DigitalOcean Holdings Inc

(in thousands, except share and per share amounts)

Note 1. Nature of the Business and Organization

DigitalOcean Holdings, Inc. and its subsidiaries (collectively, the “Company”, “we”, “our”, “us”) is a leading cloud computing platform offering on-demand infrastructure, platform and software tools for startups and growing digital-native 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 solutions across Infrastructure-as-a-Service (“IaaS”), including Droplet virtual machines, storage and networking offerings; Platform-as-a-Service (“PaaS”), including Managed Database and Managed Kubernetes offerings; Software-as-a-Service (“SaaS”), including Managed Hosting and Marketplace offerings; and artificial intelligence and machine learning (“AI/ML”), including Machines, Notebooks and Deployments offerings.

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

Note 2. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include accounts of the Company and all wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments, which include normal recurring adjustments, necessary for a fair statement of the Company’s financial position as of September 30, 2024, results of operations for the three and nine months ended September 30, 2024 and 2023, cash flows for the nine months ended September 30, 2024 and 2023, and stockholders' deficit for the three and nine months ended September 30, 2024 and 2023.

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 including estimation of the probability of performance vesting conditions, the incremental borrowing rate used to determine lease liabilities, valuation allowances against deferred tax assets, fair value of financial instruments, and the fair value and useful lives of tangible and intangible assets acquired and liabilities assumed resulting from business combinations. Management bases its estimates on historical experience and on various other assumptions which management believes to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

Restricted Cash

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

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

Accounts Receivable Net of Allowance for Expected Credit Losses

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

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

Deferred Revenue

Deferred revenue was $5,575 and $5,340 as of September 30, 2024 and December 31, 2023, respectively. Revenue recognized during the three months ended September 30, 2024 and 2023 was $441 and $624, respectively, and $3,375 and $3,424 during the nine months ended September 30, 2024 and 2023, respectively, which was included in each deferred revenue balance at the beginning of each respective period.

The Company has performance obligations associated with commitments in customer contracts for future services that have not yet been recognized in our condensed consolidated financial statements. While our customer agreements typically do not contractually bind customers to a specific usage or term, we have a limited number of contracts with original terms that exceed a one year commitment period and require the customer to spend a minimum amount over that term. As of September 30, 2024, we expect revenue of approximately $10,053 to be recognized in future periods from remaining performance obligations for contracts that exceed a one year commitment. The weighted-average remaining life of these contracts is 1.9 years. The amount and timing of revenue recognition is largely driven by customer usage.

Segment Information

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

Geographical Information

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

Revenue derived from customers in the United States was 33% and 32% of total revenue for the three and nine months ended September 30, 2024, respectively, and 30% of total revenue for the three and nine months ended September 30, 2023.

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

Concentration of Credit Risk

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

The Company’s customer base consists of a significant number of geographically dispersed customers. No customer represented 10% or more of accounts receivable, net as of September 30, 2024 and December 31, 2023. Additionally, no customer accounted for 10% or more of total revenue during the three and nine months ended September 30, 2024 and 2023.

Recent Accounting Pronouncements – Pending Adoption

In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-09, Income Taxes (Topic 740)—Improvements to Income Tax Disclosures (“ASU 2023-09”). ASU 2023-09 requires that an entity disclose specific categories in the effective tax rate reconciliation as well as provide additional information for reconciling items that meet a quantitative threshold. Further, ASU 2023-09 requires certain disclosures of state versus federal income tax expense and taxes paid. The amendments in ASU 2023-09 are required to be adopted for fiscal years beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued. The amendments should be applied on a prospective basis although retrospective application is permitted. The Company is currently evaluating the impact of adoption on its financial disclosures.

In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”). ASU 2023-07 expands public entities’ segment disclosures by requiring disclosure of significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss, an amount and description of its composition for other segment items, and interim disclosures of a reportable segment’s profit or loss and assets. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023 and for interim periods within fiscal years beginning after December 15, 2024, with early application permitted. The Company is currently evaluating the impact of adopting ASU 2023-07 on its consolidated financial statements and disclosures.

Note 3. Acquisitions, Goodwill and Intangible Assets

Paperspace Co.

On July 5, 2023 (the “Paperspace Acquisition Date”), the Company consummated a business combination acquiring 100% of Paperspace Co. (“Paperspace”) for total cash consideration of $100,399. Included in the consideration paid was a contribution of $11,100 to an escrow account held by a third party on the Paperspace Acquisition Date to support certain post-closing indemnification obligations. During the three months ended September 30, 2024, the indemnification period expired and the remaining indemnity escrow fund was distributed to the participating Paperspace stockholders in accordance with the acquisition agreement.

This acquisition has been accounted for as a business combination and the results of Paperspace’s operations have been included in the accompanying condensed consolidated financial statements since the Paperspace Acquisition Date. The acquisition and integration of Paperspace’s advanced technology into the Company’s platform will extend the

Company’s offerings, enabling customers to more easily test, develop and deploy artificial intelligence and machine learning (“AI/ML”) applications, and augment and enhance existing AI/ML applications.

During the nine months ended September 30, 2024, goodwill increased $352 due to measurement period adjustments for the business combination. The following table sets forth the final allocation of the purchase price and summarizes the fair values of the assets acquired and liabilities assumed at the Paperspace Acquisition Date:

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

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

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

Unaudited Pro Forma Financial Information

The unaudited pro forma information below summarizes the combined results of the Company and Paperspace as if the Company’s acquisition of Paperspace closed on January 1, 2022 but does not necessarily reflect the combined actual results of operations of the Company and Paperspace that would have been achieved, nor are they necessarily indicative of future results of operations. The unaudited pro forma information reflects certain adjustments that were directly attributable to the acquisition of Paperspace, including additional amortization of acquired assets and the timing of nonrecurring acquisition and integration related costs, and other adjustments the Company believes are reasonable for the pro forma presentation. If Paperspace had been acquired on January 1, 2022, it would not have had a material impact to revenue for the three and nine months ended September 30, 2023.

Contingent Compensation for Acquisitions

Contingent compensation represents compensation for post-combination services because the payments are contingent on continuing employment of the Paperspace founders, Cloudways seller, and Snapshooter Limited founder at each payment date. Contingent compensation costs related to payments due to certain Paperspace founders for $10,120, of which $5,060 was earned and paid on July 5, 2024, and $5,060 was earned during the three months ended September 30, 2024.

Contingent compensation costs related to payments due to a Cloudways seller for $38,830, of which $16,851 was earned and paid on September 1, 2023, $7,326 was earned and paid on March 1, 2024 and $7,326 was earned and paid on September 1, 2024. On October 30, 2024, the Cloudways seller resigned from the Company. In recognition of the Cloudways seller’s service, the Company has agreed to make the remaining payment of $7,326 following the resignation date.

Contingent compensation costs related to payments due to a SnapShooter Limited founder for $1,000 was earned and paid on January 4, 2024.

Note 4. Marketable Securities

The following is a summary of available-for-sale marketable securities, excluding those securities classified within cash and cash equivalents, on the Condensed Consolidated Balance Sheets as of December 31, 2023. The Company did not hold marketable securities as of September 30, 2024, as they were reallocated at maturity to cash and money market funds during the three months ended March 31, 2024.

Interest income from investments was $4,991 and $5,007 for the three months ended September 30, 2024 and 2023, respectively, and $15,393 and $19,071 for the nine months ended September 30, 2024 and 2023, respectively.

Note 5. Fair Value Measurements

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

The Company classifies its highly liquid money market funds and U.S. treasury securities within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets. The Company classifies its commercial paper investments within Level 2 because they are valued using inputs other than quoted prices that are directly or indirectly observable in the market, including readily available pricing sources for the identical underlying security which may not be actively traded. The Company had no Level 3 financial assets as of September 30, 2024 and December 31, 2023.

Financial Instruments Not Recorded at Fair Value on a Recurring Basis

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

The carrying value of the Convertible Notes as of September 30, 2024 and December 31, 2023 was net of unamortized debt issuance costs of $16,530 and $22,202, respectively.

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

Note 6. Balance Sheet Details

Property and equipment, net

Property and equipment, net consisted of the following:

Depreciation expense on property and equipment was $28,675 and $22,912 for the three months ended September 30, 2024 and 2023, respectively, and $79,294 and $66,956 for the nine months ended September 30, 2024 and 2023, respectively.

The Company capitalized costs related to the development of computer software for internal use of $8,713 and $5,070 for the nine months ended September 30, 2024 and 2023, respectively, which is included in internal-use software costs within Property and equipment, net. Amortization expense related to internal-use software was $1,563 and $1,991 for the three months ended September 30, 2024 and 2023, respectively, and $4,490 and $6,898 for the nine months ended September 30, 2024 and 2023, respectively.

Prepaid expenses and other current assets

Prepaid expenses and other current assets consisted of the following:

Note 7. Debt

Credit Facility

In February and March 2020, the Company entered into and subsequently amended a second amended and restated credit agreement with KeyBank National Association as administrative agent. In November 2021, the Company further amended such credit agreement to revise certain covenants that restricted the incurrence of indebtedness to permit the issuance of the convertible notes discussed below. In March 2022, the Company entered into a third amended and restated credit agreement (the “Credit Facility”) to, among other modifications,

(i) remove the term loan component of the existing credit facility which had been previously repaid in full;

(ii) increase the maximum borrowing limit of the revolving credit facility from $150,000 to $250,000;

(iii) extend the maturity date;

(iv) replace the existing maximum total net leverage ratio financial covenant with a maximum senior secured net leverage ratio financial covenant;

(v) eliminate the financial covenant requirement of maintaining a minimum debt service coverage ratio;

(vi) reduce the interest rates applicable to any principal amounts outstanding on the revolving credit facility as well as the annual commitment fee for unused amounts on the revolving credit facility; and

(vii) replace the benchmark reference rate for U.S. Dollar loans from LIBOR to the forward-looking term rate based on the secured overnight financing rate plus a customary adjustment (“Adjusted Term SOFR”).

At September 30, 2024, the Company had available borrowing capacity of $250,000 on the Credit Facility. The Credit Facility will mature on the earlier of (a) March 29, 2027 and (b) 90 days before the maturity date applicable to any outstanding convertible notes issued by the Company in an aggregate principal amount equal to or greater than $100,000.

The Credit Facility is secured by a first-priority security interest in substantially all of the assets of the Company. The Credit Facility contains certain financial and operational covenants, including a maximum senior secured net leverage ratio financial covenant of 3.50 x. As of September 30, 2024, the Company was in compliance with all covenants under the Credit Facility.

The per annum interest rate applicable to any principal amounts outstanding under the Credit Facility for U.S. Dollar loans will be equal to (i) Adjusted Term SOFR plus (ii) an applicable margin varying from 1.25% to 2.00%, subject to a pricing grid based on the senior secured net leverage ratio. The Credit Facility provides for an annual commitment fee varying from 0.20% to 0.30%, also subject to a pricing grid based on the senior secured net leverage ratio, applied to the average daily unused amount of the revolving credit facility. The Company incurred commitment fees on the unused balance of the Credit Facility of $128 for the three months ended September 30, 2024 and 2023, and $381 and $379 for the nine months ended September 30, 2024 and 2023, respectively.

Amortization of deferred financing fees was $105 for the three months ended September 30, 2024 and 2023, and $315 for the nine months ended September 30, 2024 and 2023.

Convertible Notes

In November 2021, the Company issued$1,500,000 aggregate principal amount of Convertible Notes in a private offering, including the exercise in full of the over-allotment option granted to the initial purchasers of $200,000. The Convertible Notes are senior unsecured obligations of the Company and do not bear interest, and the principal amount of the Convertible Notes does not accrete. The Convertible Notes will mature on December 1, 2026 unless earlier converted, redeemed, or repurchased. Amortization of deferred financing fees for the three months ended September 30, 2024 and 2023 was $1,893 and $1,883, respectively, and $5,672 and $5,643 for the nine months ended September 30, 2024 and 2023, respectively.

During the three months ended September 30, 2024, none of the circumstances allowing holders to convert the Convertible Notes were met.

Note 8. Commitments and Contingencies

Purchase Commitments

As of September 30, 2024, 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, 2023.

Leases

As of September 30, 2024, the Company had $167,301 of estimated undiscounted fixed payment obligations for leases of co-location space at data center facilities and, to a lesser extent, office space, that have not yet commenced and were not included on the Condensed Consolidated Balance Sheets. These leases are expected to commence between October 2024 and August 2025, and have a weighted average lease term of 6 years.

Letters of Credit

In conjunction with the execution of certain office space operating leases, a letter of credit in the amount of $1,747 was issued and outstanding as of September 30, 2024 and December 31, 2023. No draws have been made under the letter of credit. These funds are included as Restricted cash on the Condensed Consolidated Balance Sheets as they are related to long-term operating leases and are included in beginning and ending Cash, cash equivalents and restricted cash in the Condensed Consolidated Statements of Cash Flows. The letter of credit was reduced on an annual basis until the end of 2022 and, since January 1, 2023, the deposit held is the minimum threshold required until the lease expiration.

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.

Note 9. Stockholders’ Equity

Share Buyback Program

On February 20, 2024, the Company’s Board of Directors approved the repurchase of up to an aggregate of $140,000 of its common stock (“2024 Share Buyback Program”). Pursuant to the 2024 Share Buyback Program, repurchases of the Company’s common stock will be made at prevailing market prices through open market purchases or in negotiated transactions off the market. The repurchase program is authorized through fiscal year 2025; however, the Company is not obligated to acquire any particular amount of common stock and the program may be extended, modified, suspended or discontinued at any time at the Company’s discretion.

During the three months ended September 30, 2024, the Company repurchased and retired 297,827 shares of common stock pursuant to the 2024 Share Buyback Program for an aggregate purchase price of $11,370. During the nine months ended September 30, 2024, the Company repurchased and retired 795,191 shares of common stock for an aggregate purchase price of $29,553. All purchased shares were retired and are reflected as a reduction of Common stock for the par value of shares, with the excess applied to Additional paid-in capital. Accrued costs related to share repurchases were $2,411 and $4,885 as of September 30, 2024 and December 31, 2023, respectively, as reported as Other current liabilities in the Condensed Consolidated Balance Sheets. As of September 30, 2024, the dollar value of shares that remained available to be repurchased by the Company under the 2024 Share Buyback Program was $110,447.

Note 10. Stock-Based Compensation

Equity Incentive Plan

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

Stock Options

Stock options granted have a maximum term often years from the grant date, are exercisable upon vesting and typically vest over a period offour years. Stock option activity for the nine months ended September 30, 2024 was as follows:

The aggregate intrinsic value represents the difference between the fair value of common stock and the exercise price of outstanding in-the-money options. The aggregate intrinsic value of exercised options for the nine months ended September 30, 2024 and 2023 was $47,392 and $64,463, respectively.

No options were granted during the nine months ended September 30, 2024. The aggregate estimated fair value of stock options granted to participants that vested during the nine months ended September 30, 2024 and 2023 was $5,201 and $10,284, respectively.

As of September 30, 2024, there was $470 of unrecognized stock-based compensation, net of estimated forfeitures, related to outstanding stock options granted that is expected to be recognized over a weighted-average period of 0.21 years.

RSUs

RSUs granted typically vest over four years. RSU activity for the nine months ended September 30, 2024 was as follows:

As of September 30, 2024, there was $161,773 of unrecognized stock-based compensation, net of estimated forfeitures, related to outstanding RSUs granted that is expected to be recognized over a weighted-average period of 2.86 years.

PRSUs

The Company has issued PRSUs which vest based on the achievement of each award’s established performance targets. PRSU activity for the nine months ended September 30, 2024 was as follows:

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

LTIP PRSUs

The Company grants Long Term Incentive Plan (“LTIP”) PRSUs to certain executives of the Company typically during the first half of each fiscal year. A percentage of the LTIP PRSUs becomes eligible to vest based on the Company’s financial performance level at the end of each fiscal year. The number of LTIP PRSUs received will depend on the achievement of financial metrics relative to the approved performance targets. Depending on the actual financial metrics achieved relative to the target financial metrics throughout the defined performance period of the award, the number of LTIP PRSUs that vest could range from 0% to 200% of the target amount and are subject to the Compensation Committee’s approval of the level of achievement against the approved performance targets.

Assuming the minimum performance level is achieved, one-third of the aggregate number of the achieved LTIP PRSUs shall vest on the later of (i) March 1 of the year after grant or (ii)two trading days following the public release of the Company’s financial results, and the remainder shall vest in 8 equal quarterly installments subject, in each case, to the individual’s continuous service through the applicable vesting date.

On March 1, 2023, the Company granted an LTIP PRSU award (the “2023 LTIP PRSU”). The financial performance level under the PRSUs was the percentage equal to the sum of the revenue growth percentage and profitability percentage, which on February 21, 2024, was determined to be achieved at 38.5% of the target amount. This resulted in a performance factor reduction of 305,948 shares from the original maximum shares achievable of 378,882, excluding forfeitures.

On April 11, 2024, the Company granted an LTIP PRSU award (the “2024 LTIP PRSU”). The financial performance level under the PRSUs can be attained based on the achievement of certain revenue and adjusted free cash flow margin targets. Under the 2024 LTIP PRSU,75% of the award can be achieved based on the revenue targets and 25% of the award can be achieved based on the adjusted free cash flow margin targets. The target shares granted under the 2024 LTIP PRSU was 84,472. The actual number of shares that are received under the 2024 LTIP PRSU may be higher or lower than the target shares based on the actual financial metrics achieved relative to the target financial metrics for fiscal year 2024.

As of September 30, 2024, there was $2,211 of unrecognized stock-based compensation related to LTIP PRSUs that is expected to be recognized over a weighted-average period of 2.27 years.

MRSUs

On February 12, 2024, Padmanabhan Srinivasan joined the Company in the role of CEO. As part of his compensation package, Mr. Srinivasan received an MRSU with an estimated grant date fair value of approximately $8 million, which vests upon the satisfaction of certain service conditions and the achievement of certain Company stock price goals during afive-year performance period, as described below. A cumulative percentage of the MRSU target is earned based on the achievement of stock price goals, measured based on the average of the Company’s closing stock price over a consecutive 60 trading day period during the performance period as set forth in the table below:

The target number of achievable shares is 193,178 and the maximum number of achievable shares is 289,767. There will be no pro-rata or straight-line interpolation vesting for achievement of a stock price target between the stock price targets, except in the event of a qualifying termination.

If the stock price targets are achieved during the first three years following the grant date (the “First Performance Period”),50% of the eligible MRSUs will vest on the third anniversary of the grant date and the remaining 50% of the eligible MRSUs will vest on the fifth anniversary of the grant date. Each tranche of MRSUs whose stock price target was not achieved during the First Performance Period that is subsequently achieved during the period between the third anniversary of the grant date and fifth anniversary of the grant date will vest on the fifth anniversary of the grant date.

The unvested balance of 3,000,000 shares related to the former CEO’s MRSU were forfeited and canceled during the first quarter of 2024. There wasno unrecognized stock-based compensation related to the former CEO’s MRSU award.

As of September 30, 2024, there was $6,651 of unrecognized stock-based compensation related to the current CEO’s MRSU award that is expected to be recognized over a weighted-average period of 4.42 years.

ESPP

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

2023 Offering

A new offering period commenced on November 21, 2023, and consists oftwo purchase periods, the first of which had a purchase date of May 20, 2024 and the second will have a purchase date of November 20, 2024 (the “2023 Offering”). In connection with the purchase period that ended on May 20, 2024, there were 94,162 shares of common stock, net of shares withheld for taxes, purchased by employees at a price of $24.15.

The Company recorded stock-based compensation associated with the ESPP of $474 and $689 during the three months ended September 30, 2024 and 2023, respectively, and $1,317 and $1,909 for the nine months ended September 30, 2024 and 2023, respectively. As of September 30, 2024, $1,642 has been withheld on behalf of employees for the second purchase of the 2023 Offering.

Stock-Based Compensation

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

(1) Amount includes $31.3 million of recognized stock-based compensation related to our former CEO’s MRSUs that was estimated to be forfeited and therefore reversed for the three and nine months ended September 30, 2023.

Note 11. Net Income per Share Attributable to Common Stockholders

The following table presents the calculation of basic and diluted net income per share:

Potentially dilutive securities that were not included in the diluted per share calculations because they would be anti-dilutive were as follows:

Note 12. Income Taxes

The computation of the provision for, or benefit from, income taxes for an interim period is determined using an estimated annual effective tax rate, adjusted for discrete items, if any. Each quarter, the Company updates the estimated annual effective tax rate and records a year-to-date adjustment to the tax provision as necessary.

For the three and nine months ended September 30, 2024, the Company recorded a tax benefit of $3,308 and a tax expense of $2,479, respectively. The effective tax rate for the three and nine months ended September 30, 2024 was (11.2)% and 3.6%, respectively. The effective tax rate differs from the statutory rate primarily as a result of having a full valuation allowance in the U.S. and the mix of income in the foreign jurisdictions in which the Company conducts business, and excess tax benefits from stock-based compensation and utilization of research and development credits.

For the three and nine months ended September 30, 2023, the Company recorded a tax expense of $17,939 and $9,774, respectively. The effective tax rate for the three and nine months ended September 30, 2023, was 48.3% and 73.8%, respectively. The effective tax rate differs from the statutory rate primarily as a result of being able to benefit from current year losses in the U.S., despite maintaining a valuation allowance against the remaining U.S. deferred tax assets, as well as the mix of income in foreign jurisdictions.

The Organization for Economic Co-operation and Development Pillar Two guidelines published to date include transition and safe harbor rules around the implementation of the Pillar Two global minimum tax of 15%. Based on current enacted legislation effective in 2024, the Company is currently below the threshold of Pillar Two tax. The Company is monitoring developments and evaluating the impacts these new rules will have on its future income tax provision and effective income tax rate.