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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, 2021
OR
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
 Commission File Number: 001-40252
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 classTrading SymbolName of each exchange on which registered
Common stock, par value $0.000025 per shareDOCNThe 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 filerAccelerated filer
Non-accelerated filerSmaller 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 28, 2021, there were 109,166,409 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)
Item 2.
Item 3.
Item 4.
PART II. OTHER INFORMATION
Item 1.
Item 1a.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.



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 key personnel and our ability to identify, recruit and retain skilled personnel;
our ability to effectively manage our growth;
our ability to compete effectively with existing competitors and new market entrants; and
the growth rates of the markets in which we compete.
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 the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. 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, 2021December 31, 2020
Cash and cash equivalents$589,750 $100,311 
Accounts receivable, less allowance for doubtful accounts of $3,602 and $3,104, respectively
36,505 28,098 
Prepaid expenses and other current assets16,528 19,544 
Total current assets642,783 147,953 
Property and equipment, net241,083 238,956 
Restricted cash2,226 2,226 
Goodwill32,170 2,674 
Intangible assets43,266 34,649 
Deferred tax assets82 82 
Other assets4,215 3,712 
Total assets$965,825 $430,252 
Accounts payable12,689 12,433 
Accrued other expenses28,412 27,025 
Deferred revenue5,136 4,873 
Current portion of long-term debt 17,468 
Other current liabilities11,340 22,986 
Total current liabilities$57,577 $84,785 
Deferred tax liabilities207 211 
Long-term debt 242,215 
Other long-term liabilities1,608 2,061 
Total liabilities$59,392 $329,272 
Commitments and Contingencies (Note 6)
Convertible preferred stock$ $173,074 
Preferred stock ($0.000025 par value per share; 10,000,000 and 0 shares authorized; 0 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively)
$ $ 
Common stock ($0.000025 par value per share; 750,000,000 and 111,400,000 shares authorized; 110,990,479 and 45,299,339 issued; and 109,022,251 and 43,331,111 outstanding as of September 30, 2021 and December 31, 2020, respectively)
2 1 
Treasury stock, at cost (1,968,228 shares at September 30, 2021 and December 31, 2020)
(4,598)(4,598)
Additional paid-in capital1,085,788 99,783 
Accumulated other comprehensive loss(346)(245)
Accumulated deficit(174,413)(167,035)
Total stockholders’ equity (deficit)$906,433 $(72,094)
Total liabilities, convertible preferred stock and stockholders’ equity (deficit)$965,825 $430,252 
See accompanying notes to condensed consolidated financial statements
1

DIGITALOCEAN HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three Months EndedNine Months Ended
September 30,September 30,
2021202020212020
Revenue$111,428 $81,160 $308,899 $230,863 
Cost of revenue43,506 37,063 126,195 106,951 
Gross profit67,922 44,097 182,704 123,912 
Operating expenses:
Research and development29,927 19,706 79,450 54,313 
Sales and marketing13,312 7,700 35,545 24,111 
General and administrative26,354 23,411 68,756 62,917 
Total operating expenses69,593 50,817 183,751 141,341 
Loss from operations(1,671)(6,720)(1,047)(17,429)
Other (income) expense:
Interest expense186 3,190 2,675 10,485 
Loss on extinguishment of debt  3,435 259 
Other (income) expense, net140 438 (157)679 
Other (income) expense326 3,628 5,953 11,423 
Loss before income taxes(1,997)(10,348)(7,000)(28,852)
Income tax (benefit) expense(145)(134)378 865 
Net loss attributable to common stockholders$(1,852)$(10,214)$(7,378)$(29,717)
Net loss per share attributable to common stockholders, basic and diluted$(0.02)$(0.24)$(0.08)$(0.72)
Weighted-average shares used to compute net loss per share, basic and diluted107,955 42,215 88,265 41,197 
See accompanying notes to condensed consolidated financial statements
2

DIGITALOCEAN HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(unaudited)
Three Months EndedNine Months Ended
September 30,September 30,
2021202020212020
Net loss attributable to common stockholders$(1,852)$(10,214)$(7,378)$(29,717)
Other comprehensive loss:
Foreign currency translation adjustments, net of taxes(73)32 (101)(147)
Comprehensive loss$(1,925)$(10,182)$(7,479)$(29,864)
See accompanying notes to condensed consolidated financial statements
3

DIGITALOCEAN HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands, except share amounts)
(unaudited)
Convertible Preferred StockCommon StockTreasury StockAdditional Paid-In CapitalAccumulated Other Comprehen-sive LossAccumulated DeficitTotal
SharesAmountSharesAmountSharesAmount
Balance at June 30, 2021 $ 109,213,693 $2 (1,968,228)$(4,598)$1,035,514 $(273)$(172,561)$858,084 
Issuance of common stock under equity incentive plan, net of taxes withheld— — 907,272 — — — 3,888 — — 3,888 
Exercise of common stock warrants— — 232,520 — — — — — — — 
Issuance of common stock for acquisition— — 636,994 — — — 27,566 — — 27,566 
Stock-based compensation— — — — — — 18,820 — — 18,820 
Other comprehensive loss— — — — — — — (73)(73)
Net loss— — — — — — — — (1,852)(1,852)
Balance at September 30, 2021 $ 110,990,479 2 (1,968,228)$(4,598)$1,085,788 $(346)$(174,413)$906,433 
Convertible Preferred StockCommon StockTreasury StockAdditional Paid-In CapitalAccumulated Other Comprehen-sive LossAccumulated DeficitTotal
SharesAmountSharesAmountSharesAmount
Balance at June 30, 202045,472,229 $173,074 43,893,317 $1 (1,968,228)$(4,598)$77,727 $(291)$(142,970)$(70,131)
Issuance of common stock under equity incentive plan, net of taxes withheld— — 639,600 — — — 2,009 — — 2,009 
Stock-based compensation— — — — — — 12,861 — — 12,861 
Other comprehensive loss— — — — — — — 32 — 32 
Net loss— — — — — — — — (10,214)(10,214)
Balance at September 30, 202045,472,229 $173,074 44,532,917 $1 (1,968,228)$(4,598)$92,597 $(259)$(153,184)$(65,443)

See accompanying notes to condensed consolidated financial statements
4

DIGITALOCEAN HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands, except share amounts)
(unaudited)
Convertible Preferred StockCommon StockTreasury StockAdditional Paid-In CapitalAccumulated Other Comprehen-sive LossAccumulated DeficitTotal
SharesAmountSharesAmountSharesAmount
Balance at December 31, 202045,472,229 $173,074 45,299,339 $1 (1,968,228)$(4,598)$99,783 $(245)$(167,035)$(72,094)
Issuance of common stock under equity incentive plan, net of taxes withheld
— — 2,785,069 — — — 10,368 — — 10,368 
Exercise of common stock warrants— — 296,848 — — — — — — — 
Stock-based compensation— — — — — — 37,966 — — 37,966 
Issuance of common stock for acquisition— — 636,994 — — — 27,566 — — 27,566 
Issuance of common stock in connection with initial public offering, net of underwriting discounts and issuance costs— — 16,500,000 1 — — 723,125 — — 723,126 
Conversion of convertible preferred stock to common stock in connection with initial public offering(45,472,229)(173,074)45,472,229 — — — 173,074 — — 173,074 
Conversion of redeemable preferred stock warrants to common stock warrants— — — — — — 13,906 — — 13,906 
Other comprehensive loss— — — — — — — (101)— (101)
Net loss— — — — — — — — (7,378)(7,378)
Balance at September 30, 2021 $ 110,990,479 $2 (1,968,228)$(4,598)$1,085,788 $(346)$(174,413)$906,433 

Convertible Preferred StockCommon StockTreasury StockAdditional Paid-In CapitalAccumulated Other Comprehen-sive LossAccumulated DeficitTotal
SharesAmountSharesAmountSharesAmount
Balance at December 31, 201940,750,324 $123,264 41,095,849 $1 (1,968,228)$(4,598)$55,896 $(112)$(123,467)$(72,280)
Issuance of common stock under equity incentive plan, net of taxes withheld— — 3,437,068 — — — 11,402 — — 11,402 
Issuance of convertible preferred stock4,721,905 49,810 — — — — — — — — 
Stock-based compensation— — — — — — 25,299 — — 25,299 
Other comprehensive loss— — — — — — — (147)— (147)
Net loss— — — — — — — — (29,717)(29,717)
Balance at September 30, 202045,472,229 $173,074 44,532,917 $1 (1,968,228)$(4,598)$92,597 $(259)$(153,184)$(65,443)
See accompanying notes to condensed consolidated financial statements
5

DIGITALOCEAN HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended September 30,
20212020
Operating activities
Net loss attributable to common stockholders$(7,378)$(29,717)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization64,922 55,203 
Loss on impairment212 1,222 
Stock-based compensation37,380 24,865 
Non-cash interest expense386 907 
Loss on extinguishment of debt3,435 259 
Revaluation of warrants(556)452 
Bad debt expense6,055 9,386 
Release of VAT reserve3,188  
Other477 (139)
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable(14,462)(13,045)
Prepaid expenses and other current assets(134)(8,934)
Accounts payable and accrued expenses4,001 824 
Deferred revenue263 (267)
Other assets and liabilities2,587 (869)
Net cash provided by operating activities100,376 40,147 
Investing activities
Capital expenditures - property and equipment(66,480)(69,807)
Capital expenditures - internal-use software development(4,297)(10,159)
Purchase of intangible assets(5,636)(5,118)
Cash paid for acquisition of businesses, net of cash acquired(5,000) 
Proceeds from sale of equipment209  
Net cash used in investing activities(81,204)(85,084)
Financing activities
Repayment of capital leases (699)
Repayment of notes payable(33,214)(8,347)
Proceeds from third-party secured financings 7,795 
Repayment of term loan(166,813)(72,438)
Proceeds from issuance of term loan 170,000 
Repayment of borrowings under revolving credit facility(63,200)(84,500)
Proceeds from borrowings under revolving credit facility 63,200 
Payment of debt issuance costs (3,274)
Proceeds related to the issuance of common stock under equity incentive plan12,138 11,402 
Proceeds from the issuance of convertible preferred stock, net of issuance costs 49,810 
Payment of initial public offering costs (247)
Proceeds from initial public offering, net of underwriting discounts and commissions and other offering costs723,126  
Employee payroll taxes paid related to net settlement of restricted stock units(1,770) 
Net cash provided by financing activities470,267 132,702 
See accompanying notes to condensed consolidated financial statements
6

DIGITALOCEAN HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Increase in cash, cash equivalents and restricted cash489,439 87,765 
Cash, cash equivalents and restricted cash - beginning of period102,537 35,886 
Cash, cash equivalents and restricted cash - end of period$591,976 $123,651 
Supplemental disclosures of cash flow information:
Cash paid for interest$2,248 $9,479 
Cash paid for taxes (net of refunds)541 528 
Non-cash investing and financing activities:
Capitalized stock-based compensation$587 $435 
Property and equipment received but not yet paid, included in Accounts payable and Accrued other expenses14,291 18,280 
Seller financed equipment purchases 3,927 
Issuance of common stock for acquisition27,566  
See accompanying notes to condensed consolidated financial statements
7

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 and platform tools for developers, start-ups and small-to-medium size businesses. 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 infrastructure solutions across compute, storage and networking, and also enables developers to extend the native capabilities of the Company’s cloud with fully managed application, container and database offerings.
The Company has adopted a holding company structure and the primary operations are performed globally through our wholly-owned operating subsidiaries.
Initial Public Offering
On March 26, 2021, the Company completed its initial public offering (“IPO”), in which the Company issued and sold 16,500,000 shares of its common stock at a public offering price of $47.00 per share, which resulted in net proceeds of $723,125 after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company. In connection with the IPO, all shares of the convertible preferred stock then outstanding automatically converted into 45,472,229 shares of common stock, and the redeemable convertible preferred stock warrants automatically converted into common stock warrants.
Prior to the IPO, deferred offering costs, which consist of direct incremental legal, accounting, and consulting fees relating to the IPO, were capitalized in Prepaid expenses and other current assets in the condensed consolidated balance sheets. Upon the consummation of the IPO, $1,403 of net deferred offering costs were reclassified into stockholders’ equity as an offset against the IPO proceeds.
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 conformity with accounting principles generally accepted in the U.S. (“U.S. GAAP”), the same basis as the audited consolidated financial statements included in the Company’s final prospectus for its IPO dated as of March 23, 2021 and filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, on March 24, 2021 (“Final Prospectus”). In the opinion of management, the 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, 2021, results of operations for the three and nine months ended September 30, 2021 and 2020, cash flows for the nine months ended September 30, 2021 and 2020, and stockholders' equity for the three and nine months ended September 30, 2021 and 2020.
The condensed consolidated financial statements include the accounts of DigitalOcean Holdings, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Reclassifications
Certain prior year amounts have been reclassified and revised to conform to the current year 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, valuation allowances against deferred tax assets, and 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.
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Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments in money market funds, commercial paper and certificates of deposit, with original maturities from the date of purchase of three months or less. The carrying amounts of cash and cash equivalents approximate fair value because of the short-term maturity and highly liquid nature of these instruments. As of September 30, 2021, the Company held $80,000 in commercial paper and $30,000 in certificates of deposit, maturing monthly for the next three months, with interest rates ranging from 0.06% to 0.10%.
Restricted Cash
Restricted cash includes deposits in financial institutions related to letters of credit used to secure lease agreements. The following table reconciles cash, cash equivalents and restricted cash per the Condensed Consolidated Statements of Cash Flows:
September 30,
20212020
Cash and cash equivalents$589,750 $121,236 
Restricted cash2,226 2,415 
Total cash, cash equivalents and restricted cash$591,976 $123,651 
Accounts Receivable and Allowance for Doubtful Accounts
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 doubtful accounts 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 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 doubtful accounts through bad debt expense and reverses the allowance after the potential for recovery is considered remote.
The following table presents the changes in our allowance for doubtful accounts for the period presented:
Amount
Balance as of December 31, 2020$3,104 
Bad debt expense, net of recoveries6,055 
Write-offs(5,557)
Balance as of September 30, 2021$3,602 
Deferred Revenue
Deferred revenue was $5,136 and $4,873 as of September 30, 2021 and December 31, 2020, respectively. Revenue recognized during the three months ended September 30, 2021 and 2020 was $259 and $383, respectively, and $2,618 and $2,338 during the nine months ended September 30, 2021 and 2020, respectively, which was included in each deferred revenue balance at the beginning of each respective period.
Segment Information
The Company’s chief operating decision maker, the chief executive officer, 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.
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Geographical Information
Revenue, as determined based on the billing address of the Company’s customers, was as follows:
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
North America38 %39 %38 %38 %
Europe28 28 29 28 
Asia24 23 23 24 
Other10 10 10 10 
Total100 %100 %100 %100 %
Revenue derived from customers in the U.S. was approximately 31% of total revenue for each of the periods presented on the condensed consolidated statements of operations.
No country outside of the U.S. had net revenue greater than 10% of total consolidated revenue in any period presented.
Property and equipment located in the U.S. was approximately 48% as of September 30, 2021 and December 31, 2020 with the remainder of net assets residing in international locations, primarily in the Netherlands, Singapore and Germany.
Concentration of Credit Risk
The amounts reflected in the condensed consolidated balance sheets for cash and cash equivalents, 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, 2021 and December 31, 2020. Additionally, no customer accounted for 10% or more of total revenue during the three and nine months ended September 30, 2021 and 2020, respectively.
Recent Accounting Pronouncements – Pending Adoption
The following effective dates represent the requirements for private companies which the Company has elected as an emerging growth company.
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-02, Leases (Topic 842), and additional changes, modifications, clarifications, or interpretations related to this guidance thereafter (“ASU 2016-02”). ASU 2016-02 requires a reporting entity to recognize right-of-use assets and lease liabilities on the balance sheet for operating leases to increase transparency and comparability. ASU 2016-02 is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022 with early adoption permitted. The Company will record a right of use asset and liability, and is currently evaluating the impact of adoption on the condensed consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, with subsequent amendments, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 requires immediate recognition of management’s estimates of current expected credit losses. ASU 2016-13 is effective for annual reporting periods beginning after December 15, 2022, and interim periods within annual periods beginning after December 15, 2023, with early adoption permitted. The Company is currently evaluating the impact of adoption on the condensed consolidated financial statements.
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In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 eliminates certain exceptions in FASB Topic 740: Income Taxes (“ASC 740”) related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. ASU 2019-12 is effective for annual reporting periods beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022, with early adoption permitted. The Company is currently evaluating the impact of adoption on the condensed consolidated financial statements.
Note 3. Business Acquisitions
On September 1, 2021, the Company consummated a business combination acquiring 100% of Nimbella Corp. (“Nimbella”) pursuant to an Agreement and Plan of Reorganization (the “Agreement”). Nimbella provides a serverless platform, built on open source technologies, that is designed to simplify the cloud programming experience and help developers and SMBs focus more on application development and business outcomes and less on managing the underlying infrastructure. This acquisition has been accounted for as a business combination. The total consideration transferred for this acquisition was $5,000 in cash and 636,994 shares of common stock, of which 200,204 shares of common stock will be treated as stock based compensation that will be expensed over 36 months. See Note 9. Stock-Based Compensation, Restricted Shares for more details.
The acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations, and accordingly, the total fair value of the purchase consideration was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date. The majority of the preliminary purchase price was allocated to intangible assets and goodwill, which was $3,300 and $29,496, respectively. Goodwill resulted primarily from the expectation of enhancing the Company's product offerings. The resulting goodwill is not deductible for income tax purposes. Pro forma results of operations for this acquisition have not been presented because they were not material to the condensed consolidated results of operations. The results of operations of Nimbella, which are not material, have been included in the condensed consolidated financial statements from the date of purchase.
Note 4. Balance Sheet Details
Property and equipment, net
Property and equipment, net consisted of the following:
September 30, 2021December 31, 2020
Computers and equipment$492,173 $442,778 
Furniture and fixtures1,511 1,511 
Leasehold improvements6,820 6,820 
Internal-use software66,032 61,640 
Property and equipment, gross$566,536 $512,749 
Less: accumulated amortization $(46,151)$(36,186)
Less: accumulated depreciation(279,302)(237,607)
Property and equipment, net $241,083 $238,956 
Depreciation expense on property and equipment for the three months ended September 30, 2021 and 2020 was $18,969 and $16,020, respectively, and $54,359 and $45,368 for the nine months ended September 30, 2021 and 2020, respectively.
The Company capitalizes costs related to the development of computer software for internal use of $4,884 and $10,594 for the nine months ended September 30, 2021 and 2020, 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, 2021 and 2020 was $3,245 and $3,385, respectively, and $10,245 and $9,608 for the nine months ended September 30, 2021 and 2020, respectively.
During the three and nine months ended September 30, 2020, the Company recorded an impairment loss of $536 and $1,222, respectively, and during the three and nine months ended September 30, 2021, the Company recorded an impairment loss of $212 related to software that is no longer being used.
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Prepaid expenses and other currents assets
Prepaid expenses and other current assets consisted of the following:
September 30, 2021December 31, 2020
Prepaid expenses$9,751 $6,968 
VAT receivable6,123 9,295 
Other current expenses654 3,281 
Total prepaid expenses and other current assets
$16,528 $19,544 
Other current liabilities
Other current liabilities consisted of the following:
September 30, 2021December 31, 2020
Accrued taxes$6,577 $7,758 
Warrant liability 14,463 
ESPP withholding4,025  
Other738 765 
Total other current liabilities$11,340 $22,986 
Note 5. Debt
Debt consisted of the following:
September 30, 2021December 31, 2020
Credit Facility
Term Loan(1)
$ $165,051 
Revolving Credit Facility 63,200 
Notes payable 31,432 
Total debt$ $259,683 
Less: current portion
Credit Facility$ $(7,438)
Notes payable (10,030)
Current portion of long-term debt (17,468)
Total long-term debt$ $242,215 
___________________
(1)Amount is net of unamortized discount and debt issuance costs of $1,761 as of December 31, 2020.
Credit Facility
As of March 31, 2021, the Company paid the remaining obligations on the outstanding Credit Facility, which includes the Term Loan and Revolving Credit Facility. At September 30, 2021, the Company had available borrowing capacity of $150,000 on the Revolving Credit Facility. The Company recognized a loss on extinguishment of debt of $1,652 for the unamortized discount and debt issuance costs related to the Term Loan in the first quarter of 2021. The write-off of the unamortized discount and debt issuance costs represent a non-cash adjustment to reconcile net income to net cash provided by operating activities within the Condensed Consolidated Statements of Cash Flows.
The Company incurred commitment fees on the unused balance of the Revolving Credit Facility of $96 and $82 for the three months ended September 30, 2021 and 2020, respectively, and $266 and $237 for the nine months ended September 30, 2021 and 2020, respectively.
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Interest and amortization of deferred financing fees for the three months ended September 30, 2021 and 2020 was $90 and $2,511, respectively, and $2,153 and $7,922 for the nine months ended September 30, 2021 and 2020, respectively.
Notes Payable
During the three months ended March 31, 2021, the Company paid the remaining obligations on all outstanding notes payable.
Total interest expense for the nine months ended September 30, 2021 was $254. There was no interest expense for the three months ended September 30, 2021. Total interest expense for the three and nine months ended September 30, 2020 was $594 and $1,760, respectively. The Company recognized a loss on extinguishment of debt of $1,783 for unaccrued interest paid in conjunction with the payoff of the remaining debt obligation during the nine months ended September 30, 2021.
Note 6. Operating Leases
The Company leases data center facilities and office space under generally non-cancelable operating lease agreements, which expire at various dates through 2025. Facility leases generally include renewal options and may include escalating rental payment provisions. Additionally, the leases may require us to pay a portion of the related operating expenses. Rent expense related to these operating leases for the three months ended September 30, 2021 and 2020 was $1,010 and $1,090, respectively, and $3,032 and $3,329 for the nine months ended September 30, 2021 and 2020, respectively.
As of September 30, 2021, future minimum rental payments under operating lease agreements were as follows:
2021 (three months remaining)$11,138 
202230,954 
202324,017 
202422,316 
20253,933 
Thereafter 
Total minimum operating lease payments$92,358 
Note 7. Commitments and Contingencies
Purchase Commitments
As of September 30, 2021, 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, 2020.
Letters of Credit
In conjunction with the execution of certain office space operating leases, letters of credit in the aggregate amount of $2,226 were issued and outstanding as of September 30, 2021 and December 31, 2020, respectively. No draws have been made under such letters 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. Certain of the letters of credit can be reduced on an annual basis until 2022, at which point the deposit required will similarly reduce to meet minimum threshold requirements.
Legal Proceedings
The Company may be involved in various legal proceedings and litigation arising in the ordinary course of business. While it is not feasible to predict or determine the ultimate disposition of any such litigation matters, the Company believes that any such legal proceedings will not have a material adverse effect on its condensed consolidated financial position, results of operations, or liquidity.
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Note 8. Stockholders’ Equity (Deficit)
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, 2021 and December 31, 2020, the Company was authorized to issue 750,000,000 and 111,400,000 shares of common stock, respectively, with a par value of $0.000025 per share.
Common Stock Reserved for Future Issuance
The Company is authorized to reserve shares of common stock for potential conversion as follows:
September 30, 2021December 31, 2020
Series Seed preferred stock 12,517,832 
Series A-1 preferred stock(1)
 18,304,108 
Series B preferred stock 10,237,032 
Series C preferred stock 4,721,905 
2021 Equity Incentive Plan
30,930,000 34,821,642 
Employee Stock Purchase Plan2,200,000  
Total number of shares for common stock reserved33,130,000 80,602,519 
___________________
(1)Amount includes 308,632 shares of common stock held in reserve for the redeemable convertible preferred stock warrants which were converted to common stock warrants upon the completion of the IPO.
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 and outstanding as of September 30, 2021.
Redeemable Convertible Preferred Stock
Upon completion of the IPO, all shares of Series Seed, Series A, Series B, and Series C redeemable convertible preferred stock then outstanding, totaling 45,472,229 shares, were automatically converted into an equivalent number of shares of common stock. The carrying value of $173,074 was reclassified into Stockholders' equity (deficit). As of September 30, 2021, there were no shares of redeemable convertible preferred stock authorized, issued and outstanding.
Common Stock Warrants
During 2015 and 2014, the Company issued warrants to third parties as partial consideration for property and equipment primarily used in our co-location centers. These warrants allowed the holder to purchase 66,668 shares of common stock at $1.50 per share, and 241,964 shares of common stock at $2.0663 per share. The warrants, which are equity classified, are immediately exercisable, had a term of ten years and various expiration dates through 2025.
With the conversion of the convertible preferred stock into shares of common stock upon the completion of the IPO, 308,632 shares of the redeemable convertible preferred stock warrants automatically converted into common stock warrants. The warrants were remeasured on the date of the IPO using the public offering price of $47.00 per share, which resulted in a gain of $556 that was recorded to Other (income) expense, net for the period ending March 31, 2021. The warrants are considered indexed to the Company’s own stock and therefore no subsequent remeasurement is required.
During April 2021, a warrant holder net exercised its warrant for 64,328 shares of common stock. During July 2021, a warrant holder net exercised its warrants for 232,520 shares of common stock. No warrants remain outstanding as of July 31, 2021 and no further warrants have been issued.
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Treasury Stock
The Company records treasury stock at the cost to acquire shares and is included as a component of Stockholders’ equity (deficit). At September 30, 2021 and December 31, 2020, the Company had 1,968,228 shares of treasury stock which were carried at its cost basis of $4,598 on the Condensed Consolidated Balance Sheets.
Note 9. 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 our 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 up to an aggregate of 30,930,000 shares of common stock. Shares issued pursuant to the exercise of these awards are transferable by the holder. Amounts paid by economic interest holders in excess of fair value are recorded as stock-based compensation (see Note 12).
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, 2021 was as follows:
Number of Options OutstandingWeighted-Average Exercise PriceWeighted-Average Remaining Life in YearsAggregate Intrinsic Value
Outstanding at January 1, 202116,933,494 $6.73 8.44$596,767 
Exercised(2,712,070)4.48 
Forfeited or cancelled(770,247)7.90 
Outstanding at September 30, 202113,451,177 7.12 7.85948,468 
Vested and exercisable at September 30, 20216,276,930 5.51 7.36452,710 
Vested and unvested expected to vest at September 30, 202111,285,444 $6.71 7.74$800,370 
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, 2021 and 2020 was $98,724 and $10,970, respectively.
The weighted-average grant date fair value of options granted to participants during the nine months ended September 30, 2020 was $3.28 per share. No options were granted during the nine months ended September 30, 2021. The aggregate estimated fair value of stock options granted to participants that vested during the nine months ended September 30, 2021 and 2020 was $15,402 and $7,161, respectively.
As of September 30, 2021, there was $30,659 of unrecognized stock-based compensation expense related to outstanding stock options granted that is expected to be recognized over a weighted-average period of 2.66 years.
RSUs
RSUs granted vest over four years. RSU activity for the nine months ended September 30, 2021 was as follows:
SharesWeighted-Average Fair Value
Unvested balance at January 1, 2021413,750 $13.69 
Granted2,952,505 44.72 
Vested(117,480)18.37 
Forfeited or cancelled(144,408)42.31 
Unvested balance at September 30, 20213,104,367 41.70 
Vested and expected to vest at September 30, 20211,862,476 $42.30 
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As of September 30, 2021, there was $67,283 of unrecognized stock-based compensation expense related to outstanding RSUs granted that is expected to be recognized over a weighted-average period of 3.36 years.
PRSUs
The Company issued performance-based restricted stock units (“PRSUs”) which will vest based on the achievement of each award’s established performance targets.
SharesWeighted-Average Fair Value
Unvested balance at January 1, 2021