# DigitalOcean Holdings, Inc. (DOCN) FY 2023 MD&A Verbatim Item 7 Management's Discussion and Analysis from DigitalOcean Holdings, Inc.'s 10-K for fiscal year 2023. SEC filing source: https://www.sec.gov/Archives/edgar/data/1582961/000158296124000031/docn-20231231.htm Accession: 0001582961-24-000031 Filing date: 2024-02-21 Report date: 2023-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/DOCN/ All MD&A years: /company/DOCN/mda/ Previous year: /company/DOCN/mda/fy2022/ (FY 2022) Next year: /company/DOCN/mda/fy2024/ (FY 2024) ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be considered together with our consolidated financial statements and related notes and other financial information included in Part II, Item 8. “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. This discussion, particularly information with respect to our outlook, key trends and uncertainties, our plans and strategy for our business, and our performance and future success, includes forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed below. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report, particularly in Part I, Item 1A. “Risk Factors.” In addition, for more information regarding key factors affecting our performance, see “Key Factors Affecting Our Performance” below. Overview DigitalOcean is a leading cloud computing platform offering on-demand infrastructure and platform tools for startups and growing digital businesses. 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. The lifecycle of a customer typically begins with users coming to our platform to explore a new technology or test an idea. Thousands of users come to DigitalOcean every month, paying a small amount to learn and to complete their discrete tasks. In many cases, these early users do not intend to remain on our platform beyond their initial testing. We refer to these users that spend less than or equal to $50 per month and utilize our platform for three months or less as “Testers”. 51 Given their short time on our platform and their relatively small individual and aggregate spend, we do not consider Testers to be a meaningful part of our customer base. Once a user has remained on our platform for longer than three months, or spends greater than $50 per month, we consider them to be active and ongoing customers that have the intention to remain on our platform and to potentially scale their utilization of our products. We divide this customer population into the following three categories: •Learners: users that both (i) spend less than or equal to $50 for the month-end period and (ii) have been on our platform for more than three months. •Builders: users that spend greater than $50 and less than or equal to $500 for the month-end period. •Scalers: users that spend greater than $500 for the month-end period. As of December 31, 2023, we had approximately 644,000 Learners, Builders and Scalers using our platform to build, deploy and scale applications. We view Learners, Builders and Scalers as the most appropriate measure of our customer population, and Testers have therefore been excluded from the total customer population count. 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, managed services, and, most recently, artificial intelligence and machine learning (AI/ML) applications, 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. We offer mission-critical solutions across Infrastructure-as-a-Service (IaaS), including our Droplet virtual machines, storage and networking offerings; Platform-as-a-Service (PaaS), including our Managed Database and Managed Kubernetes offerings; Software-as-a-Service (SaaS), including our Managed Hosting and Marketplace offerings; and AI/ML, including our Machines, Notebooks and Deployments offerings. Our cloud platform was designed with simplicity in mind to ensure that startups and growing digital businesses can spend less time managing their infrastructure and more time building innovative applications that drive business growth. Improving the developer experience and increasing productivity are core to our mission. 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. We recognize revenue based on the customer utilization of our offerings. Our pricing is primarily consumption-based and billed monthly in arrears, making it easy for our customers to track usage on an ongoing basis and optimize their deployments. We have a highly efficient self-service customer acquisition model, which we complement with a sales force focused on inside sales, targeted outside sales and partnership opportunities to drive revenue growth. Our model 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 years ended December 31, 2023, 2022 and 2021, our sales and marketing expense was approximately 11%, 14% and 12% of our revenue, respectively. The efficiency of our go-to-market model and our focus on the needs of startups and growing digital businesses has enabled us to drive organic growth and establish a truly global customer base across a broad range of industries. Our customers are spread across approximately 190 countries and around two-thirds of our revenue has historically come from customers located outside the United States. For the year ended December 31, 2023, 37% of our revenue was generated from North America, 29% from Europe, 24% from Asia and 10% from the rest of the world. Our average revenue per customer (consisting of the aggregate revenue and customer counts for our Learners, Builders and Scalers, but excluding revenue and customer counts for Testers), or ARPU, has increased from $65.83 in 2021 to $82.76 in 2022 and $90.99 in 2023. We had no material customer concentration as our top 25 customers made up approximately 7%, 10%, and 10% of our revenue in the years ended December 31, 2023, 2022 and 2021, respectively. Our annual run-rate revenue, or ARR, as of December 31, 2023 was $730 million, up from $659 million as of December 31, 2022 and $490 million as of December 31, 2021. ARR as of the end of each month represents total revenue for that month multiplied by 12. 52 Growing our Builders and Scalers is a critical focus for us, and we have successfully increased the number of these customers and their percentage of our total revenue. We had approximately 17,000 Scalers as of December 31, 2023, up from approximately 15,000 as of December 31, 2022 and 11,000 as of December 31, 2021. We had approximately 139,000 Builders as of December 31, 2023, up from approximately 129,000 as of December 31, 2022 and 89,000 as of December 31, 2021. Revenue from Builders and Scalers increased 26% and 18%, respectively, for the year ended December 31, 2023 compared to the year ended December 31, 2022. Revenue from Builders and Scalers increased 30% and 45%, respectively, for the year ended December 31, 2022 compared to the year ended December 31, 2021. Revenue from Builders and Scalers as a percentage of total revenue was 86% in 2023, 85% in 2022 and 83% in 2021. 2023 Restructuring On January 27, 2023, our Board of Directors approved a restructuring plan to adjust our cost structure and accelerate our timeline to achieve 20% or better adjusted free cash flow margins. The restructuring plan included both the elimination of positions across the company as well as the shifting of additional positions across a broader geographical footprint. See Note 15, Restructuring, in our Notes to Consolidated Financial Statements included in Part II, Item 8. “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K for further information regarding these commitments. 53 Leadership Succession Plan On February 12, 2024, Padmanabhan Srinivasan, joined the Company in the role of chief executive officer (CEO) and a member of our Board of Directors. As part of the transition and as outlined in the leadership succession plan that we announced on August 24, 2023, our former CEO departed the Company on February 12, 2024. 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 businesses 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. Increasing Usage by Our Existing Customers Our existing customer base represents a significant opportunity for further sales expansion through increased usage of our platform and adoption of additional product offerings. We are highly focused on gaining a better understanding of the needs and growth plans of our existing customers. This deeper relationship with our customers will help us identify opportunities to educate our customer base on ways to utilize the platform more effectively for their individual use cases, as well as provide a feedback loop to inform our product roadmap. We are focusing our sales and support teams to prevent customer churn by ensuring that our products and services provide a high level of value. Our goal is to continue to increase our revenue from existing customers through the introduction of new products and features tailored to our customer base in addition to expanded customer outreach, focused on larger customers and specific use cases. Growing Our Base of Higher Spend Customers We believe there is a substantial opportunity to further expand our customer base to attract more businesses that can scale on our platform. We are investing in strategies that we believe will attract Builders and Scalers, including new marketing initiatives that further optimize our self-service revenue funnel to help customers expand their usage and partnership initiatives to identify potential Builders and Scalers. In addition, our Cloudways and Paperspace acquisitions added a significant number of Builders and Scalers as these offerings provide premium managed services and high value AI/ML offerings, respectively. Investing in Our Platform and Product Offerings We have a history of, and will continue to invest significantly in, delivering innovative products, features and functionality targeted at our core customer base. The market opportunity for our core IaaS services of compute, storage and networking continues to expand and we are making targeted investments to expand our IaaS revenue. Beyond IaaS, we continue to see large growth opportunities in the PaaS, SaaS and AI/ML markets and, accordingly, we have expanded our portfolio of products and offerings over the last few years. In addition, we may pursue both strategic partnerships and acquisitions, such as our acquisitions of Cloudways and Paperspace, that we believe will be complementary to our business, accelerate customer 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. Macroeconomic Conditions Unfavorable conditions in the economy both in the United States and abroad, including conditions resulting from changes in gross domestic product growth, supply chain disruptions, inflationary pressures, interest rates, financial and credit market fluctuations, volatility in the capital markets, liquidity concerns at, and failures of, banks and other financial institutions, international trade relations, political turmoil, political instability and transitions of power in regions where we operate, including Pakistan following the most recent general election, natural catastrophes, outbreaks of contagious diseases, warfare and terrorist attacks on the United States, Europe or elsewhere, including military actions affecting Russia, Ukraine, the Middle East or elsewhere, could cause a decrease in business investments in information technology and negatively affect the growth of our business and our results of operations. While our business model provides some resilience against these factors, we will continue to monitor the direct and indirect impacts of these or similar circumstances on our business and our results of operations, and will take appropriate measures, as necessary, to minimize potential risk exposure. 54 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. The table below includes the impact of our acquisitions beginning in the year in which they were acquired with respect to the metrics disclosed. [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2023","","2022","","2021"],["Learners(1)","488,094","","","468,065","","","445,756"],["Builders(1)","139,261","","","129,150","","","88,787"],["Scalers(1)","16,941","","","15,032","","","10,568"],["ARPU(2)","$","90.99","","","$","82.76","","","$","65.83"],["ARR (in millions)","$","730","","","$","659","","","$","490"],["Net dollar retention rate","101","%","","115","%","","113","%"]] [[/GREPCENT_TABLE]] (1)Customer count. (2)Beginning in the first quarter of 2023, we redefined ARPU to exclude Testers. Prior years have been restated to conform to the new definition. Learners, Builders & Scalers While we believe the total number of these customers is an important indicator of the growth of our business and future revenue opportunity, the trends relating to our Builders and Scalers is of particular importance to us as these customers represent a significant majority of our revenue and revenue growth, and they are representative of the startup and growing digital business customers that grow on our platform and use multiple products. 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 from Learners, Builders and Scalers in that period divided by the total number of Learner, Builder and Scaler 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 recurring 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. For our ARR calculations, we include the total revenue from all customers, including Testers, Learners, Builders and Scalers. 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 our net dollar retention rate calculations, we include the total revenue from all customers, 55 including Testers, Learners, Builders and Scalers. 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. Components of Results of Operations Revenue We offer mission-critical solutions across Infrastructure-as-a-Service (IaaS), including our Droplet virtual machines, storage and networking offerings; Platform-as-a-Service (PaaS), including our Managed Database and Managed Kubernetes offerings; Software-as-a-Service (SaaS), including our Managed Hosting and Marketplace offerings; and AI/ML, including our Machines, Notebooks and Deployments offerings. We recognize revenue based on the customer utilization of these resources. Customer contracts are primarily month-to-month and generally 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 acquired technology, 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, commissions, advertising and professional service fees. We expect sales and marketing expenses to increase in absolute dollars as we enhance our product offerings and implement new marketing strategies. 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 provision for expected credit losses, software, payment processing fees, business insurance, depreciation and amortization expenses, rent and facilities costs, impairment of long-lived assets, acquisition related compensation, and other administrative costs. We also expect general and administrative expenses to increase in absolute dollars as we continue to grow our business. 56 Restructuring and other charges Restructuring and other charges consist primarily of personnel costs, such as notice period, employee severance payments and termination benefits, as well as stock-based compensation related to vesting of certain equity awards. We expect restructuring and other charges to decrease as the restructuring plan was substantially completed by the end of the third quarter of 2023. Other Income (Expense), net Other income (expense), net consists primarily of accretion/amortization of premium/discounts and interest income from our marketable securities, amortization of deferred financing fees on our convertible notes, loss on extinguishment of debt, and gains or losses on foreign currency exchange. Income Tax (Expense) Benefit Prior to fiscal year 2023, income tax (expense) benefit consisted primarily of income taxes in certain foreign and state jurisdictions in which we conduct business. Beginning January 1, 2023, income tax (expense) benefit is attributable to the mix of income in the 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. Results of Operations The following table sets forth our results of operations for the periods presented: [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2023","","2022","","2021"],["","(in thousands)"],["Revenue","$","692,884","","","$","576,322","","","$","428,561"],["Cost of revenue(1)","283,967","","","211,927","","","170,595"],["Gross profit","408,917","","","364,395","","","257,966"],["Operating expenses:"],["Research and development(1)","140,365","","","143,885","","","115,684"],["Sales and marketing(1)","73,027","","","81,022","","","50,878"],["General and administrative(1)","162,742","","","165,185","","","102,590"],["Restructuring and other charges(1)","20,887","","","\u2014","","","\u2014"],["Total operating expenses","397,021","","","390,092","","","269,152"],["Income (loss) from operations","11,896","","","(25,697)","","","(11,186)"],["Other income (expense), net","14,880","","","1,812","","","(7,015)"],["Income (loss) before income taxes","26,776","","","(23,885)","","","(18,201)"],["Income tax expense","(7,367)","","","(3,919)","","","(1,302)"],["Net income (loss) attributable to common stockholders","$","19,409","","","$","(27,804)","","","$","(19,503)"]] [[/GREPCENT_TABLE]] ___________________ 57 (1)Includes stock-based compensation as follows: [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2023","","2022","","2021"],["","(in thousands)"],["Cost of revenue","$","1,836","","","$","1,820","","","$","1,147"],["Research and development","43,315","","","39,354","","","23,315"],["Sales and marketing","15,751","","","14,909","","","8,471"],["General and administrative","23,508","","","49,746","","","28,644"],["Restructuring and other charges","3,937","","","\u2014","","","\u2014"],["Total","$","88,347","","","$","105,829","","","$","61,577"]] [[/GREPCENT_TABLE]] The following table sets forth our results of operations as a percentage of revenue for the periods presented: [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2023","","2022","","2021"],["Revenue","100","%","","100","%","","100","%"],["Cost of revenue","41","","","37","","","40"],["Gross profit","59","","","63","","","60"],["Operating expenses:"],["Research and development","20","","","25","","","27"],["Sales and marketing","11","","","14","","","12"],["General and administrative","23","","","29","","","24"],["Restructuring and other charges","3","","","\u2014","","","\u2014"],["Total operating expenses*","57","","","68","","","63"],["Income (loss) from operations*","2","","","(4)","","","(2)"],["Other income (expense), net","2","","","\u2014","","","(2)"],["Income (loss) before income taxes*","4","","","(4)","","","(3)"],["Income tax expense","(1)","","","(1)","","","\u2014"],["Net income (loss) attributable to common stockholders*","3","%","","(5)","%","","(5)","%"]] [[/GREPCENT_TABLE]] *May not foot due to rounding A discussion regarding our financial condition and results of operations for the year ended December 31, 2023 compared to the year ended December 31, 2022 is presented below. A discussion regarding our financial condition and results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021 can be found under Part II, Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2022, filed with the SEC on August 11, 2023, which is available on the SEC’s website at www.sec.gov. Comparison of the Years Ended December 31, 2023 and 2022 Revenue [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2023","","2022","","$ Change","","% Change"],["","(in thousands)"],["Revenue","$","692,884","","","$","576,322","","","$","116,562","","","20","%"]] [[/GREPCENT_TABLE]] Revenue increased $116.6 million, or 20%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. This increase is primarily due to contributions from our Managed Hosting offering as a result of acquiring Cloudways in September 2022, acquiring new customers, increases in utilization from the existing customer base, and, to a lesser extent, contributions from our AI/ML offerings as a result of acquiring Paperspace in July 2023. The 58 increase in our existing customer base was primarily driven by a 10% increase in ARPU to $90.99 from $82.76; and a 21% increase in revenue from Builders and Scalers. The increase in ARPU was primarily driven by additional spend from our existing customer base. Cost of Revenue [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2023","","2022","","$ Change","","% Change"],["","(in thousands)"],["Cost of revenue","$","283,967","","","$","211,927","","","$","72,040","","","34","%"]] [[/GREPCENT_TABLE]] Cost of revenue increased $72.0 million, or 34%, for the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily due to fixed and variable operating lease costs relating to new and acquired co-location facilities, expansion of existing co-location facilities, and to a lesser extent higher depreciation from acquired finance leases and amortization of acquired developed technology. Gross profit decreased to 59% for the year ended December 31, 2023 from 63% for the year ended December 31, 2022, primarily due to an increase in co-location costs as a percentage of revenue exceeding the percentage growth in revenue. Operating Expenses [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2023","","2022","","$ Change","","% Change"],["","(in thousands)"],["Research and development","$","140,365","","","$","143,885","","","$","(3,520)","","","(2)","%"],["Sales and marketing","73,027","","","81,022","","","(7,995)","","","(10)","%"],["General and administrative","162,742","","","165,185","","","(2,443)","","","(1)","%"],["Restructuring and other charges","20,887","","","\u2014","","","20,887","","","100","%"],["Total operating expenses","$","397,021","","","$","390,092","","","$","6,929","","","2","%"]] [[/GREPCENT_TABLE]] Research and development expenses decreased $3.5 million, or 2%, for the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily due to decreases in personnel costs, partially offset by higher stock-based compensation from awards granted to personnel of our acquired businesses and software license costs. Sales and marketing expenses decreased $8.0 million, or 10%, for the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily due to decreases in advertising costs due to cost saving initiatives and personnel costs, partially offset by increases in amortization of acquired intangible assets, affiliate fees and stock-based compensation. General and administrative expenses decreased $2.4 million, or 1%, for the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily due to a reversal of $31.3 million of stock-based compensation related to the former CEO’s forfeited MRSUs and decreases in software license costs, partially offset by higher acquisition related compensation, personnel costs, stock-based compensation, and payment processing fees. Restructuring and other charges increased $20.9 million, or 100%, for the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily due to one-time severance and benefit payments, as well as stock-based compensation related to vesting of certain equity awards in connection with the restructuring that we announced in February 2023. Other Income (Expense), net [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2023","","2022","","$ Change","","% Change"],["","(in thousands)"],["Other income (expense), net","$","14,880","","","$","1,812","","","$","13,068","","","721","%"]] [[/GREPCENT_TABLE]] Other income (expense), net increased $13.1 million, or 721%, for the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily due to growth in interest income resulting from higher interest rates, partially offset by lower average balances on our marketable securities. 59 Income Tax Expense [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2023","","2022","","$ Change","","% Change"],["","(in thousands)"],["Income tax expense","$","(7,367)","","","$","(3,919)","","","$","(3,448)","","","88","%"]] [[/GREPCENT_TABLE]] Income tax expense increased $3.4 million, or 88%, for the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily as a result of the tax expense on the income in foreign jurisdictions in which we conduct business and not benefiting from the losses in the U.S. due to the full valuation allowance. Liquidity and Capital Resources We have funded our operations since inception primarily with cash flow generated by operations, private offerings of our equity and debt securities, borrowings under our existing credit facility and capital expenditure financings. Cash provided from these sources is used primarily for operating expenses, such as personnel and co-location costs, and capital expenditures, including our investments in AI/ML and core product offerings. From time to time, we may also use excess cash for share repurchases, investments in our marketable securities portfolio. We believe our existing cash and cash equivalents, cash flow from operations and availability under our Credit Facility (as defined below) will be sufficient to support working capital and capital expenditure requirements and our outstanding contractual commitments for at least the next 12 months and in the long term. In February and March 2020, we entered into and subsequently amended a second amended and restated credit agreement with KeyBank National Association as administrative agent. In November 2021, we further amended such credit agreement to revise certain covenants that restricted the incurrence of indebtedness to permit the issuance of the convertible notes discussed below. In March 2022, we entered into a third amended and restated credit facility (as amended, the “Credit Facility”) to increase our borrowing capacity from $150.0 million to $250.0 million. Our Credit Facility will mature on the earlier of (a) March 29, 2027 and (b) 90 days before the maturity date applicable to any outstanding convertible notes issued by the Company in an aggregate principal amount equal to or greater than $100.0 million. Our Credit Facility is secured by a first-priority security interest in substantially all of our assets. Our Credit Facility contains certain financial and operational covenants, including a maximum senior secured net leverage ratio financial covenant of 3.50x. Consolidated total debt and consolidated EBITDA, which are non-GAAP measures used for this covenant, are calculated in accordance with the definitions set forth in the Credit Facility. In this context, these measures are used solely to provide information on the extent to which we are in compliance with these financial covenants and may not be comparable to consolidated total debt and consolidated EBITDA used by other companies or any other non-GAAP measures we present elsewhere in this Annual Report on Form 10-K. We were in compliance with all covenants under our Credit Facility as of December 31, 2023. In March 2021, we consummated our initial public offering (“IPO”) of 16.5 million shares of our common stock at an offering price of $47.00 per share resulting in aggregate net proceeds to us of $723.0 million after deducting the underwriting discounts and commissions and offering expenses payable by us. In November 2021, we issued $1.50 billion aggregate principal amount of 0% Convertible Senior Notes due December 1, 2026 (the “Convertible Notes”), in a private offering, for net proceeds of $1.46 billion, after deducting underwriting fees, expenses and commissions. The Convertible Notes are senior unsecured obligations and do not bear regular interest, and the principal amount of the Convertible Notes does not accrete. The Convertible Notes will mature on December 1, 2026 unless earlier converted, redeemed, or repurchased. 60 In February 2022, our Board of Directors approved the repurchase of up to an aggregate of $300.0 million of our common stock throughout fiscal year 2022 (“First 2022 Share Buyback Program”). As of May 16, 2022, we repurchased the shares representing the entire amount available under the First 2022 Share Buyback Program. On May 23, 2022, our Board of Directors approved a new stock repurchase program authorizing the repurchase of up to an additional $300.0 million of our common stock throughout fiscal year 2022 (the “Second 2022 Share Buyback Program”). As of August 19, 2022, we repurchased the shares representing the entire amount available under the Second 2022 Share Buyback Program. For the year ended December 31, 2022, we repurchased and retired 13,626,594 shares of common stock for an aggregate purchase price of $600.0 million. In February 2023, our Board of Directors approved an additional repurchase program of up to an aggregate of $500.0 million of our common stock throughout fiscal year 2023. For the year ended December 31, 2023, we repurchased and retired 14,487,509 shares of common stock for an aggregate purchase price of $488.5 million. The program expired as of December 31, 2023. As of December 31, 2023, we had $317.2 million in cash and cash equivalents and $94.5 million in marketable securities. Our cash and cash equivalents primarily consist of cash and money market funds. Our marketable securities consist of U.S. treasury securities and commercial paper. We may from time to time seek to retire or purchase our outstanding equity or debt, including the repurchase of our common stock or the Convertible Notes, through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions, and other factors. The amounts involved in any such transactions, individually or in the aggregate, may be material. Further, any such purchases or exchanges may result in us acquiring and retiring a substantial amount of such indebtedness, which could impact the trading liquidity of such indebtedness. The following table summarizes our cash flows for the periods presented: [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["(In thousands)","2023","","2022","","2021"],["Net cash provided by operating activities","$","234,942","","","$","195,152","","","$","133,109"],["Net cash provided by (used in) investing activities","401,152","","","(1,148,158)","","","(113,605)"],["Net cash (used in) provided by financing activities","(468,903)","","","(610,363)","","","1,593,379"],["Increase (decrease) in cash, cash equivalents and restricted cash","167,176","","","(1,563,618)","","","1,612,888"]] [[/GREPCENT_TABLE]] 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, payment processing fees, bandwidth and connectivity, server maintenance and software licensing fees. Net cash provided by operating activities was $234.9 million, $195.2 million and $133.1 million for the years ended December 31, 2023, 2022 and 2021, respectively, for which the increases in each year were primarily driven by an increase in cash collections from higher revenues, higher interest income in our marketable securities portfolio resulting from higher interest rates and a lower cash bonus, partially offset by higher lease payments, restructuring costs and acquisition related compensation payments. Investing Activities Net cash provided by investing activities was $401.2 million for the year ended December 31, 2023 compared to $1.1 billion used in investing activities for the year ended December 31, 2022. The increase in cash provided by investing activities was primarily driven by a $1.3 billion net activity in our marketable securities portfolio and a $206.1 million decline in cash paid for acquisition of businesses, net of cash acquired. Capital expenditures increased $9.5 million, primarily due to $16.5 million related to our AI/ML offerings resulting from the Paperspace acquisition partially offset by a $7.0 million decrease related to legacy product offerings. 61 Net cash used in investing activities was $1.1 billion for the year ended December 31, 2022 compared to $113.6 million for the year ended December 31, 2021. The increase was driven by our investment in marketable securities of $1.7 billion, the acquisition of Cloudways of $305.2 million and purchase of property and equipment of $9.3 million, partially offset by maturities of marketable securities of $956.8 million. Financing Activities Net cash used in financing activities of $468.9 million and $610.4 million for the years ended December 31, 2023 and 2022, respectively, was primarily due to the repurchase and retirement of our common stock for $488.5 million and $600.0 million, respectively. Net cash provided by financing activities of $1.6 billion for the year ended December 31, 2021 was primarily due to net proceeds from our Convertible Notes issuance of $1.5 billion and IPO of $723.0 million (including $1.4 million paid in fiscal year 2020), partially offset by repayments on the Credit Facility and notes payable of $263.2 million and repurchase of our common stock of $350.0 million. Contractual Obligations and Commitments We have various contractual obligations and commitments, such as long-term leases, purchase commitments and long-term debt, that are disclosed in the footnotes to the consolidated financial statements. See Note 7. Debt; Note 8. Leases; and Note 9. Commitments and Contingencies to our Consolidated Financial Statements included in Part II, Item 8. “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K for further information regarding these commitments. Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these 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. We believe that the following accounting policies involve a greater degree of judgment and complexity in the preparation of our consolidated financial statements. We have other significant accounting policies that are more fully described in Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. Both our critical and significant accounting policies are important to an understanding of the consolidated financial statements. Revenue Recognition We recognize revenue in accordance with Accounting Standards Codification (or ASC), Topic 606, Revenue from Contracts with Customers, or ASC 606. We account for revenue using the following steps: 1. Identify the contract with a customer We consider the terms and conditions of the contract and our customary business practices in identifying our contracts under ASC 606. We determine we have a contract with a customer when the customer agrees to the terms of service, we can identify each party’s rights regarding the services to be transferred, we can identify the payment terms for the services, we have determined the customer has the ability and intent to pay and the contract has commercial substance. We apply judgment in determining the customer’s ability and intent to pay, which is based on a variety of factors, including the customer’s historical payment experience or, in the case of a new customer, we apply security checks and validate their payment method. 2. Identify the performance obligations in the contract. Our performance obligation is to provide our cloud-based infrastructure for customers to use at the customers’ election. The availability of services is free of charge, and therefore we have no performance obligation until the customer elects to use the services. 3. Determine the transaction price. The transaction price is calculated based on the customer’s usage for the month at an hourly rate that is published on the Company’s website. None of our contracts contain a significant financing component. 62 4. Allocate the transaction price to performance obligations in the contract. The transaction price is calculated based on actual monthly usage and pricing that is published on the Company’s website. This is considered a single performance obligation, and thus the entire transaction price is allocated to the single performance obligation. 5. Recognize revenue when or as we satisfy a performance obligation. We offer mission-critical solutions across Infrastructure-as-a-Service (IaaS), including our Droplet virtual machines, storage and networking offerings; Platform-as-a-Service (PaaS), including our Managed Database and Managed Kubernetes offerings; Software-as-a-Service (SaaS), including our Managed Hosting and Marketplace offerings; and AI/ML, including our Machines, Notebooks and Deployments offerings. We recognize revenue based on the customer utilization of these resources. Customer contracts are primarily month-to-month and generally 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. Our global cloud platform is supported by various third parties. We considered the principal versus agent guidance in ASC 606 and concluded that we are the principal for all services provided to its customers. 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. Timing of revenue recognition may differ from the timing of invoicing to customers. We record a receivable when revenue is recognized prior to invoicing. Any payments received in advance of billing are a contract liability, which is recorded as Deferred revenue within Total current liabilities on the Consolidated Balance Sheets. Business Combinations We apply the provisions of ASC 805, Business Combinations (“ASC 805”), in accounting for our acquisitions. ASC 805 requires that we evaluate whether a transaction pertains to an acquisition of assets or to an acquisition of a business. A business is defined as an integrated set of assets and activities that is capable of being conducted and managed for the purpose of providing a return to investors. Asset acquisitions are accounted for by allocating the cost of the acquisition to the individual assets and liabilities assumed on a relative fair value basis; whereas the acquisition of a business requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at the acquisition date fair values. Goodwill as of the acquisition date represents the excess purchase price over the fair value of identifiable net assets acquired in a business combination. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as any contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the business acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of a business acquisition’s measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations. Accounting for business combinations requires us to make significant estimates and assumptions, especially at the acquisition date, to determine the fair value of assets acquired and liabilities assumed, including the selection of valuation methodologies, estimates of future revenue and cash flows and discount rates in determining the fair value of intangible assets. Although we believe that the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results. In addition, uncertain tax positions and tax related valuation allowances assumed in a business combination are initially estimated as of the acquisition date. We reevaluate these items quarterly based upon facts and circumstances that existed as of the acquisition date with any adjustments to our preliminary estimates being recorded to goodwill if identified within the measurement period. Subsequent to the measurement period or our final determination of the tax allowance’s or contingency’s estimated value, whichever comes first, changes to these uncertain tax positions and tax related valuation allowances will affect our provision for income taxes in our consolidated statement of operations and could have a material impact on our results of operations and financial position. 63 Recently Adopted Accounting Pronouncements There were no recently adopted accounting pronouncements during the year ended December 31, 2023. See Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements in Part II, Item 8. “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K for recently issued accounting pronouncements. Non‑GAAP Financial Measures To supplement our 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 EBITDA and adjusted EBITDA margin and (ii) non-GAAP net income and non-GAAP diluted net income per share. 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 EBITDA and Adjusted EBITDA Margin We define adjusted EBITDA as net income (loss) attributable to common stockholders, adjusted to exclude depreciation and amortization, stock-based compensation, interest expense, acquisition related compensation, acquisition and integration related costs, income tax expense, loss on extinguishment of debt, restructuring and other charges, restructuring related charges, impairment of long-lived assets, revaluation of warrants, release of VAT reserve, and other income. We define adjusted EBITDA margin as adjusted EBITDA as a percentage of revenue. 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, 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 income (loss) attributable to common stockholders and other GAAP results. The following table presents a reconciliation of Net income (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: 64 [[GREPCENT_TABLE]] [["","","","","","Year Ended December 31,"],["(In thousands)","","","","","2023","","2022","","2021"],["GAAP Net income (loss) attributable to common stockholders","","","","","$","19,409","","","$","(27,804)","","","$","(19,503)"],["Adjustments:"],["Depreciation and amortization","","","","","117,866","","","102,232","","","88,371"],["Stock-based compensation(1)","","","","","115,019","","","105,829","","","61,577"],["Interest expense","","","","","8,945","","","8,396","","","3,744"],["Acquisition related compensation","","","","","27,763","","","9,443","","","\u2014"],["Acquisition and integration related costs","","","","","6,145","","","5,439","","","469"],["Income tax expense","","","","","7,367","","","3,919","","","1,302"],["Loss on extinguishment of debt","","","","","\u2014","","","407","","","3,435"],["Restructuring and other charges","","","","","20,887","","","\u2014","","","\u2014"],["Restructuring related charges(2)","","","","","(23,535)","","","\u2014","","","\u2014"],["Impairment of long-lived assets","","","","","1,140","","","1,635","","","285"],["Revaluation of warrants(3)","","","","","\u2014","","","\u2014","","","(556)"],["Release of VAT reserve(4)","","","","","\u2014","","","\u2014","","","(3,188)"],["Other income, net(5)","","","","","(23,825)","","","(10,615)","","","707"],["Adjusted EBITDA","","","","","$","277,181","","","$","198,881","","","$","136,643"],["As a percentage of revenue:"],["Net income (loss) margin","","","","","3","%","","(5)","%","","(5)","%"],["Adjusted EBITDA margin","","","","","40","%","","35","%","","32","%"]] [[/GREPCENT_TABLE]] ___________________ (1)For the year ended December 31, 2023, non-GAAP stock-based compensation excludes the $31.3 million reversal related to the former CEO’s forfeited MRSU award that is reported in Restructuring related charges, as well as $3.9 million that is reported in Restructuring and other charges, in the table above. (2)Primarily consists of the $31.3 million reversal of stock-based compensation related to the former CEO’s forfeited MRSU award, partially offset by salary continuation charges, executive reorganization charges including severance, CEO search firm fees, and other legal and professional service costs. (3)Immediately prior to the IPO, all shares of the convertible preferred stock then outstanding automatically converted into shares of common stock, and the redeemable convertible preferred stock warrants automatically converted into common stock warrants. Therefore, as the warrants no longer permitted the holder to purchase redeemable shares of preferred stock, the warrant liability was remeasured and reclassified to Additional paid-in capital. The common stock warrants were fully exercised during the year ended December 31, 2021. (4)Relates to the resolution of certain tax matters in certain jurisdictions with relevant authorities. (5)For the years ended December 31, 2023 and 2022, Other income, net primarily consists of interest income from our marketable securities. For the year ended December 31, 2021, amounts are attributable to third-party consulting costs to enhance our finance function. Non-GAAP Net Income and Non-GAAP Diluted Net Income Per Share We define non-GAAP net income as net income (loss) attributable to common stockholders, excluding stock-based compensation, acquisition related compensation, amortization of acquired intangibles, acquisition and integration related costs, loss on extinguishment of debt, restructuring and other charges, restructuring related charges, impairment of long-lived assets, revaluation of warrants, release of VAT reserve and other unusual or non-recurring transactions as they occur. We define non-GAAP diluted net income per share as non-GAAP net income divided by the weighted-average diluted shares outstanding, which includes the potentially dilutive effect of our stock options, RSUs, PRSUs, and Convertible Notes. 65 Prior to 2023, we calculated the income tax effects of non-GAAP adjustments based on the applicable statutory tax rate for the relevant jurisdiction, except for those items which were non-taxable or subject to valuation allowances for which the tax expense (benefit) was calculated at 0%. As a result, U.S. income tax effects of non-GAAP adjustments were subject to a valuation allowance and, therefore, were taxed at 0%. Beginning January 1, 2023, we used a tax rate of 17%, which we believe is a reasonable estimate of our long-term effective tax rate applicable to non-GAAP pre-tax income for 2023. We believe non-GAAP diluted net income per share provides our management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations, as this metric generally eliminates the effects of unusual or non-recurring items from period to period for reasons unrelated to overall operating performance. The following table presents a reconciliation of Net income (loss) attributable to common stockholders, the most directly comparable financial measure stated in accordance with GAAP, to Non-GAAP Net income for each of the periods presented: 66 [[GREPCENT_TABLE]] [["","","","","","Year Ended December 31,"],["(In thousands, except per share amounts)","","","","","2023","","2022","","2021"],["GAAP Net income (loss) attributable to common stockholders","","","","","$","19,409","","","$","(27,804)","","","$","(19,503)"],["Stock-based compensation(1)","","","","","115,019","","","105,829","","","61,577"],["Acquisition related compensation","","","","","27,763","","","9,443","","","\u2014"],["Amortization of acquired intangible assets","","","","","18,967","","","6,301","","","671"],["Acquisition and integration related costs","","","","","6,145","","","5,439","","","469"],["Loss on extinguishment of debt","","","","","\u2014","","","407","","","3,435"],["Restructuring and other charges","","","","","20,887","","","\u2014","","","\u2014"],["Restructuring related charges(2)","","","","","(23,535)","","","\u2014","","","\u2014"],["Impairment of long-lived assets","","","","","1,140","","","1,635","","","285"],["Revaluation of warrants(3)","","","","","\u2014","","","\u2014","","","(556)"],["Release of VAT reserve(4)","","","","","\u2014","","","\u2014","","","(3,188)"],["Non-GAAP income tax adjustment(6)","","","","","(25,469)","","","(34)","","","235"],["Non-GAAP Net income","","","","","$","160,326","","","$","101,216","","","$","43,425"],["Non-cash charges related to convertible notes(5)","","","","","$","6,249","","","$","5,910","","","$","696"],["Non-GAAP Net income used to compute net income per share, diluted","","","","","$","166,575","","","$","107,126","","","$","44,121"],["GAAP Net income (loss) per share attributable to common stockholders, diluted","","","","","$","0.20","","","$","(0.28)","","","$","(0.21)"],["Stock-based compensation(1)","","","","","1.10","","","0.91","","","0.54"],["Acquisition related compensation","","","","","0.26","","","0.09","","","\u2014"],["Amortization of acquired intangible assets","","","","","0.18","","","0.06","","","0.02"],["Acquisition and integration related costs","","","","","0.06","","","0.06","","","\u2014"],["Loss on extinguishment of debt","","","","","\u2014","","","\u2014","","","0.04"],["Restructuring and other charges","","","","","0.20","","","\u2014","","","\u2014"],["Restructuring related charges(2)","","","","","(0.23)","","","\u2014","","","\u2014"],["Impairment of long-lived assets","","","","","0.01","","","0.01","","","\u2014"],["Revaluation of warrants(3)","","","","","\u2014","","","\u2014","","","(0.01)"],["Release of VAT reserve(4)","","","","","\u2014","","","\u2014","","","(0.03)"],["Non-cash charges related to convertible notes(5)","","","","","0.06","","","0.06","","","0.02"],["Non-GAAP income tax adjustment(6)","","","","","(0.25)","","","\u2014","","","\u2014"],["Non-GAAP Net income per share, diluted","","","","","$","1.59","","","$","0.91","","","$","0.37"],["GAAP weighted-average shares used to compute net income (loss) per share, diluted","","","","","96,415","","100,806","","93,224"],["Weighted-average dilutive effect of potentially dilutive securities","","","","","8,403","","17,372","","24,804"],["Non-GAAP weighted-average shares used to compute net income per share, diluted","","","","","104,818","","118,178","","118,028"]] [[/GREPCENT_TABLE]] ______________ (1)For the year ended December 31, 2023, non-GAAP stock-based compensation excludes the $31.3 million reversal related to the former CEO’s forfeited MRSU award that is reported in Restructuring related charges, as well as $3.9 million that is reported in Restructuring and other charges, in the table above. 67 (2)Primarily consists of the $31.3 million reversal of stock-based compensation related to the former CEO’s forfeited MRSU award, partially offset by salary continuation charges, executive reorganization charges including severance, CEO search firm fees, and other legal and professional service costs. (3)Immediately prior to the IPO, all shares of the convertible preferred stock then outstanding automatically converted into shares of common stock, and the redeemable convertible preferred stock warrants automatically converted into common stock warrants. Therefore, as the warrants no longer permitted the holder to purchase redeemable shares of preferred stock, the warrant liability was remeasured and reclassified to Additional paid-in capital. The common stock warrants were fully exercised during the year ended December 31, 2021. (4)Relates to the resolution of certain tax matters in certain jurisdictions with relevant authorities. (5)Consists of non-cash interest expense for amortization of deferred financing fees related to the Convertible Notes. (6)Prior to 2023, we calculated the income tax effects of non-GAAP adjustments based on the applicable statutory tax rate for the relevant jurisdiction, except for those items which were non-taxable or subject to valuation allowances for which the tax expense (benefit) was calculated at 0%. As a result, U.S. income tax effects of non-GAAP adjustments were subject to a valuation allowance and, therefore, were taxed at 0%. Beginning January 1, 2023, we used a tax rate of 17%, which we believe is a reasonable estimate of our long-term effective tax rate applicable to non-GAAP pre-tax income for 2023.