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Table of Contents

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, 2020
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.)

120 Causeway Street 
Boston,MA02114
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (617247-1717

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each classTrading symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par value per shareRPDThe Nasdaq Global Market
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 every Interactive Data File required to be submitted 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
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 July 31, 2020, there were 51,006,114 shares of the registrant’s common stock, $0.01 par value per share, outstanding.



Table of Contents
Table of Contents
 
  Page
PART I.
Item 1.
Item 2.
Item 3.
Item 4.
PART II.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

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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, 2020December 31, 2019
Assets
Current assets:
Cash and cash equivalents$279,343  $123,413  
Short-term investments36,313  116,158  
Accounts receivable, net of allowance for doubtful accounts of $2,608 and $1,829 at June 30, 2020 and December 31, 2019, respectively
76,823  87,927  
Deferred contract acquisition and fulfillment costs, current portion18,439  17,047  
Prepaid expenses and other current assets20,708  20,051  
Total current assets431,626  364,596  
Long-term investments5,365  22,887  
Property and equipment, net48,904  50,670  
Operating lease right-of-use assets72,005  60,984  
Deferred contract acquisition and fulfillment costs, non-current portion35,815  34,213  
Goodwill213,686  97,866  
Intangible assets, net47,706  28,561  
Other assets5,304  5,136  
Total assets$860,411  $664,913  
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable$7,078  $6,836  
Accrued expenses36,165  41,021  
Operating lease liabilities, current portion9,436  7,179  
Deferred revenue, current portion227,318  231,518  
Other current liabilities  119  
Total current liabilities279,997  286,673  
Convertible senior notes, net368,161  185,200  
Operating lease liabilities, non-current portion80,081  72,294  
Deferred revenue, non-current portion33,280  36,226  
Other long-term liabilities8,204  1,352  
Total liabilities769,723  581,745  
Stockholders’ equity:
Preferred stock, $0.01 par value per share; 10,000,000 shares authorized at June 30, 2020 and December 31, 2019; 0 shares issued at June 30, 2020 and December 31, 2019
    
Common stock, $0.01 par value per share; 100,000,000 shares authorized at June 30, 2020 and December 31, 2019; 51,438,042 and 50,397,922 shares issued at June 30, 2020 and December 31, 2019, respectively; 50,951,234 and 49,911,114 shares outstanding at June 30, 2020 and December 31, 2019, respectively
509  499  
Treasury stock, at cost, 486,808 shares at June 30, 2020 and December 31, 2019
(4,764) (4,764) 
Additional paid-in-capital657,678  605,650  
Accumulated other comprehensive income85  213  
Accumulated deficit(562,820) (518,430) 
Total stockholders’ equity90,688  83,168  
Total liabilities and stockholders’ equity$860,411  $664,913  
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,
 2020201920202019
Revenue:
Products$92,430  $72,579  $179,979  $138,424  
Professional services6,482  6,380  13,273  13,720  
Total revenue98,912  78,959  193,252  152,144  
Cost of revenue:
Products23,118  16,637  44,373  31,006  
Professional services5,963  5,544  12,422  11,148  
Total cost of revenue29,081  22,181  56,795  42,154  
Total gross profit69,831  56,778  136,457  109,990  
Operating expenses:
Research and development26,120  19,626  50,322  37,491  
Sales and marketing44,959  38,172  93,104  73,310  
General and administrative14,484  11,160  28,583  21,113  
Total operating expenses85,563  68,958  172,009  131,914  
Loss from operations(15,732) (12,180) (35,552) (21,924) 
Other income (expense), net:
Interest income208  1,582  1,256  3,313  
Interest expense(5,917) (3,312) (9,379) (6,541) 
Other income (expense), net210  (29) (237) (235) 
Loss before income taxes(21,231) (13,939) (43,912) (25,387) 
Provision for (benefit from) income taxes235  (519) 478  (294) 
Net loss$(21,466) $(13,420) $(44,390) $(25,093) 
Net loss per share, basic and diluted$(0.42) $(0.28) $(0.88) $(0.52) 
Weighted-average common shares outstanding, basic and diluted50,695,706  48,451,562  50,411,508  48,141,474  
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,
 2020201920202019
Net loss$(21,466) $(13,420) $(44,390) $(25,093) 
Other comprehensive income (loss):
Change in fair value of investments128  189  (107) 382  
Adjustments for net losses (gains) realized and included in net loss35    (21)   
Total change in unrealized gains (losses) on investments163  189  (128) 382  
Comprehensive loss$(21,303) $(13,231) $(44,518) $(24,711) 

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


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RAPID7, INC.
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
(in thousands)
Common stockTreasury stockAdditional paid-in-capitalAccumulated other comprehensive gain (loss)Accumulated deficitTotal stockholders’ equity
SharesAmountSharesAmount
Balance, March 31, 202050,419  $504  487  $(4,764) $621,992  $(78) $(541,354) $76,300  
Stock-based compensation expense—  —  —  —  15,864  —  —  15,864  
Vesting of restricted stock units415  4  —  —  (4) —  —    
Shares withheld for employee taxes(42) —  —  —  (1,917) —  —  (1,917) 
Issuance of common stock upon exercise of stock options160  1  —  —  2,163  —  —  2,164  
Change in unrealized gains on investments—  —  —  —  —  163  —  163  
Equity component of convertible senior notes, net—  —  —  —  46,835  —  —  46,835  
Purchase of capped calls related to convertible senior notes—  —  —  —  (27,255) —  —  (27,255) 
Net loss—  —  —  —  —  —  (21,466) (21,466) 
Balance, June 30, 202050,952  $509  487  $(4,764) $657,678  $85  $(562,820) $90,688  

Common stockTreasury stockAdditional paid-in-capitalAccumulated other comprehensive gain (loss)Accumulated deficitTotal stockholders’ equity
SharesAmountSharesAmount
Balance, March 31, 201948,158  $482  487  $(4,764) $569,229  $162  $(476,258) $88,851  
Stock-based compensation expense—  —  —  —  10,430  —  —  10,430  
Vesting of restricted stock units351  3  —  —  (3) —  —    
Shares withheld for employee taxes(36) (1) —  —  (1,858) —  —  (1,859) 
Issuance of common stock upon exercise of stock options325  4  —  —  3,329  —  —  3,333  
Change in unrealized losses on investments—  —  —  —  —  189  —  189  
Net loss—  —  —  —  —  —  (13,420) (13,420) 
Balance, June 30, 201948,798  $488  487  $(4,764) $581,127  $351  $(489,678) $87,524  

 Common stockTreasury stockAdditional
paid-in-capital
Accumulated
other
comprehensive
gain (loss)
Accumulated
deficit
Total
stockholders’
equity
 SharesAmountSharesAmount
Balance, December 31, 201949,911  $499  487  $(4,764) $605,650  $213  $(518,430) $83,168  
Stock-based compensation expense—  —  —  —  28,829  —  —  28,829  
Issuance of common stock under employee stock purchase plan102  1  —  —  3,345  —  —  3,346  
Vesting of restricted stock units723  7  —  —  (7) —  —    
Shares withheld for employee taxes(69) —  —  —  (3,450) —  —  (3,450) 
Issuance of common stock upon exercise of stock options285  2  —  —  3,731  —  —  3,733  
Change in unrealized losses on investments—  —  —  —  —  (128) —  (128) 
Equity component of convertible senior notes, net—  —  —  —  46,835  —  —  46,835  
Purchase of capped calls related to convertible senior notes—  —  —  —  (27,255) —  —  (27,255) 
Net loss—  —  —  —  —  —  (44,390) (44,390) 
Balance, June 30, 202050,952  $509  487  $(4,764) $657,678  $85  $(562,820) $90,688  

 Common stockTreasury stockAdditional
paid-in-capital
Accumulated
other
comprehensive
gain (loss)
Accumulated
deficit
Total
stockholders’
equity
 SharesAmountSharesAmount
Balance, December 31, 201847,600  $476  487  $(4,764) $556,223  $(31) $(464,585) $87,319  
Stock-based compensation expense—  —  —  —  19,064  —  —  19,064  
Issuance of common stock under employee stock purchase plan111  1  2,633  2,634  
Vesting of restricted stock units595  6  —  —  (6) —  —    
Shares withheld for employee taxes(58) (1) —  —  (2,838) —  —  (2,839) 
Issuance of common stock upon exercise of stock options550  6  —  —  6,051  —  —  6,057  
Change in unrealized gains on investments—  —  —  —  —  382  —  382  
Net loss—  —  —  —  —  —  (25,093) (25,093) 
Balance, June 30, 201948,798  $488  487  $(4,764) $581,127  $351  $(489,678) $87,524  
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,
 20202019
Cash flows from operating activities:
Net loss$(44,390) $(25,093) 
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization10,419  7,371  
Amortization of debt discount and issuance costs7,007  5,104  
Stock-based compensation expense29,793  19,064  
Provision for doubtful accounts1,008  1,353  
Deferred income taxes  (761) 
Foreign currency re-measurement loss199  191  
Other non-cash (income) expense(147) (1,290) 
Changes in operating assets and liabilities:
Accounts receivable10,835  4,549  
Deferred contract acquisition and fulfillment costs(2,994) (3,172) 
Prepaid expenses and other assets1,773  (9,334) 
Accounts payable137  2,184  
Accrued expenses(7,437) (7,312) 
Deferred revenue(11,996) (5,066) 
Other liabilities(980) 1,129  
Net cash used in operating activities(6,773) (11,083) 
Cash flows from investing activities:
Business acquisition, net of cash acquired(125,771) (14,621) 
Purchases of property and equipment(3,955) (17,712) 
Capitalization of internal-use software costs(2,948) (3,152) 
Purchases of investments(49,259) (72,432) 
Sales/maturities of investments146,599  140,302  
Net cash (used in) provided by investing activities(35,334) 32,385  
Cash flows from financing activities:
Proceeds from issuance of convertible senior notes, net of issuance costs paid of $6,500
223,500    
Purchase of capped calls related to convertible senior notes(27,255)   
Payments of debt issuance costs(248)   
Taxes paid related to net share settlement of equity awards(3,450) (2,839) 
Proceeds from employee stock purchase plan3,346  2,634  
Proceeds from stock option exercises3,728  6,058  
Net cash provided by financing activities199,621  5,853  
Effect of exchange rate changes on cash, cash equivalents and restricted cash(301) (151) 
Net increase in cash, cash equivalents and restricted cash157,213  27,004  
Cash, cash equivalents and restricted cash, beginning of period123,413  99,565  
Cash, cash equivalents and restricted cash, end of period$280,626  $126,569  
Supplemental cash flow information:
Cash paid for interest on convertible senior notes$1,438  $1,342  
Cash paid for income taxes, net of refunds$135  $319  
Non-cash investing activities:
Leasehold improvements acquired through tenant improvement allowance$  $14,016  
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents$279,343  $126,569  
Restricted cash in other current assets1,283    
Total cash, cash equivalents and restricted cash$280,626  $126,569  

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 advancing security with visibility, analytics, and automation delivered through our Insight Platform. Our solutions simplify the complex, allowing security teams to work more effectively with IT and development to reduce vulnerabilities, monitor for malicious behavior, investigate and shut down attacks, and automate routine tasks.
Basis of Presentation and Consolidation
The accompanying unaudited consolidated financial statements have been prepared by us in accordance with accounting principles generally accepted in the United States of America (GAAP), as well as pursuant to the rules and regulations of the Securities and Exchange Commission (SEC), regarding interim financial reporting. Accordingly, certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on February 28, 2020.
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, 2020 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. Significant items subject to such estimates and assumptions include the determination of the estimated economic life of perpetual licenses for revenue recognition, the determination of standalone selling prices in revenue transactions with multiple performance obligations, the estimated period of benefit for deferred contract acquisition and fulfillment costs, the useful lives of long-lived assets, the valuation of allowance for doubtful accounts, the valuation of stock-based compensation, the valuation of intangible assets acquired in a business combination, 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.
The COVID-19 pandemic is expected to result in a sustained global slowdown of economic activity that is likely to decrease demand for a broad variety of goods and services, including from our customers. We currently expect our operational and financial performance to be negatively impacted by the slowdown in activity associated with the COVID-19 pandemic for the quarters ending September 30, 2020 and December 31, 2020 and the year ending December 31, 2020 and beyond. Estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require the exercise of judgment. As of the date of issuance of these financial statements, we are not aware of any specific event or circumstance that would require us to update our estimates, assumptions and judgments or revise the carrying value of our assets or liabilities. These estimates may change as new events occur and additional information is obtained and will be recognized in the consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to our financial statements.
Reclassification
Prior to the fiscal year beginning January 1, 2020, we have presented revenue on our consolidated statement of operations as products, maintenance and support and professional services revenue. For the three and six months ended June 30, 2020, we have combined products and maintenance and support revenue as products revenue on our consolidated statement of operations as our customers continue to migrate from our on-premise products to our SaaS Insight Platform. Given this continued migration, we believe it is more relevant to categorize maintenance and support revenue together as products revenue. Prior periods have been adjusted to conform with this presentation.
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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, 2019. There have been no changes to the significant accounting policies during the three and six-month periods ended June 30, 2020.
Recent Accounting Pronouncements
Accounting Pronouncements Recently Adopted
In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which aligns the requirements for capitalizing implementation costs in cloud computing arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. We adopted this standard on January 1, 2020 using the prospective adoption approach. The impact to our consolidated financial statements as a result of the adoption was not material.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, modifies and adds disclosure requirements for fair value measurements. We adopted this standard on January 1, 2020 and there was no impact to our consolidated financial statements as a result of the adoption.
Accounting Pronouncements Not Yet Effective
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional expedients and exceptions to GAAP guidance on contract modifications to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) to alternative reference rates. We may elect to apply the amendments prospectively through December 31, 2022. The impact to our consolidated financial statements from the adoption of this standard is expected to be immaterial.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This standard is intended to simplify various aspects related to accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifying certain aspects of the current guidance to promote consistency among reporting entities. The new standard will be effective for us in the first quarter of 2021, with early adoption permitted. An entity that elects early adoption must adopt all the amendments in the same period. Most amendments within this ASU are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. We are currently assessing the impact of adopting this standard but do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
Note 2. Revenue from Contracts with Customers
We generate products revenue from the sale of (1) cloud-based subscriptions for our InsightIDR, InsightVM, InsightAppSec and InsightConnect products, (2) managed services offerings which utilize our products and (3) term or perpetual software licenses for our Nexpose, Metasploit, AppSpider and DivvyCloud products, and associated content subscriptions for our Nexpose and Metasploit products. We also generate appliance revenue that is included in our products revenue and is associated with hardware sold with our Nexpose product to certain customers. We generate maintenance and support revenue that is included in our products revenue and is associated with customers’ purchases of our software licenses for Nexpose, Metasploit and AppSpider products. We generate professional service revenue from the sale of our deployment and training services related to our solutions, incident response services, penetration testing and security advisory services. Our deployment services educate and assist our customers on the best use and best practices to deploy our solutions.
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The following table summarizes revenue from contracts with customers for the three and six months ended June 30, 2020 and 2019:
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
(in thousands)
Subscription revenue$72,796  $52,309  $141,421  $99,278  
Term and perpetual software licenses11,281  10,315