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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q

(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020

or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from________to________

Commission File Number 001-38434

 

Dropbox, Inc.
(Exact name of Registrant as specified in its charter)
 
Delaware
 
26-0138832
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
Dropbox, Inc.
1800 Owens Street
San Francisco, California 94158
(415) 857-6800
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)
 

Securities registered pursuant to Section 12(b) of the Act:

 
 
 
 
 
 
Title of each class
Trading Symbol(s)
Name of exchange on which registered
 
 
Class A Common Stock, par value $0.00001 per share
DBX
The NASDAQ Stock Market LLC
 
 
 
 
(Nasdaq Global Select Market)
 
 
 
 
 
 

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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. (Check one):
Large Accelerated Filer
  
Accelerated filer
 
 
 
Non-accelerated filer
  
Smaller reporting company
 
 
 
 
 
 
 
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.    

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

As of May 4, 2020, there were 262,947,182 shares of the registrants’ Class A common stock outstanding (which excludes 10,333,333 shares of Class A common stock subject to restricted stock awards that were granted pursuant to the Co-Founder Grants, and vest upon the satisfaction of a service condition and achievement of certain stock price goals and 4,122,149 shares of Class A common stock subject to restricted stock awards that were granted to other Dropbox executives and vest upon the satisfaction of a service condition), 150,266,636 shares of the registrant’s Class B common stock outstanding, and no shares of the registrant’s Class C common stock outstanding.




TABLE OF CONTENTS

 
 
Page
 
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 6.
 
 

2


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, and Section 21E of the Securities Exchange Act of 1934, as amended, which statements involve substantial risk and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

our ability to retain and upgrade paying users;

our ability to attract new users or convert registered users to paying users;

our future financial performance, including trends in revenue, costs of revenue, gross profit or gross margin, operating expenses, paying users, and free cash flow;

our expectations regarding the potential impacts of the outbreak of the COVID-19 pandemic and related public health measures on our business, the business of our customers, suppliers and partners, and the economy;

our ability to compete successfully in competitive markets;

the demand for our platform or for content collaboration solutions in general;

possible harm caused by significant disruption of service or loss or unauthorized access to users’ content;

our ability to effectively integrate our platform with others;

our ability to respond to rapid technological changes;

our ability to achieve or maintain profitability;

our expectations and management of future growth;

our ability to grow due to our lack of a significant outbound sales force;

our ability to attract large organizations as users;

our ability to offer high-quality customer support;

our ability to manage our international expansion;

our ability to attract and retain key personnel and highly qualified personnel;
the expected timing and amount of our share repurchases;

our ability to protect our brand;

our ability to prevent serious errors or defects in our platform;

our ability to maintain, protect, and enhance our intellectual property; and

our ability to successfully identify, acquire, and integrate companies and assets.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.

3


You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.
The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.

4


PART I. FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS

DROPBOX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)

As of

March 31, 2020

December 31, 2019
 
 
 
 
Assets



Current assets:



Cash and cash equivalents
$
486.4


$
551.3

Short-term investments
614.4


607.7

Trade and other receivables, net
36.9


36.7

Prepaid expenses and other current assets
57.5


47.5

Total current assets
1,195.2


1,243.2

Property and equipment, net
473.2


445.3

Operating lease right-of-use asset
708.1

 
657.9

Intangible assets, net
44.4


47.4

Goodwill
233.3


234.5

Other assets
63.1


70.9

Total assets
$
2,717.3


$
2,699.2

Liabilities and stockholders’ equity



Current liabilities:



Accounts payable
$
38.8


$
40.7

Accrued and other current liabilities
149.5


161.9

Accrued compensation and benefits
41.4


101.4

Operating lease liability
84.3

 
79.9

Finance lease obligation
80.0


76.7

Deferred revenue
576.8


554.2

Total current liabilities
970.8


1,014.8

Operating lease liability, non-current
771.6

 
711.9

Finance lease obligation, non-current
147.9


138.2

Other non-current liabilities
26.6


25.9

Total liabilities
1,916.9


1,890.8

Commitments and contingencies (Note 10)


 
Stockholders’ equity:


 
Additional paid-in capital
2,528.5


2,531.3

Accumulated deficit
(1,726.6
)

(1,726.2
)
Accumulated other comprehensive income (loss)
(1.5
)

3.3

Total stockholders’ equity
800.4


808.4

Total liabilities and stockholders’ equity
$
2,717.3


$
2,699.2





See accompanying Notes to Condensed Consolidated Financial Statements.

5


DROPBOX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
(Unaudited)

Three months ended
March 31,
 

2020

2019
 
 
 
 
 
 
Revenue
$
455.0


$
385.6

 
Cost of revenue(1)
103.1


98.4

 
Gross profit
351.9


287.2

 
Operating expenses(1):



 
Research and development
181.8


150.0

 
Sales and marketing
104.3


101.5

 
General and administrative(2)
39.0


57.0

 
Total operating expenses
325.1


308.5

 
Income (loss) from operations
26.8


(21.3
)
 
Interest income, net
2.4


3.7

 
Other income, net
10.6


4.2

 
Income (loss) before income taxes
39.8


(13.4
)
 
Benefit from (provision for) income taxes
(0.5
)

5.7

 
Net income (loss)
$
39.3


$
(7.7
)
 
Net income (loss) per share-basic and diluted:
 
 
 
 
Basic net income (loss) per share
$
0.09


$
(0.02
)
 
Diluted net income (loss) per share
$
0.09

 
$
(0.02
)
 
Weighted-average shares used in computing net income (loss) per share attributable to common stockholders, basic
417.3


410.5

 
Weighted-average shares used in computing net income (loss) per share attributable to common stockholders, diluted
419.3

 
410.5

 
(1) 
Includes stock-based compensation as follows (in millions):

 
Three months ended
March 31,
 
 
2020
 
2019
 
 
 
 
 
 
Cost of revenue
$
3.5

 
$
3.0

 
Research and development
37.2

 
30.5

 
Sales and marketing
6.7

 
7.1

 
General and administrative(2)
(7.6
)
 
15.0

 


(2) 
On March 19, 2020, one of the Company's co-founders resigned as a member of the board and as an officer of the Company, resulting in the reversal of $23.8 million in stock-based compensation expense. Of the total amount reversed, $21.5 million related to expense recognized prior to December 31, 2019. See Note 12 "Stockholders' Equity" for further information.

See accompanying Notes to Condensed Consolidated Financial Statements.

6


DROPBOX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
(Unaudited)
 
Three months ended
March 31,
 
 
2020
 
2019
 
 
 
 
 
 
Net income (loss)
$
39.3

 
$
(7.7
)
 
Other comprehensive income (loss), net of tax:
 
 
 
 
Change in foreign currency translation adjustments
(3.0
)
 
1.1

 
Change in net unrealized gains (losses), on short-term investments
(1.8
)
 
1.9

 
Total other comprehensive income (loss), net of tax
$
(4.8
)
 
$
3.0

 
Comprehensive income (loss)
$
34.5

 
$
(4.7
)
 

See accompanying Notes to Condensed Consolidated Financial Statements.

7


DROPBOX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In millions)
(Unaudited)

 
Three months ended March 31, 2020
 
Three months ended March 31, 2019
 
Class A and Class B Common Stock
 
Additional paid in capital
 
Accumulated
deficit
 
Accumulated other comprehensive income (loss)
 
Total stockholders' equity
 
Class A and Class B common stock
 
Additional
paid-in
capital
 
Accumulated
deficit
 
Accumulated
other
comprehensive
income (loss)
 
Total
stockholders’
equity
 
Shares
 
Amount
 
 
 
 
 
Shares
 
Amount
 
Balances at beginning of period
417.0

 
$

 
$
2,531.3

 
$
(1,726.2
)
 
$
3.3

 
$
808.4

 
409.6

 
$

 
$
2,337.5

 
$
(1,659.5
)
 
$
(1.2
)
 
$
676.8

Cumulative-effect adjustment from adoption of ASC 842

 

 

 

 

 

 

 

 

 
1.0

 

 
1.0

Release of restricted stock units
2.7

 

 

 
 
 

 

 
2.6

 

 

 

 

 

Shares repurchased for tax withholdings on release of restricted stock
(1.0
)
 

 
(9.3
)
 
(9.6
)
 

 
(18.9
)
 
(1.0
)
 

 
(17.0
)
 
(8.5
)
 

 
(25.5
)
Repurchases of common stock
(3.7
)
 

 
(33.9
)
 
(30.1
)
 

 
(64.0
)
 

 

 

 

 

 

Exercise of stock options and awards
0.1

 

 
0.6

 

 

 
0.6

 
0.2

 

 
0.9

 

 

 
0.9

Assumed stock options in connection with acquisition
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
0.8

 
 
 
 
 
0.8

Stock-based compensation

 

 
39.8

 

 

 
39.8

 

 

 
55.6

 

 

 
55.6

Other comprehensive income (loss)

 

 

 

 
(4.8
)
 
(4.8
)
 

 

 

 

 
3.0

 
3.0

Net income (loss)

 

 

 
39.3

 

 
39.3

 

 

 

 
(7.7
)
 

 
(7.7
)
Balances at end of period
415.1

 
$

 
$
2,528.5

 
$
(1,726.6
)
 
$
(1.5
)
 
$
800.4

 
411.4

 
$

 
$
2,377.8

 
$
(1,674.7
)
 
$
1.8

 
$
704.9




See accompanying Notes to Condensed Consolidated Financial Statements.


8


DROPBOX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Three months ended March 31,
 
2020
 
2019
 
 
 
 
Cash flow from operating activities
 
 
 
Net income (loss)
39.3

 
$
(7.7
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
39.5

 
45.8

Stock-based compensation
39.8

 
55.6

Net gains on equity investments
(11.0
)
 

Amortization of deferred commissions
5.1

 
3.9

Other
1.2

 
(4.4
)
Changes in operating assets and liabilities:
 
 
 
Trade and other receivables, net
(1.2
)
 
(5.1
)
Prepaid expenses and other current assets
(14.7
)
 
(14.2
)
Other assets
17.8

 
11.2

Accounts payable
(7.8
)
 
(5.2
)
Accrued and other current liabilities
(9.9
)
 
10.0

Accrued compensation and benefits
(59.7
)
 
(45.9
)
Deferred revenue
22.2

 
18.6

Other non-current liabilities
(16.5
)
 
(13.2
)
Tenant improvement allowance reimbursement
9.2

 
13.8

Net cash provided by operating activities
53.3

 
63.2

Cash flow from investing activities
 
 
 
Capital expenditures
(27.8
)
 
(29.7
)
Business combinations, net of cash acquired

 
(172.1
)
Purchases of short-term investments
(120.5
)
 
(153.0
)
Proceeds from sales of short-term investments
65.1

 
110.2

Proceeds from maturities of short-term investments
67.7

 
66.6

Other
3.8

 
4.7

Net cash used in investing activities
(11.7
)
 
(173.3
)
Cash flow from financing activities
 
 
 
Shares repurchased for tax withholdings on release of restricted stock
(18.9
)
 
(25.5
)
Proceeds from issuance of common stock, net of repurchases
0.7

 
0.9

Principal payments on finance lease obligations
(21.7
)
 
(26.2
)
Common stock repurchases
(64.0
)
 

Other
(0.4
)
 
(0.2
)
Net cash used in financing activities
(104.3
)
 
(51.0
)
Effect of exchange rate changes on cash and cash equivalents
(2.2
)
 
1.0

Change in cash and cash equivalents
(64.9
)
 
(160.1
)
Cash and cash equivalents - beginning of period
551.3

 
519.3

Cash and cash equivalents - end of period
$
486.4

 
$
359.2

 
 
 
 
Supplemental cash flow data:
 
 
 
Property and equipment acquired under finance leases
$
34.7

 
$
39.9



See accompanying Notes to Condensed Consolidated Financial Statements.

9

DROPBOX, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)



Note 1. Description of the Business and Summary of Significant Accounting Policies

Business
Dropbox, Inc. (the “Company” or “Dropbox”) is the world’s first smart workspace. Dropbox was incorporated in May 2007 as Evenflow, Inc., a Delaware corporation, and changed its name to Dropbox, Inc. in October 2009. The Company is headquartered in San Francisco, California.

Basis of presentation and consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the United States of America generally accepted accounting principles (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission ("SEC") regarding interim financial reporting. The accompanying unaudited condensed consolidated financial statements include the accounts of Dropbox and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

The condensed consolidated balance sheet as of December 31, 2019 included herein was derived from the audited financial statements as of that date. The unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the balance sheets, statements of operations, statements of comprehensive income (loss), statements of stockholders' equity and the statements of cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full fiscal year ended December 31, 2020 or any future period.

The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto as of and for the year ended December 31, 2019, included in the Company's Annual Report on Form 10-K on file with the SEC ("Annual Report").

Use of estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the Company’s condensed consolidated financial statements and accompanying notes. These estimates are based on information available as of the date of the condensed consolidated financial statements. Management evaluates these estimates and assumptions on a regular basis. Actual results may differ materially from these estimates.

The Company’s most significant estimates and judgments involves the valuation of acquired intangible assets and goodwill from business combinations.

Financial information about segments and geographic areas
The Company manages its operations and allocates resources as a single operating segment. Further, the Company manages, monitors, and reports its financials as a single reporting segment. The Company’s chief operating decision-maker is its Chief Executive Officer, who reviews financial information presented on a consolidated basis for purposes of making operating decisions, assessing financial performance, and allocating resources. See Note 15, "Geographic Areas" for information regarding the Company’s long-lived assets and revenue by geography.

Foreign currency transactions
The assets and liabilities of the Company’s foreign subsidiaries are translated from their respective functional currencies into U.S. dollars at the exchange rates in effect at the balance sheet date. Revenue and expense amounts are translated at the average exchange rate for the period. Foreign currency translation gains and losses are recorded in other comprehensive income (loss).

Gains and losses realized from foreign currency transactions (those transactions denominated in currencies other than the foreign subsidiaries’ functional currency) are included in other income, net. Monetary assets and liabilities are remeasured using foreign currency exchange rates at the end of the period, and non-monetary assets are remeasured based on historical exchange

10

DROPBOX, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)


rates. The Company recorded net foreign currency transactions losses of $1.2 million and $0.1 million during the three months ended March 31, 2020 and 2019, respectively

Revenue recognition
The Company derives its revenue from subscription fees from customers for access to its platform. The Company’s policy is to exclude sales and other indirect taxes when measuring the transaction price of its subscription agreements. The Company accounts for revenue contracts with customers through the following steps:
Identification of the contract, or contracts, with a customer
Identification of the performance obligations in the contract
Determination of the transaction price
Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when, or as, the Company satisfies a performance obligation

The Company’s subscription agreements generally have monthly or annual contractual terms and a small percentage have multi-year contractual terms. Revenue is recognized ratably over the related contractual term beginning on the date that the platform is made available to a customer. Access to the platform represents a series of distinct services as the Company continually provides access to, and fulfills its obligation to the end customer over the subscription term. The series of distinct services represents a single performance obligation that is satisfied over time. The Company recognizes revenue ratably because the customer receives and consumes the benefits of the platform throughout the contract period. The Company’s contracts are generally non-cancelable.

The Company bills in advance for monthly contracts and typically bills annually in advance for contracts with terms of one year or longer. The Company also recognizes an immaterial amount of contract assets, or unbilled receivables, primarily relating to consideration for services completed but not billed at the reporting date. Unbilled receivables are classified as receivables when the Company has the right to invoice the customer.

The Company records contract liabilities when cash payments are received or due in advance of performance to deferred revenue. Deferred revenue primarily relates to the advance consideration received from the customer.

The price of subscriptions is generally fixed at contract inception and therefore, the Company’s contracts do not contain a significant amount of variable consideration. As a result, the amount of revenue recognized in the periods presented from performance obligations satisfied (or partially satisfied) in previous periods was not material.

The Company recognized $257.5 million and $222.6 million of revenue during the three months ended March 31, 2020, and 2019, respectively, that was included in the deferred revenue balances at the beginning of their respective periods.

As of March 31, 2020, future estimated revenue related to performance obligations that were unsatisfied or partially unsatisfied was $630.0 million. The substantial majority of the unsatisfied performance obligations will be satisfied over the next twelve months.

Stock-based compensation
The Company has granted RSUs to its employees and members of the Board of Directors under the 2008 Equity Incentive Plan (“2008 Plan”), the 2017 Equity Incentive Plan (“2017 Plan”), and the 2018 Equity Incentive Plan ("2018 Plan" and together with the 2008 Plan and 2017 Plan, the "Dropbox Equity Incentive Plans"). The Company has granted the following types of RSUs under the Dropbox Equity Incentives Plans:

One-tier RSUs, which have a service-based vesting condition over a four-year period. These awards typically have a cliff vesting period of one year and continue to vest quarterly thereafter. The Company began granting one-tier RSUs under its 2008 Plan in August 2015, and it continues to grant one-tier RSUs under its 2018 Plan. The Company recognizes compensation expense associated with one-tier RSUs ratably on a straight-line basis over the requisite service period and accounts for forfeitures in the period in which they occur.


11

DROPBOX, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)


Two-tier RSUs, which had both a service-based vesting condition and a Performance Vesting Condition. The Performance Vesting Condition was satisfied on the effectiveness of the registration statement related to the Company's IPO. Prior to August 2015, the Company granted two-tier RSUs under the 2008 Plan. The last grant date for two-tier RSUs was in May 2015. The Company recognized compensation expense associated with two-tier RSUs using the accelerated attribution method over the requisite service period.

As of March 31, 2020, the Company only had one-tier RSUs outstanding under the Dropbox Equity Incentive Plans.

Since August 2015, the Company has granted one-tier RSUs as the only stock-based payment awards to its employees, with the exception of awards granted to its co-founders and certain executives, and has not granted any stock options to employees since then. The fair values of the common stock underlying the RSUs granted in periods prior to the date of the Company's IPO were determined by the Board of Directors, with input from management and contemporaneous third-party valuations, which were performed at least quarterly. For valuations after the Company's IPO, the Board of Directors determines the fair value of each share of underlying common stock based on the closing price of the Company's Class A common stock as reported on the Nasdaq Global Select Market on the date of the grant.

In connection with the acquisition of JN Projects, Inc. (d/b/a HelloSign) ("HelloSign"), the Company assumed unvested stock options that had been granted under the HelloSign's 2011 Equity Incentive Plan. The fair value of options assumed were based upon the Black-Scholes option-pricing model, see Note 12, "Stockholders' Equity" for further information.

In December 2017, the Board of Directors approved a grant to the Company’s co-founders of restricted stock awards (“RSAs”) with respect to 14.7 million shares of Class A Common Stock in the aggregate (collectively, the “Co-Founder Grants”), of which 10.3 million RSAs were granted to Mr. Houston, the Company’s co-founder and Chief Executive Officer, and 4.4 million RSAs were granted to Mr. Ferdowsi, the Company’s co-founder and Director. These Co-Founder Grants have service-based, market-based, and performance-based vesting conditions. The Company estimated the grant date fair value of the Co-Founder Grants using a model based on multiple stock price paths developed through the use of a Monte Carlo simulation that incorporates into the valuation the possibility that the Stock Price Targets may not be satisfied. Effective March 19, 2020, Mr. Ferdowsi resigned as a member of the Board of Directors and as an officer of the Company. As of the date of Mr. Ferdowsi's resignation, none of the Stock Price Targets had been met, resulting in the forfeiture of his 4.4 million RSAs. See Note 12, "Stockholders' Equity" for further information.

Cost of revenue
Cost of revenue consists primarily of expenses associated with the storage, delivery, and distribution of the Company’s platform for both paying users and free users, also known as Basic users. These costs, which are referred to as infrastructure costs, include depreciation of servers located in co-location facilities that the Company leases and operates, rent and facilities expense for those datacenters, network and bandwidth costs, support and maintenance costs for infrastructure equipment, and payments to third-party datacenter service providers. Cost of revenue also includes costs, such as salaries, bonuses, benefits, travel-related expenses, and stock-based compensation, which are referred to as employee-related costs, for employees whose primary responsibilities relate to supporting the Company’s infrastructure and delivering user support. Other non-employee costs included in cost of revenue include credit card fees related to processing customer transactions and allocated overhead, such as facilities, including rent, utilities, depreciation on leasehold improvements and other equipment shared by all departments, and shared information technology costs. In addition, cost of revenue includes amortization of developed technologies, professional fees related to user support initiatives, and property taxes related to the datacenters.

Cash and cash equivalents
Cash consists primarily of cash on deposit with banks and includes amounts in transit from payment processors for credit and debit card transactions, which typically settle within five business days. Cash equivalents include highly liquid investments purchased with an original maturity date of 90 days or less from the date of purchase. The Company monitors its credit risk by considering factors such as historical experience, credit ratings, current economic conditions, and reasonable and supportable forecasts.


12

DROPBOX, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)


Short-term investments
The Company’s short-term investments are primarily comprised of corporate notes and obligations, U.S. Treasury securities, certificates of deposit, asset-backed securities, commercial paper, equity securities, U.S. agency obligations, supranational securities, and municipal securities. The Company determines the appropriate classification of its short-term investments at the time of purchase and reevaluates such designation at each balance sheet date. With the exception of the equity security, the Company has classified and accounted for its short-term investments as available-for-sale securities as the Company may sell these securities at any time for use in its current operations or for other purposes, even prior to maturity. As a result, the Company classifies its short-term investments, including securities with stated maturities beyond twelve months, within current assets in the condensed consolidated balance sheets.

The Company's short-term investments are recorded at fair value each reporting period. Unrealized gains and losses on these short-term investments are reported as a separate component of accumulated other comprehensive income (loss) in the condensed consolidated balance sheets until realized. Unrealized gains and losses for any short-term investments that management intends to sell or it is more likely than not that management will be required to sell prior to their anticipated recovery are recorded in other income (expense), net. The Company segments its portfolio based on the underlying risk profiles of the securities and has a zero-loss expectation for U.S. treasury and U.S. government agency securities. The Company regularly reviews the securities in an unrealized loss position and evaluates the current expected credit loss by considering factors such as credit ratings, issuer-specific factors, current economic conditions, and reasonable and supportable forecasts. The Company did not record any credit losses for its short-term investments as of March 31, 2020
  
The Company holds an equity security in a publicly traded company in which the Company does not have a controlling interest or significant influence. The investment is measured using quoted prices in its active market with changes recorded in other income, net, in the condensed consolidated statement of operations. As of March 31, 2020, the Company's equity security totaled $20.6 million and is included in short-term investments in the condensed consolidated balance sheet. The Company recognized net gains of $11.0 million related to changes in quoted prices in the investment’s active market during the three months ended March 31, 2020. The investment is classified as a Level 1 investment within the fair value hierarchy.

Concentrations of credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, accounts receivable, and short-term investments. The Company places its cash and cash equivalents, and short-term investments with well-established financial institutions.

Trade accounts receivables are typically unsecured and are derived from revenue earned from customers located around the world. One distribution partner accounted for 53% of total trade and other receivables, net as of March 31, 2020. Two distribution partners accounted for 10% and 27% of total trade and other receivables, net as of December 31, 2019. No customer accounted for more than 10% of the Company’s revenue in the periods presented.

Deferred commissions, net
Deferred commissions, net is stated as gross deferred commissions less accumulated amortization. Sales commissions earned by the Company’s sales force and third-party resellers, as well as related payroll taxes, are considered to be incremental and recoverable costs of obtaining a contract with a customer. These amounts have been capitalized as deferred commissions within prepaid and other current assets and other assets on the condensed consolidated balance sheets. The Company deferred incremental costs of obtaining a contract of $7.8 million and $7.3 million during the three months ended March 31, 2020 and 2019, respectively.

Deferred commissions, net included in prepaid and other current assets were $22.1 million and $19.9 million as of March 31, 2020 and December 31, 2019, respectively. Deferred commissions, net included in other assets were $44.0 million and $43.5 million as of March 31, 2020 and December 31, 2019, respectively.

Deferred commissions are typically amortized over a period of benefit of five years. The period of benefit was estimated by considering factors such as historical customer attrition rates, the useful life of the Company’s technology, and the impact of competition in its industry. Amortized costs were $5.1 million and $3.9 million for the three months ended March 31, 2020 and 2019, respectively. Amortized costs are included in sales and marketing expense in the accompanying condensed consolidated statements of operations. There was no impairment loss in relation to the deferred costs for any period presented.

13

DROPBOX, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)



Property and equipment, net
Equipment is stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful life of the related asset, which is generally three to seven years. Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the term of the related lease.

The following table presents the estimated useful lives of property and equipment:

Property and equipment
 
Useful life
 
 
 
Buildings
 
20 to 30 years
Datacenter and other computer equipment
 
3 to 5 years
Office equipment and other
 
3 to 7 years
Leasehold improvements
 
Lesser of estimated useful life or remaining lease term



Lease obligations
The Company leases office space, datacenters, and equipment under non-cancelable finance and operating leases with various expiration dates through 2036. The Company determines if an arrangement contains a lease at inception.

Operating lease right-of-use assets and lease liabilities are recognized at the present value of the future lease payments at commencement date. The interest rate implicit in the Company’s operating leases is not readily determinable, and therefore an incremental borrowing rate is estimated to determine the present value of future payments. The estimated incremental borrowing rate factors in a hypothetical interest rate on a collateralized basis with similar terms, payments, and economic environments. Operating lease right-of-use assets also include any prepaid lease payments and lease incentives.

Certain of the operating lease agreements contain rent concession, rent escalation, and option to renew provisions. Rent concession and rent escalation provisions are considered in determining the single lease cost to be recorded over the lease term. Single lease cost is recognized on a straight-line basis over the lease term commencing on the date the Company has the right to use the leased property. The lease terms may include options to extend or terminate the lease. The Company generally uses the base, non-cancelable, lease term when recognizing the lease assets and liabilities, unless it is reasonably certain that the option will be exercised.

In addition, certain of the Company’s operating lease agreements contain tenant improvement allowances from its landlords. These allowances are accounted for as lease incentives and decrease the Company's right-of-use asset and reduce single lease cost over the lease term.

The Company leases certain equipment from various third parties, through equipment finance leases. These leases either include a bargain purchase option, a full transfer of ownership at the completion of the lease term, or the terms of the leases are at least 75 percent of the useful lives of the assets and are therefore classified as finance leases. These leases are capitalized in property and equipment, net and the related amortization of assets under finance leases is included in depreciation and amortization expense in the Company’s condensed consolidated statements of operations. Initial asset values and finance lease obligations are based on the present value of future minimum lease payments.

The Company’s finance lease agreements may contain lease and non-lease components. The non-lease components include payments for support on infrastructure equipment obtained via finance leases, which when not significant in relation to the overall agreement, are combined with the lease components and accounted for together as a single lease component.
Business combinations
The Company uses best estimates and assumptions, including but not limited to, future expected cash flows, expected asset lives, and discount rates, to assign a fair value to the tangible and intangible assets acquired and liabilities assumed in business combinations as of the acquisition date. These estimates are inherently uncertain and subject to refinement. During the

14

DROPBOX, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)


measurement period, which may be up to one year from the acquisition date, adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed may be recorded, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s condensed consolidated statements of operations.
    
Long-lived assets, including goodwill and other acquired intangible assets, net
The Company evaluates the recoverability of its property and equipment and finite-lived intangible assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. The evaluation is performed at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If such review determines that the carrying amount of specific property and equipment or intangible assets is not recoverable, the carrying amount of such assets is reduced to its fair value.

The Company reviews goodwill for impairment at least annually in the fourth quarter, or more frequently if events or changes in circumstances would more likely than not reduce the fair value of its single reporting unit below its carrying value.

The Company has not recorded impairment charges on property and equipment, goodwill, or intangible assets for the periods presented in these condensed consolidated financial statements.

Acquired property and equipment and finite-lived intangible assets are amortized over their useful lives. The Company evaluates the estimated remaining useful life of these assets when events or changes in circumstances warrant a revision to the remaining period of amortization. If the Company revises the estimated useful life assumption for any asset, the remaining unamortized balance is amortized or depreciated over the revised estimated useful life on a prospective basis.

Income taxes
Deferred income tax balances reflect the effects of temporary differences between the financial reporting and tax bases of the Company’s assets and liabilities using enacted tax rates expected to apply when taxes are actually paid or recovered. In addition, deferred tax assets are recorded for net operating loss and credit carryforwards.

A valuation allowance is provided against deferred tax assets unless it is more likely than not that they will be realized based on all available positive and negative evidence. Such evidence includes, but is not limited to, recent cumulative earnings or losses, expectations of future taxable income by taxing jurisdiction, and the carry-forward periods available for the utilization of deferred tax assets.

The Company uses a two-step approach to recognizing and measuring uncertain income tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. The Company recognizes interest and penalties related to unrecognized tax benefits as income tax expense.

Although the Company believes that it has adequately reserved for its uncertain tax positions, it can provide no assurance that the final tax outcome of these matters will not be materially different. The Company evaluates its uncertain tax positions on a regular basis and evaluations are based on a number of factors, including changes in facts and circumstances, changes in tax law, such as the 2017 Tax Cuts and Jobs Act ("2017 Tax Reform Act") and the 2020 Coronavirus Aid, Relief, and Economic Security Act ("2020 CARES Act"), correspondence with tax authorities during the course of an audit, and effective settlement of audit issues.

To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact on the Company’s financial condition and results of operations.

Fair value measurement

15

DROPBOX, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)


The Company applies fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value measurements for assets and liabilities, the Company considers the principal or most advantageous market in which it would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions, and credit risk. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3—Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.


Recently adopted accounting pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. The Company adopted ASU No. 2016-13 on January 1, 2020 using the modified retrospective approach. The cumulative impact of transition to retained earnings, recorded as of the adoption date, was not material to the Company's consolidated financial statements. The Company did not record any material credit losses during the three months ended March 31, 2020.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), which amends disclosure requirements for fair value measurements by requiring new disclosures, modifying existing requirements, and eliminating others. The amendments are the result of a broader disclosure project, which aims to improve the effectiveness of disclosures. The Company adopted ASU No. 2018-13 on January 1, 2020. The adoption of the standard did not have a material impact on the Company's consolidated financial statements. 

In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40), Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in ASU No. 2018-15 amend the definition of a hosting arrangement and requires a customer in a hosting arrangement that is a service contract to capitalize certain costs as if the arrangement were an internal-use software project. The Company adopted ASU No. 2018-15 on January 1, 2020. The adoption of the standard did not have a material impact on the Company's consolidated financial statements. 

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes. This ASU simplifies accounting for income taxes by removing the exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or gain for other items, the exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment, the exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary, and the exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. This ASU also includes other requirements related to franchise tax, goodwill as part of a business combination, consolidations, changes in tax laws, and affordable housing projects. The Company adopted ASU No. 2019-12 on January 1, 2020. The adoption of the standard did not have a material impact on the Company's consolidated financial statements. 



16

DROPBOX, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)




Note 2. Cash, Cash Equivalents and Short-Term Investments

The amortized cost, unrealized gains and losses and estimated fair value of the Company's cash, cash equivalents and available-for-sale securities as of March 31, 2020 and December 31, 2019 consisted of the following:

As of March 31, 2020

Amortized Cost
 
Unrealized Gain
 
Unrealized Loss
 
Estimated Fair Value
 
 
 
 
 
 
 
 
Cash
$
112.1

 
$

 
$

 
$
112.1

Cash equivalents


 


 


 


Money market funds
373.0

 

 

 
373.0

Commercial paper
1.3

 

 

 
1.3

Total cash and cash equivalents
$
486.4

 
$

 
$

 
$
486.4

Short-term investments
 
 
 
 
 
 
 
Corporate notes and obligations
289.0

 
0.6

 
(2.7
)
 
286.9

U.S. Treasury securities
173.3

 
2.1

 

 
175.4

Asset-backed securities
59.1


0.1


(0.7
)

58.5

Certificates of deposit
30.8






30.8

Commercial Paper
21.4

 

 

 
21.4

U.S. agency obligations
15.3

 
0.2

 

 
15.5

Supranational securities
2.8

 

 

 
2.8

Municipal securities
2.5

 

 

 
2.5

Total available-for-sale securities
594.2

 
3.0

 
(3.4
)
 
593.8

Total
$
1,080.6

 
$
3.0

 
$
(3.4
)
 
$
1,080.2




17

DROPBOX, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)



As of December 31, 2019

Amortized cost
 
Unrealized gain
 
Unrealized loss
 
Estimated fair value
 
 
 
 
 
 
 
 
Cash
$
105.0

 
$

 
$

 
$
105.0

Cash equivalents:
 
 

 

 

Money market funds
444.3

 

 

 
444.3

Commercial paper
2.0

 

 

 
2.0

Total cash and cash equivalents
$
551.3

 
$

 
$

 
$
551.3

Investments

 

 

 

Corporate notes and obligations
285.5

 
1.2

 
(0.1
)
 
286.6

U.S. Treasury securities
171.0

 
0.3

 

 
$
171.3

Asset backed securities
53.8

 

 

 
53.8

Certificates of deposit
38.2

 

 

 
38.2

U.S. agency obligations
27.2

 

 

 
$
27.2

Commercial paper
24.2

 

 

 
24.2

Supranational securities
4.0

 

 

 
4.0

Municipal securities
2.4

 

 

 
2.4

Total short-term investments
606.3

 
1.5

 
(0.1
)
 
607.7

Total
$
1,157.6

 
$
1.5

 
$
(0.1
)
 
$
1,159.0



Included in cash and cash equivalents is cash in transit from payment processors for credit and debit card transactions of $11.8 million and $11.5 million as of March 31, 2020 and December 31, 2019, respectively.

With the exception of our equity security, all short-term investments were designated as available-for-sale securities as of March 31, 2020. The total fair value of short-term investments was $614.4 million as of March 31, 2020. All short-term investments were designated as available-for-sale securities as of December 31, 2019.

The following table presents the contractual maturities of the Company’s available for sale securities as of March 31, 2020:
 
As of March 31, 2020
 
Amortized cost
 
Estimated fair value
 
 
 
 
Due within one year
288.3

 
289.1

Due between one to three years
280.8

 
280.1

Due after three years
25.1

 
24.6

Total
$
594.2

 
$
593.8



The Company had 194 available-for-sale securities in unrealized loss positions as of March 31, 2020. There were no material unrealized losses from available-for-sale securities and no material realized gains or losses from available-for-sale securities that were reclassified out of accumulated other comprehensive income (loss) for the three months ended March 31, 2020 and 2019.

As of March 31, 2020, the Company’s short-term investments portfolio consisted of nine security types, two of which were in an unrealized loss position. The Company’s corporate notes and obligations and asset backed securities had unrealized losses of approximately $2.7 million and $0.7 million, respectively as of March 31, 2020. Unrealized losses on corporate notes and obligations and asset backed securities have not been recorded into income because management does not intend to sell nor will be required to sell these securities prior to their anticipated recovery, and for which the decline in fair value is largely due to changes in credit spreads. The credit ratings associated with the corporate notes and obligations and asset backed securities are mostly unchanged, are highly rated and the issuers continue to make timely principal and interest payments.

18

DROPBOX, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)



The Company recorded $5.1 million and $6.2 million in interest income from its cash, cash equivalents and short-term investments for the three months ended March 31, 2020 and 2019, respectively.

Note 3. Fair Value Measurements

The Company measures its financial instruments at fair value each reporting period using a fair value hierarchy that prioritizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The following table presents information about the Company’s financial instruments that are measured at fair value on a recurring basis using the input categories discussed in Note 1:   
 
As of March 31, 2020
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
Money market funds
$
373.0

 
$

 
$

 
$
373.0

Commercial paper

 
1.3

 

 
1.3

Total cash equivalents
$
373.0

 
$
1.3

 
$

 
$
374.3

Short-term investments
 
 
 
 
 
 
 
Corporate notes and obligations

 
286.9

 

 
286.9

U.S. Treasury securities

 
175.4

 

 
175.4

Asset backed securities

 
58.5

 

 
58.5

Certificates of deposit

 
30.8

 

 
30.8

Commercial paper

 
21.4

 

 
21.4

Equity securities
20.6

 

 

 
20.6

U.S agency obligations

 
15.5

 

 
15.5

Supranational securities

 
2.8

 

 
2.8

Municipal securities

 
2.5

 

 
2.5

Total short-term investments
$
20.6

 
$
593.8

 
$

 
$
614.4

Total cash equivalents and short-term investments
$
393.6

 
$
595.1

 
$

 
$
988.7




19

DROPBOX, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)


 
As of December 31, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
Money market funds
$
444.3

 
$

 
$

 
$
444.3

Commercial paper

 
2.0

 

 
2.0

Total Cash Equivalents
$
444.3

 
$
2.0

 
$

 
$
446.3

Short-term investments
 
 
 
 
 
 
 
Corporate notes and obligations

 
286.6

 

 
286.6

U.S. Treasury securities

 
171.3

 

 
171.3

Asset-backed securities

 
53.8

 

 
53.8

Certificates of deposit

 
38.2

 

 
38.2

U.S. agency obligations

 
27.2

 

 
27.2

Commercial paper

 
24.2

 

 
24.2

Supranational securities

 
4.0

 

 
4.0

Municipal securities

 
2.4

 

 
2.4

Total short-term investments
$

 
$
607.7

 
$

 
$
607.7

Equity Investments