DigitalOcean Holdings, Inc. [DOCN] Filings

10-Q 1 docn-20230930.htm 10-Q docn-20230930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 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 September 30, 2023

☐ 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: 001-40252


DigitalOcean Holdings, Inc.
(Exact Name of Registrant as Specified in Its Charter)


Delaware						45-5207470
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

101 6th Avenue

New York, New York 10013

(Address of principal executive offices and Zip Code)

(646) 827-4366

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Common stock, par value $0.000025 per share	DOCN	The New York Stock Exchange

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 such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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	☐	Smaller 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 October 26, 2023, there were 86,008,935 shares of the registrant’s common stock, with a par value of $0.000025 per share, outstanding.


TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
		Page
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022	1
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2023 and 2022	2
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2023 and 2022	3
	Condensed Consolidated Statements of Stockholders’ (Deficit) Equity for the Three and Nine Months Ended September 30, 2023 and 2022	4
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and 2022	6
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	41
Item 4.	Controls and Procedures	41

	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	43
Item 1a.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 3.	Defaults Upon Senior Securities	44
Item 4.	Mine Safety Disclosures	44
Item 5.	Other Information	44
Item 6.	Exhibits	46
	Signatures	47

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations or financial condition, business strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will” or “would” or the negative of these words or other similar terms or expressions. These forward-looking statements include, but are not limited to, statements concerning the following:

•our expectations regarding our revenue, expenses and other operating results;

•our ability to achieve profitability on an annual basis and then sustain such profitability;

•future investments in our business, our anticipated capital expenditures and our estimates regarding our capital requirements;

•our ability to acquire new customers and successfully engage and expand usage of our existing customers;

•the costs and success of our marketing efforts, and our ability to promote our brand;

•our reliance on our executive officers and other key personnel and our ability to identify, recruit and retain skilled personnel, including a new chief executive officer;

•our ability to effectively manage our growth;

•our ability to successfully integrate acquired businesses, including Cloudways and Paperspace, and achieve expected synergies and benefits;

•our ability to compete effectively with existing competitors and new market entrants;

•the growth rates of the markets in which we compete;

•our ability to maintain effective internal control over financial reporting (“ICFR”) and disclosure controls and procedures (“DCP”), including our ability to remediate any existing material weakness in our ICFR and the timing of any such remediation, as well as to reestablish effective ICFR and DCP; and

•the other factors that are described under the heading “Risk Factors” in our Annual Report on Form 10-K/A for the year ended December 31, 2022, and in the section titled “Risk Factors” and elsewhere in our subsequent Quarterly Reports on Form 10-Q.

You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition and operating results. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in Item 1A–Risk Factors in our Annual Report on Form 10-K/A for the year ended December 31, 2022 and in the section titled “Risk Factors” and elsewhere in our subsequent Quarterly Reports on Form 10-Q, as such factors have been and may be updated from time to time in our subsequent periodic filings with the SEC. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. The results, events and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q. And while we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this

Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments.

We may announce material business and financial information to our investors using our investor relations website (https://investors.digitalocean.com/). We therefore encourage investors and others interested in our company to review the information that we make available on our website, in addition to following our filings with the Securities and Exchange Commission, webcasts, press releases and conference calls.

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DIGITALOCEAN HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

(unaudited)


	September 30, 2023		December 31, 2022
Current assets:
Cash and cash equivalents	$	79,361	$	140,772
Marketable securities	304,720		723,462
Accounts receivable, less allowance for credit losses of $5,584 and $6,099, respectively	60,237		53,833
Prepaid expenses and other current assets	27,141		27,924
Total current assets	471,459		945,991

Property and equipment, net	284,806		273,170
Restricted cash	1,747		1,935
Goodwill	348,322		315,168
Intangible assets, net	145,886		118,928
Operating lease right-of-use assets, net	166,294		153,701
Deferred tax assets	731		751
Other assets	5,892		5,987
Total assets	$	1,425,137	$	1,815,631

Current liabilities:
Accounts payable	$	14,306	$	21,138
Accrued other expenses	24,779		33,987
Deferred revenue	5,094		5,550

Operating lease liabilities, current	76,122		57,432
Other current liabilities	63,988		47,409
Total current liabilities	184,289		165,516

Deferred tax liabilities	6,640		20,757
Long-term debt	1,475,913		1,470,270
Operating lease liabilities, non-current	107,230		107,693
Other long-term liabilities	9,838		3,826
Total liabilities	1,783,910		1,768,062
Commitments and Contingencies (Note 8)



Preferred stock ($0.000025 par value per share; 10,000,000 shares authorized; 0 shares issued and outstanding as of September 30, 2023 and December 31, 2022)	—		—
Common stock ($0.000025 par value per share; 750,000,000 shares authorized; 86,194,445 and 96,732,507 issued and outstanding as of September 30, 2023 and December 31, 2022, respectively)	2		2

Additional paid-in capital	—		263,957
Accumulated other comprehensive loss	(1,022)		(2,048)
Accumulated deficit	(357,753)		(214,342)
Total stockholders’ (deficit) equity	(358,773)		47,569

Total liabilities and stockholders’ equity	$	1,425,137	$	1,815,631

See accompanying notes to condensed consolidated financial statements

DIGITALOCEAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Revenue	$	177,062	$	152,115	$	512,010	$	413,324
Cost of revenue	70,329		56,730		209,562		151,746
Gross profit	106,733		95,385		302,448		261,578
Operating expenses:
Research and development	32,627		30,243		109,468		104,440
Sales and marketing	19,015		19,097		53,346		56,360
General and administrative	20,064		38,847		117,861		115,109
Restructuring and other charges	(441)		—		20,862		—
Total operating expenses	71,265		88,187		301,537		275,909

Income (loss) from operations	35,468		7,198		911		(14,331)

Other income (expense):
Interest expense	(2,333)		(2,127)		(6,634)		(6,281)
Loss on extinguishment of debt	—		—		—		(407)
Interest income and other income, net	3,979		3,274		18,967		6,206
Other income (expense), net	1,646		1,147		12,333		(482)

Income (loss) before income taxes	37,114		8,345		13,244		(14,813)
Income tax expense	(17,939)		(442)		(9,774)		(2,611)
Net income (loss) attributable to common stockholders	$	19,175	$	7,903	$	3,470	$	(17,424)
Net income (loss) per share attributable to common stockholders
Basic	$	0.22	$	0.08	$	0.04	$	(0.17)
Diluted	$	0.20	$	0.08	$	0.04	$	(0.17)
Weighted-average shares used to compute net income (loss) per share attributable to common stockholders
Basic	87,667		96,559		90,769		102,134
Diluted	102,674		104,931		97,747		102,134

See accompanying notes to condensed consolidated financial statements

DIGITALOCEAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Net income (loss) attributable to common stockholders	$	19,175	$	7,903	$	3,470	$	(17,424)
Other comprehensive income (loss):
Foreign currency translation adjustments, net of taxes	(373)		(252)		(43)		(458)
Unrealized (loss) gain on available-for-sale marketable securities, net of taxes	299		912		1,069		(3,476)
Other comprehensive (loss) income	(74)		660		1,026		(3,934)
Comprehensive income (loss)	$	19,101	$	8,563	$	4,496	$	(21,358)

See accompanying notes to condensed consolidated financial statements

DIGITALOCEAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY

(in thousands, except share amounts)

(unaudited)


	Common Stock			Treasury Stock			Additional Paid-In Capital		Accumulated Other Comprehen-sive Loss		Accumulated Deficit		Total
	Shares	Amount		Shares	Amount
Balance at June 30, 2023	88,628,893	$	2	—	$	—	$	—	$	(948)	$	(266,633)	$	(267,579)
Issuance of common stock under equity incentive plan, net of taxes withheld	915,901	—		—	—		(1,208)		—		—		(1,208)
Issuance of common stock under employee stock purchase plan, net of taxes withheld	—	—		—	—		—		—		—		—

Repurchase and retirement of common stock	(3,350,349)	—		—	—		3,205		—		(110,295)		(107,090)
Stock-based compensation	—	—		—	—		(1,997)		—		—		(1,997)
Other comprehensive loss	—	—		—	—		—		(74)		—		(74)
Net income attributable to common stockholders	—	—		—	—		—		—		19,175		19,175
Balance at September 30, 2023	86,194,445	$	2	—	$	—	$	—	$	(1,022)	$	(357,753)	$	(358,773)


	Common Stock			Treasury Stock			Additional Paid-In Capital		Accumulated Other Comprehen-sive Loss		Accumulated Deficit		Total
	Shares	Amount		Shares	Amount
Balance at June 30, 2022	98,856,183	$	2	(1,968,228)	$	(4,598)	$	268,689	$	(4,968)	$	(211,865)	$	47,260
Issuance of common stock under equity incentive plan, net of taxes withheld	420,431	—		—	—		(2,894)		—		—		(2,894)
Issuance of common stock under employee stock purchase plan, net of taxes withheld	—	—		—	—		—		—		—		—
Repurchase and retirement of common stock	(1,078,650)	—		—	—		(50,000)		—		—		(50,000)
Retirement of treasury stock	(1,968,228)	—		1,968,228	4,598		(4,598)		—		—		—
Stock-based compensation	—	—		—	—		24,081		—		—		24,081
Other comprehensive income	—	—		—	—		—		660		—		660
Net income attributable to common stockholders	—	—		—	—		—		—		7,903		7,903
Balance at September 30, 2022	96,229,736	$	2	—	$	—	$	235,278	$	(4,308)	$	(203,962)	$	27,010

See accompanying notes to condensed consolidated financial statements

DIGITALOCEAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY

(in thousands, except share amounts)

(unaudited)


	Common Stock			Treasury Stock			Additional Paid-In Capital		Accumulated Other Comprehen-sive Loss		Accumulated Deficit		Total
	Shares	Amount		Shares	Amount
Balance at December 31, 2022	96,732,507	$	2	—	$	—	$	263,957	$	(2,048)	$	(214,342)	$	47,569
Issuance of common stock under equity incentive plan, net of taxes withheld	3,230,294	—		—	—		(506)		—		—		(506)
Issuance of common stock under employee stock purchase plan, net of taxes withheld	120,348	—		—	—		2,797		—		—		2,797

Repurchase and retirement of common stock	(13,888,704)	—		—	—		(332,817)		—		(146,881)		(479,698)
Stock-based compensation	—	—		—	—		66,569		—		—		66,569
Other comprehensive income	—	—		—	—		—		1,026		—		1,026
Net income attributable to common stockholders	—	—		—	—		—		—		3,470		3,470
Balance at September 30, 2023	86,194,445	$	2	—	$	—	$	—	$	(1,022)	$	(357,753)	$	(358,773)


	Common Stock			Treasury Stock			Additional Paid-In Capital		Accumulated Other Comprehen-sive Loss		Accumulated Deficit		Total
	Shares	Amount		Shares	Amount
Balance at December 31, 2021	109,175,863	$	2	(1,968,228)	$	(4,598)	$	769,705	$	(374)	$	(186,538)	$	578,197
Issuance of common stock under equity incentive plan, net of taxes withheld	2,503,828	—		—	—		(14,116)		—		—		(14,116)
Issuance of common stock under employee stock purchase plan, net of taxes withheld	144,867	—		—	—		5,244		—		—		5,244
Repurchase and retirement of common stock	(13,626,594)	—		—	—		(600,000)		—		—		(600,000)
Retirement of treasury stock	(1,968,228)	—		1,968,228	4,598		(4,598)		—		—		—
Stock-based compensation	—	—		—	—		79,043		—		—		79,043
Other comprehensive loss	—	—		—	—		—		(3,934)		—		(3,934)
Net loss attributable to common stockholders	—	—		—	—		—		—		(17,424)		(17,424)
Balance at September 30, 2022	96,229,736	$	2	—	$	—	$	235,278	$	(4,308)	$	(203,962)	$	27,010

See accompanying notes to condensed consolidated financial statements

DIGITALOCEAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Nine Months Ended September 30,
	2023		2022
Operating activities
Net income (loss) attributable to common stockholders	$	3,470	$	(17,424)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	87,085		73,900
Stock-based compensation	65,589		77,758
Provision for expected credit losses	11,416		12,217
Operating lease right-of-use assets and liabilities, net	5,783		3,207
Loss on extinguishment of debt	—		407
Net accretion of discounts and amortization of premiums on investments	(2,262)		(3,099)
Non-cash interest expense	5,958		5,898
Loss on impairment of long-lived assets	1,140		144
Deferred income taxes	561		247
Release of VAT reserve	(819)		—

Other	484		3,582
Changes in operating assets and liabilities:
Accounts receivable	(16,777)		(20,270)
Prepaid expenses and other current assets	(7,569)		(4,938)
Accounts payable and accrued expenses	(15,870)		(4,277)
Deferred revenue	(561)		(364)
Other assets and liabilities	16,798		5,330
Net cash provided by operating activities	154,426		132,318

Investing activities
Capital expenditures - property and equipment	(67,077)		(79,679)
Capital expenditures - internal-use software development	(4,075)		(6,593)
Purchase of intangible assets	—		(4,915)
Cash paid for acquisition of businesses, net of cash acquired	(99,340)		(305,163)
Cash paid for asset acquisitions	(2,500)		(5,400)
Purchase of available-for-sale securities	(352,313)		(1,379,277)
Sales of available-for-sale securities	—		19,992
Maturities of available-for-sale securities	773,335		558,371
Purchased interest on available-for-sale securities	(151)		(1,556)
Proceeds from interest on available-for-sale securities	151		1,549
Proceeds from sale of equipment	236		967
Net cash provided by (used in) investing activities	248,266		(1,201,704)

Financing activities








Payment of debt issuance costs	—		(1,520)


Proceeds related to the issuance of common stock under equity incentive plan	15,358		10,352
Proceeds from the issuance of common stock under employee stock purchase plan	2,797		5,245

Principal repayments of finance leases	(947)		—
Employee payroll taxes paid related to net settlement of equity awards	(15,594)		(24,618)


Repurchase and retirement of common stock	(474,950)		(600,000)

See accompanying notes to condensed consolidated financial statements

DIGITALOCEAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


Net cash used in financing activities	(473,336)		(610,541)

Effect of exchange rate changes on cash, cash equivalents, and restricted cash	(55)		(348)
Decrease in cash, cash equivalents and restricted cash	(70,699)		(1,680,275)
Cash, cash equivalents and restricted cash - beginning of period	151,807		1,715,425
Cash, cash equivalents and restricted cash - end of period	$	81,108	$	35,150


Supplemental disclosures of cash flow information:
Cash paid for interest	$	595	$	349
Cash paid for taxes, net of refunds	2,034		1,669

Operating cash flows paid for operating leases	51,038		33,354

Non-cash investing and financing activities:
Capitalized stock-based compensation	$	980	$	1,285
Property and equipment received but not yet paid, included in Accounts payable and Accrued other expenses	15,804		19,964



Debt issuance costs included in accounts payable and accrued liabilities	—		18
Operating right-of-use assets obtained in exchange for operating lease liabilities	65,828		67,463
Finance right-of-use assets obtained in exchange for finance lease liabilities	11,958		—

See accompanying notes to condensed consolidated financial statements

DIGITALOCEAN HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

Note 1. Nature of the Business and Organization

DigitalOcean Holdings, Inc. and its subsidiaries (collectively, the “Company”, “we”, “our”, “us”) is a leading cloud computing platform offering on-demand infrastructure, platform and software tools for startups and small and medium-sized businesses (“SMBs”). The Company was founded with the guiding principle that the transformative benefits of the cloud should be easy to leverage, broadly accessible, reliable and affordable. The Company’s platform simplifies cloud computing, enabling its customers to rapidly accelerate innovation and increase their productivity and agility. The Company offers mission-critical solutions across Infrastructure-as-a-Service (“IaaS”), Platform-as-a-Service (“PaaS”) and Software-as-a-Service (“SaaS”).

The Company has adopted a holding company structure and the primary operations are performed globally through its wholly-owned operating subsidiaries.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include accounts of the Company and all wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments, which include normal recurring adjustments, necessary for a fair statement of the Company’s financial position as of September 30, 2023, results of operations for the three and nine months ended September 30, 2023 and 2022, cash flows for the nine months ended September 30, 2023 and 2022, and stockholders' (deficit) equity for the three and nine months ended September 30, 2023 and 2022.

Reclassifications

As previously disclosed in the Annual Report on Form 10-K/A for the year ended December 31, 2022, the Company adopted Accounting Standard Update 2016-02, Leases (“ASC 842”) using the modified retrospective transition method as of the first day of fiscal year 2022. The impact of the adoption of ASC 842 on previously reported interim financial statements during the year ended December 31, 2022, included the recognition of right-of-use (“ROU”) assets and lease liabilities for operating leases. The adoption of ASC 842 also resulted in changes to certain lines within operating activities in the Condensed Consolidated Statements of Operations and Condensed Consolidated Statement of Cash Flows due to changes in operating assets and liabilities for the related accounts. These changes to previously disclosed amounts conform to the current period presentation. Additionally, certain other reclassifications were made to prior period amounts in order to conform to the current period presentation.

Use of Estimates

The preparation of these condensed consolidated financial statements in conformity with U.S. GAAP requires management to make, on an ongoing basis, estimates, judgments and assumptions that affect the amounts reported and disclosed in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Such estimates include, but are not limited to, those related to revenue recognition, accounts receivable and related reserves, useful lives and realizability of long-lived assets, capitalized internal-use software development costs, accounting for stock-based compensation, the incremental borrowing rate used to determine lease liabilities, valuation allowances against deferred tax assets, the fair value and useful lives of tangible and intangible assets acquired, and liabilities assumed resulting from business combinations. Management bases its estimates on historical experience and on various other assumptions which management believes to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

Restricted Cash

The following table reconciles cash, cash equivalents and restricted cash per the Condensed Consolidated Statements of Cash Flows:



	September 30,
	2023		2022
Cash and cash equivalents	$	79,361	$	24,115
Restricted cash included in Prepaid expenses and other current assets(1)	—		9,100
Restricted cash(2)	1,747		1,935
Total cash, cash equivalents and restricted cash	$	81,108	$	35,150

___________________

(1)Includes contingent compensation deposits related to the Cloudways acquisition, which were paid on September 1, 2023.

(2)Includes deposits in financial institutions related to letters of credit used to secure lease agreements.

Accounts Receivable Net of Allowance for Expected Credit Losses

Accounts receivable primarily represents revenue recognized that was not invoiced at the balance sheet date and is primarily billed and collected in the following month. Trade accounts receivable are carried at the original invoiced amount less an estimated allowance for expected credit losses based on the probability of future collection. Management determines the adequacy of the allowance based on historical loss patterns, the number of days that customer invoices are past due, reasonable and supportable forecasts of future economic conditions to inform adjustments over historical loss data, and an evaluation of the potential risk of loss associated with specific accounts. When management becomes aware of circumstances that may further decrease the likelihood of collection, it records a specific allowance against amounts due, which reduces the receivable to the amount that management reasonably believes will be collected. The Company records changes in the estimate to the allowance for expected credit losses through provision for expected credit losses and reverses the allowance after the potential for recovery is considered remote.

The following table presents the changes in our allowance for expected credit losses for the period presented:


	Amount


Balance as of December 31, 2022	$	6,099
Provision for expected credit losses	11,416

Write-offs and other	(11,931)
Balance as of September 30, 2023	$	5,584

Deferred Revenue

Deferred revenue was $5,094 and $5,550 as of September 30, 2023 and December 31, 2022, respectively. Revenue recognized during the three months ended September 30, 2023 and 2022 was $624 and $246, respectively, and $3,424 and $2,750 during the nine months ended September 30, 2023 and 2022, respectively, which was included in each deferred revenue balance at the beginning of each respective period.

Impairment of Long-Lived Assets

Long-lived assets, including property and equipment, intangible assets with definite lives and right-of-use (“ROU”) assets, are reviewed for impairment when circumstances indicate the carrying value of an asset may not be recoverable. For assets that are to be held and used, impairment is recognized when the estimated undiscounted cash flows associated with the asset or group of assets is less than their carrying value. If impairment exists, an adjustment is made to write the asset down to its fair value, and a loss is recorded as the difference between the carrying value and fair value. Fair values are determined based on quoted market values, discounted cash flows or internal and external appraisals, as applicable. Assets to be disposed of are carried at the lower of carrying value or estimated net realizable value.

The Company decided to cease the use of a portion of its leased New York office space in 2022 and entered into two separate subleases agreements with third party subtenants, in which the sublease income is less than the original lease payments indicating impairment. During the nine months ended September 30, 2022, a reduction to the carrying value of the ROU asset of $1,471 was recorded representing the carrying value amount in excess of the fair value with a

corresponding impairment charge recorded to General and administrative in the Condensed Consolidated Statements of Operations.

The Company recorded an impairment loss for the three months ended September 30, 2023 and 2022 of $587 and $24, respectively, and $1,140 and $144 for the nine months ended September 30, 2023 and 2022, respectively, related to software that is no longer being used. This impairment loss is included in Cost of revenue and Research and development on the Condensed Consolidated Statements of Operations.

Restructuring Expenses

The Company records restructuring expenses when management commits to a restructuring plan, the restructuring plan identifies all significant actions, the period of time to complete the restructuring plan indicates that significant changes to the plan are not likely, and employees who are impacted have been notified.

Segment Information

The Company’s chief operating decision maker, the chief executive officer (“CEO”), reviews discrete financial information presented on a consolidated basis for purposes of regularly making operating decisions, allocation of resources, and assessing financial performance. Accordingly, the Company has one operating and reporting segment.

Geographical Information

Revenue, as determined based on the billing address of the Company’s customers, was as follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
North America	37	%	38	%	38	%	38	%
Europe	29		30		29		30
Asia	24		22		23		22
Other	10		10		10		10
Total	100	%	100	%	100	%	100	%

Revenue derived from customers in the United States was 30% of total revenue for the three and nine months ended September 30, 2023, and 31% of total revenue for the three and nine months ended September 30, 2022.

Long-lived assets includes property and equipment and leases. The geographic locations of the Company’s long-lived assets, net, based on physical location of the assets is as follows:


	September 30, 2023		December 31, 2022
United States	$	219,856	$	206,118
Singapore	45,163		60,307
Germany	61,834		50,274
Netherlands	48,412		35,951
Other	75,835		74,221
Total	$	451,100	$	426,871

Concentration of Credit Risk

The amounts reflected in the Condensed Consolidated Balance Sheets for cash and cash equivalents, marketable securities, restricted cash, and trade accounts receivable are exposed to concentrations of credit risk. Although the Company maintains cash and cash equivalents with multiple financial institutions, the deposits, at times, may exceed federally insured limits. The Company believes that the financial institutions that hold its cash and cash equivalents are financially sound and, accordingly, minimal credit risk exists with respect to these balances.

The Company’s customer base consists of a significant number of geographically dispersed customers. No customer represented 10% or more of accounts receivable, net as of September 30, 2023 and December 31, 2022. Additionally, no customer accounted for 10% or more of total revenue during the three and nine months ended September 30, 2023 and 2022.

Note 3. Acquisitions, Goodwill and Intangible Assets

Paperspace Co.

On July 5, 2023 (“Acquisition Date”), the Company consummated a business combination acquiring 100% of Paperspace Co. (“Paperspace”) for total consideration of $100,399, which consists of consideration paid of $100,716, offset by amounts due from seller of $317 related to the estimated purchase price adjustment. Included in the consideration paid is a contribution of $11,100 to an escrow account held by a third party on the Acquisition Date to support certain post-closing indemnification obligations.

This acquisition has been accounted for as a business combination and the results of Paperspace’s operations have been included in the accompanying condensed consolidated financial statements since the Acquisition Date. The acquisition and integration of Paperspace’s advanced technology into the Company’s platform will extend the Company’s offerings, enabling customers to more easily test, develop and deploy artificial intelligence and machine learning (“AI/ML”) applications, and augment and enhance existing AI/ML applications.

The initial accounting for the business combination is incomplete at the time of this filing due to the limited amount of time between the Acquisition Date and the date that these financial statements are issued. The Company has performed a preliminary valuation analysis of the fair market value of the assets and liabilities of the Paperspace business. The final purchase price allocation will be determined when the Company has completed its evaluation of the valuation analysis. The final allocation could differ materially from the preliminary allocation. The final allocation may include changes in allocations to acquired intangible assets as well as goodwill and other changes to assets and liabilities including deferred tax liabilities. The estimated useful lives of acquired intangible assets are also preliminary. Measurement period adjustments, if any, will be recognized in the reporting period in which the adjustment amounts are determined within twelve months from the Acquisition Date.

The following table sets forth the components and the preliminary allocation of the purchase price for the business combination and summarizes the preliminary fair values of the assets acquired and liabilities assumed at the Acquisition Date:


Total consideration:
Consideration Paid	$	100,716
Amount due from seller	(317)
Total consideration transferred	$	100,399

Cash and cash equivalents	$	1,376
Accounts receivable	1,042
Prepayments and other current assets	193
Property and equipment	4,515
Operating lease right-of-use asset, net	4,398
Finance lease right-of-use asset, net	11,958
Other Long Term Assets	367
Intangible assets	37,690
Accounts payable and accrued expenses	(1,445)
Deferred revenue	(105)
Operating lease liabilities- Current	(1,475)
Operating lease liabilities- Non-Current	(2,923)
Finance lease liabilities- Current	(5,707)
Finance lease liabilities- Non-Current	(6,251)
Deferred tax liabilities	(1,074)
Net identifiable assets acquired	42,559
Goodwill	57,840
Total fair value of net assets acquired	$	100,399

The Company amortizes its intangible assets assuming no residual value over periods in which the economic benefit of these assets is consumed (the useful life). The preliminary fair values allocated to the identifiable intangible assets and their estimated useful lives are as follows:


Intangible assets	Preliminary fair value		Weighted Av. Useful Life (yrs)
Trademark/Trade Name	$	300	1
Developed Technology	24,120		5
Customer Relationships	13,270		5
Total identifiable intangible assets	$	37,690

Paperspace’s assets and liabilities were measured at estimated fair values on July 5, 2023. Estimates of fair value represent management’s best estimate and require a complex series of judgments about future events and uncertainties. Third-party valuation specialists were engaged to assist in the valuation of these assets and liabilities.

The goodwill is attributable primarily to the integration of Paperspace’s advanced technology into the Company’s platform which will extend the Company’s offerings, resulting in incremental revenue from new and existing customers, and to a lesser extent intangible assets that do not qualify for separate recognition, including the existing workforce acquired through the acquisition. None of the goodwill is expected to be deductible for income tax purposes.

Acquisition and integration related costs consist of miscellaneous professional service fees and expenses for acquisition related activities. The Company recognized approximately $5,774 of acquisition related costs that were expensed in the nine months ended September 30, 2023. These costs are shown primarily as part of general and administrative expenses in the accompanying condensed consolidated statements of operations.

The amount of Paperspace’s revenue and net loss included in the Company’s condensed consolidated statements of operations from the Acquisition Date through September 30, 2023, was $2,760 and $9,526, respectively.

Contingent compensation

Contingent compensation costs relate to payments due to certain Paperspace sellers for $10,120, of which $5,060 will be earned on July 5, 2024, and $1,265 will be earned quarterly thereafter through July 5, 2025. Contingent compensation represents compensation for post-combination services because the payments are contingent on continuing employment of the Paperspace founders, at each payment date. For the three and nine months ended September 30, 2023, the Company recorded an acquisition related compensation expense of $2,068 related to estimated compensation earned by the Paperspace founders to date included in General and administrative in the accompanying Condensed Consolidated Statements of Operations.

Unaudited Pro Forma Financial Information

The unaudited pro forma information below summarizes the combined results of the Company and Paperspace as if the Company’s acquisition of Paperspace closed on January 1, 2022 but does not necessarily reflect the combined actual results of operations of the Company and Paperspace that would have been achieved, nor are they necessarily indicative of future results of operations. The unaudited pro forma information reflects certain adjustments that were directly attributable to the acquisition of Paperspace, including additional amortization of acquired assets and the timing of nonrecurring acquisition and integration related costs, and other adjustments the Company believes are reasonable for the pro forma presentation. If Paperspace had been acquired on January 1, 2022 and included in the Company’s results for 2022 and 2023, it would not have had a material impact to revenue.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Pro-forma net income (loss)	$	17,708	$	2,935	$	(7,500)	$	(41,433)

Cloudways Ltd.

On September 1, 2022 (“Acquisition Date”), the Company acquired 100% of the outstanding equity interests of Cloudways, Ltd. (“Cloudways”) pursuant to a Share Purchase Agreement, dated as of August 19, 2022. This acquisition has been accounted for as a business combination. The results of Cloudways’ operations have been included in the accompanying condensed consolidated financial statements since the Acquisition Date. The acquisition of Cloudways, a leading managed cloud hosting and software-as-a-service provider for SMBs, strengthens the Company’s ability to simplify cloud computing by enabling customers to launch a business and scale it effortlessly. Cloudways was a customer of the Company prior to the acquisition, and the Company recognized revenue of approximately $6,000 from Cloudways from January 1, 2022 through the Acquisition Date.

The acquisition purchase consideration, in accordance with ASC 805, totaled $311,237 and was paid in cash. The Share Purchase Agreement includes customary representations and warranties and covenants of the parties. The Company contributed $42,000 to an escrow account on the Acquisition Date to support certain post-closing indemnification obligations. The final accounting has been completed.

The following table sets forth the components and the allocation of the purchase price for the business combination and summarizes the fair values of the assets acquired and liabilities assumed at the Acquisition Date:


Total consideration:
Cash paid to Cloudways sellers	$	278,187
Cash contributed to escrow accounts	42,000
Other expenses	150
Less: Cash pre-funded from contingent compensation	(9,100)
Total consideration paid	$	311,237

Cash and cash equivalents	$	5,827
Accounts receivable	4,753
Prepayments and other current assets	547
Other long term assets	9
Identifiable intangible assets	72,000
Accounts payable	(1,820)
Accrued expenses	(957)
Deferred revenue	(1,013)
Deferred tax liabilities	(3,417)
Other current liabilities	(23,243)
Net identifiable assets acquired	52,686
Goodwill	258,551
Total fair value of net assets acquired	$	311,237

During the nine months ended September 30, 2023, the Company recorded measurement period adjustments of $24,686 to decrease Goodwill and a corresponding $18,269 to decrease Deferred tax liabilities, and $6,417 to decrease Other current liabilities on the Condensed Consolidated Balance Sheets. Additionally, the change to the provisional amounts resulted in an increase to Income tax expense and Deferred tax liabilities of $1,635 and a decrease to General and administrative expenses and other current liabilities of $921, respectively. The measurement period adjustments are a result of new information obtained about facts and circumstances that existed as of the acquisition date.

The Company amortizes its intangible assets assuming no residual value over periods in which the economic benefit of these assets is consumed (the useful life). The fair values allocated to the identifiable intangible assets and their estimated useful lives are as follows:


Intangible assets	Fair Value		Weighted Average Useful Life in Years
Trade name	$	9,500	10
Developed technology	31,500		5
Customer relationships	31,000		7
Total identifiable intangible assets	$	72,000

Cloudways’ assets and liabilities were measured at estimated fair values on September 1, 2022. Estimates of fair value represent management’s best estimate and require a complex series of judgments about future events and uncertainties. Third-party valuation specialists were engaged to assist in the valuation of these assets and liabilities. The Company used the relief from royalty method to fair value the developed technology and the trade name intangible assets, and the multi-period excess earnings method to fair value the customer relationship intangible assets. The significant assumptions used to estimate the value of the intangible assets included discount rates, projected revenue growth rates, EBITDA margins, technology obsolescence and royalty rates.

The goodwill is attributable primarily to the revenue synergies expected from combining the operations of both entities, and intangible assets that do not qualify for separate recognition, including the existing workforce acquired through the acquisition. None of the goodwill is expected to be deductible for income tax purposes.

Contingent compensation

Contingent compensation costs relate to payments due to a Cloudways seller for $38,830, of which $16,851 was earned and paid on September 1, 2023, and $7,326 will be earned on each of March 1, 2024, September 1, 2024 and March 1, 2025. Contingent compensation represents compensation for post-combination services because the payments are contingent on continuing employment of the Cloudways seller, with limited exceptions, at each payment date.

Unaudited Pro Forma Financial Information

The unaudited pro forma information below summarizes the combined results of the Company and Cloudways as if the Company’s acquisition of Cloudways closed on January 1, 2021 but does not necessarily reflect the combined actual results of operations of the Company and Cloudways that would have been achieved, nor are they necessarily indicative of future results of operations. The unaudited pro forma information reflects certain adjustments that were directly attributable to the acquisition of Cloudways, including additional amortization adjustments for the fair value of the assets acquired and liabilities assumed and other adjustments the Company believes are reasonable for the pro forma presentation.


	Three Months Ended		Nine Months Ended
	September 30, 2022		September 30, 2022
Pro-forma revenue	$	160,457	$	444,193
Pro-forma net income (loss)	10,010		(24,837)

Other Asset Acquisitions

In January 2023, the Company acquired certain assets of SnapShooter Limited for $2,500, which was accounted for as an asset acquisition as substantially all of the fair value of the assets acquired was concentrated in a developed technology intangible asset and will be amortized over five years.

Additionally, the Company recognized a contingent compensation liability of $1,000 that is payable one year from the date of acquisition, contingent on continuing employment and will be recognized as compensation expense over the period that it is earned.

Goodwill

Movements in goodwill during the nine months ended September 30, 2023 were as follows:


Balance at December 31, 2022	$	315,168
Acquisition of Paperspace	57,840
Measurement period adjustments	(24,686)
Balance at September 30, 2023	$	348,322

Note 4. Marketable Securities

The following is a summary of available-for-sale marketable securities, excluding those securities classified within cash and cash equivalents, on the Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022.


	September 30, 2023
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. treasury securities	$	245,528	$	6	$	(132)	$	245,402

Commercial paper	59,386		—		(68)		59,318
Total Marketable securities	$	304,914	$	6	$	(200)	$	304,720


	December 31, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. treasury securities	$	549,944	$	29	$	(849)	$	549,124
Corporate debt securities	35,293		—		(86)		35,207
Commercial paper	139,489		9		(367)		139,131
Total Marketable securities	$	724,726	$	38	$	(1,302)	$	723,462

Interest income from investments was $5,007 and $3,309 for the three months ended September 30, 2023 and 2022, respectively, and $19,071 and $6,899 for the nine months ended September 30, 2023 and 2022, respectively. As of September 30, 2023, all of the Company’s available-for-sale short-term investments were due within one year.

As of September 30, 2023, the Company held seventeen securities that were in an unrealized loss position. The Company does not intend to sell and expects that it is more likely than not that it will not be required to sell these securities until such time as the value recovers or the securities mature. Unrealized losses from fixed-income securities are primarily attributable to changes in interest rates and not credit-related factors based on the Company’s evaluation of available evidence. To determine whether a decline in value is related to credit loss, the Company evaluates, among other factors: the extent to which the fair value is less than the amortized cost basis, changes to the rating of the security by a rating agency and any adverse conditions specifically related to an issuer of a security or its industry. Management does not believe any remaining unrealized losses represent impairments based on our evaluation of available evidence. Unrealized gains and losses on marketable securities are presented net of tax.

Note 5. Fair Value Measurements

The fair value of our financial assets measured on a recurring basis is as follows:


	September 30, 2023
	Level I		Level II		Total
Cash and cash equivalents:
Cash	$	58,625	$	—	$	58,625
Money market funds	20,736		—		20,736


Total Cash and cash equivalents	$	79,361	$	—	$	79,361
Marketable securities:
U.S. treasury securities	$	245,402	$	—	$	245,402

Commercial paper	—		59,318		59,318
Total Marketable securities	$	245,402	$	59,318	$	304,720


	December 31, 2022
	Level I		Level II		Total
Cash and cash equivalents:
Cash	$	95,117	$	—	$	95,117
Money market funds	45,655		—		45,655


Total Cash and cash equivalents	$	140,772	$	—	$	140,772

Marketable securities:
U.S. treasury securities	$	549,124	$	—	$	549,124
Corporate debt securities	—		35,207		35,207
Commercial paper	—		139,131		139,131
Total Marketable securities	$	549,124	$	174,338	$	723,462

The Company classifies its highly liquid money market funds and U.S. treasury securities within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets. The Company classifies its commercial paper and corporate debt securities within Level 2 because they are valued using inputs other than quoted prices that are directly or indirectly observable in the market, including readily available pricing sources for the identical underlying security which may not be actively traded. The Company had no Level 3 financial assets as of September 30, 2023 and December 31, 2022.

Financial Instruments Not Recorded at Fair Value on a Recurring Basis

The Company reports financial instruments at fair value, with the exception of the 0% Convertible Senior Notes due December 1, 2026 (“Convertible Notes”). Financial instruments that are not recorded at fair value on a recurring basis are measured at fair value on a quarterly basis for disclosure purposes. The carrying values and estimated fair values of financial instruments not recorded at fair value are as follows:


	September 30, 2023				December 31, 2022
	Carrying Value		Fair Value		Carrying Value		Fair Value
Convertible Notes	$	1,475,913	$	1,147,500	$	1,470,270	$	1,134,030

The carrying value of the Convertible Notes as of September 30, 2023 and December 31, 2022 was net of unamortized debt issuance costs of $24,087 and $29,730, respectively.

The total fair value of the Convertible Notes was determined based on the closing trading price as of the last day of trading for the period. The Company considers the fair value to be a Level 2 valuation due to the limited trading activity.

Note 6. Balance Sheet Details

Property and equipment, net

Property and equipment, net consisted of the following:



	September 30, 2023		December 31, 2022
Computers and equipment	$	613,305	$	564,763
Furniture and fixtures	1,511		1,511
Leasehold improvements	6,820		6,820
Internal-use software	82,377		78,649
Equipment under finance leases(1)	11,922		—
Property and equipment, gross	$	715,935	$	651,743

Less: accumulated depreciation(1)	$	(363,141)	$	(317,329)
Less: accumulated amortization	(67,988)		(61,244)
Property and equipment, net	$	284,806	$	273,170

___________________

(1)As part of the Paperspace acquisition on July 5, 2023, the Company recognized finance leases for data center equipment for which it is reasonably certain that the Company will exercise, or the Company will substantially utilize, the assets over the estimated lives. Amortization expense of finance lease ROU assets is recognized on a straight-line basis over the lease term of one to five years, and interest expense for finance lease liabilities is recognized under the effective interest rate method based on the incremental borrowing rate. The Company includes the amortization of assets that are recorded under finance leases in depreciation expense included in Cost of revenue on the Company’s Condensed Consolidated Statements of Operations. Interest expense is included in Other income (expense), net on the Company’s Condensed Consolidated Statements of Operations. As of September 30, 2023, finance lease ROU assets, net of amortization, of $10,598 are included in Property and equipment, net; finance lease liabilities of $5,277 and $5,861 are included in Other current liabilities and Other non-current liabilities, respectively, on the Company’s Condensed Consolidated Balance Sheets.

Depreciation expense on property and equipment for the three months ended September 30, 2023 and 2022 was $22,912 and $20,982, respectively, and $66,956 and $62,009 for the nine months ended September 30, 2023 and 2022, respectively.

The Company capitalized costs related to the development of computer software for internal use of $5,070 and $7,879 for the nine months ended September 30, 2023 and 2022, respectively, which is included in internal-use software costs within Property and equipment, net. Amortization expense related to internal-use software for the three months ended September 30, 2023 and 2022 was $1,991 and $2,983, respectively, and $6,898 and $9,205 for the nine months ended September 30, 2023 and 2022, respectively.

Note 7. Debt

Credit Facility

In February and March 2020, the Company entered into and subsequently amended a second amended and restated credit agreement with KeyBank National Association as administrative agent. In November 2021, the Company further amended such credit agreement to revise certain covenants that restricted the incurrence of indebtedness to permit the issuance of the convertible notes discussed below. In March 2022, the Company entered into a third amended and restated credit agreement (the “Credit Facility”) to, among other modifications, (i) remove the term loan component of the existing credit facility which had been previously repaid in full; (ii) increase the maximum borrowing limit of the revolving credit facility from $150,000 to $250,000; (iii) extend the maturity date; (iv) replace the existing maximum total net leverage ratio financial covenant with a maximum senior secured net leverage ratio financial covenant; (v) eliminate the financial covenant requirement of maintaining a minimum debt service coverage ratio; (vi) reduce the interest rates applicable to any principal amounts outstanding on the revolving credit facility as well as the annual commitment fee for unused amounts on the revolving credit facility; and (vii) replace the benchmark reference rate for U.S. Dollar loans from LIBOR to the forward-looking term rate based on the secured overnight financing rate plus a customary adjustment (“Adjusted Term SOFR”).

At September 30, 2023, the Company had available borrowing capacity of $250,000 on the Credit Facility. The Credit Facility will mature on the earlier of (a) March 29, 2027 and (b) 90 days before the maturity date applicable to any outstanding convertible notes issued by the Company in an aggregate principal amount equal to or greater than $100,000.

The Credit Facility is secured by a first-priority security interest in substantially all of the assets of the Company. The Credit Facility contains certain financial and operational covenants, including a maximum senior secured net leverage ratio financial covenant of 3.50x. As of September 30, 2023, the Company was in compliance with all covenants under the Credit Facility.

The per annum interest rate applicable to any principal amounts outstanding under the Credit Facility for U.S. Dollar loans will be equal to (i) Adjusted Term SOFR plus (ii) an applicable margin varying from 1.25% to 2.00%, subject to a pricing grid based on the senior secured net leverage ratio. The Credit Facility provides for an annual commitment fee varying from 0.20% to 0.30%, also subject to a pricing grid based on the senior secured net leverage ratio, applied to the average daily unused amount of the revolving credit facility. The Company incurred commitment fees on the unused balance of the Credit Facility of $128 for the three months ended September 30, 2023 and 2022, and $379 and $349 for the nine months ended September 30, 2023 and 2022, respectively.

Amortization of deferred financing fees for the three months ended September 30, 2023 and 2022 was $105 and $106, respectively, and $315 and $293 for the nine months ended September 30, 2023 and 2022, respectively.

Convertible Notes

In November 2021, the Company issued $1,500,000 aggregate principal amount of Convertible Notes in a private offering, including the exercise in full of the over-allotment option granted to the initial purchasers of $200,000. The Convertible Notes are senior unsecured obligations of the Company and do not bear interest, and the principal amount of the Convertible Notes does not accrete. The Convertible Notes will mature on December 1, 2026 unless earlier converted, redeemed, or repurchased. The net proceeds from this offering were $1,461,795 after deducting underwriting fees, expenses and commissions. Amortization of deferred financing fees for the three months ended September 30, 2023 and 2022 was $1,883 and $1,874, respectively, and $5,643 and $5,605 for the nine months ended September 30, 2023 and 2022, respectively.

Each $1 of principal of the Convertible Notes will initially be convertible into 5.6018 shares of the Company’s common stock, which is equivalent to an initial conversion price of approximately $178.51 per share, subject to adjustment as set forth in the indenture governing the Convertible Notes. Holders of these Convertible Notes may convert their Convertible Notes at their option at any time prior to the close of the business day immediately preceding June 1, 2026, only under the following circumstances:

1.during any calendar quarter commencing after the calendar quarter ending on March 31, 2022, if the last reported sale price of the Company’s common stock exceeds 130% of the conversion price for each of at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter on each applicable trading day;

2.during the five business day period after any ten consecutive trading day period (such ten consecutive trading day period, the “measurement period”) in which the trading price of the Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per share of the common stock on such trading day and the conversion rate on such trading day;

3.if the Company calls such Convertible Notes for redemption, at any time prior to the close of business on the business day immediately preceding the redemption date; and

4.upon the occurrence of specified corporate events or distributions on the common stock.

As none of the above circumstances have occurred as of September 30, 2023, the Convertible Notes were not convertible for the fiscal quarter ending September 30, 2023.

On or after June 1, 2026 until the close of business on the scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Convertible Notes at the option of the holder regardless of the foregoing circumstances.

Upon conversion of the Convertible Notes, the Company will pay or deliver, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock, at the Company’s election.

The Company may redeem for cash all or any portion of the Convertible Notes, at its option, on or after December 2, 2024 and on or before the 25th scheduled trading day immediately before the maturity date, if the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price then in effect on each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on, and including, the trading day immediately preceding the date on which the Company provides a notice of redemption at a redemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus any accrued and unpaid special interest and additional interest, if any, to, but excluding, the redemption date.

Upon the occurrence of a fundamental change (as defined in the indenture governing the Convertible Notes), subject to certain conditions, holders may require the Company to repurchase all or a portion of the Convertible Notes for cash at a price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus any accrued and unpaid special interest and additional interest, if any, to, but excluding, the fundamental change repurchase date.

Note 8. Commitments and Contingencies

Purchase Commitments

As of September 30, 2023, the Company had long-term commitments for bandwidth usage with various networks and internet service providers and entered into purchase orders with various vendors. The Company’s purchase commitments have not materially changed since December 31, 2022.

Letters of Credit

In conjunction with the execution of certain office space operating leases, a letter of credit in the amount of $1,747 and $1,935 was issued and outstanding as of September 30, 2023 and December 31, 2022, respectively. No draws have been made under the letter of credit. These funds are included as Restricted cash on the Condensed Consolidated Balance Sheets as they are related to long-term operating leases and are included in beginning and ending Cash, cash equivalents and restricted cash in the Condensed Consolidated Statements of Cash Flows. The letter of credit was reduced on an annual basis until the end of 2022 and, beginning January 1, 2023, the deposit currently held is the minimum threshold required until the lease expiration.

Legal Proceedings

From time to time, the Company is involved in various legal proceedings arising from the normal course of business activities. While the Company intends to defend any such legal proceedings, it is not feasible to predict or determine the ultimate disposition of any such litigation matters and the cost of any defense or settlement of such proceedings.

On September 12, 2023, a federal securities class action lawsuit was filed in the United States District Court for the Southern District of New York against the Company and certain executive officers, as described in more detail under Part II — Item 1 “Legal Proceedings”. While the Company intends to defend the lawsuit vigorously, it is possible that the Company could incur losses associated with it, although it is not possible to estimate the amount of any loss or range of possible loss that might result from adverse judgments, settlements, penalties or other resolutions of such proceeding, based on the early stage thereof, the fact that alleged damages have not been specified, the uncertainty as to the certification of a class and the size of any certified class, and the lack of resolution on significant factual and legal issues.

Note 9. Stockholders’ Equity

Common Stock

The Company’s amended and restated certificate of incorporation authorizes the issuance of common and preferred stock. Holders of common stock are entitled to one vote per share.

As of September 30, 2023 and December 31, 2022, the Company was authorized to issue 750,000,000 shares of common stock with a par value of $0.000025 per share.

Preferred Stock

In connection with the IPO, the Company’s amended and restated certificate of incorporation became effective, which authorized the issuance of 10,000,000 shares of preferred stock with a par value of $0.000025 per share with rights and preferences, including voting rights, designated from time to time by the Company’s Board of Directors. No shares of preferred stock were issued or outstanding as of September 30, 2023 or December 31, 2022.

Share Buyback Program

On February 14, 2023, the Company’s Board of Directors approved the repurchase of up to an aggregate of $500,000 of the Company’s common stock (the “2023 Share Buyback Program”). Pursuant to the 2023 Share Buyback Program, repurchases of the Company’s common stock will occur using a variety of methods, which may include but are not limited to open market purchases, the implementation of a 10b5-1 plan, and/or any other available methods in accordance with SEC and other applicable legal requirements. The 2023 Share Buyback Program is authorized throughout fiscal year 2023; however, the Company is not obligated to acquire any particular amount of common stock and the 2023 Share Buyback Program may be extended, modified, suspended or discontinued at any time at the Company’s discretion.

Pursuant to the 2023 Share Buyback Program, during the three months ended September 30, 2023, the Company repurchased and retired 3,350,349 shares of common stock for an aggregate purchase price of $106,031, which excludes the 1% excise tax of $1,059 imposed under the Inflation Reduction Act. During the nine months ended September 30, 2023, the Company repurchased and retired 13,888,704 shares of common stock for an aggregate purchase price of $474,950, which excludes the 1% excise tax of $4,748. All purchased shares were retired and are reflected as a reduction of Common stock for the par value of shares, with the excess applied to Additional paid-in capital and Accumulated deficit. As of September 30, 2023, the dollar value of shares that remained available to be repurchased by the Company under the 2023 Share Buyback Program was $25,050.

Note 10. Stock-Based Compensation

Equity Incentive Plan

In March 2021, the Company’s Board of Directors adopted, and the stockholders approved, the 2021 Equity Incentive Plan. The 2021 Equity Incentive Plan is a successor to and continuation of the 2013 Stock Plan. The 2021 Equity Incentive Plan became effective on the date of the IPO with no further grants being made under the 2013 Stock Plan, however, awards outstanding under the 2013 Stock Plan will continue to be governed by their existing terms. The 2021 Equity Incentive Plan provides for the grant of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock units awards (“RSUs”), performance awards, and other awards to employees, directors, and consultants. Shares issued pursuant to the exercise of these awards are transferable by the holder.

In February 2023, the Company initiated a restructuring plan to adjust its cost structure and accelerate its timeline to achieve greater than 20% adjusted free cash flow margins (the “Restructuring Plan”), which includes both the elimination of positions across the Company as well as the shifting of additional positions across a broader geographical footprint. In connection with the Restructuring Plan, the Company recorded $3,937 of stock-based compensation related to the accelerated vesting of certain restricted stock, performance-based restricted stock units (“PRSUs”), and RSU awards during the nine months ended September 30, 2023. Refer to Note 13, Restructuring, for further details of the Restructuring Plan.

Stock Options

Stock options granted have a maximum term of ten years from the grant date, are exercisable upon vesting and vest over a period of four years. Stock option activity for the nine months ended September 30, 2023 was as follows:


	Number of Options Outstanding	Weighted-Average Exercise Price		Weighted-Average Remaining Life in Years	Aggregate Intrinsic Value
Outstanding at January 1, 2023	10,153,916	$	7.23	6.16	$	185,188

Granted	46,799	28.86
Exercised	(2,230,603)	6.89
Forfeited or cancelled	(408,105)	10.76
Outstanding at September 30, 2023	7,562,007	$	7.27	5.40	$	126,991
Vested and exercisable at September 30, 2023	6,899,260	6.64		5.24	120,046
Vested and unvested expected to vest at September 30, 2023	7,466,772	$	7.18	5.38	$	126,055

The aggregate intrinsic value represents the difference between the fair value of common stock and the exercise price of outstanding in-the-money options. The aggregate intrinsic value of exercised options for the nine months ended September 30, 2023 and 2022 was $64,463 and $78,012, respectively. The tax benefit from stock options exercised was

$975 and $344 for the three months ended September 30, 2023 and 2022, respectively, and $2,810 and $7,730 for the nine months ended September 30, 2023 and 2022, respectively.

During the nine months ended September 30, 2023, 46,799 options were granted. No options were granted during the nine months ended September 30, 2022. The aggregate estimated fair value of stock options granted to participants that vested during the nine months ended September 30, 2023 and 2022 was $10,284 and $13,452, respectively.

As of September 30, 2023, there was $7,630 of unrecognized stock-based compensation related to outstanding stock options granted that is expected to be recognized over a weighted-average period of 0.94 years.

RSUs

RSUs granted typically vest over four years. RSU activity for the nine months ended September 30, 2023 was as follows:


	Shares	Weighted-Average Fair Value
Unvested balance at January 1, 2023	4,802,435	$	44.25
Granted	5,337,840	35.03
Vested	(1,434,162)	41.14
Forfeited or cancelled	(1,852,745)	45.08
Unvested balance at September 30, 2023	6,853,368	37.49
Vested and expected to vest at September 30, 2023	4,514,288	$	37.61

Forfeitures and cancellations were primarily due to the Restructuring Program.

As of September 30, 2023, there was $155,162 of unrecognized stock-based compensation related to outstanding RSUs granted that is expected to be recognized over a weighted-average period of 2.89 years.

PRSUs

The Company issued PRSUs which will vest based on the achievement of each award’s established performance targets. PRSU activity for the nine months ended September 30, 2023 was as follows:


	Shares	Weighted-Average Fair Value
Unvested balance at January 1, 2023	666,122	$	57.41
Granted	1,118,528	31.75
Vested	(51,594)	41.24
Forfeited or cancelled	(325,057)	38.54
Adjusted by performance factor	(436,387)	60.72
Unvested balance at September 30, 2023	971,612	$	33.92

At the end of each reporting period, the Company will adjust compensation expense for the PRSUs based on its best estimate of attainment of specified performance metrics. The cumulative effect on current and prior periods of a change in the estimated number of PRSUs that are expected to be earned during the performance period will be recognized as an adjustment to earnings in the period of the revision. Compensation cost in connection with the probable number of shares that will vest will be recognized using the accelerated attribution method.

LTIP PRSUs

The Company grants Long Term Incentive Plan (“LTIP”) PRSUs to certain executives of the Company during the first fiscal quarter. A percentage of the LTIP PRSUs will become eligible to vest based on the Company’s financial performance level at the end of each fiscal year. The financial performance level is determined as the percentage equal to the sum of the revenue growth percentage and profitability percentage.

The number of LTIP PRSUs received will depend on the achievement of financial metrics relative to the approved performance targets. Depending on the actual financial metrics achieved relative to the target financial metrics throughout the defined performance period of the award, the number of LTIP PRSUs that vest could range from 0% to 200% of the target amount and are subject to the Board of Directors’ approval of the level of achievement against the approved performance targets.

Assuming the minimum performance target is achieved, one-third of the aggregate number of the LTIP PRSUs shall vest on the later of (i) March 1 of the year after grant or (ii) two trading days following the public release of the Company’s financial results, and the remainder shall vest in eight equal quarterly installments subject, in each case, to the individual’s continuous service through the applicable vesting date.

On February 24, 2022, the financial performance of the LTIP PRSUs granted in 2021 was determined to be achieved at 155% of the target amount. This resulted in a performance factor reduction of 89,769 shares from the original maximum shares achievable of 398,949.

On February 16, 2023, it was determined that the financial performance of the LTIP PRSUs granted in 2022 was not achieved. This resulted in a performance factor reduction of 436,387 shares from the original maximum shares achievable of 436,387.

On March 1, 2023, the Company granted an LTIP PRSU award (the “2023 LTIP PRSU”) with a maximum shares achievable of 1,118,528, subject to the actual financial metrics achieved relative to the target financial metrics for fiscal year 2023. As of September 30, 2023, the Company determined that it was probable that a percentage of the 2023 LTIP PRSUs granted with respect to the Company’s 2023 financial performance would vest.

There is $2,969 of unrecognized stock-based compensation that is expected to be recognized over a weighted-average period of 1.25 years in regards to the LTIP PRSUs.

Other PRSUs

In addition to the above awards, certain other PRSUs have been awarded subject to other various performance measures including the achievement of revenue targets.

As part of the Restructuring Plan, 20,000 PRSU shares were deemed achieved and will vest in early fiscal year 2024. This resulted in $1,262 of stock-based compensation, which was included in Restructuring and other charges in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2023.

During the period ended June 30, 2023, 40,000 PRSUs shares were deemed achieved and will vest in early fiscal year 2024. This resulted in $2,524 of stock-based compensation, which was included in Research and development in the Condensed Consolidated Statements of Operations for the three months ended June 30, 2023.

MRSUs

On July 27, 2021, the Company’s Board of Directors granted a market-based restricted stock unit (“MRSU”) award for 3,000,000 shares of the Company’s common stock to the Company’s CEO, Yancey Spruill, which will vest upon the satisfaction of certain service conditions and the achievement of certain Company stock price goals, as described below.

The MRSU, which has a grant date fair value of $75,300 derived by using a discrete model based on multiple stock price-paths developed through the use of a Monte Carlo simulation, is divided into five tranches that will be earned based on the achievement of stock price goals, measured based on the average of the Company’s closing stock price over a consecutive ninety (90) trading day period during the performance period as set forth in the table below.


Tranche	Company Stock Price Target	Number of Eligible MRSUs
1	$93.50	475,000
2	$140.00	575,000
3	$187.00	650,000
4	$233.50	650,000
5	$280.50	650,000

To the extent earned based on the stock price targets set forth above, the MRSU will vest over a seven-year period beginning on the date of grant in annual amounts equal to 14%, 14%, 14%, 14%, 14%, 15% and 15%, respectively, on each anniversary of the date of grant.

MRSU activity for the nine months ended September 30, 2023 was as follows:


	Shares	Weighted-Average Fair Value
Unvested balance at January 1, 2023	3,000,000	$	25.12
Granted	—	—


Unvested balance at September 30, 2023	3,000,000	$	25.12

On August 24, 2023, the Company announced its implementation of a leadership succession plan to identify the Company’s next CEO. Yancey Spruill will continue to serve as CEO until a successor has been appointed, at which point he will step down from his role as CEO and as a member of the Board. As a result, and in accordance with the Company’s accounting policy, $31,279 of recognized stock-based compensation related to the MRSUs was estimated to be forfeited and therefore reversed for the three and nine months ended September 30, 2023.

As of September 30, 2023, there was no unrecognized stock-based compensation related to the MRSUs granted remaining to be recognized.

ESPP

In March 2021, the Company’s Board of Directors adopted, and the stockholders approved, the 2021 Employee Stock Purchase Plan (“ESPP”). Eligible employees enroll in the offering period at the start of each purchase period, whereby they may purchase a number of shares at a price per share equal to 85% of the lesser of (1) the stock price at the employee’s first participation in the offering period or (2) the fair market value of the Company’s common stock on the purchase date. After the end of an offering period, a new offering will automatically begin on the date that immediately follows the conclusion of the preceding offering.

2022 Offerings

A new offering period commenced on May 23, 2022 and was scheduled to consist of two purchase periods, with purchase dates of November 18, 2022 and May 19, 2023 (the “First 2022 Offering”). In connection with the purchase period that ended on November 18, 2022, there were 111,851 shares of common stock, net of shares withheld for taxes, purchased by employees at a price of $24.03. Under the terms of the ESPP, since the Company’s stock price on the first day of the purchase period beginning on November 21, 2022 was lower than the stock price at the beginning of the First 2022 Offering, the First 2022 Offering terminated and a new 12 month offering automatically commenced on November 21, 2022, with scheduled purchase dates on May 19, 2023 and November 20, 2023 (the “Second 2022 Offering”). In connection with the purchase period that ended on May 19, 2023, there were 120,348 shares of common stock, net of shares withheld for taxes, purchased by employees at a price of $23.51.

The termination of the First 2022 Offering and commencement of the Second 2022 Offering was accounted for as a modification, which resulted in an incremental stock-based compensation of $2,069, which will be recognized over the remaining term of Second 2022 Offering.

During the three months ended September 30, 2023 and 2022, the Company recorded stock-based compensation associated with the ESPP of $689 and $902, respectively, and $1,909 and $3,441 for the nine months ended September 30, 2023 and 2022, respectively. As of September 30, 2023, $1,899 has been withheld on behalf of employees.

Restricted Shares

In connection with the closing of the Nimbella acquisition on September 1, 2021, the Company issued 200,204 shares of restricted stock for $63.11 per share for a total value of $12,635 to the founders of Nimbella. These shares vest equally on March 1, 2023 and September 1, 2024 and are expensed on a straight line basis over 36 months. The restricted stock is subject to forfeiture and dependent upon each founder’s continuous service on the vesting date.

As part of the Restructuring Plan, during the three months ended March 31, 2023, 33,963 shares of restricted stock that were issued to a former founder were vested upon the employee’s departure and $2,147 of stock-based compensation was included in Restructuring and other charges in the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2023.

During the three months ended June 30, 2023, 66,139 shares of restricted stock that were issued to the two remaining founders of Nimbella were vested upon their departure. This resulted in $3,946 of stock-based compensation which was included in Research and development in the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2023.

For the restricted shares, there was no stock-based compensation recognized for the three months ended September 30, 2023. Total stock-based compensation for the three months ended September 30, 2022 was $1,053. Total stock-based compensation was $4,879 and $3,159 for the nine months ended September 30, 2023 and 2022, respectively. As of September 30, 2023, the restricted shares in connection with the Nimbella acquisition have been fully amortized.

Stock-Based Compensation

Stock-based compensation was included in the Condensed Consolidated Statements of Operations as follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Cost of revenue	$	497	$	492	$	1,350	$	1,405
Research and development	9,502		8,236		35,280		28,617

DigitalOcean Holdings, Inc. [DOCN] Filings
10-Q	[2023-11-02]
10-Q	[2023-08-11]
10-Q	[2023-05-09]
10-K	[2023-02-22]
10-Q	[2022-11-07]
10-Q	[2022-08-08]
10-Q	[2022-05-05]
10-K	[2022-02-25]
10-Q	[2021-11-05]
10-Q	[2021-08-06]
10-Q	[2021-05-07]
S-1	[2021-02-25]