Rapid7, Inc. (RPD) FY 2022 MD&A

Item 7. 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 our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those contained in or implied by any forward-looking statements. Factors that could cause or contribute to these differences include those under “Risk Factors” included in Part I, Item 1A or in other parts of this Annual Report on Form 10-K.

Overview

Rapid7 is on a mission to create a safer digital world by making cybersecurity simpler and more accessible. We empower security professionals to manage a modern attack surface through our best-in-class technology, leading-edge research, and broad, strategic expertise. Our comprehensive security solutions help our customers unite cloud risk management and threat detection to reduce attack surfaces and eliminate threats with speed and precision.

In the over 20 years that Rapid7 has been in business, security companies and trends have come and gone, while broader technology innovation continues to advance rapidly. Every company is now a technology company, and rampant innovation inevitably creates security risk. The migration of businesses to the cloud, more distributed workforces, and ubiquitous connected devices present security teams with an increasingly complex, ever-changing, and unpredictable attack surface.

We believe as cybersecurity challenges continue to rise exponentially; two key factors can prevent organizations from effectively managing their growing security exposure. First, the tools to manage complex security problems are often equally complicated to use. Second, there is a scarcity of cybersecurity professionals who are qualified to successfully manage these sophisticated tools. These two factors compound the difficulties that resource-constrained organizations face when attempting to minimize their security exposure, meet security compliance regulations and provide visibility to their leadership. We call the expanding divide between risk created through innovation and risk effectively managed by security teams the security achievement gap.

We believe Rapid7 is uniquely positioned to improve how customer security challenges are addressed. All of our solutions and services are built with and supported by the expertise of our dedicated team of security researchers, expert SOC analysts and consultants, who bring knowledge of attacker behavior and emerging vulnerabilities directly to customers. We also continue to invest in further simplifying our technology to improve usability, lowering the barrier for teams and organizations who lack resources to manage their security posture.

While our security technology is the foundation of our mission to make successful security accessible to all, technology alone will not solve today’s cybersecurity challenges. Our ongoing commitment to researching and partnering with the technology community helps to curb new security risks born through innovation. We are also investing in under-served, at risk communities, like non-profits and hospitals, to better understand their needs and make security technology and services accessible. By continuously improving our technology, stemming the creation of risk in the community, and making security more usable and accessible, Rapid7 aims to close the security achievement gap.

We market and sell our products and professional services to organizations of all sizes globally, 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 December 31, 2022, we had over 10,000 customers in 146 countries, including 48% of the Fortune 100. Our revenue was not concentrated with any individual customer and no customer represented more than 1% of our revenue in 2022, 2021 or 2020.

Our Business Model

We have offerings in six key areas: (1) Incident Detection and Response, (2) Cloud Security, (3) Vulnerability Risk Management, (4) Application Security, (5) Threat Intelligence and (6) Security Orchestration and Automation Response.

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 subscription basis. Our InsightIDR, InsightCloudSec, InsightVM, InsightAppSec, InsightConnect and Threat Intelligence products are offered as cloud-based subscriptions, generally with a one-year term.

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

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•Licensed software consists of term licenses. When licensed software is purchased, maintenance and support and content subscriptions, as applicable, are bundled with the license for the term period. Our Nexpose, Metasploit and AppSpider products are offered through term software licenses. Our maintenance and support 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.

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, penetration testing 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.

In 2022, 2021 and 2020 recurring revenue, defined as revenue from term software licenses, content subscriptions, managed services, cloud-based subscriptions and maintenance and support, was 94%, 92% and 90%, respectively, of total revenue.

Key Metrics

We monitor the following key metrics to help us measure and evaluate the effectiveness of our operations and as a means to evaluate period-to-period comparisons. We believe that both management and investors benefit from referring to these key metrics as supplemental information in assessing our performance and when planning, forecasting, and analyzing future periods. These key metrics also facilitate management's internal comparisons to our historical performance as well as comparisons to certain competitors' operating results. We believe these key metrics are useful to investors both because they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making and also because they are used by institutional investors and the analyst community to help evaluate the health of our business:

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. We monitor total revenue and believe it is useful to investors as a measure of the overall success of our business.

Non-GAAP Income from Operations and Non-GAAP Operating Margin. We monitor non-GAAP income from operations and non-GAAP operating margin, non-GAAP financial measures, to analyze our financial results. We believe non-GAAP income from operations and non-GAAP operating margin are useful to investors, as supplements to U.S. GAAP measures, in evaluating our ongoing operational performance and enhancing an overall understanding of our past financial performance and allowing for greater transparency with respect to metrics used by our management in its financial and operational decision-making. See Non-GAAP Financial Results below for further information on non-GAAP income from operations and a reconciliation of non-GAAP income from operations to the comparable GAAP financial measure.

Free Cash Flow. Free cash flow is a non-GAAP measure that we define as cash provided by operating activities less purchases of property and equipment and capitalization of internal-use software costs. We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the

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business after necessary capital expenditures. See Non-GAAP Financial Results below for a reconciliation of non-GAAP free cash flow to the comparable GAAP financial measure.

Annualized Recurring Revenue and Growth. Annualized Recurring Revenue (“ARR”) is defined 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 an operating metric and is not intended to be combined with or replace these items. ARR is not a forecast of future revenue, which can be impacted by contract start and end dates and renewal rates and does not include revenue reported as perpetual license or professional services revenue in our consolidated statement of operations. We use ARR and believe it is useful to investors as a measure of the overall success of our business.

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

ARR per Customer. ARR per customer is defined as ARR divided by the number of customers at the end of the period.

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 income from operations, non-GAAP operating margin, non-GAAP net income (loss), non-GAAP net income (loss) per share, adjusted EBITDA and free cash flow. 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.

We define non-GAAP gross profit, non-GAAP income from operations, non-GAAP operating margin, non-GAAP net income (loss) and non-GAAP net income (loss) per share as the respective GAAP balances excluding the effect of stock-based compensation expense, amortization of acquired intangible assets, amortization of debt discount and issuance costs and certain other items such as acquisition-related expenses, litigation-related expenses and induced conversion expense. Non-GAAP net income (loss) per basic and diluted share is calculated as non-GAAP net income (loss) divided by the weighted average shares used to compute net income (loss) per share, with the number of weighted average shares decreased, when applicable, to reflect the anti-dilutive impact of the capped call transactions entered into in connection with our convertible senior notes.

We believe these non-GAAP financial measures are useful to investors in assessing our operating performance due to the following factors:

•Stock-based compensation expense. 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 allows for more meaningful comparisons between our operating results from period to period.

•Amortization of acquired intangible assets. 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 intangible assets are valued at the time of acquisition and are amortized over several years after the acquisition.

•Amortization of debt discount and issuance costs. The expense for the amortization of debt discount and debt issuance costs related to our convertible senior notes and revolving credit facility is a non-cash item and we believe the exclusion of this interest expense provides a more useful comparison of our operational performance in different periods.

•Induced conversion expense. In conjunction with the first quarter of 2021 partial repurchase of our 1.25% convertible senior notes due 2023 (the “2023 Notes”), we incurred an induced conversion expense of $2.7 million. We exclude induced conversion expense because this amount is not indicative of the performance of, or trends in, our business and is neither comparable to the prior period nor predictive of future results.

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•Litigation-related expenses. We exclude non-ordinary course litigation expense because we do not consider legal costs and settlement fees incurred in litigation and litigation-related matters of non-ordinary course lawsuits and other disputes to be indicative of our core operating performance. We do not adjust for ordinary course legal expenses, including those expenses resulting from maintaining and enforcing our intellectual property portfolio and license agreements.

•Acquisition-related expenses. We exclude acquisition-related expenses that are unrelated to the current operations and neither are comparable to the prior period nor predictive of future results. Our acquisition-related expenses for the year ended December 31, 2021 include $9.0 million of tax expense related to the sale of acquired intellectual property through an intercompany transaction related to the Alcide acquisition.

•Anti-dilutive impact of capped call transaction. Our capped calls transactions are intended to offset potential dilution from the conversion features in our convertible senior notes. Although we cannot reflect the anti-dilutive impact of the capped call transactions under GAAP, we do reflect the anti-dilutive impact of the capped call transactions in non-GAAP net income (loss) per diluted share, when applicable, to provide investors with useful information in evaluating our financial performance on a per share basis.

We define adjusted EBITDA as net loss before (1) interest income, (2) interest expense, (3) other income (expense), net, (4) provision for income taxes, (5) depreciation expense, (6) amortization of intangible assets, (7) stock-based compensation expense, (8) acquisition-related expenses and (9) litigation-related expenses. 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.

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 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.

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The following tables reconcile GAAP gross profit to non-GAAP gross profit for the years ended December 31, 2022, 2021 and 2020:

The following table reconciles GAAP loss from operations to non-GAAP income from operations for the years ended December 31, 2022, 2021 and 2020:

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The following table reconciles GAAP net loss to non-GAAP net income (loss) for the years ended December 31, 2022, 2021 and 2020:

The following table reconciles GAAP net loss to adjusted EBITDA for the years ended December 31, 2022, 2021 and 2020:

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The following table reconciles net cash provided by operating activities to free cash flow for the years ended December 31, 2022, 2021 and 2020:

Components of Results of Operations

Revenue

We generate revenue primarily from selling products and professional services through a variety of delivery models to meet the needs of our diverse customer base.

Products

We generate products revenue from the sale of (1) cloud-based subscriptions, (2) managed services offerings, which utilize our products and (3) software licenses with related maintenance and support and content subscription, as applicable. Software license revenue consists of revenues from term licenses. When software licenses are purchased, maintenance and support and content subscription, as applicable, is bundled with the license for the term period.

Professional Services

We generate professional service revenue from the sale of deployment and training services related to our products, incident response services and security advisory services.

Cost of Revenue

Our total cost of revenue consists of the costs of products and professional services, as noted below. In addition, cost of revenue includes overhead costs for depreciation, facilities, IT, information security, and recruiting. Our IT overhead costs include IT personnel compensation costs and costs associated with our IT infrastructure. All overhead costs are allocated based on relative headcount.

Cost of Products

Cost of products consists of personnel and related costs for our content, support, managed service and cloud operations teams, including salaries and other payroll related costs, bonuses, stock-based compensation and allocated overhead costs. Also included in cost of products are software license fees, cloud computing costs and internet connectivity expenses directly related to delivering our products, amortization of contract fulfillment costs, as well as amortization of certain intangible assets including internally developed software.

Cost of Professional Services

Cost of professional services consists of personnel and related costs for our professional services team, including salaries and other payroll related costs, bonuses, stock-based compensation, costs of contracted third-party vendors, travel and entertainment expenses and allocated overhead costs.

We expect our cost of revenue to increase on an absolute dollar basis as we continue to grow our revenue.

Gross Margin

Gross margin, or gross profit as a percentage of revenue, has been and will continue to be affected by a variety of factors, including the average sales price of our products and services, transaction volume growth, the mix of revenue between software licenses, cloud-based subscriptions, managed services and professional services and changes in cloud computing costs.

We expect our gross margins to fluctuate over time depending on the factors described above.

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Operating Expenses

Operating expenses consist of research and development, sales and marketing, and general and administrative expenses. Operating expenses include overhead costs for depreciation, facilities, IT, information security and recruiting. Our IT overhead costs include IT personnel compensation costs and costs associated with our IT infrastructure. All overhead costs are allocated based on relative headcount.

Research and Development Expense

Research and development expense consists of personnel costs for our research and development team, including salaries and other payroll related costs, bonuses and stock-based compensation. Additional expenses include third-party infrastructure costs, travel and entertainment, consulting and professional fees for third-party development resources as well as allocated overhead costs.

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

Sales and Marketing Expense

Sales and marketing expense consists of personnel costs for our sales and marketing team, including salaries and other payroll related costs, commissions, including amortization of deferred commissions, bonuses and stock-based compensation. Additional expenses include marketing activities and promotional events, travel and entertainment, training costs, amortization of certain intangible assets and allocated overhead costs.

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

General and Administrative Expense

General and administrative expense consists of personnel costs for our executive, legal, human resources, and finance and accounting departments, including salaries and other payroll related costs, bonuses and stock-based compensation. Additional expenses include travel and entertainment, professional fees, litigation-related expenses, insurance, acquisition-related expenses, amortization of certain intangible assets and allocated overhead costs.

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

Interest Income

Interest income consists primarily of interest income on our cash and cash equivalents and our short and long-term investments.

Interest Expense

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

Other Income (Expense), Net

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

Provision for Income Taxes

Provision for income taxes consists of income taxes in foreign jurisdictions where we conduct business, withholding taxes, and state income taxes in the United States. We maintain a full valuation allowance for domestic and certain foreign deferred tax assets, including net operating loss carryforwards and tax credits. Based on our history of losses, we expect to maintain this full valuation allowance for the foreseeable future as it is more likely than not that some or all of those deferred tax assets may not be realized.

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Results of Operations

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

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

Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021

Revenue

Total revenue increased by $149.7 million in 2022 compared to 2021 and consisted of $133.9 million of organic growth and $15.8 million related to the acquisition of IntSights in July 2021. The $133.9 million increase in revenue related to organic growth consisted of a $12.7 million increase in revenue from new customers and a $121.2 million increase in revenue from existing customers. The $121.2 million increase in revenue from existing customers was due to an increase in revenue from renewals, upsells and cross-sells as a result of the continued growth of our existing customer base. All renewals, upsells and cross-sells are considered revenue from existing customers.

The increase in total revenue in 2022 was comprised of $108.7 million generated from sales in North America and $41.0 million generated from sales from the rest of the world.

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Cost of Revenue

Total cost of revenue increased by $45.4 million in 2022 compared to 2021, primarily due to a $18.2 million increase in personnel costs, inclusive of a $3.9 million increase in stock-based compensation expense, resulting from an increase in headcount to support our growing customer base, as well as $1.5 million of additional costs attributable to the employees acquired in the IntSights acquisition in July 2021. Our increase in total cost of revenue also included a $14.8 million increase in cloud computing costs related to growing cloud-based subscription and managed services revenue, a $5.9 million increase in allocated overhead driven largely by an increase in IT and facilities costs, a $3.1 million increase in amortization expense for acquired intangible assets, a $1.6 million increase in amortization expense for capitalized internally-developed software and a $1.8 million increase in other expenses.

Total gross margin percentage increased slightly in 2022 compared to 2021 due to a higher mix of products revenue as compared to professional services revenue. The gross margin for products remained consistent. The decrease in professional services gross margin was due to an increase in personnel cost inclusive of stock-based compensation expense.

Operating Expenses

Research and Development Expense

Research and development expense increased by $29.2 million in 2022 compared to 2021, primarily due to a $18.5 million increase in personnel costs, a $8.1 million increase in allocated overhead driven largely by an increase in IT and facilities costs and a $2.6 million increase in other expenses. The $18.5 million increase in personnel costs was primarily due to a $15.2 million increase in salaries and related costs driven by growth in headcount, inclusive of $5.6 million in additional salaries and related costs attributable to the employees acquired in the acquisitions of IntSights in July 2021, and a $3.3 million increase in stock-based compensation expense.

Sales and Marketing Expense

Sales and marketing expense increased by $60.0 million in 2022 compared to 2021, primarily due to a $30.4 million increase in personnel costs, a $10.6 million increase in commission expense, a $10.0 million increase in allocated overhead driven largely by an increase in IT and facilities costs, a $3.2 million increase in marketing and advertising costs, a $1.2 million increase in amortization of acquired intangible assets, a $2.5 million increase in travel and entertainment expense and a $2.1 million increase in other expenses. The $30.4 million increase in personnel costs was primarily due to a $23.0 million increase in salaries and related costs driven by growth in headcount, inclusive of $5.2 million of additional costs attributable to the employees acquired in the IntSights acquisition in July 2021, and a $7.4 million increase in stock-based compensation expense.

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General and Administrative Expense

General and administrative expense increased by $6.7 million in 2022 compared to 2021, primarily due to a $8.1 million increase in personnel costs due to an increase in headcount, inclusive of a $2.7 million increase in stock-based compensation expense, a $1.2 million increase in allocated overhead driven largely by an increase in IT and facilities costs and a $2.5 million increase in other expenses. These increases were partially offset by a $5.1 million decrease in professional fees primarily due to a decrease in acquisition-related expenses and other professional consulting fees.

Interest Income

Interest income increased by $1.4 million in 2022 compared to 2021 primarily due to an increase in interest rates.

Interest Expense

Interest expense decreased by $3.3 million in 2022 compared to 2021 primarily due to a $2.7 million decrease of induced conversion expense incurred in conjunction with the partial repurchase of the 2023 Notes in March 2021 and a decrease in contractual interest expense related to the 2023 Notes which were partially repurchased in the first quarter of 2021, with the remaining amount repurchased in the fourth quarter of 2021.

Other Income (Expense), Net

Other income (expense), net decreased by $0.4 million in 2022 compared to 2021 due to realized and unrealized foreign currency losses, primarily related to the euro and British pound sterling.

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Provision for Income Taxes

Provision for income taxes decreased by $8.0 million in 2022 compared to 2021 primarily due to $9.0 million of tax expense associated with the 2021 intercompany sale of intellectual property as part of post-acquisition tax planning related to the Alcide acquisition, partially offset by an increase of $1.0 million due to our increased operations in foreign jurisdictions.

Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020

Revenue

Total revenue increased by $123.9 million in 2021 compared to 2020 and consisted of $114.8 million of organic growth and $9.1 million related to the acquisition of IntSights in July 2021. The $114.8 million increase in revenue related to organic growth consisted of a $3.4 million increase in revenue from new customers and a $111.4 million increase in revenue from existing customers. The $111.4 million increase in revenue from existing customers was due to an increase in revenue from renewals, upsells and cross-sells as a result of our growing base of existing customers. Revenue from new customers represents the revenue recognized from the customer's initial purchase. All renewals, upsells and cross-sells are considered revenue from existing customers.

The increase in total revenue in 2021 was comprised of $90.5 million generated from sales in North America and $33.4 million generated from sales from the rest of the world.

Cost of Revenue

Total cost of revenue increased by $47.4 million in 2021 compared to 2020, primarily due to a $19.7 million increase in cloud computing costs related to growing cloud-based subscription and managed services revenue and a $16.8 million increase in personnel costs, inclusive of a $2.2 million increase in stock-based compensation expense, resulting from an increase in headcount to support our growing customer base, as well as $1.7 million of additional costs attributable to the employees acquired in the IntSights acquisition in July 2021 and the DivvyCloud acquisition in May 2020. Our increase in total cost of revenue also included a $6.7 million increase in amortization expense for acquired intangible assets, a $1.9 million increase in third-party professional service consulting costs, a $1.4 million increase in amortization expense for capitalized internally-developed software and a $0.9 million increase in other expenses.

Total gross margin percentage decreased in 2021 compared to 2020. The decrease in products gross margin was primarily due to an increase in revenue from cloud-based subscriptions and managed services, which have lower margins than our licensed

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software products as well as an increase in amortization expense for the developed technology acquired intangible asset related to the acquisition of IntSights. The increase in professional services gross margin was primarily due to the increase in professional services revenue.

Operating Expenses

Research and Development Expense

Research and development expense increased by $52.2 million in 2021 compared to 2020, primarily due to a $44.5 million increase in personnel costs, a $4.4 million increase in allocated overhead driven largely by an increase in IT and facilities costs, a $2.5 million increase in third-party infrastructure costs and a $0.8 million increase in other expenses. The $44.5 million increase in personnel costs was primarily due to a $22.3 million increase in salaries and related costs driven by growth in headcount, inclusive of $13.7 million in additional salaries and related costs attributable to the employees acquired in the acquisitions of IntSights in July 2021, Alcide in January 2021 and DivvyCloud in May 2020, and a $22.2 million increase in stock-based compensation expense. The $22.2 million increase in stock-based compensation expense includes $16.4 million of stock-based compensation for employees acquired in the acquisitions of IntSights, DivvyCloud and Alcide, inclusive of $6.9 million of stock-based compensation expense related to accelerated vesting of a stock award which was deemed a modification of the original award.

Sales and Marketing Expense

Sales and marketing expense increased by $51.5 million in 2021 compared to 2020, primarily due to a $32.9 million increase in personnel costs, an $8.4 million increase in commission expense, a $6.1 million increase in marketing and advertising costs, a $1.2 million increase in amortization of acquired intangible asset and a $2.9 million increase in other expenses. The $32.9 million increase in personnel costs was primarily due to a $25.9 million increase in salaries and related costs driven by growth in headcount, inclusive of $7.0 million of additional costs attributable to the employees acquired in the acquisitions of IntSights in July 2021 and DivvyCloud in May 2020, and a $7.0 million increase in stock-based compensation expense.

General and Administrative Expense

General and administrative expense increased by $18.8 million in 2021 compared to 2020, primarily due to a $11.8 million increase in personnel costs due to an increase in headcount, inclusive of a $7.3 million increase in stock-based compensation expense, a $6.8 million increase in professional fees primarily due to acquisition-related expenses and other professional consulting fees and a $3.0 million increase in other expenses. These increases were partially offset by a $2.8 million decrease in bad debt expense.

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Interest Income

Interest income decreased by $1.1 million in 2021 compared to 2020 primarily due to a decrease in interest rates.

Interest Expense

Interest expense decreased by $9.8 million in 2021 compared to 2020 primarily due to a $15.8 million decrease in amortization of debt discount costs as a result of our adoption of ASU 2020-06, partially offset by $2.7 million of induced conversion expense incurred in conjunction with the partial repurchase of the 2023 Notes in March 2021, a $1.0 million increase in contractual interest and a $2.3 million increase in amortization of debt issuance costs related to the 2025 Notes issued in May 2020, the 2027 Notes issued in March 2021 and the revolving credit facility issued in April 2020 and amended in December 2021.

Other Income (Expense), Net

Other income (expense), net reflected a $1.8 million decrease in expense in 2021 compared to 2020 due to realized and unrealized foreign currency losses, primarily related to the euro and British pound sterling.

Provision for Income Taxes

Provision for income taxes increased by $8.4 million in 2021 compared to 2020 primarily due to $9.0 million of tax expense recorded for an intercompany sale of intellectual property as part of post-acquisition tax planning related to the Alcide acquisition.

Liquidity and Capital Resources

As of December 31, 2022, we had $207.3 million in cash and cash equivalents and $93.9 million of investments that have maturities ranging from 2 to 19 months. Since our inception, we have generated significant losses and expect to continue to generate losses for the foreseeable future and as of December 31, 2022 have an accumulated deficit of $860.7 million. Our principal sources of liquidity are cash and cash equivalents, investments and our Credit and Security Agreement (“Credit Agreement”). To date, we have financed our operations primarily through private and public equity financings and issuance of convertible senior notes and through cash generated by operating activities.

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

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

Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support research and development efforts, the expansion of sales and marketing activities, particularly internationally, the introduction of new and enhanced products and service offerings, the cost of any future acquisitions of technology or businesses and any election we make to redeem our convertible senior notes. In the event that additional financing is required from outside sources, we may be unable to raise the funds on acceptable terms, if at all. If we are unable to raise additional capital on terms satisfactory to us when we require it, our business, operating results and financial condition could be adversely affected.

Cash Flows

The following table shows a summary of our cash flows for the years ended December 31, 2022, 2021 and 2020:

Uses of Funds

Our historical uses of cash have primarily consisted of cash used for operating activities such as expansion of our sales and marketing operations, research and development activities and other working capital needs, as well as cash used for business acquisitions and purchases of property and equipment, including leasehold improvements for our facilities.

Operating Activities

Operating activities provided $78.2 million of cash in 2022, which reflects continued growth in revenue partially offset by our continued investments in our operations and a net benefit from changes in working capital items. Cash provided by operating activities reflected our net loss of $124.7 million, offset by a decrease in our net operating assets of $39.5 million and non-cash charges of $163.4 million related primarily to depreciation and amortization, stock-based compensation expense, deferred income taxes, amortization of debt issuance costs and other non-cash charges. The decrease in our net operating assets was primarily due to a $52.5 million increase in deferred revenue due to increased billings, a $8.0 million increase in accounts payable, an increase in accrued expenses of $3.7 million and a $2.4 million increase in other liabilities, which each had a positive impact on operating cash flow. These factors were partially offset by a $15.9 million increase in deferred contract acquisition and fulfillment costs, a $9.0 million increase in accounts receivable and a $2.2 million increase in prepaid expenses and other assets, which each had a negative impact on operating cash flow.

Operating activities provided $53.9 million of cash in 2021, which reflects continued growth in revenue partially offset by our continued investments in our operations and a net benefit from changes in working capital items. Cash provided by operating activities reflected our net loss of $146.3 million, offset by a decrease in our net operating assets of $55.0 million and non-cash charges of $145.2 million related primarily to depreciation and amortization, stock-based compensation expense, deferred income taxes, induced conversion expense, amortization of debt issuance costs and other non-cash charges. The decrease in our net operating assets was primarily due to a $85.6 million increase in deferred revenue due to increased billings, a $19.2 million increase in accrued expenses and a $3.7 million increase in other liabilities, which each had a positive impact on operating cash flow. These factors were partially offset by a $25.5 million increase in accounts receivable, a $22.5 million increase in deferred contract acquisition and fulfillment costs, a $3.4 million increase in prepaid expenses and other assets and a $2.1 million decrease in accounts payable, which each had a negative impact on operating cash flow.

Operating activities provided $4.9 million of cash in 2020, which reflects continued growth in revenue partially offset by our continued investments in our operations and changes in working capital items. Cash provided by operating activities reflected our net loss of $98.8 million and an increase in our net operating assets and liabilities of $3.5 million, offset by $106.7 million of non-cash charges related primarily to depreciation and amortization, stock-based compensation expense, amortization of debt

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discount and debt issuance costs, provision for doubtful accounts, deferred income taxes and other non-cash charges. The increase in our net operating assets and liabilities was primarily due to a $24.4 million increase in accounts receivable, a $13.4 million increase in deferred contract acquisition and fulfillment costs, a $8.9 million increase in prepaid expenses and other assets, a $2.4 million decrease in accounts payable and a $0.4 million decrease in other liabilities, which each had a negative impact on operating cash flow. These factors were partially offset by a $37.4 million increase in deferred revenue from sales of our products and services and a $8.6 million increase in accrued expenses, which each had a positive impact on operating cash flow.

Investing Activities

Investing activities used $40.0 million of cash in 2022, consisting of $20.4 million in capital expenditures to purchase computer equipment and leasehold improvements, $17.1 million for capitalization of internal-use software costs, $1.5 million of investment purchases, net of sales and maturities, and $1.0 million of other investments.

Investing activities used $325.4 million of cash in 2021, consisting of $358.4 million of cash paid for the acquisitions of IntSights, Alcide and Velocidex, net of cash acquired, $9.9 million for capitalization of internal-use software costs, $9.0 million in capital expenditures to purchase computer equipment, furniture and fixtures and leasehold improvements, $3.0 million for other investing activities, partially offset by $54.9 million of investment sales and maturities, net of purchases.

Investing activities used $156.3 million of cash in 2020, consisting of $125.8 million of cash paid for the acquisition of DivvyCloud, net of cash acquired of $5.0 million, $13.8 million in capital expenditures to purchase leasehold improvements, furniture and fixtures and computer equipment, $10.6 million for purchases of investments, net of sales and maturities, and $6.1 million for capitalization of internal-use software costs.

Financing Activities

Financing activities provided $7.4 million of cash in 2022, which consisted primarily of $11.9 million in proceeds from the issuance of common stock purchased by employees under the Rapid7, Inc. 2015 Employee Stock Purchase Plan (“ESPP”) and $3.3 million in proceeds from the exercise of stock options, partially offset by $7.5 million in withholding taxes paid for the net share settlement of equity awards and $0.3 million in payments related to the acquisition of Velocidex.

Financing activities provided $264.1 million of cash in 2021, which consisted primarily of $585.0 million in proceeds from the issuance of the 2027 Notes, net of issuance costs paid of $15.0 million, $9.3 million in proceeds from the issuance of common stock purchased by employees under the ESPP and $4.3 million in proceeds from the exercise of stock options, partially offset by $230.0 million for the redemption, repurchase and conversion of the 2023 Notes, $76.0 million for the purchase of 2027 Capped Calls, $16.0 million in withholding taxes paid for the net share settlement of equity awards, $12.1 million for payments related to the acquisitions of DivvyCloud, Alcide and IntSights, and $0.3 million for payments of debt issuance costs.

Financing activities provided $200.9 million of cash in 2020, which consisted primarily of $222.8 million in proceeds from the issuance of the 2025 Notes, net of issuance costs paid of $7.2 million, $7.8 million in proceeds from the exercise of stock options and $7.1 million in proceeds from the issuance of common stock purchased by employees under the ESPP, partially offset by $27.3 million for the purchase of 2025 Capped Calls, $8.9 million in withholding taxes paid for the net share settlement of equity awards, $0.4 million of payments of debt issuance costs and $0.2 million of deferred consideration payments.

Off-Balance Sheet Arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We do not engage in off-balance sheet financing arrangements. In addition, we do not engage in trading activities involving non-exchange traded contracts. We therefore believe that we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

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Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and disclosures. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates.

Our significant accounting policies, including those considered to be critical accounting estimates are summarized in Note 2, Summary of Significant Accounting Policies, in the Notes to our Consolidated Financial Statements included in this Annual Report on Form 10-K.

Revenue Recognition

We generate revenue primarily from: (1) subscriptions from the sale of cloud-based subscriptions, managed services, term software licenses, content subscriptions and maintenance and support associated with our software licenses and (2) professional services from the sale of our deployment and training services related to our solutions, incident response services, penetration testing and security advisory services.

The majority of our contracts with customers contain multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price (“SSP”) basis. We determine SSP of our products and services based on our overall pricing objectives using all information reasonably available to us, taking into consideration market conditions and other factors, including the geographic locations of our customers, negotiated discounts from price lists and selling method (i.e., partner or direct). When available, we use directly observable stand-alone transactions to determine SSP. When not regularly sold on a stand-alone basis, we estimate SSP for our products and services utilizing historical sales data, including discounts from list price. The historical data is aggregated and analyzed by geographic location and selling method to establish a median or average price. Once SSP is established it is applied consistently to all transactions involving that product or service utilizing a portfolio approach.

Deferred Contract Acquisition Costs

We defer contract costs that are recoverable and incremental to obtaining customer contracts. Contract costs, which primarily consist of sales commissions, are amortized on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the asset relates. Contract costs for a new customer, upsell or cross-sell are amortized on a straight-line basis over an estimated period of benefit of five years as sales commissions on initial sales are not commensurate with sales commissions on contract renewals. 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. Contract costs relating to contract renewals are deferred and amortized on a straight-line basis over the related renewal period. Contract costs 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. 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.

Recent Accounting Pronouncements

See Note 2, Summary of Significant Accounting Policies, in the Notes to our Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K for a description of recent accounting pronouncements and our expectation of their impact, if any, on our results of operations and financial conditions.

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