development	16,082			11,873			32,804			23,266
Sales and marketing	31,157			27,132			60,209			51,942
General and administrative	8,149			7,256			16,881			14,504
Total operating expenses	55,388			46,261			109,894			89,712
Loss from operations	(14,340		)	(11,897		)	(30,925		)	(22,367		)
Other income (expense), net:
Interest income (expense), net	464			218			705			387
Other income (expense), net	(326		)	229			(248		)	114
Loss before income taxes	(14,202		)	(11,450		)	(30,468		)	(21,866		)
Provision for income taxes	131			187			226			316
Net loss	$	(14,333	)	$	(11,637	)	$	(30,694	)	$	(22,182	)
Net loss per share, basic and diluted	$	(0.31	)	$	(0.27	)	$	(0.67	)	$	(0.52	)
Weighted-average common shares outstanding, basic and diluted	46,279,947			42,681,287			45,746,513			42,395,450

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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RAPID7, INC.

Consolidated Statements of Comprehensive Loss (Unaudited)

(in thousands)

	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Net loss	$	(14,333	)	$	(11,637	)	$	(30,694	)	$	(22,182	)
Other comprehensive gain (loss):
Change in fair value of investments	20			(10		)	15			(30		)
Adjustment for net losses realized and included in net loss	—			3			—			3
Total change in unrealized losses on investments	20			(7		)	15			(27		)
Comprehensive loss	$	(14,313	)	$	(11,644	)	$	(30,679	)	$	(22,209	)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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RAPID7, INC.

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

	Six Months Ended June 30,
	2018			2017
Cash flows from operating activities:
Net loss	$	(30,694	)	$	(22,182	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	5,077			3,237
Stock-based compensation expense	13,575			9,450
Provision for doubtful accounts	456			478
Foreign currency re-measurement loss (gain)	471			(238		)
Other non-cash (income) expense	(71		)	175
Changes in operating assets and liabilities:
Accounts receivable	24,586			1,240
Deferred contract acquisition and fulfillment costs	(4,531		)	—
Prepaid expenses and other assets	(3,602		)	412
Accounts payable	2,391			(1,657		)
Accrued expenses	(7,806		)	(2,122		)
Deferred revenue	(1,001		)	11,366
Other liabilities	(669		)	(819		)
Net cash used in operating activities	(1,818		)	(660		)
Cash flows from investing activities:
Purchases of property and equipment	(5,650		)	(2,578		)
Capitalization of internal-use software costs	(1,413		)	(316		)
Purchases of investments	(10,655		)	(15,828		)
Sales/maturities of investments	33,128			14,605
Net cash provided by (used in) investing activities	15,410			(4,117		)
Cash flows from financing activities:
Proceeds from secondary public offering, net of offering costs of $608	30,907			—
Deferred business acquisition payment	—			(796		)
Taxes paid related to net share settlement of equity awards	(1,005		)	(261		)
Proceeds from employee stock purchase plan	1,632			1,499
Proceeds from stock option exercises	4,657			4,111
Net cash provided by financing activities	36,191			4,553
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(314		)	144
Net increase (decrease) in cash, cash equivalents and restricted cash	49,469			(80		)
Cash, cash equivalents and restricted cash, beginning of period	51,762			53,148
Cash, cash equivalents and restricted cash, end of period	$	101,231		$	53,068
Supplemental cash flow information:
Cash paid for income taxes	$	315		$	623
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents	$	100,731		$	53,068
Restricted cash included in other assets	500			—
Total cash, cash equivalents and restricted cash	$	101,231		$	53,068

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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RAPID7, INC.

Notes to Consolidated Financial Statements (Unaudited)

Note 1. Description of Business, Basis of Presentation and Consolidation and Significant Accounting Policies

Description of Business

Rapid7, Inc. and subsidiaries ("we", "us" or "our") is trusted by IT and security professionals around the world to manage risk, simplify modern IT complexity, and drive innovation. Our analytics help transform today's vast amount of security and IT data into the answers needed to securely develop and operate sophisticated IT networks and applications.

Basis of Presentation and Consolidation

The accompanying unaudited consolidated financial statements have been prepared by us in accordance with accounting principles generally accepted in the United States of America (GAAP), as well as pursuant to the rules and regulations of the Securities and Exchange Commission (SEC), regarding interim financial reporting. Accordingly, certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on March 8, 2018.

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, 2018 are not necessarily indicative of the results to be expected for any future period or the entire fiscal year.

Significant Accounting Policies

For a more complete discussion of our significant accounting policies and other information, the consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017. As of January 1, 2018, we adopted Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which with its amendments is collectively known as ASC 606. See Accounting Pronouncements Recently Adopted below and Note 2, Revenue from Contract with Customers, for a discussion of the impact of the adoption of this standard, which we have adopted using the modified retrospective transition method, and changes in our accounting policies related to revenue recognition and accounting for costs to obtain and fulfill a customer contract.

Recent Accounting Pronouncements

Accounting Pronouncements Recently Adopted

In December 2017, the SEC issued Staff Accounting Bulletin 118 (SAB 118), which provides guidance for companies analyzing their accounting for the income tax effects of the Tax Cuts and Jobs Act of 2017 (Tax Act). SAB 118 provides that a company may report provisional amounts based on reasonable estimates. The provisional estimates are then subject to adjustment during a measurement period up to one year and should be accounted for as a prospective change. We continue to evaluate our transition tax obligation and expect to finalize our conclusion by the end of fiscal 2018. The provisional amounts recorded are based on our current interpretation and understanding of the Tax Act signed into law in December 2017, are judgmental and may change as we receive additional clarification and implementation guidance. Changes to these provisional amounts could result in additional charges or credits in future reporting periods.

In May 2017, the Financial Accounting Standards Board (FASB), issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, clarifying when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. The ASU required modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. We adopted this standard on a prospective basis on January 1, 2018. There was no impact to our consolidated financial statements as a result of the adoption.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which provided guidance on the treatment of restricted cash in the statements of cash flows. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. We adopted this standard in the first quarter of 2018 utilizing the

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retrospective transition method. The presentation of restricted cash in the consolidated statements of cash flows was adjusted as a result of adopting this new standard.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The ASU is intended to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. The ASU will allow an entity to recognize the income tax consequences of these transfers when the transfers occur. We adopted this standard on January 1, 2018 and there was no impact to our consolidated financial statements as a result of the adoption.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which replaced the revenue recognition requirements in FASB ASC Topic 605, Revenue Recognition (ASC 605). The new revenue standard outlines a single, comprehensive model for accounting for revenue from contracts with customers and requires more detailed disclosure to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from such contracts. The new revenue standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services.

We adopted ASC 606 on January 1, 2018 using the modified retrospective method. Under this method of adoption, we recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of accumulated deficit. Comparative prior year periods were not adjusted.

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As a result of applying the modified retrospective method to adopt ASC 606, the following adjustments were made to the consolidated balance sheet as of January 1, 2018:

	As Reported			Adjustments											Adjusted under ASC 606
	December 31, 2017			Term and Perpetual License			Professional Services			Other			Costs to Obtain or Fulfill a Contract		January 1, 2018
	(in thousands)
Cash and cash equivalents	$	51,562		$	—		$	—		$	—		$	—	$	51,562
Short-term investments	39,178			—			—			—			—		39,178
Accounts receivable, net	73,661			—			—			—			—		73,661
Deferred contract acquisition and fulfillment costs, current portion	—			—			—			—			7,844		7,844
Prepaid expenses and other current assets	8,877			—			30			—			—		8,907
Long-term investments	1,102			—			—			—			—		1,102
Property and equipment, net	8,589			—			—			—			—		8,589
Goodwill	83,164			—			—			—			—		83,164
Intangible assets, net	16,640			—			—			—			—		16,640
Deferred contract acquisition and fulfillment costs, non-current portion	—			—			—			—			19,321		19,321
Other assets	1,363			—			—			—			—		1,363
Total assets	$	284,136		$	—		$	30		$	—		$	27,165	$	311,331
Accounts payable	$	2,240		$	—		$	—		$	—		$	—	$	2,240
Accrued expenses	29,728			—			—			—			—		29,728
Deferred revenue, current portion	155,811			(10,912		)	(1,523		)	(1,356		)	—		142,020
Other current liabilities	1,706			—			—			—			—		1,706
Deferred revenue, non-current portion	68,689			17,647			(2,624		)	(339		)	—		83,373
Other long-term liabilities	1,809			—			—			—			429		2,238
Total liabilities	259,983			6,735			(4,147		)	(1,695		)	429		261,305
Common stock	441			—			—			—			—		441
Treasury stock	(4,764		)	—			—			—			—		(4,764		)
Additional paid-in-capital	463,428			—			—			—			—		463,428
Accumulated other comprehensive loss	(39		)	—			—			—			—		(39		)
Accumulated deficit	(434,913		)	(6,735		)	4,177			1,695			26,736		(409,040		)
Total stockholders’ equity	24,153			(6,735		)	4,177			1,695			26,736		50,026
Total liabilities and stockholders’ equity	$	284,136		$	—		$	30		$	—		$	27,165	$	311,331

Term and Perpetual Licenses

Prior to the adoption of ASC 606, we recognized revenue for our term and perpetual licenses over the contractual period of maintenance and support due to the lack of vendor-specific objective evidence (VSOE) of selling price of maintenance and support. Under ASC 606, for our term and perpetual licenses which are not dependent on the continued delivery of content subscriptions, revenue is recognized at the time of delivery. For our perpetual licenses where the utility to the customer is dependent on the continued delivery of content subscriptions, the content subscription renewal option results in a material right with respect to the perpetual license. As a result, revenue related to the sale of these perpetual licenses is recognized ratably over the customer's estimated economic life of 5 years. The net impact of these changes resulted in a $6.7 million adjustment to accumulated deficit with an associated increase to deferred revenue.

Professional Services

Under ASC 605, professional services which were sold with term or perpetual licenses were recognized ratably over the contractual period of maintenance and support. Under ASC 606, these services are deemed distinct performance obligations and therefore recognized as the services are performed. The net impact of these changes resulted in a $4.2 million adjustment to accumulated deficit with an associated decrease to deferred revenue.

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Costs to Obtain or Fulfill a Contract

Prior to the adoption of ASC 606, we expensed sales commissions in the period that they were earned by our employees (which was typically upon signing of an arrangement). Under ASC 606, the direct and incremental costs to obtain contracts with customers, including sales commissions, are deferred and recognized over a period of benefit that we have determined to be 5 years. In addition, under ASC 606, contract fulfillment costs associated with certain of our product offerings are deferred and amortized over the estimated period of benefit. Prior to the adoption of ASC 606, such costs were expensed as incurred. The net impact of these changes resulted in a $27.2 million increase in deferred contract acquisition and fulfillment costs and an adjustment to accumulated deficit.

Income Taxes

Deferred tax liabilities increased by $0.4 million due to the temporary differences between the accounting and tax carrying values of capitalized costs to obtain or fulfill a contract created as a result of the adoption of ASC 606. In addition, the increase in deferred revenue generated additional deferred tax assets. As we fully reserve our deferred tax assets in the jurisdictions impacted by the increase in deferred revenue, this impact was offset by a corresponding increase to our valuation allowance.

Refer to Note 2, Revenue from Contracts with Customers, for additional information including further discussion on the impact of the adoption of ASC 606 and changes in accounting policies relating to revenue recognition and accounting for costs to obtain or fulfill a customer contract.

Accounting Pronouncements Not Yet Effective

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The ASU requires companies to recognize on the balance sheet the assets and liabilities for the rights and obligations created by leased assets. The ASU will be effective for us in the first quarter of 2019, with early adoption permitted. We are currently evaluating the impact that the adoption of this ASU will have on our consolidated financial statements. Although we have not finalized our evaluation of the impact of adoption of the ASU on our consolidated financial statements, we expect there will be a material increase to assets and liabilities related to the recognition of new right-of-use assets and lease liabilities on our balance sheet for leases currently classified as operating leases.

Note 2. Revenue from Contracts with Customers

Effective January 1, 2018, we adopted ASC 606 under the modified retrospective transition method.  This method was applied to contracts that were not complete as of the date of initial application. The following is a summary of new and/or revised significant accounting policies affected by our adoption of ASC 606, which relate primarily to revenue and cost recognition. Refer to Note 2, Summary of Significant Accounting Policies, in our Annual Report on Form 10-K for the year ended December 31, 2017 for the policies in effect for revenue and cost recognition prior to January 1, 2018 and for a discussion of our other significant accounting policies. For further information regarding the impact of the adoption of ASC 606, see Note 1, Accounting Pronouncements Recently Adopted.

We generate products revenue from the sale of (1) term or perpetual software licenses for our Nexpose, Metasploit, AppSpider and Komand products, and associated content subscriptions for our Nexpose and Metasploit products, (2) cloud-based subscriptions for our InsightIDR, InsightVM, InsightAppSec, Logentries and InsightOps products and (3) managed services offerings which utilize our products. We also generate appliance revenue that is included in our products revenue. We generate maintenance and support revenue associated with customers’ purchases of our software licenses for Nexpose, Metasploit, AppSpider and Komand. We generate professional service revenue from the sale of our deployment and training services related to our solutions, incident response services and security advisory services. Our deployment services educate and assist our customers on the best use and best practices to deploy our solutions.

In accordance with ASC 606, revenue is recognized when a customer obtains control of promised products or services. The amount of revenue recognized reflects the consideration that we expect to be entitled to receive in exchange for these products or services. To achieve the core principle of this standard, we apply the following five steps:

1) Identify the contract with a customer

We consider the terms and conditions of the contracts and our customary business practices in identifying our contracts under ASC 606. We determine we have a contract with a customer when the contract is approved, we can identify each party’s rights regarding the services to be transferred, we can identify the payment terms for the services, and we have determined the customer has the ability and intent to pay and the contract has commercial substance. We apply judgment in determining the customer’s ability and intent to pay, which is based on a variety of factors, including the customer’s historical payment experience or, in the case of a new customer, credit and financial information pertaining to the customer.

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2) Identify the performance obligations in the contract

Performance obligations promised in a contract are identified based on the products and services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the product or service either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the products or services is separately identifiable from other promises in the contract.

3) Determine the transaction price

The transaction price is determined based on the consideration to which we expect to be entitled in exchange for transferring products or services to the customer. Variable consideration is included in the transaction price if, in our judgment, it is probable that no significant future reversal of cumulative revenue under the contract will occur.

In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to receive financing from our customers or to provide customers with financing. Examples include invoicing at the beginning of a subscription term with revenue recognized ratably over the contract period.

4) Allocate the transaction price to performance obligations in the contract

If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price (“SSP”).

5) Recognize revenue when or as we satisfy a performance obligation

Revenue is recognized at the time the related performance obligation is satisfied by transferring the promised product or service to a customer. Revenue is recognized when control of the products or services are transferred to our customers, in an amount that reflects the consideration that we expect to receive in exchange for those products or services.

The following table summarizes revenue from contracts with customers for the three and six months ended June 30, 2018:

	Three Months Ended June 30, 2018		Six Months Ended June 30, 2018
	(in thousands)
Subscription revenue	$	31,361	$	60,130
Term and perpetual software licenses	6,697		12,257
Maintenance and support	10,610		21,363
Professional services	8,788		17,271
Other	985		1,935
Total revenue	$	58,441	$	112,956

The following table summarizes the revenue by region based on the shipping address of customers who have contracted to use our product or service for the three and six months ended June 30, 2018:

	Three Months Ended June 30, 2018		Six Months Ended June 30, 2018
	(in thousands)
United States	$	47,773	$	91,983
All other	10,668		20,973
Total revenue	$	58,441	$	112,956

Subscription Revenue

Subscription revenue consists of revenue from our cloud-based subscription, managed services offerings and content subscriptions 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

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generally have terms of 1 to 3 years which are billed in advance and non-cancelable. 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 terms of 1 to 3 years which are billed in advance and non-cancelable. Revenue related to our content subscriptions associated with our software licenses is recognized ratably over the contractual period. Some of our customers have the option to purchase additional subscription and support services at a stated price. These options generally do not provide a material right as they are priced at our SSP.

Certain subscription contracts contain service level commitments, which entitle our customers to receive service credits and, in certain cases, refunds, if our services do not meet certain levels. These service credits and refunds represent variable consideration. We have historically not experienced any significant incidents affecting the defined levels of reliability and performance as required by our subscription contracts and accordingly, no estimated refunds have been considered in the allocation of the transaction price.

Term and Perpetual Software Licenses

For our perpetual software licenses where the utility to the customer is dependent on the continued delivery of content subscriptions, the content subscription renewal options result in a material right with respect to the perpetual software license. As a result, the revenue attributable to the perpetual software license is recognized ratably over the customer’s estimated economic life of 5 years, which represents a longer period of time in comparison to the initial contractual period of maintenance and support. The estimated economic life of 5 years represents the period which the customer is expected to benefit from the material right. We estimated this period of benefit by taking into consideration several factors, including the terms and conditions of our customer contracts and renewals and the expected useful life of our technology.

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 arrangement as a material right does not exist.

For our term and perpetual software licenses which are not dependent on the continued delivery of content subscriptions, the license is considered distinct from the maintenance and support, and we therefore recognize revenue attributable to the license at the time of delivery.

Maintenance and Support

Maintenance and support services are sold with our perpetual and term software licenses. As maintenance and support services are distinct from the perpetual and term software license, revenue attributable to maintenance and support services is recognized ratably over the contractual period.

Professional Services

All of our professional services are considered distinct performance obligations when sold stand alone or with other products. These contracts generally have terms of one year or less. For the majority of these contracts, revenue is recognized over time based upon the proportion of work performed to date.

Other

Other revenue primarily includes revenue from delivery of appliances and other miscellaneous revenue.

Contracts with Multiple Performance Obligations

The majority of our contracts with customers contain multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are considered distinct. The transaction price is allocated to the separate performance obligations on a relative SSP basis. We determine SSP based on our overall pricing objectives, taking into consideration market conditions and other factors, including the geographic locations of our customers and selling method (i.e., partner or direct).

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 and six months ended June 30, 2018, we recognized revenue of $48.5 million and $84.3 million, respectively, that was included in the corresponding contract liability balance at the beginning of the period presented.

We receive payments from customers based upon contractual billing schedules. Accounts receivable are recorded when the right to consideration becomes unconditional. Contract assets, or unbilled receivables, include amounts related to our contractual right

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to consideration for both completed and partially completed performance obligations that may not have been invoiced. As of January 1, 2018 and June 30, 2018, contract assets of $0.3 million and $0.7 million, respectively, are included in prepaid expenses and other current assets in our consolidated balance sheet.

Costs to Obtain or Fulfill a Contract

We capitalize commission expenses paid to internal sales personnel and partner referral fees that are incremental to obtaining customer contracts. These costs are recorded as deferred contract acquisition costs in the consolidated balance sheets. Costs to obtain a contract for a new customer, up-sell or cross-sell are amortized on a straight-line basis over an estimated period of benefit of 5 years. We determined the estimated period of benefit by taking into consideration the contractual term and expected renewals of customer contracts, our technology and other factors, including the fact that commissions paid on renewals are not commensurate with commissions paid on initial sales transactions. We periodically review the carrying amount of deferred contract acquisition costs to determine whether events or changes in circumstances have occurred that could impact the period of benefit.

Commissions paid relating to contract renewals are deferred and amortized on a straight-line basis over the related renewal period. Costs to obtain a contract for professional services arrangements are expensed as incurred in accordance with the practical expedient as the contractual period of our professional services arrangements are one year or less.

Amortization expense associated with deferred contract acquisition costs is recorded to sales and marketing expense in the accompanying consolidated statements of operations.

We capitalize costs incurred to fulfill our contracts that relate directly to the contract, are expected to generate resources that will be used to satisfy our performance obligations and are expected to be recovered through revenue generated under the contract. Contract fulfillment costs are amortized on a straight-line basis over the estimated period of benefit and recorded as cost of products in our consolidated statement of operations.

The following table summarizes the activity of the deferred contract acquisition and fulfillment costs for the six months ended June 30, 2018:

	Six Months Ended June 30, 2018
	(in thousands)
Beginning balance	$	27,165
Capitalization of contract acquisition and fulfillment costs	8,921
Amortization of deferred contract acquisition and fulfillment costs	(4,391		)
Ending balance	$	31,695

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, 2018. The estimated revenues do not include unexercised contract renewals.

	Remainder of 2018		2019		2020 and thereafter
	(in thousands)
Subscription revenue	$	57,418	$	53,620	$	24,537
Software licenses	10,953		14,663		21,908
Maintenance and support	18,674		14,932		4,657

The amounts presented in the table above primarily consist of fixed fees which are typically recognized ratably as the performance obligation is satisfied.

As of June 30, 2018, the estimated revenue expected to be recognized in the future related to professional services is $12.9 million. We will recognize this revenue as the professional services are completed, which is expected to occur within the next 12 months or less.

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Transition Disclosures

In accordance with the modified retrospective method transition requirements, we will present the financial statement line items impacted and adjusted to compare to presentation under ASC 605 for each of the interim and annual periods during the first year of our adoption of ASC 606.

The following tables summarize the impact as of and for the six months ended June 30, 2018:

	As of June 30, 2018
Balance Sheet	As Reported under ASC 606			Proforma as if ASC 605 was in effect
	(in thousands)
Cash and cash equivalents	$	100,731		$	100,731
Short-term investments	13,983			13,983
Accounts receivable, net	48,476			48,476
Deferred contract acquisition and fulfillment costs, current portion	9,481			—
Prepaid expenses and other current assets	13,212			12,995
Long-term investments	3,929			3,929
Property and equipment, net	11,184			11,184
Goodwill	83,164			83,164
Intangible assets, net	16,002			16,002
Deferred contract acquisition and fulfillment costs, non-current portion	22,214			—
Other assets	1,395			1,395
Total assets	$	323,771		$	291,859
Accounts payable	$	4,612		$	4,612
Accrued expenses	21,832			21,832
Deferred revenue, current portion	153,634			163,121
Other current liabilities	1,079			1,079
Deferred revenue, non-current portion	70,766			53,378
Other long-term liabilities	2,305			1,876
Total liabilities	254,228			245,898
Common stock	467			467
Treasury stock	(4,764		)	(4,764		)
Additional paid-in-capital	513,598			513,598
Accumulated other comprehensive loss	(24		)	(24		)
Accumulated deficit	(439,734		)	(463,316		)
Total stockholders’ equity	69,543			45,961
Total liabilities and stockholders’ equity	$	323,771		$	291,859

Total reported assets were $31.9 million greater than the proforma balance sheet, which assumes the previous guidance remained in effect as of June 30, 2018, largely due to deferred contract acquisition and fulfillment costs of $31.7 million.

Total reported liabilities were $8.3 million greater than the proforma balance sheet primarily due to changes in deferred revenue and deferred tax liabilities.

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	Three Months Ended June 30, 2018						Six Months Ended June 30,
Statement of Operations	As Reported under ASC 606			Proforma as if ASC 605 was in effect			As Reported under ASC 606			Proforma as if ASC 605 was in effect
	(in thousands, except share and per share data)
Revenue:
Products	$	39,043		$	41,043		$	74,322		$	78,809
Maintenance and support	10,610			11,558			21,363			23,240
Professional services	8,788			8,976			17,271			17,729
Total revenue	58,441			61,577			112,956			119,778
Cost of revenue:
Products	9,650			9,626			18,086			18,090
Maintenance and support	2,007			2,007			3,856			3,856
Professional services	5,736			5,734			12,045			12,036
Total cost of revenue	17,393			17,367			33,987			33,982
Total gross profit	41,048			44,210			78,969			85,796
Operating expenses:
Research and development	16,082			16,082			32,804			32,804
Sales and marketing	31,157			34,001			60,209			64,745
General and administrative	8,149			8,149			16,881			16,881
Total operating expenses	55,388			58,232			109,894			114,430
Loss from operations	(14,340		)	(14,022		)	(30,925		)	(28,634		)
Other income (expense), net:
Interest income (expense), net	464			464			705			705
Other income (expense), net	(326		)	(326		)	(248		)	(248		)
Loss before income taxes	(14,202		)	(13,884		)	(30,468		)	(28,177		)
Provision for income taxes	131			131			226			226
Net loss	$	(14,333	)	$	(14,015	)	$	(30,694	)	$	(28,403	)
Net loss per share, basic and diluted	$	(0.31	)	$	(0.30	)	$	(0.67	)	$	(0.62	)
Weighted-average common shares outstanding, basic and diluted	46,279,947			46,279,947			45,746,513			45,746,513

The following summarizes the significant changes on the consolidated statement of operations for the three and six months ended June 30, 2018 as a result of the adoption of ASC 606 on January 1, 2018 compared to if we had continued to recognize revenue under ASC 605:

• Products revenue decreased$2.0 million and $4.5 million for the three and six months ended June 30, 2018, respectively, under ASC 606 primarily due to perpetual licenses revenue which are dependent on the continued delivery of content subscriptions and the change in the allocation of contract consideration to a relative fair value method under ASC 606 from residual method under ASC 605. As a result of the allocation change, more contract consideration is allocated to license revenue under ASC 606. Given the utility of certain of our perpetual license products are dependent on the continued delivery of content subscriptions, the content subscription renewal option results in a material right with respect to the perpetual license. As a result, revenue allocated to the perpetual license is recognized ratably over the customer's estimated economic life of 5 years rather than over the contractual period of maintenance and support, typically one to three years.

• Maintenance and support revenue decreased$0.9 million and $1.9 million for the three and six months ended June 30, 2018, respectively, under ASC 606 primarily due to the change in the allocation of contract consideration to the relative fair value method under ASC 606 from the residual method under ASC 605. As a result of the allocation change, more contract consideration is allocated to license revenue under ASC 606.

• Professional services revenue decreased$0.2 million and $0.5 million for the three and six months ended June 30, 2018, respectively, under ASC 606 primarily due to professional services sold together with term or perpetual licenses. Under ASC 606, the professional services represent distinct performance obligations and therefore are recognized as such

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services are performed. Under ASC 605, professional services sold together with term or perpetual licenses were recognized ratably over the contractual period of maintenance and support.

• Sales and marketing expense decreased$2.8 million and $4.5 million for the three and six months ended June 30, 2018, respectively, under ASC 606 primarily due to the capitalization of commissions considered direct and incremental costs to obtain a contract partially offset by amortization of capitalized commissions.

	Six Months Ended June 30,
Statement of Cash Flows	As Reported under ASC 606			Proforma as if ASC 605 was in effect
	(in thousands)
Net loss	$	(30,694	)	$	(28,403	)
Adjustments to reconcile net loss to net cash used in operating activities	19,508			19,508
Changes in operating assets and liabilities:
Accounts receivable	24,586			24,586
Deferred contract acquisition and fulfillment costs	(4,531		)	—
Prepaid expenses and other assets	(3,602		)	(3,417		)
Accounts payable	2,391			2,391
Accrued expenses	(7,806		)	(7,806		)
Deferred revenue	(1,001		)	(8,008		)
Other liabilities	(669		)	(669		)
Net cash used in operating activities	$	(1,818	)	$	(1,818	)

The adoption of ASC 606 resulted in offsetting changes in operating assets and liabilities and had no impact on net cash flow from operations.

Note 3. Fair Value Measurements

We measure certain financial assets and liabilities at fair value. Fair value is determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as determined by either the principal market or the most advantageous market. Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy, as follows:

Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2: Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the asset or liability.

We consider an active market to be one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis, and we consider an inactive market to be one in which there are infrequent or few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers.

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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, 2018
	Level 1		Level 2		Level 3		Total
	(in thousands)
Description:
Assets:
Money market funds	$	55,778	$	—	$	—	$	55,778
U.S. government agencies	5,923		—		—		5,923
Commercial paper	—		2,490		—		2,490
Corporate bonds	—		11,586		—		11,586
Total assets	$	61,701	$	14,076	$	—	$	75,777

	As of December 31, 2017
	Level 1		Level 2		Level 3		Total
	(in thousands)
Description:
Assets:
Money market funds	$	95	$	—	$	—	$	95
U.S. government agencies	11,869		—		—		11,869
Commercial paper	—		12,942		—		12,942
Corporate bonds	—		12,964		—		12,964
Asset-backed securities	—		2,505		—		2,505
Total assets	$	11,964	$	28,411	$	—	$	40,375

We had no liabilities measured and recorded at fair value on a recurring basis as of June 30, 2018 or December 31, 2017.

Our investments, which are all classified as available-for-sale, consisted of the following:

	As of June 30, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
Description:
U.S. government agencies	$	5,927	$	—	$	(4	)	$	5,923
Commercial paper	2,490		—		—			2,490
Corporate bonds	9,519		—		(20		)	9,499
Total assets	$	17,936	$	—	$	(24	)	$	17,912

Our available-for-sale investments as of June 30, 2018 includes $2.1 million of corporate bonds investments which are classified as cash and cash equivalents as the original maturity was less than three months.

	As of December 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
Description:
U.S. government agencies	$	11,880	$	—	$	(11	)	$	11,869
Commercial paper	12,942		—		—			12,942
Corporate bonds	12,991		—		(27		)	12,964
Asset-backed securities	2,506		—		(1		)	2,505
Total assets	$	40,319	$	—	$	(39	)	$	40,280

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As of June 30, 2018 and December 31, 2017, our available-for-sale investments had maturities ranging from three months to two years.

For all of our investments for which the amortized cost basis was greater than the fair value at June 30, 2018 and December 31, 2017, 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 recovery. 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 4. Property and Equipment

Property and equipment are recorded at cost and consist of the following:

	As of June 30, 2018			As of December 31, 2017
	(in thousands)
Computer equipment and software	$	18,050		$	16,205
Furniture and fixtures	3,750			4,034
Leasehold improvements	12,845			9,079
Total	34,645			29,318
Less accumulated depreciation	(23,461		)	(20,729		)
Property and equipment, net	$	11,184		$	8,589

Depreciation expense was $1.6 million and $1.1 million for the three months ended June 30, 2018 and 2017, respectively, and $3.0 million and $2.3 million for the six months ended June 30, 2018 and 2017, respectively.

Note 5. Goodwill and Intangible Assets

Goodwill was $83.2 million as of June 30, 2018 and December 31, 2017.

The following table presents details of our intangible assets, which include acquired identifiable intangible assets and capitalized internal-use software costs:

		As of June 30, 2018							As of December 31, 2017
	Weighted- Average Life (years)	Gross Carrying Amount		Accumulated Amortization			Net Book Value		Gross Carrying Amount		Accumulated Amortization			Net Book Value
		(in thousands)
Intangible assets subject to amortization:
Developed technology	5.7	$	20,611	$	(7,558	)	$	13,053	$	20,611	$	(5,756	)	$	14,855
Customer relationships	6.7	1,000		(427		)	573		1,000		(351		)	649
Trade names	6.1	519		(513		)	6		519		(510		)	9
Non-compete agreements	2.0	40		(40		)	—		40		(40		)	—
Total acquired intangible assets		22,170		(8,538		)	13,632		22,170		(6,657		)	15,513
Internal-use software		2,576		(206		)	2,370		1,162		(35		)	1,127
Total intangible assets		$	24,746	$	(8,744	)	$	16,002	$	23,332	$	(6,692	)	$	16,640

Amortization expense was $1.0 million and $0.5 million for the three months ended June 30, 2018 and 2017, respectively, and $2.1 million and $1.0 million for the six months ended June 30, 2018 and 2017, respectively.

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Estimated future amortization expense of the acquired identifiable intangible assets and completed capitalized internal-use software costs as of June 30, 2018 is as follows (in thousands):

2018 (for the remaining six months)	$	2,141
2019	4,255
2020	4,197
2021	3,297
2022	1,095
2023 and thereafter	—
Total	$	14,985

The table above excludes the impact of $1.0 million of capitalized internal-use software costs for projects that have not been completed as of June 30, 2018, and therefore, we have not determined the useful life of the software, nor have all the costs associated with these projects been incurred.

Note 6. Stockholders' Equity

On January 30, 2018, we completed a public offering of 5,950,000 shares of our common stock, of which 1,500,000 shares of common stock were sold by us and 4,450,000 shares of common stock were sold by certain existing stockholders, at an offering price of $22.00 per share, including 770,000 shares pursuant to the underwriters' option to purchase additional shares from the selling stockholders. Our net proceeds from the offering were $30.9 million, after deducting underwriting discounts and commissions and our offering expenses. We did not receive any of the proceeds from the sale of shares by the selling stockholders.

Note 7. Stock-Based Compensation Expense

(a) General

Stock-based compensation expense for restricted stock, restricted stock units, stock options and issuances of common stock pursuant to our employee stock purchase plan was classified in the accompanying consolidated statements of operations as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
	(in thousands)
Stock-based compensation expense:
Cost of revenue	$	469	$	308	$	843	$	510
Research and development	2,850		1,689		5,416		3,202
Sales and marketing	2,055		1,779		3,618		3,182
General and administrative	1,976		1,395		3,698		2,556
Total stock-based compensation expense	$	7,350	$	5,171	$	13,575	$	9,450

We recognize compensation cost of all awards on a straight-line basis over the applicable vesting period, which is generally four years.

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(b) Restricted Stock and Restricted Stock Units

Restricted stock and restricted stock unit activity during the six months ended June 30, 2018 was as follows:

	Restricted Stock				Restricted Stock Units
	Shares		Weighted-Average Grant Date Fair Value		Shares		Weighted-Average Grant Date Fair Value
Unvested balance as of December 31, 2017	210,083		$	18.00	1,988,509		$	14.77
Granted	—		—		1,867,970		24.16
Vested	(94,215	)	18.82		(424,775	)	16.49
Forfeited	(700	)	23.01		(118,864	)	18.27
Unvested balance as of June 30, 2018	115,168		$	17.30	3,312,840		$	19.72

As of June 30, 2018, the unrecognized compensation expense related to our unvested restricted stock and restricted stock units expected to vest was $62.4 million. This unrecognized compensation expense will be recognized over an estimated weighted-average amortization period of 3.0 years.

(c) Stock Options

Stock option activity during the six months ended June 30, 2018 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, 2017	4,684,954		$	9.68
Granted	107,850		24.44
Exercised	(681,555	)	7.46			$	13,461
Forfeited/cancelled	(56,993	)	16.24
Outstanding as of June 30, 2018	4,054,256		$	10.35	6.7	$	72,459
Vested and exercisable as of June 30, 2018	2,599,771		$	8.31	5.9	$	51,757

As of June 30, 2018, the unrecognized compensation expense related to our unvested stock options expected to vest was $9.1 million. This unrecognized compensation expense will be recognized over an estimated weighted-average amortization period of 2.2 years.

The total fair value of stock options vested in the six months ended June 30, 2018 was $0.5 million. The weighted-average grant date fair value of stock options granted in the six months ended June 30, 2018 was $11.86 per share.

(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, 2017, we issued 138,085 shares of common stock to employees for aggregate proceeds of $1.5 million. The purchase prices of the shares of common stock were $10.60 and $12.79 per share, which were discounted in accordance with the terms of the ESPP from the closing prices of our common stock on March 16, 2016 of $12.47 and on March 15, 2017 of $15.05, respectively.

On March 15, 2018, we issued 123,607 shares of common stock to employees for aggregate proceeds of $1.6 million. The purchase prices of the shares were $12.96 and $14.78 per share, which were discounted in accordance with the terms of the ESPP from the closing prices of our common stock on March 16, 2017 of $15.25 and on September 18, 2017 of $17.39, respectively.

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Note 8. Net Loss per Share

The following table summarizes the computation of basic and diluted net loss per share of our common stock for the three and six months ended June 30, 2018 and 2017:

	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
	(in thousands, except share and per share data)
Numerator:
Net loss	$	(14,333	)	$	(11,637	)	$	(30,694	)	$	(22,182	)
Denominator:
Weighted-average common shares outstanding, basic and diluted	46,279,947			42,681,287			45,746,513			42,395,450
Net loss per share attributable to common stockholders, basic and diluted	$	(0.31	)	$	(0.27	)	$	(0.67	)	$	(0.52	)

The following potentially dilutive securities outstanding, prior to the use of the treasury stock method or if-converted method, 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,
	2018	2017
Options to purchase common stock	4,054,256	5,041,268
Unvested restricted stock	115,168	420,541
Unvested restricted stock units	3,312,840	1,878,730
Shares to be issued under ESPP	61,966	76,647
Total	7,544,230	7,417,186

Note 9. 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 outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

In November 2016, Rapid7 LLC and two of our then executive officers were named as defendants in a class action lawsuit which alleged violations of certain Massachusetts wage and hour laws. In the first quarter of 2018, we increased our litigation accrual by $0.4 million to $0.6 million which reflects the amount of the settlement agreement entered into in July 2018.

(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.

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As permitted under Delaware law, we have entered into indemnification agreements with our officers and directors, indemnifying them for certain events or occurrences while they serve as officers or directors of the company.

Note 10. 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 were as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
	(in thousands)
North America	$	49,519	$	40,218	$	95,896	$	78,211
Other	8,922		7,225		17,060		14,477
Total	$	58,441	$	47,443	$	112,956	$	92,688

Of the total net revenues generated in North America, 96% and 93% of the revenues were generated in the United States for the three months ended June 30, 2018 and 2017, respectively, and 96% and 93% of the revenues were generated in the United States for the six months ended June 30, 2018 and 2017, respectively.

Property and equipment, net by geographic area was as follows:

	As of June 30, 2018		As of December 31, 2017
	(in thousands)
United States	$	9,968	$	7,182
Other	1,216		1,407
Total	$	11,184	$	8,589

Note 11. Related Party Transactions

In October 2015, McAfee LLC (formerly known as Intel Security) announced the end-of-sale for the McAfee Vulnerability Manager to customers and partners, effective January 11, 2016, with end-of-life to follow, and announced that we were named their exclusive vulnerability management partner. Under the terms of the commercial agreement, we incur partner referral fees as customers transition from McAfee Vulnerability Manager to Nexpose. During the three and six months ended June 30, 2018, we recognized sales and marketing expense of $0.3 million and $0.5 million, respectively, related to partner referral fees payable to McAfee LLC. On February 6, 2017, Michael Berry, a member of our Board of Directors, became the Chief Financial Officer of McAfee LLC.

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Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with (1) our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and (2) the audited consolidated financial statements and the related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended December 31, 2017 included in our Annual Report on Form 10-K, filed with the SEC on March 8, 2018.

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “will,” “would” or the negative or plural of these words or similar expressions or variations and such forward-looking statements include, but are not limited to, statements with respect to our outlook; the impact of new accounting standards; deferred revenue; our transition to subscription, our business strategy, plans and objectives for future operations; and our future financial and business performance. The events described in these forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled “Risk Factors,” set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q and in our other SEC filings. You should not rely upon forward-looking statements as predictions of future events. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Overview

Organizations of all sizes are faced with a more sophisticated and motivated set of cyber attackers. Coupled with an increasingly complex IT environment and expanding attack surface, which is driven by mobility and a shift to the cloud, security and IT teams are struggling to maintain adequate levels of cyber security, provide visibility to their management teams, and meet increasing regulatory requirements. At the same time, they must navigate a shortage of capable cyber security professionals. Out of these challenges, the concept of Security Operations, or SecOps, is emerging. SecOps is a movement that recognizes that Security and IT Operations must work together to deliver better security and more nimbly adapt to emerging threats, without adding significant resources. SecOps requires solutions that provide visibility, analytics and automation that enable IT, Security and DevOps to work together to achieve significantly higher levels of productivity and success.

Rapid7 is a leading provider of security and IT analytics and automation solutions for SecOps, and is trusted by professionals around the world to provide visibility, analytics and automation to help manage risk, simplify IT complexity and drive innovation. Our solutions, which include vulnerability management, incident detection and response, security information and event management, or SIEM, application security testing, log analytics, and security orchestration and automation, all focus on the critical needs of enterprises for greater visibility into their environments, analytics that provide context to complex data, and automation that enables SecOps teams to scale and more efficiently to address critical security and IT tasks.

We combine our extensive experience in collecting data from an ever-expanding IT environment, our deep insight into attacker behaviors and techniques, and our powerful and proprietary analytics to provide solutions that can quickly and efficiently identify and prioritize risks and active threats in an enterprise’s IT environment. Our broad data collection capabilities encompass endpoints, servers, applications, users, cloud-based assets, client devices, network activity, log data and information from third-party applications. We also provide workflows and automations that can enable and accelerate remediation of these risks and active threats. We have designed our solutions to be easy to deploy and use for security and IT teams of all sizes.

We offer analytic solutions across the following three core areas of SecOps:

• Our Vulnerability Management offerings include our industry-leading vulnerability management, web application security testing and attack simulation products. These solutions provide enterprises with comprehensive, yet prioritized, visibility into potential cyber risks across their IT environment. We have also added remediation workflows to help ensure that these risks can be easily mitigated.

• Our Incident Detection and Response solutions are designed to enable organizations to rapidly detect and respond to cyber security incidents and breaches across physical, virtual and cloud assets, including those associated with the behaviors of their users. These solutions combine the collection of massive amounts of data with our core analytics and machine-learning-driven user behavioral analytics to simplify the task of identifying and responding to potential breaches.

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• Our IT Analytics and Automation solutions are designed to allow operations teams to quickly gain visibility into their IT environment and facilitate automated workflows to eliminate repetitive, manual and labor-intensive tasks.

Finally, to complement our SecOps products, we offer a range of managed services based on our software solutions and professional services, including incident response services, security advisory services, and deployment and training.

We market and sell our products and professional services to global organizations of all sizes, including mid-market businesses, enterprises, non-profits, educational institutions and government agencies. Our customers span a wide variety of industries such as technology, energy, financial services, healthcare and life sciences, manufacturing, media and entertainment, retail, education, real estate, transportation, government and professional services. As of June 30, 2018, we had over 7,200 customers in 127 countries, including 54% of the Fortune 100. Our revenue was not concentrated with any individual customer or group of customers, and no customer represented more than 1% of our revenue for the three and six months ended June 30, 2018, respectively, or 2% of our revenue for the three and six months ended June 30, 2017, respectively.

We sell our products and professional services through direct inside and field sales teams and indirect channel partner relationships. Our global sales teams focus on both new customer acquisition as well as up-selling and cross-selling additional offerings to our existing customers. Our sales teams are organized by geography, consisting of the Americas; Europe, the Middle East and Africa, or EMEA; and Asia Pacific, or APAC, as well as by target organization size. Our inside sales team primarily focuses on small and middle-market enterprises, while Fortune 500 enterprises are generally handled by our globally distributed direct field sales teams. Our highly technical sales engineers help define customer use cases, manage solution evaluations and train channel partners.

Our Business Model

We have offerings in three key areas: (1) Vulnerability Management, which includes our InsightVM, Nexpose, InsightAppSec, AppSpider and Metasploit products, (2) Incident Detection and Response, which includes our InsightIDR and Managed Detection and Response products as well as our incident response services and (3) IT Analytics and Automation Solutions, which includes our Logentries, InsightOps and Komand products.

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

• Cloud-based subscriptions, which provide our software capabilities to our customers through cloud access and on a Software as a Service basis. Our InsightIDR, InsightVM, InsightAppSec, Logentries and InsightOps products are offered as cloud-based subscriptions, generally with one to three-year terms.

• Managed services, through which we operate our products and provide our capabilities on behalf of our customers. Our Managed Vulnerability Management (InsightVM), Managed Application Security (AppSpider) and Managed Detection and Response (InsightIDR) products are offered on a managed service basis, generally pursuant to one to three-year agreements.

• Licensed software, including both term and perpetual licenses, and the simultaneous sale of maintenance and support. Our Nexpose, Metasploit and AppSpider products are offered through term or perpetual software licenses. Our customers who purchase software licenses also purchase maintenance and support, which provides our customers with telephone and web-based support and ongoing bug fixes and repairs during the term of the maintenance and support agreement, and our customers who purchase our Nexpose and Metasploit products also purchase content subscriptions, which provide them with real-time access to the latest vulnerabilities and exploits. Our maintenance and support and content subscription agreements are typically for one to three-year terms. In addition, our Komand product is offered through term licenses.

We also offer various professional services across all of our offerings, including deployment and training services related to our software and cloud-based products, incident response services and security advisory services. 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.

An important component of our revenue growth strategy is to have our existing customers renew their agreements with us and purchase additional products from us. To assess our performance against this objective, we monitor the renewal rates of our existing customers. We calculate our renewal rate by dividing the dollar value of renewed customer agreements, including upsells and cross-sells of additional products, but excluding professional services and Logentries, in a trailing 12-month period by the dollar value of the corresponding customer agreements. We also calculate an expiring renewal rate that is calculated similar to the renewal rate, however it does not take into account any upsells or cross-sells. As a result of this methodology, we would not expect our expiring renewal rate to exceed 100%. Our renewal rate was 122% and 119% for the three months ended June 30, 2018 and 2017, respectively, and our expiring renewal rate was 89% and 88% for the three months ended June 30, 2018 and 2017, respectively.

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Our goal is to maintain what we believe are strong renewal rates, and work to increase them over time. However, our renewal rates may decline or fluctuate as a result of a number of factors, including customers’ satisfaction or dissatisfaction with our products and professional services, pricing, competitive offerings, economic conditions or overall changes in our customers’ spending levels.

We generate revenue from selling products, maintenance and support, and professional services. For the three months ended June 30, 2018 and 2017, 85% and 81% of our revenue, respectively, was derived from sales of products and associated maintenance and support, while the remaining 15% and 19%, respectively, was derived from the sale of professional services. For the six months ended June 30, 2018 and 2017, 85% and 81% of our revenue, respectively, was derived from sales of products and associated maintenance and support, while the remaining 15% and 19%, respectively, was derived from the sale of professional services.

For the three months ended June 30, 2018, recurring revenue, defined as revenue from term software licenses, content subscriptions, managed services, cloud-based subscriptions and maintenance and support, was 79% of total revenue under ASC 606 and 77% of total revenue under ASC 605. For the six months ended June 30, 2018, recurring revenue, defined as revenue from term software licenses, content subscriptions, managed services, cloud-based subscriptions and maintenance and support, was 78% of total revenue under ASC 606 and 76% of total revenue under ASC 605. For the three and six months ended June 30, 2017 recurring revenue was 70% and 69% of total revenue, respectively.

For the three months ended June 30, 2018, 83% of total revenue under ASC 606 and 87% of total revenue under ASC 605, respectively, came from deferred revenue on the balance sheet at the beginning of the respective period. For the six months ended June 30, 2018, 75% of total revenue under ASC 606 and 79% of total revenue under ASC 605, respectively, came from deferred revenue on the balance sheet at the beginning of the respective period. For the three and six months ended June 30, 2017, 88% and 78%, respectively, of our total revenue came from deferred revenue on the balance sheet at the beginning of the respective period.

For the three and six months ended June 30, 2018, we recognized revenue based on the ASU 2014-09, Revenue from Contracts with Customers (Topic 606), however revenue for the three and six months ended June 30, 2017 was recognized based on ASC 605. Therefore, the periods are not directly comparable. For additional information on the impact of the new accounting standard on our revenue, see Note 2, Revenue from Contracts with Customers, in the notes to our consolidated financial statements included in this Quarterly Report on Form 10-Q.

Other Business Metrics

We regularly monitor a number of financial and operating metrics in order to measure our current performance and estimate our future performance. Our other business metrics may be calculated in a manner different than similar other business metrics used by other companies.

	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
	(dollars in thousands)
Total revenue	$	58,441		$	47,443		$	112,956		$	92,688
Year-over-year growth	23.2		%	27.3		%	21.9		%	28.6		%
Operating cash flow	$	(9,114	)	$	(3,981	)	$	(1,818	)	$	(660	)

	As of June 30,
	2018			2017
Number of customers	7,216			6,559
Annualized recurring revenue	$	198,576		$	137,612
Year-over-year growth	44.3		%	31.7		%

Total Revenue and Growth. We are focused on driving continued revenue growth through increased sales of our products and professional services to new and existing customers. See discussion above regarding the lack of comparability for current periods against historical periods given the adoption of ASC 606 as of January 1, 2018.

Operating Cash Flow. We monitor our operating cash flow as a measure of our overall business performance, which enables us to analyze our financial performance without the effects of certain non-cash items such as stock-based compensation expenses and depreciation and amortization. Additionally, operating cash flow takes into account the increase in deferred revenue as a result

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of increases in sales of products and services, which reflects the receipt of cash payment for products before they are recognized into revenue. Our operating cash flow is significantly impacted by the timing of commission and bonus payments, accounts payable payments and collections of accounts receivable.

Number of Customers. 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 (1) an active Rapid7 contract or a contract that expired within 90 days or less of the applicable measurement date; and for Logentries products, those customers with a contract value equal to or greater than $2,400 per year, or (2) purchased Rapid7 professional services within the 12 months preceding the applicable measurement date.

Annualized Recurring Revenue (ARR) and Growth. ARR is a financial measure that we define as the annual value of all recurring revenue related to contracts in place at the end of the quarter. ARR should be viewed independently of revenue and deferred revenue as ARR is a performance metric and is intended as a supplemental metric, not a replacement for these items.

Non-GAAP Financial Results

To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide investors with certain non-GAAP financial measures, including non-GAAP gross profit, non-GAAP loss from operations, non-GAAP net loss, non-GAAP net loss per share and adjusted EBITDA. The presentation of the non-GAAP financial measures is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. We use these non-GAAP financial measures for financial and operational decision-making purposes and as a means to evaluate period-to-period comparisons, and use certain non-GAAP financial measures as performance measures under our executive bonus plan. We believe that these non-GAAP financial measures provide useful information about our operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to metrics used by our management in its financial and operational decision-making. 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.

The non-GAAP gross profit, non-GAAP loss from operations, non-GAAP net loss and non-GAAP net loss per share exclude all or a combination of the following (as reflected in the following reconciliation tables): stock-based compensation expense, amortization of acquired intangible assets, and certain non-recurring items such as acquisition-related expenses, secondary public offering costs and litigation-related expenses. We exclude stock-based compensation expense because of varying available valuation methodologies, subjective assumptions and the variety of equity instruments that can impact our non-cash expense. We believe that providing non-GAAP financial measures that exclude stock-based compensation expense allow for more meaningful comparisons between our operating results from period to period. We believe that excluding the impact of amortization of acquired intangible assets allows for more meaningful comparisons between operating results from period to period as the intangibles are valued at the time of acquisition and are amortized over several years after the acquisition. We also exclude certain non-recurring items such as acquisition-related expenses, secondary public offering costs and litigation-related expenses as these costs are unrelated to the current operations and neither comparable to the prior period nor predictive of future results, which we believe allows for a more meaningful comparison between the operating results from period to period. Accordingly, we believe that excluding these expenses provides investors and management with greater visibility into the underlying performance of our business operations, facilitates comparison of our results with other periods and may also facilitate comparison with the results of other companies in our industry.

We define adjusted EBITDA as net loss before (1) interest income (expense), net, (2) other income (expense), net, (3) provision for income taxes, (4) depreciation expense, (5) amortization of intangible assets, (6) stock-based compensation expense, and (7) certain non-recurring items. 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. Adjusted EBITDA should not be considered as a substitute for other measures of financial performance reported in accordance with GAAP. There are limitations to using this non-GAAP financial measure, including that other companies may calculate this measure differently than we do, that it does not reflect our capital expenditures or future requirements for capital expenditures and that it does not reflect changes in, or cash requirements for, our working capital and excludes some items that are cash based.

Our non-GAAP financial measures may not provide information that is directly comparable to that provided by other companies in our industry, as other companies in our industry may calculate non-GAAP financial results differently, particularly related to non-recurring, unusual items. In addition, there are limitations in using non-GAAP financial measures because the non-GAAP financial measures are not prepared in accordance with GAAP, may be different from non-GAAP financial measures used by other companies and exclude expenses that may have a material impact upon our reported financial results. Further, stock-based

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

The following tables reconcile GAAP gross profit to non-GAAP gross profit for the three and six months ended June 30, 2018 and 2017:

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	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
	(in thousands)
GAAP total gross profit	$	41,048	$	34,364	$	78,969	$	67,345
Stock-based compensation expense	469		308		843		510
Amortization of acquired intangible assets	893		439		1,801		878
Non-GAAP total gross profit	$	42,410	$	35,111	$	81,613	$	68,733
	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
	(in thousands)
GAAP gross profit – products	$	29,393	$	21,611	$	56,236	$	42,843
Stock-based compensation expense	157		90		282		150
Amortization of acquired intangible assets