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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 June 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 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 July 28, 2021, there were 107,340,145 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)
1
2
3
4
6
8
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)
June 30, 2021 December 31, 2020
Cash and cash equivalents $ 577,218  $ 100,311 
Accounts receivable, less allowance for doubtful accounts of $3,086 and $3,104, respectively
33,919  28,098 
Prepaid expenses and other current assets 17,980  19,544 
Total current assets 629,117  147,953 
Property and equipment, net 243,050  238,956 
Restricted cash 2,226  2,226 
Goodwill 2,674  2,674 
Intangible assets 34,497  34,649 
Deferred tax assets 84  82 
Other assets 3,782  3,712 
Total assets $ 915,430  $ 430,252 
Accounts payable 16,187  12,433 
Accrued other expenses 21,976  27,025 
Deferred revenue 5,030  4,873 
Current portion of long-term debt —  17,468 
Other current liabilities 12,194  22,986 
Total current liabilities $ 55,387  $ 84,785 
Deferred tax liabilities 205  211 
Long-term debt —  242,215 
Other long-term liabilities 1,754  2,061 
Total liabilities $ 57,346  $ 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 June 30, 2021 and December 31, 2020, respectively)
$ —  $ — 
Common stock ($0.000025 par value per share; 750,000,000 and 111,400,000 shares authorized; 109,213,693 and 45,299,339 issued; and 107,245,465 and 43,331,111 outstanding as of June 30, 2021 and December 31, 2020, respectively)
Treasury stock, at cost (1,968,228 shares at June 30, 2021 and December 31, 2020)
(4,598) (4,598)
Additional paid-in capital 1,035,514  99,783 
Accumulated other comprehensive loss (273) (245)
Accumulated deficit (172,561) (167,035)
Total stockholders’ equity (deficit) $ 858,084  $ (72,094)
Total liabilities, convertible preferred stock and stockholders’ equity (deficit) $ 915,430  $ 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 Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
Revenue $ 103,810  $ 76,911  $ 197,471  $ 149,703 
Cost of revenue 43,145  35,205  82,689  69,888 
Gross profit 60,665  41,706  114,782  79,815 
Operating expenses:
Research and development 27,121  15,130  49,523  34,607 
Sales and marketing 11,812  6,957  22,233  16,411 
General and administrative 24,362  17,841  42,402  39,506 
Total operating expenses 63,295  39,928  114,158  90,524 
(Loss) income from operations (2,630) 1,778  624  (10,709)
Other (income) expense:
Interest expense 233  3,779  2,489  7,295 
Loss on extinguishment of debt —  —  3,435  259 
Other (income) expense, net (203) 318  (297) 241 
Other (income) expense 30  4,097  5,627  7,795 
Loss before income taxes (2,660) (2,319) (5,003) (18,504)
Income tax (benefit) expense (473) 251  523  999 
Net loss attributable to common stockholders $ (2,187) $ (2,570) $ (5,526) $ (19,503)
Net loss per share attributable to common stockholders, basic and diluted $ (0.02) $ (0.06) $ (0.07) $ (0.48)
Weighted-average shares used to compute net loss per share, basic and diluted 106,765  41,420  78,257  40,683 
See accompanying notes to condensed consolidated financial statements
2

DIGITALOCEAN HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
Net loss attributable to common stockholders $ (2,187) $ (2,570) $ (5,526) $ (19,503)
Other comprehensive loss:
Foreign currency translation adjustments, net of taxes (40) (3) (28) (179)
Comprehensive loss $ (2,227) $ (2,573) $ (5,554) $ (19,682)
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 Stock Common Stock Treasury Stock Additional Paid-In Capital Accumulated Other Comprehen-sive Loss Accumulated Deficit Total
Shares Amount Shares Amount Shares Amount
Balance at March 31, 2021 —  $ —  108,305,374  $ (1,968,228) $ (4,598) $ 1,020,313  $ (233) $ (170,374) $ 845,110 
Issuance of common stock under equity incentive plan, net of taxes withheld —  —  843,991  —  —  —  2,740  —  —  2,740 
Exercise of common stock warrants —  —  64,328  —  —  —  —  —  — 
Stock-based compensation —  —  —  —  —  —  12,461  —  —  12,461 
Other comprehensive loss —  —  —  —  —  —  —  (40) —  (40)
Net loss —  —  —  —  —  —  —  —  (2,187) (2,187)
Balance at June 30, 2021 —  $ —  109,213,693  $ (1,968,228) $ (4,598) $ 1,035,514  $ (273) $ (172,561) $ 858,084 
Convertible Preferred Stock Common Stock Treasury Stock Additional Paid-In Capital Accumulated Other Comprehen-sive Loss Accumulated Deficit Total
Shares Amount Shares Amount Shares Amount
Balance at March 31, 2020 40,750,324  $ 123,264  42,831,591  $ (1,968,228) $ (4,598) $ 71,382  $ (288) $ (140,400) $ (73,903)
Issuance of common stock under equity incentive plan, net of taxes withheld —  —  1,061,726  —  —  —  3,423  —  —  3,423 
Issuance of convertible preferred stock 4,721,905  49,810  — 
Stock-based compensation —  —  —  —  —  —  2,922  —  —  2,922 
Other comprehensive loss —  —  —  —  —  —  —  (3) —  (3)
Net loss —  —  —  —  —  —  —  —  (2,570) (2,570)
Balance at June 30, 2020 45,472,229  $ 173,074  43,893,317  $ (1,968,228) $ (4,598) $ 77,727  $ (291) $ (142,970) $ (70,131)

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 Stock Common Stock Treasury Stock Additional Paid-In Capital Accumulated Other Comprehen-sive Loss Accumulated Deficit Total
Shares Amount Shares Amount Shares Amount
Balance at December 31, 2020 45,472,229  $ 173,074  45,299,339  $ (1,968,228) $ (4,598) $ 99,783  $ (245) $ (167,035) $ (72,094)
Issuance of common stock under equity incentive plan, net of taxes withheld
—  —  1,877,797  —  —  —  6,480  $ —  —  6,480 
Exercise of common stock warrants —  —  64,328  —  —  —  —  —  —  — 
Stock-based compensation —  —  —  —  —  —  19,146  —  —  19,146 
Issuance of common stock in connection with initial public offering, net of underwriting discounts and issuance costs —  —  16,500,000  —  —  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 —  —  —  —  —  —  —  (28) —  (28)
Net loss —  —  —  —  —  —  —  —  (5,526) (5,526)
Balance at June 30, 2021 —  $ —  109,213,693  $ (1,968,228) $ (4,598) $ 1,035,514  $ (273) $ (172,561) $ 858,084 

Convertible Preferred Stock Common Stock Treasury Stock Additional Paid-In Capital Accumulated Other Comprehen-sive Loss Accumulated Deficit Total
Shares Amount Shares Amount Shares Amount
Balance at December 31, 2019 40,750,324  $ 123,264  41,095,849  $ (1,968,228) $ (4,598) $ 55,896  $ (112) $ (123,467) $ (72,280)
Issuance of common stock under equity incentive plan, net of taxes withheld —  —  2,797,468  —  —  —  9,393  —  —  9,393 
Issuance of convertible preferred stock 4,721,905  49,810  —  —  —  —  —  —  —  — 
Stock-based compensation —  —  —  —  —  —  12,438  —  —  12,438 
Other comprehensive loss —  —  —  —  —  —  —  (179) —  (179)
Net loss —  —  —  —  —  —  —  —  (19,503) (19,503)
Balance at June 30, 2020 45,472,229  $ 173,074  43,893,317  $ (1,968,228) $ (4,598) $ 77,727  $ (291) $ (142,970) $ (70,131)
See accompanying notes to condensed consolidated financial statements
5

DIGITALOCEAN HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended June 30,
2021 2020
Operating activities
Net loss $ (5,526) $ (19,503)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 42,541  35,722 
Loss on impairment —  686 
Stock-based compensation 18,825  12,139 
Non-cash interest expense 296  909 
Loss on extinguishment of debt 3,435  259 
Revaluation of warrants (556) 287 
Bad debt expense 3,467  6,891 
Other (41) (130)
Changes in operating assets and liabilities:
Accounts receivable (9,287) (9,295)
Prepaid expenses and other current assets 1,563  (8,129)
Accounts payable and accrued expenses 3,767  (2,021)
Deferred revenue 157  (126)
Other assets and liabilities 1,556  (794)
Net cash provided by operating activities 60,197  16,895 
Investing activities
Capital expenditures - property and equipment (47,036) (48,045)
Capital expenditures - internal-use software development (2,713) (7,350)
Purchase of intangible assets —  (3,630)
Proceeds from sale of equipment 81  — 
Net cash used in investing activities (49,668) (59,025)
Financing activities
Repayment of capital leases —  (463)
Repayment of notes payable (33,214) (5,520)
Proceeds from third-party secured financings —  7,795 
Repayment of term loan (166,813) (71,375)
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 plan, net of taxes withheld 6,480  9,393 
Proceeds from the issuance of convertible preferred stock, net of issuance costs —  49,810 
Payment of initial public offering costs —  (184)
Proceeds from initial public offering, net of underwriting discounts and commissions and other offering costs 723,125  — 
Net cash provided by financing activities 466,378  134,882 
Increase in cash, cash equivalents and restricted cash 476,907  92,752 
See accompanying notes to condensed consolidated financial statements
6

DIGITALOCEAN HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Cash, cash equivalents and restricted cash - beginning of period 102,537  35,886 
Cash, cash equivalents and restricted cash - end of period $ 579,444  $ 128,638 
Supplemental disclosures of cash flow information:
Cash paid for interest $ 2,152  $ 6,278 
Cash paid for taxes (net of refunds) 633  451 
Non-cash investing and financing activities:
Capitalized stock-based compensation $ 321  $ 299 
Property and equipment received but not yet paid 14,407  15,867 
Seller financed equipment purchases —  3,927 
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 June 30, 2021, results of operations for the three and six months ended June 30, 2021 and 2020, cash flows for the six months ended June 30, 2021 and 2020, and stockholders' equity for the three and six months ended June 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, and valuation allowances against deferred tax assets. 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.
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
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instruments. In June 2021, the Company purchased $120,000 in commercial paper and $30,000 in certificates of deposit, maturing monthly for the next three months, with interest rates ranging from 0.02% 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:
June 30,
2021 2020
Cash and cash equivalents $ 577,218  $ 126,223 
Restricted cash 2,226  2,415 
Total cash, cash equivalents and restricted cash $ 579,444  $ 128,638 
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 recoveries 3,467 
Write-offs (3,485)
Balance as of June 30, 2021 $ 3,086 
Deferred Revenue
Deferred revenue was $5,030 and $4,873 as of June 30, 2021 and December 31, 2020, respectively. Revenue recognized during the three months ended June 30, 2021 and 2020 was $1,821 and $1,471, respectively, and $3,546 and $2,915 during the six months ended June 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 June 30, Six Months Ended June 30,
2021 2020 2021 2020
North America 38  % 39  % 38  % 38  %
Europe 29  28  29  28 
Asia 23  24  23  25 
Other 10  10 
Total 100  % 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 June 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 June 30, 2021 and December 31, 2020. Additionally, no customer accounted for 10% or more of total revenue during the three and six months ended June 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. Balance Sheet Details
Property and equipment, net
Property and equipment, net consisted of the following:
June 30, 2021 December 31, 2020
Computers and equipment $ 480,368  $ 442,778 
Furniture and fixtures 1,511  1,511 
Leasehold improvements 6,820  6,820 
Internal-use software 64,674  61,640 
Property and equipment, gross $ 553,373  $ 512,749 
Less: accumulated amortization $ (43,185) $ (36,186)
Less: accumulated depreciation (267,138) (237,607)
Property and equipment, net $ 243,050  $ 238,956 
Depreciation expense on property and equipment for the three months ended June 30, 2021 and 2020 was $18,171 and $14,872, respectively, and $35,390 and $29,348 for the six months ended June 30, 2021 and 2020, respectively.
The Company capitalizes costs related to the development of computer software for internal use of $3,034 and $7,649 for the six months ended June 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 June 30, 2021 and 2020 was $3,343 and $3,381, respectively, and $7,000 and $6,223 for the six months ended June 30, 2021 and 2020, respectively.
During the three and six months ended June 30, 2020, the Company recorded an impairment loss of $148 and $686, respectively, related to software that is no longer being used. No impairment loss was recorded for the three or six months ended June 30, 2021.
Accrued other expenses
Accrued other expenses consisted of the following:
June 30, 2021 December 31, 2020
Accrued bonuses $ 8,942  $ 12,512 
Accrued capital expenditures 4,032  8,478 
Other accrued expenses 9,002  6,035 
Total accrued other expenses
$ 21,976  $ 27,025 
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Other current liabilities
Other current liabilities consisted of the following:
June 30, 2021 December 31, 2020
Accrued taxes $ 9,316  $ 7,758 
Warrant liability —  14,463 
ESPP withholding 2,126  — 
Other 752  765 
Total other current liabilities $ 12,194  $ 22,986 

Note 4. Debt
Debt consisted of the following:
June 30, 2021 December 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 June 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 $103 and $88 for the three months ended June 30, 2021 and 2020, respectively, and $170 and $155 for the six months ended June 30, 2021 and 2020, respectively.
Interest and amortization of deferred financing fees for the three months ended June 30, 2021 and 2020 was $90 and $3,051, respectively, and $2,063 and $5,411 for the six months ended June 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 three months ended June 30, 2021 and 2020 was $38 and $643, respectively, and $254 and $1,166 for the six months ended June 30, 2021 and 2020, 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 six months ended June 30, 2021.
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Note 5. 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 June 30, 2021 and 2020 was $988 and $1,125, respectively, and $2,022 and $2,239 for the six months ended June 30, 2021 and 2020, respectively.
As of June 30, 2021, future minimum rental payments under operating lease agreements were as follows:
2021 (six months remaining) $ 20,993 
2022 28,928 
2023 22,789 
2024 21,339 
2025 3,975 
Thereafter — 
Total minimum operating lease payments $ 98,024 
Note 6. Commitments and Contingencies
Purchase Commitments
As of June 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 June 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 7. 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 June 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:
June 30, 2021 December 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 
Common stock warrants 241,964  — 
2021 Equity Incentive Plan
30,930,000  34,821,642 
Employee Stock Purchase Plan 2,200,000  — 
Total number of shares for common stock reserved 33,371,964  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 June 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 June 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.
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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 June 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 8. 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 11).
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 six months ended June 30, 2021 was as follows:
Number of Options Outstanding Weighted-Average Exercise Price Weighted-Average Remaining Life in Years Aggregate Intrinsic Value
Outstanding at January 1, 2021 16,933,494  $ 6.73  8.44 $ 596,767 
Exercised (1,836,221) 4.08 
Forfeited or cancelled (601,894) 7.39 
Outstanding at June 30, 2021 14,495,379  7.04  8.01 $ 703,769 
Vested and exercisable at June 30, 2021 6,164,388  5.13  7.36 311,067 
Vested and unvested expected to vest at June 30, 2021 11,813,527  $ 6.57  7.87 $ 579,118 
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 six months ended June 30, 2021 and 2020 was $48,516 and $8,382, respectively.
The weighted-average grant date fair value of options granted to participants during the six months ended June 30, 2020 was $3.25 per share. No options were granted during the six months ended June 30, 2021. The aggregate estimated fair value of stock options granted to participants that vested during the six months ended June 30, 2021 and 2020 was $9,275 and $3,151, respectively.
As of June 30, 2021, there was $33,393 of unrecognized stock-based compensation expense related to outstanding stock options granted that is expected to be recognized over a weighted-average period of 2.89 years.
RSUs
RSUs granted vest over four years. RSU activity for the six months ended June 30, 2021 was as follows:
Shares Weighted-Average Fair Value
Unvested balance at January 1, 2021 413,750  $ 13.69 
Granted 2,502,560  42.25 
Vested (77,150) 11.69 
Forfeited or cancelled (69,437) 41.94 
Unvested balance at June 30, 2021 2,769,723  38.85 
Vested and expected to vest at June 30, 2021 1,505,263  $ 38.89 
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As of June 30, 2021, there was $52,713 of unrecognized stock-based compensation expense related to outstanding RSUs granted that is expected to be recognized over a weighted-average period of 3.62 years.
PRSUs
On June 10, 2021, the Company granted PRSUs to certain executives of the Company (“2021 PRSUs”). A percentage of the PRSUs ranging from 0% to 200% will become eligible to vest based on the Company’s financial performance level for fiscal year 2021 (the “Performance Period”). The financial performance level is determined as the percentage equal to the sum of the revenue growth percentage (percentage increase in revenue from fiscal year 2020 to fiscal year 2021) and profitability percentage (adjusted EBITDA margin minus capital expenditures as a percentage of revenue). Capital expenditures includes purchases of intangible assets, seller financed equipment purchases and acquisition of property and equipment from capital leases.
Assuming the minimum performance target is achieved, one-third of the aggregate number of 2021 PRSUs shall vest in 2022 on the later of (i) March 1, 2022 or (ii) two trading days following the public release of the Company’s 2021 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.
During the Performance Period, the Company will adjust compensation expense for the 2021 PRSUs based on its best estimate of attainment of the specified annual performance metrics. The cumulative effect on current and prior periods of a change in the estimated number of 2021 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.
Shares Weighted-Average Fair Value
Unvested balance at January 1, 2021 —  $ — 
Granted 318,754  41.24 
Unvested balance at June 30, 2021 318,754  41.24 
Compensation cost in connection with the probable number of shares that will vest will be recognized using the accelerated attribtuion method through March 1, 2024. As of June 30, 2021, the Company determined that it was probable that the 2021 PRSUs would vest and there was $12,501 of unrecognized stock-based compensation expense related to outstanding 2021 PRSUs granted that is expected to be recognized over a weighted-average period of 1.5 years.
Employee Stock Purchase Plan
In March 2021, the Company’s board of directors adopted, and the stockholders approved, the 2021 Employee Stock Purchase Plan (the “ESPP”), which became effective on the date of the Final Prospectus. The ESPP initially reserved and authorized the issuance of up to a total of 2,200,000 shares of common stock to participating employees. As of June 30, 2021, 2,200,000 shares of common stock remain available for issuance under the ESPP. The initial enrollment period began on the date of the IPO and ended on April 3, 2021. On each purchase date, eligible employees will purchase the shares at a price per share equal to 85% of the lesser of (1) the $47.00 initial public offering price of the Company’s common stock or (2) the fair market value of the Company’s common stock on the purchase date, as defined in the ESPP.
The initial offering and purchase period under the ESPP commenced on the IPO date with the first purchase date to be November 19, 2021. During the three months ended June 30, 2021, the Company recorded $1,922 of stock based compensation related to the ESPP. As of June 30, 2021, $2,126 has been withheld on behalf of employees and there were no purchases related to the ESPP.
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Stock-Based Compensation
Stock-based compensation was included in the Condensed Consolidated Statements of Operations as follows:
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Cost of revenue $ 405  $ 68  $ 601  $ 92 
Research and development 5,059  812  7,695  3,033 
Sales and marketing 1,902  453  3,039  679 
General and administrative 4,835  1,424  7,490  8,335 
Total $ 12,201  $ 2,757  $ 18,825  $ 12,139 
Stock-based compensation related to secondary sales of common stock by certain current and former employees for the three and six months ended June 30, 2020 was $529 and $8,140, respectively. There were no such expenses recorded for the three and six months ended June 30, 2021.
Note 9. Net Loss per Share Attributable to Common Stockholders
The following table presents the calculation of basic and diluted net loss per share:
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Numerator:
Net loss attributable to common stockholders $ (2,187) $ (2,570) $ (5,526) $ (19,503)
Denominator:
Weighted average shares, in thousands, used to compute net loss per share, basic and diluted 106,765  41,420  78,257  40,683 
Net loss per share attributable to common stockholders, basic and diluted $ (0.02) $ (0.06) $ (0.07) $ (0.48)
Potentially dilutive securities that were not included in the diluted per share calculations because they would be anti-dilutive were as follows:
June 30,
2021 2020
Series Seed —  12,517,832 
Series A-1 —  17,995,460 
Series B —  10,237,032 
Series C —  4,721,905 
Warrants 244,304  308,632 
Stock Options 14,495,379  16,335,808 
RSUs 2,769,723  220,000 
PRSUs 318,754  — 
Total 17,828,160  62,336,669 
Note 10. Income Taxes
The computation of the provision for or benefit from income taxes for interim periods is determined by applying the estimated annual effective tax rate to year-to-date income (loss) before tax and adjusting for discrete tax items recorded in the period, if any.
For the three and six months ended June 30, 2021, the Company recorded a tax benefit of $(473) and a tax provision of $523, respectively. The effective tax rate for the three and six months ended June 30, 2021 was 17.8% and
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(10.5)%, respectively. The effective tax rate differs from the statutory rate primarily as a result of not recognizing deferred tax assets for U.S. losses due to a full valuation allowance against the U.S. deferred tax assets, and excess tax benefits from stock-based compensation.
For the three and six months ended June 30, 2020, the Company recorded a tax provision of $251 and $999, respectively. The effective tax rate for the three and six months ended June 30, 2020 was (10.8)% and (5.4)%, respectively. The effective tax rate differs from the statutory rate primarily as a result of not recognizing deferred tax assets for U.S. losses due to a full valuation allowance against the U.S. deferred tax assets, and excess tax benefits from stock-based compensation.
The provision for income taxes consists primarily of income taxes related to international jurisdictions in which the Company conducts business. Based on the available supporting evidence, including the amount and timing of future taxable income, the Company has concluded that it is more likely than not that a significant portion of the deferred tax assets will not be realized. As such, the Company maintains a full valuation allowance on its U.S. deferred tax assets.
For the three and six months ended June 30, 2021, uncertain tax positions recorded by the Company resulted in an expense of $66 and $134, respectively. For the three and six months ended June 30, 2020, uncertain tax positions recorded by the Company resulted in an expense of $54 and $387, respectively. To the extent the remaining uncertain tax positions are ultimately recognized, the Company’s effective tax rate may be impacted in future periods. The Company’s policy is to recognize interest and penalties related to uncertain tax positions in income tax expense.
Note 11. Related Party Transactions
During the three and six months ended June 30, 2020, the Company recorded $529 and 8,140, respectively, of stock-based compensation associated with secondary sales transactions. There were no such expenses recorded for the three and six months ended June 30, 2021. The secondary sales transactions were executed primarily between holders of economic interest in the Company and the Company’s employees and former employees at prices in excess of the fair value of such shares. Accordingly, the Company recognized such excess value as stock-based compensation. The Company did not sell any shares or receive any proceeds from the transactions.
Note 12. Subsequent Events
On July 27, 2021, the board of directors of the Company granted a RSU award to the Company’s Chief Executive Officer, Yancey Spruill (the “CEO Performance Award”).
The CEO Performance Award consists of an RSU award under the Company’s 2021 Equity Incentive Plan for 3,000,000 shares of the Company’s common stock and will vest upon the satisfaction of certain service conditions and the achievement of certain Company stock price goals, as described below.
The CEO Performance Award will be earned based on the Company’s stock price performance over a seven-year period beginning on the date of grant. The CEO Performance Award, which is estimated to have a grant date fair value of approximately $85 million, 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 RSUs
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
If the average stock price over a consecutive ninety (90) trading day period fails to reach $93.50 during the performance period, no portion of the CEO Performance Award will be earned.
To the extent earned based on the stock price targets set forth above, the CEO Performance Award 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.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and the related notes and the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Final Prospectus for our IPO dated as of March 23, 2021 and filed with the SEC pursuant to Rule 424(b)(4) on March 24, 2021, or Final Prospectus. This discussion, particularly information with respect to our future results of operations or financial condition, business strategy, plans and objectives of management for future operations and the potential impact that the ongoing COVID-19 pandemic may have on our business, includes forward-looking statements that involve risks and uncertainties as described under the heading “Special Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q. You should review the disclosure under the heading “Risk Factors” in this Quarterly Report on Form 10-Q for a discussion of important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements.
Overview
DigitalOcean is a leading cloud computing platform offering on-demand infrastructure and platform tools for developers, start-ups and small and medium-sized businesses, or SMBs. We were founded with the guiding principle that the transformative benefits of the cloud should be easy to leverage, broadly accessible, reliable and affordable. Our platform simplifies cloud computing, enabling our customers to rapidly accelerate innovation and increase their productivity and agility. Approximately 602,000 individual and business customers currently use our platform to build, deploy and scale software applications. Our users include software engineers, researchers, data scientists, system administrators, students and hobbyists. Our customers use our platform across numerous industry verticals and for a wide range of use cases, such as web and mobile applications, website hosting, e-commerce, media and gaming, personal web projects, and managed services, among many others. We believe that our focus on simplicity, community, open source and customer support are the four key differentiators of our business, driving a broad range of customers around the world to build their applications on our platform.
Improving the developer experience and increasing developer productivity are core to our mission. Our developer cloud platform was designed with simplicity in mind to ensure that software developers can spend less time managing their infrastructure and more time turning their ideas into innovative applications to grow their businesses. Simplicity guides how we design and enhance our easy-to-use-interface, the core capabilities we offer our customers and our approach to predictable and transparent pricing for our solutions. We offer mission-critical infrastructure solutions across compute, storage and networking, and we also enable developers to extend the native capabilities of our cloud with fully managed application, container and database offerings. In just minutes, developers can set up thousands of virtual machines, secure their projects, enable performance monitoring and scale up and down as needed.
We generate revenue from the usage of our cloud computing platform by our customers, including but not limited to compute, storage and networking services. We recognize revenue based on the customer utilization of these resources. Our pricing is consumption-based and billed monthly in arrears, making it easy for our customers to track usage on an ongoing basis and optimize their deployments. The pricing for each of our products is available on our website. For example, the standard price for a Droplet is $5.00 per month, and our Managed Database product is available starting at $15.00 per month.
We have historically generated almost all of our revenue from our efficient self-service marketing model, which enables customers to get started on our platform very quickly and without the need for assistance. We focus heavily on enabling a self-service, low-friction model that makes it easy for users to try, adopt and use our products. For the three months ended June 30, 2021 and 2020, our sales and marketing expense was approximately 11% and 9%, respectively. The efficiency of our go-to-market model and our focus on the needs of the individual and SMB markets have enabled us to drive organic growth and establish a truly global customer base across a broad range of industries.
We had approximately 602,000 customers as of June 30, 2021, up from approximately 554,000 as of June 30, 2020. Our customers are spread across approximately 185 countries, and around two-thirds of our revenue has historically come from customers located outside the United States. For the three months ended June 30, 2021, 38% of our revenue was generated from North America, 29% from Europe, 23% from Asia and 10% from the rest of the world. We have a growing number of customers with higher spending levels, and our existing customers are continuing to expand their business with us. Our average revenue per customer, or ARPU, has increased significantly, from $46.44 in the quarter ended June 30,
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2020 to $58.07 in the quarter ended June 30, 2021. We had no material customer concentration for the three months ended June 30, 2021 as our top 25 customers made up approximately 10% of our revenue.
We have experienced strong and predictable growth in recent periods. Our annual run-rate revenue, or ARR, as of June 30, 2021 was $426 million, up from $313 million as of June 30, 2020. ARR as of the end of each month represents total revenue for that month multiplied by 12.
Impact of the COVID-19 Pandemic
To date, the COVID-19 pandemic has not had a significant impact on our operations or financial performance. However, the extent of the impact of the COVID-19 pandemic on our operational and financial performance depends on certain developments, including the duration and spread of the outbreak, its impact on industry events, and its effect on our customers, partners, suppliers and vendors and other parties with whom we do business, all of which are uncertain and cannot be predicted at this time. To the extent possible, we are conducting business as usual, with necessary or advisable modifications to employee travel and employee work locations, and conducting our marketing and sales activities virtually. We actively monitor the rapidly evolving situation related to COVID-19 and may take further actions that alter our business operations, including those that may be required by federal, state or local authorities, or that we determine are in the best interests of our employees, customers, partners, suppliers, vendors and stockholders. The extent to which the COVID-19 pandemic may impact our results of operations and financial condition remains uncertain.
Key Factors Affecting Our Performance
Increasing Importance of Cloud Computing and Developers
Our future success depends in large part on the continuing adoption of cloud computing, proliferation of cloud-native start-ups and SMBs and the increasing importance of developers, all of which are driving the adoption of our developer cloud platform. We believe our market opportunity is large and that these factors will continue to drive our growth. We plan to continue to invest significantly in scaling across many organizational functions in order to grow our operations both domestically and internationally to capitalize on these trends.
Growing our Customer Base
We believe there is a substantial opportunity to further expand our customer base, and our future growth depends, in large part, on our ability to increase the number of customers using our cloud computing platform. We have historically attracted customers by offering a low-friction, self-service cloud platform combined with a highly-efficient self-service marketing model. We are investing in strategies that we believe will continue to drive new customer adoption, especially among SMB customers, such as implementing new marketing initiatives that further optimize our self-service revenue funnel and expanding our go-to market teams in select international locations. Our ability to attract new customers will depend on a number of factors, including our success in recruiting and expanding our sales and marketing organization and competitive dynamics in our target markets.
Increasing Usage by Our Existing Customers
Our customer base of approximately 602,000 customers represents a significant opportunity for further consumption of our services. There are substantial opportunities to expand revenue within our large customer base through increased usage of our platform as our customers grow their businesses, adoption of additional product offerings and targeted sales initiatives focused on our larger customers. Our consumption-based pricing model makes it frictionless for customers to increase their usage of our platform as they require more compute and storage as they grow and scale. We have also expanded the breadth of our platform offerings and will continue to do so as we have experienced strong adoption of recently developed products. To accelerate this growth across our larger customers, we have recently complemented our self-service marketing model with internal go-to-market teams that are specifically focused on expanding our business with our larger customers. Our ability to increase the usage of our platform by existing customers will depend on a number of factors, including our customers’ satisfaction with our platform and product offerings, competition, pricing and overall changes in our customers’ spending levels.
Enhancing Our Platform and Product Offerings
We believe the market opportunity for serving developers, start-ups and SMBs is very large and goes far beyond providing the core IaaS services of compute, storage and networking. We have a history of, and will continue to invest significantly in, developing and delivering innovative products, features and functionality targeted at our core customer base. In addition, while we have not been focused on acquisition opportunities to drive our growth, we may pursue both strategic partnerships and acquisitions that we believe will be complementary to our business, accelerate customer
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acquisition, increase usage of our platform and/or expand our product offerings in our core markets. Our results of operations may fluctuate as we make these investments to drive usage and take advantage of our expansive market opportunity.
Key Business Metrics
We utilize the key metrics set forth below to help us evaluate our business and growth, identify trends, formulate financial projections and make strategic decisions. We are not aware of any uniform standards for calculating these key metrics, and other companies may not calculate similarly titled metrics in a consistent manner, which may hinder comparability.
Three Months Ended June 30,
2021 2020
Customers 601,714  554,236 
ARPU $ 58.07  $ 46.44 
ARR (in millions) $ 426  $ 313 
Net dollar retention rate 113  % 102  %
Capital expenditures as a percentage of revenue 25  % 40  %
Customers
We believe that the number of customers is an important indicator of the growth of our business and future revenue opportunity. We define a customer at the end of any period as a person or entity who has incurred usage in the period and, as a result, has generated an invoice of greater than $0 for that period. We treat each customer that generates an invoice as a unique customer, and a single organization with multiple divisions, segments or subsidiaries may be counted as multiple customers if they separately signed up on our platform.
ARPU
We believe that our average revenue per customer, which we refer to as ARPU, is a strong indication of our ability to land new customers with higher spending levels and expand usage of our platform by our existing customers. We calculate ARPU on a monthly basis as our total revenue in that period divided by the number of customers determined as of the last day of that period. For a quarterly or annual period, ARPU is determined as the weighted average monthly ARPU over such three or 12-month period.
ARR
Given the renewable nature of our business, we view annual run-rate revenue as an important indicator of our current progress towards meeting our revenue targets and projected growth rate going forward. We calculate ARR at a point in time by multiplying the latest monthly period’s revenue by 12.
Net Dollar Retention Rate
Our ability to maintain long-term revenue growth and achieve profitability is dependent on our ability to retain and grow revenue from our existing customers. We have a history of retaining customers for multiple years and in many cases increasing their spend with us over time. To help us measure our performance in this area, we monitor our net dollar retention rate. We calculate net dollar retention rate monthly by starting with the revenue from the cohort of all customers during the corresponding month 12 months prior, or the Prior Period Revenue. We then calculate the revenue from these same customers as of the current month, or the Current Period Revenue, including any expansion and net of any contraction or attrition from these customers over the last 12 months. The calculation also includes revenue from customers that generated revenue before, but not in, the corresponding month 12 months prior, but subsequently generated revenue in the current month and are therefore reflected in the Current Period Revenue. We include this group of re-engaged customers in this calculation because our customers frequently use our platform for projects that stop and start over time. We then divide the total Current Period Revenue by the total Prior Period Revenue to arrive at the net dollar retention rate for the relevant month. For a quarterly or annual period, the net dollar retention rate is determined as the average monthly net dollar retention rates over such three or 12-month period. Our net dollar retention rate for the three months ended June 30, 2021 includes approximately 3% from re-engaged customers.
Capital Expenditures as a Percentage of Revenue
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We consider capital expenditures as a percentage of revenue to be an important indicator of our efficiency of capital spend. We calculate capital expenditures as a percentage of revenue by dividing total capital expenditures during the period, including purchases of intangible assets, seller financed equipment purchases and acquisition of property and equipment from capital leases, by revenue.
Non‑GAAP Financial Measures
To supplement our condensed consolidated financial statements, which are prepared and presented in accordance with generally accepted accounting principles in the United States, or GAAP, we provide investors with non-GAAP financial measures including: (i) adjusted gross profit and adjusted gross margin; and (ii) adjusted EBITDA and adjusted EBITDA margin. These measures are presented for supplemental informational purposes only, have limitations as analytical tools and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. Our calculations of each of these measures may differ from the calculations of measures with the same or similar titles by other companies and therefore comparability may be limited. Because of these limitations, when evaluating our performance, you should consider each of these non-GAAP financial measures alongside other financial performance measures, including the most directly comparable financial measure calculated in accordance with GAAP and our other GAAP results. A reconciliation of each of our non-GAAP financial measures to the most directly comparable financial measure calculated in accordance with GAAP is set forth below.
Adjusted Gross Profit and Adjusted Gross Margin
We believe adjusted gross profit and adjusted gross margin, when taken together with our GAAP financial results, provides a meaningful assessment of our performance, and is useful for the preparation of our annual operating budget and quarterly forecasts.
We define adjusted gross profit as gross profit exclusive of stock-based compensation, amortization of capitalized internal-use software development costs and depreciation of our data center equipment included within Cost of revenue. We exclude stock-based compensation, which is a non-cash item, because we do not consider it indicative of our core operating performance. We exclude depreciation and amortization, which primarily relates to our investments in our data center servers that are long lived assets with an economic life of five years, because it may not reflect our current or future cash spending levels to support our business. While we intend to spend a significant amount on capital expenditures on an absolute basis in the coming years, our capital expenditures as a percentage of revenue has declined significantly and will continue to decline. We define adjusted gross margin as a percentage of adjusted gross profit to revenue.
The following table presents a reconciliation of gross profit, the most directly comparable financial measure stated in accordance with GAAP, to adjusted gross profit, for each of the periods presented:
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Three Months Ended Six Months Ended
June 30, June 30,
(In thousands) 2021 2020 2021 2020
Gross profit $ 60,665  $ 41,706  $ 114,782  $ 79,815 
Adjustments:
Depreciation and amortization 20,042  16,864  39,266  32,912 
Stock-based compensation 405  68  601  92 
Adjusted gross profit $ 81,112  $ 58,638  $ 154,649  $ 112,819 
Gross margin 58  % 54  % 58  % 53  %
Adjusted gross margin 78  % 76  % 78  % 75  %
Adjusted EBITDA and Adjusted EBITDA Margin
We define adjusted EBITDA as net loss attributable to common stockholders, adjusted to exclude depreciation and amortization, stock-based compensation, interest expense, income tax expense, loss on extinguishment of debt, restructuring and severance expense, asset impairment, revaluation of warrants and other charges. We believe that adjusted EBITDA, when taken together with our GAAP financial results, provides meaningful supplemental information regarding our operating performance and facilitates internal comparisons of our historical operating performance on a more consistent basis by excluding certain items that may not be indicative of our business, results of operations or outlook. In particular, we believe that the use of adjusted EBITDA is helpful to our investors as it is a measure used by management in assessing the health of our business, determining incentive compensation, evaluating our operating performance, and for internal planning and forecasting purposes.
Our calculation of adjusted EBITDA and adjusted EBITDA margin may differ from the calculations of adjusted EBITDA and adjusted EBITDA margin by other companies and therefore comparability may be limited. Because of these limitations, when evaluating our performance, you should consider adjusted EBITDA and adjusted EBITDA margin alongside other financial performance measures, including our net loss attributable to common stockholders and other GAAP results.
The following table presents a reconciliation of net loss attributable to common stockholders, the most directly comparable financial measure stated in accordance with GAAP, to adjusted EBITDA for each of the periods presented:
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands) 2021 2020 2021 2020
Net loss attributable to common stockholders $ (2,187) $ (2,570) $ (5,526) $ (19,503)
Adjustments:
Depreciation and amortization $ 21,589  $ 18,328  $ 42,541  $ 35,722 
Stock-based compensation(1)
12,201  2,757  18,825  12,139 
Interest expense 233  3,779  2,489  7,295 
Income tax (benefit) expense (473) 251  523  999 
Loss on extinguishment of debt —  —  3,435  259 
Restructuring and severance(2)
—  630  —  3,922 
Asset impairment(3)
—  148  —  686 
Revaluation of warrants —  284  (556) 287 
Other(4)
—  335  315  578 
Adjusted EBITDA $ 31,363  $ 23,942  $ 62,046  $ 42,384 
Revenue $ 103,810  $ 76,911  $ 197,471  $ 149,703 
Adjusted EBITDA margin 30  % 31  % 31  % 28  %
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(1)Consists of stock-based compensation for the three and six months ended June 30, 2020 and includes compensation of $0.5 million and $8.1 million, respectively, related to secondary sales of common stock by certain current and former employees. There were no such expenses recorded for the three and six months ended June 30, 2021.
(2)Consists primarily of expenses related to changes in our senior leadership, sales and infrastructure teams.
(3)Consists of internal-use software impairment charges related to software that is no longer being used.
(4)Consists primarily of third-party consulting costs to enhance our finance function.
Components of Results of Operations
Revenue
We provide cloud computing services, including but not limited to compute, storage and networking, to our customers. We recognize revenue based on the customer utilization of these resources. Customer contracts are primarily month-to-month and do not include any minimum guaranteed quantities or fees. Fees are billed monthly, and payment is typically due upon invoicing. Revenue is recognized net of allowances for credits and any taxes collected from customers, which are subsequently remitted to governmental authorities.
We may offer sales incentives in the form of promotional and referral credits and grant credits to encourage customers to use our services. These types of promotional and referral credits typically expire in two months or less if not used. For credits earned with a purchase, they are recorded as contract liabilities when earned and recognized at the earlier of redemption or expiration. The majority of credits are redeemed in the month they are earned.
Cost of Revenue
Cost of revenue consists primarily of fees related to operating in third-party co-location facilities, personnel expenses for those directly supporting our data centers and non-personnel costs, including amortization of capitalized internal-use software development costs and depreciation of our data center equipment. Third-party co-location facility costs include data center rental fees, power costs, maintenance fees, network and bandwidth. Personnel expenses include salaries, bonuses, benefits, and stock-based compensation.
We intend to continue to invest additional resources in our infrastructure to support our product portfolio and scalability of our customer base. The level, timing and relative investment in our infrastructure could affect our cost of revenue in the future.
Operating Expenses
Research and Development Expenses
Research and development expenses consist primarily of personnel costs including salaries, bonuses, benefits and stock-based compensation. Research and development expenses also include amortization of capitalized internal-use software development costs for research and development activities, which are amortized over three years, and professional services, as well as costs related to our efforts to add new features to our existing offerings, develop new offerings, and ensure the security, performance, and reliability of our global cloud platform. We expect research and development expenses to increase in absolute dollars as we continue to invest in our platform and product offerings.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of personnel costs of our sales, marketing and customer support employees including salaries, bonuses, benefits and stock-based compensation. Sales and marketing expenses also include costs for marketing programs, advertising and professional service fees. We expect sales and marketing expenses to continue to increase in absolute dollars as we enhance our product offerings and implement new marketing strategies.
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General and Administrative Expenses
General and administrative expenses consist primarily of personnel costs of our human resources, legal, finance, and other administrative functions including salaries, bonuses, benefits and stock-based compensation. General and administrative expenses also include bad debt expense, software, payment processing fees, depreciation and amortization expenses, rent and facilities costs, and other administrative costs. We expect to incur significant additional legal, accounting and other expenses to support our operations as a public company, including costs associated with our compliance with the Sarbanes-Oxley Act. We also expect general and administrative expenses to increase in absolute dollars as we continue to grow our business.
Other (Income) Expense
Other (income) expense consists primarily of interest expense on our existing credit facility and third-party equipment financing, loss on extinguishment of debt, and gains or losses on foreign currency exchange.
Income Tax Expense
Income tax expense consists primarily of income taxes in certain foreign and state jurisdictions in which we conduct business. We maintain a full valuation allowance on our U.S. federal and state deferred tax assets as we have concluded that it is more likely than not that the deferred assets will not be realized.
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Results of Operations
The following table sets forth our results of operations for the periods presented:
Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
(in thousands)
Revenue $ 103,810  $ 76,911  $ 197,471  $ 149,703 
Cost of revenue(1)
43,145  35,205  82,689  69,888 
Gross profit 60,665  41,706  114,782  79,815 
Operating expenses:
Research and development(1)
27,121  15,130  49,523  34,607 
Sales and marketing(1)
11,812  6,957  22,233  16,411 
General and administrative(1)
24,362  17,841  42,402  39,506 
Total operating expenses 63,295  39,928  114,158  90,524 
(Loss) income from operations (2,630) 1,778  624  (10,709)
Other (income) expense 30  4,097  5,627  7,795 
Loss before income taxes (2,660) (2,319) (5,003) (18,504)
Income tax (benefit) expense (473) 251  523  999 
Net loss attributable to common stockholders $ (2,187) $ (2,570) $ (5,526) $ (19,503)
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(1)    Includes stock-based compensation as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
(in thousands)
Cost of revenue $ 405  $ 68  $ 601  $ 92 
Research and development 5,059  812  7,695  3,033 
Sales and marketing 1,902  453  3,039  679 
General and administrative 4,835  1,424  7,490  8,335 
Total $ 12,201  $ 2,757  $ 18,825  $ 12,139 
Stock-based compensation for the three and six months ended June 30, 2020 included compensation of $0.5 million and $8.1 million, respectively, related to secondary sales of common stock by certain current and former employees, which is primarily included in General and administrative. There were no such expenses recorded for the three and six months ended June 30, 2021. See “Comparison of the Three Months Ended June 30, 2021 and 2020—Operating Expenses” and “Comparison of the Six Months Ended June 30, 2021 and 2020—Operating Expenses” below.
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The following table sets forth our results of operations as a percentage of revenue for the periods presented:
Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
Revenue 100  % 100  % 100  % 100  %
Cost of revenue 42  46  42  47 
Gross profit 58  54  58  53 
Operating expenses:
Research and development 26  20  25  23 
Sales and marketing 11  11  11 
General and administrative 23  23  21  26 
Total operating expenses 60  52  57  60 
(Loss) income from operations (2) (7)
Other (income) expense — 
Loss before income taxes (2) (3) (2) (12)
Income tax (benefit) expense —  —  — 
Net loss attributable to common stockholders (2) % (3) % (2) % (13) %
Comparison of the Three Months Ended June 30, 2021 and 2020
Revenue
Three Months Ended June 30,
2021 2020 $ Change % Change
(in thousands)
Revenue $ 103,810  $ 76,911  $ 26,899  35  %
Revenue increased $26.9 million, or 35%, for the three months ended June 30, 2021 compared to the three months ended June 30, 2020, primarily due to a 25% increase in ARPU to $58.07 from $46.44 and an increase of approximately 47,000 customers to approximately 602,000. The increase in ARPU was primarily driven by continued adoption of our products by our customers leading to higher average usage on our platform.
Cost of Revenue
Three Months Ended June 30,
2021 2020 $ Change % Change
(in thousands)
Cost of revenue $ 43,145  $ 35,205  $ 7,940  23  %
Cost of revenue increased $7.9 million, or 23%, for the three months ended June 30, 2021 compared to the three months ended June 30, 2020, primarily due to higher co-location costs, bandwidth expenses and depreciation of our network equipment to support the growth in our business.
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Operating Expenses
Three Months Ended June 30,
2021 2020 $ Change % Change
(in thousands)
Research and development $ 27,121  $ 15,130  $ 11,991  79  %
Sales and marketing 11,812  6,957  4,855  70 
General and administrative 24,362  17,841  6,521  37 
Total operating expenses $ 63,295  $ 39,928  $ 23,367  59  %

Research and development expenses increased $12.0 million, or 79%, for the three months ended June 30, 2021 compared to the three months ended June 30, 2020, primarily due to higher personnel costs and stock-based compensation.
Sales and marketing expenses increased $4.9 million, or 70%, for the three months ended June 30, 2021 compared to the three months ended June 30, 2020, primarily due to an increase in advertising costs, stock-based compensation, and personnel costs.
General and administrative expenses increased $6.5 million, or 37%, for the three months ended June 30, 2021 compared to the three months ended June 30, 2020, primarily due to higher stock-based compensation and personnel costs, and increases in payment processing fees, insurance and VAT reserve, partially offset by a decrease in bad debt expense.
Other (Income) Expense
Three Months Ended June 30,
2021 2020 $ Change % Change
(in thousands)
Other (income) expense $ 30  $ 4,097  $ (4,067) (99) %
Other (income) expense decreased $4.1 million, or 99%, for the three months ended June 30, 2021 compared to the three months ended June 30, 2020, primarily due to the payoff of the term loan and notes payable in the first quarter of 2021.
Income Tax Expense
Three Months Ended June 30,
2021 2020 $ Change % Change
(in thousands)
Income tax (benefit) expense $ (473) $ 251  $ (724) (288) %
Income tax expense decreased $0.7 million, or 288%, for the three months ended June 30, 2021 compared to the three months ended June 30, 2020, primarily due to income taxes related to international jurisdictions in which we conduct business.
Comparison of the Six Months Ended June 30, 2021 and 2020
Revenue
Six Months Ended June 30, 2021
2021 2020 $ Change % Change
(in thousands)
Revenue $ 197,471  $ 149,703  $ 47,768  32  %
Revenue increased $47.8 million, or 32%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020, primarily due to a 23% increase in ARPU to $55.90 from $45.57 and an increase of approximately 47,000 customers to approximately 602,000. The increase in ARPU was primarily driven by continued adoption of our products by our customers leading to higher average usage on our platform.
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Cost of Revenue
Six Months Ended June 30, 2021
2021 2020 $ Change % Change
(in thousands)
Cost of revenue $ 82,689  $ 69,888  $ 12,801  18  %
Cost of revenue increased $12.8 million, or 18%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020, primarily due to higher co-location costs, bandwidth expenses and depreciation of our network equipment to support the growth in our business, as well as an increase in revenue share in our Managed Database product.
Operating Expenses
Six Months Ended June 30, 2021
2021 2020 $ Change % Change
(in thousands)
Research and development $ 49,523  $ 34,607  $ 14,916  43  %
Sales and marketing 22,233  16,411  5,822  35 
General and administrative 42,402  39,506  2,896 
Total operating expenses $ 114,158  $ 90,524  $ 23,634  26  %
Research and development expenses increased $14.9 million, or 43%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020, primarily due to higher personnel costs and stock-based compensation, partially offset by a decrease in restructuring costs.
Sales and marketing expenses increased $5.8 million, or 35%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020, primarily due to an increase in advertising costs, stock-based compensation and personnel costs, partially offset by lower restructuring and severance costs.
General and administrative expenses increased $2.9 million, or 7%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020, primarily due to higher personnel costs, and increases in payment processing fees, insurance, professional services and VAT reserve, partially offset by a decrease in bad debt expense and stock-based compensation.
Other (Income) Expense
Six Months Ended June 30, 2021
2021 2020 $ Change % Change
(in thousands)
Other (income) expense $ 5,627  $ 7,795  $ (2,168) (28) %
Other (income) expense decreased $2.2 million, or 28%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020, primarily due to our payoff of the term loan and notes payable in the first quarter of 2021.
Income Tax Expense
Six Months Ended June 30, 2021
2021 2020 $ Change % Change
(in thousands)
Income tax expense $ 523  $ 999  $ (476) (48) %
Income tax expense decreased $0.5 million, or (48)%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020, primarily due to income taxes related to international jurisdictions in which we conduct business.
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Liquidity and Capital Resources
We have funded our operations since inception primarily with cash flow generated by operations, private offerings of our securities, borrowings under our existing credit facility and capital expenditure financings. In March 2021, we consummated our initial public offering of 16,500,000 shares of our common stock at an offering price of $47.00 per share resulting in aggregate net proceeds to us of $723.1 million after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.
We believe that our existing cash and cash equivalents and cash flow from operations will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months.
The following table summarizes our cash flows for the periods presented:
Six Months Ended June 30,
(In thousands)
2021 2020
Net cash provided by operating activities $ 60,197  $ 16,895 
Net cash used in investing activities (49,668) (59,025)
Net cash provided by financing activities 466,378  134,882 
Net increase in cash and cash equivalent
476,907  92,752 
Operating Activities
Our largest source of operating cash is cash collections from sales to our customers. Our primary uses of cash from operating activities are for personnel costs, data center co-location expenses, marketing expenses, payment processing fees, bandwidth and connectivity, server maintenance and software licensing fees. For the six months ended June 30, 2021, we generated positive cash flows through our public offering of securities. For the six months ended June 30, 2020, we generated positive cash flows through net proceeds from borrowings under our Credit Facility and our Series C preferred stock offering.
Net cash provided by operating activities was $60.2 million and $16.9 million for the six months ended June 30, 2021 and 2020, respectively, primarily driven by an increase in cash collections from higher revenues offset by an increase in cash expenses from personnel related costs.
Investing Activities
Net cash used in investing activities decreased from $59.0 million for the six months ended June 30, 2020 to $49.7 million for the six months ended June 30, 2021 primarily as a result of decreases in capitalization of internal-use software development costs and acquired intangibles related to our IP addresses.
Financing Activities
Net cash provided by financing activities of $466.4 million for the six months ended June 30, 2021 was primarily due to net proceeds from our IPO of $723.1 million, partially offset by repayments on the Credit Facility and notes payable of $259.7 million.
Net cash provided by financing activities of $134.9 million for the six months ended June 30, 2020 was primarily due to $77.3 million in net additional borrowings under the Term Loan and Credit Facility, $49.8 million from our Series C preferred stock offering and $7.8 million of proceeds from third-party equipment financings, partially offset by $5.5 million in repayment of notes payable associated with financed equipment purchases.
Contractual Obligations and Commitments
During the three months ended March 31, 2021, we paid the remaining obligations on the Credit Facility and all outstanding notes payable. With the exception of the aforementioned debt repayment, there have been no material changes to our obligations under our operating leases and purchase commitments as compared to those disclosed in the Final Prospectus.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes
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referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.
There have been no material changes to our critical accounting policies as compared to those disclosed in the Final Prospectus.
Recently Adopted Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies, in our Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of recent accounting pronouncements.
Emerging Growth Company Status
We are an emerging growth company, as defined under the JOBS Act. The JOBS Act provides that an emerging growth company may take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Therefore, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period under the JOBS Act until the earlier of the date we (1) are no longer an emerging growth company or (2) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risk from the information provided in the Final Prospectus for our IPO dated as of March 23, 2021 and filed with the SEC pursuant to Rule 424(b)(4) on March 24, 2021.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2021. Based on the evaluation of our disclosure controls and procedures as of June 30, 2021, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
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Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are involved in various legal proceedings arising from the normal course of business activities. We are not presently a party to any litigation the outcome of which, if determined adversely to us, would in our estimation, have a material adverse effect on our business, operating results, cash flows or financial condition. Defending such proceedings is costly and can impose a significant burden on management and employees. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
ITEM 1A. RISK FACTORS
Investing in our common stock involves a high degree of risk. You should consider and read carefully all of the risks and uncertainties described below, as well as other information included in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q, before making an investment decision. The risks described below are not the only ones we face. The occurrence of any of the following risks or additional risks and uncertainties not presently known to us or that we currently believe to be immaterial could materially and adversely affect our business, financial condition or results of operations. In such case, the trading price of our common stock could decline, and you may lose some or all of your original investment.
Risk Factors Summary
Investing in our common stock involves a high degree of risk because our business is subject to numerous risks and uncertainties, as more fully described below. These risks and uncertainties include, among others:
Our recent growth may not be indicative of our future growth.
We have a history of operating losses and may not achieve or sustain profitability in the future.
We expect fluctuations in our financial results, making it difficult to project future results, and if we fail to meet the expectations of securities analysts or investors with respect to our results of operations, our stock price and the value of your investment could decline.
If we are unable to attract new customers, including through our self-service customer acquisition model, retain existing customers and/or expand usage of our platform by such customers, we may not achieve the growth we expect, which would adversely affect our results of operations and financial condition.
If we or our third-party service providers experience a security breach or unauthorized parties otherwise obtain access to our platform or our customers’ data or our sensitive or proprietary data, we may incur significant liabilities and our reputation and business may be harmed.
If we fail to timely release updates and new features to our platform and adapt and respond effectively to rapidly changing technology, evolving industry standards, changing regulations, or customer needs, our platform and products may become less competitive.
The markets in which we participate are competitive, and if we do not compete effectively, our business, financial condition and results of operations could be harmed.
Our current operations are international in scope, and we plan further geographic expansion, creating a variety of operational challenges.
Activities of our customers or the content on their websites could subject us to liability.
The success of our business depends on our customers’ continued and unimpeded access to our platform on the internet and, as a result, also depends on internet providers and the related regulatory environment.
Risks Related to Our Business and Industry
Our recent growth may not be indicative of our future growth.
Our revenue was $103.8 million and $76.9 million for the three months ended June 30, 2021 and 2020, respectively, and $197.5 million and $149.7 million, respectively, for the six months ended June 30, 2021 and 2020. You should not rely on the revenue growth of any prior quarterly or annual period as an indication of our future performance. Even if our revenue continues to increase, our revenue growth rate may decline in the future as a result of a variety of
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factors, including the maturation of our business. Overall growth of our revenue depends on a number of factors, including our ability to:
attract new customers and grow our customer base;
maintain and increase the rates at which existing customers use our platform, sell additional products and services to our existing customers, and reduce customer churn;
invest in our platform and product offerings;
augment our platform through opportunistic strategic acquisitions; and
grow and engage our community.
We may not successfully accomplish any of these objectives and, as a result, it is difficult for us to forecast our future results of operations. If the assumptions that we use to plan our business are incorrect or change in reaction to changes in our market, we may be unable to maintain consistent revenue or revenue growth, our stock price could be volatile, and it may be difficult to achieve and maintain profitability. You should not rely on our results or growth for any prior quarterly or annual periods as any indication of our future results or growth.
We have a history of operating losses and may not achieve or sustain profitability in the future.
We have incurred significant losses since inception. We generated net loss attributable to common stockholders of $2.2 million and $2.6 million for the three months ended June 30, 2021 and 2020, respectively, and $5.5 million and $19.5 million for the six months ended June 30, 2021 and 2020, respectively. As of June 30, 2021, we had an accumulated deficit of $172.6 million. While we have experienced significant revenue growth in recent periods, we are not certain whether or when we will obtain a high enough volume of sales to sustain or increase our growth or achieve or maintain profitability in the future. We also expect our costs and expenses will increase in future periods, which could negatively affect our future results of operations if our revenue does not increase. Our efforts to grow our business may be costlier than we expect, or the rate of our growth in revenue may be slower than we expect, and we may not be able to increase our revenue enough to offset our increased operating expenses. We may incur significant losses in the future for a number of reasons, including the other risks described herein, and unforeseen expenses, difficulties, complications or delays, and other unknown events. If we are unable to achieve and sustain profitability, the value of our business and common stock may significantly decrease.
In addition, we expect to continue to expend substantial financial and other resources on:
our technology infrastructure, including systems architecture, scalability, availability, performance, security, hardware, equipment and other capital expenditures, including expenses to increase or maintain data center capacity and to successfully optimize and operate data center facilities;
our sales and marketing organization to engage our existing and prospective customers, increase brand awareness and drive adoption of our products;
product development, including investments in our product development team and the development of new products and new functionality for our platform as well as investments in both further optimizing our existing products and infrastructure and expanding our integrations and other add-ons to existing products and services;
acquisitions or strategic investments; and
general administration, including increased legal and accounting expenses associated with being a public company.
Additionally, we may encounter unforeseen operating expenses, difficulties, complications, delays, and other unknown factors that may result in losses in future periods. If our revenue growth does not meet our expectations in future periods, our business, financial position and results of operations may be harmed, and we may not achieve or maintain profitability in the future.
We have a limited operating history, which makes it difficult to forecast our future results of operations.
We were founded in 2012 and, as a result of our limited operating history, our ability to accurately forecast our future results of operations is limited and subject to a number of uncertainties, including our ability to plan for and model future growth. Our historical revenue growth should not be considered indicative of our future performance. Further, in future periods, our revenue growth could slow or our revenue could decline for a number of reasons, including slowing
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demand for our products, increasing competition, changes to technology, a decrease in the growth of our overall market, our failure to attract more small and medium sized business customers, or our failure, for any reason, to continue to take advantage of growth opportunities. We have also encountered, and will continue to encounter, risks and uncertainties frequently experienced by growing companies in rapidly changing industries, including the other risks and uncertainties described herein. If our assumptions regarding these risks and uncertainties and our future revenue growth are incorrect or change, or if we do not address these risks successfully, our operating and financial results could differ materially from our expectations, and our business could suffer.
We expect fluctuations in our financial results, making it difficult to project future results, and if we fail to meet the expectations of securities analysts or investors with respect to our results of operations, our stock price and the value of your investment could decline.
Our results of operations have fluctuated in the past and are expected to fluctuate in the future due to a variety of factors, many of which are outside of our control. As a result, our past results may not be indicative of our future performance. In addition to the other risks described herein, factors that may affect our results of operations include the following:
fluctuations in demand for or pricing and usage of our platform and products;
our ability to attract new customers and retain existing customers;
customer expansion rates;
integration of new products;
timing and amount of our investments and capital expenditures related to successfully optimizing, utilizing and expanding our data center facilities;
the investment in and integration of new products and features relative to investments in our existing infrastructure and products;
our ability to control costs, including our operating expenses, and the timing of payment for expenses;
the amount and timing of non-cash expenses, including stock-based compensation, goodwill impairments and other non-cash charges;
the amount and timing of costs associated with recruiting, training and integrating new employees and retaining and motivating existing employees;
the effects of acquisitions and their integration;
general economic conditions, both domestically and internationally, and economic conditions specifically affecting industries in which our customers participate, including those related to the recent COVID-19 pandemic and responses thereto;
the impact of new accounting pronouncements;
changes in regulatory or legal environments that may cause us to, among other elements, be unable to continue operating in a particular market, remove certain customers from our platform, and/or incur expenses associated with compliance;
changes in the competitive dynamics of our market, including consolidation among competitors or customers or new entrants into our market;
our ability to control fraudulent registrations and usage of our platform, reduce bad debt and lessen capacity constraints on our data centers, servers and equipment; and
significant security breaches of, technical difficulties with, or interruptions to, the delivery and use of our products and platform capabilities.
Any of these and other factors, or the cumulative effect of some of these factors, may cause our results of operations to vary significantly. If our quarterly results of operations fall below the expectations of investors and securities analysts who follow our stock, the price of our common stock could decline substantially, and we could face costly lawsuits, including securities class action suits.
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If we are unable to attract new customers, including through our self-service customer acquisition model, retain existing customers and/or expand usage of our platform by such customers, we may not achieve the growth we expect, which would adversely affect our results of operations and financial condition.
In order to grow our business, we must continue to attract new customers in a cost-effective manner and enable these customers to realize the benefits associated with our products and services. Our business is usage-based and it is important for our business and financial results that our paying customers maintain or increase their usage of our platform and purchase additional products from us. Historically, we have relied on our self-service customer acquisition model for a significant majority of our revenue. While we are expanding our direct sales efforts and personnel, we expect a significant majority of our revenue to come from our self-service customer acquisition model in the coming years. If our self-service customer acquisition model is not as effective as we anticipate, our future growth will be impacted.
In addition, we must persuade potential customers that our products offer significant advantages over those of our competitors. As our market matures, our products evolve, and competitors introduce lower cost or differentiated products that are perceived to compete with our platform and products, our ability to maintain or expand usage of our platform could be impaired. Even if we do attract new customers, the cost of new customer acquisition, product implementation and ongoing customer support may prove higher than anticipated, thereby impacting our profitability. For example, while we maintain an active user community that serves as a support resource for our customers, there is no guarantee that our customers will continue to contribute to or utilize the community as a self-support resource, and any failure to maintain such an active community could require us to expend more resources on customer acquisition and customer support, and impact our profitability.
Other factors, many of which are out of our control, may now or in the future impact our ability to add new customers in a cost-effective manner, include:
potential customers’ commitments to existing platforms or greater familiarity or comfort with other platforms or products;
our failure to expand, retain, and motivate our sales and marketing personnel;
our failure to obtain or maintain industry security certifications for our platform and products;
negative media, industry, or financial analyst commentary regarding our platform and the identities and activities of some of our customers;
the perceived risk, commencement, or outcome of litigation; and
deteriorating general economic conditions.
The vast majority of our contracts with our customers are based on our terms of service, which do not require our customers to commit to a specific contractual period, and which permit the customer to terminate their contracts or decrease usage of our products and services without advance notice. Our customers generally have no obligation to maintain their usage of our platform. This ease of termination could cause our results of operations to fluctuate significantly from quarter to quarter. Our customer retention may decline or fluctuate as a result of a number of factors, including our customers’ satisfaction with the security, performance, and reliability of our products, our prices and usage plans, our customers’ budgetary restrictions, the perception that competitive products provide better or less expensive options, negative public perception of us or our customers, and deteriorating general economic conditions. As a result, we may face high rates of customer churn if we are unable to meet our customer needs, requirements and preferences.
Our future financial performance also depends in part on our ability to expand our existing customers’ usage of our platform and sell additional products to our existing customers. Conversely, our paying customers may reduce their usage to lower-cost pricing tiers if they do not see the marginal value in maintaining their usage at a higher-cost pricing tier, thereby impacting our ability to increase revenue. In order to expand our commercial relationship with our customers, existing customers must decide that the incremental cost associated with such an increase in usage or subscription to additional products is justified by the additional functionality. Our customers’ decision whether to increase their usage or subscribe to additional products is driven by a number of factors, including customer satisfaction with the security, performance, and reliability of our platform and existing products, the functionality of any new products we may offer, general economic conditions, and customer reaction to our pricing model. If our efforts to expand our relationship with our existing customers are not successful, our financial condition and results of operations may materially suffer.
In addition, to encourage awareness, usage, familiarity and adoption of our platform and products, we may offer a credit to new customers who sign up for and use our platform. To the extent that we are unable to successfully retain
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customers after use of the initial credit, we will not realize the intended benefits of these marketing strategies and our ability to grow our revenue will be adversely affected.
The market for our platform and solutions may develop more slowly or differently than we expect.
It is difficult to predict customer adoption rates and demand for our products and services, the entry of competitive products or services or the future growth rate and size of the Infrastructure-as-a-Service (IaaS) and Platform-as-a-Service (PaaS) markets. The expansion of these markets depends on a number of factors, including the cost, performance, and perceived value associated with cloud computing platforms as an alternative to more established and legacy systems, the ability of cloud computing platform providers to address heightened data security and privacy concerns, and the cost and effort associated with converting or transition from current systems to cloud-based systems. If we or other cloud computing platform providers experience security incidents, loss of customer data, disruptions or other similar problems, the market for these applications as a whole, including our platform and products, may be negatively affected. If there is a reduction in demand caused by a lack of customer acceptance, technological challenges, weakening economic conditions, data security or privacy concerns, governmental regulation, competing technologies and products, or decreases in information technology spending or otherwise, either now or in the future, the market for our platform and products might not continue to develop or might develop more slowly than we expect, which would adversely affect our business, financial condition and results of operations.
Our core customer base consists of individual developers, early stage start-ups and small-to-medium size businesses. As these individuals and organizations grow, if we are unable to meet their evolving needs, we may not be able to retain them as customers. Our business will also suffer if the markets for our solutions proves less lucrative than projected or if we fail to effectively acquire and service such users.
Our core customer base consists of individual developers, early stage start-ups and small-to-medium size businesses, many of which plan for high growth. We expect that our path to growth will, in part, rely on scaling our platform to meet the needs of such customers as they increase usage of our platform. Accordingly, if such customers fail to grow as expected, then our path to growth may be adversely affected. In addition, our inability to offer both suitable services to support their businesses at scale and suitable and appropriately priced services for the initial state of their business, and could adversely affect our business, financial condition and results of operations.
We believe that the individual developer, early stage start-ups and small-to-medium size business markets are underserved, and we intend to continue to devote substantial resources to such markets. However, these customers and potential customers frequently have limited budgets and may choose to allocate resources to items other than our solutions, especially in times of economic uncertainty or recessions. If the individual developer, early stage start-ups and small-to-medium size business markets fail to be as lucrative as we project or we are unable to market and sell our services to such customers effectively, our ability to grow our revenues quickly and achieve or maintain profitability will be harmed.
As we expand our product offerings, we may also attract larger customers outside of our core customer base. Sales to larger customers involve risks that may not be present or that are present to a lesser extent with sales to smaller entities.
Sales to larger customers outside of our core customer base involve risks that may not be present or that are present to a lesser extent with sales to individual developers, early stage start-ups and small-to-medium size businesses, such as longer sales cycles, more complex customer requirements, substantial upfront sales costs, and less predictability in completing some of our sales. For example, larger customers may require considerable time to evaluate and test our solutions and those of our competitors prior to making a decision on whether to subscribe to our platform. Moreover, larger customers often begin to deploy our products on a limited basis, but nevertheless demand configuration, integration services and pricing negotiations, which increase our upfront investment in the sales effort with no guarantee that these customers will deploy our products widely enough across their organization to justify our substantial upfront investment.
If we fail to timely release updates and new features to our platform and adapt and respond effectively to rapidly changing technology, evolving industry standards, changing regulations, or customer needs, our platform and products may become less competitive.
Our ability to attract new users and customers, expand our customer base, and increase revenue from existing customers depends in large part on our ability to enhance and improve our existing platform and products, increase adoption and usage of our platform and products, and introduce new products and capabilities. The market in which we compete is relatively new and subject to rapid technological change, evolving industry standards, and changing regulations, as well as changing customer needs, requirements and preferences. The success of our business will depend, in part, on our ability to adapt and respond effectively to these changes on a timely basis, anticipate and respond to customer demands and
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preferences, address business model shifts, optimize our go-to-market execution by improving our cost structure, align sales coverage with strategic goals, improve channel execution and strengthen our services and capabilities in our areas of strategic focus. If we were unable to enhance our products and platform capabilities to keep pace with rapid technological and regulatory change, or if new technologies emerge that are able to deliver competitive products at lower prices, more efficiently, more conveniently, or more securely than our products, our business, financial condition and results of operations could be adversely affected.
We expect that the number of integrations and developer tools we will need to support will continue to expand as developers adopt new technologies, and we will have to develop new or upgraded versions of our platform and products to work with those new platforms. This development effort may require significant engineering, sales and marketing resources, all of which would adversely affect our business. Any failure of our platform or products to operate effectively with future technologies and developer tools could reduce the demand for our platform and products. If we are unable to respond to these changes in a cost-effective manner, our platform may become less marketable and less competitive or obsolete, and our business, financial condition and results of operations could be adversely affected.
Our policies regarding user privacy could cause us to experience adverse business and reputational consequences with customers, employees, suppliers, government entities, users, and other third parties.
From time to time, government entities and law enforcement bodies may seek our assistance with obtaining information about our customers or users. Although we protect the privacy of our customers to the extent possible, we may be required from time to time to provide information about our customers to government entities and law enforcement bodies. In light of our privacy commitments, we may legally challenge law enforcement requests to provide access to our systems, customer Droplets, or other user content but may face complaints that we have provided information improperly to law enforcement or in response to third party abuse complaints. We may experience adverse political, business, and reputational consequences, to the extent that we (a) do not provide assistance to or comply with requests from government entities or challenge those requests publicly or in court or (b) provide, or are perceived as providing, assistance to government entities that exceeds our legal obligations. Any such disclosure could significantly and adversely impact our business and reputation.
We publish a transparency report on an annual basis to provide details of law enforcement and government requests we receive. Our transparency report also includes a list of certain actions we have taken (e.g., disclosure of information) in response to law enforcement requests, as well as our standard policies and procedures regarding any such requests. Both the publishing of our transparency report and, conversely, the actions we take or challenge in response to law enforcement requests could damage our business and reputation.
We rely on third-party data center providers to ensure the functionality of our platform and products. If our data center providers fail to meet the requirement of our business, or if our data center facilities experience damage, interruption or a security breach, our ability to provide access to our platform and maintain the performance of our network could be negatively impacted.
We operate fourteen data centers through leases with third-party data center providers located in the United States, India, Germany, the United Kingdom, Canada, the Netherlands and Singapore. Our business is reliant on these data center facilities. Given that we lease this data center space, we do not control the operation of these third-party facilities. Consequently, we may be subject to service disruptions as well as failures to provide adequate support for reasons that are outside of our direct control. All of our data center facilities and network infrastructure are vulnerable to damage or interruption from a variety of sources including earthquakes, floods, fires, power loss, system failures, computer viruses, physical or electronic break-ins, human error, malfeasance or interference, including by employees, former employees, or contractors, terrorism and other catastrophic events. We and our data centers have experienced, and may in the future experience, disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes and capacity constraints, due to an overwhelming number of customers accessing our platform simultaneously. Data center facilities housing our network infrastructure may also be subject to local administrative actions, changes to legal or permitting requirements, labor disputes, litigation to stop, limit, or delay operations, and other legal challenges, including local government agencies seeking to gain access to customer accounts for law enforcement or other reasons. In addition, while we have entered into various agreements for the lease of data center space, equipment, maintenance and other services, the third party could fail to live up to the contractual obligations under those agreements.
Other factors, many of which are beyond our control, that can affect the delivery, performance, and availability of our platform and products include:
the development, maintenance, and functioning of the infrastructure of the internet as a whole;
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the performance and availability of third-party telecommunications services with the necessary speed, data capacity, and security for providing reliable internet access and services;
the failure of our redundancy systems, in the event of a service disruption at one of the facilities hosting our network infrastructure, to redistribute load to other components of our network;
the failure of our disaster recovery and business continuity plans; and
decisions by the owners and operators of the co-location and ISP-partner facilities where our network infrastructure is deployed or by global telecommunications service provider partners who provide us with network bandwidth to terminate our contracts, discontinue services to us, shut down operations or facilities, increase prices, change service levels, limit bandwidth, declare bankruptcy, breach their contracts with us, or prioritize the traffic of other parties.
The occurrence of any of these factors, or our inability to efficiently and cost-effectively fix such errors or other problems that may be identified, could damage our reputation, negatively impact our relationship with our customers, or otherwise materially harm our business, results of operations, and financial condition.
The components of our global network are interrelated, such that disruptions or outages affecting one or more of our network data center facilities may increase the strain on other components of our network. In addition, the failure of any of our data center facilities for any significant period of time could place a significant strain upon the ongoing operation of our business, as we have only limited redundant functionality for these facilities, and there may be concentration issues regarding the storing and backup of customer data. Such a failure of a core data center facility could degrade and slow down our network, reduce the functionality of our products for our customers, impact our ability to bill our customers, and otherwise materially and adversely impact our business, reputation, and results of operations.
In addition, if we do not optimize and operate these data center facilities efficiently, or if we fail to expand our data centers to meet increased customer demand, it could result in either lack of available capacity (resulting in poor service performance or technical issues) or excess data center capacity (resulting in increased unnecessary costs), both of which could result in the dissatisfaction or loss of customers and cause our business, results of operations and financial condition to suffer. As we continue to add product and service capabilities, our data center networks become increasingly complex and operating them becomes more challenging.
The terms of our existing data center agreements and leases vary in length and expire on various dates. Upon the expiration or termination of our data center facility leases, we may not be able to renew these leases on terms acceptable to us, if at all. Even if we are able to renew the leases on our existing data centers, rental rates, which will be determined based on then-prevailing market rates with respect to the renewal option periods and which will be determined by negotiation with the landlord after the renewal option periods, may increase from the rates we currently pay under our existing lease agreements. Migrations to new facilities could also be expensive and present technical challenges that may result in downtime for our affected customers. There can also be no assurances that our plans to mitigate customer downtime for affected customers will be successful.
If we or our third-party service providers experience a security breach or unauthorized parties otherwise obtain access to our platform or our customers’ data or our sensitive or proprietary data, we may incur significant liabilities and our reputation and business may be harmed.
Our platform and products involve the storage and transmission of data, including personally identifiable information, and security breaches or unauthorized access to our platform and products could result in the loss of our or our customers’ or users’ data, litigation, indemnity obligations, fines, penalties, disputes, investigations and other liabilities. We have been in the past and may continue to be in the future impacted by and the target of cyber-attacks by third parties seeking unauthorized access to our or our customers’ or users’ sensitive or proprietary data or to disrupt our ability to provide our services. While we have taken steps to protect the confidential and personal information that we have access to, our security measures or those of our third-party service providers that store or otherwise process certain of our and our customers’ or users’ data on our behalf could be breached or we could suffer a loss of our or our customers’ or users’ data. Our ability to monitor our third-party service providers’ data security is limited. Cyber-attacks, computer malware, viruses, supply chain attacks, social engineering (including spear phishing and ransomware attacks), and general hacking have become more prevalent in our industry, particularly against cloud services. In addition, errors due to the action or inaction of our employees, contractors, or others with authorized access to our network could lead to a variety of security incidents. Further, we do not directly control content that our customers or users store, use, or access in our products. If our customers or users use our products for the transmission or storage of personally identifiable information and our security measures
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are or are believed to have been breached as a result of third party action, employee error, malfeasance or otherwise, our reputation could be damaged, our business may suffer, and we could incur significant liability. In addition, our remediation efforts may not be successful.
We also process, store and transmit our own data as part of our business and operations. This data may include personally identifiable, confidential or proprietary information. There can be no assurance that any security measures that we or our third party service providers have implemented will be effective against current or future security threats. While we have developed systems and processes to protect the integrity, confidentiality and security of our and our customers’ or users’ data, our security measures or those of our third party service providers could fail and result in unauthorized access to or disclosure, modification, misuse, loss or destruction of such data.
Because there are many different security breach techniques and such techniques continue to evolve, we may be unable to anticipate attempted security breaches, react in a timely manner or implement adequate preventative measures. Third parties may also conduct attacks designed to temporarily deny customers or users access to our cloud services. Any security breach or other security incident, or the perception that one has occurred, could result in a loss of customer confidence in the security of our platform and damage to our brand, reduce the demand for our products, disrupt normal business operations, require us to spend material resources to investigate or correct the breach and to prevent future security breaches and incidents, expose us to legal liabilities, including litigation, regulatory enforcement, and indemnity obligations, and adversely affect our business, financial condition and results of operations. These risks are likely to increase as we continue to grow and process, store, and transmit increasingly large amounts of data.
Additionally, although we maintain cybersecurity insurance coverage, we cannot be certain that such coverage will be adequate for data security liabilities actually incurred, will cover any indemnification claims against us relating to any incident, will continue to be available to us on economically reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could adversely affect our reputation, business, financial condition and results of operations.
In addition, our customers require and expect that we and/or our service providers maintain industry-related compliance certifications, such as SOC 1, SOC 2, SOC 3, PCI-DSS, NIST 800-53, and others. There are significant costs associated with maintaining existing and implementing any newly-adopted industry-related compliance certifications, including costs associated with retroactively building security controls into services which may involve re-engineering technology, processes and staffing. The inability to maintain applicable compliance certifications could result in monetary fines, disruptive participation in forensic audits due to a breach, security-related control failures, customer contract breaches, customer churn and brand and reputational harm.
We may not be able to successfully manage our growth, and if we are not able to grow efficiently, our business, financial condition and results of operations could be harmed.
The growth and expansion of our business will continue to require additional management, operational and financial resources. As usage of our platform grows, we will need to devote additional resources to improving and maintaining our infrastructure and integrating with third-party applications. In addition, we will need to appropriately scale our internal business systems and our services organization, including customer support, to serve our growing customer base, and to improve our information technology and financial infrastructure, operating and administrative systems and our ability to effectively manage headcount, capital and processes, including by reducing costs and inefficiencies. Any failure of or delay in these efforts could result in impaired system performance and reduced customer satisfaction, which would negatively impact our revenue growth and our reputation. Even if we are successful in our expansion efforts, they will be expensive and complex, and require the dedication of significant management time and attention. We cannot be sure that the expansion of and improvements to our internal infrastructure will be effectively implemented on a timely basis, if at all, and such failures could harm our business, financial condition and results of operations.
In addition, we must also continue to effectively manage our capital expenditures by maintaining and expanding our data center capacity, servers and equipment, grow in geographies where we currently have a small presence and ensure that the performance, features and reliability of our service offerings and our customer service remain competitive in a rapidly changing technological environment. If we fail to manage our growth, the quality of our platform and products may suffer, which could negatively affect our brand and reputation and harm our ability to retain and attract customers and employees.
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If we underestimate or overestimate our data center capacity requirements and our capital expenditures on data centers, servers and equipment, our results of operations could be adversely affected.
The costs of building out, leasing and maintaining our data centers constitute a significant portion of our capital and operating expenses. To manage our capacity while minimizing unnecessary excess capacity costs, we continuously evaluate our short and long-term data center capacity requirements in order to effectively manage our capital expenditures. We may be unable to project accurately the rate or timing of increases in volume of usage on our platform or to successfully allocate resources to address such increases, and may underestimate the data center capacity needed to address such increases, and in response, we may be unable to increase our data capacity, and increase our capital expenditures on servers and other equipment, in an expedient and cost-effective manner to address such increases. If we underestimate our data center capacity requirements and capital expenditure requirements, we may not be able to provide our platform and products to current customers or service the expanding needs of our existing customers and may be required to limit new customer acquisition or enter into leases or other agreements for data centers, servers and other equipment that are not optimal, all of which may materially and adversely impair our results of operations.
In addition, many of our data center sites are subject to multi-year leases. If our capacity needs are reduced, or if we decide to close a data center, we may nonetheless be committed to perform our obligations under the applicable leases including, among other things, paying the base rent for the balance of the lease term and continuing to pay for any servers or other equipment. If we overestimate our data center capacity requirements and capital expenditures, and therefore secure excess data center capacity and servers or other equipment, our operating margins could be materially reduced.
We rely on a limited number of suppliers for certain components of the equipment we use to operate our network and any disruption in the availability of these components could delay our ability to expand or increase the capacity of our platform or replace defective equipment.
We do not manufacture the products or components we use to build our platform and the related infrastructure. We rely on a limited number of suppliers for several components of the equipment we use to operate our platform and provide products to our customers. Our reliance on these suppliers exposes us to risks, including:
reduced control over production costs and constraints based on the then current availability, terms, and pricing of these components;
limited ability to control the quality, quantity and cost of our products or of their components;
the potential for binding price or purchase commitments with our suppliers at higher than market rates;
limited ability to adjust production volumes in response to our customers’ demand fluctuations;
labor and political unrest at facilities we do not operate or own;
geopolitical disputes disrupting our supply chain;
business, legal compliance, litigation and financial concerns affecting our suppliers or their ability to manufacture and ship our products in the quantities, quality and manner we require;
impacts on our supply chain from adverse public health developments, including outbreaks of contagious diseases such as the ongoing COVID-19 pandemic; and
disruptions due to floods, earthquakes, storms and other natural disasters, particularly in countries with limited infrastructure and disaster recovery resources.
In addition, we are continually working to expand and enhance our platform features, technology and network infrastructure and other technologies to accommodate substantial increases in the volume of usage on our platform, the amount of content we host and our overall total customers. We may be unable to project accurately the rate or timing of these increases or to successfully allocate resources to address such increases, and may underestimate the data center capacity needed to address such increases, and our limited number of suppliers may not be able to quickly respond to our needs, which could have a negative impact on customer experience and our financial results. In the future, we may be required to allocate additional resources, including spending substantial amounts, to build, purchase or lease data centers and equipment and upgrade our technology and network infrastructure in order to handle increased customer usage, and our suppliers may not be able to satisfy such requirements. In addition, our network or our suppliers’ networks might be unable to achieve or maintain data transmission capacity high enough to process orders or download data effectively or in a timely manner. Our failure, or our suppliers’ failure, to achieve or maintain high data transmission capacity could
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significantly reduce consumer demand for our products. Such reduced demand and resulting loss of traffic, cost increases, or failure to accommodate new technologies could harm our business, revenue and financial condition.
If we do not or cannot maintain the compatibility of our platform with third-party applications that our customers use in their businesses, our business will be harmed.
Because our customers choose to integrate our products with certain capabilities provided by third-party providers, the functionality and popularity of our platform depends, in part, on our ability to integrate our platform and applications with developer tools and other third-party applications. These third parties may change the features of their technologies, restrict our access to their applications, or alter the terms governing use of their applications in a manner that is adverse to our business. Such changes could functionally limit or prevent our ability to use these third-party technologies in conjunction with our platform, which would negatively affect adoption of our platform and harm our business. If we fail to integrate our platform with new third-party applications that our customers use, we may not be able to offer the functionality that our customers need, which would harm our business.
We rely heavily on the reliability, security and performance of our internally developed systems and operations. Any difficulties in maintaining these systems may result in damage to our brand, service interruptions, decreased customer service or increased expenditures.
The reliability and continuous availability of the software, hardware and workflow processes underlying our internal systems, networks and infrastructure and the ability to deliver our products are critical to our business. Any interruptions resulting in our inability to timely deliver our products, or materially impacting the efficiency or cost with which we provide our products, would harm our brand, profitability and ability to conduct business. If third-party vendors increase their prices and we are unable to successfully pass those costs on to our customers, it could have a substantial effect on our results of operations.
We rely on third-party software for certain essential financial and operational services, and a failure or disruption in these services could materially and adversely affect our ability to manage our business effectively.
We rely on third-party software to provide many essential financial and operational services to support our business, including, without limitation, encryption and authentication technology, infrastructure operations, employee email, content delivery to customers, back-office support, credit card processing and other functions. Many of these vendors are less established and have shorter operating histories than traditional software vendors. Moreover, these vendors provide their services to us via a cloud-based model instead of software that is installed on our premises. As a result, we depend upon these vendors to provide us with services that are always available and are free of errors or defects that could cause disruptions in our business processes. Any failure by these vendors to do so, or any disruption in our ability to access the internet, would materially and adversely affect our ability to manage our operations. In addition, although we have developed systems and processes that are designed to protect customer and user data and prevent data loss and other security breaches, including systems and processes designed to reduce the impact of a security breach at a third-party service provider, such measures cannot provide absolute security.
Performance problems or defects associated with our platform may adversely affect our business, financial condition and results of operations.
It may become increasingly difficult to maintain and improve our platform performance, especially during peak usage times and as our customer base grows and our platform becomes more complex. If our platform is unavailable or if our customers are unable to access our platform within a reasonable amount of time or at all, we may experience a loss of customers, lost or delayed market acceptance of our platform, delays in payment to us by customers, injury to our reputation and brand, legal claims against us, significant cost of remedying these problems and the diversion of our resources. In addition, to the extent that we do not effectively address capacity constraints, upgrade our systems as needed and continually develop our technology and network architecture to accommodate actual and anticipated changes in technology, our business, financial condition and results of operations, as well as our reputation, may be adversely affected.
Further, the software technology underlying our platform is inherently complex and may contain material defects or errors, particularly when new products are first introduced or when new features or capabilities are released. We have from time to time found defects or errors in our platform, and new defects or errors in our existing platform or new products may be detected in the future by us or our users. We cannot assure you that our existing platform and new products will not contain defects. Any real or perceived errors, failures, vulnerabilities, or bugs in our platform could result in negative publicity or lead to data security, access, retention or other performance issues, all of which could harm our business. The
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costs incurred in correcting such defects or errors may be substantial and could harm our business. Moreover, the harm to our reputation and legal liability related to such defects or errors may be substantial and could similarly harm our business.
The markets in which we participate are competitive, and if we do not compete effectively, our business, financial condition and results of operations could be harmed.
The markets that we serve are highly competitive and rapidly evolving. With the introduction of new technologies and innovations, we expect the competitive environment to remain intense. We compete primarily with large, diversified technology companies that focus on large enterprise customers and provide cloud computing as just a portion of the services and products that they offer. The primary vendors in this category include Amazon (AWS), Microsoft (Azure), Google (GCP), IBM and Oracle. We also compete with smaller, niche cloud service providers that typically target individuals and smaller businesses, simple use cases or narrower geographic markets. Some examples in this category include OVH, Vultr, Heroku, and Linode.
Our competitors vary in size and in the breadth and scope of the products offered. Many of our competitors and potential competitors, particularly our larger competitors, have substantial competitive advantages as compared to us, including greater name recognition and longer operating histories, larger sales and marketing and customer support budgets and resources, the ability to bundle products together, larger and more mature intellectual property portfolios, greater resources to make acquisitions and greater resources for technical assistance and customer support. Further, other potential competitors not currently offering competitive solutions may expand their product or service offerings to compete with our products and platform capabilities, or our current and potential competitors may establish cooperative relationships among themselves or with third parties that may further enhance their resources and product offerings in our addressable market. Our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards, and customer requirements. An existing competitor or new entrant could introduce new technology that reduces demand for our products and platform capabilities.
In addition, some of our actual and potential competitors have been acquired by other larger enterprises and have made or may make acquisitions or may enter into partnerships or other strategic relationships that may provide more comprehensive offerings than they individually had offered or achieve greater economies of scale than us. In addition, new entrants not currently considered to be competitors may enter the market through acquisitions, partnerships or strategic relationships.
For all of these reasons, we may not be able to compete successfully against our current or future competitors, and this competition could result in the failure of our platform to continue to achieve or maintain market acceptance, any of which would harm our business, results of operations, and financial condition.
We do not have sufficient history with our pricing model to accurately predict the optimal pricing necessary to attract new customers and retain existing customers. Our pricing model subjects us to various challenges that could make it difficult for us to derive sufficient value from our customers.
We have limited experience determining the optimal prices for our products and, as a result, we have in the past and expect that we will need to change our pricing model from time to time in the future. As the market for our products matures, or as new competitors introduce new products or services that compete with ours, we may be unable to attract new customers using the same pricing models as we have used historically. Pricing decisions may also impact the mix of adoption among our customers and negatively impact our overall revenue. Moreover, certain customers may demand substantial price concessions. As a result, in the future we may be required to reduce our prices or develop new pricing models, which could adversely affect our revenue, gross margin, profitability, financial position, and cash flow.
We generally charge our customers for their usage of our platform, and the add-on features and functionality they choose to enable. We do not know whether our current or potential customers or the market in general will continue to accept this pricing model going forward and, if it fails to gain acceptance, our business could be harmed.
If we fail to retain and motivate members of our management team or other key employees, or fail to attract additional qualified personnel to support our operations, our business and future growth prospects would be harmed.
Our success and future growth depend largely upon the continued services of our executive officers, particularly Yancey Spruill, our Chief Executive Officer. From time to time, there may be changes in our executive management team or other key employees resulting from the hiring or departure of these personnel. For example, a number of our executive officers have only recently joined us. If we do not successfully manage executive officer transitions, it could be viewed negatively by our customers, employees or investors and co