UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
For the quarterly period ended September 30, 2018
or
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

For the transition period from to

Commission File Number: 001-38275

SendGrid, Inc.

www.sendgrid.com

NYSE: SEND

(Exact name of registrant as specified in its charter)

Delaware	27-0654600
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

1801 California Street, Suite 500

Denver, Colorado 80202
(Address of principal executive offices) (Zip Code)

(888) 985-7363
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒~~(Do~~ ~~not check if a smaller reporting company)~~ Smaller reporting company ☐ Emerging Growth Company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

On ~~July 23~~October 31, 2018, the registrant had 4647,~~387~~357,~~368~~ 102 shares of common stock outstanding.

Table of Contents

SendGrid, Inc.

Quarterly Report on Form 10-Q

For the Quarter Ended ~~June~~September 30, 2018

Table of Contents

		Page
	PART I – FINANCIAL INFORMATION
	Disclosure Regarding Forward-Looking Statements	3
Item 1.	Financial Statements (unaudited)	5
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2018 and 2017	5
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2018 and 2017	5
	Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017	6
	Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017	6
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017	7
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017	7
	Condensed Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2018	8
	Condensed Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2018	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2123
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3540
Item 4	Controls and Procedures	3540
	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	3641
Item 1A.	Risk Factors	3641
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6473
Item 3.	Defaults Upon Senior Securities	6473
Item 4.	Mine Safety Disclosures	6473
Item 5.	Other Information	6573
Item 6.	Exhibits	6573
	Signatures	6876

Table of Contents

Unless the content otherwise requires, references in this Quarterly Report on Form 10-Q to “SendGrid,” “company,” “our,” “us,” and “we” refer to SendGrid, Inc. and where appropriate its consolidated subsidiaries.

“SendGrid” and other trademarks or service marks of SendGrid appearing in this Quarterly Report on Form 10-Q are our property. This Quarterly Report on Form 10-Q contains additional trade names, trademarks, and service marks of other companies, which are the property of their respective owners. We do not intend our use or display of other companies’ trade names, trademarks, or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our potential merger with Twilio Inc., a Delaware corporation, or Twilio, future financial condition, results of operations, business strategy and plans and objectives of management for future operations, as well as statements regarding industry trends, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “believe,” “will,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “could,” “potentially” or the negative of these terms or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions described under the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, regarding, among other things:

· •the ~~our~~occurrence ~~ability~~of any event, change, or other circumstances that could delay or prevent closing of the proposed merger or give rise to ~~effectively~~the ~~sustain~~termination of that certain Agreement and ~~manage~~Plan ~~our~~of ~~growth~~Merger and ~~future~~Reorganization ~~expenses~~dated October 15, ~~and~~2018 ~~our~~by ~~ability~~and toamong ~~achieve~~SendGrid, Twilio, and ~~maintain~~Topaz ~~future~~Merger ~~profitability~~Subsidiary, Inc., a Delaware corporation, or the Merger Agreement;

· •the ~~our~~risk ~~ability~~that SendGrid and Twilio will be unable to ~~attract~~complete ~~new~~the ~~customers~~proposed ~~and~~merger due to ~~maintain~~the ~~and~~failure ~~expand~~to ~~our~~obtain ~~existing~~requisite ~~customer~~stockholder ~~base~~approvals by SendGrid or Twilio or the failure to satisfy other conditions to completion of the proposed merger, including that a governmental entity may prohibit, delay, or refuse to grant regulatory approval for the consummation of the proposed merger;

· •the ~~our~~risk ~~dependence~~that onSendGrid ~~our~~could ~~self-service~~be ~~model~~required to pay a termination fee of up to $69.0 million to Twilio under certain circumstances pursuant to the terms of the Merger Agreement;

· •the ~~our~~risk ~~ability~~that tostockholder ~~scale~~litigation ~~and~~in ~~update~~connection ~~our~~with ~~platform~~the toproposed ~~respond~~merger tomay ~~customers’~~affect ~~needs~~the ~~and~~timing ~~rapid~~or ~~technological~~occurrence ~~change~~of the proposed merger or result in significant costs of defense, indemnification, and liability;

· •the ~~our~~significant ~~reliance~~transaction oncosts ~~third~~which ~~parties,~~have ~~including~~been ~~for~~and ~~strategic~~may ~~relationships~~continue to ~~sell~~be ~~our~~incurred ~~services~~by ~~and~~SendGrid ~~for~~related ~~network~~to ~~connectivity,~~the ~~hosting~~proposed ~~and other services~~merger;

· •the risk that the ~~effects~~expected benefits of ~~increased~~the ~~competition~~proposed onmerger ~~our~~or ~~market~~other ~~and~~commercial ~~our~~opportunities ~~ability~~may otherwise not be fully realized or may take longer to ~~compete~~realize ~~effectively~~than expected;

· •risks ~~our~~associated ~~ability~~with any failure to ~~expand~~closing ~~our~~the ~~operations~~proposed merger, including the potential distraction of employee and ~~increase~~management ~~adoption~~attention during the pendency of ~~our~~the ~~platform~~proposed ~~internationally~~merger, uncertainty about the effect of the proposed merger on SendGrid’s relationships with employees, potential and existing customers and suppliers and other parties, and the impact that the failure of the proposed merger to close could have on the trading price of shares of SendGrid common stock and SendGrid’s operating results;

· •our ability to ~~maintain,~~effectively ~~protect~~sustain and ~~enhance~~manage our ~~brand~~growth and future expenses, and our ability to achieve and maintain future profitability;

· our customers’ and other platform users’ violation of our policies or misuse of our platform;

· the sufficiency of our cash and cash equivalents to satisfy our liquidity needs;

· our failure or the failure of our platform of services to comply with applicable industry standards, laws, and regulations;

· our ability to maintain our corporate culture;

· our ability to hire, retain and motivate qualified personnel;

· our ability to identify targets for, execute on and realize the benefits of potential acquisitions;

· our ability to estimate the size and potential growth of our target market; and

· our ability to maintain proper and effective internal controls.

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~~These~~•our ~~risks~~ability ~~are~~to ~~not~~attract ~~exhaustive.~~new ~~Other~~customers ~~sections of this Quarterly Report on Form 10-Q may include additional factors that could adversely impact our business~~ and ~~financial performance. New risk factors emerge from time~~ to ~~time~~maintain and itexpand ~~is not possible for~~ our ~~management~~existing tocustomer ~~predict~~base; all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in, or implied by, any forward-looking statements.

•our dependence on our self-service model;

•our ability to scale and update our platform to respond to customers’ needs and rapid technological change;

•our reliance on third parties, including for strategic relationships to sell our services and for network connectivity, hosting, and other services;

•the effects of increased competition on our market and our ability to compete effectively;

•our ability to expand our operations and increase adoption of our platform internationally;

•our ability to maintain, protect and enhance our brand;

•our customers’ and other platform users’ violation of our policies or misuse of our platform;

•the sufficiency of our cash and cash equivalents to satisfy our liquidity needs;

•our failure or the failure of our platform of services to comply with applicable industry standards, laws, and regulations;

•our ability to maintain our corporate culture;

•our ability to hire, retain and motivate qualified personnel;

•our ability to identify targets for, execute on and realize the benefits of potential acquisitions;

•our ability to estimate the size and potential growth of our target market; and

•our ability to maintain proper and effective internal controls.

These risks are not exhaustive. Other sections of this Quarterly Report on Form 10-Q may include additional factors that could adversely impact our business and financial performance. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in, or implied by, any forward-looking statements. The forward-looking statements do not assume the consummation of the proposed merger with Twilio unless specifically stated otherwise.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason.

You should read this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance, and achievements may be materially different from what we expect.

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PART I – FINANCIAL INFORMATION

Item 1.Financial Statements

SENDGRID, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except per share amounts)

(Unaudited)

For the Three Months Ended June 30,

For the Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

2018

2017

2018

2017

Revenue

3537,~~675~~199

2728,~~012~~316

68105,~~244~~443

5180,~~843~~159

Cost of revenue

8,~~805~~978

7,~~274~~612

1726,~~293~~271

1321,~~745~~357

Gross profit

2628,~~870~~221

1920,~~738~~704

5079,~~951~~172

3858,~~098~~802

Operating expenses:

Research and development

911,~~871~~049

7,~~139~~545

1829,~~805~~854

1321,~~663~~208

Selling and marketing

89,~~707~~612

67,~~870~~124

1626,~~643~~255

1320,~~458~~582

General and administrative

910,~~165~~606

67,~~494~~684

1828,~~031~~637

1321,~~538~~222

Loss on disposal of assets

-22

6284

Total operating expenses

2731,~~743~~289

2022,~~505~~353

5384,~~541~~830

4063,~~661~~014

Loss from operations

(~~873~~3,068)

(~~767~~1,649)

(25,~~590~~658)

(24,~~563~~212)

Other income (expense):

Interest income

~~626~~759

1,~~116~~875

Interest expense

(56136)

(3229)

(~~104~~240)

(6998)

Adjustment to redeemable preferred stock warrant liability

~~(544)~~84

(~~518~~434)

Other

~~(7)~~22

101

~~(5)~~17

1617

Other income (expense)

~~563~~645

~~(566)~~56

1,~~007~~652

(~~571~~515)

Net loss before provision for income taxes

(~~310~~2,423)

(1,~~333~~593)

(14,~~583~~006)

(34,~~134~~727)

Provision for income taxes

Net loss

(~~310~~2,423)

(1,~~333~~593)

(14,~~583~~006)

(34,~~134~~727)

Weighted average common shares outstanding

4446,~~581~~550

78,~~943~~020

43,~~099~~841

7,~~896~~938

Net loss per share attributable to common stockholders

(0.0105)

(0.1720)

(0.0409)

(0.4060)

Comprehensive loss:

Net loss

(~~310~~2,423)

(1,~~333~~593)

(14,~~583~~006)

(34,~~134~~727)

Change in cumulative foreign currency translation adjustment

(61)

(34)

Comprehensive loss

(~~316~~2,424)

(1,~~332~~591)

(14,~~586~~010)

(34,~~133~~724)

See accompanying notes to condensed consolidated financial statements.

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SENDGRID, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)

	As of June 30,		As of December 31,
	As of September 30,		As of December 31,
	2018		2017
Assets
Current Assets:
Cash and cash equivalents	$	~~182~~186,~~317~~423	$	175,496
Restricted cash		1,~~120~~122		-
Accounts receivable - trade, net of allowance		6,~~103~~756		5,765
Prepaid expenses and other current assets		56,~~599~~128		9,087
Total current assets		~~195~~200,~~139~~429		190,348
Noncurrent Assets:
Property and equipment, net		3435,~~249~~858		29,192
Intangible assets, net		16,~~554~~213		1,795
Other assets		~~322~~964		300
Goodwill		1,648		1,648
Total noncurrent assets		3744,~~773~~683		32,935
Total assets	$	~~232~~245,~~912~~112	$	223,283
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities	$	913,~~405~~612	$	13,837
Current portion of capital lease obligations		6,~~208~~397		6,110
Current portion of deferred rent		1,138		328
Current portion of note payable		2,005		-
Other current liabilities		1,273		1,575
Current portion of deferred rent		1,263		328
Total current liabilities		18,024		21,850
Other current liabilities		1,260		1,575
Total current liabilities		24,537		21,850
Long-Term Obligations, Net of Current Portion:
Capital lease obligations, net of current portion		10,~~492~~165		11,095
Deferred rent, net of current portion		9,561		10,054
Note payable, net of current portion		3,842		-
Other long-term liabilities		532		510
Deferred rent, net of current portion		9,231		10,054
Total long-term obligations, net of current portion:		20,585		21,659
Other long-term liabilities		487		510
Total liabilities		38,609		43,509
Total long-term obligations, net of current portion:		23,725		21,659
Commitment and contingencies (notes 5 - 12)
Total liabilities		48,262		43,509
Commitment and contingencies (notes 5 - 14)
Stockholders’ equity:
Common stock, $0.001 par value, 250,000,000 shares authorized as of Jun. 30, 2018 and Dec. 31, 2017, 46,365,202 and 42,175,647 shares issued and outstanding as of Jun. 30, 2018 and Dec. 31, 2017, respectively		46		39
Common stock, $0.001 par value, 250,000,000 shares authorized as of Sep. 30, 2018 and Dec. 31, 2017, 47,049,147 and 42,175,647 shares issued and outstanding as of Sep. 30, 2018 and Dec. 31, 2017, respectively		47		39
Preferred stock, $0.001 par value, 10,000,000 shares authorized as of Jun. 30, 2018 and Dec. 31, 2017. None issued or outstanding.		-		-
Preferred stock, $0.001 par value, 10,000,000 shares authorized as of Sep. 30, 2018 and Dec. 31, 2017. None issued or outstanding.		-		-
Additional paid-in capital		~~246~~251,~~328~~298		229,594
Accumulated deficit		(5254,~~066~~489)		(49,857)
Accumulated other comprehensive loss		(56)		(2)
Total stockholders’ equity		~~194~~196,~~303~~850		179,774
Total liabilities and stockholders’ equity	$	~~232~~245,~~912~~112	$	223,283

See accompanying notes to condensed consolidated financial statements

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SENDGRID, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	For the Six Months Ended June 30,
	Nine Months Ended September 30,
	2018		2017
Cash flows from operating activities:
Net loss	$	(14,~~583~~006)	$	(34,~~134~~727)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		58,~~243~~385		47,~~562~~048
Stock-based compensation		48,~~640~~082		12,~~381~~677
Adjustment to redeemable preferred stock warrant liability		-		~~518~~434
Non-cash interest expense and other		21		10
Non-cash interest expense		58		22
Loss on disposal of assets and restructuring of assets		~~221~~340		352
Reimbursement of tenant improvements		2,~~434~~464		~~654~~718
Changes in operating assets and liabilities:
Accounts receivable		(~~332~~1,017)		(~~803~~458)
Prepaid expenses and other assets		~~891~~1,244		(~~494~~1,439)
Accounts payable and accrued liabilities		(12,~~673)~~166		24,~~050~~264
Other liabilities		(1,~~129~~728)		261,240
Net cash flows from operating activities		815,~~733~~988		510,~~122~~131
Cash flows from investing activities:
Purchase of property and equipment		(911,~~288~~474)		(34,~~014~~806)
Cash paid for business combination		-		(2,726)
Cash acquired in business combination		-		527
Proceeds from sale of assets		27		9
Net cash flows from investing activities		(911,~~261~~447)		(56,~~204~~996)
Cash flows from financing activities:
Proceeds from stock option exercises		68,~~410~~337		~~264~~396
Proceeds from follow-on public offering, net of $0.7 million underwriting discount		13,716		-
Payments for stock issuance costs		(1,~~167~~346)		(401,523)
Payments for tax withholding on equity awards		(7,~~146~~703)		-
Principal payments on capital lease obligations		(34,~~341~~946)		(25,~~997~~092)
Net cash flows from financing activities		8,472		(2,773)
Principal payments on note payable		(547)
Effect of foreign currency exchange rates on cash		(3)		2
Net cash flows from financing activities		7,511		(6,219)
Net increase (decrease) in cash, cash equivalents, and restricted cash		7,941		(2,853)
Effect of foreign currency exchange rates on cash		(3)		3
Net increase (decrease) in cash, cash equivalents, and restricted cash		12,049		(3,081)
Cash, cash equivalents, and restricted cash at beginning of period		175,496		40,478
Cash, cash equivalents, and restricted cash at end of period	$	~~183~~187,~~437~~545	$	37,~~625~~397
Supplemental disclosure of cash flow information:
Assets acquired under capitalized leases	$	24,~~913~~470	$	811,~~352~~124
Property and equipment purchases included in accounts payable	$	217	$	41
Intangible asset and related prepaid professional services financed via note payable	$	6,363	$	-
Property and equipment purchases included in accounts payable	$	845	$	83
Issuance of common stock for business combination	$	-	$	432
Cash paid for interest	$	93234	$	6942

See accompanying notes to condensed consolidated financial statements

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SENDGRID, INC.

CONDENSED CONSOLIDATED STATEMENTS STOCKHOLDERS’ EQUITY

(In thousands, except share amounts)

(Unaudited)

								Accumulated
				Additional				Other		Total
	Common Stock			Paid-in		Accumulated		Comprehensive		Stockholders'
	Shares	Amount		Capital		Deficit		Loss		Equity
Balance at January 1, 2018	42,175,647	$	39	$	229,594	$	(49,857)	$	(2)	$	179,774
Exercise of common stock options	3,~~286~~946,~~005~~941		34		68,~~407~~333						68,~~410~~337
Vesting of restricted stock units	~~303~~326,~~550~~559		-		-						-
Tax withholding associated with vesting of restricted stock units					(7,~~310~~703)						(7,~~310~~703)
Stock-based compensation					48,~~640~~082						48,~~640~~082
Net loss							(14,~~583~~006)				(14,~~583~~006)
Foreign currency translation adjustment									(34)		(34)
Follow-on offering of common stock	600,000		4		13,712						13,716
Issuance costs associated with IPO and follow-on offering					(1,~~341~~346)						(1,~~341~~346)
Adoption of ASU 2016-09 (Note 2)					626		(626)				-
Balance at June 30, 2018	46,365,202	$	46	$	246,328	$	(52,066)	$	(5)	$	194,303
Balance at September 30, 2018	47,049,147	$	47	$	251,298	$	(54,489)	$	(6)	$	196,850

See accompanying notes to condensed consolidated financial statements

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SENDGRID, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) Organization and Description of Business

SendGrid, Inc. and our wholly owned subsidiaries, SendGrid UK Limited and JCKM, Inc. (“Bizzy”) (collectively, “we,” “us,” “our,” “SendGrid,” or “the Company”), operate a leading digital communication platform that enables businesses to engage with their customers via email reliably, effectively, and at scale. SendGrid’s cloud-based platform allows for frictionless adoption and immediate value creation for businesses, providing their developers and marketers with the tools to seamlessly and effectively reach their customers using email. We maintain business operations in the United States and United Kingdom, with sales to customers in the United States and internationally.

In November 2017, we completed our initial public offering (“IPO”). We sold 9.4 million shares of our common stock at the public offering price of $16.00 per share. We received net proceeds of $136.3 million after deducting underwriting discounts, commissions, and offering expenses. Our common stock began trading on the New York Stock Exchange on November 15, 2017.

On October 15, 2018, we entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Twilio Inc. Refer to Note 14 for additional details.

(2) Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

The accompanying condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Certain information and disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K.

These condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany transactions and account balances have been eliminated in consolidation. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Our results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the full year.

Emerging Growth Company Status

Currently, we are an emerging growth company (“EGC”) as defined by the Jumpstart Our Business Startups Act (“JOBS Act”). The JOBS Act provides that an EGC can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an EGC to delay adoption of certain accounting standards until those standards would otherwise apply to private companies. We elected to take advantage of the extended transition period.

As of June 30, 2018, the market value of orour common stock held by non-affiliates exceeded $700 million. Therefore, effective December 31, 2018, we will cease to be classified as an EGC. As a result, as of December 31, 2018, we will be required to adopt all applicable accounting standards that were effective for any period during 2018.

Use of Estimates

The preparation of consolidated financial statements, in conformity with GAAP, requires estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, the reported amounts of revenue and expenses during the reporting period, and certain information disclosed in the notes to the consolidated financial statements. Actual results could materially differ from ~~these estimates. Significant estimates and assumptions that affect our consolidated financial condition and results of operations include:~~

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SENDGRID, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

these estimates. Significant estimates and assumptions that affect our consolidated financial condition and results of operations include:


 revenue recognition	 deferred taxes and related valuation allowances
 allowance for doubtful accounts and sales returns	 sales and use tax
 income tax uncertainties	 stock-based compensation
 other contingencies	 determination of the fair value of assets acquired and liabilities assumed in business combinations

We review estimates and assumptions periodically, and the effects of revisions are reflected prospectively in the period they occur.

Sales Taxes

We account for sales tax collected from customers and remitted to governmental authorities on a net basis and, therefore, we do not include such tax in revenue or cost of revenue in our consolidated statements of operations and comprehensive loss.

Other

Aside from the treatment of restricted cash on the statements of cash flows (see discussion of ASU 2016-18 below) and our accounting policy election regarding forfeitures on stock awards (see discussion of ASU 2016-09 below), there have been no material changes to our significant accounting policies as described in our December 31, 2017 consolidated financial statements.

Recently Adopted Accounting Standards

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies when transactions should be accounted for as acquisitions (or disposals) of assets or business. We adopted ASU 2017-01 effective January 1, 2018. The adoption did not have a significant impact on our consolidated financial statements and related disclosures.

In November 2016, the FASB issued ASU 2016-18, Statements of Cash Flow (Topic 230): Restricted Cash, which requires that a statement of cash flows explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents are included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amount shown on the statement of cash flows. We adopted ASU 2016-18 effective April 1, 2018. Our condensed consolidated balance sheet as of ~~June~~September 30, 2018 includes $1.1 million of restricted cash related to SendGrid.org (Note 3). The condensed consolidated statement of cash flows includes this restricted cash within the end-of-period total amount shown as “cash, cash equivalents, and restricted cash.” When the SendGrid.org restricted cash is actually disbursed, we will classify it as a use of cash from operating activities. We restated the prior period to conform to current year presentation. For the ~~six~~nine months ended ~~June~~September 30, 2017, this resulted in a $0.1 million decrease in cash used in investing activities.

In August 2016, the FASB issued ASU 2016-15, Statements of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which clarifies classification for certain cash receipts and cash payments on the consolidated statement of cash flows. The standard requires retrospective application for each period presented. We adopted ASU 2016-

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SENDGRID, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements for Employee Share-Based Payment Accounting, which simplifies certain aspects of accounting for share-based payment transactions, including the following:

accounting for income tax consequences;

minimum statutory tax withholdings requirements;

forfeitures;

excess tax benefits in the statement of cash flows; and

classification of employee taxes paid when an employer withholds shares for tax-withholding purposes in the statement of cash flows.

We adopted ASU 2016-09 effective January 1, 2018. We made an accounting policy election to account for forfeitures in stock-based compensation cost as they occur and recorded a cumulative-effect adjustment of $0.6 million to accumulated deficit. The adoption of the remaining provisions of ASU 2016-09 did not have a significant impact on our consolidated financial statements and related disclosures.

New Accounting Pronouncements Not Yet Adopted

In ~~February~~August 2018, the FASB issued ASU 2018-0215, ~~which~~Intangibles—Goodwill ~~allows~~and aOther—Internal-Use ~~reclassification~~Software ~~from~~(Subtopic ~~accumulated~~350-40): ~~other~~Customer's ~~comprehensive~~Accounting ~~income to accumulated deficit~~ for ~~stranded~~Implementation ~~tax~~Costs ~~effects~~Incurred ~~resulting~~in ~~from~~a ~~the~~Cloud ~~Tax~~Computing ~~Cuts~~Arrangement ~~and~~That ~~Jobs~~Is ~~Act~~a ofService ~~2017 (“the 2017 Act”)~~Contract. The ~~ASU~~standard ~~2018-02~~aligns isthe ~~effective~~requirements for uscapitalizing ~~beginning~~implementation ~~January~~costs 1,incurred ~~2019.~~in ~~Early~~a ~~adoption~~cloud iscomputing ~~permitted,~~arrangement ~~but~~that weis doa ~~not~~service ~~expect~~contract to(such doas ~~so.~~a ~~Companies~~hosting ~~that~~arrangement) ~~elect to reclassify the stranded effects associated~~ with the ~~change~~requirements infor ~~U.S.~~capitalizing ~~federal~~implementation ~~corporate~~costs ~~income~~incurred ~~tax~~to ~~rate~~develop ~~must~~or doobtain sointernal-use-software. ~~for~~Capitalized ~~all~~implementation ~~items~~costs ~~within~~will ~~Accumulated~~be ~~Other~~amortized ~~Comprehensive~~over ~~Income~~the ~~(“AOCI”).~~term ~~This standard allows adoption under one~~ of ~~two~~the ~~transition~~hosting ~~methods:~~arrangement, ~~(1)~~beginning ~~retrospective~~when tothe ~~each~~module ~~period (~~or ~~periods)~~component ~~in which the income tax effects~~ of the ~~2017~~hosting ~~Act~~arrangement ~~related~~is toready ~~items~~for ~~remaining~~its inintended ~~AOCI~~use. ~~are~~ASU ~~recognized,~~2018-02 oris ~~(2)~~effective atfor ~~the~~us beginning ofJanuary ~~the~~1, ~~period~~2020. ofEarly adoption. Weis ~~expect~~permitted, tobut ~~adopt~~we atdo ~~the~~not ~~beginning~~expect ofto ~~the~~do ~~period~~so. ofWe ~~adoption~~have ~~and do~~ not ~~anticipate~~yet determined the ~~adoption~~effect of ~~this~~the standard ~~will have a significant impact~~ on our consolidated financial statements and related disclosures.

In February ~~2016~~2018, the FASB issued ASU ~~2016~~2018-02, ~~Leases~~Income Statement — Reporting Comprehensive Income (Topic ~~842~~220), ~~which~~Reclassification ~~requires~~of ~~lessees~~Certain toTax ~~recognize,~~Effects onfrom ~~the~~Accumulated ~~balance~~Other ~~sheet,~~Comprehensive Income. The standard allows a ~~liability~~reclassification tofrom ~~make~~accumulated ~~lease~~other ~~payments~~comprehensive ~~and~~income ato ~~corresponding~~accumulated ~~right-of-use~~deficit ~~asset~~for ~~representing~~stranded atax ~~right~~effects toresulting ~~use~~from the ~~underlying~~Tax ~~asset~~Cuts ~~for~~and Jobs Act of 2017 (“the ~~lease~~2017 ~~term~~Act”). ASU ~~2016~~2018-02 is effective for us beginning January 1, 2019. Early adoption is permitted, but we do not expect to do so. ~~The~~ ~~standard~~Companies ~~requires~~that aelect ~~modified~~to ~~retrospective~~reclassify ~~approach~~the stranded effects associated with the change in U.S. ~~The~~federal ~~FASB~~corporate ~~recently~~income ~~approved~~tax ~~Proposed~~rate ~~ASU~~must ~~2018-200,~~do ~~Leases~~so for all items within Accumulated Other Comprehensive Income (~~Topic~~“AOCI”). ~~842~~This standard allows adoption under one of two transition methods: (1), ~~Targeted~~retrospective ~~Improvements.~~to Weeach ~~anticipate~~period ~~electing~~(or periods) in which the ~~optional~~income ~~transition~~tax ~~method~~effects of the 2017 Act related to items remaining in ~~ASU~~AOCI ~~2018-200~~are recognized, ~~which~~or ~~still~~(2) ~~requires~~at athe ~~modified~~beginning ~~retrospective~~of ~~transition~~the period of adoption. We expect to adopt at the beginning of the period of adoption and ~~contains~~do not anticipate the ~~following~~adoption ~~provisions:~~of this standard will have a significant impact on our consolidated financial statements and related disclosures.

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SENDGRID, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The standard requires lessees to recognize, on the balance sheet, a liability to make lease payments and a corresponding right-of-use asset representing a right to use the underlying asset for the lease term. ASU 2016-02 is effective for us beginning January 1, 2019. Early adoption is permitted, but we do not expect to do so. The standard requires a modified retrospective approach. However, the FASB recently approved ASU 2018-11, Leases (Topic 842), Targeted Improvements, which permits an optional effective date transition method. We anticipate electing this effective date transition method, which contains the following provisions:

transition provisions of the new standard are applied at its adoption date;

recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption; and

continue to apply the legacy guidance in Topic 840, Leases, including its disclosure requirements, in the comparative periods presented in the year the new leases standard is adopted.

The standard permits three practical expedients, which must be elected as a package. We expect to elect these practical expedients, which allow us to not reassess the following factors for all leases that commenced before January 1, 2019:

whether expired or existing contracts contain leases under the new definition of a lease;

lease classification for expired or existing leases; and

whether previously capitalized initial direct costs would qualify for capitalization under Topic 842.

We are currently in the process of accumulating and evaluating all contractual lease arrangements in order to determine the impact on our consolidated financial statements and related disclosures. While we expect the adoption of this standard to result in an increase to our reported assets and liabilities, we have not yet determined the full impact.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), and modified the standard thereafter. The standard requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This new accounting standard also impacts the recognition of incremental costs to obtain a sales contract, such as sales commissions. Under the new standard, these incremental costs will be capitalized at inception and expensed over an estimate of the customer’s life. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. Most public companies adopted ASU 2014-09 effective January 1, 2018. Due to the cessation of our EGC status, the new standard is effective for us beginning December 31, 2018. Early adoption is permitted, but we will not do so.

11The standard permits the use of either a full or a modified retrospective transition method. We will adopt the standard using the modified retrospective method, which contains the following provisions:

For contracts not completed as of December 31, 2018, we will recognize the cumulative effect of initially applying the new revenue standard as an adjustment to our accumulated deficit;

Results for the December 31, 2018 and future reporting periods will be presented under Topic 606; and

Comparative prior period amounts will not be adjusted and continue to be reported in accordance with historic accounting guidance under Topic 605.

We continue to evaluate the impact of the new standard on our consolidated financial statements. We are in the process of evaluating customer arrangements and commissions and identifying differences in accounting between new and existing standards. We do not anticipate the new standard will have a material impact on the timing or amount of revenue recognition. However, we expect some impact on our consolidated statements of operations as a result of the deferred expense on sales commissions.

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SENDGRID, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

will be capitalized at inception and expensed over an estimate of the customer’s life. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. Most public companies adopted ASU 2014-09 effective January 1, 2018. Due to the cessation of our EGC status, the new standard is effective for us beginning December 31, 2018. Early adoption is permitted, but we do not expect to do so. The standard permits the use of either the retrospective or cumulative effect transition method. We continue to evaluate the impact of the new standard and available adoption methods on our consolidated financial statements. We are in the process of evaluating customer arrangements and commissions and identifying differences in accounting between new and existing standards. We do not anticipate the new standard will have a material impact on the timing or amount of revenue recognition. However, we expect some impact on our consolidated statements of operations as a result of the deferred expense on sales commissions.

(3) Restricted Cash

Restricted cash as of ~~June~~September 30, 2018 represents amounts designated for SendGrid.org. SendGrid.org is a division of SendGrid and not a separate legal entity. Its mission is to support nonprofit organizations.

(4) Property and Equipment

Property and equipment consist of the following:

	Estimated Useful		As of ~~June~~September 30,		As of December 31,
	Life (in months)		2018		2017
			(In thousands)
Data center equipment	36 - 48		$	3132,~~566~~617	$	28,474
Leasehold improvements	7671 - 131	*		1214,~~837~~919		8,067
Office furniture and equipment	36 - 60			5,~~840~~960		4,560
Computer equipment and peripherals	36			32,~~295~~979		3,276
				53,538		44,377
				56,475		44,377
Less accumulated depreciation				(1920,~~289~~617)		(15,185)
Property and equipment, net			$	3435,~~249~~858	$	29,192

*We depreciate leasehold improvements using the straight-line method over the shorter of the asset’s useful life or the life of the lease.

We hold certain equipment under capital lease arrangements. This equipment is classified as data center or office equipment. We depreciate this equipment using the straight-line method over the shorter of the useful life or the term of the lease agreement. The following table summarizes our capital lease arrangements:

	As of June 30,		As of December 31,
	As of September 30,		As of December 31,
	2018		2017
	(In thousands)
Equipment held under capital lease agreements	$	2526,~~428~~743	$	24,866
Less accumulated depreciation		(810,~~835~~302)		(7,860)
Carrying value	$	16,~~593~~441	$	17,006

The following table summarizes depreciation expense, including depreciation of assets held under capital lease arrangements:

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
	(In thousands)
Depreciation expense	$	2,~~605~~741	$	2,~~410~~422	$	57,~~002~~743	$	46,~~501~~923

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(5) Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consists of the following:

	As of June 30,		As of December 31,
	As of September 30,		As of December 31,
	2018		2017
	(In thousands)
Bonus and commission	$	35,~~831~~543	$	4,031
Accounts payable		12,~~913~~767		3,553
Sales tax		984		2,057
Employee benefits		1,037		557
Marketing expense		~~707~~948		203
Employee benefits		650		557
Sales tax		815		2,057
Vacation		1916		1,832
Professional fees and other		1,301		1,604
Other accrued liabilities		2,486		1,604
Accounts payable and accrued liabilities	$	913,~~405~~612	$	13,837

(6) ~~Revolving~~Note ~~Line of Credit~~Payable

WeIn ~~have~~August a2018, ~~loan~~we ~~and~~entered ~~security~~into ~~agreement~~an ~~(“LSA”)~~arrangement with a ~~bank~~financing ~~that~~company ~~provides~~whereby awe ~~revolving~~obtained ~~line~~$5.1 ofmillion ~~credit~~in ~~with~~software and $401.03 million ~~maximum~~in ~~borrowing~~related ~~availability. The~~professional ~~LSA~~services ~~matures~~ in ~~August~~exchange ~~2018.~~for Wea ~~had~~ $406.0 4 million ~~available~~note topayable. On ~~draw~~our ascondensed ofconsolidated ~~June~~balance 30sheet, ~~2018~~the ~~and~~software ~~December~~is 31included in “Intangible assets, ~~2017~~net.” WeThe ~~were~~related inprofessional ~~compliance~~services ~~with~~are included ~~all~~in ~~financial~~“Prepaid ~~covenants~~expenses asand ofother ~~June~~current ~~30,~~assets” ~~2018~~and “Other assets” and ~~December~~will ~~31,~~be ~~2017~~amortized over six to 36 months. The ~~For~~note ~~all~~payable ~~periods~~bears ~~presented,~~interest noat ~~amounts~~6.6% ~~were~~per ~~outstanding,~~annum compounded monthly and wematures ~~had~~in noAugust ~~borrowing~~2021. Principal ~~activity~~and interest payments are paid quarterly (Note 13).

~~Amounts~~(7) Revolving ~~available~~Line toof ~~draw under the LSA are calculated from a trailing three-month revenue base, which can differ from the maximum loan amount. Advances are subject to the following interest rates:~~Credit

· We ~~prime~~have ~~rate~~a ~~then~~loan inand ~~effect~~security ~~plus~~agreement ~~0.50%,~~(“LSA”) with a ~~floor~~bank that provides a revolving line of 4credit with $40.~~00%~~0 ~~while~~million ~~our~~maximum ~~cash~~borrowing ~~balance~~availability. The isLSA ~~greater~~matures ~~than~~in August 2019. We had $840.0 million available to draw as of September 30, 2018 and December 31, 2017. We were in compliance with all financial covenants as of September 30, 2018 and December 31, 2017. For all periods presented, no amounts were outstanding, and we had no borrowing activity.

· Amounts ~~prime~~available ~~rate~~to ~~then~~draw inunder ~~effect~~the ~~plus~~LSA ~~1.25%,~~are ~~with~~calculated from a ~~floor~~trailing ofthree-month ~~4.75%~~revenue ~~while~~base, ~~our~~which ~~cash~~can ~~balance~~differ isfrom ~~not~~the ~~greater~~maximum ~~than~~loan $8amount.0 ~~million~~Advances bear interest on the outstanding daily balance at the bank’s prime rate.

Principal is due at maturity. Borrowings are secured by substantially all of our assets. The LSA contains certain restrictions, affirmative and negative covenants, and limitations, including, among other things:

restriction on our ability to pledge our intellectual property;

requirement to maintain at least 40% of our aggregate cash and cash equivalents in depository, operating, and investment accounts with the bank;

requirement to maintain certain business performance levels;

limitations on disposal of assets;

limitations on certain fundamental business changes;

limitations on incurrences of debt;

limitations on incurrences of liens;

limitations on payments of dividends;

limitations on repurchases of stock; and

limitations on engaging in affiliate transactions.

Each case is subject to certain exceptions. The LSA also contains certain events of default including, among other things, that during the existence of an event of default, interest on the obligations could be increased. 14

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SENDGRID, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~(7) Equity~~Each ~~Financing~~case is subject to certain exceptions. The LSA also contains certain events of default including, among other things, that during the existence of an event of default, interest on the obligations could be increased.

(8) Equity Financing

On April 10, 2018 we closed a follow-on public offering of 7,514,369 shares of SendGrid common stock priced at $24.00, before underwriting discounts and commissions. Of the total shares sold, existing stockholders and option holders sold 6,914,369 shares, and the Company sold 600,000 shares. We received net proceeds of $12.4 million after deducting $0.7 million of underwriting discounts and commissions and $1.3 million of offering expenses.

(89) Stock Awards

In 2009, we created the 2009 Equity Incentive Plan (the”2009 Plan”), in 2012, we created the 2012 Equity Incentive Plan (the “2012 Plan”), and in 2017, we created the 2017 Equity Incentive Plan (the “2017 Plan”). The 2009 Plan terminated upon the effectiveness of the 2012 Plan, and the 2012 Plan terminated upon the effectiveness of the 2017 Plan. However, any outstanding stock awards will continue to be governed by their existing terms.

The following table summarizes remaining shares available for grant:

	As of June 30,		As of December 31,
	As of September 30,		As of December 31,
Stock Awards Available for Grant	2018		2017
	(In thousands)
2017 Plan		5,~~581~~667		3,504

The 2009 Plan allowed granting of stock options. The 2012 Plan allowed and the 2017 Plan allows granting of stock options and restricted stock units. Options have an exercise price not less than 100% of the fair value of common stock on the date of grant and expire no more than ten years from the grant date. Stock options and restricted stock units generally vest over two to four years.

The following table summarizes our stock option activity:

		Weighted
		Average
	Stock	Exercise
	Options	Price
Outstanding January 1, 2018	12,217,721	$	4.79
Granted	249,740	$	26.28
Exercised	(3,~~286~~946,~~005~~941)	$	12.9511
Forfeited	(~~598~~785,~~009~~874)	$	7.2925
Outstanding June 30, 2018	8,583,447	$	6.33
Outstanding September 30, 2018	7,734,646	$	6.62
Vested and exercisable June 30, 2018	3,762,222	$	2.30
Vested and exercisable September 30, 2018	3,669,373	$	2.75

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table summarizes information about stock options outstanding and exercisable:

	As of June 30, 2018
	As of September 30, 2018
	Options Outstanding				Options Exercisable
		Weighted				Weighted
		Average	Weighted			Average	Weighted
	Number of	Remaining	Average		Number of	Remaining	Average
	Options	Contractual Life	Exercise		Options	Contractual Life	Exercise
Exercise Price	Outstanding	(In Years)	Price		Exercisable	(In Years)	Price
$0.18 - $1.50	~~769~~522,~~286~~649	4.87	$	1.0712	~~769~~522,~~286~~649
$1.83 - $2.12	1,~~280~~200,~~363~~873	6.30	$	1.8584	1,~~162~~189,~~142~~680
$2.18	1963,~~007,841~~442	6.97	$	2.18	~~714~~756,~~385~~636
$2.46 - $2.79	1924,~~055,838~~166	7.41	$	2.55	~~567~~529,~~820~~172
$4.24	1981,~~073,986~~834	87.29	$	4.24	~~373~~371,~~011~~705
$4.52 - $7.58	~~838~~643,~~853~~879	8.84	$	5.8279	~~165~~151,~~620~~774
$12.00	1,~~521~~485,~~581~~734	98.18	$	12.00	934,~~958~~831
$12.72 - $22.87	~~873~~855,~~404~~814	9.30	$	16.0623	-112,926
$24.97 - $30.35	~~162~~156,~~295~~255	9.73	$	27.9687	-
	8,583,447	7.7	$	6.33	3,762,222	6.6	$	2.30
	7,734,646	7.5	$	6.62	3,669,373	6.5	$	2.75

The ~~2012 Plan allowed and the 2017 Plan also allows for the issuance of restricted stock units. The~~ following table summarizes our restricted stock unit activity:

		Weighted
	Restricted	Average
	Stock	Grant Date
	Units	Fair Value
Outstanding at January 1, 2018	656,854	$	2.54
Granted	~~676~~825,~~906~~227	$	27.1791
Vested	(~~303~~326,~~550~~559)	$	1.0826
Withheld for taxes	(~~278~~291,~~899~~475)	$	1.0826
Forfeited	(1347,~~138~~349)	$	27.0055
Outstanding at June 30, 2018	738,173	$	25.12
Outstanding at September 30, 2018	816,698	$	27.05

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SENDGRID, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For all periods presented, we computed the fair value of options granted using the Black-Scholes option pricing model. The model requires estimates and assumptions, including:


Estimate or Assumption	Criteria
The fair value of our common stock	Subsequent to our IPO in November 2017, we obtain the fair value of our common stock from the public market. Prior to our IPO, there was no public trading market for our common stock or preferred stock. As a result, our board of directors considered an independent third-party valuation of our common stock and whether any new material information after the date of such valuation had materially affected the fair value of our common stock.
Risk-free interest rates	The risk-free interest rate is based on the U.S. Treasury yield for treasury securities with maturities that align closely with the timing of the average remaining expected life of the option.
Volatility	We estimate a volatility factor utilizing an average of the stock volatility of peer companies blended with the volatility of our own common stock.
Expected dividend yield	Because we have never declared or paid a dividend and do not expect to do so in the foreseeable future, we assume a dividend yield of zero.
Expected option life	Given our limited history, we applied the simplified method (the average of the period from vesting to expiration) to determine the expected option life.

The use of different estimates and assumptions could cause significant adjustments to the valuation.

The following table summarizes the estimates and assumptions used and the resulting weighted average grant date fair value of the options granted:. During the three months ended September 30, 2018, there were no options granted.

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Fair value of common stock		~~$27.00~~-		$511.4895 - $711.5895		$22.87 - $30.35		$4.5247 - $711.5895
Risk-free interest rate		~~2.7%~~-		1.89% - 2.0%		2.4% - 2.7%		1.8% - 2.1%
Expected life		~~5.6 years~~-		6.04 years		5.9 years		6.02 years
Expected dividend yield		-		-		-		-
Expected volatility		~~50.1%~~-		5046.5% - 52.96%		50.1% - 50.6%		5046.5% - 54.0%
Weighted average grant date fair value of the options granted		~~$13.47~~-		$36.7026		$13.38		$35.3106

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

We recognize stock-based compensation cost on a straight‑line basis over the requisite service period for the entire award and account for forfeitures as they occur. We allocate stock-based compensation to the same expense categories as the base compensation for such employees. We recognized the following stock-based compensation expense for options, RSUs, and ~~RSUs~~our employee stock purchase plan:

For the Three Months Ended June 30,

For the Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

2018

2017

2018

2017

(In thousands)

Cost of revenue

~~324~~371

97186

~~526~~897

~~151~~337

Research and development

1,~~114~~308

~~215~~387

13,~~708~~016

~~362~~749

Selling and marketing

~~409~~532

~~180~~281

~~633~~1,165

~~315~~596

General and administrative

~~965~~1,231

~~301~~442

13,~~773~~004

~~553~~995

Stock-based compensation

23,~~812~~442

~~793~~1,296

48,~~640~~082

12,~~381~~677

The following table summarizes our unrecognized compensation cost:

	As of June 30,
	As of September 30,
	2018
Unrecognized compensation cost (in thousands)	$	36,~~463~~936
Weighted average remaining vesting period		2.9 years
Weighted average remaining vesting period (in years)		2.4

(910) Net Loss Per Share Attributed to Common Stockholders

We calculate our basic and diluted net loss per share attributable to common stockholders in conformity with the two-class method, which is required for companies with participating securities. We exclude all potentially dilutive securities, which include the following “common stock equivalents”:

Options to purchase common stock

Restricted stock units

Redeemable convertible preferred stock (existed prior to our IPO and considered a participating security)

Redeemable convertible preferred stock warrant (existed prior to our IPO)

The two-class method requires the following:


Periods when we have net loss		We calculate both basic and diluted net loss per common share by dividing net loss by the weighted average number of common shares outstanding during the period.
		Common stock equivalents are not considered because their effect is antidilutive.
Periods when we have net income		Basic net income per share
		We calculate basic net income per share by dividing the net income attributable to the common stockholder by the weighted average number of common shares outstanding during the period.
		Diluted net income per share
		We calculate diluted net income per share by dividing net income attributable to the common stockholder by the weighted average number of common shares and common stock equivalents outstanding during the period. The potential dilution from stock awards is accounted for using the treasury stock method.

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SENDGRID, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table summarizes our net loss per share:

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
	(In thousands, except per share amounts)
Net loss	$	(~~310~~2,423)	$	(1,~~333~~593)	$	(14,~~583~~006)	$	(34,~~134~~727)
Weighted average common shares outstanding		4446,~~581~~550		78,~~943~~020		43,~~099~~841		7,~~896~~938
Net loss attributable to common stockholders	$	(0.0105)	$	(0.1720)	$	(0.0409)	$	(0.4060)

The following common stock equivalents were excluded from the computation of diluted net loss per share for the periods presented because their effect would have been anti-dilutive.

	As of June 30,		As of June 30,
	As of September 30,		As of September 30,
	2018		2017
	(In thousands)
Stock options		87,~~583~~735		1011,~~057~~592
Restricted stock units		~~738~~817		617
Convertible preferred stock		-		24,535
Redeemable preferred stock warrants		-		54
		9,321		35,263
		8,552		36,798

(1011) Segment and Geographic Information

Our Chief Executive Officer and Chief Financial Officer / Chief Operating Officer are ~~the~~our chief operating decision makers. They regularly review financial information presented on a consolidated basis for the purposes of allocating resources and evaluating performance. Accordingly, we determined that we currently operate in one reportable business segment.

Substantially all of our assets are located in the United States. We consider all revenue derived from customers with a U.S. billing address as U.S. revenue. All other revenue is considered international revenue.

The following table summarizes revenue by geographic area:

For the Three Months Ended June 30,

For the Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

2018

2017

2018

2017

(In thousands)

United States

2122,~~705~~440

1617,~~811~~537

4164,~~847~~287

3250,~~559~~096

International

1314,~~970~~759

10,~~201~~779

2641,~~397~~156

1930,~~284~~063

Total revenue

3537,~~675~~199

2728,~~012~~316

68105,~~244~~443

5180,~~843~~159

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SENDGRID, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1112) Income Tax

Accounting for deferred taxes involves the evaluation of a number of factors concerning the realizability of our net deferred tax assets. We primarily considered such factors as our history of operating losses, the nature of our deferred tax assets, and the timing, likelihood, and amount, if any, of future taxable income during the periods in which those temporary differences and carryforwards become deductible. At present, we do not believe that it is more likely than not that the net deferred tax assets will be realized. Accordingly, we established a full valuation allowance.

Currently, we do not have any uncertain tax positions. We do not anticipate any significant changes within twelve months of ~~June~~September 30, 2018 in uncertain tax positions that would be material to the consolidated financial statements taken as a whole.

We file U.S. federal income tax returns as well as income tax returns in many U.S. states and the United Kingdom. The 2009 through 2017 tax years remain open to examination by the major jurisdictions in which we are subject to tax.

(1213) Commitments and Contingencies

Commitments

The following table summarizes commitments on contracts that meet the following criteria:

enforceable;

legally binding; and

specify all significant terms, including fixed or minimum services to be used, fixed, minimum, or variable price provisions, and the approximate timing of the actions under the contracts.

The table excludes obligations under agreements that we can cancel without a significant penalty.

	Payments due by Period
	As of June 30, 2018
	As of September 30, 2018
	2018(Remainderof Year)		2019		2020		2021		2022		Thereafter		Total
	(In thousands)
Operating lease obligations	$	21,~~176~~177	$	4,808	$	4,936	$	5,065	$	5,197	$	16,595	$	3837,~~777~~778
Capital lease obligations		31,~~247~~698		56,~~896~~262		5,~~129~~516		2,~~278~~686		~~150~~400		-		16,~~700~~562
Interest on capital lease obligations		~~100~~65		~~138~~206		74121		2955		26		-		~~343~~453
Purchase obligations		3,639		6,778		5,808		9,017		4,625		-		29,867
Note payable		489		2,039		2,176		1,143		-		-		5,847
Total	$	9,162	$	17,620	$	15,947	$	16,389	$	9,974	$	16,595	$	85,687
Interest on note payable		93		291		153		22				-		559
Purchase obligations		1,846		6,858		5,808		9,017		4,625		-		28,154
Total	$	5,368	$	20,464	$	18,710	$	17,988	$	10,228	$	16,595	$	89,353

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SENDGRID, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Sales and Use Tax

We conduct operations in many tax jurisdictions throughout the United States. In many of these jurisdictions, non-income-based taxes, such as sales and use taxes are assessed on our operations. Prior to May 1, 2018, we did not bill or collect these taxes. We record a provision for such tax exposure when it is both probable that a liability has been incurred and the amount of the exposure can be reasonably estimated. The liability is recorded in “accounts payable and accrued liabilities” and “other long-term liabilities” on the condensed consolidated balance sheets. These estimates include several key assumptions including, but not limited to, the taxability of our services, the jurisdictions in which we believe we have nexus, and the sourcing of revenues to those jurisdictions. In the event these jurisdictions challenge our assumptions and analysis, the actual exposure could differ materially from the current estimates.

We are closely monitoring the impact of the United States Supreme Court decision in South Dakota v. Wayfair on June 21, 2018 that overturned the requirement from its 1992 ruling in Quill Corp. v. North Dakota, which held that sellers must have a physical presence in a state before they can be required to collect sales tax. The case will likely result in a significant increase in the cost of our sales tax compliance responsibilities.

Indemnification

Our arrangements with customers generally include an indemnification provision that we will indemnify and defend a customer in actions that claim our services infringe upon a valid patent, copyright, or trademark. Historically, we have not incurred any costs related to indemnification claims and do not expect to incur such costs. Accordingly, we do not maintain a reserve for such exposure.

Other

From time to time, we are subject to various legal proceedings and claims that arise in the ordinary course of business, including, among other things, regulatory matters and disputes with customers and vendors. In our opinion, the amount of ultimate liability with respect to any of these actions is unlikely to materially affect our financial condition, results of operations or liquidity.

20(14) Subsequent Events

On October 15, 2018, we entered into the Merger Agreement with Twilio Inc., a Delaware corporation (“Twilio”), and Topaz Merger Subsidiary, Inc., a Delaware corporation, and direct wholly owned subsidiary of Twilio (“Merger Sub”). Pursuant to the Merger Agreement, Merger Sub will be merged with and into SendGrid and SendGrid will continue as the surviving corporation and as a direct wholly owned subsidiary of Twilio (the “Merger”). In connection with the Merger, all of our issued and outstanding shares of common stock will be converted into the right to receive (a) 0.485 of a share of Twilio’s Class A Common Stock, par value $0.001 per share plus (b) any cash payable in lieu of fractional shares of Twilio’s Class A Common Stock otherwise issuable as merger consideration. The Merger is intended to qualify as a tax-free reorganization under the provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”).

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SENDGRID, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Consummation of the Merger is subject to certain closing conditions, including:

the absence of certain legal impediments;

the expiration or termination of the required waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended;

the effectiveness of a registration statement on Form S-4 to be filed with the Securities and Exchange Commission;

adoption of the Merger Agreement by the holders of a majority of our outstanding common stock at our stockholders’ meeting;

approval of the issuance of shares of Twilio Class A Common Stock in the Merger by the holders of a majority of the votes of Twilio’s Class A Common Stock and Class B Common Stock voting together as a single class, present in person or by proxy, and entitled to vote thereon, at the Twilio stockholders meeting; and

receipt of opinions from legal counsel regarding the intended tax treatment of the Merger as a tax-free reorganization under the provisions of Section 368(a) of the Code.

The parties to the Merger Agreement have made certain representations, warranties, and covenants in the Merger Agreement, including covenants regarding the conduct of their respective businesses and the use of reasonable best efforts to cause the conditions to the Merger to be satisfied. The Merger Agreement contains certain termination rights for both SendGrid and Twilio and further provides that, in connection with our termination of the Merger Agreement under certain circumstances, including our termination to accept and enter into a definitive agreement with respect to a superior proposal, we must pay Twilio a termination fee of $69.0 million. In connection with the termination of the Merger Agreement by Twilio under certain circumstances, including termination by Twilio to accept and enter into a definitive agreement with respect to a superior proposal, Twilio must pay us a termination fee of $120.0 million. Further, in connection with the termination of the Merger Agreement for Twilio’s failure to obtain stockholder approval, Twilio will owe us a termination fee of $120.0 million if the shares of Twilio Class B Common Stock subject to certain proxies fail to be voted in favor of the issuance of Class A Common Stock pursuant to the Merger Agreement.

In connection with execution of the Merger Agreement, we incurred a financial advisory fee of $4.0 million.

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the sections titled “Note Regarding Forward-Looking Statements” and “Risk Factors” for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a leading digital communication platform, enabling businesses to engage with their customers via email reliably, effectively and at scale. Our cloud-based platform allows for frictionless adoption and immediate value creation for businesses, providing their developers and marketers with the tools to seamlessly and effectively reach their customers using email. Since our inception we have processed more than one trillion emails.

SendGrid was started by three developers who found themselves spending an increasing amount of time resolving email issues rather than working on the core products of their emerging technology companies. Frustrated with the time and effort required to send email at scale, they started our company with the goal of building an effective and easy to adopt platform for scalable email delivery. Since our founding, we have focused on extending the scale and reliability of our platform while expanding the scope of our offerings. We introduced our Email API service in 2009, which allowed businesses to send both transactional and marketing emails. We continued to add functionality to our platform and in late 2015 introduced our Marketing Campaigns service, which allows marketers to upload and manage customer contact lists, create and test email templates, and then execute and analyze multi-faceted email campaigns that engage customers and drive growth. Our Marketing Campaigns service replaced our predecessor email marketing service, which we sunset at the end of 2017. In 2016, we introduced Expert Services to help businesses further optimize the deliverability of their emails and the effectiveness of their email marketing programs.

Our services are designed to be easy to adopt and affordable for businesses of all sizes. Our services are easily accessible from our website, with transparent pricing and a monthly contract term. Our customers pay for what they need and can begin using our services in minutes. We generate revenue primarily through sales of subscriptions to our services. We offer our Email API service on a subscription basis, priced based on email volume. Our Email API service pricing plans start at $9.95 per month for up to 40,000 emails. Our Marketing Campaigns service is priced based on the number of email contacts stored on our platform and the number of monthly emails sent to those contacts through our Email API service. Our Marketing Campaigns service is fully integrated, such that businesses using the service to store email contacts on our system must also use our Email API to send email to those contacts. Therefore, revenue from our Marketing Campaigns service includes revenue generated from subscriptions by our Marketing Campaigns customers both to store email contacts on our system and to send emails through our Email API service to those contacts. Expert Services are charged either on a monthly basis or as a one-time consultation fee and to date has accounted for a de minimis percentage of our total revenue.

We primarily sell to developers and marketers who want easy to use, self-service tools. Businesses learn about us through our marketing efforts or through our user community and sign up through our website. We offer documentation to enable self-service onboarding and 24 x 7 support to answer questions. We also sell our services to and through strategic partners, including the following:

leading public cloud infrastructure providers and ecommerce platforms, such as Heroku, Amazon Web Services, and Microsoft Azure;

· software vendors that offer complementary products and with which we co-sell our Email API and Marketing Campaigns services~~, such as GitHub, New Relic, and Twilio~~; and

· digital marketing agencies, ~~such as Deloitte Digital,~~ which resell our services to their clients.

Additionally, we have a limited inside sales team to manage inbound interest from businesses.

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We target any business that needs to deliver transactional or marketing email. As a result, our customers include small and midsize businesses, or SMBs, and large enterprises across a wide range of industries. As of ~~June~~September 30, 2018, we had more than 7478,000 customers globally. No single customer represented more than 2% of total revenue in the ~~six~~nine months ended ~~June~~September 30, 2018 and 2017, and our ten largest customers comprised 12% or less of our total revenue in the ~~six~~nine months ended ~~June~~September 30, 2018 and 2017.

In November 2017, we issued and sold 9.4 million shares of our common stock at the public offering price of $16.00 per share in our initial public offering, or IPO. We received net proceeds of $136.3 million after deducting underwriting discounts, commissions, and offering expenses.

On April 10, 2018, we closed our follow-on public offering in which we and certain of our stockholders sold an aggregate of 7,514,369 shares of common stock at the public offering price of $24.00 per share~~, including 980,135 shares sold pursuant to the underwriters’ option to purchase additional shares~~. Of the 7,514,369 shares of common stock sold in the offering, we sold 600,000 shares and selling stockholders sold 6,914,369 shares. We received net proceeds of $12.4 million after deducting $0.7 million of underwriting discounts and commissions and $1.3 million of offering expenses. ~~As of July 23, 2018, substantially all of the associated offering costs have been paid.~~

Potential Merger with Twilio

On October 15, 2018, we entered into the Merger Agreement with Twilio and Merger Sub, pursuant to which Merger Sub will be merged with and into SendGrid and SendGrid will continue as the surviving corporation and as a direct wholly owned subsidiary of Twilio. In connection with the Merger, all of our issued and outstanding shares of common stock will be converted into the right to receive (a) 0.485 of a share of Twilio’s Class A Common Stock, par value $0.001 per share plus (b) any cash payable in lieu of fractional shares of Twilio’s Class A Common Stock otherwise issuable as merger consideration. The Merger is intended to qualify as a tax-free reorganization under the provisions of Section 368(a) of the Code.

Consummation of the Merger is subject to certain closing conditions, including:

the absence of certain legal impediments;

the expiration or termination of the required waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended;

the effectiveness of a registration statement on Form S-4 to be filed with the Securities and Exchange Commission;

adoption of the Merger Agreement by the holders of a majority of our outstanding common stock at our stockholders’ meeting;

receipt of opinions from legal counsel regarding the intended tax treatment of the Merger as a tax-free reorganization under the provisions of Section 368(a) of the Code.

In connection with execution of the Merger Agreement, we incurred a financial advisory fee of $4.0 million.

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Key Business Metrics

We regularly review the following key metrics to measure performance, identify trends, formulate financial projections, and make strategic decisions. We are not aware of any uniform standards for calculating these key metrics. In addition, other companies may not calculate similarly titled metrics in a consistent manner, which may hinder comparability.

Customers

We believe that the size of our customer base is an important indicator of the growth of our business, the market acceptance of our platform, and future revenue trends. We define a customer as any user account from which we derive revenue during the last month of the period. We believe a relatively small number of businesses have more than one unique paying account with us, and we count each of these accounts as a separate customer. Any such affiliations among our customers do not impact how we manage our business or our customer relationships or how our operating results are reported. We view our total number of customers, irrespective of any affiliations among them, as reflective of the number of sources of revenue to us and our growth and potential for future growth because each customer reported is making a separate purchasing decision with respect to our services. Furthermore, in general, we count each of our strategic partners as a single customer regardless of how many end customers the strategic partner may have that are using our services.

Email volume

We believe email volume is an important measure of our business because it is a key indicator of growth and our ability to generate revenue, since a substantial majority of our revenue is based on the number of emails processed. Email volume consists of the total number of emails we processed in a given period.

Subscription Net Dollar Retention Rate

We believe subscription net dollar retention rate is an important measure for evaluating our business because it quantifies the impact on revenue growth from both retention and expansion of our existing customers and also takes into account customers who no longer use our services.

Our ability to drive growth and generate incremental revenue depends, in part, on our ability to retain our customers and increase their use of our platform. An important way in which we track our performance in this area is by measuring subscription net dollar retention rate.

Our subscription net dollar retention rate increases when our customers increase their usage of our Email API service or extend usage of our various other services. Our subscription net dollar retention rate decreases when customers temporarily or permanently cease or reduce usage of our Email API service or otherwise cease or reduce usage of our other services. Changes in our pricing may materially impact our subscription net dollar retention rate in the future but did not have a material impact for any of the periods presented.

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Our subscription net dollar retention rate compares the subscription revenue from a set of customers in a period to the same period in the prior year. To calculate the subscription net dollar retention rate for a period, we first identify the cohort of customers that were customers in the equivalent prior year period. Subscription net dollar retention rate for a period is the quotient obtained by dividing the subscription revenue generated from that cohort in a period, by the subscription revenue generated from that same cohort in the corresponding prior year period.

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Alternatively, our subscription net dollar retention rate can be calculated as the difference between our subscription dollar expansion rate and our subscription gross dollar churn rate. Our subscription dollar expansion rate is indicative of net revenue growth period over period from customers that contribute revenue in both the measured period and the equivalent prior year period. We calculate subscription dollar expansion rate for a period in two steps: first, we take the increase or decrease in the subscription revenue in a period from customers that contributed revenue in both that period and the same period in the prior year and add the total subscription revenue in the prior year period; and second, we divide the result of the first step by the total subscription revenue in the prior year period. Our subscription gross dollar churn rate is indicative of lost revenue from customers that contribute no revenue in the measured period but did contribute revenue in the equivalent prior year period. We also calculate subscription gross dollar churn rate in a period in two steps: first, we measure the amount of subscription revenue in the same period in the prior year from customers that contributed revenue in the prior year period but did not contribute revenue in the given period; and second, we divide the result of the first step by the total subscription revenue in the equivalent prior year period.

The following table summarizes our key metrics:

	As of June 30,			As of June 30,
	As of September 30,			As of September 30,
	2018			2017			Amount Change			% Change
	(In thousands)
Number of customers		7478.6			5558.2			1920.4		35.1	%
	For the Three Months Ended June 30,
	Three Months Ended September 30,
	2018			2017			Amount Change			% Change
	(In billions)
Email volume		~~140~~141.27			~~109~~115.10			3126.17		2923.2	%
	For the Three Months Ended June 30,
	Three Months Ended September 30,
	2018			2017			Amount Change			% Change
Subscription dollar expansion rate		~~123~~122	%		~~127~~125	%		(~~400~~300)	bps	(32.4)	%
Subscription gross dollar churn rate		9	%		9	%		-	bps	-	%
Subscription net dollar retention rate		~~114~~113	%		~~118~~116	%		(~~400~~300)	bps	(32.6)	%

Our ~~subscription~~email ~~dollar~~volume ~~expansion~~grew 23.2% in the three months ended September 30, 2018 compared to the three months ended September 30, 2017. That growth rate ~~decreased~~was ~~400~~approximately 530 basis points, orlower ~~bps,~~than our email volume growth rate of 28.5% in the three months ended June 30, 2018, compared to the three months ended June 30, 2017. The ~~decrease~~lower ~~was~~growth ~~primarily~~rate was attributable in part to decreased expansion in use of our Email API service, by high-volume customers and toin apart ~~lesser~~due ~~extent~~to the ~~elimination~~fact ofthat ~~our~~there ~~predecessor~~was ~~email~~one ~~marketing~~fewer ~~service,~~business ~~which~~day ~~was~~(and ~~discontinued~~one atfewer ~~the~~Friday) ~~end~~in ofSeptember ~~2017.~~2018 ~~Our~~as ~~subscription~~compared ~~gross~~to ~~dollar~~September ~~churn~~2017. Our ~~remained~~email ~~constant~~volume inis ~~the~~generally ~~three~~higher ~~months~~on ~~ended~~business ~~June 30~~days, ~~2018~~and ~~compared~~Friday tois ~~the~~typically ~~three~~a ~~months~~high-volume ~~ended~~email ~~June~~day ~~30,~~for ~~2017~~us.

23Our subscription dollar expansion rate decreased 300 basis points, or bps, in the three months ended September 30, 2018, compared to the three months ended September 30, 2017. The decrease was primarily attributable to decreased expansion in our Email API service, and to a lesser extent the elimination of our predecessor email marketing service, which was discontinued at the end of 2017. Our subscription gross dollar churn remained relatively constant in the three months ended September 30, 2018 compared to the three months ended September 30, 2017.

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Components of Results of Operations

Revenue

We generate revenue primarily through the sale of our Email API and Marketing Campaigns services, which we sell on a monthly subscription basis. Generally, we recognize revenue ratably over the applicable service period. The following table summarizes the components of our revenue:

	For the Three Months Ended June 30,
	Three Months Ended September 30,
	2018			2017
Email API		79.4	%		79.4	%
Marketing Campaigns		1817.3			1213.8
Predecessor email marketing service		-			53.4
Other		3.3			3.4
Total		100.0	%		100.0	%

Our customers subscribe to our Email API service through a plan that provides for a predetermined allowance of renewable email credits to be used each month. Usage above the plan’s credit allowance is billed as an overage charge. All plans include basic customer support.

Certain customers also subscribe to our Marketing Campaigns service. ~~Our~~These customers store email contacts and segmentation information on our platform in order to customize communications. Marketing Campaigns revenue is based on Email volume as well as number of stored contacts.

~~Revenue~~The ~~attributed~~Marketing toCampaigns ~~sales~~service ofutilizes ~~our~~the Email API ~~service~~infrastructure. ~~does~~However, ~~not include the portion of revenue generated by subscriptions from our email marketing services customers to send emails through our~~ Email API torevenue ~~contacts~~does ~~stored~~not oninclude ~~our~~any ~~system~~allocation for ~~use~~subscriptions ~~with~~to ~~our~~ Marketing Campaigns ~~service~~or ~~and~~ our predecessor email marketing service.

Cost of Revenue

Cost of revenue consists principally of depreciation and amortization expense related to hosting equipment and outsourced managed hosting costs. Other components include employee related costs, including compensation, other related costs, and an allocation of our general overhead. We expect our cost of revenue to continue to increase in absolute dollar amounts as we invest in our business.

Gross Profit and Gross Margin

Gross profit is total revenue less total cost of revenue. Gross margin is gross profit expressed as a percentage of total revenue. We expect that gross profit and gross margin will continue to be affected by various factors including our pricing, our mix of services sold and our ability to increase total revenue at a sufficient rate to cover fixed costs.

Operating Expenses

Our operating expenses consist of research and development, selling and marketing, and general and administrative expenses.

Research and Development Expense

Research and development expense consists primarily of employee related costs, including compensation, other related costs, and an allocation of our general overhead. Also included are non-personnel costs, such as consulting and professional fees for third party development resources, and depreciation costs. Our research and development efforts focus on maintaining and enhancing functionality of existing services and adding new features and services. We expect research and development expense to increase in absolute dollars as we invest in the enhancement of our services.

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Selling and Marketing Expense

Selling and marketing expense consists primarily of employee related costs, including compensation, other related costs, and an allocation of our general overhead. These expenses also include expenditures related to advertising, marketing, promotional events, and brand awareness activities. We expect selling and marketing expense to continue to increase in absolute dollars as we enhance our services and implement new marketing strategies.

General and Administrative Expense

General and administrative expense consists primarily of employee related costs, including compensation, other related costs, and an allocation of our general overhead for those employees associated with administrative services such as legal, human resources, information technology, accounting, and finance. These expenses also include certain third-party consulting services, certain facilities costs, credit card processing fees, and any corporate overhead costs not allocated to other expense categories.

We expect our general and administrative expense to increase in absolute dollars as we continue to grow our business. We also anticipate that we will incur additional costs for employees and third-party consulting services related to operating as a public company.

Non-GAAP Financial Measures

To supplement our condensed consolidated financial statements, which are prepared and presented in accordance with accounting principles generally accepted in the United States of America, or GAAP, we use certain non-GAAP financial measures, as described below, to understand and evaluate our core operating performance. These non-GAAP financial measures, which may be different than similarly titled measures used by other companies, are presented to enhance investors' overall understanding of our financial performance and should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP.

We believe that these non-GAAP financial measures provide useful information about our financial performance, enhance the overall understanding of our past performance and future prospects, and allow for greater transparency with respect to important metrics used by our management for financial and operational decision-making. We are presenting these non‑GAAP financial metrics to assist investors in seeing our financial performance through the eyes of management, and because we believe that these measures provide an additional tool for investors to use in comparing our core financial performance over multiple periods with other companies in our industry.

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Adjusted net income

We use the non-GAAP financial measure of adjusted net income, which is defined as GAAP net income (loss), excluding stock-based compensation expense, restructuring expense, costs associated with mergers and acquisitions, warrant interest expense, and non-capitalizable costs associated with our recent IPO. Due to our significant federal and state net operating loss carryforwards, as well as a full valuation against our net deferred tax assets, there is no income tax effect on adjusted net income in the presented periods. We believe that adjusted net income helps identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude in adjusted net income. Additionally, our executive compensation structure uses an adjusted net income target as one of the components when calculating payments that have been earned.following:

non-cash, stock-based compensation expense;

restructuring expense;

costs associated with mergers and acquisitions;

warrant interest expense; and

non-capitalizable costs associated with our IPO.

Due to our significant federal and state net operating loss carryforwards, as well as a full valuation against our net deferred tax assets, there is no income tax effect on adjusted net income in the presented periods. We believe that adjusted net income helps identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude in adjusted net income. Additionally, our executive compensation structure uses an adjusted net income target as one of the components when calculating payments that have been earned.

The following table presents a reconciliation of net loss, the most directly comparable financial measure calculated in accordance with GAAP, to adjusted net income, for each of the periods presented:

	For the Three Months Ended June 30,
	Three Months Ended September 30,
	2018		2017		Change
	(In thousands)
Net loss	$	(~~310~~2,423)	$	(1,~~333~~593)	$	~~1,023~~(830)
Stock-based compensation expense		2,812		793		2,019
Non-cash, stock-based compensation expense		3,442		1,296		2,146
Restructuring expense		~~174~~205		~~167~~112		793
Merger and acquisition expense		~~157~~1,552		~~214~~190		~~(57)~~1,362
Adjustment to convertible preferred stock warrant liability		-		~~544~~(84)		~~(544)~~84
Certain IPO costs		-		~~166~~720		(~~166~~720)
Adjusted net income	$	2,~~833~~776	$	~~551~~641	$	2,~~282~~135

Adjusted net income increased $2.31 million in the three months ended ~~June~~September 30, 2018, compared to the three months ended ~~June~~September 30, 2017. The increase was due in part to ~~a decrease in net loss of $1.0 million, offset by~~ an increase in non-cash, stock-based compensation expense of $2.01 million. ~~Merger~~ and ~~acquisition~~an ~~expense~~increase ~~from~~in ~~our~~merger and acquisition expense of ~~Bizzy decreased~~ $0.1.4 million. ~~Adjustment~~(principally related to ~~convertible~~the ~~preferred~~pending ~~stock~~sale ~~warrant~~to ~~liability~~Twilio ~~and~~announced ~~certain~~on ~~IPO~~October ~~costs were $0 in the three months ended June 30~~15, 2018), ~~due~~offset toby ~~the~~an ~~completion~~$0.8 ofmillion ~~our~~increase ~~initial~~in ~~public~~our ~~offering~~net loss.

~~There~~Adjustment ~~are a number of limitations related~~ to ~~the~~convertible ~~use~~preferred ofstock ~~adjusted~~warrant ~~net~~liability ~~income~~and ascertain ~~compared~~IPO tocosts ~~net~~were $0 in ~~loss,~~the ~~including~~three ~~that~~months ~~adjusted~~ended ~~net~~September ~~income excludes stock-based compensation expense~~30, ~~which~~2018 ~~has~~due ~~been, and will continue~~ to ~~be for~~ the ~~foreseeable~~completion ~~future, a significant recurring expense in our business and an important part~~ of our ~~compensation strategy~~IPO.

There are a number of limitations related to the use of adjusted net income as compared to net loss, including that adjusted net income excludes non-cash, stock-based compensation expense, which has been, and will continue to be for the foreseeable future, a significant recurring expense in our business and an important part of our compensation strategy.

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Free cash flow

We use the non-GAAP financial measure of free cash flow, which is defined as GAAP net cash flows from operating activities, reduced by ~~purchase of property and equipment, and principal payments on capital lease obligations. We believe free cash flow is an important liquidity measure of~~ the cash that is available, after capital expenditures, for operational expenses, investment in our business and to make acquisitions. Free cash flow is useful to investors as a liquidity measure because it measures our ability to generate or use cash. Once our business needs and obligations are met, cash can be used to maintain a strong balance sheet and invest in future growth.following:

purchase of property and equipment;

principal payments on capital lease obligations; and

principal payments on notes payable.

We believe free cash flow is an important liquidity measure of the cash that is available, after capital expenditures, for operational expenses, investment in our business and to make acquisitions. Free cash flow is useful to investors as a liquidity measure because it measures our ability to generate or use cash. Once our business needs and obligations are met, cash can be used to maintain a strong balance sheet and invest in future growth.

The following table presents a reconciliation of net cash from operating activities, the most directly comparable financial measure calculated in accordance with GAAP, to free cash flow for each of the periods presented:

	For the Three Months Ended June 30,
	Three Months Ended September 30,
	2018		2017		Change
	(In thousands)
Net cash flows from operating activities	$	87,~~772~~255	$	35,~~392~~009	$	52,~~380~~246
Purchase of property and equipment		(32,~~226~~186)		(1,~~220~~792)		(~~2,006~~394)
Principal payments on capital lease obligations		(1,~~647~~605)		(12,~~480~~095)		~~(167)~~490
Free cash flow	$	3,899	$	692	$	3,207
Principal payments on notes payable		(547)		-		(547)
Free cash flow	$	2,917	$	1,122	$	1,795

26Free cash flow increased $1.8 million in the three months ended September 30, 2018, compared to the three months ended September 30, 2017. The increase was primarily attributable to a $2.2 million increase in net cash flows from operating activities resulting from:

~~Table~~· ofa ~~Contents~~ $0.8 million increase in net loss;

~~Free~~· ~~cash flow increased~~ $3.2 ~~million in the three months ended June 30, 2018, compared to the three months ended June 30, 2017~~.1 ~~The increase was primarily due to a $5.4~~ million ~~increase~~of inadditional ~~net~~ non-cash, ~~flows~~stock-based ~~from~~compensation ~~operating activities related to:~~ expense;

· a $20.37 million ~~increase~~ in ~~adjusted~~additional ~~net~~depreciation ~~income~~and amortization expense; and

· a $10.53 million increase indue ~~cash~~to ~~flow~~various ~~from~~other items, including timing of cash receipts and payments associated with current assets and liabilities;.

· These aitems were partially offset by an increase of $10.14 million in purchases of property and equipment and an increase of $0.1 million in ~~reimbursements~~principal ~~from~~payments ~~landlords~~on ~~for~~capital ~~tenant~~lease ~~improvement~~obligations ~~allowances;~~and notes payable due to purchases of additional equipment.

· $0.3 million in additional depreciation and amortization expense; and

· a $0.2 million loss on disposal of assets and various other items

These items were partially offset by an increase of $2.0 million in purchases of property and equipment mainly related to construction of our new Irvine, California and Redwood City, California offices. Principal payments on capital lease obligations increased $0.2 million due to additional equipment used to support growth in the business.

There are a number of limitations related to the use of free cash flow as compared to net cash from operating activities, including that free cash flow does not reflect future contractual commitments.

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Results of Operations

The following table sets forth our condensed consolidated statements of operations data for the periods indicated:

For the Three Months Ended June 30,

For the Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

2018

2017

2018

2017

(In thousands)

Condensed Consolidated Statements of Operations Data:

Revenue

3537,~~675~~199

2728,~~012~~316

68105,~~244~~443

5180,~~843~~159

Cost of revenue (1)(2)

8,~~805~~978

7,~~274~~612

1726,~~293~~271

1321,~~745~~357

Gross profit

2628,~~870~~221

1920,~~738~~704

5079,~~951~~172

3858,~~098~~802

Operating expenses: (1)(2)

Research and development

911,~~871~~049

7,~~139~~545

1829,~~805~~854

1321,~~663~~208

Selling and marketing

89,~~707~~612

67,~~870~~124

1626,~~643~~255

1320,~~458~~582

General and administrative (3)(4)

910,~~165~~606

67,~~494~~684

1828,~~031~~637

1321,~~538~~222

Loss on disposal of assets

-22

2—

6284

Total operating expenses

2731,~~743~~289

2022,~~505~~353

5384,~~541~~830

4063,~~661~~014

Loss from operations

(~~873~~3,068)

(~~767~~1,649)

(25,~~590~~658)

(24,~~563~~212)

Other income (expense), net

~~563~~645

~~(566)~~56

1,~~007~~652

(~~571~~515)

Net loss before provision for income taxes

(~~310~~2,423)

(1,~~333~~593)

(14,~~583~~006)

(34,~~134~~727)

Provision for income taxes

Net loss

(~~310~~2,423)

(1,~~333~~593)

(14,~~583~~006)

(34,~~134~~727)

(1) Includes non-cash, stock-based compensation expense as follows:

For the Three Months Ended June 30,

For the Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

2018

2017

2018

2017

(In thousands)

Cost of revenue

~~324~~371

97186

~~526~~897

~~151~~337

Research and development

1,~~114~~308

~~215~~387

13,~~708~~016

~~362~~749

Selling and marketing

~~409~~532

~~180~~281

~~633~~1,165

~~315~~596

General and administrative

~~965~~1,231

~~301~~442

13,~~773~~004

~~553~~995

Total

23,~~812~~442

~~793~~1,296

48,~~640~~082

12,~~381~~677

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(2)

Includes merger and acquisition expense as follows:

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
	(In thousands)
Cost of revenue	$	20	$	209	$	4060	$	3847
Research and development		128		~~195~~147		~~282~~410		~~195~~342
Selling and marketing		45		~~(6)~~5		914		611
General and administrative		51,399		529		~~(7)~~1,392		~~232~~261
Total	$	~~157~~1,552	$	~~214~~190	$	~~324~~1,876	$	~~471~~661

(3) Includes non-capitalizable costs related to preparation to become and operate as a public company of $0.27 million and $01.30 million for the three and ~~six~~nine months ended ~~June~~September 30, 2017, respectively.

(4) Includes restructuring expense of $0.2 million, $0.21 million, $0.57 million, and $1.01 million for the three months ended ~~June~~September 30, 2018 and 2017 and the ~~six~~nine months ended ~~June~~September 30, 2018 and 2017, respectively.

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The following table sets forth our condensed consolidated statements of operations data expressed as a percentage of total revenue:

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Condensed Consolidated Statements of Operations Data:
Revenue		100.0	%		100.0	%		100.0	%		100.0	%
Cost of revenue		24.71			26.9			2524.39			26.56
Gross margin		75.39			73.1			7475.71			73.54
Operating expenses:
Research and development		2729.7			26.46			2728.63			26.45
Selling and marketing		2425.48			25.42			24.49			2625.07
General and administrative		2528.75			2427.01			2627.42			26.15
Loss on disposal of assets		-0.1			-			0.1			-
Total operating expenses		7784.81			7578.9			7880.5			78.46
Loss from operations		(28.42)			(25.8)			(35.84)			(45.93)
Other income (expense), net:		1.67			(20.1)2			1.56			(10.16)
Net loss before provision for income taxes		(06.95)			(45.96)			(2.3.8)			(65.09)
Provision for income taxes		-			-			-			-
Net loss		(06.95)	%		(45.96)	%		(2.3.8)	%		(65.09)	%

2832

Table of Contents

Comparison of the Three Months Ended ~~June~~September 30, 2018 and 2017

Revenue

	For the Three Months Ended June 30,
	Three Months Ended September 30,
	2018		2017		$ Change		% Change
	(In thousands)
Email API	$	2829,~~240~~542	$	2122,~~411~~474	$	67,~~829~~068		31.94	%
Marketing Campaigns		6,~~294~~426		3,~~196~~906		32,~~098~~520		9664.95	%
Predecessor email marketing service		-		~~1,447~~964		(~~1,447~~964)		(100.0)	%
Other		1,~~141~~231		~~958~~972		~~183~~259		1926.16	%
Total	$	3537,~~675~~199	$	2728,~~012~~316	$	8,~~663~~883		3231.14	%

Total revenue increased $8.79 million, or 3231.14%, in the three months ended ~~June~~September 30, 2018 compared to the three months ended ~~June~~September 30, 2017. The increase was primarily attributable to an increase in email volume from and sales of additional services to existing customers and secondarily related to sales of our Email API and other services to new customers. Revenue growth from existing customers comprised $7.69 million, or 8889.14%, of the $8.79 million increase, with the remaining revenue growth attributed to new customers. ~~Our~~A ~~overall~~significant ~~email~~portion ~~volume increased to 140.2 billion, or 29%, in the second quarter~~ of ~~2018 from 109.1 billion in the second quarter of 2017, and~~ our ~~number~~new ofcustomer ~~customers~~growth ~~increased~~relates to ~~74.6~~customers ~~thousand,~~who ortypically ~~35%,~~have atlower ~~June~~volume ~~30,~~but ~~2018~~pay ~~from~~higher ~~55.2~~rates ~~thousand~~per atemail ~~June 30, 2017~~processed.

~~Revenue~~Our ~~from~~overall ~~our~~email ~~Email~~volume ~~API service~~ increased ~~by $6~~23.82% ~~million,~~to ~~or 31~~141.~~9%,~~7 billion in the ~~three~~third ~~months~~quarter ~~ended~~of ~~June 30,~~ 2018, compared to 115.0 ~~the~~billion ~~three~~in ~~months~~the ~~ended~~third ~~June~~quarter ~~30,~~of 2017. ~~Revenue~~Our ~~from~~number ~~our~~of ~~email~~customers ~~marketing services (which includes our Marketing Campaigns service and its predecessor)~~ increased ~~by $1~~35.71% ~~million,~~to ~~or 35~~78.6%, inthousand at ~~the~~September ~~second~~30, ~~quarter of~~ 2018 compared to 58.2 ~~the~~thousand ~~second~~at ~~quarter~~September of30, 2017. asNumerous afactors ~~result~~can ofcause afluctuations ~~$3.1 million increase~~ in ~~revenue~~email ~~from~~volume, ~~our~~including ~~Marketing Campaigns service in~~ the ~~second~~number ~~quarter~~ of ~~2018,~~business ~~offset~~days bycompared awith ~~$1.4~~non-business ~~million~~days ~~decrease~~ in ~~revenue~~the ~~from~~period, ~~our~~with ~~predecessor~~ email ~~marketing~~volume ~~service,~~generally ~~which~~higher ~~was~~on ~~discontinued~~business ~~at the end of 2017~~days.

Revenue from our Email API service increased by $7.1 million, or 31.4%, in the three months ended September 30, 2018, compared to the three months ended September 30, 2017. Growth in Email API revenue is due in part to the inclusion of features for customers in the current period that were not offered in the prior period. These additional features do not result in additional email volume but carry additional fees.

Revenue from our email marketing services (which includes our Marketing Campaigns service and its predecessor) increased by $1.6 million, or 32.0%, in the third quarter of 2018 compared to the third quarter of 2017 as a result of a $2.5 million increase in revenue from our Marketing Campaigns service in the third quarter of 2018, offset by a $1.0 million decrease in revenue from our predecessor email marketing service, which was discontinued at the end of 2017. Our Marketing Campaigns service has a higher price point than our Email API service and is currently growing at a higher rate.

Cost of Revenue and Gross Margin

	For the Three Months Ended June 30,
	Three Months Ended September 30,
	2018			2017			$ Change		% Change
	(In thousands)
Cost of revenue	$	8,~~805~~978		$	7,~~274~~612		$	1,~~531~~366		2117.09	%
Gross margin		75.39	%		73.1	%

Cost of revenue increased $1.5 4 million, or 2117.09%, in the three months ended ~~June~~September 30, 2018, compared to the three months ended ~~June~~September 30, 2017. The increase was primarily attributable to ~~a $0.6 million increase in employee costs due to an increase in headcount related to delivering our services and supporting our customers~~: as well as a $0.4 million increase in data center and hosting costs related to the investment in additional property and equipment to support growth. Our non-cash, stock-based compensation increased by $0.2 million compared to the prior year period. There was also an increase of $0.3 million in other expenses, including allocated overhead.

29 · a $0.4 million increase in employee costs due to an increase in headcount;

a $0.4 million increase in allocated overhead and other expenses;

a $0.3 million increase in data center and hosting costs related to the investment in additional property and equipment;

a $0.2 million increase in non-cash, stock-based compensation expense; and

a $0.1 million increase in amortization expense associated with use of additional intangible assets.

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Operating Expenses

	For the Three Months Ended June 30,
	Three Months Ended September 30,
	2018		2017		$ Change		% Change
	(In thousands)
Research and development	$	911,~~871~~049	$	7,~~139~~545	$	23,~~732~~504		3846.34	%
Selling and marketing	$	89,~~707~~612	$	67,~~870~~124	$	12,~~837~~488		2634.79	%
General and administrative	$	910,~~165~~606	$	67,~~494~~684	$	2,~~671~~922		4138.10	%

Research and Development

Research and development expense increased $23.75 million, or 3846.34%, in the three months ended ~~June~~September 30, 2018 compared to the three months ended ~~June~~September 30, 2017. This increase was primarily aattributable ~~result of a $1.6 million increase in product and engineering employee costs related~~ to additional research and development initiatives. Our non-cash, stock-based compensation increased by $0.9 million compared to the prior year period. Additionally, we had a $0.2 million increase in other expenses, including allocated overhead. :

a $1.5 million increase in employee costs due to an increase in headcount;

a $0.9 million increase in non-cash, stock-based compensation expense

a $0.5 million increase in third-party consulting services;

a $0.5 million increase in allocated overhead and other expenses; and

a $0.1 million increase in amortization expense associated with use of additional intangible assets.

Selling and Marketing

Selling and marketing expense increased $12.85 million, or 2634.79%, in the three months ended ~~June~~September 30, 2018 compared to the three months ended ~~June~~September 30, 2017. This increase was aprimarily ~~result~~attributable ~~of an $0.8 million increase in employee costs related~~ to an increase in headcount and a $0.5 million increase in advertising and promotion expense. Our non-cash, stock-based compensation increased by $0.2 million compared to the prior year period. Additionally, we had a $0.3 million increase in other expenses, including allocated overhead.:

a $1.3 million increase in advertising and promotion expense;

a $0.5 million increase in employee costs due to an increase in headcount;

a $0.3 million increase in non-cash, stock-based compensation expense;

a $0.3 million increase in allocated overhead and other expenses; and

a $0.1 million increase in referral fees.

General and Administrative

General and administrative expense increased $2.79 million, or 4138.10%, in the three months ended ~~June~~September 30, 2018 compared to the three months ended ~~June~~September 30, 2017. This increase was aprimarily ~~result~~attributable ~~of an $0.8 million increase in employee costs, largely related~~ to an increase in headcount to support the revenue growth of our business and being a public company, a $0.7 million increase in non-cash, stock-based compensation, a $0.5 million increase in office expense, a $0.4 million increase in third-party consulting services,: a $0.2 million increase in credit card fees, a $0.2 million increase to support public company operating requirements, and a $0.1 million increase in various other costs. These increases were partially offset by an $0.2 million decrease in costs related to our recent IPO.

30 · a $1.4 million increase in professional fees related to merger and acquisition activity, including the Twilio transaction;

an $0.8 million increase in non-cash, stock-based compensation;

a $0.7 million increase in third-party consulting services;

a $0.4 million increase in office expense;

a $0.3 million increase in employee costs due to an increase in headcount;

a $0.2 million increase to support public company operating requirements;

a $0.2 million increase in credit card fees; and

a $0.1 million increase in various other costs.

These increases were partially offset by:

a $0.7 million decrease in costs related to our recent IPO; and

a $0.5 million decrease in sales and use tax expense.

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Comparison of the ~~Six~~Nine Months Ended ~~June~~September 30, 2018 and 2017

Revenue

	For the Six Months Ended June 30,
	Nine Months Ended September 30,
	2018		2017		$ Change		% Change
	(In thousands)
Email API	$	5483,~~108~~650	$	4163,~~357~~831	$	1219,~~751~~819		3031.80	%
Marketing Campaigns		1118,~~739~~165		59,~~896~~802		58,~~843~~363		9985.13	%
Predecessor email marketing service		—-		23,~~967~~931		(23,~~967~~931)		(100.0)	%
Other		23,~~397~~628		12,~~623~~595		~~774~~1,033		4739.78	%
Total	$	68105,~~244~~443	$	5180,~~843~~159	$	1625,~~401~~284		31.65	%

Total revenue increased $1625.43 million, or 31.65%, in the ~~six~~nine months ended ~~June~~September 30, 2018 compared to the ~~six~~nine months ended ~~June~~September 30, 2017. The increase was primarily attributable to an increase in email volume from and sales of additional services to existing customers and secondarily related to sales of our Email API and other services to new customers. Revenue growth from existing customers comprised $1318.32 million, or 8172.10%, of the $1625.43 million increase, with the remaining revenue growth attributed to new customers. ~~Our~~A ~~overall~~significant ~~email~~portion ~~volume increased to 270.6 billion, or 29%, in the first half~~ of ~~2018 from 210.0 billion in the first half of 2017, and~~ our ~~number~~new ofcustomer ~~customers~~growth ~~increased~~relates to ~~74.6~~customers ~~thousand,~~who ortypically ~~35%,~~have atlower ~~June~~volume ~~30,~~but ~~2018~~pay ~~from~~higher ~~55.2~~rates ~~thousand~~per atemail ~~June 30, 2017~~processed.

~~Revenue~~Our ~~from~~overall ~~our~~email ~~Email~~volume ~~API service~~ increased ~~by $12~~26.89% to ~~million, or 30~~412.~~8%,~~3 billion in the ~~six~~first nine months ~~ended~~of ~~June 30,~~ 2018, compared to 325.0 ~~the~~billion ~~six~~in ~~months~~the ~~ended~~first ~~June~~nine ~~30,~~months of 2017. Our ~~Revenue~~number ~~from~~of ~~our~~customers ~~email marketing services (which includes our Marketing Campaigns service and its predecessor)~~ increased by35.1% to $278.96 ~~million,~~thousand at orSeptember ~~32.4%~~30, ~~in the first half of~~ 2018 compared to 58.2 ~~the~~thousand ~~first~~at ~~half~~September of30, 2017. Numerous asfactors acan ~~result~~cause offluctuations ~~a $5.8 million increase~~ in ~~revenue~~email ~~from~~volume, ~~our~~including ~~Marketing Campaigns service in~~ the ~~first~~number ~~half~~ of ~~2018,~~business ~~offset~~days bycompared awith ~~$3.0~~non-business ~~million~~days ~~decrease~~ in ~~revenue~~the ~~from~~period, ~~our~~with ~~predecessor~~ email ~~marketing~~volume ~~service,~~generally ~~which~~higher ~~was~~on ~~discontinued~~business ~~at the end of 2017~~days.

~~Cost~~Revenue from our Email API service increased by $19.8 million, or 31.0%, in the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017. Growth in Email API revenue is due in part to the inclusion of ~~Revenue~~features ~~and~~for ~~Gross~~customers ~~Margin~~in the current period that were not offered in the prior period. These additional features do not result in additional email volume but carry additional fees.

	For the Six Months Ended June 30,
	2018			2017			$ Change		% Change
	(In thousands)
Cost of revenue	$	17,293		$	13,745		$	3,548		25.8	%
Gross margin		74.7	%		73.5	%

Revenue from our email marketing services (which includes our Marketing Campaigns service and its predecessor) increased by $4.4 million, or 32.3%, in the first nine months of 2018 compared to the first nine months of 2017 as a result of an $8.4 million increase in revenue from our Marketing Campaigns service in the first nine months of 2018, offset by a $3.9 million decrease in revenue from our predecessor email marketing service, which was discontinued at the end of 2017. Our Marketing Campaigns service has a higher price point than our Email API service and is currently growing at a higher rate.

Cost of revenue increased $3.5 million, or 25.8%, in the six months ended June 30, 2018, compared to the six months ended June 30, 2017. The increase was primarily attributable to a $1.4 million increase in data center and hosting costs related to the investment in additional property and equipment to support growth, as well as $1.2 million increase in employee costs due to an increase in headcount related to delivering our services and supporting our customers. Our non-cash, stock-based compensation increased by $0.4 million compared to the prior year period. There was also an increase of $0.5 million in other expenses, including allocated overhead.35

Table of Contents

Cost of Revenue and Gross Margin


	Nine Months Ended September 30,
	2018			2017			$ Change		% Change
	(In thousands)
Cost of revenue	$	26,271		$	21,357		$	4,914		23.0	%
Gross margin		75.1	%		73.4	%

Cost of revenue increased $4.9 million, or 23.0%, in the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017. The increase was primarily attributable to:

a $1.7 million increase in data center and hosting costs related to the investment in additional property and equipment;

a $1.7 million increase in employee costs due to an increase in headcount;

a $0.6 million increase in allocated overhead and other expenses;

a $0.6 million increase in non-cash, stock-based compensation expense; and

a $0.3 million increase in amortization expense associated with use of additional intangible assets.

Operating Expenses

	For the Six Months Ended June 30,
	Nine Months Ended September 30,
	2018		2017		$ Change		% Change
	(In thousands)
Research and development	$	1829,~~805~~854	$	1321,~~663~~208	$	58,~~142~~646		3740.68	%
Selling and marketing	$	1626,~~643~~255	$	1320,~~458~~582	$	35,~~185~~673		2327.76	%
General and administrative	$	1828,~~031~~637	$	1321,~~538~~222	$	47,~~493~~415		3334.29	%

Research and Development

Research and development expense increased $58.16 million, or 3740.68%, in the ~~six~~nine months ended ~~June~~September 30, 2018 compared to the ~~six~~nine months ended ~~June~~September 30, 2017. This increase was primarily aattributable ~~result of a $3.2 million increase in product and engineering employee costs related~~ to additional research and development initiatives. Our non-cash, stock-based compensation increased by $1.3 million compared to the prior year period. Additionally, we had a $0.9 million increase in other expenses, including allocated overhead. These increases were partially offset by a decrease in costs related to third‑party consulting services of $0.3 million. :

a $4.7 million increase in employee costs due to an increase in headcount;

a $2.3 million increase in non-cash, stock-based compensation;

a $1.2 million increase in allocated overhead and other expenses;

a $0.2 million increase in third-party consulting services; and

a $0.2 million increase in amortization expense associated with use of additional intangible assets.

Selling and Marketing

Selling and marketing expense increased $35.27 million, or 2327.76%, in the ~~six~~nine months ended ~~June~~September 30, 2018 compared to the ~~six~~nine months ended ~~June~~September 30, 2017. This increase was aprimarily ~~result~~attributable ~~of a $1.5 million increase in employee costs related~~ to an increase in headcount and a $0.7 million increase in advertising and promotion expense. Our non-cash, stock-based compensation increased by $0.3 million compared to the prior year period. Additionally, we had a $0.7 million increase in other expenses, including allocated overhead.:

a $2.0 million increase in employee costs due to an increase in headcount;

a $2.0 million increase in advertising and promotion expense;

a $0.7 million increase in allocated overhead and other expenses;

a $0.6 million increase in non-cash, stock-based compensation expense;

a $0.3 million increase in referral fees; and

a $0.1 million increase in amortization expense associated with use of additional intangible assets.

Table of Contents

General and Administrative

General and administrative expense increased $47.54 million, or 3334.29%, in the ~~six~~nine months ended ~~June~~September 30, 2018 compared to the ~~six~~nine months ended ~~June~~September 30, 2017. This increase was aprimarily ~~result~~attributable ~~of a $1.5 million increase in employee costs, largely related~~ to an increase in headcount to support the revenue growth of our business and being a public company, a $1.2 million increase in non-cash, stock-based compensation, a $1.1 million increase in office expense, a $1.0 million increase in third-party consulting services, a $0.4 million increase in credit card fees, a $0.5 million increase to support public company operating requirements, and a $0.2 million increase in various other costs. These increases were partially offset by an $0.8 million decrease in merger and acquisition costs, travel and entertainment expense, and costs related to our recent IPO. Additionally, we had a $0.6 million decrease in restructuring costs. :

a $2.0 million increase in non-cash, stock-based compensation expense;

a $1.8 million increase in employee costs due an increase in headcount;

a $1.7 million increase in third-party consulting services;

a $1.5 million increase in office expense;

a $1.1 million increase in professional fees related to merger and acquisition activity, including the Twilio transaction;

a $0.7 million increase to support public company operating requirements;

a $0.6 million increase in credit card fees; and

a $0.3 million increase in various other costs;

These increases were partially offset by:

a $1.2 million decrease in costs related to our IPO;

a $0.7 million decrease in sales and use tax expense; and

a $0.4 million decrease in restructuring expense associated with facility lease terminations and office relocations

Liquidity and Capital Resources

Since inception, we have financed our operations primarily through the sale of equity securities, debt financings, and the sale of software subscriptions and support.

As of ~~June~~September 30, 2018, we had $~~182~~186.34 million of cash and cash equivalents. We believe that existing cash and cash equivalents and expected positive cash flows from operations will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months.

We have a loan and security agreement, or LSA, with a bank that provides a revolving line of credit with $40.0 million maximum borrowing availability. The LSA matures in August ~~2018, and we intend to renew it subject to satisfactory terms and conditions~~2019. We had $40.0 million available to draw as of ~~June~~September 30, 2018 and were in compliance with all financial covenants. No amounts were outstanding as of ~~June~~September 30, 2018, and we had no borrowing activity during the three months ended ~~June~~September 30, 2018.

For further information on our LSA, refer to Note 67 in the condensed consolidated financial statements contained elsewhere in this Quarterly Report on Form 10-Q.

32On October 15, 2018, we entered into the Merger Agreement with Twilio and Merger Sub. We have agreed to various covenants and agreements, including, among others, agreements to conduct our business in the ordinary course during the period between the execution of the Merger Agreement and the effective time of the merger. Outside of certain limited exceptions, we may not take, authorize, commit, resolve, or agree to do certain actions without Twilio’s consent, including:

acquiring businesses;

incurring capital expenditures above specified thresholds;

issuing additional debt facilities;

repurchasing shares of our outstanding common stock.

We do not believe these restrictions will prevent us from meeting our ongoing costs of operations, working capital needs, or capital expenditure requirements.

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Contractual Obligations, Commitments, and Future Capital Requirements

For further information on our commitments and contingencies, refer to Note 1213 in the condensed consolidated financial statements contained elsewhere in this Quarterly Report on Form 10-Q.

Historical Cash Flows

The following table shows a summary of our cash flows for the periods indicated:

	For the Six Months Ended June 30,
	Nine Months Ended September 30,
	2018		2017
	(In thousands)
Net cash flows from operating activities	$	815,~~733~~988	$	510,~~122~~131
Net cash flows from investing activities		(911,~~261~~447)		(56,~~204~~996)
Net cash flows from financing activities		87,~~472~~511		(26,~~773~~219)
Effect from foreign currency exchange rates		(3)		23
Net increase (decrease) in cash, cash equivalents, and restricted cash		712,~~941~~049		(23,~~853~~081)
Cash, cash equivalents, and restricted cash at beginning of period		175,496		40,478
Cash, cash equivalents, and restricted cash at end of period	$	~~183~~187,~~437~~545	$	37,~~625~~397

Operating Activities

Net cash from operating activities was $816.80 million in the ~~six~~nine months ended ~~June~~September 30, 2018, ~~primarily~~which ~~due~~was toa result of our net loss of $14.60 million adjusted for non-cash items, including:

· $58.24 million of depreciation and amortization expense;

· $48.61 million of non-cash, stock-based compensation expense; and

· $2.45 million of landlord reimbursements for leasehold improvements associated with the construction of our Irvine, California and Redwood City, California offices.

Due to the timing of cash receipts and payments, ~~changes~~we inhad ~~operating assets and liabilities resulted in~~ a $20.27 million net ~~use~~cash ofinflow ~~cash~~from changes in operating assets and ~~consisted~~liabilities, ofwhich ~~the~~was ~~following~~a result of:

· aan ~~decrease~~increase in ~~prepaid~~accounts ~~expenses~~payable and ~~other~~accrued ~~assets~~liabilities of $02.92 million due in part to seasonal employee payments;

· ana ~~increase~~decrease in ~~accounts~~other ~~receivable~~liabilities of $01.37 million due in part to the timing of sales tax payments;

· a decrease in ~~accounts~~prepaid ~~payable~~expenses and ~~accrued~~other ~~liabilities~~assets of $1.72 million ~~due in part to seasonal employee payments~~; and

· aan ~~decrease~~increase in ~~other~~accounts ~~liabilities~~receivable of $1.10 million ~~due in part to the timing of sales tax payments~~.

Net cash from operating activities was $510.1 million in the ~~six~~nine months ended ~~June~~September 30, 2017, ~~primarily~~which ~~due~~was toa result of our net loss of $34.17 million adjusted for non-cash items, including:

· $47.60 million of depreciation and amortization expense;

· $12.47 million of non-cash, stock-based compensation expense;

$0.7 million of landlord reimbursements for leasehold improvements associated with the construction of our Denver, Colorado office; and

· a $0.54 million adjustment to our redeemable preferred stock warrant liability, which existed prior to our IPO.

~~Due to the timing of cash receipts and payments, changes in operating assets and liabilities resulted in a net cash inflow of $0.8 million and consisted of the following:~~38

· an increase in accounts receivable of $0.8 million;

· an increase in prepaid expenses and other assets of $0.5 million; and

· an increase in accounts payable and accrued liabilities of $2.1 million.

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Due to the timing of cash receipts and payments, we had a $3.6 million net cash inflow from changes in operating assets and liabilities, which was the result of:

an increase in accounts receivable of $0.5 million;

an increase in prepaid expenses and other assets of $1.4 million;

an increase in accounts payable and accrued liabilities of $4.3 million; and

an increase in other liabilities of $1.2 million.

Investing Activities

Net cash used in investing activities was $911.34 million in the ~~six~~nine months ended ~~June~~September 30, 2018, ~~primarily~~relating ~~due~~ to $810.41 million for the buildout of our new offices in Irvine and Redwood City, California and our corporate headquarters in Denver, Colorado. The remainder ~~was~~relates ~~due~~ to purchases of property and equipment used to support the growth of the business.

Net cash used in investing activities was $57.20 million in the ~~six~~nine months ended ~~June~~September 30, 2017, ~~primarily~~relating ~~due~~ to $34.08 million ~~related~~in to purchases of property and equipment ~~used to support the growth of the business~~ and $2.2 million ~~related~~for tothe ~~our~~ acquisition of Bizzy.

Financing Activities

Net cash from financing activities was $87.5 million in the ~~six~~nine months ended ~~June~~September 30, 2018, ~~primarily~~relating ~~due~~ to ~~the following~~:

$13.7 million in proceeds from our follow-on public offering (net of $0.7 million underwriting discounts and commissions);

· $68.43 million in proceeds from stock option exercises;

· $7.17 million in payments for tax withholding on stock awards;

· $35.30 million in principal payments on capital lease obligations; ~~and~~

· $1.23 million in payments for stock issuance costs related to our follow-on public offering.; and

~~Net~~· ~~cash used in financing activities was~~ $20.85 million in ~~the six months ended June 30, 2017, primarily due to $3.0 million in~~ principal payments on ~~capital~~notes ~~lease obligations, partially offset by $0~~payable.~~3 million in proceeds from stock option exercises.~~

Net cash used in financing activities was $6.2 million in the nine months ended September 30, 2017, relating to:

$5.1 million in principal payments on capital lease obligations; and

$1.5 million in payments for offering costs.

These cash outflows were partially offset by $0.4 million in proceeds from stock option exercises.

Critical Accounting Policies

Our condensed consolidated financial statements were prepared in accordance with GAAP and applicable rules and ~~regulations of the~~ Securities and Exchange Commission regulations regarding interim financial reporting. The preparation of consolidated financial statements, in conformity with GAAP, requires estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, the reported amounts of revenue and expenses during the reporting period, and certain information disclosed in the notes to the consolidated financial statements. Actual results could materially differ from these estimates.

We believe that the assumptions and estimates associated with revenue recognition, the valuation of goodwill and intangible assets, and stock-based compensation involve a greater degree of judgment and complexity. Accordingly, these are the accounting policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.

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Aside from the treatment of restricted cash on the statements of cash flows and our accounting policy election regarding forfeitures on stock awards (refer to Note 2 in the condensed consolidated financial statements contained elsewhere in this Quarterly Report on Form 10-Q), there have been no material changes to our significant accounting policies as described in our December 31, 2017 consolidated financial statements.

Recently Issued Accounting Guidance

For further information on recently adopted accounting standards and new accounting pronouncements not yet adopted, refer to Note 2 in the condensed consolidated financial statements contained elsewhere in this Quarterly Report on Form 10-Q.

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Off Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off balance sheet arrangements or other contractually narrow or limited purposes.

Item 3.Quantitative and Qualitative Disclosure About Market Risk

Market Risks Associated with Financial Instruments

There have been no material changes in our market risk during the three months ended ~~June~~September 30, 2018. For additional information, see Item 7A. Quantitative and Qualitative Disclosures About Market Risk in Part II of our Annual Report on Form 10-K for the year ended December 31, 2017.

Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our principal executive officer and principal financial officer have concluded that as of such date, our disclosure controls and procedures were effective.

Changes in Internal Control

There were no changes in our internal control over financial reporting in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10‑Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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PART II – OTHER INFORMATION

Item 1.Legal Proceedings

From time to time we are involved in legal proceedings and subject to claims arising in the ordinary course of our business. We are not presently a party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, financial condition, or cash flows. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management time and resources and other factors.

Item 1A.Risk Factors

Our operations and financial results are subject to various risks and uncertainties including those described below. You should carefully consider the risks and uncertainties described below, together with all of the other information in this Quarterly Report on Form 10-Q, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as our other public filings with the SEC. Our business, operating results, financial condition, or prospects could be materially and adversely affected by any of these risks and uncertainties. In that case, the trading price of our common stock could decline. In addition, the risks and uncertainties discussed below are not the only ones we face. Our business, operating results, financial condition, or prospects could also be harmed by risks and uncertainties not currently known to us or that we currently do not believe are material, and these risks and uncertainties could result in a decrease in the market price of our common stock. In assessing the risks and uncertainties described below, you should also refer to the other information contained in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and the related notes thereto.

Risks Related to Our Potential Merger with Twilio

Failure to complete, or delays in completing, the potential merger with Twilio announced on October 15, 2018 could materially and adversely affect our results of operations and our stock price.

On October 15, 2018, we entered into an agreement with Twilio pursuant to which, if all of the conditions to closing are satisfied or waived, we will merge with a subsidiary of Twilio and become a wholly-owned subsidiary of Twilio. Consummation of the Merger is subject to certain closing conditions and a number of the conditions are not within our control, and may prevent, delay or otherwise materially adversely affect the completion of the transaction. We cannot predict with certainty whether and when any of the required closing conditions will be satisfied or if another uncertainty may arise and cannot assure you that we will be able to successfully consummate the proposed merger as currently contemplated under the Merger Agreement or at all. Risks related to the failure of the proposed merger to be consummated include, but are not limited to, the following:

we would not realize any or all of the potential benefits of the Merger, including any synergies that could result from combining our financial and proprietary resources with those of Twilio, which could have a negative effect on our stock price;

under some circumstances, we may be required to pay a termination fee to Twilio of $69.0 million or to reimburse Twilio for its expenses up to a cap of $5.0 million;

we will remain liable for significant transaction costs, including legal, accounting, financial advisory and other costs relating to the Merger regardless of whether the Merger is consummated;

the trading price of our common stock may decline to the extent that the current market price for our stock reflects a market assumption that the Merger will be completed;

the attention of our management may have been diverted to the Merger rather than to our own operations and the pursuit of other opportunities that could have been beneficial to us;

we could be subject to litigation related to any failure to complete the Merger;

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the potential loss of key personnel during the pendency of the Merger as employees and other service providers may experience uncertainty about their future roles with us following completion of the Merger; and

under the Merger Agreement, we are subject to certain restrictions on the conduct of our business prior to completing the Merger, which restrictions could adversely affect our ability to conduct our business as we otherwise would have done if we were not subject to these restrictions.

The occurrence of any of these events individually or in combination could materially and adversely affect our results of operations and our stock price.

Uncertainty about the Merger may adversely affect relationships with our customers, suppliers, and employees, whether or not the Merger is completed.

In response to the announcement of the Merger, our existing or prospective customers or suppliers may:

delay, defer, or cease purchasing products or services from, or providing products or services to, us or the combined company;

delay or defer other decisions concerning us or the combined company; or

otherwise seek to change the terms on which they do business with us or the combined company.

Any such delays or changes to terms could materially harm our business or, if the Merger is completed, the business of the combined company.

In addition, as a result of the Merger, our current and prospective employees could experience uncertainty about their future with us or the combined company. As a result, key employees may depart because of issues relating to such uncertainty or a desire not to remain with Twilio following the completion of the Merger.

Losses of customers, employees or other important strategic relationships could have a material adverse effect on our business, operating results, and financial condition. Such adverse effects could also be exacerbated by a delay in the completion of the Merger for any reason, including delays associated with obtaining requisite regulatory approvals or the approvals of our stockholders and/or Twilio’s stockholders.

If the Merger is consummated, the combined company may not perform as we or the market expects, which could have an adverse effect on the price of Twilio Class A Common Stock, which our current stockholders will own following the completion of the Merger.

Even if the Merger is consummated, the combined company may not perform as we or the market expect. Risks associated with the combined company following the Merger include:

if the Merger does not qualify as a tax-free reorganization under Section 368(a) of the Code, our stockholders may be required to pay substantial U.S. federal income taxes;

integrating two businesses is a difficult, expensive, and time-consuming process, and the failure to integrate successfully the businesses of SendGrid and Twilio in the expected time frame would adversely affect Twilio’s future results following completion of the Merger;

the Merger will significantly increase the size of Twilio’s operations, and if Twilio is not able to effectively manage its expanded operations, its Class A Common Stock price may be adversely affected;

it is possible that key employees might decide not to remain with Twilio after the Merger is completed, and the loss of key personnel could have a material adverse effect on the resulting entity’s financial condition, results of operations and growth prospects;

the success of the combined company will also depend upon relationships with third parties and pre-existing

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customers of SendGrid and Twilio, which relationships may be affected by customer preferences or public attitudes about the Merger. Any adverse changes in these relationships could adversely affect the combined company’s business, financial condition, and results of operations;

the stock price of Twilio Class A Common Stock after the Merger may be affected by factors different from those currently affecting the shares of SendGrid; and

if governmental agencies or regulatory bodies impose requirements, limitations, costs, divestitures, or restrictions on the consummation of the proposed Merger, the combined company’s ability to realize the anticipated benefits of the Merger may be impaired.

If any of these events were to occur, the value of the Twilio Class A Common Stock received by our stockholders in the Merger would be adversely affected.

The Merger Agreement contains provisions that could discourage or deter a potential competing acquirer that might be willing to pay more to effect a business combination with us.

Unless and until the Merger Agreement is terminated in accordance with its terms, subject to certain specified exceptions, we are not permitted to solicit, initiate, induce or knowingly encourage or knowingly facilitate any inquiries or the making of any proposal or offer that constitutes, or would reasonably be expected to lead to, an alternative transaction proposal or to engage in discussions or negotiations with third parties regarding any alternative transaction proposal. Such restrictions could discourage or deter a third party that may be willing to pay more than Twilio for the outstanding capital stock of SendGrid from considering or proposing such an acquisition of SendGrid.

Because the number of shares of Twilio’s Class A Common Stock issuable in the Merger in respect of one share of our common stock is fixed and will not be adjusted in the event of changes in the price of either Twilio’s Class A Common Stock or our common stock, the market value of the shares of Twilio’s Class A Common Stock to be received by our stockholders in connection with the Merger is subject to change prior to the completion of the Merger.

The number of shares of Twilio’s Class A Common Stock issuable in the Merger in respect of one share of our common stock is fixed such that each share of our common stock will be converted into the right to receive 0.485 of a share of Twilio Class A Common Stock in connection with the Merger. No adjustments to this exchange ratio will be made based on changes in the price of either Twilio’s Class A Common Stock or our common stock or changes in the business or future prospects of Twilio or us prior to the completion of the Merger. Changes in stock price, business or future prospects may result from a variety of factors, including, among others, general market and economic conditions, changes in Twilio’s or our operations and financial projections, market assessment of the likelihood that the Merger will be completed as anticipated or at all and regulatory considerations. Many of these factors are beyond Twilio’s or our control.

As a result of any such changes in stock price, the market value of the shares of Twilio’s Class A Common Stock that our stockholders will receive at the time that the Merger is completed could vary significantly from the value of such shares immediately prior to the public announcement of the Merger.

Lawsuits may be filed against us and the members of our board of directors arising out of the proposed merger, which may delay or prevent the proposed merger.

Putative stockholder complaints, including stockholder class action complaints, and other complaints may be filed against us, our board of directors, Twilio, Twilio’s board of directors and others in connection with the transactions contemplated by the Merger Agreement. The outcome of litigation is uncertain, and we may not be successful in defending against any such future claims. Lawsuits that may be filed against us, our board of directors, Twilio, or Twilio’s board of directors could delay or prevent the Merger, divert the attention of our management and employees from our day-to-day business and otherwise adversely affect us financially.

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The ability to complete the Merger is subject to the receipt of consents and approvals from government entities, which may impose conditions that could have an adverse effect on us or the combined company or could cause either party to abandon the Merger.

Completion of the Merger is conditioned upon, among other things, the expiration or termination of the required waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. In deciding whether to grant antitrust approvals, the Federal Trade Commission, or the FTC, and the United States Department of Justice, or the DOJ, will consider the effect of the Merger on competition. The FTC or DOJ may condition their approval of the Merger on Twilio’s or our agreement to various requirements, limitations, or costs, or require divestitures or place restrictions on the conduct of Twilio’s business following the Merger. If we and Twilio agree to these requirements, limitations, costs, divestitures or restrictions, the ability to realize the anticipated benefits of the Merger may be impaired. We cannot provide any assurance that we or Twilio will obtain the necessary approvals or that any of the requirements, limitations, costs, divestitures, or restrictions to which we might agree will not have a material adverse effect on Twilio following the Merger. In addition, these requirements, limitations, costs, divestitures, or restrictions may result in the delay or abandonment of the Merger.

The Merger Agreement contains provisions that may preclude us, while the transaction is pending, from pursuing acquisitions that we might otherwise pursue or that could discourage or deter competing bids for SendGrid. Voting agreements with us and Twilio also may have the effect of deterring competing bids for SendGrid.

Under the Merger Agreement, subject to certain exceptions, SendGrid is restricted from pursuing or entering into agreements with respect to transactions involving acquisitions of its assets or business. In addition, unless and until the merger agreement is terminated, subject to specified exceptions, SendGrid is restricted from soliciting, initiating, knowingly encouraging, or knowingly facilitating proposals that could reasonably be expected to lead to an alternative acquisition proposal for the SendGrid. Our board is permitted under certain circumstances to change its recommendation to our stockholders prior to obtaining stockholder consent if it receives a “Company Superior Proposal” or if an “Intervening Event” has occurred (in each case, as such terms are defined in the Merger Agreement). In such events, SendGrid is required to negotiate with Twilio regarding potential amendments to the Merger Agreement and may only enter into an agreement with respect to a “Company Superior Proposal” if specified conditions have been satisfied and we have paid a termination fee of $69.0 million to Twilio.

Additionally, certain SendGrid stockholders have agreed to vote their shares in favor of the Merger Agreement and the Merger and certain Twilio stockholders have agreed to vote their shares in favor of the issuance of Twilio Class A Common Stock in exchange for our common stock pursuant to the Merger Agreement, which may increase the likelihood that the Merger is consummated.

The restrictive covenants contained in the Merger Agreement could have the effect while the acquisition is pending of preventing us from pursuing acquisitions that could be in the best interests of SendGrid and our stockholders. In addition, these restrictions could discourage a third party that may have an interest in acquiring SendGrid from considering or proposing such an acquisition. If such a proposal were forthcoming, we may not be able to enter into an agreement with respect to such an alternative transaction without incurring potentially significant liability to Twilio.

Risks Related to our Business

If we are unable to implement and maintain effective internal controls over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may be negatively affected.

We currently meet the definition of an “emerging growth company.” However, as of June 30, 2018, the market value of our common stock held by non-affiliates exceeded $700 million and we therefore will cease to be an “emerging growth company” at the conclusion of this fiscal year ending on December 31, 2018. Accordingly, pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, we will be required to include in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, an attestation report as to the effectiveness of our internal control over financial reporting that is issued by our independent registered public accounting firm.

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Because our independent registered public accounting firm has not yet attested as to the effectiveness of our internal control over financial reporting, we cannot conclude that such an audit would not uncover a material weakness in our internal controls or a combination of significant deficiencies that could result in the conclusion that we have a material weakness in our internal controls. Under rules of the SEC, a material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. We cannot assure you that material weaknesses will not be identified in the future.

If material weaknesses or other deficiencies occur in the future, or if we fail to fully maintain effective internal controls in the future, it could result in a material misstatement of our financial statements that would not be prevented or detected on a timely basis, which could require a restatement, cause investors to lose confidence in our financial information, or cause our stock price to decline.

We have incurred and will continue to incur increased costs as a result of operating as a public company, and our management is required to devote substantial time to compliance initiatives.

As a public company, we incur significant legal, accounting, insurance, and other expenses that we did not incur as a private company, and our management and other personnel have and will need to continue to devote a substantial amount of time to compliance initiatives resulting from operating as a public company. We also anticipate that these costs and compliance initiatives will increase as a result of ceasing to be an “emerging growth company,” as defined in the JOBS Act, at the conclusion of this fiscal year ending December 31, 2018. In particular, because we will no longer qualify as an “emerging growth company” after this year, we will be required to include in our Annual Report on Form 10-K for the year ended December 31, 2018, an attestation report as to the effectiveness of our internal control over financial reporting that is issued by our independent registered public accounting firm.

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compliance initiatives will increase as a result of ceasing to be an “emerging growth company,” as defined in the JOBS Act, at the conclusion of this fiscal year ending December 31, 2018. In particular, because we will no longer qualify as an “emerging growth company” after this year, we will be required to include in our Annual Report on Form 10-K for the year ended December 31, 2018, an attestation report as to the effectiveness of our internal control over financial reporting that is issued by our independent registered public accounting firm.

Our recent growth may not be indicative of our future growth and, if we continue to grow, we may not be able to manage our growth effectively.

We have recently experienced a period of rapid growth in our headcount and operations. In particular, we grew from 58 employees as of December 31, 2011, to ~~433~~448 fulltime employees as of ~~June~~September 30, 2018, and we have also significantly increased the number of emails processed by our platform over the last several years. We anticipate that we will continue to expand our operations and headcount in the near term. Our growth has placed, and future growth will place, a significant strain on our management, technical, administrative, operational, and financial infrastructure. Our success will depend in part on our ability to manage this growth effectively. To manage the expected growth of our operations and personnel, we will need to continue to improve our management, technical, administrative, operational, and financial controls and our reporting systems and procedures. Failure to effectively manage our growth could result in difficulty or delays in effectively scaling our platform to handle increased email volumes, declines in quality or customer satisfaction, increases in costs, difficulties in introducing new features or other operational difficulties. Any of these difficulties could adversely impact our business and results of operations.

If we are unable to sustain our revenue growth rate, we may not achieve or maintain profitability in the future.

We have experienced rapid revenue growth over recent years, with revenue of $111.9 million, $79.9 million, and $58.5 million in 2017, 2016, and 2015, respectively. Although we have experienced rapid revenue growth historically, we may not continue to grow as rapidly in the future and our revenue growth rates may decline. Any success that we may experience in the future will depend in large part on our ability to, among other things:

maintain and expand our customer base;

increase revenue from existing customers through increased or broader use of our platform within their organizations;

improve the performance and capabilities of our platform through research and development;

continue to successfully expand our business domestically and internationally;

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achieve the anticipated benefits from any businesses or technologies that we may acquire; and

successfully compete with other companies.

If we are unable to maintain consistent revenue or revenue growth, our stock price could be volatile or decline, and we may not achieve or maintain profitability. You should not rely on our revenue for any prior quarterly or annual periods as any indication of our future revenue or revenue growth.

If we are unable to attract new customers, retain existing customers or increase sales both to new and existing customers, our business and results of operations will be affected adversely.

To succeed, we must continue to attract and retain customers and increase sales to new and existing customers. We price our services on a tiered subscription model based on the customer’s use of our services (principally, email volumes), and therefore the revenue we generate from our customers depends on their use of our services. We have only a limited salesforce and to date have relied primarily on our self-service model to generate our revenue. The amount that new and existing customers purchase, renew, and use our services depends on a number of factors, including those outside of our control.

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We may fail to attract new customers, retain existing customers or increase sales to new or existing customers as a result of a number of factors, including: reductions in our current or potential customers’ spending levels; competitive factors affecting the cloud-based business software market, including the introduction of competing platforms, discount pricing and other strategies that may be implemented by our competitors; our ability to execute on our growth strategy and operating plans; a decline in our customers’ level of satisfaction with our platform and customers’ usage of our platform or an increased perception by our customers’ that they can manage their email distribution and marketing efforts internally or otherwise without use of our platform; reductions in the use of email as a digital communication channel; the difficulty and cost to switch to a competitor may not be significant for many of our customers; changes in our relationships with third parties, including our strategic partners and payment processors; the timeliness and success of new services and functionality we may offer now or in the future, including our Marketing Campaigns service that we introduced in late 2015; concerns relating to actual or perceived security breaches; the frequency and severity of any system outages; and technological changes or problems. In addition, we believe a relatively small number of businesses have more than one unique paying account with us, and we count each of these accounts as a separate customer. We believe our number of customers is an important measure for evaluating our business. Because some businesses have more than one unique paying account with us and we count each of these accounts as a separate customer, the number of our customers set forth in this Quarterly Report on Form 10-Q for any period is not necessarily indicative of the number of unique businesses from which we received revenue during any such period. We rely on our reputation and recommendations from key customers in order to promote our platform. The loss of any of our key customers could have a significant impact on our business reputation and our ability to obtain new customers. In addition, acquisitions of our customers could lead to cancellation of our contracts with those customers or by the acquiring companies.

Failure to attract new customers, retain existing customers or increase sales to customers will harm our business and results of operations.

Our limited operating history in new and developing markets and our rapid growth make it difficult to evaluate our current business and future prospects.

We introduced our Email API service in 2009, our Marketing Campaigns service in late 2015, and our Expert Services in 2016. The majority of our revenue growth has occurred in the last few years and was derived from the sale of subscriptions to our Email API service. This short operating history and our rapid growth make it difficult to evaluate our future prospects. Our ability to forecast our future operating results is subject to a number of uncertainties, including our ability to plan for and model future growth, particularly with respect to our most recently introduced services. If our assumptions regarding these uncertainties are incorrect or change in reaction to changes in our markets, or if we do not address these risks successfully, our operating and financial results could differ materially from our historical and expected operating and financial results, our business could suffer, and the trading price of our stock may decline.

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We also operate in new and developing markets that may not continue to develop as we expect. You should consider our future prospects in light of the challenges and uncertainties that we face, including the fact that our business has grown rapidly, and it may not be possible to discern fully the trends that we are subject to, that we operate in new and developing markets and that elements of our business strategy are new and subject to ongoing development. We have encountered and will continue to encounter risks and difficulties frequently experienced by growing companies in rapidly changing industries, including increasing and unforeseen expenses as we continue to grow our business. If we do not manage these risks successfully, our business and results of operations will be harmed.

If we are unable to increase adoption of our platform through our self-service model, our business, results of operations, and financial condition may be adversely affected.

Historically, we have relied on the adoption of our platform through our self-service model for a significant majority of our revenue. We have only a limited salesforce. Although we believe our business model can continue to scale without a significantly larger salesforce, our self-service model may not continue to be as effective as we anticipate, and the absence of a large direct sales function may impede our future growth.

As we continue to scale our business, we may choose to invest in a larger direct salesforce to reach additional customers and grow our revenue. Our ability to manage a larger direct salesforce is uncertain. Identifying and recruiting additional qualified sales personnel and managing and training them once hired would require significant time, expense and attention and would significantly impact our business model. In addition, adding additional salesforce would considerably change our cost structure and results of operations, and we may have to reduce other expenses, such as our research and development expense, in order to accommodate a corresponding increase in marketing and sales expense and attain and maintain profitability. If our lack of a large direct salesforce limits us from reaching additional customers and growing our revenue and we are unable to hire, develop and retain talented sales personnel in the future, our revenue growth and results of operations may be harmed.

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and would significantly impact our business model. In addition, adding additional salesforce would considerably change our cost structure and results of operations, and we may have to reduce other expenses, such as our research and development expense, in order to accommodate a corresponding increase in marketing and sales expense and attain and maintain profitability. If our lack of a large direct salesforce limits us from reaching additional customers and growing our revenue and we are unable to hire, develop and retain talented sales personnel in the future, our revenue growth and results of operations may be harmed.

Our growth depends in part on the success of our strategic relationships with third parties to sell our services.

We have established strategic relationships with a number of other companies, including public cloud infrastructure providers and ecommerce platforms, software vendors that offer complementary products and with which we co-sell our services and digital marketing agencies that resell our services to their clients. In order to grow our business, we anticipate that we will continue to establish and maintain these strategic relationships. Identifying strategic partners, and negotiating and documenting relationships with them, requires significant time and resources. Our competitors may be effective in providing incentives to third parties to favor their products or services over ours or to prevent or reduce subscriptions to our platform. In addition, acquisitions of our strategic partners by our competitors, or acquisition of our competitors by our strategic partners, could result in a decrease in the number of our current and potential customers, as our strategic partners may no longer facilitate the adoption of our platform by potential customers.

If we are unsuccessful in establishing or maintaining our strategic relationships with third parties, our ability to compete or to grow our revenues could be impaired and our operating results could suffer. Even if we are successful in our strategic relationships, we cannot assure you that these relationships will result in increased usage of our services or increased revenues.

Our future success depends in part on our ability to continue to drive adoption of our platform and services by international customers, and our international operations and sales to customers with international operations expose us to risks inherent in international sales.

During the years ended December 31, 2017, 2016, and 2015, we generated more than 36% of our revenue from customers located outside the United States. The future success of our business will depend, in part, on our ability to continue to expand our customer base worldwide and to sell additional services to international customers.

If we are unable to successfully market our platform to or localize our services for international customers, then our business, results of operations, and financial condition may be adversely affected, and our growth may be constrained.

We have limited experience operating in international markets where the challenges of conducting our business can be significantly different from those we have faced in the United States and the existing markets in which we operate and where business practices may create internal control risks. We have only recently established operations outside of the United States, with the opening of an office in London in late 2016. We may open additional non-U.S. offices in the future. There are a number of risks inherent in conducting international business, including:

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where business practices may create internal control risks. We have only recently established operations outside of the United States, with the opening of an office in London in late 2016. We may open additional non-U.S. offices in the future. There are a number of risks inherent in conducting international business, including:

fluctuations in foreign currency exchange rates;

the burden of complying with a wide variety of laws and regulatory regimes, including those relating to labor matters, consumer and data protection, privacy, network security, encryption, and taxes;

tariffs, export and import restrictions, restrictions on foreign investments, sanctions, and other trade barriers or protection measures;

costs and difficulties of localizing our services;

lack of acceptance of our localized services;

difficulties in and costs of staffing, managing, and operating our international operations;

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tax issues, including restrictions on repatriating earnings and with respect to our corporate operating structure and intercompany arrangements;

weaker intellectual property protection;

economic weakness or currency related crises;

limitations on the ability of our self-service sales model to attract international customers;

our limited historical sale experience outside the United States;

our ability to adapt to our marketing and selling efforts to different cultures and customer requirements;

common local business behaviors that are in direct conflict with our policies and codes of conduct and ethics;

corporate espionage; and

political instability and security risks in the countries where we are doing business.

If we are unable to effectively manage these risks, our relationships with our existing and prospective customers, strategic partners and employees and our operations outside of the United States may be adversely affected.

If we are not able to maintain and enhance our brand and maintain and increase market awareness of our company and services, then our business, results of operations, and financial condition may be adversely affected.

We believe that maintaining and enhancing the “SendGrid” brand identity and maintaining and increasing market awareness of our company and services is critical to achieving widespread acceptance of our platform, to strengthen our relationships with our existing customers and to our ability to attract new customers. The successful promotion of our brand will depend largely on our continued marketing efforts, our ability to continue to offer high quality services, our ability to be thought leaders in our industry and our ability to successfully differentiate our platform and services from competing products and services. For example, we rely on both algorithmic and purchased listings displayed by search engines to attract a significant percentage of our customers. Algorithmic listings cannot be purchased, and instead are determined and displayed solely by a set of formulas designed by the search engine. Purchased listings can be purchased by advertisers in order to attract customers to their websites, but the cost of purchased search listing advertising may increase as demand for these channels grows. If search engines on which we rely for algorithmic listings modify their algorithms in an attempt to optimize their search listings, this could result in fewer potential customers clicking through to our website, requiring us to resort to additional purchased listings or other costly advertisements to attempt to replace this traffic. If one or more search engines on which we rely for purchased listings modifies or terminates its relationship with us, or increases the amounts it charges us, our expenses could rise. Any such increases could negatively affect market awareness of our brand and our business, results of operations, and financial condition.

In addition, independent industry analysts often provide reviews of our services and competing products and services, which may significantly influence the perception of our services in the marketplace. If these reviews are negative or not as strong as reviews of our competitors’ products and services, then our brand may be harmed. This may cause us to lose existing customers, decrease the number of new customers that we are able to attract or lower our pricing model, each of which would likely harm our results of operations.48

From time to time, our customers and other third parties have complained about our platform, such as complaints about our pricing and customer support or the use of our platform to transmit spam, phishing scams, website links to harmful applications or other harmful or illegal material. If we do not handle customer and other complaints effectively, then our brand and reputation may suffer, our customers may lose confidence in us and our customers may reduce or cease their use of our services. In addition, many of our customers post about and discuss Internet-based products and services, including our platform and services, on social media. Our success depends, in part, on our ability to generate positive customer feedback and minimize negative feedback on social media channels where existing and potential customers seek and share information. If actions we take or changes we make to our platform or services, particularly as our platform

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~~continues~~with ~~to scale~~us, ~~upset~~or ~~these~~increases ~~customers~~the ~~then~~amounts ~~their~~it ~~online~~charges ~~commentary~~us, ~~could negatively affect~~ our ~~brand~~expenses ~~and~~could ~~reputation~~rise. ~~Complaints~~Any orsuch ~~negative~~increases ~~publicity~~could ~~about~~negatively ~~us,~~affect ~~our~~market ~~platform~~awareness orof our ~~services~~brand ~~could materially~~ and ~~adversely impact~~ our ~~ability to attract and retain customers, our~~ business, results of operations, and financial condition.

The promotion of our brand also requires us to make substantial expenditures, and we anticipate that these expenditures will increase as our market becomes more competitive and as we expand into new markets. To the extent that these activities increase revenue, this revenue still may not be enough to offset the increased expenses we incur. If we do not successfully maintain and enhance our brand, then our business may not grow, we may see our pricing power reduced relative to competitors and we may lose customers, all of which would adversely affect our business, results of operations, and financial condition.

The market in which we participate is highly competitive and, if we do not compete effectively, our operating results could be harmed.

We provide cloud-based services that enable businesses to reach their customers using email for both transactional and marketing purposes. The market for providing these services is fragmented, with some vendors addressing transactional email services, some vendors addressing email marketing services and other vendors providing a broad array of services that include transactional and marketing services as part of a software suite or broader portfolio of software offerings. Notwithstanding the availability of third-party software services, some businesses rely on internally-developed solutions for their email communications needs. The market for digital communications services is rapidly evolving, creating opportunity for new competitors to enter the market with point product solutions or addressing specific segments of the market. In addition, in some instances, we have strategic or other commercial relationships with companies with which we also compete, such as Amazon Web Services. Our competitors include:

· ~~Companies~~companies that offer transactional email services, including Amazon, Mailgun, Oracle, and SparkPost; and

· ~~Companies~~companies that offer email marketing services, including Adobe, Campaign Monitor, Endurance, IBM, MailChimp, Oracle, and Salesforce.

We believe the principal factors on which we compete include: completeness of offering; credibility with developers and marketers; global reach; ease of adoption; features and functionality; platform scalability, reliability, security, and performance; brand awareness and reputation; integration with third-party applications and data sources; customer support; and the total cost of deployment and ownership. Our current and potential competitors may develop and market new technologies with similar or superior functionality to our platform or at a cheaper price point that render our existing or future services less competitive or obsolete, and we may need to decrease the prices or accept less favorable terms for subscriptions for our services in order to remain competitive. If we are unable to maintain our pricing due to competitive pressures, our margins will be reduced, and our operating results will be negatively affected.

Our current and potential competitors also may have significantly more financial, technical, marketing, and other resources than we have, may be able to devote greater resources to the development, promotion, sale and support of their products and services, may have more extensive customer bases and broader customer relationships and may have longer operating histories and greater name recognition. As a result, these competitors may respond faster to new technologies and undertake more extensive marketing programs for their products or services. If these companies decide to further invest in and develop, market, or resell competitive products or services, or acquire or form a strategic alliance with one of our other competitors, our ability to compete effectively could be significantly compromised and our operating results could be harmed. In a few cases, these vendors may offer competitive products or services at little or no additional cost by bundling such products or services with their existing suite of applications. To the extent any of our competitors has existing relationships with potential customers for either email software or other applications, those customers may be unwilling to purchase our platform because of their existing relationships with our competitor. If we are unable to compete with such companies, the demand for our platform and services could substantially decline.49

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If our security measures are breached or unauthorized access to our or our customers’ and their end customers’ private or proprietary data is otherwise obtained, our platform or services may be perceived as not being secure, our reputation may be severely harmed, customers may reduce the use of or stop using our services, we may incur significant liabilities and we may lose the ability to offer our customers a credit card payment option.

Our operations involve the storage and transmission of data of our customers and their end customers, including personally identifiable information. Security breaches or other incidents could result in unauthorized access to, loss of or unauthorized disclosure of this information, litigation, indemnity obligations and other possible liabilities, as well as negative publicity, which could damage our reputation, impair our sales, and harm our customers and our business. Cyberattacks and other malicious Internet-based activity continue to increase generally, and cloud-based service providers like us are regularly targeted. For example, in 2013, we suffered a distributed denial of service attack, whereby a cybercriminal denied our customers access to our webpage and, in 2015, a cybercriminal gained unauthorized access to several of our internal systems, including those containing sensitive and confidential customer data. It is possible that we may face increased risk of cybersecurity attacks as compromising our platform may allow cybercriminals to send a large number of phishing emails that bypasses end users’ spam filters. If our security measures are compromised as a result of third-party action, employee or customer error, malfeasance, stolen or fraudulently obtained log-in credentials or otherwise, our reputation could be damaged, our business may be harmed, and we could incur significant liability. In addition, if the security measures of our customers are compromised, even without any actual compromise of our own systems, we may face negative publicity or reputational harm if our customers or anyone else incorrectly attributes the blame for such security breaches to us or our systems. We may be unable to anticipate or prevent techniques used to obtain unauthorized access or to sabotage our systems because they change frequently and generally are not detected until after an incident has occurred. As we increase our customer base and our brand becomes more widely known and recognized, we may become more of a target for third parties seeking to compromise our security systems or gain unauthorized access to our customers’ data. Further, as we rely more on third-party and public-cloud infrastructure, such as Amazon Web Services, we will become more dependent on third-party security measures to protect against unauthorized access, cyberattacks and the mishandling of customer data. Any security breach, whether actual or perceived, would harm our reputation, and we could lose customers and fail to acquire new customers. In addition, many governments have enacted laws requiring companies to notify individuals of data security incidents involving certain types of personal data and any mandatory disclosures we may make regarding a security breach would likely lead to widespread negative publicity, which may cause our customers to lose confidence in the effectiveness of our data security measures. It is also possible that security breaches sustained by our competitors could result in negative publicity for our entire industry that indirectly harms our reputation and diminishes demand for our services.

Furthermore, failure to maintain compliance with the data protection policy standards adopted by ~~the~~ major credit card issuers and other payment processors may limit our ability to offer our customers a credit card or online payment option. Any loss of our ability to offer our customers a credit card payment or online payment option would harm our reputation and make our platform and services less attractive to many organizations by negatively impacting our customer experience and significantly increasing our administrative costs related to customer payment processing.

Our existing general liability insurance may not cover any, or cover only a portion of any, potential claims related to security breaches to which we are exposed or may not be adequate to indemnify us for all or any portion of liabilities that may be imposed. In addition, there can be no assurance that the limitations on liability in our contracts would be enforceable or adequate or would otherwise protect us from any such liabilities with respect to any particular claim. Any imposition of liability that is not covered by insurance or is in excess of insurance coverage would increase our operating expenses and reduce our net income.

Our customers’ and other users’ violation of our policies or other misuse of our platform to transmit offensive or illegal messages, spam, phishing scams, and website links to harmful applications or for other fraudulent activity could damage our reputation, and we may face liability for unauthorized, inaccurate, or fraudulent information distributed via our platform.50

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~~These~~enforceable actions are in violation of our policies. However, our efforts to defeat spamming attacks and other fraudulent activity will not prevent all such attacks and activity, such use of our platform could damage our reputation and we could face claims for damages, copyright or ~~trademark~~adequate ~~infringement, defamation, negligence,~~ or ~~fraud.~~would ~~Moreover,~~otherwise ~~our~~protect ~~customers’~~us ~~and~~from ~~other~~any ~~users’~~such ~~promotion~~liabilities ~~of their products and services through our platform might not comply~~ with ~~federal,~~respect ~~state,~~to ~~and~~any ~~foreign~~particular ~~laws~~claim. WeAny ~~rely~~imposition ~~on contractual representations made to us by our customers that their use~~ of ~~our~~liability ~~platform will comply with our policies and applicable law, including, without limitation, our email policy. Although we retain the right to verify~~ that ~~customers~~is ~~and~~not ~~other~~covered ~~users are abiding~~ by ~~our~~insurance ~~email policy and to review their email and email lists, our customers and other users are ultimately responsible for compliance with our policies, and we do not systematically audit our customers~~ or ~~other~~is ~~users to confirm compliance with our policies. We cannot predict whether our role~~ in ~~facilitating~~excess ~~our~~of ~~customers’~~insurance orcoverage ~~other users’ activities~~ would ~~expose~~increase usour tooperating ~~liability~~expenses ~~under applicable law. Even if claims asserted against us do not result in liability, we may incur substantial costs in investigating~~ and ~~defending~~reduce ~~such claims. If we are found liable for~~ our ~~customers’~~net or other users’ activities, we could be required to pay fines or penalties, redesign business methods or otherwise expend resources to remedy any damages caused by such actions and to avoid future liabilityincome.

Despite our ongoing and substantial efforts to limit such use, a portion of our customers use our platform to transmit offensive or illegal messages, spam, phishing scams, and website links to harmful applications, reproduce and distribute copyrighted material or the trademarks of others without permission, and report inaccurate or fraudulent data or information. These issues also arise with respect to a portion of those users who use our platform on a free trial basis. These actions are in violation of our policies. However, our efforts to defeat spamming attacks and other fraudulent activity will not prevent all such attacks and activity, such use of our platform could damage our reputation and we could face claims for damages, copyright or trademark infringement, defamation, negligence, or fraud. Moreover, our customers’ and other users’ promotion of their products and services through our platform might not comply with federal, state, and foreign laws. We rely on contractual representations made to us by our customers that their use of our platform will comply with our policies and applicable law, including, without limitation, our email policy. Although we retain the right to verify that customers and other users are abiding by our email policy and to review their email and email lists, our customers and other users are ultimately responsible for compliance with our policies, and we do not systematically audit our customers or other users to confirm compliance with our policies. We cannot predict whether our role in facilitating our customers’ or other users’ activities would expose us to liability under applicable law. Even if claims asserted against us do not result in liability, we may incur substantial costs in investigating and defending such claims. If we are found liable for our customers’ or other users’ activities, we could be required to pay fines or penalties, redesign business methods or otherwise expend resources to remedy any damages caused by such actions and to avoid future liability.

Real or perceived errors, failures, vulnerabilities, or bugs in our software could adversely affect our business, results of operations, financial condition, and growth prospects.

Our platform is complex, and therefore, undetected errors, failures or bugs may occur, particularly as we continue to scale our platform to accommodate future growth. Our platform may be used in IT environments with different operating systems, system management software, applications, devices, databases and equipment and networking configurations, which may cause errors or failures of our platform or other aspects of the IT environment into which it is deployed. Despite testing by us, errors, failures, or bugs may not be found until our platform is used by our customers. Real or perceived errors, failures or bugs in our platform or services could result in negative publicity, loss of or delay in market acceptance of our platform or services, weakening of our competitive position, claims by customers for losses sustained by them or failure to meet any stated service level commitments in our customer agreements. For example, in November 2017, while making changes to increase stability in our system, a subset of recipient data was relocated within one of our data centers. During the relocation, this subset of recipient data did not fully propagate for some customer accounts, resulting in the decision to suspend Marketing Campaigns email sending for several hours until recipient data was restored. Correcting any of these problems could require significant expenditures of our capital and other resources and could cause interruptions, delays, or cessation in the sale of our services, which could cause us to lose existing or potential customers and adversely affect our business, results of operations, and financial condition.

Our platform and services and our business are subject to a variety of U.S. and international laws and regulations, including those regarding privacy, data protection and information security. Any failure by us or our third-party service providers, as well as the failure of our platform or services to comply with applicable laws and regulations would harm our business, results of operations, and financial condition.

We are subject to a variety of laws and regulations, including regulation by various federal government agencies, including the U.S. Federal Trade Commission, or FTC, and state and local agencies. The United States and various state and foreign governments have adopted or proposed limitations on, or requirements regarding, the collection, distribution, use, security, and storage of personally identifiable information of individuals. For example, in May 2018, the general data protection regulation became effective, bringing with it a complete overhaul of E.U. data protection laws. The new rules supersede prior E.U. data protection legislation, impose more stringent E.U. data protection requirements, and provide for greater penalties for noncompliance. Further, the FTC and many state attorneys general are applying federal and state consumer protection laws to impose standards on the online collection, use and dissemination of data. Self-regulatory obligations, other industry standards, policies and other legal obligations may apply to our collection, distribution, use, security or storage of personally identifiable information or other data relating to individuals. In addition, the federal government and many states and foreign governments have enacted laws requiring companies to notify individuals of data security breaches involving certain types of personal data. These obligations may be interpreted and applied in an inconsistent manner from one jurisdiction to another and may conflict with one another, other regulatory requirements, or our internal practices. Any failure or perceived failure by us to comply with United States, European Union or other foreign privacy or security laws, regulations, policies, industry standards or legal obligations or any security incident that results in the unauthorized access to, or acquisition, release or transfer of, personally identifiable information or other customer data may result in governmental enforcement actions, litigation, fines and penalties or adverse publicity and could cause our customers to lose trust in us, which could have an adverse effect on our reputation and business.

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prior E.U. data protection legislation, impose more stringent E.U. data protection requirements, and provide for greater penalties for noncompliance. Further, the FTC and many state attorneys general are applying federal and state consumer protection laws to impose standards on the online collection, use and dissemination of data. Self-regulatory obligations, other industry standards, policies and other legal obligations may apply to our collection, distribution, use, security or storage of personally identifiable information or other data relating to individuals. In addition, the federal government and many states and foreign governments have enacted laws requiring companies to notify individuals of data security breaches involving certain types of personal data. These obligations may be interpreted and applied in an inconsistent manner from one jurisdiction to another and may conflict with one another, other regulatory requirements, or our internal practices. Any failure or perceived failure by us to comply with United States, European Union or other foreign privacy or security laws, regulations, policies, industry standards or legal obligations or any security incident that results in the unauthorized access to, or acquisition, release or transfer of, personally identifiable information or other customer data may result in governmental enforcement actions, litigation, fines and penalties or adverse publicity and could cause our customers to lose trust in us, which could have an adverse effect on our reputation and business.

We expect that there will continue to be new proposed laws, regulations and industry standards concerning privacy, data protection and information security in the United States, the European Union, and other jurisdictions, and we cannot yet determine the impact such future laws, regulations and standards may have on our business. Changing definitions of personal data and information may also limit or inhibit our ability to operate or expand our business, including limiting strategic partnerships that may involve the sharing of data. Also, some jurisdictions require that certain types of data be retained on servers within these jurisdictions. Our failure to comply with applicable laws, directives and regulations may result in enforcement action against us, including fines and imprisonment, and damage to our reputation, any of which may have an adverse effect on our business and operating results. In 2016, the European Union and the United States political authorities adopted the E.U.-U.S. Privacy Shield, or Privacy Shield, to enable companies in the United States to transfer personal data lawfully from the European Union and Switzerland to the United States. Organizations in the United States may participate in the Privacy Shield program once they have satisfied a series of requirements (as contained in a set of privacy-protective principles), which are designed to ensure they will continue to provide a level of data protection deemed “adequate” by the European Commission. The Privacy Shield is administered by the U.S. Department of Commerce and the European Commission. In December 2017, we obtained our E.U.-U.S. Privacy Shield certification and Swiss-U.S. Privacy Shield certification. By submitting our self-certifications to these Privacy Shield frameworks, we have committed to apply the frameworks’ principles to all personal information received by us from the European Economic Area and Switzerland in reliance on these frameworks. These frameworks enable us to lawfully collect, receive and process personal data from the European Union and Switzerland.

We publicly post our privacy policies and practices concerning our processing, use and disclosure of the personally identifiable information provided to us by our website visitors. Our publication of our privacy policies and other statements we publish that provide promises and assurances about privacy and security can subject us to potential state and federal action if they are found to be deceptive or misrepresentative of our practices.

If our service is perceived to cause, or is otherwise unfavorably associated with, violations of privacy or data security requirements, it may subject us or our customers to public criticism and potential legal liability. Existing and potential privacy laws and regulations concerning privacy and data security and increasing sensitivity of consumers to unauthorized processing of personal information may create negative public reactions to technologies, products, and services such as ours. Public concerns regarding personal information processing, privacy and security may cause some of our customers’ end users to be less likely to visit their websites or otherwise interact with them. If enough end users choose not to visit our customers’ websites or otherwise interact with them, our customers could stop using our platform. This, in turn, may reduce the value of our services and slow or eliminate the growth of our business.

Evolving and changing definitions of what constitutes “Personal Information” and “Personal Data” within the European Union, the United States and elsewhere, especially relating to the classification of internet protocol, or IP, addresses, machine or device identification numbers, location data and other information, may limit or inhibit our ability to operate or expand our business. Future laws, regulations, standards, and other obligations could impair our ability to collect or use information that we utilize to provide email delivery and marketing services to our customers, thereby impairing our ability to maintain and grow our customer base and increase revenue. Future restrictions on the collection, use, sharing or disclosure of our customers’ data or additional requirements for express or implied consent of customers for the use and disclosure of such information limit our ability to develop new services and features.

United States federal legislation and the laws of many foreign countries impose certain obligations on the senders of commercial emails, which could minimize the effectiveness of our platform, and establish financial penalties for non-compliance, which could increase the costs of our business.52

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~~laws~~ United ~~may~~States ~~not~~federal belegislation ~~preempted by the CAN-SPAM Act. In addition, certain foreign jurisdictions, such as Australia, Canada,~~ and the ~~European Union, have enacted~~ laws ~~that regulate sending email, and some~~ of ~~these~~many ~~laws are more restrictive than U.S. laws. For example, some~~ foreign ~~laws~~countries ~~prohibit~~impose ~~sending~~certain ~~broad~~obligations ~~categories~~on ~~of email unless~~ the ~~recipient~~senders ~~has provided the sender advance consent to receipt~~ of ~~such~~commercial ~~email~~emails, orwhich incould ~~other~~minimize ~~words has “opted-in” to receiving such email. If we were found to be in violation of~~ the ~~CAN-SPAM~~effectiveness ~~Act, applicable state laws governing email not preempted by the CAN-SPAM Act or foreign laws regulating the distribution~~ of ~~email, whether as a result of violations by~~ our ~~customers or our own acts or omissions~~platform, weand ~~could~~establish befinancial ~~required~~penalties tofor ~~pay large penalties~~non-compliance, which ~~would~~could ~~adversely~~increase affect our financial condition, significantly harm our business, and injure our reputation. The terms of injunctions, judgments, consent decrees or settlement agreements entered into connection with enforcement actions or investigations against our company in connection with any of the ~~foregoing~~costs ~~laws may also require us to change one or more aspects~~ of ~~the way we operate~~ our business~~, which could impair our ability to attract and retain customers or could increase our operating costs~~.

The Federal Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, or the CAN-SPAM Act, establishes certain requirements for commercial email messages and transactional email messages and specifies penalties for the transmission of email messages that are intended to deceive the recipient as to source or content. The CAN-SPAM Act, among other things, obligates the sender of commercial emails to provide recipients with the ability to opt out of receiving future commercial emails from the sender. In addition, some states have passed laws regulating commercial email practices that are significantly more restrictive and difficult to comply with than the CAN-SPAM Act. For example, Utah and Michigan prohibit the sending of email messages that advertise products or services that minors are prohibited by law from purchasing (e.g., alcoholic beverages, tobacco products, illegal drugs) or that contain content harmful to minors (e.g., pornography) to email addresses listed on specified child protection registries. Some portions of these state laws may not be preempted by the CAN-SPAM Act. In addition, certain foreign jurisdictions, such as Australia, Canada, and the European Union, have enacted laws that regulate sending email, and some of these laws are more restrictive than U.S. laws. For example, some foreign laws prohibit sending broad categories of email unless the recipient has provided the sender advance consent to receipt of such email, or in other words has “opted-in” to receiving such email. If we were found to be in violation of the CAN-SPAM Act, applicable state laws governing email not preempted by the CAN-SPAM Act or foreign laws regulating the distribution of email, whether as a result of violations by our customers or our own acts or omissions, we could be required to pay large penalties, which would adversely affect our financial condition, significantly harm our business, and injure our reputation. The terms of injunctions, judgments, consent decrees or settlement agreements entered into connection with enforcement actions or investigations against our company in connection with any of the foregoing laws may also require us to change one or more aspects of the way we operate our business, which could impair our ability to attract and retain customers or could increase our operating costs.

The standards that private entities and inbox service providers use to regulate the use and delivery of email have in the past interfered with, and may in the future interfere with, the effectiveness of our platform and our ability to conduct business.

Our customers rely on email to communicate with their existing or prospective customers. Various private entities attempt to regulate the use of email for commercial solicitation. These entities often advocate standards of conduct or practice that significantly exceed current legal requirements and classify certain email solicitations that comply with current legal requirements as spam. Some of these entities maintain “blacklists” of companies and individuals, and the websites, inbox service providers and IP addresses associated with those entities or individuals that do not adhere to those standards of conduct or practices for commercial email solicitations that the blacklisting entity believes are appropriate. If a company’s IP addresses are listed by a blacklisting entity, emails sent from those addresses may be blocked if they are sent to any internet domain or internet address that subscribes to the blacklisting entity’s service or uses its blacklist.

From time to time, some of our IP addresses have become, and we expect will continue to be, listed with one or more blacklisting entities due to the messaging practices of our customers and other users. We may be at an increased risk of having our IP addresses blacklisted due to our scale and volume of email processed, compared to our smaller competitors. While the overall percentage of such email solicitations that our individual customers send may be at or below reasonable standards, the total aggregate number of all emails that we process on behalf of our customers may trigger increased scrutiny from these blacklisting entities. There can be no guarantee that we will be able to successfully remove ourselves from those lists. Because we fulfill email delivery on behalf of our customers, blacklisting of this type could undermine the effectiveness of our customers’ transactional email, email marketing programs and other email communications, all of which could have a material negative impact on our business and results of operations.

Additionally, inbox service providers can block emails from reaching their users. While we continually improve our own technology and work closely with inbox service providers to maintain our deliverability rates, the implementation of new or more restrictive policies by inbox service providers may make it more difficult to deliver our customers’ emails, particularly if we are not given adequate notice of a change in policy or struggle to update our platform or services to comply with the changed policy in a reasonable amount of time. In addition, some inbox service providers categorize as “promotional” emails that originate from email service providers and, as a result, direct them to an alternate or “tabbed” section of the recipient’s inbox. If inbox service providers materially limit or halt the delivery of our customers’ emails, or if we fail to deliver our customers’ emails in a manner compatible with inbox service providers’ email handling or authentication technologies or other policies, or if the open rates of our customers’ emails are negatively impacted by the actions of inbox service providers to categorize emails, then customers may question the effectiveness of our platform and cancel their accounts. This, in turn, would harm our business and financial condition.

We are subject to governmental export controls and economic sanctions and anti-corruption laws and regulations that could impair our ability to compete in international markets and subject us to liability if we are not in compliance with applicable laws.53

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~~license, for a particular deployment may be time-consuming, is not guaranteed and may result in the delay~~ or ~~loss~~if ofwe ~~sales~~fail ~~opportunities.~~to Indeliver ~~addition, changes in~~ our ~~platform~~customers’ ~~capabilities~~emails ~~or services, or changes~~ in ~~applicable~~a ~~export~~manner orcompatible ~~economic~~with ~~sanctions~~inbox ~~regulations~~service ~~may~~providers’ ~~create~~email ~~delays~~handling inor ~~the~~authentication ~~introduction~~technologies ~~and deployment of our platform and services in international markets,~~ or, inother ~~some cases~~policies, ~~prevent the provision of our services to certain countries~~ or ~~end~~if ~~users. Any change in export or economic sanctions regulations, shift in~~ the ~~enforcement~~open orrates ~~scope~~ of ~~existing~~our ~~regulations,~~customers’ oremails ~~change~~are innegatively ~~the~~impacted ~~countries, governments, persons, or technologies targeted~~ by ~~such~~the ~~regulations,~~actions ~~could also result in decreased use~~ of ~~our~~inbox ~~platform~~service ~~and~~providers ~~services, or in our decreased ability~~ to ~~provide~~categorize ~~our~~emails, ~~services~~then ~~to existing or prospective~~ customers ~~with~~may ~~international~~question ~~operations.~~the ~~Any~~effectiveness ~~decreased use~~ of our platform and ~~services~~cancel ortheir ~~limitation~~accounts. onThis, ~~our~~in ~~ability~~turn, towould ~~provide~~harm our ~~services could adversely affect our~~ business, ~~results of operations,~~ and financial condition.

Various of our operations and services may be subject to export control and economic sanctions regulations, including the U.S. Export Administration Regulations, U.S. Customs regulations and various economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Controls. The provision of our services must be made in compliance with these laws and regulations. Obtaining the necessary authorizations, including any required license, for a particular deployment may be time-consuming, is not guaranteed and may result in the delay or loss of sales opportunities. In addition, changes in our platform capabilities or services, or changes in applicable export or economic sanctions regulations may create delays in the introduction and deployment of our platform and services in international markets, or, in some cases, prevent the provision of our services to certain countries or end users. Any change in export or economic sanctions regulations, shift in the enforcement or scope of existing regulations, or change in the countries, governments, persons, or technologies targeted by such regulations, could also result in decreased use of our platform and services, or in our decreased ability to provide our services to existing or prospective customers with international operations. Any decreased use of our platform and services or limitation on our ability to provide our services could adversely affect our business, results of operations, and financial condition.

Furthermore, U.S. export control laws and economic sanctions prohibit the exportation of certain products and services to countries, territories, governments, and persons targeted by U.S. sanctions. While we are currently taking precautions to prevent our platform from being accessed by persons targeted by U.S. sanctions, including IP address blocking, such measures may be circumvented. Given the technical limitations in developing measures that will prevent access to internet based services from particular geographies or by particular individuals, we have previously identified and expect we will continue to identify customer accounts for our platform and services that originate or that we suspect originate from countries that are subject to U.S. embargoes.

We are aware that trials of and subscriptions to our platform have been initiated by persons and organizations in countries that are the subject of U.S. embargoes. Our provision of services in these instances was likely in violation of trade sanctions laws. We have terminated the accounts of such persons and organizations as we have become aware of them. We filed an initial voluntary self-disclosure with the U.S. Department of Treasury’s Office of Foreign Assets Control, or OFAC, in February 2016 concerning these potential violations. In December 2017, OFAC informed us it had completed its review of our voluntary self-disclosure and issued a cautionary letter instead of pursuing a civil monetary penalty. The cautionary letter is a final enforcement response but does not constitute a final agency determination and does not preclude OFAC from taking future enforcement action should new or additional information warrant renewed attention.

Our failure to comply with U.S. sanctions or export control laws or regulations could cause us and certain of our employees to be subject to substantial civil or criminal penalties, including the possible loss of export privileges; fines, which may be imposed on us and responsible employees or managers; and, in extreme cases, the incarceration of responsible employees or managers. Each instance in which we allow access to our platform may constitute a separate violation of these laws. We may also suffer reputational harm.

Further, we incorporate encryption technology into certain of our platform functions and services. Various countries regulate the import of certain encryption technology, including through import permitting and licensing requirements, and have enacted laws that could limit our customers’ ability to import our services into those countries. Encryption products and the underlying technology may also be subject to export control restrictions. Governmental regulation of encryption technology and regulation of exports of encryption products, or our failure to obtain required approval for our services, when applicable, could harm our international sales and adversely affect our revenue. Compliance with applicable regulatory requirements regarding the provision of our services, including with respect to new services, may create delays in the introduction of our services in international markets, prevent our customers with international operations from ~~deploying our platform and using our services throughout their globally-distributed systems or, in some cases, prevent the provision of our services to some countries altogether.~~

Additionally, we are subject to the Foreign Corrupt Practices Act, or FCPA, the U.K. Bribery Act and other anti-corruption, anti-bribery, and anti-money laundering laws in various jurisdictions both domestic and abroad. We and our third-party business partners and intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and may be held liable for the corrupt or other illegal activities of these third-party business partners and intermediaries, our employees, representatives, contractors, channel partners, and agents, even if we do not explicitly authorize such activities. While we have policies and procedures in place to address compliance with such laws, we cannot assure you that all of our employees and agents will not take actions in violation of our policies and applicable law, for which we may be ultimately held responsible. Any violation of the FCPA or other applicable anti-bribery, anti-corruption laws, and anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations, loss of export privileges, severe criminal or civil sanctions, or suspension or debarment from 54

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~~U.S.~~deploying ~~government~~our ~~contracts,~~platform ~~all~~and ofusing ~~which~~our ~~may~~services ~~have~~throughout antheir ~~adverse~~globally-distributed ~~effect~~systems onor, ~~our~~in ~~reputation,~~some ~~business~~cases, ~~operating~~prevent ~~results,~~the ~~and~~provision ~~prospects~~of our services to some countries altogether.

If we are unable to develop and release enhancements to our platform and services or new services and functionality to respond to rapid technological change in a timely and cost-effective manner, our business, operating results, and financial condition could be adversely affected.

The market for our platform and services is characterized by rapid technological change, frequent new product and service introductions and enhancements, changing customer demands, and evolving industry standards. The introduction of products and services embodying new technologies can quickly make existing products and services obsolete and unmarketable. For example, new Internet standards and technologies or new standards in the field of operating system support could emerge that are incompatible with customer deployments of our platform. The success of any enhancements or improvements to our platform or any new services or functionality depends on several factors, including timely completion, competitive pricing, adequate quality testing, integration with existing technologies and our platform, and overall market acceptance. We cannot be sure that we will succeed in developing, marketing, and delivering on a timely and cost-effective basis enhancements or improvements to our platform or any services or functionality that respond to technological change or new customer requirements, nor can we be sure that any enhancements or improvements to our platform will achieve market acceptance. For example, we introduced our Marketing Campaigns service in late 2015 and the service may not achieve broad market acceptance or be cost-effective in the long term.

Further, our success depends on meeting customer demands and expectations both with respect to the ability of our API to integrate within their applications and the speed, reliability, and effectiveness of our platform. For example, if we are unable to adapt our platform on a timely basis to new email or operating system protocols or we fail to effectively integrate our API with new technologies and standards, the ability of our platform to integrate with our customers’ systems or satisfy our customers’ needs may be impaired. In addition, because we use both co-located data centers and public cloud resources to host our platform, we need to continually enhance and improve our platform to keep pace with changes in Internet-related hardware, software, communications, and database technologies and standards. As we transition to Amazon Web Services to host a portion of our platform, we will become more dependent on third parties to keep pace with such changes. If we cannot deliver technologically competitive services, we could lose customers and our revenues and stock price may decline.

Any new services or functionality that we develop may not be introduced in a timely or cost-effective manner, may contain errors or defects, or may not achieve the broad market acceptance necessary to generate sufficient revenue. Moreover, even if we introduce new services or functionality, we may experience a decline in revenue of our existing services that is not offset by revenue from the new services or functionality. For example, customers may delay making purchases of new services to permit them to make a more thorough evaluation of these services or until industry and marketplace reviews become widely available. In addition, we may lose existing customers that choose a competitor’s products and services or that choose to rely on an internally-developed solution, rather than migrate to our new services. Similarly, if we offer a bundle of our services that our customers and prospective customers do not find compelling, our business will be harmed. This could result in a temporary or permanent revenue shortfall and adversely affect our business.

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We may not be able to scale our technology infrastructure and platform quickly enough to meet our customers’ growing needs and if we are not able to grow efficiently, our operating results could be harmed.

As usage of our platform grows, we will need to continue making significant investments to develop and implement new technologies in our infrastructure operations to support our growth. In addition, we will need to appropriately scale our internal business systems and our services organization, including basic customer support and our Expert Services team, to serve our growing customer base. Any failure of, or delay in, these efforts could impair the performance of our platform and reduce customer satisfaction and reduce our growth. Even if we are able to upgrade our systems and expand our staff, any such expansion may be expensive and complex. To the extent that we do not effectively scale our platform and infrastructure to meet the growing needs of our customers or are not able to manage that growth effectively, we may not be able to grow as quickly as we anticipate, our customers may reduce or stop use of our services, we may be unable to compete effectively, and our business and operating results may be harmed.

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We are primarily dependent on a single service, our Email API service, and the lack of continued market acceptance of our Email API service could cause our operating results to suffer.

Sales of our Email API service account for a substantial majority of our revenue. We expect that we will be substantially dependent on our Email API service to generate revenue for the foreseeable future. As a result, our operating results could suffer due to:

any decline in demand for our Email API service;

the failure of our Email API service to achieve continued market acceptance;

the market for our Email API service not continuing to grow, or growing more slowly than we expect;

the introduction or increase in popularity of products and technologies that serve as a replacement or substitute for, or represent an improvement over, our Email API service;

technological innovations or new standards that our Email API service does not address;

sensitivity to current or future prices offered by us or competing solutions;

our inability to release enhanced versions of our Email API service on a timely basis; and

the continued use and ubiquity of email in commercial transactions and applications.

If the market for our Email API service grows more slowly than anticipated or if demand for our Email API service does not grow as quickly as anticipated, we may not be able to grow our revenue.

Our services are sold on a short-term basis, such that subscription renewal or usage rates can decrease rapidly, and if we do not accurately predict these rates, our future revenue and operating results may be harmed.

We charge our customers based on their use of our services. We generally enter into monthly subscription agreements with our customers and, therefore, most of our customers may reduce or cease their use of our services on a monthly basis without penalty or termination charges. Our retention of customers and our customers’ use of our services are used to determine our subscription net dollar retention rate. We believe subscription net dollar retention rate is an important measure for evaluating our business. Additionally, our subscription agreements for use of our Email API service include a fixed fee that covers a specified number of email credits in the applicable month. If our customers lower the number of email credits they purchase in any month, then the fixed fees we charge will decrease. We have historically experienced customer turnover as a result of many of our customers being SMBs in the entrepreneurial stage of their development that are more susceptible than larger businesses to general economic conditions and other risks affecting their businesses. We cannot accurately predict customers’ usage levels on a monthly basis and the loss of customers or reductions in their usage levels of our services may each have a negative impact on our business, results of operations, and financial condition, including our subscription net dollar retention rate and our subscription gross dollar churn rate, which is a component of our subscription net dollar retention rate.

~~Any failure to offer high-quality support may harm our relationships with our customers and have a negative impact on our business and financial condition.~~56

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those associated with delivering support and documentation in languages other than English. If we are unable to provide efficient customer support globally at scale, our ability to grow our operations may be harmed and we may need to hire additional support personnel, which could negatively impact our operating results. In addition, we provide self-service support resources to our customers, such as our best practice guides and webcasts hosted on our website. We also rely on our user community to serve as a resource for questions on any part of our platform. Members of our user community are not obligated to participate in discussions with other users, and to the extent they do not our customers’ ability to find answers to questions about our platform of services may suffer. If we are unable to develop self-service support resources that are easy to use and that our customers utilize to resolve their technical issues or if our customers choose not to take advantage of these self-service support services, customers may continue to direct support requests to our customer support team instead of relying on our self-service support resources and our customers’ experience with our platform may be negatively impacted. Any failure to ~~maintain~~offer high-quality support, ormay ~~a market perception that we do not maintain high-quality support, could~~ harm our ~~reputation,~~relationships ~~our~~with ~~ability to sell~~ our ~~services~~customers toand ~~existing~~have ~~and~~a ~~prospective~~negative ~~customers,~~impact ~~and~~on our business, ~~operating results,~~ and financial condition.

Our customers depend on our customer support team to resolve technical and operational issues relating to our platform. Our ability to provide effective customer support is largely dependent on our ability to attract, train, and retain qualified personnel with experience in supporting customers on platforms such as ours. Our customer base has grown significantly and that has and will put additional pressure on our customer support team. We may be unable to respond quickly enough to accommodate short-term increases in customer demand for support. We also may be unable to modify the scope and delivery of our support to compete with changes in the support provided by our competitors. Increased customer demand for support, without corresponding revenue, could increase costs and negatively affect our operating results. In addition, as we continue to grow our operations and expand internationally, we need to be able to provide efficient customer support that meets our customers’ needs globally at scale and our customer support team will face additional challenges, including those associated with delivering support and documentation in languages other than English. If we are unable to provide efficient customer support globally at scale, our ability to grow our operations may be harmed and we may need to hire additional support personnel, which could negatively impact our operating results. In addition, we provide self-service support resources to our customers, such as our best practice guides and webcasts hosted on our website. We also rely on our user community to serve as a resource for questions on any part of our platform. Members of our user community are not obligated to participate in discussions with other users, and to the extent they do not our customers’ ability to find answers to questions about our platform of services may suffer. If we are unable to develop self-service support resources that are easy to use and that our customers utilize to resolve their technical issues or if our customers choose not to take advantage of these self-service support services, customers may continue to direct support requests to our customer support team instead of relying on our self-service support resources and our customers’ experience with our platform may be negatively impacted. Any failure to maintain high-quality support, or a market perception that we do not maintain high-quality support, could harm our reputation, our ability to sell our services to existing and prospective customers, and our business, operating results, and financial condition.

To deliver our services, we rely on internet service providers for network connectivity and co-location facilities and public cloud infrastructure to host our platform.

We interconnect with internet service providers around the world to enable the use of our platform by our customers and we expect that we will continue to rely heavily on internet service providers for network connectivity going forward. Our reliance on internet service providers reduces our control over quality of service and exposes us to potential service outages and rate fluctuations. If a significant portion of our internet service providers stop providing us with access to their network infrastructure, fail to provide access on a cost-effective basis, cease operations, or otherwise terminate access, the delay caused by qualifying and switching to other internet service providers could be time consuming and costly and could adversely affect our business, results of operations, and financial condition.

In addition, we currently serve the majority of our platform infrastructure from multiple co-located third-party data centers located throughout the United States and in certain international locations. We are in the process of transitioning the hosting of a portion of our platform infrastructure to Amazon Web Services. As a result, our operations depend, in part, on the ability of third parties to protect these facilities and resources against damage or interruption from natural disasters, power or network failures, criminal acts and similar events. In the event that any of our hosting arrangements are terminated, or if there is a lapse of service or damage to a facility or other resource, we could experience interruptions in our platform as well as delays and additional expenses in arranging new facilities and resources. We have experienced and expect that we will in the future experience such interruptions from time to time.

Any damage to, or failure of, the systems of our third-party providers could result in interruptions to and may cause errors or poor quality communications with our platform. Even with current and planned disaster recovery arrangements, our business could be harmed. Also, in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur. These factors in turn could further reduce our revenue, subject us to liability, damage our reputation and cause customers to become dissatisfied and fail to renew their subscriptions or demand credits, any of which could materially and adversely affect our business.

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If we are unable to hire, retain and motivate qualified personnel, our business will suffer.

Our future success depends, in part, on our ability to continue to attract and retain highly skilled personnel. From time to time we have experienced difficulty in hiring and retaining employees who have appropriate qualifications, and we are continuing our efforts to meet our hiring goals. We believe that there is, and will continue to be, intense competition for highly skilled executive, technical, marketing, and other personnel with experience in the locations where we maintain offices. We must provide competitive compensation packages and a high-quality work environment to hire, retain and motivate employees. If we are unable to retain and motivate our existing employees and attract qualified personnel to fill key positions, we may be unable to manage our business effectively, including the development, marketing, and sale of our services, which could adversely affect our business, results of operations, and financial condition. To the extent we hire personnel from competitors, we also may be subject to allegations that they have been improperly solicited or divulged proprietary or other confidential information.

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Volatility in, or lack of performance of, our stock price may also affect our ability to attract and retain key personnel. Many of our key personnel are, or will soon be, vested in a substantial amount of shares of common stock or stock awards. Employees may be more likely to terminate their employment with us if the shares they own or the shares underlying their vested options have significantly appreciated in value relative to the original purchase prices of the shares or the exercise prices of the options, or, conversely, if the exercise prices of the options that they hold are significantly above the trading price of our common stock. Additionally, if our stock price underperforms or the outlook for our stock is negative, we may not be able to attract qualified personnel to join our business. Candidates making employment decisions, particularly in high-technology industries, often consider the value and growth potential of any equity they may receive in connection with their employment. As a result, any significant decline in the market price of our common stock may adversely affect our ability to attract or retain highly skilled executive, technical, marketing, and other personnel. If we are unable to retain and attract highly-skilled employees, our business, results of operations, and financial condition could be adversely affected.

We have experienced losses in the past, and we may not achieve or sustain profitability in the future.

We generated net losses of $6.3 million, $3.9 million, and $5.9 million in 2017, 2016, and 2015, respectively. As of December 31, 2017, we had an accumulated deficit of $49.9 million. We will need to generate and sustain increased revenue levels in future periods in order to achieve or sustain profitability. We also expect our costs to increase in future periods, which could negatively affect our future operating results if our revenue does not increase commensurately. For example, we intend to continue to expend significant funds to develop and enhance our technical infrastructure, platform, and services, including possibly through the acquisition of complementary businesses and technologies, expand our research and development efforts and selling and marketing operations, including through increased headcount, meet the increased compliance requirements associated with our transition to and operation as a public company, and expand into new markets. Our efforts to grow our business may be more costly than we expect, and we may not be able to increase our revenue enough to offset our higher operating expenses. We may incur significant losses in the future for a number of reasons, including the other risks described in this Quarterly Report on Form 10-Q, and unforeseen expenses, difficulties, complications and delays and other unknown events. If we are unable to achieve or sustain profitability, our stock price may significantly decrease.

We may require additional financing in the future and may not be able to obtain such financing on favorable terms, if at all, which could slow or stop our ability to grow or otherwise harm our business.

We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges and opportunities, including the need to develop new features or enhance our platform, improve our operating infrastructure, or acquire complementary businesses and technologies. To date, we have financed our operations primarily through our operations, sales of our equity securities and debt financing provided by financial institutions. We may not be able to obtain additional financing on terms favorable to us, if at all. We may need to engage in equity or debt financings to secure additional funds. If we raise additional equity financing, our stockholders may experience significant dilution of their ownership interests and the per share value of our common stock could decline. If we engage in debt financing, the holders of debt would have priority over the holders of our common stock, and we may be required to accept terms that restrict our ability to incur additional indebtedness and our ability to operate our business. We may also be required to take other actions that would otherwise be in the interests of the debt holders and force us to maintain specified liquidity or other ratios, any of which could harm our business, financial condition, and operating results. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired, and our business may be adversely affected.

~~Our quarterly results may fluctuate significantly, and if we fail to meet the expectations of analysts or investors, our stock price could decline substantially.~~58

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~~have~~liquidity aor ~~limited~~other ~~operating~~ratios, ~~history~~any ~~with~~of ~~the~~which ~~current~~could ~~scale~~harm of our business, ~~which~~financial ~~makes~~condition, itand ~~difficult~~operating results. If we are unable to ~~forecast~~obtain ~~our~~adequate ~~future~~financing ~~results.~~or ~~Some~~financing ofon ~~the~~terms ~~factors~~satisfactory ~~that~~to ~~may~~us ~~cause~~when we require it, our ~~results~~ability ofto ~~operations~~continue to ~~fluctuate~~support ~~from~~our ~~quarter~~business growth and to ~~quarter~~respond ~~include:~~to business challenges could be significantly impaired, and our business may be adversely affected.

Our quarterly results may fluctuate significantly, and if we fail to meet the expectations of analysts or investors, our stock price could decline substantially.

Our results of operations, including our revenue, operating expenses, and cash flows, have fluctuated from quarter to quarter in the past and may continue to fluctuate as a result of a variety of factors, many of which are outside of our control, may be difficult to predict and may or may not fully reflect the underlying performance of our business. Additionally, we have a limited operating history with the current scale of our business, which makes it difficult to forecast our future results. Some of the factors that may cause our results of operations to fluctuate from quarter to quarter include:

our ability to attract new customers;

our ability to retain customers and expand their usage of our services;

changes in customers’ budgets and in the timing of their purchasing decisions, including as a result of any changes in their usage or expected usage of our services;

potential customers opting for alternative solutions, including internally-developed and maintained solutions, and competitive email or digital communication solutions;

our ability to control costs, including our operating expenses;

the timing and success of new products, features, and services by us and our competitors;

changes in the competitive dynamics of our industry, including price competition or consolidation among competitors, customers, or strategic partners;

significant security breaches of, technical difficulties with, or interruptions to, the delivery and use of our platform;

reputational harm or other liabilities resulting from the use of our platform to transmit spam, phishing scams, website links to harmful applications or other harmful or illegal material;

the collectability of receivables from customers, which may be hindered or delayed if these customers experience financial distress;

general economic conditions, both domestically and internationally, as well as economic conditions specifically affecting industries in which our customers participate;

fluctuations in foreign currency exchange rates which could, for example, cause our subscription agreements denominated in U.S. dollars to be more expensive internationally;

sales tax and other tax determinations by authorities in the jurisdictions in which we conduct business;

the impact of new accounting pronouncements; and

fluctuations in stock-based compensation expense.

The occurrence of one or more of the foregoing and other factors may cause our results of operations to vary significantly. Accordingly, our results of operations in any one quarter may not be meaningful and should not be relied upon as indicative of future performance. Additionally, if our quarterly results of operations fall below the expectations of investors or ~~securities analysts who follow our stock, the price of our common stock could decline substantially, and we could face costly lawsuits, including securities class action suits.~~

~~Our revenue is affected by seasonality.~~59

Our revenue is directly correlated with the number of emails sent by our customers. During the fourth-quarter holiday season, our customers process a relatively higher number of transactions, run a greater number of marketing programs, and therefore send more emails. Partially because of this seasonality, a greater percentage of our annual revenue has come from our fourth quarter than from other quarters. In 2017, 2016, and 2015, 28% to 29% of our annual revenue was in our fourth quarter. While we believe that this seasonality has affected and will continue to affect our quarterly results, our rapid growth has largely masked seasonal trends to date. Seasonality may become more pronounced in the future to the

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~~extent~~securities ~~our~~analysts ~~revenue~~who ~~mix~~follow ~~shifts between~~ our ~~Email API~~stock, ~~Marketing~~the ~~Campaigns,~~price ~~and~~of ~~other~~our ~~revenue~~common ~~sources~~stock ~~over~~could ~~time.~~decline ~~As a result~~substantially, ~~historical~~and ~~patterns~~we incould ~~our~~face ~~business~~costly ~~may~~lawsuits, ~~not~~including besecurities aclass ~~reliable~~action ~~indicator of our future performance~~suits.

Our revenue is affected by seasonality.

Our reliance on cloud-based technologies from third parties may adversely affect our business, results of operations, and financial condition.

We rely heavily on hosted cloud-based technologies from third parties in order to operate critical internal functions of our business, including our accounting, billing, and office management functions. If these services become unavailable due to extended outages or interruptions, or because they are no longer available on commercially reasonable terms or prices, our expenses could increase. As a result, our ability to manage our operations could be interrupted and our processes for managing our sales process and supporting our customers could be impaired until equivalent services, if available, are identified, obtained, and implemented, all of which could adversely affect our business, results of operations, and financial condition.

Our corporate culture has contributed to our success, and if we cannot maintain this culture as we grow, we could lose the innovation, creativity and teamwork fostered by our culture, which could harm our business.

We believe that our culture has been and will continue to be a key contributor to our success. Between December 31, 2011 and ~~June~~September 30, 2018, we have increased the size of our full-time workforce by 390 ~~375~~ employees, and we expect to continue to hire as we expand. If we do not continue to maintain our corporate culture as we grow, we may be unable to foster the innovation, creativity, and teamwork we believe we need to support our growth. Moreover, many of our employees may be able to receive significant proceeds from sales of our common stock in the public markets after our recent initial public offering, or IPO, which could lead to disparities of wealth among our employees that adversely affects relations among employees and our culture in general. Our potential headcount growth and our transition from a private company to a public company may result in a change to our corporate culture, which could harm our business.

Acquisition opportunities could be difficult to identify, and any pursued acquisitions could divert the attention of management, pose integration challenges, disrupt our business, dilute stockholder value, and adversely affect our operating results and financial condition.

We have in the past acquired and intend in the future seek to acquire or invest in businesses, products, or technologies that we believe could complement or expand our platform, enhance our technical capabilities, or otherwise offer growth opportunities. For example, in 2017, we acquired Bizzy, a marketing automation company. We do not know if we will be able to fully realize the anticipated benefits of this or other acquisitions and we may not be successful in integrating acquired technologies and businesses into our company. Acquisitions may disrupt our business, divert our resources, and require significant management attention that would otherwise be available for development of our existing business.

We also may not achieve the anticipated benefits from an acquired business due to a number of factors, including:

inability to integrate or benefit from acquired technologies or services in a profitable manner;

unanticipated costs, accounting charges or other liabilities associated with the acquisition;

incurrence of acquisition-related costs;

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difficulty integrating the accounting systems, operations, and personnel of the acquired business, including due to language, geographical or cultural differences;

difficulties and additional expenses associated with supporting legacy products and hosting infrastructure of the acquired business;

difficulty converting the customers of the acquired business onto our platform and contract terms, including disparities in the revenues, licensing, support, or professional services model of the acquired company;

adverse effects to our existing business relationships with business partners and customers as a result of the acquisition;

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the potential loss of key employees;

retention of employees from the acquired company;

use of resources that are needed in other parts of our business;

litigation or other claims arising in connection with the acquired company;

additional regulatory and compliance requirements; and

use of substantial portions of our available cash to consummate the acquisition.

In addition, a significant portion of the purchase price of companies we acquire may be allocated to goodwill and other intangible assets, which must be assessed for impairment at least annually. Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our operating results. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our operating results based on this impairment assessment process, which could adversely affect our results of operations.

Our platform or services may infringe the intellectual property rights of third parties and this may create liability for us or otherwise harm our business.

From time to time third parties have claimed, and may in the future claim, that our platform capabilities or services infringe their intellectual property rights, and such claims may also result in claims against our customers. These claims may damage our brand and reputation, harm our customer relationships, and create liability for us. We expect the number of such claims will increase as the number of products and services and the level of competition in our market grows, the functionality of our platform or services overlap with that of other products and services, and the volume of issued software patents and patent applications continues to increase.

Companies in the software and technology industries, including some of our current and potential competitors, own large numbers of patents, copyrights, trademarks, and trade secrets and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights. In addition, many of these companies have the capability to dedicate substantially greater resources to enforce their intellectual property rights and to defend claims that may be brought against them. Furthermore, patent holding companies, non-practicing entities and other adverse patent owners that are not deterred by our existing intellectual property protections have asserted, and in the future may seek to assert, patent claims against us. From time to time, third parties have contacted us inviting us to license their patents and may, in the future, assert patent, copyright, trademark or other intellectual property rights against us, our strategic partners or our customers. We have received, and may in the future receive, notices that claim we have misappropriated, misused, or infringed other parties’ intellectual property rights, and, to the extent we gain greater market visibility, we face a higher risk of being the subject of intellectual property infringement claims, which is not uncommon with respect to our market.

There may be third-party intellectual property rights, including issued or pending patents, that cover significant aspects of our technologies or business methods. In addition, if we acquire or license technologies from third parties, we may be exposed to increased risk of being the subject of intellectual property infringement due to, among other things, our lower level of visibility into the development process with respect to such technology and the care taken to safeguard against infringement risks. Any intellectual property claims, with or without merit, may be very time-consuming, may be expensive to settle or litigate, and may divert our management’s attention and other resources. These claims may also subject us to significant liability for damages, potentially including treble damages if we are found to have willfully infringed patents or copyrights and may require us to indemnify our customers for liabilities they incur as a result of such claims. These claims may also result in our having to stop using technology found to be in violation of a third party’s rights. We may be required to seek a license for the intellectual property, which may not be available on reasonable terms or at all. Even if a license were available, we may be required to pay significant royalties, which would increase our operating expenses. Alternatively, we may be required to develop alternative non-infringing technology, which may require significant time, effort, and expense, and may affect the performance or features of our platform. If we cannot license or develop alternative non-infringing substitutes for any infringing technology used in any aspect of our business,

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level of visibility into the development process with respect to such technology and the care taken to safeguard against infringement risks. Any intellectual property claims, with or without merit, may be very time-consuming, may be expensive to settle or litigate, and may divert our management’s attention and other resources. These claims may also subject us to significant liability for damages, potentially including treble damages if we are found to have willfully infringed patents or copyrights and may require us to indemnify our customers for liabilities they incur as a result of such claims. These claims may also result in our having to stop using technology found to be in violation of a third party’s rights. We may be required to seek a license for the intellectual property, which may not be available on reasonable terms or at all. Even if a license were available, we may be required to pay significant royalties, which would increase our operating expenses. Alternatively, we may be required to develop alternative non-infringing technology, which may require significant time, effort, and expense, and may affect the performance or features of our platform. If we cannot license or develop alternative non-infringing substitutes for any infringing technology used in any aspect of our business, we would be forced to limit or stop sales of our services and may be unable to compete effectively. Any of these results would adversely affect our business, operating results, and financial condition.

Indemnity provisions in various agreements potentially expose us to substantial liability for intellectual property infringement and other losses.

Our agreements with customers and other third parties typically include indemnification or other provisions under which we agree to indemnify or otherwise be liable to them for losses suffered or incurred as a result of claims of intellectual property infringement or other liabilities relating to or arising from our platform or services or other acts or omissions. Large indemnity payments or damage claims from contractual breach could harm our business, results of operations, and financial condition. Although we normally contractually limit our liability with respect to such obligations, we may still incur substantial liability related to them. Any dispute with a customer with respect to such obligations could have adverse effects on our relationship with that customer and other current and prospective customers, reduce demand for our platform and adversely affect our business, results of operations, and financial condition.

Our platform contains third-party open source software components, and failure to comply with the terms of the underlying open source software licenses could restrict our ability to sell our services.

Our platform incorporates open source software code. An open source license allows the use, modification, and distribution of software in source code form. Certain kinds of open source licenses further require that any person who creates a product or service that contains, links to, or is derived from software that was subject to an open source license must also make their own product or service subject to the same open source license. Using software that is subject to this kind of open source license can lead to a requirement that our services be provided free of charge or be made available or distributed in source code form. Although we do not believe our platform includes any open source software in a manner that would result in the imposition of any such requirement, the interpretation of open source licenses is legally complex, and, despite our efforts, it is possible that our platform could be found to contain this type of open source software. Further, few of the licenses applicable to open source software have been interpreted by courts, and there is a risk that these licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our platform or services in the future.

Moreover, we cannot assure you that our processes for controlling our use of open source software in our platform will be effective. If we have not complied with the terms of an applicable open source software license, we could be required to seek licenses from third parties to continue offering our platform on terms that are not economically feasible, to re-engineer our services to remove or replace the open source software, to discontinue the sale of our services if re-engineering could not be accomplished on a timely basis, to pay monetary damages, or to make generally available the source code for our proprietary technology, any of which could adversely affect our business, operating results, and financial condition.

In addition to risks related to license requirements, use of open source software can involve greater risks than those associated with use of third-party commercial software, as open source licensors generally do not provide warranties or assurance of title, performance, non-infringement, or controls on origin of the software. There is typically no support available for open source software, and we cannot assure you that the authors of such open source software will not abandon further development and maintenance. Many of the risks associated with the use of open source software, such as the lack of warranties or assurances of title or performance, cannot be eliminated, and could, if not properly addressed, negatively affect our business. We have established processes to help alleviate these risks, including a review process for screening requests from our development organizations for the use of open source software, but we cannot be sure that all open source software is identified or submitted for approval prior to use in our platform.

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screening requests from our development organizations for the use of open source software, but we cannot be sure that all open source software is identified or submitted for approval prior to use in our platform.

Responding to any infringement claim, regardless of its validity, or discovering open source software code in our platform could harm our business, operating results, and financial condition, by, among other things:

resulting in time-consuming and costly litigation;

diverting management’s time and attention from developing our business;

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requiring us to pay monetary damages or enter into royalty and licensing agreements on terms that may not be favorable to us;

causing delays in the deployment of our platform;

requiring us to stop selling some aspects of our platform;

requiring us to redesign certain components of our platform using alternative non-infringing or non-open source technology or practices, which could require significant effort and expense;

requiring us to disclose our software source code, the detailed program commands for our software; and

requiring us to satisfy indemnification obligations to our customers.

Any failure to protect our proprietary technology and intellectual property rights could substantially harm our business and operating results.

Our success and ability to compete depend in part on our ability to protect our proprietary technology and intellectual property. To safeguard these rights, we rely on a combination of patent, trademark, copyright and trade secret laws and contractual protections in the United States and other jurisdictions, all of which provide only limited protection and may not now or in the future provide us with a competitive advantage.

In order to protect our unpatented proprietary technologies and processes, we rely on trade secret laws and confidentiality and invention assignment agreements with our employees, consultants, strategic partners, vendors, and others. Also, despite our efforts to protect our proprietary technology and trade secrets, unauthorized parties may attempt to misappropriate, copy, reverse engineer or otherwise obtain and use them. In addition, others may independently discover our trade secrets, in which case we would not be able to assert trade secret rights or develop similar technologies and processes. Further, the contractual provisions that we enter into may not prevent unauthorized use or disclosure of our proprietary technology or intellectual property rights and may not provide an adequate remedy in the event of unauthorized use or disclosure of our proprietary technology or intellectual property rights. Moreover, policing unauthorized use of our technologies, trade secrets and intellectual property is difficult, expensive, and time-consuming, particularly in foreign countries where the laws may not be as protective of intellectual property rights as those in the United States and where mechanisms for enforcement of intellectual property rights may be weak. To the extent that we expand our activities outside of the United States, our exposure to unauthorized copying and use of our platform and proprietary information may increase. We may be unable to determine the extent of any unauthorized use or infringement of our platform, technologies, or intellectual property rights.

We cannot assure you that any patents we have obtained or that may be issued to us in the future will give us the protection that we seek or that such patents will not be challenged, invalidated, or circumvented. As of ~~June~~September 30, 2018, we had one issued patent. Any patents that may be issued to us in the future may not provide sufficiently broad protection and may not be enforceable in actions against alleged infringers. Obtaining and enforcing software patents in the United States is becoming increasingly challenging. Any patents we have obtained or may obtain in the future may be found to be invalid or unenforceable in light of recent and future changes in the law. Similarly, we cannot assure you that any future trademark registrations will be issued from current or future applications or that any registered trademarks we have obtained or may obtain in the future will be enforceable or provide adequate protection of our proprietary rights. We also license software from third parties for integration into our software, including open source software and other software available on commercially reasonable terms. We cannot assure you that such third parties will maintain such software or continue to make it available.

There can be no assurance that the steps that we take will be adequate to protect our proprietary technology and intellectual property, that others will not develop or patent similar or superior technologies, products, or services, or that our trademark, patent, and other intellectual property rights will not be challenged, invalidated, or circumvented by others. Furthermore, effective trademark, patent, copyright, and trade secret protection may not be available in every country in which our software is available or where we have employees or independent contractors. In addition, the legal standards relating to 63

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~~the~~from ~~validity,~~third ~~enforceability~~parties for integration into our software, including open source software and ~~scope~~other ofsoftware ~~protection~~available ofon ~~intellectual~~commercially ~~property~~reasonable ~~rights~~terms. inWe ~~internet~~cannot ~~and~~assure you that such third parties will maintain such software~~-related~~ ~~industries~~or ~~are~~continue ~~uncertain~~to ~~and~~make ~~still~~it ~~evolving~~available.

In order to protect our proprietary technology and intellectual property rights, we may be required to spend significant resources to monitor and protect these rights. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming, and distracting to management and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our proprietary technology and intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights. Our failure to secure, protect and enforce our intellectual property rights could materially and adversely affect our business.

We face exposure to foreign currency exchange rate fluctuations, and such fluctuations could adversely affect our business, results of operations, and financial condition.

As our international operations expand beyond our current London location, our exposure to the effects of fluctuations in currency exchange rates grows. While we have primarily transacted with customers and business partners in U.S. dollars, we expect to expand the number of transactions with customers and business partners that are denominated in foreign currencies in the future as we expand our business internationally. We incur expenses for some of our internet service provider costs outside of the United States in local currencies and for employee compensation and other operating expenses at our U.K. location in British pounds. Fluctuations in the exchange rates between the U.S. dollar and other currencies could result in an increase to the U.S. dollar equivalent of such expenses.

Accordingly, changes in the value of foreign currencies relative to the U.S. dollar may, particularly in the future as we expand our business internationally, affect our results of operations due to transactional and translational remeasurement. As a result of such foreign currency exchange rate fluctuations, it could be more difficult to detect underlying trends in our business and results of operations. In addition, to the extent that fluctuations in currency exchange rates cause our results of operations to differ from our expectations or the expectations of our investors and securities analysts who follow our stock, the trading price of our common stock could be adversely affected.

Our subscription agreements are denominated in U.S. dollars, and therefore our revenue currently is not subject to foreign currency risk. However, a strengthening of the U.S. dollar could increase the real cost of our platform to current and prospective customers outside of the United States, adversely affecting our business, results of operations, and financial condition.

We do not currently maintain a program to hedge transactional exposures in foreign currencies. However, in the future, we may use derivative instruments, such as foreign currency forward and option contracts, to hedge certain exposures to fluctuations in foreign currency exchange rates. The use of such hedging activities may not offset any or more than a portion of the adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place. Moreover, the use of hedging instruments may introduce additional risks if we are unable to structure effective hedges with such instruments.

Comprehensive tax reform bills could adversely affect our business and financial condition.

On December 22, 2017, and effective January 1, 2018, the U.S. government enacted H.R. 1, “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018” (informally titled the “Tax Cuts and Jobs Act”) which includes significant changes to the taxation of business entities. The Tax Cuts and Jobs Act, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), implementation of a “base erosion anti-abuse tax” which requires U.S. corporations to make an alternative determination of taxable income without regard to tax deductions for certain payments to affiliates, taxation of certain non-U.S. corporations’ earnings considered to be “global intangible low taxed income,” or GILTI, repeal of the alternative minimum tax, or AMT, for corporations and changes to a taxpayer’s ability to either utilize or refund the AMT credits previously generated, changes in the attribution rules relating to stockholders of certain “controlled foreign corporations,” limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates

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Jobs Act, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), implementation of a “base erosion anti-abuse tax” which requires U.S. corporations to make an alternative determination of taxable income without regard to tax deductions for certain payments to affiliates, taxation of certain non-U.S. corporations’ earnings considered to be “global intangible low taxed income,” or GILTI, repeal of the alternative minimum tax, or AMT, for corporations and changes to a taxpayer’s ability to either utilize or refund the AMT credits previously generated, changes in the attribution rules relating to stockholders of certain “controlled foreign corporations,” limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits. Notwithstanding the reduction in the corporate income tax rate, the Tax Cuts and Jobs Act remains subject to interpretation and further guidance from U.S. taxing authorities and as a result the overall impact of this tax reform is uncertain and may change due to interpretation changes, and our business and financial condition could be adversely affected. In addition, it is uncertain if and to what extent various U.S. states will conform their tax laws to the Tax Cuts and Jobs Act. The impact of the Tax Cuts and Jobs Act on holders of our common stock is also uncertain and could be adverse. We are unable to predict what tax reform may be proposed or enacted in the future or what effect such changes would have on our business, but such changes, to the extent they are brought into tax legislation, regulations, policies, or practices, could affect our effective tax rates in the future in countries where we have operations and have an adverse effect on our overall tax rate in the future, along with increasing the complexity, burden, and cost of tax compliance. We urge our stockholders to consult with their legal and tax advisors with respect to the Tax Cuts and Jobs Act and the potential tax consequences of investing in or holding our common stock.

Taxing authorities may successfully assert that we should have collected or paid, or in the future should collect or pay, sales, use, value added or similar taxes, and we could be subject to liability with respect to past or future sales, which could adversely affect our financial results.

We do not collect sales, use, value added and similar taxes in all jurisdictions in which we have sales. Sales, use, value added, and similar tax laws and rates vary greatly by jurisdiction. Certain jurisdictions in which we do not collect such taxes may assert that such taxes are applicable, which could result in tax assessments, penalties, and interest, and we may be required to collect and/or remit such taxes in the future. While we reserve estimated amounts with respect to such taxes on our financial statements, we cannot be certain that we have made sufficient reserves to cover such tax liabilities or such taxes. If our reserve amounts are inadequate, such tax assessments, penalties and interest or future requirements may adversely affect our results of operations and financial condition. Additionally, the application of federal, state, local and international tax laws to cloud services are continuously evolving. Income, sales, use or other tax laws, statutes, rules, regulations, or ordinances could be enacted or amended at any time, possibly with retroactive effect, which could increase our taxes and ultimately have a negative impact on our results of operations and cash flows.

We could be required to collect additional sales taxes or be subject to other tax liabilities that may increase the costs our clients would have to pay for our offering and adversely affect our operating results.

An increasing number of states have considered or adopted laws that attempt to impose tax collection obligations on out-of-state companies. Additionally, the Supreme Court of the United States recently ruled in South Dakota v. Wayfair, Inc. et al, or Wayfair, that online sellers can be required to collect sales and use tax despite not having a physical presence in the buyer’s state. In response to Wayfair, or otherwise, states or local governments may adopt, or begin to enforce, laws requiring us to calculate, collect, and remit taxes on sales in their jurisdictions. A successful assertion by one or more states requiring us to collect taxes where we presently do not do so, or to collect more taxes in a jurisdiction in which we currently do collect some taxes, could result in substantial tax liabilities, including taxes on past sales, as well as penalties and interest. The imposition by state governments or local governments of sales tax collection obligations on out-of-state sellers could also create additional administrative burdens for us, put us at a competitive disadvantage if they do not impose similar obligations on our competitors and decrease our future sales, which could have a material adverse impact on our business and operating results.

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Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations.

As of December 31, 2017, we had net operating loss, or NOL, carryforwards for U.S. federal income tax purposes of approximately $37.1 million, which expire in various years beginning in 2029 if not utilized.

In general, under Section 382 of the ~~United States Internal Revenue~~ Code ~~of 1986~~, ~~as amended, or the Code,~~ a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-ownership change NOLs to offset future taxable income. As of December 31, 2017, we had not completed a Section 382 limitation study, and postponed completion of our prior study, due to a significant level of legacy ownership both before and after our IPO. We will continue to monitor and assess our significant ownership interests. Future changes in our stock ownership, some of which are outside of our control, could also result in an ownership change under Section 382 of the Code.

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Our ability to utilize our NOLs is dependent on attaining profitability sufficient to offset such available NOLs prior to their expiration. In addition, we may not be able to utilize a portion of the NOLs reflected on our balance sheet, even if we attain profitability.

Under the Tax Cuts and Jobs Act, NOLs generated in 2018 and future years may be carried forward indefinitely but may not be carried back and are only eligible to offset up to a maximum of 80% of taxable income generated in a given year. It is uncertain if and to what extent various U.S. states will conform their net operating loss rules to the Tax Cuts and Jobs Act.

We could be subject to additional tax liabilities.

We are subject to federal, state, and local taxes in the United States and the United Kingdom. Significant judgment is required in evaluating our tax positions and our worldwide provision for taxes. During the ordinary course of business, there are many activities and transactions for which the ultimate tax determination is uncertain. In addition, our tax obligations and effective tax rates could be adversely affected by changes in the relevant tax, accounting and other laws, regulations, principles and interpretations, including those relating to income tax nexus, by our earnings being lower than anticipated in jurisdictions where we have lower statutory rates and higher than anticipated in jurisdictions where we have higher statutory rates, by changes in foreign currency exchange rates, or by changes in the valuation of our deferred tax assets and liabilities. We may be audited in various jurisdictions, and such jurisdictions may assess additional taxes against us. Although we believe our tax estimates are reasonable, the final determination of any tax audits or litigation could be materially different from our historical tax provisions and accruals, which could have a material adverse effect on our operating results or cash flows in the period or periods for which a determination is made.

Unfavorable conditions in our industry or the global economy or reductions in marketing information technology spending could limit our ability to grow our business and negatively affect our results of operations.

Our results of operations may vary based on the impact of changes in our industry or the global economy on us or our customers. The revenue growth and potential profitability of our business depend on demand for email services and email marketing generally and for our services in particular. Current or future economic uncertainties or downturns could adversely affect our business and results of operations. Negative conditions in the general economy both in the United States and abroad, including conditions resulting from changes in gross domestic product growth, financial and credit market fluctuations, political turmoil, natural catastrophes, warfare and terrorist attacks on the United States, Europe, the Asia Pacific region or elsewhere, could cause a decrease in business investments, including spending on information technology, and negatively affect the growth of our business. To the extent our platform or services are perceived by customers and potential customers as discretionary, there may be delays or reductions in spending on our services, we may need to reduce our prices in order to remain competitive and our revenue may decline. In addition, the increased pace of consolidation in certain industries may result in reduced overall spending on our platform and services. We cannot predict the timing, magnitude or duration of any economic slowdown, instability, or recovery, generally or within any particular industry. If the economic conditions of the general economy or markets in which we operate worsen, our business, results of operations, and financial condition could be adversely affected.

Furthermore, many of our customers are SMBs. These organizations frequently have limited budgets and are often resource- and time-constrained and, as a result, may be significantly more affected by economic downturns than their larger, more established counterparts. As a result, SMBs may choose to spend the limited funds that they have on items other than our services. Moreover, if SMBs experience economic distress, they may be unwilling or unable to expend time and financial resources on email, which could negatively affect the overall demand for our platform, increase customer attrition and cause our revenue growth or operating results to decline.

~~The success of our business depends on the continued growth and acceptance of email as a communications tool and the related accessibility, expansion, and reliability of the Internet infrastructure.~~66

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~~discourage~~larger, ~~businesses~~more ~~and~~established ~~consumers from using email~~counterparts. InAs ~~addition~~a result, ~~alternative~~SMBs ~~communications~~may ~~tools~~choose ~~such~~to asspend ~~social~~the ~~media~~limited orfunds ~~text~~that ~~messaging~~they have ~~gained~~on ~~significant~~items ~~widespread~~other ~~acceptance~~than ~~and~~our ~~may~~services. ~~gain~~Moreover, ~~additional~~if ~~acceptance~~SMBs ~~for~~experience ~~both~~economic ~~email~~distress, ~~marketing~~they ~~and~~may ~~transactional~~be ~~record~~unwilling ~~purposes.~~or Tounable ~~the~~to ~~extent~~expend ~~use~~time ofand ~~these~~financial ~~alternative~~resources ~~communications~~on ~~tools continues to grow~~email, ~~these~~which ~~tools~~ could benegatively ~~used~~affect bythe ~~our~~overall ~~customers~~demand ~~as a substitute~~ for our ~~services~~platform, ~~and~~increase ~~demand~~customer ~~for~~attrition and cause our ~~services~~revenue ~~and~~growth ~~our~~or ~~revenues~~operating ~~could~~results to decline.

The success of our business depends on the continued growth and acceptance of email as a communications tool and the related accessibility, expansion, and reliability of the Internet infrastructure.

The future success of our business depends on the continued widespread use of email as a primary means of communication and as the document of record for many digital business transactions. Security problems such as viruses, worms and other malicious programs, reliability issues arising from outages and damage to the Internet infrastructure or an overabundance of spam could create the perception that email is not a safe, reliable, or efficient means of communication, which would discourage businesses and consumers from using email. In addition, alternative communications tools such as social media or text messaging have gained significant widespread acceptance and may gain additional acceptance for both email marketing and transactional record purposes. To the extent use of these alternative communications tools continues to grow, these tools could be used by our customers as a substitute for our services, and demand for our services and our revenues could decline.

Furthermore, federal, state, or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting the use of the Internet as a commercial medium. In addition, government agencies or private organizations have imposed and may impose additional taxes, fees, or other charges for accessing the Internet or commerce conducted via the Internet. We provide our platform through the Internet and many of our customers use our services in connection with their own online transactions. Changes in these laws or regulations could require us to modify our platform in order to comply with these changes and could impact our customers’ businesses, reducing demand for our services. These laws or charges could limit the growth of Internet-related commerce or the use of Internet communications such as email or result in reductions in the demand for Internet-based services such as our platform. In addition, the use of the Internet and email as business tools could be adversely affected due to delays in the development or adoption of new standards and protocols to handle increased demands in Internet activity, security, reliability, cost, ease-of-use, accessibility, and quality of service. Any decrease in the use of the Internet or email would reduce demand for our platform and harm our business.

If we experience excessive credit card or other fraudulent activity, we could incur substantial costs.

Most of our customers authorize us to bill their credit card or other online accounts directly for subscription fees that we charge. If people pay for our services with stolen credit cards or other wrongly obtained online account information, we could incur substantial third-party vendor costs for which we may not be reimbursed. Further, our customers provide us with credit card billing information online, and we do not review the physical credit cards used in these transactions, which increases our risk of exposure to fraudulent activity. We also incur charges, which we refer to as chargebacks, from the credit card and other online payment processing companies from claims that the customer did not authorize the credit card or other online transaction to purchase our subscription. If the number of unauthorized credit card or other online transactions becomes excessive, we could be assessed substantial fines for excess chargebacks and we could lose the right to accept credit cards or other online accounts for payment, which could have a material adverse effect on our business and operating results.

Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.

~~Generally accepted accounting principles, or~~ GAAP, in the United States ~~are~~is subject to interpretation by the ~~Financial Accounting Standards Board, or~~ FASB, ~~the~~ SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results for periods prior to and subsequent to such change and could affect the reporting of transactions completed before the announcement of a change.

In particular, in May 2014, the FASB issued ~~Accounting Standards Update, or~~ ASU, No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Accounting Standards Codification, or ASC 605, Revenue Recognition. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services; this new accounting standard also impacts the recognition of sales commissions. ASU 2014-09 will become applicable for us on December 31, 2018.

ASU 2014-09 permits the use of either a retrospective or cumulative effect transition method. We continue to evaluate the impact of the new standard and available adoption methods on our consolidated financial statements. We are in the process of evaluating arrangements with customers and identifying differences in accounting between new and existing standards. Regardless of the transition method, the application of this new guidance could have an adverse effect on our operating results in one or more periods as compared to what they would have been under current standards. 67

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promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services; this new accounting standard also impacts the recognition of sales commissions. ASU 2014-09 will become applicable for us on December 31, 2018.

We continue to evaluate the impact of the new standard on our consolidated financial statements. We are in the process of evaluating arrangements with customers and identifying differences in accounting between new and existing standards., The application of this new guidance could have an adverse effect on our operating results in one or more periods as compared to what they would have been under current standards.

If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our results of operations could be adversely affected.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity, and the amount of revenue and expenses that are not readily apparent from other sources. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition, valuation of goodwill and intangible assets, and stock-based compensation. Our results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in the trading price of our common stock.

The requirements of being a public company may strain our resources, divert management’s attention, and affect our ability to attract and retain executive management and qualified board members.

As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the New York Stock Exchange, or NYSE, and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming, or costly, and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company” as defined in the JOBS Act.

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, further increasing legal and financial compliance costs, and making some activities more time consuming. These laws, regulations, and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest substantial resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expense and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.

Moreover, the demands on management in operating a publicly-traded company, interacting with public company investors, and complying with the increasingly complex laws pertaining to public companies, are significant. Our management team may not successfully or efficiently manage us as a public company subject to significant regulatory oversight and reporting obligations under the federal securities laws and the continuous scrutiny of securities analysts and investors. These new obligations and constituents require significant attention from our senior management and could divert their attention away from the day-to-day management of our business, which could adversely affect our business, results of operations, and financial condition.

We also expect that being a public company will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors and qualified executive officers.68

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Risks Related to Ownership of Our Common Stock

The trading price of our stock may be volatile.

The market price of our common stock may be highly volatile and may fluctuate substantially as a result of a variety of factors, some of which are related in complex ways. Since shares of our common stock were sold in our IPO in November 2017 at a price of $16.00 per share, our stock price has ranged from an intraday low of $17.50 to an intraday high of $3238.03 66 through ~~June~~September 30, 2018. In addition to the factors discussed in this “Risk Factors” section and elsewhere in this Quarterly Report on Form 10-Q, the factors that may affect the market price of our common stock include:

the timing of, and our ability to close, the potential Merger with Twilio, as well as changes in factors that influence and the timing or likelihood of closing the potential Merger;

changes in the market price of Twilio’s Class A Common Stock prior to consummation of the Merger;

our operating performance and the operating performance of similar companies;

failure to meet revenue, earnings, key metrics or other financial or operational expectations that we establish or are established by securities analysts or investors;

the overall performance and volatility of the equity markets in general or of our industry in particular;

actual or anticipated developments in our business, our competitors’ businesses, or the competitive landscape generally;

the number of shares of our common stock publicly owned and available for trading;

threatened or actual litigation;

changes in laws or regulations affecting our business;

changes in our board of directors or management;

publication of research reports about us or our industry or changes in recommendations or withdrawal of research coverage by securities analysts;

public reaction to our press releases, other public announcements, and filings with the SEC, including related to new services or functionalities or announced or completed acquisitions;

changes in accounting standards, policies, guidelines, interpretations, or principles;

large volumes of sales of shares of our common stock by us or our existing stockholders; and

general political and economic conditions.

In addition, the stock market in general, and the market for technology companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may seriously affect the market price of our stock regardless of actual operating performance. Securities class action litigation has often been instituted against companies following periods of volatility in the market price of their securities. This form of litigation, if instituted against us, could result in very ~~substantial costs, divert our management’s attention and resources, and harm our business, operating results, and financial condition.~~

~~An active public trading market for our common stock may not be sustained.~~69

Prior to the completion of our IPO in November 2017, no public market for our common stock existed. Although our common stock is listed on the NYSE, we cannot assure you that an active public trading market for our common stock will continue to develop or be sustained. If an active market for our common stock does not continue to develop or is not sustained, it may be difficult for investors in our common stock to sell shares without depressing the market price for the shares or to sell the shares at all. An inactive market may also impair our ability to raise capital to continue to fund

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~~operations~~substantial bycosts, ~~selling~~divert ~~shares and may impair~~ our ~~ability~~management’s toattention ~~acquire~~and ~~other~~resources, ~~companies~~and orharm ~~technologies~~our bybusiness, ~~using~~operating ~~our~~results, ~~shares~~and asfinancial ~~consideration~~condition.

An active public trading market for our common stock may not be sustained.

Substantial future sales of shares of our common stock could cause the market price of our common stock to decline.

The market price of our common stock could decline as a result of substantial sales of our common stock, particularly sales by our directors, executive officers, and significant stockholders, a large number of shares of our common stock becoming available for sale, or the perception in the market that holders of a large number of shares intend to sell their shares.

Certain holders of our common stock have rights, subject to some conditions, to require us to file registration statements covering the sale of their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. Once we register the offer and sale of shares for the holders of registration rights, they can be freely sold in the public market upon issuance, subject to restrictions of Rule 144 under the Securities Act in the case of our affiliates. Any sales of our common stock by these stockholders could have a material adverse effect on the trading price of our common stock.

We may issue shares of our common stock or securities convertible into our common stock from time to time in connection with a financing, acquisition, investment or otherwise. Any such issuance could result in substantial dilution to our existing stockholders and cause the trading price of our common stock to decline. We may invest or spend the proceeds of our initial public offering and follow-on public offering in ways with which you may not agree or in ways which may not yield a return.

We intend to use the remaining net proceeds to us from our IPO and follow-on public offering for working capital and other general corporate purposes, including developing and enhancing our technical infrastructure, platform, and services, expanding our research and development efforts and selling and marketing operations, meeting the increased compliance requirements associated with our transition to and operation as a public company, and expanding into new markets. We may also use a portion to make acquisitions or investments. However, we do not have any agreements or commitments for any acquisitions or strategic investments at this time. Our management generally will have broad discretion to use the net proceeds, and you will be relying on the judgment of our management regarding the application of these proceeds. Our management might not apply the net proceeds in ways that increase the value of your investment. Until we use the net proceeds, we plan to invest them, and these investments may not yield a favorable rate of return. If we do not invest or apply the net proceeds in ways that enhance stockholder value, we may fail to achieve expected financial results, which could cause our stock price to decline.

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Concentration of ownership among our officers, directors, and their affiliates may prevent minority investors from influencing corporate decisions.

Our officers, directors, and their affiliated funds beneficially owned an aggregate of approximately 2019.29% of the outstanding shares of our common stock as of ~~June~~ September 30, 2018. If some of these persons or entities act together, they will have significant influence over the outcome of matters submitted to our stockholders for approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or our assets, including the approval of the potential Merger with Twilio. Certain of our officers, directors, and their affiliated funds, in their respective capacities as stockholders of SendGrid, have entered into voting agreements with Twilio pursuant to which they have agreed, among other things, to vote their respective SendGrid shares in favor of the Merger. This concentration of ownership could limit the ability of other stockholders to influence corporate matters and may have the effect of delaying or preventing a change of control of our company. Some of these persons or entities may have interests different from yours.

We do not intend to pay dividends for the foreseeable future.

We never have declared or paid any cash dividends on our capital stock and do not intend to pay any cash dividends in the foreseeable future. In addition, our credit facility ~~restricts~~and the Merger Agreement restrict, and any future debt or preferred security arrangements may restrict, our ability to make distributions to our stockholders. We anticipate that we will retain any future earnings for use in the development of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors. Accordingly, investors must rely on sales of their shares of our common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.

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Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our common stock.

Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws include provisions that:

authorize our board of directors to issue, without further action by the stockholders, shares of undesignated preferred stock with terms, rights, and preferences determined by our board of directors that may be senior to our common stock;

require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent;

specify that special meetings of our stockholders can be called only by our board of directors, the chairperson of our board of directors, or our chief executive officer;

establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors;

establish that our board of directors is divided into three classes, with each class serving three-year staggered terms;

prohibit cumulative voting in the election of directors;

provide that our directors may be removed for cause only upon the vote of sixty-six and two-thirds percent (66%) of our outstanding shares of common stock;

provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum; and

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require the approval of our board of directors or the holders of at least sixty-six and two-thirds percent (66%) of our outstanding shares of common stock to amend our bylaws and certain provisions of our certificate of incorporation.

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder. Any delay or prevention of a change of control transaction or changes in our management could cause the market price of our common stock to decline.

Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware or the U.S. federal district courts are the exclusive forums for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or other employees.

Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the sole and exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a breach of fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, any action asserting a claim against us arising pursuant to any provisions of the Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated bylaws, or any action asserting a claim against us that is governed by the internal affairs doctrine. Our amended and restated certificate of incorporation further provides that the U.S. federal district courts are the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. These choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage such lawsuits. If a court were to find either choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our results of operations and financial condition.

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district courts are the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. These choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage such lawsuits. If a court were to find either choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our results of operations and financial condition.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who cover us downgrade our common stock or publish inaccurate or unfavorable research about our business, our common stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our common stock could decrease, which might cause our common stock price and trading volume to decline.

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Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

None.

Use of Proceeds from Initial Public Offering of Common Stock

In November 2017, we closed our IPO in which we sold 9,430,000 shares of common stock at a public offering price of $16.00 per share. This includes share sold in connection with the exercise of the underwriters’ option to purchase additional shares. The offer and sale of all of the shares in the IPO were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-221003), which was declared effective by the SEC on November 14, 2017.

Morgan Stanley & Co. LLC and J.P. Morgan Securities LLC acted as representatives for the underwriters. The offering commenced on November 14, 2017 and did not terminate before all securities registered in the registration statement were sold.

We raised $136.3 million in net proceeds after deducting underwriting discounts and commissions of $10.6 million and offering expenses of $4.0 million. No offering expenses were paid directly or indirectly to any of our directors, officers, or persons owning 10 percent or more of our capital stock (or their associates or affiliates). ~~As of June 30, 2018, substantially all expenses incurred in connection with our IPO have been paid.~~

There has been no material change in the planned use of the IPO proceeds as described in our final prospectus filed with the SEC on November 15, 2017 pursuant to Rule 424(b) of the Securities Act. As of ~~June~~September 30, 2018, all proceeds were held as cash and cash equivalents.

Issuer or Affiliated Purchaser Purchases of Equity Securities

None.

Item 3.Defaults Upon Senior Securities

None.

Item 4.Mine Safety Disclosure

None.

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Item 5.Other Information

None.

Item 6.Exhibits

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EXHIBIT INDEX

Incorporated by Reference

ExhibitNumber

Exhibit Description

Form

File No.

Exhibit

FilingDate

FiledHerewith

2.1 †

Agreement and Plan of Merger and Reorganization among Registrant, Twilio Inc. and Topaz Merger Subsidiary, Inc.

8-K

001-38275

2.1

10/16/18

3.1

Amended and Restated Certificate of Incorporation.

10-K

001-38275

3.1

2/26/2018

3.2

Amended and Restated Bylaws.

10-K

001-38275

3.2

2/26/2018

4.1

Reference is made to Exhibits 3.1 and 3.2.

4.2

Specimen stock certificate evidencing shares of common stock.

S-1/A

333-221003

4.2

10/30/2017

4.3

Amended and Restated Registration Rights Agreement, dated as of November 17, 2016, by and among SendGrid, Inc., and certain of its stockholders.

S-1

333-221003

4.3

10/18/2017

10.1+

Non-Employee Director Compensation Policy

10-Q

001-38275

10.1

7/31/2018

10.2

~~Ninth~~Tenth Amendment ~~and~~to Loan and Security Agreement, by and between the Registrant and Pacific Western Bank, dated ~~April~~August 306, 2018

8-K

001-38275

10.1

8/9/2018

31.1

Certification of the Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

10.3+

Offer Letter by and between Registrant and Carrie Palin dated September 22, 2018

31.2

Certification of the Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

10.4

Form of Voting Agreement, dated as of October 15, 2018, by and between the Registrant and certain holders of Class A Common Stock and Class B Common Stock of Twilio Inc.

8-K

001-38275

10.1

10/16/2018

32.1*

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

10.5

Form of Voting Agreement, dated as of October 15, 2018, by and between the Registrant and certain holders of Class A Common Stock of Twilio Inc.

8-K

001-38275

10.2

10/16/2018

32.2*

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

10.6

Form of Voting Agreement, dated as of October 15, 2018, by and between Twilio Inc. and certain directors and officers of the Registrant

8-K

001-38275

10.3

10/16/2018

101 INS

XBRL Instance Document

10.7

Form of Voting Agreement, dated as of October 15, 2018, by and between Twilio Inc. and a stockholder of the Registrant and its affiliated entities.

8-K

001-38275

10.4

10/16/2018

101SCH

XBRL Taxonomy Extension Schema Document

101 CAL

XBRL Taxonomy Extension Calculation Linkbase Document

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Incorporated by Reference

ExhibitNumber

Exhibit Description

Form

File No.

Exhibit

FilingDate

FiledHerewith

31.1

Certification of the Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of the Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101 INS

XBRL Instance Document

101SCH

XBRL Taxonomy Extension Schema Document

101 CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101 DEF

XBRL Taxonomy Extension Definition Linkbase Document

101 LAB

XBRL Taxonomy Extension Label Linkbase Document.

101 PRE

XBRL Taxonomy Extension Presentation Linkbase Document

†Schedules omitted pursuant to Item 601(b)(2) of Regulation S-K. SendGrid agrees to furnish a supplemental copy of any omitted schedule to the SEC upon request.

*This certification accompanies the Quarterly Report on Form 10-Q to which it relates, is not deemed filed with the SEC and is not incorporated by reference into any filing of the Registrant under the Securities Act or the Exchange Act (whether made before or after the date of the Quarterly Report on Form 10-Q), irrespective of any general incorporation language contained in such filing.

+Indicates management contract or compensatory plan.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Signature	Title	Date
/s/ Sameer Dholakia	President, Chief Executive Officer, and Director(Principal Executive Officer)	~~July~~November 316, 2018
Sameer Dholakia
/s/ Yancey Spruill	Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)	~~July~~November 316, 2018
Yancey Spruill

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Filing Compare · SendGrid, Inc.