UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
For the fiscal year ended December 31 , 2021
OR
For the transition period from________to________
Commission File Number 001-38434
| (Exact name of registrant as specified in its charter) | ||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |||||||||||||
Dropbox, Inc.
(Address of principal executive offices, including zip code)
(415 ) 857-6800
(Registrant's telephone number, including area code)
| Title of each class | Trading Symbol(s) | Name of exchange on which registered | ||||||||||||
Securities registered pursuant to Section 12(g) of the Act None | ||||||||||||||
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"). Yes ☐ No ☒
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):
| ☒ | 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the registrant's Class A common stock held by non-affiliates of the registrant, based on the closing price of a share of the registrant's Class A common stock on June 30, 2021 as reported by the NASDAQ Global Select Market on such date was approximately $7,207.4 million. Shares of the registrant’s Class A common stock held by each executive officer, director and holder of 5% or more of the outstanding Class A common stock have been excluded as such persons may be deemed to be affiliates. This calculation does not reflect a determination that certain persons are affiliates of the registrant for any other purpose.
As of February 15, 2022 there were 298,856,588 shares of the registrant's Class A common stock outstanding (which includes 8,266,666 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 2,415,437 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 and, as applicable, achievement of certain stock price goals), 82,798,358 shares of the registrant’s Class B common stock outstanding, and no shares of the registrant’s Class C common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
| TABLE OF CONTENTS | ||||||||
| Page | ||||||||
| Part I | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 1B. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Part II | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
| Item 7. | ||||||||
| Item 7A. | ||||||||
| Item 8. | ||||||||
| Item 9. | ||||||||
| Item 9A. | ||||||||
| Item 9B. | ||||||||
| Item 9C. | ||||||||
| Part III | ||||||||
| Item 10. | ||||||||
| Item 11. | ||||||||
| Item 12. | ||||||||
| Item 13. | ||||||||
| Item 14. | ||||||||
| Part IV | ||||||||
| Item 15. | ||||||||
| Item 16. | ||||||||
2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), 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 Annual Report on Form 10-K 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, annual recurring revenue, average revenue per user, free cash flow, and the assumptions underlying such trends;
•Our expectations regarding the challenges and anticipated benefits to our business from our Virtual First work model as well as the impact to our financial results and business operations as a result of this model;
•Our ability to compete successfully in competitive markets;
•Our expectations regarding the potential ongoing impacts of the COVID-19 pandemic and related public health measures, as well as the potential for a more permanent global shift to remote work, on our business, the business of our customers, suppliers and partners, and the economy;
•The demand for our platform or for content collaboration solutions in general;
•Our ability to effectively integrate our platform with others;
•Our ability to respond to rapid technological changes, including our ability to take advantage of potential market opportunities arising from what we believe to be a more permanent shift towards remote work;
•Our ability to achieve or maintain profitability;
•Our expectations around future growth;
•Our ability to successfully introduce new products and features;
•Our ability to attract, retain, integrate, and manage key and other highly qualified personnel, including as we transition to a Virtual First model with an increasingly distributed workforce;
•Our ability to prevent security breaches and unauthorized access to customer data;
•Our capital allocation plans, including expected allocations of cash and timing for our share repurchases and other investments;
•The effects of new or modified laws, policies, taxes, and regulations on our business;
•Our ability to maintain, protect, and enhance our intellectual property;
•The sufficiency of our cash and cash equivalents to meet our liquidity needs; and
•Acquisitions of companies and assets.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Annual Report on Form 10-K.
3
You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Annual Report on Form 10-K 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 Annual Report on Form 10-K. 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 Annual Report on Form 10-K. 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 Annual Report on Form 10-K 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 Annual Report on Form 10-K to reflect events or circumstances after the date of this Annual Report on Form 10-K 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.
SUMMARY OF RISK FACTORS
Below is a summary of the principal factors that could materially harm our business, operating results and/or financial condition, impair our future prospects or cause the price of our Class A common stock to decline. This summary does not address all of the risks that we face. Additional discussion of the risks summarized in this risk factor summary, and other risks that we face, can be found below under the heading “Risk Factors” and should be carefully considered, together with other information in this Form 10-K and our other filings with the Securities and Exchange Commission ("SEC") before making an investment decision regarding our Class A common stock.
•Our business depends on our ability to retain and upgrade paying users, and any decline in renewals or upgrades could adversely affect our future results of operations.
•Our future growth could be harmed if we fail to attract new users or convert registered users to paying users.
•Our revenue growth rate has declined in recent periods and may continue to slow in the future.
•We have a limited history of operating with a Virtual First workforce and the long-term impact on our financial results and business operations is uncertain.
•We operate in competitive markets, and we must continue to compete effectively.
•Our business could be damaged, and we could be subject to liability if there is any unauthorized access to our data or our users' content, including through privacy and data security breaches or incidents.
•Our business could be harmed by any significant disruption of service on our platform or loss of content.
•The full extent of the impacts of the COVID-19 pandemic on our business is currently unknown, but it may adversely affect our financial results as well as our business operations.
•We generate revenue from sales of subscriptions to our platform, and any decline in demand for our platform or for content collaboration solutions in general could negatively impact our business.
•Our business depends upon the interoperability of our platform across devices, operating systems, and third-party applications that we do not control.
•Failure to respond to rapid technological changes, extend our platform, or develop new features or products may harm our ability to compete effectively, which would adversely affect our business.
•We may not successfully manage our growth or plan for future growth.
4
•We depend on our key personnel and other highly qualified personnel, and if we fail to attract, integrate, and retain our personnel, and maintain our unique corporate culture, our business could be harmed.
•We have a history of net losses, we may increase expenses in the future, and we may not be able to achieve or to maintain profitability.
•Our lack of a significant outbound sales force may limit the potential growth of our business.
•Servicing our 2026 Notes and 2028 Notes may require a significant amount of cash, and we may not have sufficient cash flow or the ability to raise the funds necessary to satisfy our obligations under the 2026 Notes or 2028 Notes.
5
PART I.
ITEM 1. BUSINESS
Overview
Dropbox, Inc. (the “Company”, “we”, or “us”) is the one place to keep life organized and keep work moving.
We were founded in 2007 with a simple idea: Life would be a lot better if everyone could access their most important information anytime from any device. Over the past decade, we’ve largely accomplished that mission by building tools to help people work from anywhere—and along the way we recognized that for most of our users, sharing and collaborating on the Dropbox, Inc. platform (“Dropbox”) was even more valuable than storing files.
Our market opportunity has grown as we’ve expanded from keeping files in sync to keeping teams in sync. Today, we are well-positioned to reimagine the way work gets done. We're focusing on reducing the inordinate amount of time and energy the world spends on “work about work”—tedious tasks like searching for content, switching between applications, and managing workflows. We believe the need for our platform will continue to grow as teams become more fluid and global, and content is increasingly fragmented across incompatible tools and devices. Dropbox breaks down silos by centralizing the flow of information between the products and services our users prefer, even if they’re not our own. In a world where using technology at work can be fragmented and distracting, Dropbox makes it easy to focus on the work that matters.
The popularity of our platform promotes viral growth, which has allowed us to scale rapidly and efficiently. We’ve built a thriving global business with 16.79 million paying users as of December 31, 2021.
What Sets Us Apart
From our founding, we’ve focused on simplifying the lives of our users. In a world where business software can be frustrating to use, challenging to integrate, and expensive to sell, we take a different approach. As businesses around the world adapt to a distributed environment, we are at the forefront of developing the technology to support them. We provide tools to help distributed teams prioritize, get organized, and keep work moving securely—from anywhere.
Simple and intuitive design
While traditional tools developed in the desktop age have struggled to keep up with evolving user demands, Dropbox was designed for the cloud era. We build simple, beautiful products that bring joy to our users and make it easier for them to do their best work.
Open ecosystem
Because people use a wide variety of devices, tools and platforms, Dropbox works across the devices, operating systems, and apps users want—from Android to iOS, Windows, Mac, desktop, and mobile. We also integrate seamlessly with other products, integrating with partners including Microsoft, Zoom, Slack, BetterCloud, Atlassian, and Google.
Viral, bottom-up adoption
Every year, millions of users sign up for Dropbox at work. Bottom-up adoption within organizations has been critical to our strategy and success as users increasingly choose their own tools at work. We generate over 90% of our revenue from self-serve channels—users who purchase a subscription through our app or website.
Performance and security
Our custom-built infrastructure allows us to maintain high standards of performance, availability, and security. Dropbox is built on proprietary, block-level sync technology to achieve industry-leading performance. We designed our platform with multiple layers of redundancy to guard against data loss and deliver high availability. We also offer numerous layers of protection, from secure file data transfer and encryption to network configuration and application-level controls.
Our Solution
Dropbox allows individuals, teams, and organizations to collaborate more effectively and focus on the work that matters. Anyone can sign up for free through our website or app, and upgrade to a paid subscription plan for premium features. Our customers include individuals, families, teams, and organizations of all sizes, from freelancers and small businesses to Fortune 100 companies. They work across a wide range of industries, including professional services, technology, media, education,
6
industrial, consumer and retail, and financial services. Within companies, our platform is used by all types of teams and functions, including sales, marketing, product, design, engineering, finance, legal, and human resources.
Key elements of our platform
•Unified home for content. We provide a unified home for the world’s content and the relevant context around it. To date, our users have added hundreds of billions of pieces of content to Dropbox, totaling over multiple exabytes of data. When users adopt the Dropbox platform, they gain access to a digital workspace that supports the full content lifecycle—they can create and organize their content, access it from anywhere, share it with internal and external collaborators, and review feedback and history.
•Global sharing network. We’ve built one of the largest collaboration platforms in the world. We cater to the needs of dynamic, dispersed teams. The overwhelming majority of our customers use Dropbox to share and collaborate. As we continue to grow, more users benefit from frictionless sharing, and powerful network effects increase the utility and stickiness of our platform.
•Product experiences and integrations. The insights we glean from our community of users and our deep integrations with best-of-breed companies lead us to develop or acquire new product experiences and extend the capabilities of our platform. Products like Dropbox Passwords, Vault, Computer Backup, HelloSign, DocSend, and Dropbox Capture and deep integrations with companies like Microsoft, Zoom, Atlassian, Slack, and BetterCloud help us provide our users with the functionality they need to do their best work. Machine learning further improves the user experience by enabling more intelligent search, better organization, and utility of information. This ongoing innovation broadens the value of our platform and deepens user engagement.
These elements reinforce one another to produce a powerful flywheel effect. As users create and share more content with more people, they expand our global sharing network. This network allows us to gather insights and feedback that help us create new product experiences. And with our scale, we can instantly put these innovations in the hands of millions. This, in turn, helps attract more users and content, which further propels the flywheel.
Our Capabilities
Dropbox is a single organized place where individuals and teams can create content, access it from anywhere, and share it with collaborators. The power of our platform lies in the breadth of our capabilities and the diverse ways our users make Dropbox work for them. We monetize through a range of subscription plans. Our platform capabilities are described below:
Create
Paper. With Dropbox Paper, users can co-author content, tag others, create timelines, assign tasks with due dates, embed and comment on files, tables, checklists, code snippets, and rich media—all in real-time. We designed Paper to be simple and beautiful so users can focus on the most important ideas and tasks at hand.
Doc scanner. The doc scanner in our mobile app lets users create content in Dropbox from hard copies. This includes transforming everything from printed materials to whiteboard brainstorming sessions into digital documents that users can edit and share. We apply proprietary machine learning techniques to automatically detect the document being scanned, extract it from the background, fit it to a rectangular shape, remove shadows, adjust the contrast, and save it as a PDF or image file. For Dropbox Business teams, scanned content is analyzed using Optical Character Recognition so text within these scans is searchable in Dropbox.
Access and organize
Search. Dropbox has powerful search capabilities that allow users to quickly find the files and folders they need. Our autocomplete technology surfaces and prioritizes content based on users’ previous activity. For Dropbox Plus, Professional, and Business users, full text search allows users to scan the entire content of their files.
Rich previews. Rich previews allow users to easily interact with files across any device without having to open different applications. Users can comment on, annotate, review, and present files, and see who viewed and edited them. We support previews of over 300 file types, and Dropbox users currently preview files tens of millions of times every day.
Smart Sync. With Smart Sync, users can access all of their content natively on their computers without taking up storage space on their local hard drives. We intelligently sync files to a user’s computer as they need them, and users can control which files or folders are always synced locally. With Smart Sync, files that are only stored in the cloud appear in the local file system
7
and can be opened directly from Windows File Explorer or Mac Finder, instead of having to navigate to our web interface. Smart Sync is available to Dropbox Plus, Professional, and Business users.
Version history. As paying users work on files, our servers keep snapshots of all their changes. Users can see a file’s complete version history so they can reference and retrieve older versions if needed. Version histories are kept between 30 to 180 days for paying users, depending on subscription plan.
Third-party ecosystem. Our open and thriving ecosystem fosters deeper relationships with our users and developers. Developers can build applications that connect to Dropbox through our DBX Developer Platform. For example, email apps can plug into Dropbox to send attachments or shared links, video-conferencing apps allow users to start meetings and share content natively from Dropbox, and eSignature apps give users the ability to manage and maintain contract workflows all from within Dropbox. As of December 31, 2021, Dropbox was receiving over 75 billion API calls per month and just under 1,000,000 developers had registered and built applications on our platform. In addition, more than 80% of Dropbox Business teams have linked to one or more third-party applications.
Rewind. Dropbox Rewind is a tool that lets a user take a folder, or their entire account, back to a specific point in time. The tool uses version history to undo changes made to files and folders and can recover any file edits or deletions made within the last 30 to 180 days depending on the users’ subscription.
Computer Backup. Computer backup automatically syncs folders on a user's computer to the cloud. When turned on, files on the user's PC or Mac are continuously backed up on the cloud. Any changes made in synced folders are automatically updated in the Dropbox account and on the hard drive. Computer backup allows users to get up-to-date versions of files stored on the user's PC or Mac from anywhere and from any device instantly. Content is secure in the cloud, no matter what happens to the user's computer.
Passwords. Dropbox Passwords allows users to sign-in to websites and apps by creating and storing unique usernames and passwords across devices. The app can autofill usernames and passwords for instant access anywhere within applications available for Windows, Mac, iOS, and Android.
Vault. Dropbox Vault helps secure and organize sensitive information in the cloud. Vault is a PIN-protected folder in Dropbox that a user can access any time and on any device. Sensitive data can be added and viewed from any device: Windows, Mac, iOS, and Android.
Share
Folders. There are three types of folders in Dropbox: private, shared, and team folders. A private folder allows an individual to sync files between devices. A shared folder allows users to quickly and easily start a project space for group collaboration. A team folder, which is only available for Dropbox Business teams, is a central, administrator-managed hub where they can store and collaborate on content.
Shared links. Users can share files and folders with anyone, including non-Dropbox users, by creating a Dropbox link. Once created, the link can be sent through email, text, Facebook, Twitter, instant message, or other channels. The recipient can view the file with a rich preview or see all the files in a shared folder. Dropbox Professional subscribers and Dropbox Business teams can set passwords and expiration dates and specify whether recipients can comment on or download the files.
Transfer. Dropbox Transfer gives users a quick and secure way to send large files or collections of files to anyone. With Transfer, users can send up to 100 GB of files in just a few clicks. Users also have the option to drag and drop files to upload from their computer, or add items stored in Dropbox. After creating a transfer, users receive a link that can be pasted anywhere and sent to anyone. Recipients receive copies of the files, so the sender’s originals remain untouched.
File requests. With file requests, users can invite anyone to submit files into a specified Dropbox folder through a simple link—regardless of whether the recipient has a Dropbox account. File requests are ideal for tasks such as collecting bids from contractors or requesting submissions from coworkers and clients. All submitted files are organized into a Dropbox folder that’s private to the requesting user.
Watermarking. Our Dropbox watermarking feature allows users to protect and share digital files quickly and easily. The watermark feature can be used to protect graphic designs, confidential contracts, and personal photographs. Users can create their own custom watermark and watermark any file without leaving Dropbox.
8
DocSend. DocSend is a secure document sharing and analytics platform that gives customers visibility into what happens to their documents after they send them. DocSend technology enables customers to track who opens their documents and how much time they spend on each page, protect documents with security features like email verification and viewer whitelisting, and share multiple documents with a single link.
Shop. Dropbox Shop provides users with a valuable and flexible digital sales experience for creators by streamlining the process of sharing and monetizing their content, all within Dropbox. This platform allows creators to easily sell content directly to their customers. Users can add content directly from Dropbox or their computer, set a custom image, audio, or video preview, and determine their price. Buyers with a Dropbox account can access everything they have purchased when logged in and those that don't have Dropbox can purchase content via email verification and download it within a specific timeframe.
Collaborate
Comments and annotations. Dropbox comments and annotations marry content with the conversations and relevant context around it. Instead of being scattered across separate silos, such as email and chat, the editing and development of content are tied to a file. Users can give feedback on specific parts of files through a rich, innovative overlay on our web and mobile platforms.
File activity stream. An activity feed lives next to every file preview on our web interface and in the desktop app, telling users what’s happening with a file. The feed shows when someone opens a file, edits a file, or shares a file.
Notifications. We use real-time notifications across all our channels—web, desktop, email, and mobile—to keep users up-to-date on what’s happening with their work. Users can choose to be notified when someone opens, edits, shares, or comments on a file, or adds a file to their shared folders.
Viewer information and presence. On both file previews and Paper docs, Dropbox shows users in real-time who’s viewing a doc and when a doc was last viewed by other users. On desktop, the Dropbox badge is a subtle overlay to Microsoft Word, Excel, and PowerPoint that lets users know if someone opens or edits the file they’re working in. The Dropbox badge gives users real-time insight into how others are interacting with their content, bringing modern collaboration features often found only in web-based documents to desktop files.
HelloSign. HelloSign is an eSignature and document workflow platform that enables customers to easily sign, send, and receive documents through its intuitive web and mobile based interfaces. Once documents are signed, copies automatically sync to the user's Dropbox account.
Capture. Dropbox Capture is an all-in-one visual communication tool that helps team members share their work and idea asynchronously. Dropbox Capture allows users to visually present their work through easy-to-take screen recordings, GIFs, and screenshots.
Secure
Security protections. We employ strong protections for all of the data on our platform.
•Encryption. Dropbox file data at rest is encrypted using 256-bit Advanced Encryption Standard, or AES. To protect data in transit between Dropbox apps such as desktop, mobile, API, or web and our servers, Dropbox uses Secure Sockets Layer, or SSL, and Transport Layer Security, or TLS, for data transfer, creating a secure tunnel protected by 128-bit or higher AES encryption.
•File recovery. Every deletion event in Dropbox is recorded, including when groups of files are deleted. Users can easily recover files through our web interface. Dropbox Plus subscribers may recover prior versions for up to 30 days after deletion, and Dropbox Professional and Dropbox Business subscribers may recover prior versions for up to 180 days after deletion.
Administrator controls. Dropbox Business team administrators have many ways to customize security settings in both global and granular ways, including real-time detections of suspicious behavior, risky activity, and potential data leaks.
•Sharing permissions: Team administrators can set up and monitor how their members share team folders, and can set sharing permissions on all folders, sub-folders, and links through the sharing tab.
•Remote device wipe: Team administrators can delete their organization’s Dropbox content from a member’s linked devices, which is especially useful should someone lose a device or leave the team.
9
•Audit log: Team administrators can monitor which members are sharing files and logging into Dropbox, among other events. They can review activity logs, create full reports for specific time ranges, and pull activity reports on specific members. Advanced and Enterprise team administrators have access to audit logs with file-event tracking.
•Device approvals: Advanced and Enterprise team administrators can manage how members access Dropbox on their devices.
•Tiered administrator roles: Advanced and Enterprise teams have the ability to set multiple administrator roles, each with a different set of permissions.
•Network control: Enterprise team administrators can restrict personal Dropbox usage on their organization’s network.
Third-party security integrations. We’ve partnered with industry-leading third parties to enable us to provide a wide range of IT processes and satisfy industry compliance standards, including:
•Security information and event management: Allows Dropbox Business administrators to oversee and manage employee activity, and access sensitive data through the administrator page.
•Data loss prevention: Protects sensitive data like personally identifiable information and payment card industry data stored in Dropbox Business accounts.
•eDiscovery and legal hold: Enables secure search and the ability to collect and preserve electronically stored information in Dropbox Business accounts.
•Digital rights management: Provides third-party encryption for company data stored in Dropbox Business accounts.
•Data migration and on-premises backup: Assists in transferring large amounts of data between locations and securing sensitive information with on-site data backup.
•Identity management: Allows companies to keep their Dropbox Business team authenticated with an external identity provider like Active Directory.
Our Subscription Plans
We offer a range of subscription plans for our users, including a free, Basic plan, paid Personal plans, and Business plans.
Our Customers
We’ve built a thriving global business with 16.79 million paying users. As of December 31, 2021, we had more than 550,000 paying Dropbox Business teams. Our customer base is highly diversified, and in 2019, 2020, and 2021, no customer accounted for more than 1% of our revenue. Our customers include individuals, families, teams, and organizations of all sizes, from freelancers and small businesses to Fortune 100 companies. They work across a wide range of industries, including professional services, technology, media, education, industrials, consumer and retail, and financial services. Within companies, our platform is used by all types of teams and functions, including sales, marketing, product, design, engineering, finance, legal, and human resources.
How we support our customers
All of our users can access support through the following resources:
•Help center: Provides an online repository of helpful information about our platform, responses to frequently asked questions, and best practices for use.
•Community support: Facilitates collaboration between users on answers, solutions, and ideas about our platform in an online community.
•Social media support: Provides users real-time product and service updates, and offers tips and troubleshooting information.
•Guided troubleshooting: Offers step-by-step instructions to resolve common questions and provides a portal to submit help requests for questions that aren’t otherwise addressed.
We also offer additional levels of support for our paying users depending on the subscription plan they choose.
10
Our Sales and Marketing Approach
As users share content and collaborate on our platform, they introduce and invite new users, driving viral growth. We generate over 90% of our revenue from self-serve channels, which limits customer acquisition costs.
We’ve developed an efficient marketing function that’s focused on building brand awareness and reinforcing our self-serve model.
Our goal is to rapidly demonstrate the value of our platform to our users in order to convert them to paying users and upgrade them to our premium offerings. We reach them through in-product prompts and notifications, time-limited trials of paid subscription plans, email, and lifecycle marketing. Each year, hundreds of millions of devices—including computers, phones, and tablets—are actively connected to the Dropbox platform, representing a large number of touchpoints to communicate with our users. We complement our self-serve strategy with a focused outbound sales effort targeted at organizations with existing organic adoption of Dropbox.
Once prospects are identified, our sales team works to broaden adoption of our platform into wider-scale deployments. We also acquire some users through paid marketing and distribution partnerships in which hardware manufacturers pre-install our software on their devices.
Our Technology Infrastructure and Operations
Our users trust us with their most important content, and we focus on providing them with a secure and easy-to-use platform. More than 90% of our users’ data is stored on our own custom-built infrastructure, which has been designed from the ground up to be reliable and secure, and to provide annual data durability of at least 99.999999999%. We have datacenter co-location facilities in California, Oregon, Texas, and Virginia.
We also utilize Amazon Web Services, or AWS, for the remainder of our users’ storage needs and to help deliver our services. These AWS datacenters are located in the United States, Australia, Europe, and Japan, which allows us to localize where content is stored. Our technology infrastructure, combined with select use of AWS resources, provides us with a distributed and scalable architecture on a global scale.
We designed our platform with multiple layers of redundancy to guard against data loss and deliver high availability. Incremental backups are performed hourly and full backups are performed daily. In addition, as a default, redundant copies of content are stored independently in at least two separate geographic regions and replicated reliably within each region.
Our Commitment to Security, Privacy and Legal Compliance
Trust is the foundation of our relationship with our users, and we take significant measures every day to protect their privacy and security.
Security
Our sophisticated infrastructure is designed to protect our users’ content while it is transferred, stored, and processed. We offer multiple layers of protection, including secure file data transfer, encryption, network configuration, and application-level controls. For Dropbox Business teams, our tools also empower administrators with control and visibility features that allow them to customize our platform to their organizations’ needs. Our information security policies and management framework are designed to build a culture of security, and we continually assess risks and improve the security, confidentiality, integrity, and availability of our systems. We voluntarily engage third-party security auditors to test our systems and controls at least annually against the most widely recognized security standards and regulations. We also encourage and support independent research through our bug bounty program, where we work with leading security researchers from around the world to maintain the high standards of security our users have come to expect.
Dropbox supports HIPAA and HITECH compliance. We sign business associate agreements with our customers who require them in order to comply with the Health Insurance Portability and Accountability Act, or HIPAA, and the Health Information Technology for Economic and Clinical Health Act, or HITECH. We also offer a HIPAA assessment report performed by an independent third party.
Privacy
We are committed to keeping user data private, and are subject to a number of privacy laws and regulations such as the European Union's General Data Protection Regulation ("GDPR") and the California Consumer Privacy Act ("CCPA") in the
11
U.S. These laws and regulations impose increasingly numerous, complex obligations on us. To comply with and manage our obligations under such privacy laws and regulations, we operate a robust privacy program and have appointed a Data Protection Officer. Our privacy policy details how we process our users’ personal data as well as the steps we take to protect it. For third-party developers that create applications that connect to Dropbox, we also set forth terms and guidelines that explain their obligation to protect the privacy of our users' personal data.
Other Government Regulations
We are subject to compliance with various laws and regulations. These include those covering copyright, indecent content, child protection, and similar matters regarding the content stored and created on our platform as well as consumer protection laws that may impact our sales and marketing efforts, including laws related to subscriptions, billing, and auto renewal. In addition to laws and regulations governing content stored and created on our platform and consumer protection, we are also subject to anti-corruption laws and export and import regulations. The laws in these areas are often in a state of flux and can vary widely between jurisdictions. To comply with and manage our obligations under such laws and regulations, we track relevant legislative, regulatory, and contractual requirements. In addition, we have instituted processes and policies to ensure we review our business practices for appropriate compliance with such requirements.
Our Competition
The market for content collaboration platforms is competitive and rapidly changing. Certain features of our platform compete in the cloud storage market with products offered by Microsoft, Amazon, Apple, Slack, Google, and Adobe and in the content collaboration market with products offered by Microsoft, Atlassian, and Google. On a more limited basis, we compete with Box in the cloud storage market for deployments by large enterprises and with Adobe and DocuSign in the e-signature market. We also compete with smaller private companies that offer point solutions in the cloud storage market or the content collaboration market.
We believe that the principal competitive factors in our markets include the following:
•user-centric design;
•ease of adoption and use;
•scale of user network;
•features and platform experience;
•performance;
•brand;
•security and privacy;
•accessibility across several devices, operating systems, and applications;
•third-party integration;
•customer support;
•continued innovation; and
•pricing.
We believe we compete favorably across these factors and are largely unhindered by legacy constraints. However, some of our competitors may have greater name recognition, longer operating histories, more varied services, the ability to bundle a broader range of products and services, larger marketing budgets, established marketing relationships, access to larger user bases, major distribution agreements with hardware manufacturers and resellers, and greater financial, technical, and other resources.
Intellectual Property
We believe that our intellectual property rights are valuable and important to our business. We rely on patents, patent applications, trademarks, copyrights, trade secrets, know-how license agreements, confidentiality procedures, non-disclosure agreements, employee disclosure and invention assignment agreements, and other contractual rights to establish and protect our proprietary rights. In addition, from time to time we’ve purchased patents, inbound licenses, trademarks, domain names, and patent applications from third parties.
12
We have over 1,400 issued patents and more than 350 pending patent applications in the United States and abroad. These patents and patent applications seek to protect our proprietary inventions relevant to our business. In addition, we license a number of key third-party patents in the file collaboration, storage, syncing, and sharing markets.
We have trademark rights in our name, our logo, and other brand indicia, and have trademark registrations for select marks in the United States and many other jurisdictions around the world. We also have registered domain names for websites that we use in our business, such as www.dropbox.com, and similar variations.
We intend to pursue additional intellectual property protection to the extent we believe it would be beneficial and cost effective. Despite our efforts to protect our intellectual property rights, they may not be respected in the future or may be invalidated, circumvented, or challenged. In addition, the laws of various foreign countries where our products are distributed may not protect our intellectual property rights to the same extent as laws in the United States.
Human Capital
At Dropbox, we believe that the world can work better. But that starts with us: building a team that emphasizes the kindness and collaboration needed to grow. We believe the strength of our workforce is one of the most significant contributors to our success. As of December 31, 2021, we had 2,667 full-time employees. Of our full-time employees, 2,293 were located in the United States and 374 were employees located outside of the United States. None of our employees are represented by a labor union. We have not experienced any work stoppages, and we believe that our employee relations are strong.
On January 13, 2021, we announced a reduction in our global workforce of approximately 11% in order to streamline our operations and reallocate our investments to support our strategic priorities. We provided employees impacted by this reduction in force with severance packages and job placement support.
Virtual First
In October 2020, we announced our Virtual First work model pursuant to which remote work has become the primary experience for all of our employees. As a result, we intend for our workforce to continue becoming more distributed over time. We also promote work-life balance by empowering our employees to adopt flexible working arrangements and providing tools for efficient remote collaboration and continuing to provide opportunities for in-person collaboration, when safe to do so, at our “Dropbox Studios” locations. Additionally, we provide our employees with a flexible quarterly allowance that can be used to cover expenses related to health and fitness, family and caregiver support, productivity and ergonomics, financial wellness, and learning and development programs, as well as resources to support Dropboxer effectiveness in their work environments.
Compensation and Benefits Program
Our compensation program is designed to attract and reward talented individuals who possess the skills necessary to support our business, contribute to our strategic goals and create long-term value for our stockholders. We provide employees with competitive compensation packages that include base salary, annual incentive bonuses, 401(k) with a company match, and equity awards tied to the value of our stock price. Our highly competitive benefits package includes medical, dental, vision, life and disability plans. In addition to these core benefits, Dropbox also provides enhanced mental health benefits, family formation benefits and our adoption and surrogacy assistance program. Our comprehensive programs also provide various leave benefits - including 24 weeks of leave for new parents.
Employee Wellness and Safety
We recognize the importance of the well-being of our employees. With the shift to our Virtual First work model, we remain committed to supporting their well-being and development. A component of our comprehensive health and wellness benefits package to all employees includes additional time-off opportunities as well as mental and physical wellness benefits. We conduct a bi-annual employee satisfaction survey to gather candid feedback from employees with focus on areas such as experience with our managers, wellness initiatives, career and company initiatives. Survey results are reviewed extensively and become part of our action plans at all levels of the organization.
In addition, the safety of our employees is paramount to our success. We have a physical security policy applicable to all our employees with a global physical security team that is empowered to protect the safety of our employees in the event of emergencies or disasters. We also established Global COVID-19 Workplace Health & Safety Standards, based on guidance from public health authorities, for situations where it was necessary for employees to enter our offices. This is driven through a centralized, cross-functional Crisis Management Team dedicated to Dropbox’s COVID-19 response.
13
Learning and Development
We want all of our employees to have thriving careers where they grow and develop in meaningful ways. We develop and provide access to internal learning and development resources to assist in professional development in various ways such as skills-building programs, on-demand learning options, mentoring programs, and leadership development courses. We also offer extensive onboarding and training programs to prepare our employees at all levels for career progression and individual development.
Diversity and Inclusion
We believe that an equitable and inclusive environment comprised of diverse teams produces more creative solutions, results in better and more innovative products, and is crucial to our efforts to attract and retain key talent. We are focused on building an inclusive culture and sustaining a diverse workforce through a variety of company initiatives. As part of that effort we have a number of executive-sponsored Employee Resource Groups, or ERGs, that provide support for diverse members of our workforce by fostering an inclusive environment and providing professional development and community-building opportunities. In addition, we provide resources and training to employees at all levels to ensure that we are hiring, promoting and retaining diverse teams, as well as sponsor a number of professional development programs to support the advancement of underrepresented employees at our Company.
Community
We empower our employees to give back to their communities by providing paid volunteer time off, matching a portion of employee donations to nonprofits and making product donations to nonprofit organizations nominated by our employees.
Corporate Information
We were incorporated in May 2007 as Evenflow, Inc., a Delaware corporation, and changed our name to Dropbox, Inc. in October 2009. Our principal offices are located at 1800 Owens Street, San Francisco, California, 94158, and our telephone number is (415) 857-6800. Our Class A common stock is listed on the Nasdaq Global Select Market under the symbol “DBX.”
Available Information
Our website is located at http://www.dropbox.com/, our investor relations website is located at http://investors.dropbox.com/, and our blog is located at https://blog.dropbox.com/topics/news. We have used, and intend to continue to use, our investor relations website, our blog, press releases, public conference calls and webcasts to disclose material non-public information and to comply with our disclosure obligations under Regulation FD. The following filings are available through our investor relations website after we file them with the SEC: Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K, and our Proxy Statement for our annual meeting of stockholders. These filings are also available for download free of charge on our investor relations website. The SEC also maintains an Internet website that contains reports, proxy statements and other information about issuers, like us, that file electronically with the SEC. The address of that website is www.sec.gov. The contents of these websites are not incorporated into this filing. Further, the Company’s references to the URLs for these websites are intended to be inactive textual references only.
14
ITEM 1A. RISK FACTORS
Investing in our Class A common stock involves a high degree of risk. In addition to the other information set forth in this Annual Report, you should carefully consider the risks and uncertainties described below, together with all of the other information in this Annual Report on Form 10-K, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, before making a decision to invest in our Class A common stock. Our business, results of operations, financial condition, or prospects could also be harmed by risks and uncertainties that are not presently known to us or that we currently believe are not material. If any of the risks actually occur, our business, results of operations, financial condition, and prospects could be materially and adversely affected. In that event, the market price of our Class A common stock could decline, and you could lose all or part of your investment. In addition, the impacts of COVID-19 and any worsening of the economic environment may exacerbate the risks described below, any of which could have a material impact on us. This situation is changing rapidly and additional impacts may arise that we are not currently aware of.
Risks Related to Our Business and Operations
Our business depends on our ability to retain and upgrade paying users, and any decline in renewals or upgrades could adversely affect our future results of operations.
Our business depends upon our ability to maintain and expand our relationships with our users. Our business is subscription-based, and paying users are not obligated to and may not renew their subscriptions after their existing subscriptions expire. As a result, we cannot provide assurance that paying users will renew their subscriptions utilizing the same tier of our products or upgrade to premium offerings. Renewals of subscriptions to our platform may decline or fluctuate because of several factors, such as dissatisfaction with our products, support, pricing, or mix of features, a user no longer having a need for our products, the availability of competitive products that are, or are perceived to be, less expensive, shifts in the mix of monthly and annual subscriptions or the impact of catastrophic events, such as the ongoing COVID-19 pandemic, on our paying users. In addition, some paying users downgrade or do not renew their subscriptions.
We encourage paying users to upgrade to our premium offerings by recommending additional features and through in-product prompts and notifications. We are focused on increasing recurring revenue and we believe that users that subscribe to our premium paid offerings demonstrate a propensity to retain and expand their deployments over time. We seek to expand within organizations through viral means by adding new users, having workplaces purchase additional products, or expanding the use of Dropbox into other departments within a workplace. We often see enterprise IT decision-makers deciding to adopt Dropbox after noticing substantial organic adoption by individuals and teams within the organization. If our paying users cancel their subscriptions or fail to renew, or if we fail to upgrade our paying users to premium offerings or expand within organizations, our business, results of operations, and financial condition may be harmed. Furthermore, we have and may continue to see an increase in customers opting for our monthly plans rather than our annual plans, including from users who upgrade to paid plans using mobile devices. As a result, if more of our users subscribe to our paid plans through mobile devices or otherwise opt for monthly plans, subscription renewals may fluctuate or decline.
Although it is important to our business that our users renew their subscriptions after their existing subscriptions expire and that we expand our commercial relationships with our users, given the volume of our users, we do not actively monitor the retention rates of our individual users. As a result, we may be unable to address any retention issues with specific users in a timely manner, which could harm our business.
Our future growth could be harmed if we fail to attract new users or convert registered users to paying users.
We must continually add new users to grow our business beyond our current user base and to replace users who choose not to continue to use our platform. Historically, our revenue has been driven by our self-serve model, and we generate more than 90% of our revenue from self-serve channels. Any decrease in user satisfaction with our products or support could harm our brand, word-of-mouth referrals, and ability to grow.
Additionally, many of our users initially access our platform free of charge. We strive to demonstrate the value of our platform to our registered users, thereby encouraging them to convert to paying users through in-product prompts and notifications, and time-limited trials of paid subscription plans. As of December 31, 2021, we served over 700 million registered users but only 16.79 million paying users. The actual number of unique users is lower than we report as one person may register more than once for our platform. As a result, we have fewer unique registered users that we may be able to convert to paying users. A majority of our registered users may never convert to a paid subscription to our platform, and failure to convert users to a paid subscription will restrict our ability to grow our revenue.
15
In addition, our user growth rate has and may continue to slow in the future as our market penetration rates increase and we turn our focus to converting registered users to paying users rather than growing the total number of registered users. The availability of less expensive and bundled competitive products also has and may continue to slow our user growth rate and negatively impact our ability to convert registered users to paying users. If we are not able to continue to expand our user base or fail to convert our registered users to paying users, demand for our paid services and our revenue may grow more slowly than expected or decline. Furthermore, catastrophic events that financially impact our registered users and other prospective paying users, may cause these users to delay or reduce technology spending, which may impact our ability to convert registered users or otherwise attract new paying users.
Our business could be damaged, and we could be subject to liability, if there is any unauthorized access to our data or our users’ content, including through privacy and data security breaches or incidents.
The use of our platform involves the transmission, storage, and processing of user content, some of which may be considered personal, confidential, or sensitive information of users or their organizations. We also process, store and transmit our own data as part of our business and operations. This data may include personal, confidential, or sensitive information. We face security threats from malicious third parties that could obtain unauthorized access to our systems, infrastructure, and networks. We anticipate that these threats will continue to grow in scope and complexity over time. For example, in 2016, we learned that an old set of Dropbox user credentials for approximately 68 million accounts was released. These credentials consisted of email addresses and passwords protected by cryptographic techniques known as hashing and salting. Hashing and salting can make it more difficult to obtain the original password, but may not fully protect the original password from being obtained. We believe these Dropbox user credentials were obtained in 2012 and related to a security incident we disclosed to users. In response, we notified all existing users we believed to be affected and completed a password reset for anyone who had not updated their password since mid-2012. We responded to this event by expanding our security team and data monitoring capabilities and continuing to work on features such as two-factor authentication to increase protection of user information. While we believe our corrective actions will reduce the likelihood of similar incidents occurring in the future, third parties might use techniques that we are unable to defend against to compromise and infiltrate our systems, infrastructure, and networks.
Emerging and evolving cybersecurity threats such as the attack on SolarWinds and the Log4j vulnerablity reported in December 2021 pose unique challenges and involve sophisticated threat actors. Computer malware, ransomware, cyber viruses, social engineering (phishing attacks), denial of service or other attacks, employee theft or misuse and increasingly sophisticated network attacks have become more prevalent, particularly against cloud services. In this fast-changing threat environment, we are continuously assessing our security posture, including through the use of penetration testing and red team exercises, to identify gaps, threats, and vulnerabilities and we are actively taking additional and ongoing steps that are intended to strengthen our cybersecurity capabilities and mitigate the risk of a breach or incident. If we fail to respond appropriately to any identified gaps, threats or vulnerabilities, including by providing adequate funding and prioritizing strategic initiatives, or if we fail to adequately identify the gaps, threats or vulnerabilities, we face greater risk that an unauthorized party will obtain access to or disrupt our systems or networks obtain access to data or content that we or third parties on which we rely store or otherwise process. Notwithstanding our efforts, we may fail to detect the existence of security breaches or incidents, including breaches or compromise of user content, and be unable to prevent unauthorized access to user content. The techniques used to obtain unauthorized access to, and to disable or degrade service, or sabotage systems change frequently and are often not recognized until launched against a target. They may originate from less regulated or remote areas around the world, or from state-sponsored actors. If our security measures are breached or compromised or we, our systems or networks, or those of third parties on which we rely otherwise are subject to a security breach or incident, or our users’ content is otherwise accessed, misused, modified, rendered unavailable, destroyed, or otherwise processed through unauthorized means, or if any such actions are believed to occur, our platform may be perceived as insecure, and we may lose existing users or fail to attract and retain new users. Moreover, public announcements concerning any cybersecurity-related incidents and steps we may take to respond to or remediate any such incidents could be perceived by securities analysts or investors to be negative, and such perception could, among other things, have an adverse effect on the price of our Class A common stock.
We may rely on third parties when deploying our infrastructure, and in doing so, expose it to security risks outside of our direct control. We rely on outside vendors and contractors to perform services necessary for the operation of the business, and they may fail to adequately secure our user and company content data. This risk may increase when vendors and contractors work remotely, including as part of our shift to Virtual First.
In addition, certain developers or other partners who create applications that integrate with our platform, may receive or store information provided by us or by our users through these applications. If these third parties or developers fail to adopt or
16
adhere to adequate data security practices, or in the event of a breach or other compromise of their networks or systems, our data or our users' data may be improperly accessed, used, or disclosed.
Third parties may attempt to compromise our employees and their privileged access into internal systems to gain access to accounts, our information, our networks, or our systems or those of third parties on which we rely. Employee error, malfeasance, or other errors in the storage, use, transmission, or other processing of personal information could result in an actual or perceived breach of user privacy. These risks may be heightened as we transition to a Virtual First and increasingly distributed workforce. In addition, our users may also disclose or lose control of their passwords, or use the same or similar passwords on third parties’ systems, which could lead to unauthorized access to their accounts on our platform.
Any unauthorized or inadvertent access to, or an actual or perceived security breach of or incident impacting, our systems, infrastructure, or networks or of third parties on which we rely could result in an actual or perceived loss of, or unauthorized access to or disclosure, modification, misuse, loss, corruption, unavailability, or destruction of, our data or our users’ content, regulatory investigations, proceedings, and orders, claims, demands, and litigation, indemnity obligations, damages, penalties, fines, and other costs in connection with actual and alleged contractual breaches, violations of applicable laws and regulations or other actual or asserted obligations, and other liabilities. Any such incident could also materially damage our reputation and market position and harm our business, results of operations, and financial condition, including reducing our revenue, causing us to issue credits to users, negatively impacting our ability to accept and process user payment information, eroding our users’ trust in our services and payment solutions, subjecting us to costly user notification or remediation, harming our ability to retain users, harming our brand, or increasing our cost of acquiring new users. We maintain errors, omissions, and cyber liability insurance policies covering certain security and privacy damages. However, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all. Further, if a high-profile security breach or incident occurs with respect to another content collaboration solutions provider, our users and potential users could lose trust in the security of content collaboration solutions providers generally, which could adversely impact our ability to retain users or attract new ones.
We have a limited history of operating with a Virtual First workforce and the long-term impact on our financial results and business operations are uncertain.
In October 2020, we announced a Virtual First work model pursuant to which remote work has become the primary experience for all of our employees and our intention is for our workforce continue being more distributed over time. However, we have a limited history of operating with a Virtual First workforce and, although we anticipate that our shift to a Virtual First work model will have a long-term positive impact on our financial results and business operations, the impact remains uncertain. Additionally, there is no guarantee that we will realize any anticipated benefits to our business, including any cost savings, operational efficiencies, or productivity.
Our continuing shift to Virtual First could make it increasingly difficult to manage our business and adequately oversee our employees and business functions, potentially resulting in harm to our company culture, increased employee attrition, and the loss of key personnel, as well as potentially negatively impacting product research and development and the growth of our business. We may also experience an increased risk of privacy and data security breaches and incidents involving our data or our users’ content. Any of these factors could adversely affect our financial condition and operating results.
In addition, as we continue our shift to Virutal First, we will need less office space than we are currently contractually committed to leasing and as a result, we have recorded and may in the future record impairment charges related to the office spaces we no longer expect to need, which has impacted and may in the future impact our ability to achieve GAAP profitability in future periods. Furthermore, any prolonged recessionary period and industry shifts towards remote work, including as a result of the ongoing COVID-19 pandemic, may prevent us from finding subtenants for our unused office space on favorable terms or at all. In the event that we are unable to sublease our space on favorable terms or at all, or if we are able to sublease space but our subtenants fail to make lease payments to us or otherwise default on their obligations to us, we may generate less sublease income than we have currently estimated, continue to incur substantial payment obligations under our leases and incur additional or higher impairment charges than we have currently estimated, any of which could materially and adversely affect our business, cash flows, results of operations, profitability, and financial condition.
We operate in competitive markets, and we must continue to compete effectively.
The market for content collaboration platforms is competitive and rapidly changing. Certain features of our platform compete in the cloud storage market with products offered by Microsoft, Amazon, Apple, Google, and Adobe and in the content collaboration market with products offered by Microsoft, Atlassian, Slack, and Google. On a more limited basis, we
17
compete with Box in the cloud storage market for deployments by large enterprises and with Adobe and DocuSign in the e-signature market. We also compete with smaller private companies that offer point solutions in the cloud storage market or the content collaboration market. We believe the principal competitive factors in our markets include the following:
•user-centric design;
•ease of adoption and use;
•scale of user network;
•features and platform experience
•performance;
•brand;
•security and privacy
•accessibility across several devices, operating system, and applications;
•third-party integration;
•customer support;
•continued innovation; and
•pricing.
With the introduction of new technologies and market entrants, we expect competition to intensify. Many of our actual and potential competitors or alliances among competitors benefit from competitive advantages over us, such as greater name recognition, longer operating histories, more varied products and services, larger marketing budgets, more established marketing relationships, access to larger user bases, major distribution agreements with hardware manufacturers and resellers, and greater financial, technical, and other resources. Some of our competitors may make acquisitions or enter into strategic relationships to offer a broader range of products and services than we do. These combinations may make it more difficult for us to compete effectively. We expect these trends to continue as competitors attempt to strengthen or maintain their market positions.
Demand for our platform is also sensitive to price. Many factors, including our marketing, user acquisition and technology costs, and our current and future competitors’ pricing and marketing strategies, can significantly affect our pricing strategies. Certain of our competitors offer, or may in the future offer, lower-priced or free products or services that compete with our platform or may bundle and offer a broader range of products and services.
Similarly, certain competitors may use marketing strategies that enable them to acquire users at a lower cost than us. There can be no assurance that we will not be forced to engage in price-cutting initiatives or to increase our marketing and other expenses to attract and retain users in response to competitive pressures, either of which could materially and adversely affect our business, results of operations, and financial condition.
Our business depends upon the interoperability of our platform across devices, operating systems, and third-party applications that we do not control.
One of the most important features of our platform is its broad interoperability with a range of diverse devices, operating systems, and third-party applications. Our platform is accessible from the web and from devices running Windows, Mac OS, iOS, Android, WindowsMobile, and Linux. We also have integrations with Microsoft, Adobe, Apple, Salesforce, Atlassian, Slack, BetterCloud, Google, IBM, Cisco, VMware, Okta, Symantec, Palo Alto Networks, Zoom, and a variety of other productivity, collaboration, data management, and security vendors. We are dependent on the accessibility of our platform across these third-party operating systems and applications that we do not control. Several of our competitors own, develop, operate, or distribute operating systems, app stores, third-party datacenter services, and other software, and also have material business relationships with companies that own, develop, operate, or distribute operating systems, applications markets, third-
18
party datacenter services, and other software that our platform requires in order to operate. Moreover, some of these competitors have inherent advantages developing products and services that more tightly integrate with their software and hardware platforms or those of their business partners.
Third-party services and products are constantly evolving, and we may not be able to modify our platform to assure its compatibility with that of other third parties following development changes. In addition, some of our competitors may be able to disrupt the operations or compatibility of our platform with their products or services, or exert strong business influence on our ability to, and terms on which we, operate and distribute our platform. For example, we currently offer products that directly compete with several large technology companies that we rely on to ensure the interoperability of our platform with their products or services. We also rely on these companies to make our mobile applications available through their app stores. As our respective products evolve, we expect this level of competition to increase. Should any of our competitors modify their products or standards in a manner that degrades the functionality of our platform or gives preferential treatment to competitive products or services, whether to enhance their competitive position or for any other reason, the interoperability of our platform with these products could decrease and our business, results of operations, and financial condition could be harmed.
Our business could be harmed by any significant disruption of service on our platform or loss of content.
Our brand, reputation, and ability to attract, retain, and serve our users are dependent upon the reliable performance of our platform, including our underlying technical infrastructure. Our users rely on our platform to store digital copies of their valuable content, including financial records, business information, documents, photos, and other important content. Our technical infrastructure may not be adequately designed with sufficient reliability and redundancy to avoid performance delays or outages that could be harmful to our business, and turnover in our personnel, may additionally impact our ability to respond to any such delays or outages. If our platform is unavailable when users attempt to access it, or if it does not load as quickly as they expect, users may not use our platform as often in the future, or at all.
As our user base and the amount and types of information stored, synced, and shared on our platform continues to grow, we will need an increasing amount of technical infrastructure, including network capacity and computing power, to continue to satisfy the needs of our users. The vast majority of user content is stored at our own custom-built infrastructure in co-location facilities that we directly lease and operate. As we add to our infrastructure, we may move or transfer additional content.
Further, as we continue to grow and scale our business to meet the needs of our users, we may overestimate or underestimate our infrastructure capacity requirements, which could adversely affect our results of operations. The costs associated with leasing and maintaining our custom-built infrastructure in co-location facilities and third-party datacenters already constitute a significant portion of our capital and operating expenses. We continuously evaluate our short- and long-term infrastructure capacity requirements to ensure adequate capacity for new and existing users while minimizing unnecessary excess capacity costs. If we overestimate the demand for our platform and therefore secure excess infrastructure capacity, our operating margins could be reduced. If we underestimate our infrastructure capacity requirements, we may not be able to service the expanding needs of new and existing users, and our hosting facilities, network, or systems may fail. Additionally, our ability to accurately perform capacity planning is dependent on the reliability of the global supply chain for hardware, network, and platform infrastructure equipment. Due to the effects of the COVID-19 pandemic, in addition to competition for a limited supply of such equipment, our global supply chain for datacenter equipment has experienced challenges, and such challenges could impact our infrastructure capacity. Our datacenter equipment is primarily manufactured by third-party manufacturers, some of which utilize certain components for which there are few qualified suppliers. Prolonged disruptions at these suppliers could lead to a disruption in our ability to manufacture datacenter equipment on time to meet demand. Furthermore, our competitors use some of the same suppliers and their demand for hardware components can affect the capacity available to us resulting in inadequate datacenter capacity. Furthermore, our efforts to mitigate such disruptions and compete for such equipment may impact the timing and magnitude of our infrastructure spending, resulting in unexpected increases in shorter-term or longer-term costs than originally projected.
In addition, the datacenters that we use are vulnerable to damage or interruption from human error, intentional bad acts, security breaches and incidents, including computer malware, ransomware, cyber viruses, social engineering (phishing attacks), denial of service or other attacks, employee theft or misuse and other network attacks, earthquakes, floods, fires, war, terrorist attacks, power losses, hardware failures, systems failures, telecommunications failures, and similar events, any of which could disrupt our service, destroy user content, or prevent us from being able to continuously back up or record changes in our users’ content. In the event of significant physical damage to one of these datacenters, it may take a significant period of time to achieve full resumption of our services, and our disaster recovery planning may not account for all eventualities. Damage or interruptions to these datacenters could harm our platform and business.
19
We generate revenue from sales of subscriptions to our platform, and any decline in demand for our platform or for content collaboration solutions in general could negatively impact our business.
We generate, and expect to continue to generate, revenue from the sale of subscriptions to our platform. As a result, widespread acceptance and use of content collaboration solutions in general, and our platform in particular, is critical to our future growth and success. If the content collaboration market fails to grow or grows more slowly than we currently anticipate, or if the current shift to remote or distributed work does not materialize into a longer-term trend, demand for our platform could be negatively affected.
Changes in user preferences for content collaboration may have a disproportionately greater impact on us than if we offered multiple platforms or disparate products. Demand for content collaboration solutions in general, and our platform in particular, is affected by a number of factors, many of which are beyond our control. Some of these potential factors include:
•awareness of the content collaboration category generally;
•availability of products and services that compete with ours;
•the impact, scale, and duration, of trends towards or away from remote or distributed work;
•ease of adoption and use;
•features and platform experience;
•performance;
•brand;
•security and privacy;
•customer support; and
•pricing.
The content collaboration market is subject to rapidly changing user demand and trends in preferences. If we fail to successfully predict and address these changes and trends, meet user demands, or achieve more widespread market acceptance of our platform, our business, results of operations, and financial condition could be harmed.
Failure to respond to rapid technological changes, extend our platform, or develop new features or products may harm our ability to compete effectively which would adversely affect our business.
The content collaboration market is characterized by rapid technological change and frequent new product and service introductions. Our ability to grow our user base and increase revenue from existing users will depend heavily on our ability to enhance and improve our platform, introduce new features and products, increase our strategic partnerships with third parties, and interoperate across an increasing range of devices, operating systems, and third-party applications. Users may require features and capabilities that our current platform does not have. In addition, while we believe current trends towards remote or distributed work will prove to be significant and long lasting, and that these trends will open up increased market opportunities for us, such trends or opportunities may not materialize or, if they do, we may not be able to develop new features or products, or enhance our existing offerings, sufficiently to take advantage of them. We invest significantly in research and development, and our goal is to focus our spending on measures that improve quality and ease of adoption and create organic user demand for our platform. For example, in 2020, we introduced Dropbox Passwords and Vault to provide additional security features for our users to safely store and access content on our platform. More recently, in 2021 we launched Dropbox Transfer as a way for users to safely and securely send large files, Dropbox Shop which allows creators to easily sell content directly to their customers, and Dropbox Capture which allows users to visually present their work through easy-to-take screen recordings, GIFs, and screenshots. There is no assurance that our enhancements to our platform or our new product experiences, partnerships, features, or capabilities will be compelling to our users or gain market acceptance. If our research and development investments do not accurately anticipate user demand, we are unsuccessful in establishing or maintaining our strategic partnerships, or if we fail to develop our platform in a manner that satisfies user preferences in a timely and cost-effective manner, we may fail to retain our existing users or increase demand for our platform.
20
The introduction of new products and services by competitors or the development of entirely new technologies to replace existing offerings could make our platform obsolete or adversely affect our business, results of operations, and financial condition. We may experience difficulties with software development, design, or marketing that could delay or prevent our development, introduction, or implementation of new product experiences, features, or capabilities. We also may experience broad-based business or economic disruptions that could adversely affect the productivity of our employees and result in delays in the development or implementation process. For example, as a result of the ongoing COVID-19 pandemic, we are temporarily requiring substantially all of our employees to work remotely, which may lead to disruptions and decreased productivity that could result in delays in our product development process. The risk of such disruptions and decreased productivity may persist as we continue to transition to a Virtual First workforce. We have in the past experienced delays in our internally planned release dates of new features and capabilities, and there can be no assurance that new product experiences, features, or capabilities will be released according to schedule. Any delays could result in adverse publicity, loss of revenue or market acceptance, or claims by users brought against us, all of which could have a material and adverse effect on our reputation, business, results of operations, and financial condition. Moreover, new features may require substantial investment, and we have no assurance that such investments will be successful. If users do not widely adopt our new product experiences, features, and capabilities, we may not be able to realize a return on our investment. If we are unable to develop, license, or acquire new features and capabilities to our platform on a timely and cost-effective basis, or if such enhancements do not achieve market acceptance, our business, results of operations, and financial condition could be adversely affected.
The full extent of the impacts of the COVID-19 pandemic on our business is currently unknown, but it may adversely affect our financial results as well as our business operations.
Although we did not experience material impacts to our financial condition and results of operations during the year ended December 31, 2021, as a result of the on-going COVID-19 pandemic, the full extent of the impacts of the COVID-19 pandemic on our financial results and business operations are currently unknown and cannot be estimated with any degree of certainty. Impacts to our financial results may include, without limitation, (1) negative impacts to our current and prospective users’ purchases or renewals of paid licenses for access to our platform, delays or defaults on payment obligations, which could negatively affect our revenues and cash flows, (2) modifications to net payment terms or invoice frequency, which could negatively affect our cash flows, (3) fluctuations in foreign currency exchange rates, which have and may in the future negatively impact our results of operations and cash flows, and (4) decreases in interest rates, which have and may continue to reduce interest income. Impacts to our business operations may include, without limitation, (1) disruptions to our sales operations and marketing efforts, (2) negative impacts to the financial condition or operations of our vendors and business partners, as well as disruptions to the supply chain of hardware needed to offer our services, (3) disruptions to our ability to conduct product development and other important business activities, and (4) potential postponement or cancellation of previously planned investments or other initiatives. In addition, economic effects related to the COVID-19 pandemic, such as ongoing supply chain disruption, a competitive labor market and labor shortages have impacted, and may continue to impact, us and our customers and vendors. Accordingly, the COVID-19 pandemic may have a negative impact on our financial results as well as our business operations, the magnitude and duration of which we are currently unable to predict. Additionally, concerns over the economic impact of the COVID-19 pandemic have caused extreme volatility in financial and other capital markets which may adversely impact our stock price.
We have seen, and expect to continue to see, cost savings from the shift to remote work for all of our employees as a result of the COVID-19 pandemic in areas that include events, travel, utilities, and other benefits. Although we anticipate that some of these cost savings will continue beyond the resolution of the COVID-19 pandemic as result of our continuing shift to a Virtual First work model, we expect that some expenses in these areas will increase relative to current levels as we become more able to offer our employees opportunities for in-person collaboration, and this may impact our rate of profitability in future periods.
We may not successfully manage our growth or successfully execute our plan for future growth.
The growth and expansion of our business, including the introduction of new features and products, places a continuous significant strain on our management, operational, and financial resources. As we introduce new products and features, and our user base and third-party relationships expand, our information technology systems, organizational structures, and internal controls and procedures may not be adequate to support our operations. In addition, we face challenges of integrating, developing, and motivating an increasingly distributed employee base in various countries around the world. These challenges may be heightened as we transition to a Virtual First workforce and seek to align our resources in order to create a more nimble and streamlined organization. Certain members of our management do not have prior experience managing a public company, which may affect how they manage our growth. Managing our growth will also require significant expenditures and allocation of valuable management resources.
21
In addition, the expansion of our business may make it difficult to evaluate our future prospects. Our ability to forecast our future results of operations is subject to a number of uncertainties, including our ability to effectively plan for and model future growth. We have encountered in the past, and may encounter in the future, risks and uncertainties frequently experienced by growing companies in rapidly changing industries. If we fail to achieve the necessary level of efficiency in our organization as it grows, or if we are not able to accurately forecast future growth, our business, results of operations, and financial condition could be harmed.
We depend on our key personnel and other highly qualified personnel, and if we fail to attract, integrate, and retain our personnel, and maintain our unique corporate culture, our business could be harmed.
We depend on the continued service and performance of our key personnel. In particular, Andrew W. Houston, our Chief Executive Officer and one of our co-founders, is critical to our vision, strategic direction, culture, and offerings. From time to time, there have been changes in our management team resulting from the hiring or departure of our executives, and there may be additional changes in the future. While we seek to manage these transitions carefully, such changes may result in a loss of institutional knowledge and may cause disruptions to our business. If we fail to successfully integrate new key personnel into our organization or if key employees are unable to successfully transition into new roles, our business could be adversely affected.
All of our officers and key personnel are at-will employees. In addition, many of our key technologies and systems are custom-made for our business by our key personnel. The loss of key personnel, including key members of our management team, as well as certain of our key marketing, sales, product development, or technology personnel, could disrupt our operations and have an adverse effect on our ability to grow our business. In addition, while we believe our Virtual First strategy will give us the opportunity to realign our resources in order to create a more nimble and streamlined organization, we can provide no assurance that we will be able to successfully execute on these plans, and failure to successfully manage these transitions may cause disruptions to our business. Additionally, we will need to adapt and respond to frequently changing circumstances that may impact our workforce, such as natural disasters or pandemics (including the ongoing COVID-19 pandemic), or our ability to maintain an effective workforce may be impacted.
To execute our business plan, we must attract and retain highly qualified personnel. Competition for these employees is intense and has recently intensified as a result of industry trends and we may not be successful in attracting and retaining qualified personnel. We have experienced, and we may continue experience, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. As we transition to a Virtual First workforce, our recent hires and planned hires may not become as productive as we expect, and we may be unable to hire, integrate, or retain sufficient numbers of qualified individuals. Many of the companies with which we compete for experienced personnel have greater resources than we have. In addition, in making employment decisions, particularly in the internet and high-technology industries, job candidates often consider the value of the equity they are to receive in connection with their employment. Employees may be more likely to leave us if the shares they own or the shares underlying their equity incentive awards have significantly appreciated or significantly reduced in value. Many of our employees may receive significant proceeds from sales of our equity in the public markets, which may reduce their motivation to continue to work for us. If we fail to attract new personnel, or fail to retain and motivate our current personnel, our business and growth prospects could be harmed.
Additionally, if we do not maintain and continue to develop our corporate culture as we grow and evolve, it could harm our ability to foster the innovation, creativity, and teamwork we believe that we need to support our growth. Additions of executive-level management, significant numbers of new and remote employees, our January 2021 workforce reduction and higher employee turnover could significantly and adversely impact our culture, as could our transition to a Virtual First workforce.
Our lack of a significant outbound sales force may limit the potential growth of our business.
Historically, our business model has been driven by organic adoption and viral growth, with more than 90% of our revenue generated from self-serve channels. As a result, we do not have a significant outbound sales force, which has enabled us to be more efficient with our sales and marketing spend. Furthermore, as part of our workforce reduction in January 2021 we have reduced the size of our outbound sales force to simplify and drive further efficiencies in our outbound sales operations. Although we believe our business model can continue to scale without a large outbound sales force, our word-of-mouth and user referral marketing model may not continue to be as successful as we anticipate, and our limited experience selling directly to large organizations through our outbound sales force may impede our future growth. As we continue to scale our business, an enhanced sales infrastructure could assist in reaching larger organizations and growing our revenue. Identifying and recruiting additional qualified sales personnel and training them would require significant time, expense, and attention, and would
22
significantly impact our business model. Further, adding more sales personnel would change our cost structure and results of operations, and we may have to reduce other expenses in order to accommodate a corresponding increase in sales and marketing expenses. If our limited outbound sales force and lack of experience selling and marketing to large organizations prevents us from reaching larger organizations and growing our revenue, and if we are unable to hire, develop, and retain talented sales personnel in the future, our business, results of operations, and financial condition could be adversely affected.
We may expand sales to large organizations, which could lengthen sales cycles and result in greater deployment challenges.
As our business evolves, we may need to invest more resources into sales to large organizations. Large organizations may undertake a significant evaluation and negotiation process, which can lengthen our sales cycle. We may also face unexpected deployment challenges with large organizations or more complicated deployment of our platform. Large organizations may demand more configuration and integration of our platform or require additional security management or control features. We may spend substantial time, effort, and money on sales efforts to large organizations without any assurance that our efforts will produce any sales. Additionally, our ability to sell via an outbound sales force has been, and may continue to be, impeded by catastrophic events, including public health epidemics such as the ongoing COVID-19 pandemic, that limit our ability to travel or meet in person, as well as the reduction in the size of our outbound sales force as part of our workforce reduction in January 2021. As a result, sales to large organizations may lead to greater unpredictability in our business, results of operations, and financial condition.
Any failure to offer high-quality customer support may harm our relationships with our users and our financial results.
We have designed our platform to be easy to adopt and use with minimal to no support necessary. Any increased user demand for customer support could increase costs and harm our results of operations. In addition, as we continue to grow our operations and support our global user base, we need to be able to continue to provide efficient customer support that meets our customers’ needs globally at scale. Paying users receive additional customer support features and the number of our paying users has grown significantly, which will put additional pressure on our support organization. For example, the number of paying users has grown from 8.81 million as of December 31, 2016, to 16.79 million as of December 31, 2021. 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 harm our results of operations. Our new user signups are highly dependent on our business reputation and on positive recommendations from our existing users. Any failure to maintain high-quality customer support, or a market perception that we do not maintain high-quality customer support, could harm our reputation, business, results of operations, and financial condition.
Our business depends on a strong brand, and if we are unable to maintain and enhance our brand, our ability to expand our base of users will be impaired and our business, results of operations, and financial condition will be harmed.
We believe that our brand identity and awareness have contributed to our success and have helped fuel our efficient go-to-market strategy. We also believe that maintaining and enhancing the Dropbox brand is critical to expanding our base of users. We anticipate that, as our market becomes increasingly competitive, maintaining and enhancing our brand may become increasingly difficult and expensive. Any unfavorable publicity or consumer perception of our platform or the providers of content collaboration solutions generally could adversely affect our reputation and our ability to attract and retain users. Additionally, if we fail to promote and maintain the Dropbox brand, our business, results of operations, and financial condition will be materially and adversely affected.
We are continuing to expand our operations outside the United States, where we may be subject to increased business and economic risks that could impact our results of operations.
We have paying users across 180 countries and approximately half of our revenue in the year ended December 31, 2021 was generated from paying users outside the United States. We expect to continue to expand our international operations, which may include employees working in new jurisdictions and providing our platform in additional languages. Any new markets or countries into which we attempt to sell subscriptions to our platform may not be receptive. For example, we may not be able to expand further in some markets if we are unable to satisfy certain government- and industry-specific requirements. In addition, our ability to manage our business and conduct our operations internationally requires considerable management attention and resources and is subject to the particular challenges of supporting a rapidly growing business in an environment of multiple languages, cultures, customs, legal and regulatory systems, alternative dispute systems, and commercial markets. International expansion has required, and will continue to require, investment of significant funds and other resources. Operating internationally subjects us to new risks and may increase risks that we currently face, including risks associated with:
23
•compliance with applicable international laws, regulations, and standards including laws and regulations with respect to privacy, data protection, consumer protection, and unsolicited email, and the risk of penalties to our users and individual members of management or employees if our practices are deemed to be out of compliance;
•recruiting and retaining talented and capable employees outside the United States, and maintaining our company culture across all of our locations, including as we shift to Virtual First and an increasingly distributed workforce;
•providing our platform and operating our business across a significant distance, in different languages and among different cultures, including the potential need to modify our platform and features to ensure that they are culturally appropriate and relevant in different countries;
•management of an employee base in jurisdictions that may not give us the same employment and retention flexibility as does the United States;
•operating in jurisdictions that do not protect intellectual property rights to the same extent as does the United States;
•compliance by us and our business partners with anti-corruption laws, import and export control laws, tariffs, trade barriers, economic sanctions, and other regulatory limitations on our ability to provide our platform in certain international markets;
•foreign exchange controls that might require significant lead time in setting up operations in certain geographic territories and might prevent us from repatriating cash earned outside the United States;
•political and economic instability;
•changes in diplomatic and trade relationships, including the imposition of new trade restrictions, trade protection measures, import or export requirements, trade embargoes and other trade barriers;
•double taxation of our international earnings and potentially adverse tax consequences due to changes in the income and other tax laws of the United States or the international jurisdictions in which we operate;
•higher costs of doing business internationally, including increased accounting, travel, infrastructure, and legal compliance costs; and
•the impact of natural disasters and public health epidemics on employees, travel and the global economy, including the ongoing global COVID-19 pandemic.
Compliance with laws, regulations, and standards applicable to our global operations substantially increases our cost of doing business in international jurisdictions. We may be unable to keep current with changes in laws, regulations, or standards as they change. Although we have implemented policies and procedures designed to support compliance with these laws, regulations, and standards there can be no assurance that we will always maintain compliance or that all of our employees, contractors, partners, and agents will comply. Any violations could result in regulatory investigations and enforcement actions, fines, civil and criminal penalties, damages, injunctions, restrictions on our ability to conduct business, or reputational harm. If we are unable comply with these laws and regulations or manage the complexity of our global operations successfully, our business, results of operations, and financial condition could be adversely affected.
We depend on our infrastructure and third-party datacenters, and any disruption in the operation of these facilities or failure to renew the services could adversely affect our business.
We host our services and serve all of our users using a combination of our own custom-built infrastructure that we lease and operate in co-location facilities and third-party datacenter services such as Amazon Web Services. While we typically control and have access to the servers we operate in co-location facilities and the components of our custom-built infrastructure that are located in those co-location facilities, we control neither the operation of these facilities nor our third-party service providers. Furthermore, we have no physical access or control over the services provided by Amazon Web Services.
24
Datacenter leases and agreements with the providers of datacenter services expire at various times. The owners of these datacenters and providers of these datacenter services may have no obligation to renew their agreements with us on commercially reasonable terms, or at all. Problems faced by datacenters, with our third-party datacenter service providers, with the telecommunications network providers with whom we or they contract, or with the systems by which our telecommunications providers allocate capacity among their users, including us, could adversely affect the experience of our users or result in unexpected increases in our costs. Our third-party datacenter operators could decide to close their facilities or cease providing services without adequate notice. In addition, any financial difficulties, such as bankruptcy, faced by our third-party datacenter operators or any of the service providers with whom we or they contract may have negative effects on our business, the nature and extent of which are difficult to predict.
If the datacenters and service providers that we use are unable to keep up with our growing needs for capacity, or if we are unable to renew our agreements with datacenters, and service providers on commercially reasonable terms, we may be required to transfer servers or content to new datacenters or engage new service providers, and we may incur significant costs, and possible service interruption in connection with doing so. Any changes in third-party service levels at datacenters or any real or perceived errors, defects, disruptions, or other performance problems with our platform could harm our reputation and may result in damage to, or loss or compromise of, our users’ content. Interruptions in our platform might, among other things, reduce our revenue, cause us to issue refunds to users, subject us to potential liability, harm our reputation, or decrease our renewal rates.
We have relationships with third parties to provide, develop, and create applications that integrate with our platform, and our business could be harmed if we are unable to continue these relationships.
We use software and services licensed and procured from third parties to develop and offer our platform. We may need to obtain future licenses and services from third parties to use intellectual property and technology associated with the development of our platform, which might not be available to us on acceptable terms, or at all. Any loss of the right to use any software or services required for the development and maintenance of our platform could result in delays in the provision of our platform until equivalent technology is either developed by us, or, if available from others, is identified, obtained, and integrated, which could harm our platform and business. Any errors or defects in third-party software or services could result in errors or a failure of our platform, which could harm our business, results of operations, and financial condition.
We also depend on our ecosystem of developers to create applications that will integrate with our platform. As of December 31, 2021, Dropbox was receiving over 75 billion API calls per month, and just under 1,000,000 developers had registered and built applications on our platform. Our reliance on this ecosystem of developers creates certain business risks relating to the quality of the applications built using our APIs, service interruptions of our platform from these applications, lack of service support for these applications, and possession of intellectual property rights associated with these applications.
We may not have the ability to control or prevent these risks. As a result, issues relating to these applications could adversely affect our business, brand, and reputation.
Our use of open source software could negatively affect our ability to offer and sell subscriptions to our platform and subject us to possible litigation.
A portion of the technologies we use incorporates open source software, and we may incorporate open source software in the future. Open source software is generally licensed by its authors or other third parties under open source licenses. These licenses may subject us to certain unfavorable conditions, including requirements that we offer our platform that incorporates the open source software for no cost, that we make publicly available source code for modifications or derivative works we create based upon, incorporating or using the open source software, or that we license such modifications or derivative works under the terms of the particular open source license. Additionally, if a third-party software provider has incorporated open source software into software that we license from such provider, we could be required to disclose any of our source code that incorporates or is a modification of our licensed software. If an author or other third party that distributes open source software that we use or license were to allege that we had not complied with the conditions of the applicable license, we could be required to incur significant legal expenses defending against those allegations and could be subject to significant damages, enjoined from offering or selling our solutions that contained the open source software, and required to comply with the foregoing conditions. Any of the foregoing could disrupt and harm our business, results of operations, and financial condition.
25
Our ability to sell subscriptions to our platform could be harmed by real or perceived material defects or errors in our platform.
The software technology underlying our platform is inherently complex and may contain material defects or errors, particularly when first introduced or when new features or capabilities are released. We have from time to time found defects or errors in our platform, and new defects or errors in our existing platform or new software may be detected in the future by us or our users. There can be no assurance that our existing platform and new software will not contain defects. Any real or perceived errors, failures, vulnerabilities, or bugs in our platform could result in negative publicity or lead to data security, access, retention, or other performance issues, all of which could harm our business. The costs incurred in correcting such defects or errors may be substantial and could harm our results of operations and financial condition. Moreover, the harm to our reputation and legal liability related to such defects or errors may be substantial and could harm our business, results of operations, and financial condition.
We also utilize hardware purchased or leased and software and services licensed from third parties on our platform. Any defects in, or unavailability of, our or third-party software, services, or hardware that cause interruptions to the availability of our services, loss of data, or performance issues could, among other things:
•cause a reduction in revenue or delay in market acceptance of our platform;
•require us to issue refunds to our users or expose us to claims for damages;
•cause us to lose existing users and make it more difficult to attract new users;
•divert our development resources or require us to make extensive changes to our platform, which would increase our expenses;
•increase our technical support costs; and
•harm our reputation and brand.
We have acquired, and may in the future acquire, other businesses, and we may also receive offers to be acquired, any of which could require significant management attention, disrupt our business, or dilute stockholder value.
As part of our business strategy, we have acquired, and may in the future acquire, other companies, employee teams, or technologies to complement or expand our products, obtain personnel, or otherwise grow our business. For example, in the first fiscal quarter of 2021, we acquired DocSend, a secure document sharing platform, to expand our content collaboration capabilities to include additional business critical workflows. Additionally, in the fourth fiscal quarter of 2021, we acquired Command E, a universal search and productivity company, to enhance our search capability. The pursuit of acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating, and pursuing suitable acquisitions, whether or not they are consummated.
We have limited experience making acquisitions. We may not be able to find suitable acquisition candidates and we may not be able to complete acquisitions on favorable terms, if at all, and even if we are able to identify suitable acquisition candidates, we may not be able to receive approval from the applicable competition authorities, or such target may be acquired by another company, including one of our competitors. If we do complete acquisitions, we may not ultimately strengthen our competitive position or achieve the anticipated benefits from such acquisitions, due to a number of factors, including:
•acquisition-related costs, liabilities, or tax impacts, some of which may be unanticipated;
•difficulty integrating and retaining the personnel, intellectual property, technology infrastructure, and operations of an acquired business;
•ineffective or inadequate, controls, procedures, or policies at an acquired business;
•multiple product lines or services offerings, as a result of our acquisitions, that are offered, priced, and supported differently;
•potential unknown liabilities or risks associated with an acquired business, including those arising from existing contractual obligations or litigation matters;
26
•inability to maintain relationships with key customers, suppliers, and partners of an acquired business;
•lack of experience in new markets, products or technologies;
•diversion of management's attention from other business concerns; and
•use of resources that are needed in other parts of our business.
In addition, a significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill. We review goodwill for impairment at least annually. In the future, if our acquisitions do not yield expected returns, we may be required to record impairment charges based this assessment, which could adversely affect our results of operations.
We may not be able to integrate acquired businesses successfully or effectively manage the combined company following an acquisition. If we fail to successfully integrate acquisitions, or the people or technologies associated with those acquisitions, the results of operations of the combined company could be adversely affected. Any integration process will require significant time, resources, and attention from management, and disrupt the ordinary functioning of our business, and we may not be able to manage the process successfully, which could adversely affect our business, results of operations, and financial condition.
Any acquisition we complete could be viewed negatively by users, developers, partners, or investors, and could have adverse effects on our existing business relationships. In addition, we may not successfully evaluate or utilize acquired technology or accurately forecast the financial impact of an acquisition transaction, including accounting charges.
We may have to pay a substantial portion of our available cash, incur debt, or issue equity securities to pay for any such acquisitions, each of which could affect our financial condition or the value of our capital stock. The sale of equity to finance any such acquisitions could result in dilution to our stockholders. If we incur more debt, it would result in increased fixed obligations and could also subject us to covenants or other restrictions that would impede our ability to flexibly operate our business.
Our business may be significantly impacted by a change in general economic, political, and market conditions, including any resulting effect on consumer or business spending.
Our business may be affected by general economic, political, and market conditions, including any resulting effect on spending by our business and consumer users. Some of our users may view a subscription to our platform as a discretionary purchase, and our paying users may reduce their discretionary spending on our platform during an economic downturn, especially in the event of a prolonged recessionary period. Concerns about inflation, geopolitical issues, the ongoing COVID-19 pandemic or a widespread economic slowdown (in the United States or internationally) have and could continue to lead to increased market volatility and economic uncertainty, which could cause current and prospective paying users to delay, decrease, or cancel purchases of our products and services, or delay or default on their payment obligations. As a result, our business, results of operations, and financial condition may be significantly affected by changes in the economy generally.
Our current and future indebtedness may limit our operating flexibility or otherwise affect our business.
Our current indebtedness, including our 2026 Notes, 2028 Notes and our revolving credit facility, place significant restrictions on our business and could have important consequences to our stockholders and effects on our business, as could any future indebtedness.
For example, the terms of our revolving credit and guarantee agreement, as amended, contain a number of covenants that limit our ability and our subsidiaries’ ability to, among other things, incur additional indebtedness, pay dividends, make redemptions and repurchases of stock, make investments, loans and acquisitions, create liens, engage in transactions with affiliates, merge or consolidate with other companies, or sell substantially all of our assets. We are also required to maintain certain financial covenants, including a consolidated leverage ratio incurrence covenant and a minimum liquidity balance.
In addition, such current and future indebtedness could:
•make it more difficult for us to satisfy our debt obligations, including the 2026 Notes and the 2028 Notes;
•increase our vulnerability to general adverse economic and industry conditions;
27
•require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital and other general corporate purposes;
•limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
•restrict our current and future operations, make it more difficult to successfully execute our business strategy, or restrict us from exploiting business opportunities;
•place us at a competitive disadvantage compared to our competitors that have less indebtedness or are not subject to restrictive covenants;
•restrict or otherwise impact the pace and timing of repurchases under our stock repurchase program; and
•limit our availability to borrow additional funds for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy, or other general purposes.
Any of the foregoing could have a material adverse effect on our business, cash flows, results of operations, and financial condition.
Our operations may be interrupted and our business, results of operations, and financial condition could be adversely affected if we default on our leasing or credit obligations.
We finance a significant portion of our expenditures through leasing arrangements, and we may enter into additional similar arrangements in the future. As of December 31, 2021, we had an aggregate of $1,342.0 million of commitments to settle contractual obligations. In particular, we utilize both finance and operating leases to finance some of our equipment, datacenters and offices. In addition, we may draw upon our revolving credit facility to finance our operations or for other corporate purposes. If we default on these leasing or credit obligations, our leasing partners and lenders may, among other things:
•require repayment of any outstanding lease obligations;
•terminate our leasing arrangements;
•terminate our access to the leased datacenters we utilize;
•stop delivery of ordered equipment;
•sell or require us to return our leased equipment;
•require repayment of any outstanding amounts drawn on our revolving credit facility;
•terminate our revolving credit facility; or
•require us to pay significant fees, penalties, or damages.
If some or all of these events were to occur, our operations may be interrupted and our ability to fund our operations or obligations, as well as our business, results of operations, and financial condition, could be adversely affected. In particular, if the debt under our revolving credit facility were to be accelerated, we may not have sufficient cash or be able to borrow sufficient funds to refinance the debt or sell sufficient assets to repay the debt, which could immediately materially and adversely affect our business, cash flows, results of operations, and financial condition. Even if we were able to obtain new financing, it may not be on commercially reasonable terms or on terms that are acceptable to us.
28
Risks Related to Our Financial Performance or Results
Our revenue growth rate has declined in recent periods and may continue to slow in the future.
We have experienced significant revenue growth in prior periods. However, our rates of revenue growth have slowed and may continue to slow in future periods. Many factors may contribute to declines in our growth rates, including higher market penetration, increased competition, particularly from the availability of less expensive and bundled competitive products, slowing demand for our platform, a decrease in the growth of the overall content collaboration market, a failure by us to continue capitalizing on growth opportunities, the impact of catastrophic events on economic conditions or on our current and prospective paying users, and the maturation of our business, among others. You should not rely on the revenue growth of any prior quarterly or annual period as an indication of our future performance. If our growth rates decline further, investors’ perceptions of our business and the trading price of our Class A common stock could be adversely affected.
We have a history of net losses, we may increase expenses in the future, and we may not be able to achieve or maintain profitability.
We incurred net losses on an annual basis from our inception until 2020. We incurred net losses of $256.3 million and $52.7 million in the years ended December 31, 2020 and 2019, respectively. While we have been profitable on a GAAP basis in prior fiscal quarters, 2021 was our first profitable full fiscal year, however we may not achieve or maintain profitability in future periods. We generated net income of $335.8 million in the year ended December 31, 2021 and we had an accumulated deficit of $2,739.4 million as of December 31, 2021. As we strive to grow our business, expenses may increase, particularly as we continue to make investments to scale our business. For example, we will need an increasing amount of technical infrastructure to continue to satisfy the needs of our user base. Our research and development expenses may also increase as we plan to continue to hire employees for our engineering, product, and design teams to support these efforts. These investments may not result in increased revenue or growth in our business or our revenue may not grow to the extent we expect and expense growth may outpace revenue. Further, we have created mobile applications and mobile versions of Dropbox that are distributed to users primarily through app stores operated by Apple and Google, each of whom charge us in-application purchase fees. As a result, if more of our users subscribe to our products through mobile applications, these fees may have an adverse impact on our results of operations. In addition, although we anticipate that our shift to a Virtual First work model will have a long-term positive impact on our financial results and business operations, the impact remains uncertain. We have incurred impairment charges related to our facilities and may incur additional or unanticipated expense related to subleasing our facilities, including lower than anticipated sublease income that may result in additional or higher impairment charges than we have currently estimated, particularly if we are unable to sublease our unused office space on favorable terms or at all or if our subtenants fail to make lease payments to us in connection with our shift to a Virtual First model. We may also encounter unforeseen or unpredictable factors, including unforeseen operating expenses, complications, or delays, which may result in increased costs, or cause us to generate less sublease income than we have currently estimated. Furthermore, it is difficult to predict the size and growth rate of our market, user demand for our platform or for any new features or products we develop, user adoption and renewal of our platform or of any new features or products we develop, the entry of competitive products and services, or the success of existing competitive products and services. As a result, we may not achieve or maintain profitability in future periods. If we fail to grow our revenue sufficiently to keep pace with our investments and other expenses, our results of operations and financial condition would be adversely affected.
Servicing our 2026 Notes and 2028 Notes may require a significant amount of cash, and we may not have sufficient cash flow or the ability to raise the funds necessary to satisfy our obligations under the 2026 Notes or 2028 Notes.
Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the 2026 Notes and 2028 Notes, or to make cash payments in connection with any conversion of the 2026 Notes, 2028 Notes or upon any fundamental change if holders of the applicable series of notes require us to repurchase their notes for cash, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our indebtedness and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring indebtedness or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations, which would materially and adversely impact our business, financial condition and operating results.
Our quarterly results may fluctuate significantly and may not fully reflect the underlying performance of our business.
29
Our quarterly results of operations, including our revenue, gross margin, operating margin, profitability, cash flow from operations, and deferred revenue, may vary significantly in the future and period-to-period comparisons of our results of operations may not be meaningful. Accordingly, the results of any one quarter should not be relied upon as an indication of future performance. For example, while we have been profitable on a GAAP basis in prior fiscal quarters, our quarterly operating results have fluctuated in the past and will fluctuate in the future. Our quarterly results of operations may fluctuate as a result of a variety of factors, many of which are outside of our control, and as a result, may not fully reflect the underlying performance of our business. Fluctuation in quarterly results may negatively impact the value of our securities. Factors that may cause fluctuations in our quarterly results of operations include, without limitation, those listed below:
•our ability to retain and upgrade paying users;
•our ability to attract new paying users and convert registered to paying users;
•the timing of expenses and recognition of revenue;
•the amount and timing of operating expenses related to the maintenance and expansion of our business, operations, and infrastructure, as well as entry into operating and finance leases;
•the timing of expenses related to acquisitions;
•any large indemnification payments to our users or other third parties;
•changes in our pricing policies or those of our competitors;
•the timing and success of new product feature and service introductions by us or our competitors;
•network outages or actual or perceived security breaches;
•changes in the competitive dynamics of our industry, including consolidation among competitors;
•changes in laws and regulations that impact our business;
•general economic and market conditions;
•catastrophic events, including earthquakes, fires, floods, tsunamis, or other weather events, power loss, telecommunications failures, software or hardware malfunctions, cyber-attack, war, or terrorist attacks, and pandemics such as the ongoing COVID-19 pandemic;
•changes in reserves or other non-cash credits or charges, such as the impairment charges related to certain of our unused office space in connection with our shift to a Virtual First work model and releases of deferred tax asset valuation allowances; and
•any other impacts of shifting our operations to a Virtual First work model.
Our results of operations may not immediately reflect downturns or upturns in sales because we recognize revenue from our users over the term of their subscriptions with us.
We recognize revenue from subscriptions to our platform over the terms of these subscriptions. Our subscription arrangements generally have monthly or annual contractual terms, and we also have a small percentage of multi-year contractual terms. Amounts that have been billed are initially recorded as deferred revenue until the revenue is recognized. As a result, a large portion of our revenue for each quarter reflects deferred revenue from subscriptions entered into during previous quarters, and downturns or upturns in subscription sales, or renewals and potential changes in our pricing policies may not be reflected in our results of operations until later periods. Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as subscription revenue from new users is recognized over the applicable subscription term. By contrast, a significant majority of our costs are expensed as incurred, which occurs as soon as a user starts using our platform. As a result, an increase in users could result in our recognition of more costs than revenue in the earlier portion of the subscription term. We may not attain sufficient revenue to maintain positive cash flow from operations or achieve profitability in any given period.
30
Our results of operations, which are reported in U.S. dollars, could be adversely affected if currency exchange rates fluctuate substantially in the future.
We conduct our business across 180 countries around the world. As we continue to expand our international operations, we will become more exposed to the effects of fluctuations in currency exchange rates. This exposure is the result of selling in multiple currencies and operating in foreign countries where the functional currency is the local currency. In 2021, 30% of our sales were denominated in currencies other than U.S. dollars. Our expenses, by contrast, are primarily denominated in U.S. dollars. As a result, any increase in the value of the U.S. dollar against these foreign currencies, including those resulting from the impact of the COVID-19 pandemic, could cause our revenue to decline relative to our costs, thereby decreasing our gross margins. Our results of operations are primarily subject to fluctuations in the Euro and British pound sterling. Because we conduct business in currencies other than U.S. dollars, but report our results of operations in U.S. dollars, we also face translation exposure to fluctuations in currency exchange rates, which could hinder our ability to predict our future results and earnings and could materially impact our results of operations. We do not currently maintain a program to hedge exposures to non-U.S. dollar currencies.
We are subject to counterparty risk with respect to the convertible note hedge transactions.
In connection with the pricing of the 2026 Notes and 2028 Notes, we entered into convertible note hedge transactions with certain financial institutions or affiliates of financial institutions, which we refer to as the “option counterparties,” and we will be subject to the risk that one or more of such option counterparties may default under the convertible note hedge transactions. Our exposure to the credit risk of the option counterparties will not be secured by any collateral. If any option counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at that time under the convertible note hedge transaction. Our exposure will depend on many factors but, generally, the increase in our exposure will be correlated to the increase in the market price of our Class A common stock and in the volatility of the market price of our Class A common stock. In addition, upon a default by the option counterparty, we may suffer adverse tax consequences and dilution with respect to our Class A common stock. We can provide no assurance as to the financial stability or viability of any option counterparty.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
As of December 31, 2021, we had $623.8 million of federal, $352.1 million of state, and $310.1 million of foreign net operating loss carryforwards available to reduce future taxable income. Of our federal net operating loss carryforwards, $5.1 million will begin to expire in 2032 and $618.7 million will carryforward indefinitely, while state net operating losses begin to expire in 2029. As of December 31, 2021, we had research credit carryforwards of $246.1 million and $130.0 million for federal and state income tax purposes. The federal credit carryforwards will begin to expire in 2031. The state research credits have no expiration date. We also had $3.6 million of state enterprise zone credit carryforwards as of December 31, 2021, which will begin to expire in 2023 and $0.6 million of foreign tax credit carryforwards as of December 31, 2021, which will carryforward indefinitely. It is possible that we will not generate taxable income in time to use these net operating loss carryforwards before their expiration or at all. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change attributes, such as research tax credits, to offset its post-change income may be limited. In general, an “ownership change” will occur if there is a cumulative change in our ownership by “5-percent stockholders” that exceeds 50 percentage points over a rolling three-year period. Similar rules and other limitations may apply under state tax laws. We have determined that we have experienced multiple ownership changes and, as a result, the annual utilization of our net operating loss carryforwards and other pre-change attributes will be subject to limitation. However, we do not expect that the annual limitations will significantly impact our ability to utilize our net operating loss or tax credit carryforwards prior to expiration.
Our operating results may be harmed if we are required to collect sales or other related taxes for our subscription services in jurisdictions where we have not historically done so.
We collect sales and value-added tax as part of our subscription agreements in a number of jurisdictions. One or more states or countries may seek to impose incremental or new sales, use, or other tax collection obligations on us, including for past sales by us or our resellers and other partners. A successful assertion by a state, country, or other jurisdiction that we should have been or should be collecting additional sales, use, or other taxes on our services could, among other things, result in
31
substantial tax liabilities for past sales, create significant administrative burdens for us, discourage users from purchasing our platform, or otherwise harm our business, results of operations, and financial condition.
Our results of operations and financial condition could be materially affected by the enactment of legislation implementing changes in the U.S. or foreign taxation of international business activities or the adoption of other tax reform policies.
On January 1, 2022, a provision of the Tax Cuts and Jobs Act of 2017 (“TCJA”) went into effect which eliminates the option to deduct research and development costs in the year incurred and instead requires taxpayers to amortize such costs over five years and 15 years for domestic and foreign costs, respectively. Congress has proposed tax legislation to delay the effective date of this change to later years, but it is uncertain whether the proposed delay will ultimately be enacted into law. If no new legislation is passed, the provision is expected to adversely impact cash flows from operations beginning in 2022.
In October 2021, an update to the Build Back Better Act (the “Bill”) was released. The Bill, as revised, includes, but is not limited to, (1) reducing benefits included in the Global Intangible Low-Taxed Income (“GILTI”) regime and Foreign-Derived Intangible Income (“FDII”) deductions, (2) amending the Base Erosion and Anti-Abuse Tax (“BEAT”) tax rates from 10% up to 18% through 2025, and (3) delaying the capitalization of research expenditures to take effect in 2022. If enacted, certain proposed changes could have an adverse impact on our business, results of operations, financial condition and cash flow.
On June 5, 2021 the G7 Finance Ministers announced an agreement in which the participating countries committed to new taxing rights that allow countries to reallocate some portion of profits of large multinational companies with global revenues exceeding EUR20 billion to markets where sales arise (“Pillar One”), as well as enact a global minimum tax rate of at least 15% for multinationals with global revenue exceeding EUR750 million (“Pillar Two”). The meeting marked an early test of whether the US position on the OECD's Inclusive Framework “Taxation of the Digital Economy” project would provide momentum to finding a common base for agreement. On December 8, 2021, the OECD released Pillar Two model rules for implementation of a 15% global minimum tax, after previously announcing in October 2021 that 137 member jurisdictions have politically committed to the potential changes to the international corporate tax system.
In 2018, the European Commission (“EC”) introduced proposals addressing taxation of digital businesses operating within the European Union (“EU”) but has not reached an agreement on a sales tax with a scope limited to digital advertising services. As a result, certain countries, including the UK, Italy and France, unilaterally moved to introduce their own digital service tax. In January 2021, the EC released an Inception Impact Assessment to inform stakeholders about proposed legislative changes to the taxation of the digital economy. It is intended that the new initiative will help mitigate potential distortions and fragmentation of tax rules arising in the EU single market by designing a single set of rules which is consistent with the Digital Services Act package and the EC's digital strategy. In June 2021, as part of the OECD-IF's Pillar Two, there was an agreement to support efforts through the G20/OECD-IF and provide for appropriate coordination between the application of the new international tax rules and the removal of all digital services taxes, and other similar measures, on all companies.
In October 2021, an agreement was reached between the U.S. and a number of countries (France, Spain, Italy, Austria and the UK, and followed subsequently by Turkey and India) that unilateral measures introduced would be “rolled-back” once the OECD-IF led Pillar I comes into effect and that no further unilateral measures would be introduced by these countries. Additionally, the agreement reached by the parties stated that to the extent that unilateral measures generate taxable sums during an “interim period” (as defined under the agreements) that exceed the taxable sums that would be generated by Pillar I, any excess tax can be credited against the Pillar I Amount A tax when that comes into effect. The concept of an EU Digital Levy was fully dropped in December 2021 by the EU Commission.
Due to the increasing focus by government taxing authorities on multinational companies, the tax laws of certain countries in which we do business could change on a prospective or retroactive basis, and any such changes could increase our liabilities for taxes, interest and penalties, lead to higher effective tax rates, and harm our cash flows, results of operations and financial condition.
We have publicly disclosed market opportunity estimates, growth forecasts, and key metrics, including the key metrics included in this Annual Report on Form 10-K, which could prove to be inaccurate, and any real or perceived inaccuracies may harm our reputation and negatively affect our business.
Market opportunity estimates and growth forecasts are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. The estimates and forecasts we disclose relating to the size and expected growth of our target market may prove to be inaccurate. Even if the markets in which we compete meet the size estimates and growth we have forecasted, our business could fail to grow at similar rates, if at all. We also rely on assumptions and estimates to calculate
32
certain of our key metrics, such as annual recurring revenue, paying users, average revenue per paying user and free cash flow. We regularly review and may adjust our processes for calculating our key metrics to improve their accuracy. Our key metrics may differ from estimates published by third parties or from similarly titled metrics of our competitors due to differences in methodology. We have found that aggregate user activity metrics are not leading indicators of revenue or conversion. For that reason, we do not comprehensively track user activity across the Dropbox platform for financial planning and forecasting purposes. If investors or analysts do not perceive our metrics to be accurate representations of our business, or if we discover material inaccuracies in our metrics, our reputation, business, results of operations, and financial condition would be harmed.
Risks Related to Legal and Regulatory Compliance
We are subject to a variety of U.S. and international laws that could subject us to claims, increase the cost of operations, or otherwise harm our business due to changes in the laws, changes in the interpretations of the laws, greater enforcement of the laws, or investigations into compliance with the laws.
We are subject to compliance with various laws, including those covering copyright, indecent content, child protection, consumer protection, and similar matters. There have been instances where improper or illegal content has been stored on our platform without our knowledge. As a service provider, we do not regularly monitor our platform to evaluate the legality of content stored on it. While to date we have not been subject to material legal or administrative actions as result of this content, the laws in this area are currently in a state of flux and vary widely between jurisdictions. Accordingly, it may be possible that in the future we and our competitors may be subject to legal actions, along with the users who uploaded such content. In addition, regardless of any legal liability we may face, our reputation could be harmed should there be an incident generating extensive negative publicity about the content stored on our platform. Such publicity could harm our business and results of operations.
We are also subject to consumer protection laws that may impact our sales and marketing efforts, including laws related to subscriptions, billing, and auto-renewal. These laws, as well as any changes in these laws, could adversely affect our self-serve model and make it more difficult for us to retain and upgrade paying users and attract new ones. Additionally, we have in the past, are currently, and may from time to time in the future become the subject of inquiries and other actions by regulatory authorities as a result of our business practices, including our policies and practices around subscriptions, billing, auto-renewal, intermediary liability, privacy, and data protection. Consumer protection laws may be interpreted or applied by regulatory authorities in a manner that could require us to make changes to our operations or incur fines, penalties or settlement expenses, which may result in harm to our business, results of operations, and brand.
Our platform depends on the ability of our users to access the internet and our platform has been blocked or restricted in some countries for various reasons. For example, our platform is blocked in the People’s Republic of China. If we fail to anticipate developments in the law, or fail for any reason to comply with relevant law, our platform could be further blocked or restricted and we could be exposed to significant liability that could harm our business.
We are also subject to various U.S. and international anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, and Irish Criminal Justice (Corruption Offences) Act 2018, as well as other similar anti-bribery and anti-kickback laws and regulations. These laws and regulations generally prohibit companies and their employees and intermediaries from authorizing, offering, or providing improper payments or benefits to officials and other recipients for improper purposes. Although we take precautions to prevent violations of these laws, our exposure for violating these laws increases as we continue to expand our international presence and any failure to comply with such laws could harm our reputation and our business.
We are subject to export and import control laws and regulations that could impair our ability to compete in international markets or subject us to liability if we violate such laws and regulations.
We are subject to U.S. export controls and sanctions regulations that prohibit the shipment or provision of certain products and services to certain countries, governments, and persons targeted by U.S. sanctions. While we take precautions to prevent our products and services from being exported in violation of these laws, including implementing IP address blocking, we may have experienced violations in the past and we cannot guarantee that the precautions we take will prevent future violations of export control and sanctions laws. For example, in 2017, we discovered that our platform had been accessed by certain users in apparent violation of United States sanctions regulations. We filed an Initial Voluntary Self Disclosure in October 2017 with the Office of Foreign Assets Control, or OFAC, and a Final Voluntary Self Disclosure with OFAC in February 2018. In October 2018, OFAC notified us that it had completed its review of these matters and closed its review with the issuance of a Cautionary Letter. No monetary penalties were assessed with respect to the 2018 filing. If in the future we are found to be in
33
violation of U.S. sanctions or export control laws, it could result in substantial fines and penalties for us and for the individuals working for us, particularly in light of warning letters we previously received from OFAC.
In addition, various countries regulate the import and export of certain encryption and other technology, including import and export permitting and licensing requirements, and have enacted laws that could limit our ability to distribute our products or could limit our users’ ability to access our platform in those countries. Changes in our platform or client-side software, or future changes in export and import regulations may prevent our users with international operations from deploying our platform globally or, in some cases, prevent the export or import of our platform to certain countries, governments, or persons altogether. Any change in export or import regulations, economic sanctions or related legislation, or change in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use of our platform by, or in our decreased ability to export or sell subscriptions to our platform to, existing or potential users with international operations. Any decreased use of our platform or limitation on our ability to export or sell our products would likely adversely affect our business, results of operations, and financial results.
Our actual or perceived failure to comply with privacy, data protection, and information security laws, regulations, and obligations could harm our business.
We receive, store, process, and use personal information and other user content. There are numerous federal, state, local, and international laws and regulations regarding privacy, data protection, information security, and the storing, sharing, use, processing, transfer, disclosure, and protection of personal information and other content, the scope of which are changing, subject to differing interpretations, and may be inconsistent among countries, or conflict with other rules. We also post privacy policies and are subject to contractual obligations to third parties related to privacy, data protection, and information security. We strive to comply with applicable laws, regulations, policies, and other legal obligations relating to privacy, data protection, and information security to the extent possible. However, the regulatory framework for privacy and data protection worldwide is, and is likely to remain, uncertain for the foreseeable future, and it is possible that these or other actual or alleged obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices.
We also expect that there will continue to be new laws, regulations, and industry standards concerning privacy, data protection, and information security proposed and enacted in various jurisdictions. For example, in May 2018, the General Data Protection Regulation, or GDPR, went into effect in the EU. The GDPR imposed more stringent data protection requirements and provides greater penalties for noncompliance than previous data protection laws.
Additionally, although we have self-certified under the U.S.-EU and U.S.-Swiss Privacy Shield Frameworks with regard to our transfer of certain personal data from the European Economic Area ("EEA") and Switzerland to the United States, on July 16, 2020, the Court of Justice of the European Union ("CJEU") invalidated Decision 2016/1250 on the adequacy of the protection provided by the U.S.-EU Privacy Shield Framework, and on September 8, 2020, the Swiss Federal Data Protection and Information Commissioner announced that it no longer considers the U.S.-Swiss Privacy Shield adequate for the purposes of transfers of personal data from Switzerland to the U.S. While we rely on additional legal mechanisms to transfer data from the EEA and Switzerland to the United States, there is some regulatory uncertainty surrounding the future of data transfers from these locations to the United States, and we are closely monitoring regulatory developments in this area. In its decision invalidating the U.S.-EU Privacy Shield Framework, the CJEU also imposed additional obligations on companies relying on standard contractual clauses approved by the European Commission (“SCCs”) to transfer personal data. The CJEU decision may result in European data protection regulators applying differing standards for, and requiring additional measures in connection with, transfers of personal data from the EEA and Switzerland to the United States. The European Commission issued revised SCCs in June 2021 that are required to be implemented. The revised SCCs and other developments relating to cross-border data transfer may require us to implement additional contractual and technical safeguards for any personal data transferred out of the EEA and Switzerland, which may increase our costs, lead to increased regulatory scrutiny or liability, necessitate additional contractual negotiations, and adversely impact our business, results of operations, and financial results.
Additionally, several states in the U.S. have begun enacting new data privacy laws. For example, CCPA, which affords consumers expanded privacy protections, went into effect on January 1, 2020. However, certain aspects of the CCPA and its enforcement remain uncertain. Additionally, a new privacy law, the California Privacy Rights Act ("CPRA"), which will go into effect on January 1, 2023, significantly modified the CCPA, potentially resulting in further uncertainty and requiring us to incur additional costs and expenses. The effects of the CCPA and the CPRA remain far-reaching, and depending on final regulatory guidance and other related developments, potentially may require us to modify our data processing practices and policies and to incur substantial costs and expenses in an effort to comply. The enactment of the CCPA has prompted similar legislative developments in other states, such as Virginia, which in March 2021 enacted a Consumer Data Protection Act that
34
will go into effect January 1, 2023, and Colorado, which in June 2021 enacted a Colorado Privacy Act that will go into effect July 1, 2023. Similar laws are being considered by other state legislatures. These developments create the potential for a patchwork of overlapping but different state laws. Similarly, a number of legislative proposals in the European Union, the United States, at both the federal and state level, as well as other jurisdictions could impose new obligations in areas affecting our business. In addition, some countries are considering or have passed legislation implementing data protection requirements or requiring local storage and processing of data, or similar requirements, that could increase the cost and complexity of delivering our services.
With laws and regulations such as the GDPR in the EU and the California Consumer Privacy Act in the U.S. imposing new and relatively burdensome obligations, and with substantial uncertainty over the interpretation and application of these and other laws and regulations, we may face challenges in addressing their requirements and making necessary changes to our policies and practices, and may incur significant costs and expenses in an effort to do so. Any failure or perceived failure by us to comply with our privacy policies, our privacy-related obligations to users or other third parties, or any of our other legal obligations relating to privacy, data protection, or information security may result in governmental investigations or enforcement actions, litigation, claims, or public statements against us by consumer advocacy groups or others, and could result in significant liability or cause our users to lose trust in us, which could have an adverse effect on our reputation and business.
Furthermore, the costs of compliance with, and other burdens imposed by, the laws, regulations, and policies that are applicable to the businesses of our users may limit the adoption and use of, and reduce the overall demand for, our services. In addition to government regulation, self-regulatory standards, industry-specific regulations and other industry standards or requirements may legally or contractually apply to us or be argued to apply to us, or we may elect to comply with, or to facilitate our customers’ compliance with, such regulations, standards, requirements, or other actual or asserted obligations. If we are unable or are perceived to be unable to comply with any of these regulations, standards, requirements, or other actual or asserted obligations, if we are unable to maintain certifications or standards relevant to our customers, or if our customers are unable to obtain regulatory approval to use our services where required, our business may be harmed. In addition, an inability to satisfy the standards of certain government agencies that our customers may expect may have an adverse impact on our business and results.
Additionally, if third parties we work with, such as vendors or developers, violate applicable laws or regulations or our policies, such violations may also put our users’ content at risk and could in turn have an adverse effect on our business. Any significant change to applicable laws, regulations, or industry practices regarding the collection, use, retention, security, or disclosure of our users’ content, or regarding the manner in which the express or implied consent of users for the collection, use, retention, or disclosure of such content is obtained, could increase our costs and require us to modify our services and features, possibly in a material manner, which we may be unable to complete, and may limit our ability to store and process user data or develop new services and features.
Our business could be adversely impacted by changes in internet access for our users or laws specifically governing the internet.
Our platform depends on the quality of our users’ access to the internet. Certain features of our platform require significant bandwidth and fidelity to work effectively. Internet access is frequently provided by companies that have significant market power that could take actions that degrade, disrupt or increase the cost of user access to our platform, which would negatively impact our business. We could incur greater operating expenses and our user acquisition and retention could be negatively impacted if network operators:
•implement usage-based pricing;
•discount pricing for competitive products;
•otherwise materially change their pricing rates or schemes;
•charge us to deliver our traffic at certain levels or at all;
•throttle traffic based on its source or type;
•implement bandwidth caps or other usage restrictions; or
•otherwise try to monetize or control access to their networks
35
On June 11, 2018, the repeal of the Federal Communications Commission’s, or FCC, “net neutrality” rules took effect and returned to a “light-touch” regulatory framework. The prior rules were designed to ensure that all online content is treated the same by internet service providers and other companies that provide broadband services. Additionally, California and a number of other states are considering or have enacted legislation or executive actions that would regulate the conduct of broadband providers. We cannot predict whether the FCC order or state initiatives will be modified, overturned, or vacated by legal action of the court, federal legislation, or the FCC. With the repeal of net neutrality rules in effect, we could incur greater operating expenses, which could harm our results of operations. As the internet continues to experience growth in the number of users, frequency of use, and amount of data transmitted, the internet infrastructure that we and our users rely on may be unable to support the demands placed upon it. The failure of the internet infrastructure that we or our users rely on, even for a short period of time, could undermine our operations and harm our results of operations.
In addition, there are various laws and regulations that could impede the growth of the internet or other online services, and new laws and regulations may be adopted in the future. These laws and regulations could, in addition to limiting internet neutrality, involve taxation, tariffs, privacy, data protection, content, copyrights, distribution, electronic contracts and other communications, consumer protection, and the characteristics and quality of services, any of which could decrease the demand for, or the usage of, our platform. Legislators and regulators may make legal and regulatory changes, or interpret and apply existing laws, in ways that require us to incur substantial costs, expose us to unanticipated civil or criminal liability, or cause us to change our business practices. These changes or increased costs could materially harm our business, results of operations, and financial condition.
We are currently, and may be in the future, party to intellectual property rights claims and other litigation matters and, if resolved adversely, they could have a significant impact on our business, results of operations, or financial condition.
We own a large number of patents, copyrights, trademarks, domain names, and trade secrets and, from time to time, are subject to litigation based on allegations of infringement, misappropriation or other violations of intellectual property, or other rights. As we face increasing competition and gain an increasingly high profile, the possibility of intellectual property rights claims, commercial claims, and other assertions against us grows. We have in the past been, are currently, and may from time to time in the future become, a party to litigation and disputes related to our intellectual property, our business practices, transactions involving our securities and our platform. For example, we were recently subject to a number of putative class action lawsuits in state and federal court alleging federal securities law violations in connection with our IPO. Although the lawsuits in both the federal and state courts have since been dismissed, we may not be successful in an appeal proceeding or in winning dismissal of an amended complaint. The costs of supporting litigation and dispute resolution proceedings are considerable, and there can be no assurances that a favorable outcome will be obtained. Our business, results of operations, and financial condition could be materially and adversely affected by such costs and any unfavorable outcomes in current or future litigation. We may need to settle litigation and disputes on terms that are unfavorable to us, or we may be subject to an unfavorable judgment that may not be reversible upon appeal. The terms of any settlement or judgment may require us to cease some or all of our operations or pay substantial amounts to the other party. With respect to any intellectual property rights claim, we may have to seek a license to continue practices found to be in violation of third-party rights, which may not be available on reasonable terms and may significantly increase our operating expenses. A license to continue such practices may not be available to us at all, and we may be required to develop alternative non-infringing technology or practices or discontinue the practices. The development of alternative, non-infringing technology or practices could require significant effort and expense.
Our failure to protect our intellectual property rights and proprietary information could diminish our brand and other intangible assets.
We rely and expect to continue to rely on a combination of patents, patent licenses, trade secrets, domain name protections, trademarks, and copyright laws, as well as confidentiality and license agreements with our employees, consultants, and third parties, to protect our intellectual property and proprietary rights. In the United States and abroad, we have over 1,400 issued patents and more than 350 pending patent applications. However, third parties may knowingly or unknowingly infringe our proprietary rights, third parties may challenge our proprietary rights, pending and future patent, trademark, and copyright applications may not be approved, and we may not be able to prevent infringement without incurring substantial expense. We have also devoted substantial resources to the development of our proprietary technologies and related processes. In order to protect our proprietary technologies and processes, we rely in part on trade secret laws and confidentiality agreements with our employees, consultants, and third parties. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover our trade secrets, in which case we would not be able to assert trade secret rights, or develop
36
similar technologies and processes. Further, laws in certain jurisdictions may afford little or no trade secret protection, and any changes in, or unexpected interpretations of, the intellectual property laws in any country in which we operate may compromise our ability to enforce our intellectual property rights. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights. If the protection of our proprietary rights is inadequate to prevent use or appropriation by third parties, the value of our platform, brand, and other intangible assets may be diminished and competitors may be able to more effectively replicate our platform and its features. Any of these events could materially and adversely affect our business, results of operations, and financial condition.
Risks Related to Ownership of Our Class A Common Stock
The trading price of our Class A common stock may be volatile, and you could lose all or part of your investment.
The trading price of our Class A common stock may be volatile and could be subject to fluctuations in response to various factors, some of which are beyond our control. Factors that could cause fluctuations in the trading price of our Class A common stock include the following:
•price and volume fluctuations in the overall stock market from time to time;
•volatility in the trading prices and trading volumes of technology stocks;
•changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular;
•sales of shares of our Class A common stock by us or our stockholders;
•failure of securities analysts to maintain coverage of us, changes in financial estimates by securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;
•the financial projections we may provide to the public, any changes in those projections, or our failure to meet those projections;
•announcements by us or our competitors of new products, features, or services;
•the public’s reaction to our press releases, other public announcements, and filings with the SEC;
•rumors and market speculation involving us or other companies in our industry;
•actual or anticipated changes in our results of operations or fluctuations in our results of operations;
•actual or anticipated changes in our key metrics;
•actual or anticipated developments in our business, our competitors’ businesses or the competitive landscape generally;
•actual or perceived breaches of, or failures related to, privacy, data protection or data security;
•litigation involving us, our industry, or both, or investigations by regulators into our operations or those of our competitors;
•developments or disputes concerning our intellectual property or other proprietary rights;
•announced or completed acquisitions of businesses, products, services, or technologies by us or our competitors;
•new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
•changes in accounting standards, policies, guidelines, interpretations, or principles;
•any significant change in our management; and
37
•general economic conditions and slow or negative growth of our markets and catastrophic events, including earthquakes, fires, floods, tsunamis, or other weather events, power loss, telecommunications failures, software or hardware malfunctions, cyber-attack, war, or terrorist attacks, and pandemics such as the ongoing COVID-19 pandemic.
In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. For example, we were recently subject to a number of putative class action lawsuits in state and federal court alleging federal securities law violations in connection with our IPO. Although the lawsuits in both the federal and state courts have since been dismissed, we may not be successful in an appeal proceeding or in winning dismissal of an amended complaint. This recent litigation, and any securities litigation that may be instituted against us in the future, could result in substantial costs and a diversion of our management’s attention and resources.
The multi-class structure of our common stock has the effect of concentrating voting control with those stockholders who held our capital stock prior to the completion of our IPO, and it may depress the trading price of our Class A common stock.
Our Class A common stock has one vote per share, our Class B common stock has ten votes per share, and our Class C common stock has no voting rights, except as otherwise required by law. As of December 31, 2021, our directors, executive officers and holders of more than 5% of our common stock, and their respective affiliates, held in the aggregate 78.9% of the voting power of our capital stock, with Mr. Houston holding approximately 72.8% of the voting power of our capital stock. We are including Mr. Houston's Co-Founder Grant in this calculation since the shares underlying such grant are legally issued and outstanding shares of our Class A common stock and Mr. Houston is able to vote these shares prior to their vesting. Because of the ten-to-one voting ratio between our Class B and Class A common stock, the holders of our Class B common stock collectively will continue to control a majority of the combined voting power of our common stock and therefore be able to control all matters submitted to our stockholders for approval so long as the shares of Class B common stock represent at least 9.1% of all outstanding shares of our Class A and Class B common stock. This concentrated control will limit or preclude other stockholders' ability to influence corporate matters for the foreseeable future, including the election of directors, amendments of our organizational documents, and any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction requiring stockholder approval. In addition, this may prevent or discourage unsolicited acquisition proposals or offers for our capital stock that other stockholders may feel are in their best interests as one of our stockholders.
Future transfers or sales by holders of Class B common stock will generally result in those shares converting to Class A common stock, except for certain transfers described in our amended and restated certificate of incorporation, including transfers effected for estate planning purposes where sole dispositive power and exclusive voting control with respect to the shares of Class B common stock is retained by the transferring holder and transfers between our co-founders. In addition, each outstanding share of Class B common stock held by a stockholder who is a natural person, or held by the permitted entities or permitted transferees of such stockholder (as described in our amended and restated certificate of incorporation), will convert automatically into one share of Class A common stock upon the death of such natural person. In the event of Mr. Houston's death or permanent and total disability, shares of Class B common stock held by Mr. Houston, his permitted entities or permitted transferees will convert to Class A common stock, provided that the conversion will be deferred for nine months, or up to 18 months if approved by a majority of our independent directors, following his death or permanent and total disability. Transfers between our co-founders are permitted transfers and will not result in conversion of the shares of Class B common stock that are transferred; however, upon the death or total and permanent disability of the transferring co-founder, the transferred shares would convert to Class A common stock following the deferral period of nine months, or up to 18 months if approved by a majority of our independent directors. The conversion of Class B common stock to Class A common stock will have the effect, over time, of increasing the relative voting power of those individual holders of Class B common stock who retain their shares in the long term.
In addition, because our Class C common stock carries no voting rights (except as otherwise required by law), if we issue Class C common stock in the future, the holders of Class B common stock may be able to elect all of our directors and to determine the outcome of most matters submitted to a vote of our stockholders for a longer period of time than would be the case if we issued Class A common stock rather than Class C common stock in such transactions.
Additionally, in July 2017, FTSE Russell and Standard & Poor’s announced that they would cease to allow most newly public companies utilizing dual or multi-class capital structures to be included in their indices. Affected indices include the Russell 2000 and the S&P 500, S&P MidCap 400, and S&P SmallCap 600, which together make up the S&P Composite 1500. Although we have since met the requirements to be included, and are now included, in an FTSE Russell index, our multi-class capital structure still makes us ineligible for inclusion in any of the above listed S&P indices, and as a result, mutual funds,
38
exchange-traded funds, and other investment vehicles that attempt to passively track these S&P indices will not be investing in our stock. It is as of yet unclear what effect, if any, these policies will have on the valuations of publicly traded companies excluded from one or more of these indices, but it is possible that they may depress these valuations compared to those of other similar companies that are included.
Substantial future sales could depress the market price of our Class A common stock.
The market price of our Class A common stock could decline as a result of a large number of sales of shares of such stock, and the perception that these sales could occur may also depress the market price of our Class A common stock.
In addition, we have filed registration statements to register shares reserved for future issuance under our equity compensation plans. As a result, subject to the satisfaction of applicable exercise periods, the shares issued upon exercise of outstanding stock options or upon settlement of outstanding RSU awards are available for immediate resale in the United States in the open market.
Sales of our shares may make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. These sales also could cause the trading price of our Class A common stock to fall and make it more difficult for you to sell shares of our Class A common stock.
Transactions relating to our 2026 Notes and 2028 Notes may dilute the ownership interest of stockholders, or may otherwise depress the price of our common stock.
If the 2026 Notes or the 2028 Notes are converted by holders of such series, we have the ability under the applicable indenture to deliver cash, common stock, or any combination of cash or common stock, at our election upon conversion of the applicable series of convertible notes. If we elect to deliver common stock upon conversion of the 2026 Notes or the 2028 Notes, it would dilute the ownership interests of existing stockholders. Any sales in the public market of the Class A common stock issuable upon such conversion could adversely affect prevailing market prices of our Class A common stock. In addition, certain holders of the 2026 Notes or the 2028 Notes may engage in short selling to hedge their position in the convertible notes. Anticipated future conversions of the 2026 Notes or 2028 Notes into shares of our Class A common stock could depress the price of our Class A common stock.
Delaware law and provisions in our restated certificate of incorporation and restated bylaws could make a merger, tender offer, or proxy contest difficult, thereby depressing the market price of our Class A common stock.
Our status as a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay, or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our restated certificate of incorporation and restated bylaws contain provisions that may make the acquisition of our company more difficult, including the following:
•any transaction that would result in a change in control of our company requires the approval of a majority of our outstanding Class B common stock voting as a separate class;
•our multi-class common stock structure, which provides our holders of Class B common stock with the ability to significantly influence the outcome of matters requiring stockholder approval, even if they own significantly less than a majority of the shares of our outstanding Class A common stock, Class B common stock, and Class C common stock;
•when the outstanding shares of Class B common stock represent less than a majority of the total combined voting power of our Class A and Class B common stock, or the Voting Threshold Date, our Board of Directors will be classified into three classes of directors with staggered three-year terms, and directors will only be able to be removed from office for cause;
•until the Class B common stock, as a class, converts to Class A common stock, any amendments to our restated certificate of incorporation will require the approval of two-thirds of the combined vote of our then-outstanding shares of Class A common stock and Class B common stock; and following the conversion of our Class B common stock, as a class, to Class A common stock, certain amendments to our amended and restated certificate of incorporation will require the approval of two-thirds of our then outstanding voting power;
39
•our amended and restated bylaws will provide that approval of stockholders holding two-thirds of our outstanding voting power voting as a single class is required for stockholders to amend or adopt any provision of our bylaws;
•after the Voting Threshold Date our stockholders will only be able to take action at a meeting of stockholders, and will not be able to take action by written consent for any matter;
•until the Voting Threshold Date, our stockholders will be able to act by written consent only if the action is first recommended or approved by the Board of Directors;
•vacancies on our Board of Directors will be able to be filled only by our Board of Directors and not by stockholders;
•only the chairman of our Board of Directors, our chief executive officer, a majority of our Board of Directors, or, until the Class B common stock, as a class, converts to Class A common stock, a stockholder holding thirty percent of the combined voting power of our Class A and Class B common stock are authorized to call a special meeting of stockholders;
•certain litigation against us may be required to be brought in Delaware;
•our restated certificate of incorporation authorizes undesignated preferred stock, the terms of which may be established and shares of which may be issued, without the approval of the holders of Class A common stock; and
•advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders.
These anti-takeover defenses could discourage, delay, or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors of their choosing and to cause us to take other corporate actions they desire, any of which, under certain circumstances, could limit the opportunity for our stockholders to receive a premium for their shares of our capital stock, and could also affect the price that some investors are willing to pay for our Class A common stock.
Our amended and restated bylaws designate a state or federal court located within the State of Delaware as the exclusive forum for substantially all disputes between us and our stockholders, and also provide that the federal district courts will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act, each of which could limit our stockholders’ ability to choose the judicial forum for disputes with us or our directors, officers, or employees.
Our amended and restated bylaws provide that, unless we consent in writing to the selection of an alternative forum, the sole and exclusive forum for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, or other employees to us or our stockholders, (3) any action arising pursuant to any provision of the Delaware General Corporation Law, or the certificate of incorporation or the amended and restated bylaws, or (4) any other action asserting a claim that is governed by the internal affairs doctrine shall be the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, the federal district court for the District of Delaware), in all cases subject to the court having jurisdiction over indispensable parties named as defendants.
Our amended and restated bylaws also provide that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act, or a Federal Forum Provision.
Any person or entity purchasing or otherwise acquiring any interest in any of our securities shall be deemed to have notice of and consented to this provision. These exclusive-forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum of its choosing for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers, and other employees.
If we face relevant litigation and are unable to enforce these provisions, we may incur additional costs associated with resolving the dispute in other jurisdictions, which could harm our results of operations.
40
We cannot guarantee that our stock repurchase program will be fully implemented or that it will enhance long-term stockholder value
In February 2020, our Board of Directors approved a stock repurchase program for the repurchase of up to $600 million of the outstanding shares of our Class A common stock, in February 2021 our Board of Directors authorized the repurchase of up to an additional $1 billion of the outstanding shares of our Class A common stock and in February 2022 our Board of Directors further authorized the repurchase of up to an additional $1.2 billion of the outstanding shares of our Class A common stock. The repurchase program does not have an expiration date and we are not obligated to repurchase a specified number or dollar value of shares. Share repurchases will be made from time to time in private transactions or open market purchases, as permitted by securities laws and other legal requirements. Although we have previously announced an intention to increase the pace of our share repurchases, any share repurchases remain subject to the circumstances in place at that time, including prevailing market prices. As a result, there can be no guarantee around the timing of our share repurchases, or that the volume of such repurchases will increase. The stock repurchase program could affect the price of our Class A common stock, increase volatility and diminish our cash reserves. Our repurchase program may be suspended or terminated at any time and, even if fully implemented, may not enhance long-term stockholder value.
We do not intend to pay dividends for the foreseeable future.
We have never declared nor paid cash dividends on our capital stock. We currently intend to retain any future earnings to finance the operation and expansion of our business and fund our stock repurchase program, and we do not expect to declare or pay any dividends in the foreseeable future. As a result, stockholders must rely on sales of their Class A common stock after price appreciation as the only way to realize any future gains on their investment. In addition, our revolving credit facility contains restrictions on our ability to pay dividends.
General Risk Factors
Our business could be disrupted by catastrophic events.
Occurrence of any catastrophic event, including earthquake, fire, flood, tsunami, or other weather event, power loss, telecommunications failure, software or hardware malfunctions, cyber-attack, war, or terrorist attack, could result in lengthy interruptions in our service or result in unexpected increases in our costs. Further, outbreaks of pandemic diseases, such as COVID-19, or the fear of such events, have resulted in responses, including government-imposed travel restrictions, grounding of flights, and shutdown of workplaces. As a result, we are conducting business with substantial modifications, including modifications to employee travel and employee work locations. These modifications may disrupt important business operations, such as our product development and sales and marketing activities, and the productivity of our employees.
Additionally, our U.S. headquarters and some of the datacenters we utilize are located in the San Francisco Bay Area, a region known for seismic activity, and our insurance coverage may not compensate us for losses that may occur in the event of an earthquake or other significant natural disaster. In addition, acts of terrorism could cause disruptions to the internet or the economy as a whole. Even with our disaster recovery arrangements, our service could be interrupted. If our systems were to fail or be negatively impacted as a result of a natural disaster or other event, our ability to deliver products to our users would be impaired, we could lose critical data and we may be subject to increased costs. If we are unable to develop adequate plans to mitigate the impact of a disaster or to ensure that our business functions continue to operate during and after a disaster, and successfully execute on those plans in the event of a disaster or emergency, our business, results of operations, financial condition, and reputation would be harmed.
We may have exposure to greater than anticipated tax liabilities, which could adversely impact our results of operations.
While to date we have not incurred significant income taxes in operating our business, we are subject to income taxes in the United States and various jurisdictions outside of the United States. Our effective tax rate could fluctuate due to changes in the mix of earnings and losses in countries with differing statutory tax rates. Our tax expense could also be impacted by changes in non-deductible expenses, changes in excess tax benefits of stock-based compensation, changes in the valuation of deferred tax assets and liabilities and our ability to utilize them, the applicability of withholding taxes and effects from acquisitions.
Our tax provision could also be impacted by changes in accounting principles, changes in U.S. federal, state, or international tax laws applicable to corporate multinationals such as the recent legislation enacted in the United States, other fundamental law changes currently being considered by many countries, and changes in taxing jurisdictions’ administrative interpretations, decisions, policies, and positions. Additionally, the Organization for Economic Co-Operation and Development
41
has released guidance covering various topics, including digital economy, transfer pricing, country-by-country reporting, and definitional changes to permanent establishment that could ultimately impact our tax liabilities.
We are subject to review and audit by U.S. federal, state, local, and foreign tax authorities. Such tax authorities may disagree with tax positions we take and if any such tax authority were to successfully challenge any such position, our financial results and operations could be materially and adversely affected. We may also be subject to additional tax liabilities due to changes in non-income-based taxes resulting from changes in federal, state, or international tax laws, changes in taxing jurisdictions’ administrative interpretations, decisions, policies, and positions, results of tax examinations, settlements or judicial decisions, changes in accounting principles, changes to the business operations, including acquisitions, as well as the evaluation of new information that results in a change to a tax position taken in a prior period.
If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.
We are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the rules and regulations of the applicable listing standards of the Nasdaq Global Select Market, or Nasdaq. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting, and financial compliance costs, make some activities more difficult, time-consuming and costly, and place significant strain on our personnel, systems, and resources.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are also required to provide an annual management report on the effectiveness of our disclosure controls and procedures over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we will file with the SEC is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. We are also continuing to improve our internal control over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended, and anticipate that we will continue to expend, significant resources, including accounting-related costs and significant management oversight. In addition, our independent registered public accounting firm is required to audit the effectiveness of our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act annually. Testing, or the subsequent testing by our independent registered public accounting firm, may reveal material weaknesses or significant deficiencies. If material weaknesses are identified or we are not able to comply with the requirements of Section 404 in a timely manner, our reported financial results could be materially misstated, we could receive an adverse opinion regarding our internal control over financial reporting from our independent registered public accounting firm, we could be subject to investigations or sanctions by regulatory authorities and we could incur substantial expenses.
Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Additionally, to the extent we acquire other businesses, the acquired company may not have a sufficiently robust system of internal controls and we may uncover new deficiencies. Weaknesses in our disclosure controls and internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement that could harm our results of operations or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that are required to be included in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our Class A common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on Nasdaq.
Our reported results of operations may be adversely affected by changes in accounting principles generally accepted in the United States.
Generally accepted accounting principles in the United States are 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 results of operations, and may even affect the reporting of transactions completed before the announcement or effectiveness of a change. It is difficult to
42
predict the impact of future changes to accounting principles or our accounting policies, any of which could negatively affect our results of operations.
We may need additional capital, and we cannot be certain that additional financing will be available on favorable terms, or at all.
Historically, we have funded our operations and capital expenditures primarily through equity issuances, cash generated from our operations, and debt financing for capital purchases. Although we currently anticipate that our existing cash, cash equivalents and short-term investments, amounts available under our existing credit facilities, and cash flow from operations will be sufficient to meet our cash needs for the foreseeable future, we may require additional financing. We evaluate financing opportunities from time to time, and our ability to obtain financing will depend, among other things, on our development efforts, business plans, operating performance, and condition of the capital markets at the time we seek financing. We cannot assure you that additional financing will be available to us on favorable terms when required, or at all. If we raise additional funds through the issuance of equity or equity-linked or debt securities, those securities may have rights, preferences or privileges senior to the rights of our Class A common stock, and our stockholders may experience dilution.
Our Class A common stock market price and trading volume could decline if securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business.
The trading market for our Class A common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. The analysts’ estimates are based upon their own opinions and are often different from our estimates or expectations. If one or more of the analysts who cover us downgrade our Class A common stock or publish inaccurate or unfavorable research about our business, the price of our securities would likely decline. If few securities analysts commence coverage of us, or if one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our securities could decrease, which might cause the price and trading volume of our Class A common stock to decline.
43
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our corporate headquarters are located in San Francisco, California, pursuant to operating leases that expire in 2033. We lease additional offices in San Francisco and around the world, including in Austin, Texas; New York, New York; Mountain View, California; Seattle, Washington; Dublin, Ireland; and Sydney, Australia. We have data center co-location facilities in California, Oregon, Texas, and Virginia. We believe that these facilities are generally suitable to meet our needs.
ITEM 3. LEGAL PROCEEDINGS
Legal Proceedings
We are currently involved in, and may in the future be involved in, legal proceedings, claims, and government investigations in the ordinary course of business, including legal proceedings with third parties asserting infringement of their intellectual property rights.
We are currently involved in four putative class action lawsuits alleging violations of the federal securities laws that were filed on August 30, 2019, September 5, 2019, September 13, 2019, and October 3, 2019, in the Superior Court of the State of California, San Mateo County, against the Company, certain of its officers and directors, underwriters of its IPO, and Sequoia Capital XII, L.P. and certain of its affiliated entities (collectively, the “Dropbox Defendants”). On October 4, 2019, two putative class action lawsuits alleging violations of the federal securities laws were filed against the Dropbox Defendants in the U.S. District Court for the Northern District of California. The six lawsuits each make the same or similar allegations of violations of federal securities laws, for allegedly making materially false and misleading statements in, or omitting material information from, our IPO registration statement. The plaintiffs seek unspecified monetary damages and other relief.
On March 2, 2020, the Federal Plaintiffs filed a consolidated class action complaint. On April 16, 2020, the Dropbox Defendants filed a motion to dismiss the federal consolidated class action complaint. On October 21, 2020, the federal court issued an order granting our motion to dismiss the Federal Plaintiffs’ complaint with leave to amend setting a deadline of January 6, 2021 for the Federal Plaintiffs to file any amended complaint. The federal court extended this deadline to February 22, 2021 to provide time for the parties to explore resolving the case. On February 11, 2021, the parties attended mediation and reached a settlement in principle for an immaterial amount subject to final documentation and preliminary and final approval by the court. On July 22, 2021, the Court held a preliminary settlement approval hearing. On August 3, 2021, the Court entered an order preliminarily approving the settlement and providing for notice to the class. The Court held a hearing for final approval of the settlement on December 2, 2021. On December 8, 2021, the Court entered an order approving the settlement and dismissing the case. Accordingly, the federal securities litigation is now resolved.
On May 11, 2020, the Dropbox Defendants filed a motion to dismiss the consolidated state court case based on the exclusive federal forum provisions contained in our amended and restated bylaws. On December 4, 2020, the state court issued an order granting our motion to dismiss the consolidated state court case. On December 15, 2020, the State Plaintiffs filed a notice of appeal of this order, and on December 8, 2021, the State Plaintiffs filed their opening brief. Dropbox filed its responding appellate brief on February 4, 2022. We believe the appeal and claims are without merit and we intend to vigorously defend against them.
Future litigation may be necessary, among other things, to defend ourselves or our users by determining the scope, enforceability, and validity of third-party proprietary rights or to establish our proprietary rights. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
44
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information for Class A Common Stock
Our Class A common stock has been listed on the Nasdaq Global Market under the symbol "DBX" since March 23, 2018.
Holders of Record
As of February 15, 2022, we had 764 holders of record of our Class A and Class B common stock, respectively, and no holders of our Class C common stock. The actual number of stockholders is greater than this number of record holders and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees.
Dividend Policy
We have never declared or paid any cash dividends on our capital stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our Board of Directors, subject to applicable laws, and will depend on a number of factors, including our financial condition, results of operations, capital requirements, contractual restrictions, general business conditions, and other factors that our Board of Directors may deem relevant. In addition, the terms of our revolving credit facility place certain limitations on the amount of cash dividends we can pay, even if no amounts are currently outstanding.
Issuer Purchases of Equity Securities
The following table presents information with respect to our repurchases of Class A common stock during the quarter ended December 31, 2021.
| Period | Total Number of Shares Purchased (in millions)(1) | Average Price Paid per Share(2) | Total Number of Shares Purchased as Part of Publicly Announced Programs (in millions)(1) | Approximate Dollar Value of Shares that May Yet Be Purchased Under Publicly Announced Programs (in millions)(1) | ||||||||||||||||||||||
| October 1 - 31 | 2.68 | $ | 29.55 | 2.68 | $ | 559.38 | ||||||||||||||||||||
| November 1 - 30 | 4.83(3) | $ | 26.63 | 3.71 | $ | 460.47 | ||||||||||||||||||||
| December 1 - 31 | 4.80 | $ | 24.39 | 4.80 | $ | 343.49 | ||||||||||||||||||||
| Total | 12.31 | $ | 26.37 | 11.19 | ||||||||||||||||||||||
(1) On February 20, 2020, we announced that our Board of Directors approved a stock repurchase program for the repurchase of up to $600 million of the Company's outstanding shares of Class A common stock. On February 18, 2021, we announced that our Board of Directors authorized the repurchase of an additional $1 billion of the outstanding shares of our Class A common stock. We completed the February 2020 authorization of $600 million during the three months ended March 31, 2021 and continued stock repurchases under the February 2021 authorization. On February 11, 2022, our Board of Directors authorized the repurchase of an additional $1.2 billion of the outstanding shares of our Class A common stock. Under this program, shares may be repurchased, subject to general business and market conditions and other investment opportunities, through open market purchases or privately held negotiated transactions, including through Rule 10b5-1 plans, in each case as permitted by securities laws and other legal requirements. The repurchase program does not have an expiration date. See Note 12 "Stockholders' (Deficit) Equity" of this Annual Report on Form 10-K for additional information related to share repurchases.
(2) Average price paid per share includes costs associated with the repurchases.
(3) Includes 1,117,743 shares of restricted common stock delivered by certain employees upon vesting of restricted stock awards to satisfy tax withholding requirements.
45
Stock Performance Graph
This performance graph shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, or the SEC, for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any of our filings under the Securities Act of 1933, as amended, or the Securities Act.
The following graph compares (i) the cumulative total stockholder return on our Class A common stock from March 23, 2018 (the date our Class A common stock commenced trading on the Nasdaq Global Select Market) through December 31, 2021 with (ii) the cumulative total return of the Standard & Poor's 500 Index and the Nasdaq Computer Index over the same period, assuming the investment of $100 in our common stock and in both of the other indices on March 23, 2018 and the reinvestment of dividends. The graph uses the closing market price on March 23, 2018 of $28.48 per share as the initial value of our common stock. As discussed above, we have never declared or paid a cash dividend on our common stock and do not anticipate declaring or paying a cash dividend in the foreseeable future.
*Returns are based on historical results and are not necessarily indicative of future performance. See the disclosure in Part I, Item 1A, “Risk Factors.”
Unregistered Sales of Equity Securities
None.
ITEM 6. Reserved
46
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” included elsewhere in this Annual Report on Form 10-K. For a comparison of our results of operations for the fiscal years ended December 31, 2020 and 2019 see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on February 19, 2021.
Overview
Our modern economy runs on knowledge. Today, knowledge lives in the cloud as digital content, and Dropbox is where businesses and individuals can create, access, and share this content globally. We serve more than 700 million registered users across 180 countries.
Since our founding in 2007, our market opportunity has grown as we’ve expanded from keeping files in sync to keeping teams in sync. In a world where using technology at work can be fragmented and distracting, Dropbox makes it easy to focus on the work that matters.
By solving these universal problems, we’ve become invaluable to our users. The popularity of our platform drives viral growth, which has allowed us to scale rapidly and efficiently. We’ve built a thriving global business with 16.79 million paying users.
Our Subscription Plans
We generate revenue from individuals, families, teams, and organizations by selling subscriptions to our platform, which serve the varying needs of our diverse customer base. Subscribers can purchase individual licenses through our Plus and Professional plans, or purchase multiple licenses through our Family plan or our Standard, Advanced, and Enterprise team plans. Each team or family represents a separately billed deployment that is managed through a single administrative dashboard. Teams must have a minimum of three users, but can also have more than tens of thousands of users. Families can have up to six users. Customers can choose between an annual or monthly plan, with a small number of large organizations on multi-year plans. A majority of our customers opt for our annual plans, although we have seen and may continue to see an increase in customers opting for our monthly plans. Our customer base is highly diversified, and in the periods presented, no customer accounted for more than 1% of our revenue. We typically bill our customers at the beginning of their respective terms and recognize revenue ratably over the term of the subscription period. International customers can pay in U.S. dollars or a select number of foreign currencies.
Our premium subscription plans, such as Professional and Advanced, provide more functionality than other subscription plans and have higher per user prices. Our Standard and Advanced subscription plans offer robust capabilities for businesses, and the vast majority of Dropbox Business teams purchase our Standard or Advanced subscription plans. While our Enterprise subscription plan offers more opportunities for customization, companies can subscribe to any of these team plans for their business needs.
In the first quarter of 2021, we acquired DocSend, a secure document sharing and analytics company. The combination of DocSend with our other product offerings helps customers across industries manage end-to-end document workflows—from content collaboration to sharing and e-signature—giving them more control over their business results.
DocSend offers paid subscription plans, including a personal plan designed for individuals and Standard, Advanced, and Enterprise plans designed for business users and teams. Similar to Dropbox plans, pricing of DocSend's plans is based on the number of licenses purchased. Customers can choose between an annual or monthly plan, with a small number of large organizations on multi-year plans. We typically bill DocSend customers at the beginning of their respective terms and recognize revenue ratably over the subscription period. DocSend primarily sells within the United States, and the majority of sales are in U.S. dollars.
We also offer HelloSign as our e-signature solution. HelloSign has several product lines, and the pricing and revenue generated from each product line varies, with some product lines priced based on the number of licenses purchased (similar to Dropbox plans), while others are priced based on a customer’s transaction volume. Depending on the product purchased, teams must have a minimum number of licenses, but can also have hundreds of users. Customers can choose between an annual or
47
monthly plan, with a small number of large organizations on multi-year plans. We typically bill HelloSign customers at the beginning of their respective terms and recognize revenue ratably over the subscription period. We sell HelloSign products globally and sell primarily in U.S. dollars.
Our Business Model
Drive new signups
We acquire users efficiently and at relatively low costs through word-of-mouth referrals, direct in-product referrals, and sharing of content. Anyone can create a Dropbox account for free through our website or app and be up and running in minutes. These users often share and collaborate with other non-registered users, attracting new signups into our network.
Increase conversion of registered users to our paid subscription plans
We generate over 90% of our revenue from self-serve channels—users who purchase a subscription through our app or website. To grow our recurring revenue base, we actively encourage our registered users to convert to one of our paid plans based on the functionality that best suits their needs. We do this via in-product prompts and notifications, time-limited free trials of paid subscription plans, email campaigns, and lifecycle marketing. Together, these enable us to generate increased recurring revenues from our existing user base.
Upgrade and expand existing customers
We offer a range of paid subscription plans, from Plus, Professional, and Family for individuals to Standard, Advanced, and Enterprise for teams. We analyze usage patterns within our network and run hundreds of targeted marketing campaigns to encourage paying users to upgrade their plans. We prompt individual subscribers who collaborate with others on Dropbox to purchase our Standard or Advanced plans for a better team experience, and we also encourage existing Dropbox Business teams to purchase additional licenses or to upgrade to premium subscription plans. We also aim to offer additional products that expand our content collaboration capabilities, such as through our acquisitions of HelloSign in 2019 and DocSend in 2021.
COVID-19 Update
Although we did not experience material impacts to our financial condition and results of operations during the year ended December 31, 2021, as a result of the on-going COVID-19 pandemic, we have seen and may continue to see impacts to certain components of results of operations, as described below. However, the full extent of the impact of the COVID-19 pandemic on our operational and financial performance will continue to depend on certain developments, including the duration and spread of the outbreak, new information about additional variants, the availability and efficacy of vaccine distributions, additional or renewed actions by government authorities and private businesses to contain the pandemic or respond to its impact and altered consumer behavior, the pace of reopening, impact on our customers and our sales cycles, impact on our business operations, impact on our customer, employee or industry events, and effect on our vendors, all of which are uncertain and cannot be predicted. In addition, the COVID-19 pandemic has created economic uncertainty, including disruptions of the supply chain globally and labor shortages, which may adversely impact us directly or indirectly as a result of the effects on our customers and vendors. Accordingly, the full extent to which the COVID-19 pandemic may impact our business, financial condition or results of operations remains uncertain, but may include, without limitation, impacts to our paying user growth as well as disruptions to our business operations as a result of travel restrictions, shutdown of workplaces and potential impacts to our vendors.
Additionally, our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates relative to U.S. dollars, our reporting currency, as well as changes in interest rates. Volatile market conditions related to the COVID-19 pandemic has, at times, and may in the future negatively impact our results of operations and cash flows, due to (i) a weakening of foreign currencies relative to the U.S. dollar, which may cause our revenues to decline relative to our costs, and (ii) government-initiated reductions in interest rates or maintaining low interest rates, which may reduce our interest income. Conversely, we have seen and may continue to see cost savings from the shift to remote work for all of our employees in areas including events, travel, utilities, and other benefits. We may continue to experience certain of these cost savings beyond the resolution of the COVID-19 pandemic as we shift to our Virtual First work model, as described below. Due to our subscription-based business model, the effect of the COVID-19 pandemic may not be fully reflected in our results of operations until future periods, if at all.
48
Virtual First
The effects of the COVID-19 pandemic have led us to reimagine the way we work, resulting in our announcement in October 2020 of our shift to a Virtual First work model pursuant to which remote work has become the primary experience for all of our employees. As a result, we expect that our workforce will continue becoming more distributed over time, although we will continue to offer our employees opportunities for in-person collaboration in all locations we currently have offices, either through our existing real-estate, or new on-demand, flexible spaces, which are known as "Dropbox Studios". Consistent with this strategy, we have retained a portion of our office space while the remainder will be subleased. In the fourth quarter of 2021, we executed a partial termination of our headquarters head lease and the related sublease for the space. See Note 9, "Leases" for additional information. We recorded impairment charges of $31.3 million during the year ended December 31, 2021 related to the continued adoption of Virtual First, including impairment related to real estate assets acquired as part of our acquisition of DocSend. We recorded an impairment charge of $398.2 million in the year ended December 31, 2020. See Note 9, "Leases" for additional information. We may incur additional charges depending on the continued recovery of the global real estate market. In addition to generating sublease income, we expect that as a result of our shift to Virtual First we will continue to see certain savings that we experienced as a result of the COVID-19 pandemic in areas, including reductions in facilities related costs and depreciation expense due to the impairment charges related to the continued adoption of Virtual First.
Reduction in Force
On January 13, 2021, we announced a reduction of our global workforce by approximately 11% to streamline our team structure in support of our business priorities. As a result, during the year ended December 31, 2021, we incurred $14.3 million of expenses related to severance, benefits, and other related items. We do not expect to incur additional expenses of any significance related to our reduction in force in future periods.
Key Business Metrics
We review a number of operating and financial metrics, including the following key metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions.
Total annual recurring revenue
We primarily focus on total annual recurring revenue (“Total ARR”) as the key indicator of the trajectory of our business performance. Total ARR represents the amount of revenue that we expect to recur annually, enables measurement of the progress of our business initiatives, and serves as an indicator of future growth. In addition, Total ARR is less subject to variations in short-term trends that may not appropriately reflect the health of our business, however the changes in ARR throughout the year could be subject to seasonality. Total ARR is a performance metric and should be viewed independently of revenue and deferred revenue, and is not intended to be a substitute for, or combined with, any of these items.
Total ARR consists of contributions from all of our revenue streams, including subscriptions and add-ons. We calculate Total ARR as the number of users who have active paid licenses for access to our platform as of the end of the period, multiplied by their annualized subscription price to our platform. We include ARR related to acquired companies in our total ARR in the period of the acquisition. We adjust the exchange rates used to calculate Total ARR on an annual basis at the beginning of each fiscal year.
We experienced an increase in ARR during the year ended December 31, 2021, as compared to the year ended December 31, 2020. The increase in ARR was primarily driven by an increase in paying users across our product portfolio, as well as an increased mix of sales going to our higher-priced subscription plans. In addition, we acquired DocSend in the first quarter of 2021, resulting in a benefit to Total ARR.
The below tables set forth our Total ARR using the exchange rates set at the beginning of each year, as well as on a constant currency basis relative to the exchange rates used in 2021.
49
| As of December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (In millions) | |||||||||||
| Total ARR | $ | 2,261 | $ | 2,022 | |||||||
| As of December 31, | |||||||||||
| Constant Currency | 2021 | 2020 | |||||||||
| (In millions) | |||||||||||
| Total ARR | $ | 2,261 | $ | 2,052 | |||||||
Revaluing our ending Total ARR for fiscal 2021 using exchange rates set at the beginning of fiscal 2022, Total ARR at the end of fiscal 2021 would be $2,250 million.
Paying users
We define paying users as the number of users who have active paid licenses for access to our platform as of the end of the period. One person would count as multiple paying users if the person had more than one active license. For example, a 50-person Dropbox Business team would count as 50 paying users, and an individual Dropbox Plus user would count as one paying user. If that individual Dropbox Plus user was also part of the 50-person Dropbox Business team, we would count the individual as two paying users.
We have experienced growth in the number of paying users across our products, with the majority of paying users for the periods presented coming from our self-serve channels.
We define DocSend paying users as the number of users who have active paid licenses for access to our platform as of the end of the period. DocSend users have been included as paying users since our acquisition of DocSend in 2021.
HelloSign has several product lines and the pricing and revenue generated from each product line varies, with some product lines priced based on the number of licenses purchased (similar to Dropbox plans), while others are priced based on a customer’s transaction volume. For purposes of HelloSign results, we include as paying users either (i) the number of users who have active paid licenses for access to the HelloSign platform as of the period end for those products that are priced based on the number of licenses purchased (which is the same method we use to evaluate existing Dropbox plans) or (ii) the number of customers for those products that are priced based on transaction volumes.
The below table sets forth the number of paying users as of December 31, 2021 and 2020:
| As of December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (In millions) | |||||||||||
| Paying users | 16.79 | 15.48 | |||||||||
Average revenue per paying user
We define average revenue per paying user, or ARPU, as our revenue for the period presented divided by the average paying users during the same period. For interim periods, we use annualized revenue, which is calculated by dividing the revenue for the particular period by the number of days in that period and multiplying this value by 365 days. Average paying users are calculated based on adding the number of paying users as of the beginning of the period to the number of paying users as of the end of the period, and then dividing by two.
We experienced an increase in our average revenue per paying user for the year ended December 31, 2021, compared to the year ended December 31, 2020 primarily due to an increased mix of sales toward our higher-priced subscription plans and the acquisition of DocSend, as well as favorable foreign exchange rates across multiple currencies.
50
The below table sets forth our ARPU for the years ended December 31, 2021 and 2020:
| Year ended December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| ARPU | $ | 133.73 | $ | 128.50 | |||||||
Non-GAAP Financial Measure
In addition to our results determined in accordance with U.S. generally accepted accounting principles, or GAAP, we believe that free cash flow, or FCF, a non-GAAP financial measure, is useful in evaluating our liquidity.
Free cash flow
We define FCF as GAAP net cash provided by operating activities less capital expenditures. We believe that FCF is a liquidity measure and that it provides useful information regarding cash provided by operating activities and cash used for investments in property and equipment required to maintain and grow our business. FCF is presented for supplemental informational purposes only and should not be considered a substitute for financial information presented in accordance with GAAP. FCF has limitations as an analytical tool, and it should not be considered in isolation or as a substitute for analysis of other GAAP financial measures, such as net cash provided by operating activities. Some of the limitations of FCF are that FCF does not reflect our future contractual commitments, excludes investments made to acquire assets under finance leases, includes capital expenditures, and may be calculated differently by other companies in our industry, limiting its usefulness as a comparative measure.
Our FCF increased for the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to an increase in cash provided by operating activities, which was driven by increased subscription sales, as a majority of our paying users are invoiced in advance, and a decrease in capital expenditures as a result of decreased spend on office build-outs.
We expect our FCF to generally increase in future periods as we increase subscription sales and reduce our capital expenditures as we shift to a Virtual First environment. Although we expect to continue to purchase infrastructure equipment to support our user base, we anticipate that our capital expenditures related to building out our office spaces will continue to decline in future periods. The timing of our operating expenses as described below, may result in FCF to vary from period to period as a percentage of revenue.
The following is a reconciliation of FCF to the most comparable GAAP measure, net cash provided by operating activities:
| Year ended December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (In millions) | |||||||||||
| Net cash provided by operating activities | $ | 729.8 | $ | 570.8 | |||||||
| Capital expenditures | (22.1) | (80.1) | |||||||||
| Free cash flow | $ | 707.7 | $ | 490.7 | |||||||
Components of Our Results of Operations
Revenue
We generate revenue from sales of subscriptions to our platform.
Revenue is recognized ratably over the related contractual term generally beginning on the date that our platform is made available to a customer. Our subscription agreements typically have monthly or annual contractual terms, although a small percentage have multi-year contractual terms. Our agreements are generally non-cancelable. We typically bill in advance for monthly contracts and annually in advance for contracts with terms of one year or longer. Amounts that have been billed are initially recorded as deferred revenue until the revenue is recognized.
51
Our revenue is driven primarily by conversions and upsells to our paid plans. We also generate revenue from transaction-based products and fees from the referral of users to our partners. We generate over 90% of our revenue from self-serve channels. No customer represented more than 1% of our revenue in the periods presented.
Cost of revenue and gross margin
Cost of revenue. Our cost of revenue consists primarily of expenses associated with the storage, delivery, and distribution of our platform for both paying users and free users. These costs, which we refer to as infrastructure costs, include depreciation of our servers located in co-location facilities that we lease and operate, rent and facilities expense for those datacenters, network and bandwidth costs, support and maintenance costs for our infrastructure equipment, and payments to third-party datacenter service providers. Cost of revenue also includes costs, such as salaries, bonuses, employer payroll taxes and benefits, travel-related expenses, and stock-based compensation, which we refer to as employee-related costs, for employees whose primary responsibilities relate to supporting our 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.
We plan to continue increasing the capacity and enhancing the capability and reliability of our infrastructure to support user growth and increased use of our platform. We expect that cost of revenue will increase in absolute dollars in future periods.
Gross margin. Gross margin is gross profit expressed as a percentage of revenue. Our gross margin may fluctuate from period to period based on the timing of additional capital expenditures and the related depreciation expense, or other increases in our infrastructure costs, as well as revenue fluctuations. We generally expect our gross margin to remain relatively constant in both the near term and the long term.
Operating expenses
Research and development. Our research and development expenses consist primarily of employee-related costs for our engineering, product, and design teams, compensation expenses related to key personnel from acquisitions and allocated overhead. These groups are responsible for the design, development, testing, delivery of new technologies and features, and support of our self-serve platform. We continue to focus our product development efforts on adding new features and enhancing the functionality and ease of use of our offerings. Additionally, research and development expenses include internal development-related third-party hosting fees. We have expensed almost all of our research and development costs as they were incurred.
We plan to continue hiring employees for our engineering, product, and design teams to support our research and development efforts. We expect that research and development costs will increase in absolute dollars in future periods and fluctuate from period to period as a percentage of revenue.
Sales and marketing. Our sales and marketing expenses relate to both self-serve and outbound sales activities, and consist primarily of employee-related costs, brand marketing costs, lead generation costs, sponsorships and allocated overhead. Sales commissions earned by our outbound sales team and the related payroll taxes, as well as commissions earned by third-party resellers that we consider to be incremental and recoverable costs of obtaining a contract with a customer, are deferred and are typically amortized over an estimated period of benefit of five years. Additionally, sales and marketing expenses include non-employee costs related to app store fees, fees payable to third-party sales representatives and amortization of acquired customer relationships.
We plan to continue to invest in sales and marketing to grow our user base and increase our brand awareness, including marketing efforts to continue to drive our self-serve business model. We expect that sales and marketing expenses will generally increase in absolute dollars in future periods and fluctuate from period to period as a percentage of revenue. The trend and timing of sales and marketing expenses will depend in part on the timing of marketing campaigns.
General and administrative. Our general and administrative expenses consist primarily of employee-related costs for our legal, finance, human resources, and other administrative teams, as well as certain executives. In addition, general and administrative expenses include allocated overhead, outside legal, accounting and other professional fees, and non-income-based taxes.
We expect to incur additional general and administrative expenses to support the growth of the Company. General and administrative expenses include the recognition of stock-based compensation expense related to the grant of restricted stock
52
made to our co-founder. We expect that general and administrative expenses will fluctuate in absolute dollars in future periods and will generally decrease as a percentage of revenue.
Interest income (expense), net
Interest income (expense), net consists primarily of interest income earned on our money market funds classified as cash and cash equivalents and short-term investments, partially offset by interest expense related to our finance lease obligations for infrastructure and amortization of debt issuance costs.
Other income, net
Other income, net consists of other non-operating gains or losses, including those related to equity investments, disposal of assets, lease arrangements, which include sublease income, foreign currency transaction gains and losses, and realized gains and losses related to our short-term investments.
Benefit from (provision for) income taxes
Provision for income taxes consists primarily of U.S. federal and state income taxes and income taxes in certain foreign jurisdictions in which we conduct business. For the periods presented, the difference between the U.S. statutory rate and our effective tax rate is primarily due to changes to the valuation allowance on deferred tax assets. Our effective tax rate is also impacted by earnings realized in foreign jurisdictions with statutory tax rates lower than the federal statutory tax rate. We maintain a full valuation allowance on our net deferred tax assets for federal and state as we have concluded that it is not more likely than not that the deferred assets will be realized.
Results of Operations
The following tables set forth our results of operations for the periods presented and as a percentage of our total revenue for those periods:
| Year ended December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (In millions) | |||||||||||
| Revenue | $ | 2,157.9 | $ | 1,913.9 | |||||||
Cost of revenue(1) | 444.2 | 414.6 | |||||||||
| Gross profit | 1,713.7 | 1,499.3 | |||||||||
Operating expenses:(1) | |||||||||||
| Research and development | 755.9 | 727.5 | |||||||||
| Sales and marketing | 427.5 | 422.8 | |||||||||
| General and administrative | 224.6 | 227.8 | |||||||||
Impairment related to real estate assets(2) | 31.3 | 398.2 | |||||||||
| Total operating expenses | 1,439.3 | 1,776.3 | |||||||||
| Income (loss) from operations | 274.4 | (277.0) | |||||||||
| Interest (expense) income, net | (5.2) | 1.7 | |||||||||
| Other income, net | 30.1 | 25.1 | |||||||||
| Income (loss) before income taxes | 299.3 | (250.2) | |||||||||
Benefit from (provision for) income taxes(3) | 36.5 | (6.1) | |||||||||
| Net income (loss) | $ | 335.8 | $ | (256.3) | |||||||
(1)Includes stock-based compensation as follows:
53
| Year ended December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (In millions) | |||||||||||
| Cost of revenue | $ | 23.2 | $ | 17.1 | |||||||
| Research and development | 190.1 | 174.1 | |||||||||
| Sales and marketing | 25.0 | 33.7 | |||||||||
General and administrative(4) | 48.8 | 36.6 | |||||||||
| Total stock-based compensation | $ | 287.1 | $ | 261.5 | |||||||
(2)Includes impairment charges related to real estate assets as a result of our decision to shift to a Virtual First work model. See Note 9 "Leases" for further information.
(3)Fourth quarter and full-year 2021 net income was impacted by a $38.1 million one-time income tax benefit from the release of a valuation allowance on our Irish deferred tax assets.
(4)On March 19, 2020, one of our 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' (Deficit) Equity" for further information.
The following table sets forth our results of operations for each of the periods presented as a percentage of revenue:
| Year ended December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| As a percentage of revenue | |||||||||||
| Revenue | 100 | % | 100 | % | |||||||
Cost of revenue | 21 | 22 | |||||||||
| Gross profit | 79 | 78 | |||||||||
| Operating expenses: | |||||||||||
| Research and development | 35 | 38 | |||||||||
| Sales and marketing | 20 | 22 | |||||||||
| General and administrative | 10 | 12 | |||||||||
| Impairment related to real estate assets | 1 | 21 | |||||||||
| Total operating expenses | 68 | 93 | |||||||||
| Income (loss) from operations | 13 | (14) | |||||||||
| Interest income, net | — | — | |||||||||
| Other income, net | 1 | 1 | |||||||||
| Income (loss) before income taxes | 14 | (13) | |||||||||
| Benefit from (provision for) income taxes | 2 | — | |||||||||
| Net income (loss) | 16 | % | (13) | % | |||||||
Comparison of the year ended December 31, 2021 and 2020
Revenue
| Year ended December 31, | |||||||||||||||||||||||
| 2021 | 2020 | $ Change | % Change | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Revenue | $ | 2,157.9 | $ | 1,913.9 | $ | 244.0 | 13 | % | |||||||||||||||
Revenue increased $244.0 million or 13% during the year ended December 31, 2021, as compared to the year ended December 31, 2020. The increase in revenue was driven primarily by an increase in paying users, an increased mix of sales towards our higher-priced subscription plans and favorable foreign exchange rates across multiple currencies.
54
Cost of revenue, gross profit, and gross margin
| Year ended December 31, | |||||||||||||||||||||||
| 2021 | 2020 | $ Change | % Change | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Cost of revenue | $ | 444.2 | $ | 414.6 | $ | 29.6 | 7 | % | |||||||||||||||
| Gross profit | 1,713.7 | 1,499.3 | 214.4 | 14 | % | ||||||||||||||||||
| Gross margin | 79 | % | 78 | % | |||||||||||||||||||
Cost of revenue increased $29.6 million or 7% during the year ended December 31, 2021, as compared to the year ended December 31, 2020, primarily due to increases of $14.4 million in infrastructure costs due to an increase in depreciation expense, $8.1 million in credit card transaction fees due to higher sales and $6.3 million in employee-related costs. These increases were offset by a decrease of $3.4 million in allocated overhead, which includes facilities-related costs for our corporate headquarters.
Our gross margin increased from 78% during the year ended December 31, 2020 to 79% during the year ended December 31, 2021, primarily due to a 13% increase in revenue during the period, which was offset by a lower percentage increase in our cost of revenue described above.
Research and development
| Year ended December 31, | |||||||||||||||||||||||
| 2021 | 2020 | $ Change | % Change | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Research and development | $ | 755.9 | $ | 727.5 | $ | 28.4 | 4 | % | |||||||||||||||
Research and development expenses increased $28.4 million or 4% during the year ended December 31, 2021, as compared to the year ended December 31, 2020, primarily due to an increase of $45.4 million in employee-related costs. This increase was offset by a decrease of $20.8 million in allocated overhead, which includes facilities-related costs for our corporate headquarters.
Sales and marketing
| Year ended December 31, | |||||||||||||||||||||||
| 2021 | 2020 | $ Change | % Change | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Sales and marketing | $ | 427.5 | $ | 422.8 | $ | 4.7 | 1 | % | |||||||||||||||
Sales and marketing expenses increased $4.7 million or 1% during the year ended December 31, 2021, as compared to the year ended December 31, 2020, primarily due to $33.7 million related to brand and other marketing related expenses primarily due to our marketing campaigns during the second half of 2021, $6.9 million in app store fees due to increased sales, and $1.5 million in amortization of intangible assets due to our acquisition of DocSend. These increases were offset by decreases of $26.2 million in allocated overhead, which includes facilities-related costs for our corporate headquarters and $12.0 million in employee-related costs driven by a reduction in headcount including the impact of our reduction in force in the first quarter of 2021.
General and administrative
55
| Year ended December 31, | |||||||||||||||||||||||
| 2021 | 2020 | $ Change | % Change | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| General and administrative | $ | 224.6 | $ | 227.8 | $ | (3.2) | (1) | % | |||||||||||||||
General and administrative expense decreased $3.2 million or 1% during the year ended December 31, 2021, as compared to the year ended December 31, 2020, primarily due to decreases of $16.4 million in allocated overhead, which includes facilities-related costs for our corporate headquarters, $2.3 million in non-income-based taxes and $1.7 million in legal fees. These decreases were offset by increases of $15.3 million due to employee-related costs, including $12.2 million in stock-based compensation driven by the resignation of one of the co-founders and the forfeiture of his Co-Founder Grant in the first quarter of 2020 and $1.3 million in software license subscriptions.
Impairment related to real estate assets
| Year ended December 31, | |||||||||||||||||||||||
| 2021 | 2020 | $ Change | % Change | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
Impairment related to real estate assets | $ | 31.3 | $ | 398.2 | $ | (366.9) | (92) | % | |||||||||||||||
Impairment related to real estate assets was $31.3 million during the year ended December 31, 2021 as we continued to evaluate the recoverability of our real estate assets as a result of our continued adoption of our Virtual First strategy. Adjustments to market participant assumptions, primarily expected downtime prior to the commencement of future subleases, resulted in the additional impairment losses, as well as impairment related to real estate assets acquired as part of the acquisition of DocSend in the first quarter of 2021.
Interest income, net
Interest income, net decreased $6.9 million during the year ended December 31, 2021, as compared to the year ended December 31, 2020, primarily due to a decrease in interest income from our money market funds and short-term investments as a result of government-initiated interest rate reductions in response to the COVID-19 pandemic and an increase in interest expense due to the amortization of debt issuance costs incurred as part of our convertible debt offering during the three months ended March 31, 2021.
Other income, net
Other income, net increased $5.0 million during the year ended December 31, 2021, as compared to the year ended December 31, 2020, primarily due to a $13.6 million gain related to the partial termination of our headquarters head lease and $14.1 million in gains related to the disposal of infrastructure assets. These increases were offset by $17.5 million in gains related to the sale of an equity investment during the year ended December 31, 2020 and decreases of $4.7 million in foreign currency transaction gains.
Benefit from (provision for) income taxes
Benefit from income taxes increased by $42.6 million during the year ended December 31, 2021 as compared to the year ended December 31, 2020, primarily due to tax benefits from the DocSend acquisition and the release of a valuation allowance on Irish deferred tax assets during the year ended December 31, 2021.
Liquidity and Capital Resources
As of December 31, 2021, we had cash and cash equivalents of $533.0 million and short-term investments of $1,185.1 million, which were held for working capital purposes. Our cash, cash equivalents, and short-term investments consist primarily of cash, money market funds, corporate notes and obligations, U.S. Treasury securities, certificates of deposit, asset-backed securities, commercial paper, foreign government securities, U.S. agency obligations, supranational securities, and municipal
56
securities. As of December 31, 2021, we had $201.4 million of our cash and cash equivalents held by our foreign subsidiaries. We do not expect to incur material taxes in the event we repatriate any of these amounts.
Since our inception, we have financed our operations primarily through cash generated from our operations, the issuance of the Notes and equity issuances, and finance leases to finance infrastructure-related assets in co-location facilities that we directly lease and operate. We enter into finance leases in part to better match the timing of payments for infrastructure-related assets with that of cash received from our paying users. In our business model, some of our registered users convert to paying users over time, and consequently there is a lag between initial investment in infrastructure assets and cash received from some of our users.
In February 2021, we issued approximately $1.4 billion in aggregate principal amount of convertible senior notes, comprised of $695.8 million in aggregate principal amount of 2026 Notes and $693.3 million in aggregate principal amount of 2028 Notes. The net proceeds from the issuance of the 2026 Notes and 2028 Notes were $684.8 million, net of debt issuance costs, and $682.3 million, net of debt issuance costs, respectively. The 2026 Notes mature on March 1, 2026 and the 2028 Notes mature on March 1, 2028. The Notes of each series will not bear regular interest and the principal will not accrete. The Notes of each series may bear special interest as the remedy relating to the Company’s failure to comply with certain of its reporting obligations. These Notes can be converted or repurchased prior to maturity if certain conditions are met.
Our principal uses of cash in recent periods have been funding our operations, repurchases of our Class A common stock, purchases of short-term investments, the satisfaction of tax withholdings in connection with the settlement of restricted stock units and awards, making principal payments on our finance lease obligations, and capital expenditures. In February 2020, our Board of Directors approved a stock repurchase program for the repurchase of up to $600 million of the outstanding shares of our Class A common stock. In February 2021, our Board of Directors authorized the repurchase of up to an additional $1 billion of the outstanding shares of our Class A common stock. In February 2022, our Board of Directors authorized the repurchase of up to an additional $1.2 billion of the outstanding shares of our Class A common stock. Share repurchases will be made from time to time in private transactions or open market purchases as permitted by securities laws and other legal requirements and will be subject to a review of the circumstances in place at that time, including prevailing market prices. The program does not obligate us to repurchase any specific number of shares and has no specified time limit; it may be discontinued at any time. During the year ended December 31, 2021, we repurchased and subsequently retired 41.1 million shares of our Class A common stock for an aggregate amount of $1,058.6 million. This includes $200.0 million used to repurchase 8.6 million shares of our Class A common stock in conjunction with the issuance of the Notes, which was outside of our stock repurchase program. The pace of our share repurchases may vary due to various circumstances, including market conditions and our stock price.
In April 2017, we entered into a $600.0 million credit facility with a syndicate of financial institutions, which was subsequently amended in February 2018 and February 2021. Pursuant to the terms of the revolving credit facility, we may issue letters of credit under the revolving credit facility, which reduce the total amount available for borrowing under such facility. The revolving credit facility terminates on April 4, 2022. In February 2018, we amended our revolving credit facility to, among other things, permit us to make certain investments, enter into an unsecured standby letter of credit facility, and increase our standby letter of credit sublimit to $187.5 million. We also increased our borrowing capacity under the revolving credit facility from $600.0 million to $725.0 million. In February 2021, we amended our revolving credit facility to decrease our borrowing capacity from $725.0 million to $500.0 million. We may from time to time request increases in the borrowing capacity under the revolving credit facility of up to $250.0 million, provided no event of default has occurred or is continuing or would result from such increase.
Interest on borrowings under the revolving credit facility accrues at a variable rate tied to SOFR, the prime rate, or the federal funds effective rate at our election. Interest is payable quarterly in arrears. Pursuant to the terms of the revolving credit facility, we are required to pay an annual commitment fee that accrues at a rate of 0.20% per annum on the unused portion of the borrowing commitments under the revolving credit facility. In addition, we are required to pay a fee in connection with letters of credit issued under the revolving credit facility that accrues at a rate of 1.375% per annum on the amount of such letters of credit outstanding. There is an additional fronting fee of 0.125% per annum multiplied by the average aggregate daily maximum amount available under all letters of credit.
The revolving credit facility contains customary conditions to borrowing, events of default, and covenants, including covenants that restrict our ability to incur indebtedness, grant liens, make distributions to our holders or our subsidiaries’ equity interests, make investments, or engage in transactions with our affiliates. In addition, the revolving credit facility contains financial covenants, including a consolidated leverage ratio incurrence covenant and a minimum liquidity balance. We were in compliance with all covenants under the revolving credit facility as of as of December 31, 2021.
57
As of December 31, 2021, we had no amounts outstanding under the revolving credit facility and an aggregate of $52.2 million in letters of credit issued under the revolving credit facility. Our total available borrowing capacity under the revolving credit facility was $447.8 million as of December 31, 2021.
We believe our existing cash and cash equivalents, together with our short-term investments, cash provided by operations and amounts available under the revolving credit facility, will be sufficient to meet our needs for the foreseeable future. In addition to the convertible notes discussed above, as of December 31, 2021, we have cash commitments due to additional known contractual obligations.
The following table presents cash commitments due to known contractual obligations as of December 31, 2021:
| Total | Less than 1 year | 1 - 3 years | 3 - 5 years | More than 5 years | |||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||
Operating lease commitments(1) | $ | 931.6 | $ | 116.2 | $ | 187.4 | $ | 146.8 | $ | 481.2 | |||||||||||||||||||
Finance lease commitments(2) | 298.9 | 127.2 | 151.2 | 20.5 | — | ||||||||||||||||||||||||
Other commitments(3) | 111.5 | 47.9 | 45.3 | 0.7 | 17.6 | ||||||||||||||||||||||||
| Total contractual obligations | $ | 1,342.0 | $ | 291.3 | $ | 383.9 | $ | 168.0 | $ | 498.8 | |||||||||||||||||||
(1)Consists of future non-cancelable minimum rental payments under operating leases for our offices and data centers, excluding rent payments from our sub-tenants and variable operating expenses with terms of 14 years or less. As of December 31, 2021, we are entitled to non-cancelable rent payments from our sub-tenants of $76.3 million, which will be collected over the next 9 years.
(2)Consists of future non-cancelable minimum rental payments under finance leases primarily for our infrastructure with terms of 4 years or less.
(3)Consists of commitments to third-party vendors for services related to our infrastructure, infrastructure warranty contracts, and asset retirement obligations for office modifications with terms of 14 years or less.
Our future capital requirements will depend on many factors including our revenue growth rate, subscription renewal activity, billing frequency, the timing and extent of spending to support further infrastructure development and research and development efforts, the timing and extent of additional capital expenditures to invest in collaboration spaces, our ability to sublease space at office locations where we have unused spaces, the satisfaction of tax withholding obligations for the release of restricted stock units and awards, the expansion of sales and marketing and international operation activities, the introduction of new product capabilities and enhancement of our platform, the continuing market acceptance of our platform, and the volume and timing of our share repurchases. We have and may in the future enter into arrangements to acquire or invest in complementary businesses, services, and technologies, including intellectual property rights. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, results of operations, and financial condition could be materially and adversely affected.
Our cash flow activities were as follows for the periods presented:
| Year ended December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (In millions) | |||||||||||
| Net cash provided by operating activities | $ | 729.8 | $ | 570.8 | |||||||
| Net cash used in investing activities | (524.8) | (233.6) | |||||||||
| Net cash provided by (used in) financing activities | 16.2 | (577.7) | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (3.1) | 4.1 | |||||||||
| Net (decrease) increase in cash and cash equivalents | $ | 218.1 | $ | (236.4) | |||||||
Operating activities
Our largest source of operating cash is cash collections from our paying users for subscriptions to our platform. Our primary uses of cash from operating activities are for employee-related expenditures, infrastructure-related costs, and marketing expenses. Net cash provided by operating activities is impacted by our net income adjusted for certain non-cash items, including depreciation and amortization expenses, stock-based compensation, and impairment related to real estate assets, as well as the effect of changes in operating assets and liabilities.
58
For the year ended December 31, 2021, net cash provided by operating activities was $729.8 million, which primarily consisted of our net income of $335.8 million, adjusted for stock-based compensation expense of $287.1 million, depreciation and amortization expenses of $151.4 million, impairment related to real estate assets of $31.3 million, and net cash outflow of $93.9 million from operating assets and liabilities. The outflow from operating assets and liabilities was primarily due to the payment of our corporate bonus, key employee holdback payments related to the acquisition of HelloSign, and payment for partial termination of the headquarters head lease.
Investing activities
Net cash used in investing activities is primarily impacted by purchases of short-term investments, purchases of property and equipment to make improvements or modifications to existing and new office spaces, and for purchasing infrastructure equipment in co-location facilities that we directly lease and operate.
For the year ended December 31, 2021, net cash used in investing activities was $524.8 million, which primarily related to $396.1 million in net investment outflows, driven by the purchases of short-term investments, net of sales and maturities and $140.0 million related to cash paid for acquisitions. Additionally, cash paid for capital expenditures during the period was $22.1 million related to our office and datacenter build-outs.
Financing activities
Net cash used in financing activities is primarily impacted by cash used for repurchases of common stock, tax withholding obligations for the release of RSUs and RSAs, and principal payments on finance lease obligations for our infrastructure equipment. Additionally, in connection with the issuance of convertible senior notes, proceeds from the issuance of convertible notes, proceeds from the issuance of warrants, purchases of convertible senior note hedges, and debt issuance costs impacted net cash used in financing activities.
For the year ended December 31, 2021, net cash provided by financing activities was $16.2 million, which primarily consisted of $1,303.0 million in net proceeds from the 2026 Notes and 2028 Notes, offset by offering costs, and the concurrent Note Hedges and Warrants transaction, $1,058.5 million for the repurchase of our common stock, $124.8 million for the satisfaction of tax withholding obligations for the release of restricted stock units and awards, and $110.4 million in principal payments on finance lease obligations.
Significant Impacts of Stock-Based Compensation
Co-Founder Grants
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 Drew Houston, the Company’s co-founder and Chief Executive Officer, and 4.4 million RSAs were granted to Arash Ferdowsi, the Company’s co-founder and former director. These Co-Founder Grants have service-based, market-based, and performance-based vesting conditions. The Co-Founder Grants are excluded from Class A common stock issued and outstanding until the satisfaction of these vesting conditions. The Co-Founder Grants also provide the holders with certain stockholder rights, such as the right to vote the shares with the other holders of Class A common stock and a right to cumulative declared dividends.
In March 2020, one of the Company's co-founders, 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 all of his 4.4 million RSAs. As he did not provide the requisite service associated with the Co-Founder Grants, the Company reversed all stock-based compensation expense that had been recognized from the grant date through March 19, 2020. See Note 12, "Stockholders' (Deficit) Equity" for further information.
The Co-Founder Grants are eligible to vest over the ten-year period following the date the Company’s shares of Class A common stock commenced trading on the Nasdaq Global Select Market in connection with the Company’s IPO. The Co-Founder Grants comprise nine tranches that are eligible to vest based on the achievement of stock price goals, each of which are referred to as a Stock Price Target, measured over a consecutive thirty-day trading period during the Performance Period. The Performance Period began on January 1, 2019.
59
| Company Stock Price Target | Shares Eligible to Vest for Mr. Houston | ||||||||||
| $30.00 | 2,066,667 | ||||||||||
| $37.50 | 1,033,334 | ||||||||||
| $45.00 | 1,033,334 | ||||||||||
| $52.50 | 1,033,333 | ||||||||||
| $60.00 | 1,033,333 | ||||||||||
| $67.50 | 1,033,333 | ||||||||||
| $75.00 | 1,033,333 | ||||||||||
| $82.50 | 1,033,333 | ||||||||||
| $90.00 | 1,033,333 | ||||||||||
During the first four years of the Performance Period, no more than 20% of the shares subject to each Co-Founder Grant would be eligible to vest in any calendar year. After the first four years, all shares are eligible to vest based on the achievement of the Stock Price Targets.
The Performance Vesting Condition for the Co-Founder Grants was satisfied on the date the Company’s shares of Class A common stock commenced trading on the Nasdaq Global Select Market in connection with the Company’s IPO, which was March 23, 2018.
The Stock Price Target for Mr. Houston's first tranche of the Co-Founder Grant was achieved in the third quarter of 2021. As a result, the first tranche of Mr. Houston's Co-Founder Grant, or 2.1 million shares of Class A common stock, vested in the fourth quarter of 2021. The stock-based compensation expense for Mr. Houston's Co-Founder Grant is recognized utilizing the accelerated attribution method, and therefore no incremental stock-based compensation was recognized. From time to time, directors, officers, and employees of the Company enter into 10b5-1 plans. Mr. Houston adopted a 10b5-1 plan in June 2021, pursuant to which a portion of the shares issued upon achievement of the performance targets under his Co-Founder Award (the "vested shares") were sold to satisfy income taxes related to the vesting of the Co-Founder Award and, as the Company’s share price was below the share price established in Mr. Houston's 10b5-1 plan, the remainder of the vested shares were not sold. If the Company’s share price reaches or exceeds the share price established in Mr. Houston's 10b5-1 plan prior to the date on which the term of such 10b5-1 plan expires, the remainder of the vested shares will be sold.
Critical Accounting Estimates
Our consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K are prepared in accordance with generally accepted accounting principles, or GAAP, in the United States. The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected.
While our significant accounting policies are more fully described in Note 1 “Description of the Business and Summary of Significant Accounting Policies” to our Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K, we believe that the accounting policies described below involve a greater degree of judgment and estimation uncertainty.
Business combinations
Accounting for business combinations requires us to make significant estimates and assumptions. We allocate the purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values, with the excess recorded to goodwill. Purchase consideration includes assets transferred, liabilities assumed, and/or equity interests issued by us, all of which are measured at their fair value as of the date of acquisition. Critical estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows, expected asset lives, and discount rates. The amounts and useful lives assigned to acquisition-related intangible assets impact the amount and timing of future amortization expense.
60
During the measurement period, which is not to exceed one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.
Impairment related to real estate assets
In accordance with ASC 360, Property, Plant, and Equipment (“ASC 360”), we evaluate our long-lived assets for impairment whenever events and circumstances indicate that the assets might be impaired. When the projected undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts, the assets are adjusted to their estimated fair value and an impairment loss is recorded as a component of operating income.
In the fourth quarter of 2020, as a result of our Virtual First strategy, we reassessed our asset groupings and evaluated the recoverability of our right-of-use and related lease assets, including leasehold improvements, furniture and fixtures, and computer equipment, and determined that the carrying value of the respective assets groups was not fully recoverable. As a result, we utilized discounted cash flow models to estimate the fair value of the assets groups and calculated the corresponding impairment loss. This review required the application of significant judgment in determining market participant assumptions.
During the year ended December 31, 2021, we continued to evaluate the recoverability of our real estate assets and made adjustments to market participant assumptions, primarily expected downtime prior to the commencement of future subleases, and recorded additional impairment losses.
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, which requires management's judgment, 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. To the extent sufficient positive evidence becomes available, we may release all or a portion of our valuation allowance in one or more future periods. A release of the valuation allowance, if any, would result in the recognition of certain deferred tax assets and a material income tax benefit for the period in which such release is recorded. Refer to Note 14, “Income Taxes” to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for more information.
61
Recent Accounting Pronouncements
See Note 1, “Description of the Business and Summary of Significant Accounting Policies” to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for recently adopted accounting pronouncements as of the date of this Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk
We had cash and cash equivalents of $533.0 million and short-term investments of $1,185.1 million as of December 31, 2021. We hold our cash and cash equivalents and short-term investments for working capital purposes. Our cash, cash equivalents, and short-term investments consist primarily of cash, money market funds, corporate notes and obligations, U.S. Treasury securities, certificates of deposit, asset-backed securities, commercial paper, foreign government securities, U.S. agency obligations, supranational securities, and municipal securities. The primary objectives of our investment activities are the preservation of capital, the fulfillment of liquidity needs, and the control of cash and investments. We do not enter into investments for trading or speculative purposes. Due to the short-term nature of these instruments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Decreases in interest rates, however, would reduce future interest income.
Any borrowings under the revolving credit facility bear interest at a variable rate tied to SOFR, the prime rate, or the federal funds effective rate. As of December 31, 2021, we had no amounts outstanding under the revolving credit facility. We do not have any other long-term debt or financial liabilities with floating interest rates that would subject us to interest rate fluctuations.
As of December 31, 2021, a hypothetical change in interest rates by 100 basis points would not have a significant impact on our cash and cash equivalents or the fair value of our investment portfolio.
Foreign currency exchange risk
Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates relative to U.S. dollars, our reporting currency.
Most of our revenue is generated in U.S. dollars, with the remainder generated in Euros, British pounds sterling, Australian dollars, Canadian dollars, and Japanese yen.
Our expenses are generally denominated in the currencies in which our operations are located, which are primarily the United States and, to a lesser extent, Europe and Asia. The functional currency of Dropbox International Unlimited, our international headquarters and largest international entity, is denominated in U.S. dollars. Our results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates in ways that are unrelated to our operating performance.
As exchange rates may fluctuate significantly between periods, revenue and operating expenses, when converted into U.S. dollars, may also experience significant fluctuations between periods. Volatile market conditions arising from the COVID-19 pandemic have and may in the future result in significant changes in exchange rates, and in particular a weakening of foreign currencies relative to the U.S. dollar has and may in the future negatively affect our revenue expressed in U.S. dollars. Historically, a majority of our revenue and operating expenses have been denominated in U.S. dollars, Euros, and British pounds sterling. Although we are impacted by the exchange rate movements from a number of currencies relative to the U.S. dollar, our results of operations are particularly impacted by fluctuations in the U.S. dollar-Euro and U.S. dollar-British pounds sterling exchange rates. In the year ended December 31, 2021, 30% of our sales were denominated in currencies other than U.S. dollars. Our expenses, by contrast, are primarily denominated in U.S. dollars. As a result, any increase in the value of the U.S. dollar against these foreign currencies could cause our revenue to decline relative to our costs, thereby decreasing our margins.
We recorded $1.8 million losses and $2.9 million gains in net foreign currency transactions in the years ended December 31, 2021 and 2020, respectively. A hypothetical 10% change in foreign currency rates would not have resulted in material gains or losses for the years ended December 31, 2021 and 2020.
To date, we have not engaged in any hedging activities. As our international operations grow, we will continue to reassess our approach to managing risks relating to fluctuations in currency rates.
62
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DROPBOX, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | |||||
Report of Independent Registered Public Accounting Firm (PCAOB ID: | |||||
63
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Dropbox, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Dropbox, Inc. (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), stockholders' (deficit) equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 18, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| Revenue from Contracts with Customers | |||||
| Description of the Matter | As described in Note 1 to the consolidated financial statements, the Company derives its revenue from subscription fees from customers for access to its platform, which it recognizes ratably over the related contractual term. The Company's revenue recognition process involves several applications responsible for the initiation, processing, and recording of transactions from the Company’s various sales channels, and the calculation of revenue in accordance with the Company’s accounting policy. Auditing the Company's accounting for revenue from contracts with customers was challenging and complex due to the high volume of individually-low-monetary-value transactions, dependency on the effective design and operation of multiple applications, some of which are specifically designed for the Company’s business, and the use of multiple data sources in the revenue recognition process. | ||||
64
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of internal controls over the Company’s accounting for revenue from contracts with customers. For example, with the assistance of IT professionals, we tested the controls over the initiation and billing of new and recurring subscriptions, the provisioning of customers, and the Company’s cash to billings reconciliation process. We also tested the controls related to the key application interfaces between the provisioning, billing, and accounting systems, which included controls related to access to the relevant applications and data and changes to the relevant systems and interfaces, as well as controls over the configuration of the relevant applications. To test the Company’s accounting for revenue from contracts with customers, we performed substantive audit procedures that included, among others, testing on a sample basis the completeness and accuracy of the underlying data within the Company’s billing system, performing data analytics by extracting data from the system to evaluate the completeness and accuracy of recorded revenue and deferred revenue amounts, tracing a sample of sales transactions to source data, and testing a sample of cash to billings reconciliations. | ||||
Accounting for Acquisition of DocSend, Inc. | |||||
| Description of the Matter | As disclosed in Note 5 to the consolidated financial statements, on March 22, 2021, the Company completed its acquisition of DocSend, Inc. for total consideration of $131.8M. The transaction was accounted for as a business combination in accordance with ASC 805. Auditing the Company's accounting for its acquisition of DocSend, Inc. was complex due to the significant estimation required by management to determine the fair value of the acquired customer relationship ($8.1M) and developed technology ($11.5M) intangible assets. The Company applied the multi-period excess earnings method to value the customer relationship intangible asset and applied the relief from royalty method to value the developed technology intangible asset. These methods required the development of certain key assumptions, including discount rates, projected revenue growth rates, costs and expenses as a percentage of revenue, and customer attrition rates. These assumptions, taken together, have a significant effect on the estimated fair value of the acquired intangible assets, and could be impacted by future economic and market conditions. | ||||
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of internal controls over the Company’s accounting for business combinations. For example, we tested the controls over the recognition and determination of the fair value of acquired intangible assets, including the development and review of the valuation models and underlying assumptions used to develop such estimates. We reviewed historical results and performed inquiries to validate the completeness of the identified intangible assets. To test the fair value of the customer relationship and developed technology intangible assets, we performed substantive audit procedures that included, among others, involving our valuation specialists to assist with our evaluation of the Company’s selection of valuation methodologies, testing the significant assumptions used to develop the prospective financial information, and testing the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. For example, we compared the significant assumptions to current industry, market and economic trends, and to the historical results of the acquired business. Specifically, when assessing the key assumptions, we focused on discount rates, projected revenue growth rates, costs and expenses as a percentage of revenue, and customer attrition rates. | ||||
/s/ | ||
| We have served as the Company’s auditor since 2013. | ||
| February 18, 2022 | ||
65
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Dropbox, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Dropbox, Inc.’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Dropbox, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), stockholders’ (deficit) equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and our report dated February 18, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
San Francisco, California
February 18, 2022
66
DROPBOX, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except for par value)
| As of December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Short-term investments | |||||||||||
| Trade and other receivables, net | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease right-of-use asset | |||||||||||
| Intangible assets, net | |||||||||||
| Goodwill | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and stockholders’ (deficit) equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued and other current liabilities | |||||||||||
| Accrued compensation and benefits | |||||||||||
| Operating lease liability | |||||||||||
| Finance lease obligation | |||||||||||
| Deferred revenue | |||||||||||
| Total current liabilities | |||||||||||
| Operating lease liability, non-current | |||||||||||
| Finance lease liability, non-current | |||||||||||
| Convertible senior notes, net, non-current | |||||||||||
| Other non-current liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 10) | |||||||||||
| Stockholders’ (deficit) equity: | |||||||||||
Convertible preferred stock, $ | |||||||||||
Preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Accumulated other comprehensive (loss) income | ( | ||||||||||
| Total stockholders’ (deficit) equity | ( | ||||||||||
| Total liabilities and stockholders’ (deficit) equity | $ | $ | |||||||||
67
DROPBOX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
| Year ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Revenue | $ | $ | $ | ||||||||||||||
Cost of revenue(1) | |||||||||||||||||
| Gross profit | |||||||||||||||||
Operating expenses(1): | |||||||||||||||||
| Research and development | |||||||||||||||||
| Sales and marketing | |||||||||||||||||
| General and administrative | |||||||||||||||||
Impairment related to real estate assets(2) | |||||||||||||||||
| Total operating expenses | |||||||||||||||||
| Income (loss) from operations | ( | ( | |||||||||||||||
| Interest (expense) income, net | ( | ||||||||||||||||
| Other income, net | |||||||||||||||||
| Income (loss) before income taxes | ( | ( | |||||||||||||||
Benefit from (provision for) income taxes(3) | ( | ( | |||||||||||||||
| Net income (loss) | $ | $ | ( | $ | ( | ||||||||||||
| Net income (loss) per share-basic and diluted: | |||||||||||||||||
| Basic net income (loss) per share | $ | $ | ( | $ | ( | ||||||||||||
| Diluted net income (loss) per share | $ | $ | ( | $ | ( | ||||||||||||
| Weighted-average shares used in computing net income (loss) per share attributable to common stockholders, basic | $ | $ | $ | ||||||||||||||
| Weighted-average shares used in computing net income (loss) per share attributable to common stockholders, diluted | |||||||||||||||||
(1)Includes stock-based compensation as follows (in millions):
| Year ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Cost of revenue | $ | $ | $ | ||||||||||||||
| Research and development | |||||||||||||||||
| Sales and marketing | |||||||||||||||||
General and administrative(4) | |||||||||||||||||
(2)Includes impairment charges related to real estate assets as a result of our decision to shift to a Virtual First work model. See Note 9 "Leases" for further information.
(3)Fourth quarter and full-year 2021 GAAP net income was impacted by a $38.1
(4)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' (Deficit) Equity" for further information.
See accompanying Notes to Consolidated Financial Statements.
68
DROPBOX, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
| Year ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Net income (loss) | $ | $ | ( | $ | ( | ||||||||||||
| Other comprehensive (loss) income, net of tax: | |||||||||||||||||
| Change in foreign currency translation adjustments | $ | ( | $ | $ | |||||||||||||
| Change in net unrealized (losses) gains on short-term investments | ( | ||||||||||||||||
| Total other comprehensive (loss) income, net of tax | $ | ( | $ | $ | |||||||||||||
| Comprehensive income (loss) | $ | $ | ( | $ | ( | ||||||||||||
See accompanying Notes to Consolidated Financial Statements.
69
DROPBOX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY
(In millions)
| Convertible preferred stock | Class A and Class B common stock | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive income (loss) | Total stockholders’ (deficit)equity | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2018 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
| — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Release of restricted stock units and awards | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Shares withheld related to net share settlement | — | — | ( | — | ( | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Exercise of stock options and awards | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Assumed stock options in connection with acquisition | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| Release of restricted stock units and awards | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Shares withheld related to net share settlement | — | — | ( | — | ( | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | — | — | ( | — | ( | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Exercise of stock options and awards | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| Release of restricted stock units and awards | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Shares withheld related to net share settlement of restricted stock units and awards | — | — | ( | — | ( | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | — | — | ( | — | ( | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Exercise of stock options and awards | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Assumed stock options in connection with acquisition | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Purchase of bond hedges in connection with issuance of convertible senior notes | — | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Sale of warrants in connection with issuance of convertible senior notes | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Tax benefit attributable to bond hedges purchased in connection with issuance of convertible senior notes | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
70
DROPBOX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
| Year ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Cash flows from operating activities | |||||||||||||||||
| Net income (loss) | $ | $ | ( | $ | ( | ||||||||||||
| Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||||||||||||
| Depreciation and amortization | |||||||||||||||||
| Stock-based compensation | |||||||||||||||||
| Impairment related to real estate assets | |||||||||||||||||
| Amortization of debt issuance costs | |||||||||||||||||
| Net gains on equity investments | ( | ||||||||||||||||
| Amortization of deferred commissions | |||||||||||||||||
| Net gains on lease termination | ( | ||||||||||||||||
| Other | ( | ( | ( | ||||||||||||||
| Changes in operating assets and liabilities: | |||||||||||||||||
| Trade and other receivables, net | ( | ( | ( | ||||||||||||||
| Prepaid expenses and other current assets | ( | ( | ( | ||||||||||||||
| Other assets | |||||||||||||||||
| Accounts payable | ( | ||||||||||||||||
| Accrued and other current liabilities | ( | ( | |||||||||||||||
| Accrued compensation and benefits | |||||||||||||||||
| Deferred revenue | |||||||||||||||||
| Other non-current liabilities | ( | ( | ( | ||||||||||||||
| Tenant improvement allowance reimbursement | |||||||||||||||||
| Cash paid for lease termination | ( | ||||||||||||||||
| Net cash provided by operating activities | |||||||||||||||||
| Cash flows from investing activities | |||||||||||||||||
| Capital expenditures | ( | ( | ( | ||||||||||||||
| Purchase of intangible assets | ( | ( | ( | ||||||||||||||
| Business combinations, net of cash acquired | ( | ( | |||||||||||||||
| Purchases of short-term investments | ( | ( | ( | ||||||||||||||
| Proceeds from maturities of short-term investments | |||||||||||||||||
| Proceeds from sales of short-term investments | |||||||||||||||||
| Other | |||||||||||||||||
| Net cash used in investing activities | ( | ( | ( | ||||||||||||||
| Cash flows from financing activities | |||||||||||||||||
| Proceeds from issuance of convertible senior notes | |||||||||||||||||
| Purchases of convertible note hedge in connection with issuance of convertible senior notes | ( | ||||||||||||||||
| Proceeds from sale of warrants in connection with issuance of convertible senior notes | |||||||||||||||||
| Payments of debt issuance costs | ( | ||||||||||||||||
| Payments for taxes related to net share settlement of restricted stock units and awards | ( | ( | ( | ||||||||||||||
| Proceeds from issuance of common stock, net of taxes withheld | |||||||||||||||||
| Principal payments on finance lease obligations | ( | ( | ( | ||||||||||||||
71
| Common stock repurchases | ( | ( | |||||||||||||||
| Other | ( | ( | |||||||||||||||
| Net cash provided by (used in) financing activities | ( | ( | |||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ||||||||||||||||
| Change in cash and cash equivalents | ( | ||||||||||||||||
| Cash and cash equivalents—beginning of period | |||||||||||||||||
| Cash and cash equivalents—end of period | $ | $ | $ | ||||||||||||||
| Supplemental cash flow data: | |||||||||||||||||
| Cash paid during the period for: | |||||||||||||||||
| Interest | $ | $ | $ | ||||||||||||||
| Income taxes | $ | $ | $ | ||||||||||||||
| Non-cash investing and financing activities: | |||||||||||||||||
| Property and equipment received and accrued in accounts payable and accrued liabilities | $ | $ | $ | ||||||||||||||
| Property and equipment acquired under finance leases | $ | $ | $ | ||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
72
DROPBOX, INC.
NOTES TO 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”) helps keep life organized and work moving. The Company 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
Use of estimates
Financial information about segments and geographic areas
Foreign currency transactions
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
73
DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
•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 $610.5 million, $554.2 million, and $481.1 million of revenue during the years ended December 31, 2021, 2020, and 2019 respectively, that was included in the deferred revenue balances at the beginning of their respective periods.
As of December 31, 2021, future estimated revenue related to performance obligations that were unsatisfied or partially unsatisfied was $733.8 million. The substantial majority of the unsatisfied performance obligations will be satisfied over the next twelve months .
Stock-based compensation
The Company has primarily granted restricted stock units (“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”). Since August 2015, the Company has granted RSUs, which have a service based vesting condition over a four-year period vesting quarterly, 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 under the Dropbox Equity Incentives Plans. The Company recognizes compensation expense associated with RSUs ratably on a straight-line basis over the requisite service period and accounts for forfeitures in the period in which they occur.
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 DocSend, Inc. (“DocSend”), the Company assumed unvested stock options and an immaterial number of unvested RSUs that had been granted under DocSend's 2013 Stock Plan and DocSend's 2015 Stock Option and Grant Plan. The fair value of the DocSend options assumed were based upon the Black-Scholes option-pricing model. See Note 12 "Stockholders' (Deficit) Equity" for further information.
74
DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
Cost of revenue
Advertising and promotional expense
Cash and cash equivalents
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, U.S. agency obligations, foreign government securities, 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. 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 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 (loss) income in the 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
75
DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
Concentrations of credit risk
Trade and other receivables, net
Trade and other receivables, net consists primarily of trade receivables that are recorded at the invoice amount, net of an allowance for expected credit losses.
The allowance for expected credit losses is based on the Company’s assessment of the collectability of accounts receivable. The Company assesses collectability by reviewing accounts receivable on a collective basis where similar characteristics exist and on an individual basis when the Company identifies specific customers with known disputes or collectability issues. The Company regularly reviews the adequacy of the allowance for expected credit losses by considering the age of each outstanding invoice, the collection history of each customer, and other relevant factors, including contractual term and current and future economic conditions. The Company's allowance for expected credit losses was $1.0 million and $0.5 million as of December 31, 2021 and 2020, respectively.
Non-trade receivables
Deferred commissions, net
Deferred commissions, net included in prepaid and other current assets were $30.8 million and $26.7 million as of December 31, 2021 and 2020, respectively. Deferred commissions, net included in other assets were $34.6 million and $47.3 million as of December 31, 2021 and 2020, respectively.
Commissions related to new contracts are typically deferred and 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. Commissions related to renewal contracts are typically amortized over one year . Amortized costs were $32.3 million, $24.4 million, and $17.5 million for the years ended December 31, 2021, 2020, and 2019, respectively. Amortized costs are included in sales and marketing expense in the accompanying consolidated statements of operations. There was no
76
DROPBOX, INC.
NOTES TO 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 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 | ||||||||
| Data center and other computer equipment | ||||||||
| Office equipment and other | ||||||||
| Leasehold improvements | Lesser of estimated useful life or remaining lease term | |||||||
Equity investments
Lease obligations
The Company leases office space, data centers, 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 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.
As part of the Company's Virtual First strategy, Dropbox will retain a portion of its office space to be used for the Company’s team collaboration use and a portion will be subleased. During the year ended December 31, 2021, the Company recorded impairment charges of $31.3 million related to its operating leases and related assets and real estate assets acquired as part of the acquisition of DocSend in the first quarter of 2021. During the fourth quarter of 2020, the Company recorded an impairment charge of $398.2 million related to its operating leases and related assets. These impairment charges were recorded as a result of the Company's decision to move towards a Virtual First work model. See Note 9 "Leases" for further information.
77
DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
In the fourth quarter of 2021, the Company paid $32 million to partially terminate its headquarters head lease. In conjunction with the termination, the Company reduced its assets by $63.6 million and its liabilities by $109.1 million. As a result, the Company is relieved from future obligations related to this space and recognized a $13.6 million gain.
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 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.
Internal use software
Business combinations
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. At December 31, 2021, the single reporting unit had a zero or negative carrying value of net assets. Goodwill allocated to the single reporting unit is $356.6 million at December 31, 2021.
The Company has not recorded impairment charges on goodwill or intangible assets for the periods presented in these consolidated financial statements.
The Company recorded impairment charges of $31.3 million related to right-of-use assets and other lease related property and equipment assets and $215.8 million related to right-of-use assets and $182.4 million related to other lease related property and equipment assets during the years ended December 31, 2021 and December 31, 2020, respectively, in conjunction with its decision to move towards a Virtual First work model. See Note 9 "Leases" for further information.
78
DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
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, 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
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 issued accounting pronouncements not yet adopted
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt - Modifications and Extinguishments (Subtopic 470-50), Compensation - Stock Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40) to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after
79
DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
modification or exchange. The guidance is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. The Company does not expect the adoption of ASU 2021-04 to have a significant impact on its consolidated financial statements.
In July 2021, the FASB issued ASU 2021-05, Leases (Topic 842), which amends ASC 842 so that lessors are no longer required to recognize a selling loss upon commencement of a lease with variable lease payments that, prior to the amendments, would have been classified as a sales-type or direct financing lease. Furthermore, a lessor must classify as an operating lease any lease that would otherwise be classified as a sales-type or direct financing lease and that would result in the recognition of a selling loss at lease commencement, provided that the lease includes variable lease payments that do not depend on an index or rate. The guidance is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. The Company does not expect the adoption of ASU 2021-05 to have a significant impact on its consolidated financial statements.
Recently adopted accounting pronouncements
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40). This ASU simplifies the accounting for convertible instruments and contracts in an entity’s own equity, as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. Among other changes, the new guidance eliminates the requirement to separate the convertible debt into debt and equity components, unless the conversion feature is required to be bifurcated and accounted for as a derivative or the debt is issued at a substantial premium. As a result, after adopting the guidance, entities will no longer separately present such embedded conversion features in equity, and will instead account for the convertible debt wholly as debt. The ASU also removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. Lastly, entities are required to use the if-converted method for convertible instruments in the diluted earnings per share calculation. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted, but only at the beginning of the fiscal year. This update permits the use of either the modified retrospective or fully retrospective method of transition.
The Company early adopted this guidance as of January 1, 2021 using the modified retrospective approach. The adoption of the guidance did not have an impact on the Company’s financial statement as of the adoption date. As further discussed in Note 8 "Debt", the Company issued certain convertible senior notes and entered into certain contracts in the Company’s own equity during the year ended December 31, 2021, and the accounting for these instruments was based on the guidance in ASU 2020-06. Additionally, the impact on diluted earnings per share of the convertible senior notes was calculated based on the if-converted method, as further described in Note 13 "Net Income (Loss) Per Share" for further information.
80
DROPBOX, INC.
NOTES TO 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
| Amortized cost | Unrealized gain | Unrealized loss | Estimated fair value | ||||||||||||||||||||
| Cash | $ | $ | — | $ | — | $ | |||||||||||||||||
| Cash equivalents | |||||||||||||||||||||||
| Money market funds | — | — | |||||||||||||||||||||
| Total cash & cash equivalents | $ | $ | — | $ | — | $ | |||||||||||||||||
| Short-term investments | |||||||||||||||||||||||
| Corporate notes and obligations | ( | ||||||||||||||||||||||
| U.S. Treasury securities | ( | ||||||||||||||||||||||
| Asset backed securities | ( | ||||||||||||||||||||||
| Municipal securities | ( | ||||||||||||||||||||||
| Commercial paper | |||||||||||||||||||||||
| Certificates of deposit | |||||||||||||||||||||||
| Foreign government obligations | ( | ||||||||||||||||||||||
| U.S. agency obligations | ( | ||||||||||||||||||||||
| Supranational securities | ( | ||||||||||||||||||||||
| Total short-term investments | ( | ||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | ||||||||||||||||||
81
DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
The amortized cost, unrealized gains and losses and estimated fair value of the Company's cash, cash equivalents and short-term investments as of December 31, 2020 consisted of the following:
| Amortized cost | Unrealized gain | Unrealized loss | Estimated fair value | ||||||||||||||||||||
| Cash | $ | $ | — | $ | — | $ | |||||||||||||||||
| Cash equivalents | |||||||||||||||||||||||
| Money market funds | — | — | |||||||||||||||||||||
| U.S. Treasury securities | — | — | |||||||||||||||||||||
| Commercial paper | — | — | |||||||||||||||||||||
| Corporate notes and obligations | — | — | |||||||||||||||||||||
| Municipal securities | — | — | |||||||||||||||||||||
| Total cash and cash equivalents | $ | $ | — | $ | — | ||||||||||||||||||
| Short-term investments | |||||||||||||||||||||||
| Corporate notes and obligations | ( | ||||||||||||||||||||||
| U.S. Treasury securities | |||||||||||||||||||||||
| Asset backed securities | |||||||||||||||||||||||
| Municipal securities | |||||||||||||||||||||||
| U.S. agency obligations | |||||||||||||||||||||||
| Commercial paper | |||||||||||||||||||||||
| Supranational securities | |||||||||||||||||||||||
| Foreign government obligations | |||||||||||||||||||||||
| Certificates of deposit | |||||||||||||||||||||||
| Total short-term investments | ( | ||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | ||||||||||||||||||
Included in cash and cash equivalents is cash in transit from payment processors for credit and debit card transactions of $8.3 million and $9.8 million as of December 31, 2021 and December 31, 2020, respectively.
All short-term investments were designated as available-for-sale securities as of December 31, 2021.
The following table presents the contractual maturities of the Company’s short-term investments as of December 31, 2021:
| Amortized cost | Estimated fair value | ||||||||||
| Due within one year | $ | $ | |||||||||
| Due between one to three years | |||||||||||
| Due after three years | |||||||||||
| Total | $ | $ | |||||||||
The Company had 667 short-term investments in unrealized loss positions as of December 31, 2021. There were no material unrealized losses from short-term investments and no material realized gains or losses from short-term investments that were reclassified out of accumulated other comprehensive (loss) income for the year ended December 31, 2021.
As of December 31, 2021, the Company’s short-term investments portfolio consisted of nine security types, seven of which were in an unrealized loss position. The Company’s short-term investments had unrealized losses of approximately $9.2 million as of December 31, 2021. Unrealized losses on short-term investments have not been recorded into income because
82
DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
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 are mostly unchanged, are highly rated and the issuers continue to make timely principal and interest payments.
The Company recorded $7.5 million, $12.5 million, and $22.8 million in interest income from its cash, cash equivalents and short-term investments for the years ended December 31, 2021, 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 December 31, 2021 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Cash equivalents | |||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | |||||||||||||||||||
| Total cash equivalents | $ | $ | $ | $ | |||||||||||||||||||
| Short-term investments | |||||||||||||||||||||||
| Corporate notes and obligations | |||||||||||||||||||||||
| U.S. Treasury securities | |||||||||||||||||||||||
| Asset backed securities | |||||||||||||||||||||||
| Municipal securities | |||||||||||||||||||||||
| Commercial paper | |||||||||||||||||||||||
| Certificates of deposit | |||||||||||||||||||||||
| Foreign government obligations | |||||||||||||||||||||||
| U.S. agency obligations | |||||||||||||||||||||||
| Supranational securities | |||||||||||||||||||||||
| Total short-term investments | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
As of December 31, 2021, the Company has an investment in a non-marketable equity security in a privately held Company without a readily determinable market value. The investments had a carrying value of $5.6 million and is categorized as Level 3.
83
DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
| As of December 31, 2020 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Cash equivalents | |||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | |||||||||||||||||||
| U.S. Treasury securities | |||||||||||||||||||||||
| Commercial paper | |||||||||||||||||||||||
| Corporate notes and obligations | |||||||||||||||||||||||
| Municipal securities | |||||||||||||||||||||||
| Total Cash Equivalents | $ | $ | $ | $ | |||||||||||||||||||
| Short-term investments | |||||||||||||||||||||||
| Corporate notes and obligations | |||||||||||||||||||||||
| U.S. Treasury securities | |||||||||||||||||||||||
| Asset backed securities | |||||||||||||||||||||||
| Municipal securities | |||||||||||||||||||||||
| U.S. agency obligations | |||||||||||||||||||||||
| Commercial paper | |||||||||||||||||||||||
| Supranational securities | |||||||||||||||||||||||
| Foreign government obligations | |||||||||||||||||||||||
| Certificates of deposit | |||||||||||||||||||||||
| Total short-term investments | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
The Company had no transfers between levels of the fair value hierarchy.
The carrying amounts of certain financial instruments, including cash held in banks, accounts receivable and accounts payable approximate fair value due to their short-term maturities and are excluded from the fair value table above.
The Company has $695.8 million in aggregate principal amount of 0 % convertible senior notes due in 2026 (the "2026 Notes"), and $693.3 million in aggregate principal amount of 0 % convertible senior notes due in 2028 (the "2028 Notes" and together with the 2026 Notes, the "Notes"), outstanding as of December 31, 2021. Refer to Note 8 "Debt" for further details on the 2026 Notes and 2028 Notes.
The estimated fair value of the 2026 Notes and the 2028 Notes, based on a market approach as of December 31, 2021 was approximately $680.8 million and $686.4 million, respectively. The Notes were categorized as Level 2 instruments as the estimated fair value was determined based on the estimated or actual bids and offers of the Notes in an over-the-counter market on the last business day of the period.
84
DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
Note 4. Property and Equipment, Net
Property and equipment, net consisted of the following:
| As of December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Data center and other computer equipment | $ | $ | |||||||||
| Furniture and fixtures | |||||||||||
| Leasehold improvements | |||||||||||
| Construction in progress | |||||||||||
| Total property and equipment | |||||||||||
| Accumulated depreciation and amortization | ( | ( | |||||||||
| Property and equipment, net | $ | $ | |||||||||
During the fourth quarter of 2021, the Company retired $65.0 million of fully depreciated data center assets that are no longer in use.
The Company leases certain infrastructure, computer equipment, and furniture from various third parties, through equipment finance leases. Infrastructure assets as of December 31, 2021 and 2020, respectively, included a total of $469.4 million and $395.2 million acquired under finance lease agreements. These leases are capitalized in property and equipment, and the related amortization of assets under finance leases is included in depreciation and amortization expense. The accumulated depreciation of the equipment under finance leases totaled $237.6 million and $156.6 million as of December 31, 2021 and 2020, respectively.
Depreciation expense related to property and equipment was $135.7 million and $145.1 million for the years ended December 31, 2021 and 2020 respectively.
Note 5. Business Combinations
2021 Business Combination
On March 22, 2021, the Company acquired all outstanding stock of DocSend, a secure document sharing and analytics company. The Company believes the combination of Dropbox, HelloSign, and DocSend will help customers across industries manage end-to-end document workflows—from content collaboration to sharing and e-signature—giving them more control over their business results. The results of DocSend's operations have been included in the Company’s consolidated results of operations since the date of acquisition and were immaterial for the periods presented.
The purchase consideration transferred consisted of the following:
| Purchase consideration | |||||
| Cash paid to common and preferred stockholders and vested option holders | $ | ||||
| Transaction costs paid by Dropbox on behalf of DocSend | |||||
Fair value of assumed DocSend options attributable to pre-combination services(1) | |||||
| Purchase price adjustments | |||||
| Total purchase consideration | $ | ||||
(1) The fair value of options assumed was based upon the Black-Scholes option-pricing model.
In addition to the total purchase consideration above, the Company has compensation agreements with key DocSend personnel consisting of $30.7 million in future cash payments subject to ongoing employee service. The related expense will be recognized within sales and marketing and research and development expenses over the required service period of three years .
85
DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
The related payments will be paid out evenly on an annual basis in the first and second year, and in quarterly installments in the third year. Payments will begin in the first quarter of 2022 if the requisite service is provided.
The purchase consideration was allocated to the tangible and intangible assets and liabilities acquired as of the acquisition date, with the excess recorded to goodwill as shown below. The fair value of assets and liabilities acquired may change as additional information is received during the measurement period. The measurement period will end no later than one-year from the acquisition date.
| Assets acquired: | |||||
| Cash and cash equivalents | $ | ||||
| Acquisition-related intangible assets | |||||
| Accounts receivable, prepaid and other assets | |||||
| Total assets acquired | $ | ||||
| Liabilities assumed: | |||||
| Accounts payable, accrued and other liabilities | $ | ||||
| Deferred revenue | |||||
| Deferred tax liability | |||||
| Total liabilities assumed | |||||
| Net assets acquired, excluding goodwill | |||||
| Total purchase consideration | |||||
Goodwill (2) | $ | ||||
(2) The goodwill recognized was primarily attributable to the opportunity to expand the user base of the Company's platform. The goodwill is not deductible for U.S. federal income tax purposes.
The fair value of the separately identifiable finite-lived intangible assets acquired and estimated weighted average useful lives are as follows:
| Estimated fair values | Estimated weighted average useful lives (In years) | ||||||||||
| Developed technology | |||||||||||
| Customer relationships | |||||||||||
| Trade name | |||||||||||
| Total acquisition-related intangible assets | $ | ||||||||||
The fair values of the acquisition-related intangible assets were determined using the following methodologies: the multi-period excess earnings method for customer relationships, and the relief from royalty method for developed technology, and the trade name, respectively. The valuation model inputs required the application of significant judgment by management. The acquired intangible assets have a total weighted average amortization period of 5.0 years.
One-time acquisition-related diligence costs of $1.2 million were expensed within general and administrative expenses as incurred during the three months ended March 31, 2021.
2019 Business Combination
On February 8, 2019, the Company acquired all outstanding stock of JN Projects, Inc. (d/b/a HelloSign) ("HelloSign"), which provides an e-signature and document workflow platform. The acquisition of HelloSign expands the Company's content collaboration capabilities to include additional business-critical workflows. The results of HelloSign operations have been included in the Company’s consolidated results of operations since the date of acquisition.
86
DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
The purchase consideration transferred consisted of the following:
| Purchase consideration | |||||
| Cash paid to common and preferred stockholders and vested option holders | $ | ||||
| Transaction costs paid by Dropbox on behalf of HelloSign | |||||
Fair value of assumed HelloSign options attributable to pre-combination services(1) | |||||
| Purchase price adjustments | ( | ||||
| Total purchase consideration | $ | ||||
(1) The fair value of options assumed were based upon the Black-Scholes option-pricing model.
In addition to the total purchase consideration above, the Company has employee holdback agreements with key HelloSign personnel consisting of $48.5 million in cash payments subject to ongoing employee service. The related expenses are recognized within research and development expenses over the required service period of three years . The payments began in the first quarter of 2020, with $16.2 million paid during the year ended December 31, 2021. The remaining balance of $4.1 will be paid evenly in quarterly installments over the remaining required service period.
The purchase consideration was allocated to the tangible and intangible assets and liabilities acquired as of the acquisition date, with the excess recorded to goodwill as shown below.
| Assets acquired: | |||||
| Cash and cash equivalents | $ | ||||
| Short-term investments | |||||
| Acquisition-related intangible assets | |||||
| Accounts receivable, prepaid and other assets | |||||
| Total assets acquired | $ | ||||
| Liabilities assumed: | |||||
| Accounts payable, accrued and other liabilities | $ | ||||
| Deferred revenue | |||||
| Deferred tax liability | |||||
| Total liabilities assumed | |||||
| Net assets acquired, excluding goodwill | |||||
| Total purchase consideration | |||||
Goodwill(2) | $ | ||||
(2) The goodwill recognized was primarily attributable to the opportunity to expand the user base of the Company's platform. The goodwill is not deductible for U.S. federal income tax purposes.
87
DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
The fair value of the separately identifiable finite-lived intangible assets acquired and estimated weighted average useful lives are as follows:
| Estimated fair values | Estimated weighted average useful lives (In years) | ||||||||||
| Customer relationships | $ | ||||||||||
| Developed technology | |||||||||||
| Trade name | |||||||||||
| Total acquisition-related intangible assets | $ | ||||||||||
Note 6. Intangible Assets
Intangible assets consisted of the following:
As of December 31, | Weighted- average remaining useful life (In years) | |||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||
| Developed technology | $ | $ | ||||||||||||||||||
| Customer relationships | ||||||||||||||||||||
| Patents | ||||||||||||||||||||
| Software | ||||||||||||||||||||
| Trademarks and trade names | ||||||||||||||||||||
| Licenses | — | |||||||||||||||||||
| Assembled workforce in asset acquisitions | — | |||||||||||||||||||
| Other | ||||||||||||||||||||
| Total intangibles | ||||||||||||||||||||
| Accumulated amortization | ( | ( | ||||||||||||||||||
| Intangible assets, net | $ | $ | ||||||||||||||||||
Amortization expense was $15.6 million, $14.1 million, and $13.6 million, for the years ended December 31, 2021, 2020, and 2019, respectively.
88
DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
Expected future amortization expense for intangible assets as of December 31, 2021, is as follows:
| 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| Thereafter | |||||
| Total | $ | ||||
Note 7. Goodwill
Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible assets acquired. The changes in the carrying amounts of goodwill were as follows:
| Balance at December 31, 2020 | $ | ||||
| DocSend acquisition | |||||
| Other acquisition | |||||
| Effect of foreign currency translation | |||||
| Balance at December 31, 2021 | $ | ||||
Note 8. Debt
Revolving credit facility
In April 2017, the Company entered into an amended and restated credit and guaranty agreement which provided for a $600.0 million revolving loan facility (as amended from time to time, the “revolving credit facility”). In conjunction with the revolving credit facility, the Company paid upfront issuance fees of $2.6 million, which are being amortized over the five-year term of the agreement.
In February 2018, the Company amended the revolving credit facility to, among other things, permit the Company to make certain investments, enter into an unsecured standby letter of credit facility and increase its standby letter of credit sublimit to $187.5 million. The Company increased its borrowing capacity under the revolving credit facility from $600.0 million to $725.0 million. In February 2021, the Company amended the revolving credit facility to decrease its borrowing capacity under the revolving credit facility from $725.0 million to $500.0 million and extended the term of the agreement through March 2026. The Company may from time to time request increases in its borrowing capacity under the revolving credit facility of up to $250.0 million, provided no event of default has occurred or is continuing or would result from such increase. In conjunction with the February 2021 amendment, the Company paid upfront issuance fees of $1.7 million, which are being amortized over the remaining term of the agreement, and wrote-off $0.2 million in unamortized deferred debt issuance costs.
Pursuant to the terms of the revolving credit facility, the Company may issue letters of credit under the revolving credit facility, which reduce the total amount available for borrowing. Pursuant to the terms of the revolving credit facility, the Company is required to pay an annual commitment fee that accrues at a rate of 0.20 % per annum on the unused portion of the borrowing commitments under the revolving credit facility. In addition, the Company is required to pay a fee in connection
89
DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
with letters of credit issued under the revolving credit facility, which accrues at a rate of 1.375 % per annum on the amount of such letters of credit outstanding. There is an additional fronting fee of 0.125 % per annum multiplied by the average aggregate daily maximum amount available under all letters of credit. Borrowings under the revolving credit facility bear interest, at the Company’s option, at an annual rate based on SOFR plus a spread of 1.375 % or at an alternative base rate plus a spread of 0.375 %.
The revolving credit facility contains customary conditions to borrowing, events of default and covenants, including covenants that restrict the Company’s ability to incur indebtedness, grant liens, make distributions to holders of the Company or its subsidiaries’ equity interests, make investments, or engage in transactions with its affiliates. In addition, the revolving credit facility contains financial covenants, including a consolidated leverage ratio incurrence covenant and a minimum liquidity balance of $100.0 million, which includes any available borrowing capacity. The Company was in compliance with the covenants of the revolving credit facility as of December 31, 2021 and 2020, respectively.
The Company had an aggregate of $52.2 million of letters of credit outstanding under the revolving credit facility as of December 31, 2021, and the Company’s total available borrowing capacity under the revolving credit facility was $447.8 million as of December 31, 2021. The Company’s letters of credit have final expiration dates through 2036.
Convertible senior notes
During the first quarter of 2021, the Company issued $695.8 million aggregate principal amount of the 2026 Notes. Additionally, during the first quarter of 2021, the Company issued $693.3 million aggregate principal amount of the 2028 Notes. The Notes were issued in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933. The net proceeds from the sale of the Notes were approximately $1.4 billion after deducting offering and issuance costs related to the Notes.
The Notes of each series do not bear regular interest. The Notes of each series may bear special interest as the remedy relating to the Company’s failure to comply with certain of its reporting obligations. The Company has complied with this reporting obligations from the issuance date through December 31, 2021. The 2026 Notes will mature on March 1, 2026, and the 2028 Notes will mature on March 1, 2028, in each case, unless earlier converted, redeemed or repurchased.
The initial conversion rate for the 2026 Notes is 26.1458 shares of the Company’s Class A common stock per $1,000 principal amount of such Note, which is equivalent to an initial conversion price of approximately $38.25 per share. The initial conversion rate for the 2028 Notes is 28.2889 shares of Class A common stock per $1,000 principal amount of such Notes, which is equivalent to an initial conversion price of approximately $35.35 per share. The conversion rate for each series of Notes will be subject to adjustment upon the occurrence of certain specified events but will not be adjusted for accrued and unpaid special interest. In addition, upon the occurrence of a make-whole fundamental change (as defined in the relevant indentures governing the Notes) or a notice of redemption, the Company will, in certain circumstances, increase the conversion rate of the relevant series of Notes by a number of additional shares for a holder that elects to convert all or a portion of its Notes of such series in connection with such make-whole fundamental change or who elects to convert such Notes that are subject to such notice of redemption. The conversion rate for the 2026 Notes and the 2028 Notes shall not exceed 43.1406 shares per $1,000 principal amount of such Notes, subject to certain customary anti-dilution adjustments (as defined in the relevant indentures governing the Notes). There have been no changes to the initial conversion price of the Notes since issuance as of December 31, 2021.
Upon conversion, the principal portion of the Notes of the applicable series being converted will be settled in cash, and any amount in excess of the principal portion of such Notes will be settled in cash or shares of the Company’s Class A common stock or any combination thereof at the Company’s option. The if-converted value of the 2026 Notes and the 2028 Notes was below the principal value of the respective Notes as of December 31, 2021. In addition, during the year ended December 31, 2021, the conditions allowing holders of the Notes to convert were not met. As a result, the Notes are not convertible during the year ended December 31, 2021.
Prior to the close of business on the business day immediately preceding December 1, 2025, in the case of the 2026 Notes, and prior to the close of business on the business day immediately preceding December 1, 2027, in the case of the 2028 Notes, the Notes of the applicable series will be convertible only under the following circumstances: (1) during any calendar quarter commencing after June 30, 2021 (and only during such calendar quarter), if the last reported sale price of the Class A common stock for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on
90
DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the conversion price for the relevant series of Notes on each applicable trading day; (2) during the five business day period after any five consecutive trading day period in which, for each trading day of that period, the trading price per $1,000 principal amount of 2026 Notes or 2028 Notes, as applicable, for such trading day was less than 98 % of the product of the last reported sale price of the Class A common stock and the conversion rate for such series of Notes on each such trading day; (3) if the Company calls any or all of the Notes for redemption, such Notes of the applicable series called for redemption may be converted at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate transactions.
On or after December 1, 2025, in the case of the 2026 Notes, and on or after December 1, 2027, in the case of the 2028 Notes, until the close of business on the second scheduled trading day immediately preceding the relevant maturity date, holders of the relevant series of Notes may convert all or a portion of their Notes of such series regardless of the foregoing conditions.
The Company may redeem for cash all or any part of the Notes, at its option, on or after March 6, 2024, in the case of the 2026 Notes, and on or after March 6, 2025, in the case of the 2028 Notes, if the last reported sale price of its Class A common stock has been at least 130 % of the conversion price for the relevant series of Notes then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100 % of the principal amount of the series of Notes to be redeemed, plus any accrued and unpaid special interest to, but excluding, the redemption date. No sinking fund is provided for the Notes.
Upon the occurrence of a fundamental change (as defined in the relevant indentures governing the Notes) prior to the relevant maturity date, holders of the relevant series of Notes may require the Company to repurchase all or a portion of the Notes of such series for cash at a price equal to 100 % of the principal amount of the series of Notes to be repurchased, plus any accrued and unpaid special interest to, but excluding, the fundamental change repurchase date. Additionally, and upon events of default (as defined in the relevant indentures governing the Notes), the maturity of the Notes may be accelerated.
The Notes are the Company’s general unsecured obligations and will rank senior in right of payment to any existing and future indebtedness that is contractually subordinated to the Notes; rank equal in right of payment with the Company’s existing and future senior unsecured indebtedness that is not so subordinated; effectively rank junior in right of payment to any of the Company’s existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness; and be structurally subordinated to all indebtedness and other liabilities (including trade payables) of subsidiaries of the Company.
In accounting for the Notes, issuance costs of $11.0 million and $11.0 million for the 2026 Notes and the 2028 Notes were deducted from the carrying value of the Notes in the consolidated balance sheet. Issuance costs will be recognized as interest expense over the five-year term and seven-year term for the 2026 Notes and the 2028 Notes, respectively.
The following is a summary of the Company’s convertible senior notes as of December 31, 2021.
| 2026 Notes | 2028 Notes | Total | |||||||||||||||
| Principal balance | $ | $ | $ | ||||||||||||||
| Unamortized issuance costs | ( | ( | ( | ||||||||||||||
| Carrying value, net | |||||||||||||||||
During the year ended December 31, 2021, the Company recognized $1.9 million and $1.3 million in interest expense for the 2026 Notes and the 2028 Notes, respectively, with such interest expense solely consisting of amortization of issuance costs. The effective interest rate for the 2026 Notes and the 2028 Notes was 0.32 % and 0.22 %, respectively, as of December 31, 2021.
91
DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
Maturities on the Company's long-term convertible debt are as follows:
| Convertible Debt | |||||
| 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| Thereafter | |||||
| Total | |||||
Convertible Note Hedges and Warrants
Concurrent with the offering of the Notes, the Company entered into convertible note hedge transactions with certain counterparties whereby the Company had the option to purchase a total of approximately 18.2 million shares for note hedges expiring in March 2026 (the “2026 Note Hedges”) and 19.6 million shares for note hedges expiring in March 2028 (the “2028 Note Hedges”, together with the 2026 Note Hedges, the “Note Hedges”), respectively, of its common stock at a price of approximately $38.25 and $35.35 per share, respectively. The aggregate cost of the convertible note hedge transactions was $265.3 million.
The Note Hedges, or a portion thereof, are exercisable upon conversion of the Notes and the satisfaction of certain conditions set forth in the Note Hedges. Additionally, the Note Hedges may be terminated and early settled upon the occurrence of certain events, including certain merger events, events of default, and upon a fundamental change (as defined in the relevant indentures for the Notes). The Note Hedges are settleable in cash, shares or a combination of cash and shares, at the option of the Company, and the settlement alternative will be the same as the settlement alternative of the conversion spread for the respective Notes.
The convertible note hedge transactions are expected generally to reduce the potential dilution to the Class A common stock upon conversion of the relevant series of Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of such converted Notes, as the case may be, in the event that the market price per share of the Class A common stock, as measured under the terms of the convertible note hedge transactions, is greater than the applicable strike price of those convertible note hedge transactions. As of December 31, 2021, the Company’s stock price was below the exercise price of the respective Note Hedges.
In addition, the Company sold warrants to certain counterparties whereby the holders of the warrants had the option to purchase a total of approximately 18.1 million shares underlying warrants expiring in 2026 (the “2026 Warrants”) and 20.1 million shares underlying warrants expiring in 2028 (the “2028 Warrants”, together with the 2026 Warrants, the “Warrants”), respectively, of the Company’s Class A common stock at an initial strike price of $46.36 and $46.36 per share, respectively. The Company received aggregate cash proceeds of $202.9 million from the sale of these Warrants.
If the market price per share of the Company’s Class A common stock, as measured under the terms of the Warrants, exceeds the strike price of the Warrants, the Warrants could have a dilutive effect, unless the Company elects, subject to certain conditions, to settle the Warrants in cash. The Warrants are only exercisable on the applicable expiration dates in accordance with the terms of the Warrants. Subject to the other terms of the Warrants, the first expiration date applicable to the 2026 Warrants and to the 2028 Warrants is June 1, 2026, and June 1, 2028, respectively, and the final expiration date applicable to the 2026 Warrants and 2028 Warrants is August 10, 2026 and August 10, 2028, respectively. As of December 31, 2021, the Company’s Class common stock price was below the exercise price of the Warrants.
Taken together, the purchase of the Note Hedges and the sale of the Warrants are intended to reduce potential dilution from the conversion of the 2026 Notes and the 2028 Notes, and to effectively increase the overall conversion price from $38.25 per share to $46.36 per share and from $35.35 per share to $46.36 for the 2026 Notes and the 2028 Notes, respectively.
The Note Hedges and the Warrants are equity-classified instruments as a result of being indexed to the Company’s Class A common stock and meeting certain equity classification criteria, and the instruments will not be remeasured in subsequent
92
DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
Note 9. Leases
Leases
The Company has operating leases for corporate offices and data centers, and finance leases for infrastructure and office equipment. The Company’s leases have remaining lease terms of 1 year to 14 years, some of which include options to extend the leases for up to 5 years.
The Company also has subleases for several floors of its former corporate offices. The Company classifies its subleases as operating leases. The subleases have remaining lease terms of 1 year to 9 years. Sublease income, which is recorded as a reduction of operating lease cost, was $17.6 million for the year ended December 31, 2021 and $7.2 million for the year ended December 31, 2020.
The components of lease cost were as follows:
| Year ended December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
Operating lease cost (1) | |||||||||||
| Finance lease cost: | |||||||||||
| Amortization of assets under finance lease | |||||||||||
| Interest | |||||||||||
| Total finance lease cost | |||||||||||
(1) Is presented gross of sublease income and includes short-term leases, which are immaterial
Other information related to leases was as follows:
| Year ended December 31, 2021 | Year ended December 31, 2020 | ||||||||||
| Supplemental Cash Flow Information: | |||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Payments for operating leases included in cash from operating activities | $ | $ | |||||||||
| Payments for finance leases included in cash from operating activities | |||||||||||
| Payments for finance leases included in cash from financing activities | |||||||||||
| Assets obtained in exchange for lease obligations: | |||||||||||
| Operating leases | |||||||||||
| Finance leases | $ | $ | |||||||||
93
DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
| As of December 31, 2021 | As of December 31, 2020 | ||||||||||
| Weighted Average Remaining Lease Term (in years) | |||||||||||
| Operating leases | |||||||||||
| Finance leases | |||||||||||
| Weighted Average Discount Rate | |||||||||||
| Operating leases | % | % | |||||||||
| Finance leases | % | % | |||||||||
Future minimum lease payments under non-cancellable leases as of December 31, 2021 were as follows:
| Year ending December 31, | Operating leases(1) | Finance leases | |||||||||
| 2022 | $ | $ | |||||||||
| 2023 | |||||||||||
| 2024 | |||||||||||
| 2025 | |||||||||||
| 2026 | |||||||||||
| Thereafter | |||||||||||
| Total future minimum lease payments | |||||||||||
| Less imputed interest | ( | ( | |||||||||
| Less tenant improvement receivables | ( | ||||||||||
| Total liability | $ | $ | |||||||||
(1) Consists of future non-cancelable minimum rental payments under operating leases for the Company’s corporate offices and data centers where the Company has possession, excluding rent payments from the Company’s sub-tenants and variable operating expenses.
Future non-cancelable rent payments from the Company's subtenants as of December 31, 2021 were as follows:
| Year ending December 31, | Operating leases | ||||
| 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| Thereafter | |||||
| Total future sublease rent payments | |||||
| Less sub-tenant incentive | ( | ||||
| Total future sublease rent payments, net | $ | ||||
In 2017, the Company entered into a lease agreement for office space in San Francisco, California, to serve as its corporate headquarters. The Company took possession of three phases of the space between June 2018 and December 2019, and began to recognize lease costs and lease obligations, net of tenant improvement reimbursements related to the space. At lease commencement, the Company's total expected minimum obligations for all three phases of the lease were $836.4 million, which
94
DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
exclude expected tenant improvement reimbursements from the landlord of approximately $75.0 million and variable operating expenses. The Company’s obligations under the lease are supported by a $34.2 million letter of credit, which reduced the borrowing capacity under the revolving credit facility. The Company does not expect to collect further tenant improvement reimbursements through the remainder of the lease. In the fourth quarter of 2021, the Company executed a partial termination of its headquarters and the related sublease for the space. In conjunction with the termination, the Company reduced its assets by $63.6 million and its liabilities by $109.1 million. The Company also paid a one-time fee to the landlord for $32 million. As a result, the Company recognized a $13.6 million gain. As of December 31, 2021, the Company's remaining minimum obligation for its headquarters was $602.3 million.
In the fourth quarter of 2020, the Company announced a Virtual First work model pursuant to which remote work will become the primary experience for all of its employees. As part of the Virtual First strategy, Dropbox retained a portion of its office space to be used for the Company’s team collaboration use and a portion will be marketed for sublease. The Company evaluated certain of its right-of-use assets and other lease related assets including leasehold improvements, furniture and fixtures, and computer equipment for impairment under ASC 360.
In connection with this analysis, the Company reassessed its real estate asset groups and estimated the fair value of the office space to be subleased using current market conditions. Where the carrying value of the individual asset groups exceeded their fair value, an impairment charge was recognized for the difference.
As a result, the Company recorded total impairment of $398.2 million for its operating leases and related assets during the year ended December 31, 2020. Of the total impairment charge, $215.8 million was related to right-of-use assets and $182.4 million was related to other lease related assets including leasehold improvements, furniture and fixtures, and computer equipment. During the year ended December 31, 2021, the Company recorded a total impairment of $31.3 million for its operating leases and related assets.
As of December 31, 2021, the Company had commitments of $29.7 million for an operating lease that has not yet commenced, and therefore is not included in the right-of-use asset or operating lease liability. This operating lease will commence in 2022 with a lease term of 14 years.
95
DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
Note 10. Commitments and Contingencies
Other commitments
Other commitments include payments to third-party vendors for services related to the Company's infrastructure, infrastructure warranty contracts, and asset retirement obligations for office modifications.
Future minimum payments under the Company's non-cancelable leases, finance lease obligations, and other commitments as of December 31, 2021, are as follows, and exclude non-cancelable rent payments from the Company's sub-tenants:
| Finance lease commitments | Operating lease commitments(1) | Other commitments(2) | ||||||||||||||||||
| Year ended December 31: | ||||||||||||||||||||
| 2022 | ||||||||||||||||||||
| 2023 | ||||||||||||||||||||
| 2024 | ||||||||||||||||||||
| 2025 | ||||||||||||||||||||
| 2026 | ||||||||||||||||||||
| Thereafter | ||||||||||||||||||||
| Future minimum payments | ||||||||||||||||||||
| Less interest and taxes | ( | |||||||||||||||||||
| Less current portion of the present value of minimum lease payments | ( | |||||||||||||||||||
| Financing lease obligations, net of current portion | ||||||||||||||||||||
(1)This balance includes short-term lease obligations and operating leases that we have entered into but have not yet commenced.
Legal matters
From time to time, the Company is a party to a variety of claims, lawsuits, and proceedings which arise in the ordinary course of business, including claims of alleged infringement of intellectual property rights. The Company records a liability when it believes that it is probable that a loss will be incurred and the amount of loss or range of loss can be reasonably estimated. In its opinion, resolution of pending matters is not likely to have a material adverse impact on its consolidated results of operations, cash flows, or its financial position. Given the unpredictable nature of legal proceedings, the Company bases its estimate on the information available at the time of the assessment. As additional information becomes available, the Company reassesses the potential liability and may revise the estimate.
The Company is currently involved in four putative class action lawsuits alleging violations of the federal securities laws that were filed on August 30, 2019, September 5, 2019, September 13, 2019, and October 3, 2019, in the Superior Court of the State of California, San Mateo County, against the Company, certain of its officers and directors, underwriters of its IPO, and Sequoia Capital XII, L.P. and certain of its affiliated entities (collectively, the “Dropbox Defendants”). On October 4, 2019, two putative class action lawsuits alleging violations of the federal securities laws were filed against the Dropbox Defendants in the U.S. District Court for the Northern District of California (the "Federal Plaintiffs"). The six lawsuits each make the same or similar allegations of violations of federal securities laws, for allegedly making materially false and misleading statements in, or omitting material information from, the Company's IPO registration statement. The plaintiffs seek unspecified monetary damages and other relief.
On March 2, 2020, the Federal Plaintiffs filed a consolidated class action complaint. On April 16, 2020, the Dropbox Defendants filed a motion to dismiss the federal consolidated class action complaint. On October 21, 2020, the court issued an order granting the Company's motion to dismiss the Federal Plaintiffs’ complaint, setting a deadline of January 6, 2021 for the Federal Plaintiffs to file any amended complaint. The federal court extended this deadline to February 22, 2021 to provide time
96
DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
for the parties to explore resolving the case. On February 11, 2021, the parties attended mediation and reached a settlement in principle for an immaterial amount subject to final documentation and preliminary and final approval by the court. On July 22, 2021, the Court held a preliminary settlement approval hearing. On August 3, 2021, the Court entered an order preliminarily approving the settlement and providing for notice to the class. The Court held a hearing for final approval of the settlement on December 2, 2021. On December 8, 2021, the Court entered an order approving the settlement and dismissing the case. Accordingly, the federal securities litigation is now resolved.
On May 11, 2020, the Dropbox Defendants filed a motion to dismiss the consolidated state court case based on the exclusive federal forum provisions contained in the Company's amended and restated bylaws. On December 4, 2020, the state court issued an order granting the Company's motion to dismiss the consolidated state court case. On December 15, 2020, the State Plaintiffs filed a notice of appeal of this order, and on December 8, 2021, the State Plaintiffs filed their opening brief. Dropbox filed its responding appellate brief on February 4, 2022. The Company believes the appeal and claims are without merit and intends to vigorously defend against them.
Indemnification
The Company’s arrangements generally include certain provisions for indemnifying customers against liabilities if its products or services infringe a third party’s intellectual property rights. It is not possible to determine the maximum potential amount under these indemnification obligations due to the limited history of prior indemnification claims.
Note 11.Accrued and Other Current Liabilities
Accrued and other current liabilities consisted of the following:
| As of December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Non-income taxes payable | $ | $ | |||||||||
| Accrued legal and other external fees | |||||||||||
| Other accrued and current liabilities | |||||||||||
| Total accrued and other current liabilities | $ | $ | |||||||||
Note 12. Stockholders’ (Deficit) Equity
Common stock
The Company’s amended and restated certificate of incorporation authorizes the issuance of Class A common stock, Class B common stock, and Class C common stock. Holders of Class A common stock, Class B common stock, and Class C common stock are entitled to dividends on a pro rata basis, when, as, and if declared by the Company’s Board of Directors, subject to the rights of the holders of the Company’s preferred stock. Holders of Class A common stock are entitled to one vote per share, holders of Class B common stock are entitled to 10 votes per share, and holders of Class C common stock are entitled to zero votes per share.
As of December 31, 2021, the Company had authorized 2,400.0 million shares of Class A common stock, 475.0 million shares of Class B common stock, and 800.0 million shares of Class C common stock, each at par value of $0.00001 . Holders of Class B common stock voluntarily converted 0.7 million and 77.8 million shares into an equivalent number shares of Class A common stock during the years ended December 31, 2021 and December 31, 2020 respectively. As of December 31, 2021, 292.7 82.8 no 322.3 83.5 no 8.3 million unvested restricted stock awards granted to the Company's co-founder. Class A shares issued and outstanding as of December 31, 2020 exclude 10.3 million
97
DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
unvested restricted stock awards granted to the Company's co-founders. See "Co-Founder Grants" section below for further details.
Preferred stock
The Company's Board of Directors will have the authority, without further action by the Company's stockholders, to issue up to 240.0 million shares of undesignated preferred stock with rights and preferences, including voting rights, designated from time to time by the Board of Directors.
Stock repurchase program
In February 2020, the Company's Board of Directors approved a stock repurchase program for the repurchase of up to $600 million of the Company’s outstanding shares of Class A common stock. In February 2021 the Board of Directors authorized the Company to repurchase up to an additional $1 billion of the Company's outstanding shares of Class A common stock. The Company completed the February 2020 stock repurchase program of up to $600 million during the nine months ended September 30, 2021. In February 2022, the Board of Directors authorized the Company to repurchase up to an additional $1.2 billion of the Company's outstanding shares of Class A common stock. Share repurchases will be made from time to time in private transactions or open market purchases, as permitted by securities laws and other legal requirements and will be subject to a review of the circumstances in place at that time, including prevailing market prices. The program does not obligate the Company to repurchase any specific number of shares and may be discontinued at any time.
During the year ended December 31, 2021, the Company repurchased and subsequently retired 41.1 million shares of its Class A common stock for an aggregate amount of $1.1 billion. This includes $200.0 million in repurchases of 8.6 million shares of our Class A common stock in conjunction with the issuance of the Notes, which was outside of our stock repurchase program. During the year ended December 31, 2020, the Company repurchased and subsequently retired 20.2 million of its Class A common stock for an aggregate amount of $397.5 million.
Equity incentive plans
Under the 2018 Plan, the Company may grant stock-based awards to purchase or directly issue shares of common stock to employees, directors, and consultants. Options are granted at a price per share equal to the fair market value of the Company's common stock at the date of grant. Options granted are exercisable over a maximum term of 10 years from the date of grant and generally vest over a period of four years . RSUs and RSAs are also granted under the 2018 Plan. The 2018 Plan will terminate 10 years after the later of (i) its adoption or (ii) the most recent stockholder-approved increase in the number of shares reserved under the 2018 Plan, unless terminated earlier by the Company's Board of Directors. The 2018 Plan was adopted on March 22, 2018.
In connection with the acquisition of DocSend, the Company assumed unvested stock options and an immaterial number of unvested RSUs that had been granted under DocSend's 2013 Stock Plan and DocSend's 2015 Stock Option Grant.
As of December 31, 2021, there were 25.3 million stock-based awards issued and outstanding and 96.7 million shares available for issuance under the Dropbox Equity Incentive Plans, HelloSign's 2011 Equity Incentive Plan, DocSend's 2013 Stock Plan and DocSend's 2015 Stock Option Grant (collectively, the "Plans").
98
DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
Stock option and restricted stock activity for the Plans was as follows for the years ended December 31, 2021 and 2020:
| Options outstanding | Restricted stock outstanding | ||||||||||||||||||||||||||||||||||
| Number of shares available for issuance under the Plans | Number of shares outstanding under the Plans | Weighted- average exercise price per share | Weighted- average remaining contractual term (In years) | Aggregate Intrinsic Value | Number of Plan shares outstanding | Weighted- average grant date fair value per share | |||||||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Additional shares authorized | |||||||||||||||||||||||||||||||||||
| Options exercised and restricted stock units and awards released | ( | ( | |||||||||||||||||||||||||||||||||
| Options and restricted stock units and awards canceled | ( | ( | |||||||||||||||||||||||||||||||||
| Shares withheld related to net share settlement | |||||||||||||||||||||||||||||||||||
| Options and restricted stock units and awards granted | ( | ||||||||||||||||||||||||||||||||||
Balance as of December 31, 2020(2) | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Additional shares authorized | |||||||||||||||||||||||||||||||||||
Stock options assumed (1) | $ | ||||||||||||||||||||||||||||||||||
| Options exercised and restricted stock units and awards released | ( | ( | |||||||||||||||||||||||||||||||||
| Options and restricted stock units and awards canceled | ( | ( | |||||||||||||||||||||||||||||||||
| Shares withheld related to net share settlement of restricted stock units and awards | |||||||||||||||||||||||||||||||||||
| Options and restricted stock units and awards granted | ( | ||||||||||||||||||||||||||||||||||
Balance as of December 31, 2021(2) | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Vested at December 31, 2021 | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Unvested at December 31, 2021 | $ | $ | $ | ||||||||||||||||||||||||||||||||
(1) This amount includes an immaterial amount of unvested RSUs that were assumed as part of the acquisition of DocSend. The RSUs had a weighted-average grant date fair value of $26.86 per share and a total fair value of $0.4 million, all of which will be recognized as post-combination stock-based compensation expense.
The following table summarizes information about the pre-tax intrinsic value of options exercised during the years ended December 31, 2021 and 2020:
| Year ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||
| Intrinsic value of options exercised | $ | $ | ||||||||||||||||||
99
DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
As of December 31, 2021, unamortized stock-based compensation related to unvested stock options, restricted stock awards (excluding the Co-Founder Grants), and RSUs was $603.1 million. The weighted-average period over which such compensation expense will be recognized if the requisite service is provided is approximately 2.7 years as of December 31, 2021.
Assumed stock options
In connection with the acquisition of DocSend the Company assumed 0.9 million unvested stock options which were valued using the Black-Scholes option-pricing model. The fair value of stock options assumed were estimated using the following assumptions:
| Expected volatility | % | ||||
| Expected term (in years) | |||||
| Risk-free interest rate | |||||
| Dividend yield | % | ||||
Expected volatility. The expected volatility is based on the Company's historical volatility. Management believes this is the best estimate of the expected volatility over the expected life of its stock options.
Expected term. The Company determines the expected term based on the average period the stock options are expected to remain outstanding, generally calculated as the midpoint of the stock options’ remaining vesting term and contractual expiration period, as the Company does not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior.
Risk-free interest rate. The risk-free interest rate is based on the U.S. Treasury security in effect at the time the options were assumed for maturities corresponding with the expected term of the option.
Expected dividend yield. The Company has not paid and does not expect to pay dividends. Consequently, the Company uses an expected dividend yield of zero .
In connection with the acquisition of DocSend, the estimated weighted-average grant date fair value for stock options assumed was $25.28 per share and a total fair value of $9.3 million, of which, $8.1 million will be recognized as post-combination stock-based compensation expense.
Co-Founder Grants
In December 2017, the Board of Directors approved the Company’s Co-Founder Grants, consisting of 14.7 million shares of Class A Common Stock in the aggregate, of which 10.3 million RSAs were granted to Drew Houston, the Company’s co-founder and Chief Executive Officer, and 4.4 million RSAs were granted to Arash Ferdowsi, the Company’s co-founder and former director. These Co-Founder Grants have service-based, market-based, and performance-based vesting conditions. The Co-Founder Grants are excluded from Class A common stock issued and outstanding until the satisfaction of these vesting conditions. The Co-Founder Grants also provide the holders with certain stockholder rights, such as the right to vote the shares with the other holders of Class A common stock and a right to cumulative declared dividends.
The Co-Founder Grants are eligible to vest over the ten-year period following the date the Company’s shares of Class A common stock commenced trading on the Nasdaq Global Select Market in connection with the Company’s IPO. The Co-Founder Grants comprise nine tranches that are eligible to vest based on the achievement of stock price goals, each of which are referred to as a Stock Price Target, measured over a consecutive thirty-day trading period during the Performance Period. The Performance Period began on January 1, 2019.
During the first four years of the Performance Period, no more than 20 % of the shares subject to each Co-Founder Grant would be eligible to vest in any calendar year. After the first four years , all shares are eligible to vest based on the achievement of the Stock Price Targets.
100
DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
In March 2020, one of the Company's co-founders, 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 all of his 4.4 million RSAs. As he did not provide the requisite service associated with the Co-Founder Grants, the Company reversed all stock-based compensation expense that had been recognized from the grant date through March 19, 2020, which totaled $23.8 million, of which $21.5 million related to expense recognized prior to December 31, 2019, and ceased recognizing further expense related to the award.
The first tranche of Mr. Houston's Co-Founder Grant, or 2.1 million shares of Class A common stock, vested in the fourth quarter of 2021. The stock-based compensation expense for Mr. Houston's Co-Founder Grant is recognized utilizing the accelerated attribution method, and therefore no incremental stock-based compensation was recognized. From time to time, directors, officers, and employees of the Company enter into 10b5-1 plans. Mr. Houston adopted a 10b5-1 plan in June 2021, pursuant to which a portion of the shares issued upon achievement of the performance targets under his Co-Founder Award (the "vested shares") were sold to satisfy income taxes related to the vesting of the Co-Founder Award and, as the Company’s share price was below the share price established in Mr. Houston's 10b5-1 plan, the remainder of the vested shares were not sold. If the Company’s share price reaches or exceeds the share price established in Mr. Houston's 10b5-1 plan prior to the date on which the term of such 10b5-1 plan expires, the remainder of the vested shares will be sold.
Note 13. Net Income (Loss) Per Share
The Company computes net income (loss) per share using the two-class method required for multiple classes of common stock and participating securities. The rights, including the liquidation and dividend rights, of the Class A common stock and Class B common stock are substantially identical, other than voting rights. Accordingly, the Class A common stock and Class B common stock share equally in the Company’s net income and losses.
Basic net income per share is computed by dividing net income attributable to common stockholders by the weighted-average number of shares of the Class A and Class B common stock outstanding.
Diluted net income per share is computed by dividing net income attributable to common stockholders by the weighted-average number of diluted common shares outstanding. The computation of the diluted net income per share of Class A common stock assumes the conversion of our Class B common stock to Class A common stock, while the diluted net income per share of Class B common stock does not assume the conversion of those shares to Class A common stock. The dilutive effect of potentially dilutive common shares is reflected in diluted earnings per share by application of the if-converted method for the 2026 Notes and the 2028 Notes, and by application of the treasury stock method for the Company's other potentially dilutive securities.
101
DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
| Year ended December 31, | |||||||||||
| 2021 | |||||||||||
| Class A | Class B | ||||||||||
| Basic net income per share: | |||||||||||
| Numerator | |||||||||||
| Net income attributable to common stockholders | $ | $ | |||||||||
| Denominator | |||||||||||
| Weighted-average number of common shares outstanding used in computing basic net income per share | $ | $ | |||||||||
| Net income per common share, basic | $ | $ | |||||||||
| Diluted net income per share: | |||||||||||
| Numerator | |||||||||||
| Net income attributable to common stockholders | $ | $ | |||||||||
| Reallocation of net income as a result of conversion of Class B to Class A common stock | $ | $ | |||||||||
| Reallocation of net income to Class B common stock | $ | $ | ( | ||||||||
| Net income attributable to common stockholders for diluted EPS | $ | $ | |||||||||
| Denominator | |||||||||||
| Weighted-average number of common shares outstanding used in computing basic net income per share | |||||||||||
| Weighted-average effect of dilutive restricted stock units and awards and employee stock options | |||||||||||
| Conversion of Class B to Class A common stock | |||||||||||
| Weighted-average number of common shares outstanding used in computing diluted net income per share | |||||||||||
| Net income per common share, diluted | $ | $ | |||||||||
The following table sets forth the calculation of basic and diluted net loss per share attributable to common stockholders during the periods presented. The voluntary conversions of Class B common stock into Class A common stock are included in the table below weighted for the respective periods outstanding.
| Year ended December 31, | |||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||
| Class A | Class B | Class A | Class B | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net loss attributable to common stockholders | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted-average number of common shares outstanding used in computing basic and diluted net loss per common share | |||||||||||||||||||||||
| Net loss per common share, basic and diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
102
DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
The weighted-average impact of potentially dilutive securities that were not included in the diluted per share calculations because they would be anti-dilutive was as follows:
| Year ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Restricted stock units and awards | |||||||||||||||||
| Options to purchase shares of common stock | |||||||||||||||||
| Co-Founder Grants | |||||||||||||||||
| Convertible Senior Notes | |||||||||||||||||
| Warrants | |||||||||||||||||
| Total | |||||||||||||||||
Note 14. Income Taxes
For the years ended December 31, 2021, 2020, and 2019, the Company’s income (loss) from continuing operations before provision for income taxes was as follows:
| Year ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Domestic | $ | $ | ( | $ | ( | |||||||||||||||
| Foreign | ( | |||||||||||||||||||
| Income (loss) before income taxes | $ | $ | ( | $ | ( | |||||||||||||||
The components of the benefit from (provision for) income taxes in the years ended December 31, 2021, 2020, and 2019, were as follows:
| Year ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Current: | ||||||||||||||||||||
| Federal | $ | ( | $ | $ | ||||||||||||||||
| State | ( | ( | ( | |||||||||||||||||
| Foreign | ( | ( | ( | |||||||||||||||||
| Deferred: | ||||||||||||||||||||
| Federal | ||||||||||||||||||||
| State | ||||||||||||||||||||
| Foreign | ||||||||||||||||||||
| Benefit from (provision for) income taxes | $ | $ | ( | $ | ( | |||||||||||||||
103
DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
| Year ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Tax (provision) benefit at federal statutory rate | $ | ( | $ | $ | ||||||||||||||||
| State taxes, net of federal benefit | ( | |||||||||||||||||||
| Foreign rate differential | ( | ( | ||||||||||||||||||
| Research and other credits | ||||||||||||||||||||
| Non-deductible compensation | ( | ( | ( | |||||||||||||||||
| Meals & entertainment | ( | ( | ( | |||||||||||||||||
| Permanent differences | ( | ( | ( | |||||||||||||||||
| Change in valuation allowance | ( | ( | ||||||||||||||||||
| Stock-based compensation | ( | |||||||||||||||||||
| Other non-deductible items | ( | ( | ( | |||||||||||||||||
| Benefit from (provision for) income taxes | $ | $ | ( | $ | ( | |||||||||||||||
The significant components of the Company’s deferred tax assets and liabilities as of December 31, 2021 and 2020 were as follows:
| As of December 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Deferred tax assets: | ||||||||||||||
| Net operating loss carryforwards | $ | $ | ||||||||||||
| Research credit carryforwards | ||||||||||||||
| Stock-based compensation | ||||||||||||||
| Accruals and reserves | ||||||||||||||
| Lease liability | ||||||||||||||
| Convertible senior notes | ||||||||||||||
| Other | ||||||||||||||
| Gross deferred tax assets | ||||||||||||||
| Valuation allowance | ( | ( | ||||||||||||
| Total deferred tax assets, net of valuation allowance | ||||||||||||||
| Deferred tax liabilities: | ||||||||||||||
| Fixed assets and intangible assets | ||||||||||||||
| Right-of-use assets | ||||||||||||||
| Other | ||||||||||||||
| Total deferred tax liability | ||||||||||||||
| Net deferred tax assets | $ | $ | ||||||||||||
For the years ended December 31, 2021 and 2020, based on all available objective evidence, including the existence of cumulative losses, the Company determined that it was unlikely that the U.S. and Israel net deferred tax assets were fully realizable as of December 31, 2021 and 2020. Accordingly, the Company established a full valuation allowance against its U.S. deferred tax assets and a partial valuation allowance against its Israeli deferred tax assets totaling $586.7 million, if recognized, $57.1 million of the U.S. valuation allowance would be recorded to additional paid in capital.
The Company recognized an income tax benefit of $38.1 million due to the release of the valuation allowance on the Irish deferred tax assets for the year ended December 31, 2021. These Irish deferred tax assets were created primarily as a result of net operating loss carryforwards from the Company's historical Irish subsidiary business operations. Management applied
104
DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
judgment in assessing the positive and negative evidence available in the determination of the amount of deferred tax assets that were more-likely-than-not to be realized in the future.
Given the Company’s recent history of U.S. earnings, management believes that there is a reasonable possibility that, within the next twelve months, sufficient positive evidence may become available to allow management to reach a conclusion that a significant portion of the valuation allowance recorded against the deferred tax assets held by the U.S. will be reversed. The reversal would result in an income tax benefit for the quarterly and annual fiscal period in which the Company releases the valuation allowance. However, the exact timing and amount of the valuation allowance release are subject to change on the basis of the level of profitability that the Company actually achieves.
As of December 31, 2021, the Company had $623.8 million of federal, $352.1 million of state, and $310.1 million of foreign net operating loss carryforwards available to reduce future taxable income. Of the federal net operating loss carryforwards, $5.1 million will begin to expire in 2032 and $618.7 million will carryforward indefinitely, while state net operating losses begin to expire in 2029. The foreign net operating loss carryforwards will carryforward indefinitely.
As of December 31, 2021, the Company had research credit carryforwards of $246.1 million and $130.0 million for federal and state income tax purposes, respectively, of which $61.7 million and $33.7 million is the unrecognized tax benefit portion related to the research credit carryforwards for federal and state, respectively. The federal credit carryforward will begin to expire in 2031. The state research credits have no expiration date.
As of December 31, 2021, the Company had $0.6 million of foreign tax credit carryforwards, which will carryforward indefinitely. The Company also had $3.6 million of state enterprise zone credit carryforwards, which will begin to expire in 2023.
Under Section 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change attributes, such as research tax credits, to offset its post-change income may be limited. In general, an “ownership change” will occur if there is a cumulative change in our ownership by “5-percent shareholders” that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under state tax laws. The Company has determined that it has experienced multiple ownership changes and, as a result, the annual utilization of its net operating loss carryforwards and other pre-change attributes will be subject to limitation. However, the Company does not expect that the annual limitations will significantly impact its ability to utilize its net operating loss or tax credit carryforwards prior to expiration.
As of December 31, 2021, the balance of unrecognized tax benefits was $107.3 million of which $11.9 million, if recognized, would affect the effective tax rate and $95.4 million would result in adjustment to deferred tax assets with corresponding adjustments to the valuation allowance.
A reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows:
| Year ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Balance of gross unrecognized tax benefits at the beginning of the fiscal year | $ | $ | $ | |||||||||||||||||
| Gross increases related to prior period tax positions | ||||||||||||||||||||
| Gross decreases related to prior period tax positions | ( | |||||||||||||||||||
| Gross increases related to current period tax positions | ||||||||||||||||||||
| Reductions due to lapse in statute of limitations | ( | ( | ||||||||||||||||||
| Reductions due to settlements with taxing authorities | ( | |||||||||||||||||||
| Balance of gross unrecognized tax benefits at the end of the fiscal year | $ | $ | $ | |||||||||||||||||
105
DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
The Company recognizes interest and/or penalties related to income tax matters as a component of income tax expense. As of December 31, 2021, the amount of accrued interest and penalties related to uncertain tax positions was $3.7 million. Interest and penalties recognized for the year ended December 31, 2021, 2020, and 2019 was $0.4 million, $0.7 million, and $1.3 million, respectively.
It is reasonably possible that there could be changes to the amount of uncertain tax positions due to activities of the taxing authorities, settlement of audit issues, reassessment of existing uncertain tax positions, or the expiration of applicable statutes of limitations; however, the Company is not able to estimate the impact of these items at this time.
The Company files income tax returns in the U.S. federal, multiple states, and foreign jurisdictions. All of the Company’s tax years from 2007 remain open for examination by the federal and state authorities, and from 2014 by foreign authorities.
The Company generally does not provide deferred income taxes for the undistributed earnings of its foreign subsidiaries as the Company intends to reinvest such earnings indefinitely. Should circumstances change and it becomes apparent that some or all of the undistributed earnings will no longer be indefinitely reinvested, the Company will accrue for income taxes not previously recognized. As of December 31, 2021, there were no cumulative undistributed earnings in its Irish subsidiary and, as a result, there were no unrecorded deferred tax liabilities. The amount of undistributed earnings in the Company’s other foreign subsidiaries, if any, are immaterial.
Note 15. Geographic Areas
Long-lived assets
The following table sets forth long-lived assets by geographic area:
| As of December 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| United States | $ | $ | ||||||||||||
International(1) | ||||||||||||||
| Total property and equipment, net | $ | $ | ||||||||||||
(1)No single country other than the United States had a property and equipment balance greater than 10% of total property and equipment, net, as of December 31, 2021 and 2020.
Revenue
Revenue by geography is generally based on the address of the customer as defined in the Company’s subscription agreement. The following table sets forth revenue by geographic area for the years ended December 31, 2021, 2020, and 2019:
| Year ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| United States | $ | $ | $ | ||||||||||||||
International(1) | |||||||||||||||||
| Total revenue | $ | $ | $ | ||||||||||||||
106
DROPBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in millions except per share data, or as otherwise noted)
Note 16. Subsequent Events
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. 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 Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this Annual Report on Form 10-K. 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 at a reasonable assurance level.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles.
Our management, under the supervision of our Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2021.
The effectiveness of our internal control over financial reporting as of December 31, 2021 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report, which is included in Item 8 of this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(d) and 15d-15(d) under the Exchange Act) that occurred during the quarter ended December 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Disclosure Controls and Procedures
Our management, including our principal executive officer and principal financial officer, do not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur
107
because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Due to inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
ITEM 9B. OTHER INFORMATION
Not applicable.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference to our Proxy Statement relating to our 2022 Meeting of Stockholders. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the end of the fiscal year ended December 31, 2021.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to our Proxy Statement relating to our 2022 Meeting of Stockholders. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the end of the fiscal year ended December 31, 2021.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to our Proxy Statement relating to our 2022 Meeting of Stockholders. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the end of the fiscal year ended December 31, 2021.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference to our Proxy Statement relating to our 2022 Meeting of Stockholders. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the end of the fiscal year ended December 31, 2021.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is incorporated by reference to our Proxy Statement relating to our 2022 Meeting of Stockholders. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the end of the fiscal year ended December 31, 2021.
108
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following documents are filed as a part of this Annual Report on Form 10-K
(a)Financial statements
Our Consolidated Financial Statements are listed in the “Index to Consolidated Financial Statements” under Part II, Item 8 of this Annual Report on Form 10-K.
(b)Financial statement schedules.
All financial statement schedules not listed above have been omitted because the information called for is not required or is shown either in the consolidated financial statements or in the notes thereto.
(c)Exhibits
The documents listed in the Exhibit Index of this Annual Report on Form 10-K are incorporated by reference or are filed with this Annual Report on Form 10-K, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K).
109
EXHIBIT INDEX
| Form | File Number | Exhibit | Filed with SEC | |||||||||||||||||||||||||||||
| Exhibit Number | Description | |||||||||||||||||||||||||||||||
| 3.1 | 10-Q | 001-38434 | 3.2 | May 11, 2018 | ||||||||||||||||||||||||||||
| 3.2 | 10-Q | 001-38434 | 3.3 | May 11, 2018 | ||||||||||||||||||||||||||||
| 4.1 | S-1/A | 333-223182 | 4.1 | March 12, 2018 | ||||||||||||||||||||||||||||
| 4.2 | S-1 | 333-223182 | 4.2 | February 23, 2018 | ||||||||||||||||||||||||||||
| 4.3 | 10-Q | 001-38434 | 4.3 | May 11, 2018 | ||||||||||||||||||||||||||||
| 4.4 | 8-K | 001-38434 | 4.1 | February 26, 2021 | ||||||||||||||||||||||||||||
| 4.5 | 8-K | 001-38434 | 4.2 | February 26, 2021 | ||||||||||||||||||||||||||||
| 4.6 | 8-K | 001-38434 | 4.3 | February 26, 2021 | ||||||||||||||||||||||||||||
| 4.7 | 8-K | 001-38434 | 4.4 | February 26, 2021 | ||||||||||||||||||||||||||||
| 4.8 | 10-Q | 001-38434 | 4.1 | August 7, 2020 | ||||||||||||||||||||||||||||
| 10.1+ | S-1 | 333-223182 | 10.1 | February 23, 2018 | ||||||||||||||||||||||||||||
| 10.2+ | 10-K | 001-38434 | 10.2 | February 19, 2021 | ||||||||||||||||||||||||||||
| 10.3+ | S-1/A | 333-223182 | 10.3 | March 21, 2018 | ||||||||||||||||||||||||||||
| 10.4+ | S-1/A | 333-223182 | 10.4 | March 21, 2018 | ||||||||||||||||||||||||||||
| 10.5+ | S-1/A | 333-223182 | 10.5 | March 21, 2018 | ||||||||||||||||||||||||||||
| 10.6+ | S-1/A | 333-223182 | 10.6 | March 21, 2018 | ||||||||||||||||||||||||||||
110
| Form | File Number | Exhibit | Filed with SEC | |||||||||||||||||||||||||||||
| 10.7+ | S-1/A | 333-223182 | 10.7 | March 21, 2018 | ||||||||||||||||||||||||||||
| 10.8+ | 10-K | 001-38434 | 10.8 | February 19, 2021 | ||||||||||||||||||||||||||||
| 10.9+ | S-1 | 333-223182 | 10.9 | February 23, 2018 | ||||||||||||||||||||||||||||
| 10.10+ | 10-K | 001-38434 | 10.11 | February 21, 2020 | ||||||||||||||||||||||||||||
| 10.11+ | S-1/A | 333-223182 | 10.12 | March 12, 2018 | ||||||||||||||||||||||||||||
| 10.12+ | 10-K | 001-38434 | 10.14 | February 21, 2020 | ||||||||||||||||||||||||||||
| 10.13+ | 10-K | 001-38434 | 10.17 | February 21, 2020 | ||||||||||||||||||||||||||||
| 10.14+ | 10-Q | 001-38434 | 10.1 | August 7, 2020 | ||||||||||||||||||||||||||||
| 10.15+ | 10-Q | 001-38434 | 10.1 | November 6, 2020 | ||||||||||||||||||||||||||||
| 10.16+ | 10-K | 001-38434 | 10.17 | February 19, 2021 | ||||||||||||||||||||||||||||
| 10.17 | S-1 | 333-223182 | 10.19 | February 23, 2018 | ||||||||||||||||||||||||||||
| 10.18 | 10-Q | 001-38434 | 10.2 | August 10, 2018 | ||||||||||||||||||||||||||||
| 10.19 | 8-K | 001-38434 | 10.6 | February 26, 2021 | ||||||||||||||||||||||||||||
| 10.20 | 8-K | 001-38434 | 10.1 | February 26, 2021 | ||||||||||||||||||||||||||||
| 10.21 | 8-K | 001-38434 | 10.2 | February 26, 2021 | ||||||||||||||||||||||||||||
| 10.22 | 8-K | 001-38434 | 10.3 | February 26, 2021 | ||||||||||||||||||||||||||||
| 10.23 | 8-K | 001-38434 | 10.4 | February 26, 2021 | ||||||||||||||||||||||||||||
| 10.24 | 8-K | 001-38434 | 10.5 | February 26, 2021 | ||||||||||||||||||||||||||||
111
| Form | File Number | Exhibit | Filed with SEC | |||||||||||||||||||||||||||||
| 10.25+ | 10-K | 001-38434 | 10.22 | February 21, 2020 | ||||||||||||||||||||||||||||
| 10.26* | ||||||||||||||||||||||||||||||||
| 21.1* | ||||||||||||||||||||||||||||||||
| 23.1* | ||||||||||||||||||||||||||||||||
| 24.1* | ||||||||||||||||||||||||||||||||
| 31.1* | ||||||||||||||||||||||||||||||||
| 31.2* | ||||||||||||||||||||||||||||||||
| 32.1† | ||||||||||||||||||||||||||||||||
| 101 | The following financial statements from the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2021, formatted in Inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statement of Operations, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statement of Cash Flows, (v) Consolidated Statements of Stockholders' (Deficit) Equity, and (vi) Notes to Consolidated Financial Statements. | |||||||||||||||||||||||||||||||
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | |||||||||||||||||||||||||||||||
| * | Filed herewith. | ||||
| + | Indicates management contract or compensatory plan. | ||||
| † | The certifications attached as Exhibit 32.1 that accompany this Annual Report on Form 10-K are deemed furnished and not filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Dropbox, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K, irrespective of any general incorporation language contained in such filing. | ||||
112
ITEM 16. FORM 10-K SUMMARY
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in San Francisco, California, on February 18, 2022.
| DROPBOX, INC. | ||||||||
| By: | /s/ Andrew W. Houston | |||||||
| Andrew W. Houston | ||||||||
| Chief Executive Officer | ||||||||
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Andrew W. Houston and Timothy J. Regan, and each of them, as his or her true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for such individual in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or the individual’s substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons on behalf of the Company and in the capacities and on the dates indicated.
113
| Signature | Title | Date | ||||||||||||
| /s/ Andrew W. Houston Andrew W. Houston | Chief Executive Officer and Chairman (Principal Executive Officer) | February 18, 2022 | ||||||||||||
| /s/ Timothy J. Regan Timothy J. Regan | Chief Financial Officer (Principal Accounting and Financial Officer) | February 18, 2022 | ||||||||||||
| /s/ Donald W. Blair Donald W. Blair | Director | February 18, 2022 | ||||||||||||
| /s/ Lisa Campbell Lisa Campbell | Director | February 18, 2022 | ||||||||||||
| /s/ Paul E. Jacobs Paul E. Jacobs | Director | February 18, 2022 | ||||||||||||
| /s/ Sara Mathew Sara Mathew | Director | February 18, 2022 | ||||||||||||
| /s/ Karen A. Peacock Karen A. Peacock | Director | February 18, 2022 | ||||||||||||
| /s/ Michael Seibel Michael Seibel | Director | February 18, 2022 | ||||||||||||
114
Exhibit 10.26
EIGHTH AMENDMENT TO OFFICE LEASE
THIS EIGHTH AMENDMENT TO OFFICE LEASE (this “Eighth Amendment”) is made and entered into as of November 1, 2021, by and between KRE EXCHANGE OWNER LLC, a Delaware limited liability company (“Landlord”), and DROPBOX, INC., a Delaware corporation (“Tenant”).
RECITALS
A.Landlord (as successor by assignment from KR Mission Bay, LLC, a Delaware limited liability company) and Tenant are parties to that certain Office Lease dated as of October 6, 2017 (the “Original Lease”), as amended by that certain (i) First Amendment to Office Lease dated May 18, 2018 (the “First Amendment”), (ii) Second Amendment to Office Lease dated May 25, 2018 (the “Second Amendment”), (iii) Third Amendment to Office Lease dated September 19, 2018 (the “Third Amendment”), (iv) Fourth Amendment to Office Lease dated November 9, 2018 (the “Fourth Amendment”), (v) Fifth Amendment to Office Lease dated April 25, 2019 (the “Fifth Amendment”), (vi) Sixth Amendment to Office Lease dated August 16, 2019 (the “Sixth Amendment”), and (vii) Seventh Amendment to Office Lease dated August 25, 2020 (the “Seventh Amendment”, together with the Original Lease, as amended by all the foregoing amendments, the “Existing Lease”) for certain space consisting of approximately 738,081 rentable square feet (the “Existing Premises”), of that certain project commonly known as “The Exchange” and more particularly described in the Original Lease (the “Project”).
B.Tenant, as tenant under the Master Lease, presently subleases to VIR Biotechnology, Inc., a Delaware corporation (“Subtenant”), a portion of the Existing Premises pursuant to that certain Sublease dated November 4, 2020 (the “Sublease”). Landlord’s predecessor-in-interest, KR Mission Bay, LLC, a Delaware limited liability company, consented to the Existing Sublease pursuant to a certain Consent to Sublease made as of December 21, 2020.
C.The Sublease covers floors 8, 9, 10, 11 and 12 of the North Tower (which floors constitute the “Subleased Premises”) of the Project.
D.Subtenant desires to lease the Subleased Premises directly from Landlord, terminating the Sublease and replacing it with a direct lease (the “Direct Lease”) thereby eliminating Tenant from its role as sublandlord to Subtenant.
E.Tenant and Landlord have agreed that, effective as of 12:01 am on the Lease Commencement Date of the Direct Lease (the “Give-Back Date”), Tenant will downsize the Existing Premises by surrendering to Landlord floors 8, 9, 10, 11 and 12 of the North Tower (i.e., approximately 133,896 rentable square feet of the Existing Premises), as designated on Exhibit A attached hereto (the “Give-Back Space”), and Landlord and Tenant hereby acknowledge that the Give-back Space is co-extensive with and the same as the Subleased Premises and that those terms are used interchangeably in this Eighth Amendment), in accordance with the terms hereof. From and after the Give-Back Date, Tenant will lease approximately 604,185 rentable square feet of space in the Project (the “Remaining Premises”).
F.Landlord and Tenant further desire to amend the Existing Lease to modify certain provisions thereof in order to document the nature of the Project as no longer a single-tenant
project, as contemplated by Section 29.42 of the Existing Lease and as more particularly set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant agree that the Existing Lease is amended as follows:
1.Defined Terms. Capitalized terms used and not otherwise defined herein shall have the same meanings ascribed to them in the Existing Lease. As used herein, the term “Lease” shall refer to the Existing Lease, as amended by this Eighth Amendment.
2.Vacation of the Give-Back Space. Landlord and Tenant acknowledge that (a) on the day prior to the Give-Back Date, Subtenant shall be in possession of the Give-Back Space pursuant to the Sublease, (b) the Sublease shall terminate as of 12:01 am on the Give-Back Date, and (c) simultaneously with the termination of the Sublease, the term of the Direct Lease entered into by and between Landlord and Subtenant shall commence and Subtenant shall remain in possession of the Give-Back Space as the tenant under, and pursuant to and in accordance with the terms of, the Direct Lease. On the day prior to the Give-Back Date (and effective as of the Give-Back Date) and subject to Tenant’s payment to Landlord of the Termination Fee, Tenant shall be deemed to have surrendered to Landlord all of Tenant’s interest in and all rights to the Give-Back Space arising under the Existing Lease. Tenant’s interest in the Give-Back Space shall be surrendered to, and accepted by, Landlord in its then-current “AS IS” condition and subject to Subtenant’s continuing occupancy thereof pursuant to the Direct Lease. Through the day prior to the Give-Back Date, Tenant shall continue to pay Base Rent and Additional Rent for the entire Premises (i.e., the Give-Back Space and the Remaining Premises) pursuant to the terms of the Existing Lease. From and after the Give-Back Date, (y) Tenant shall have no further obligation for the payment of Base Rent (except to the extent otherwise provided in Section 4 below) or Additional Rent for the Give-Back Space, and (z) to reflect the reduction in the rentable square footage of the Premises covered by the Lease as a consequence of the surrender of the Give-Back Space, the Base Rent owing under the Lease for the Remaining Premises shall be as set forth in Section 15 below, and Tenant’s Percentage Share applicable to the Remaining Premises for purposes of determining the Additional Rent owing by Tenant under the Lease shall be as set forth in Section 7 below. The parties agree that after the Give-Back Space is returned to Landlord as set forth herein, the measurement of the Premises shall be 604,185 rentable square feet, and all references to the “Premises” in the Lease shall thereafter be references to the Remaining Premises.
Tenant shall remain responsible for any liabilities or obligations with respect to Give-Back Space which, in accordance with the terms of the Existing Lease, specifically survive following surrender of the Give-Back Space to Landlord.
Effective as of the Give Back Date, Exhibit A-1 to the Existing Lease is hereby amended and restated with replacement Exhibit A-1 attached hereto.
3.Condition of the Remaining Premises. Landlord shall have no obligation whatsoever to construct leasehold improvements for Tenant or to repair or refurbish the Remaining Premises as a consequence of Tenant’s surrender of the Give-Back Space other than any maintenance and repair obligations of Landlord in the Existing Lease. The continued possession of the Remaining Premises by Tenant shall be conclusive evidence that Tenant accepts the same “AS IS” and that the Remaining Premises is suitable for the use intended by Tenant and is in good and satisfactory condition. Tenant acknowledges that neither Landlord nor Landlord’s agents has made any representation or warranty as to the condition of the Remaining Premises or the Building or its suitability for Tenant’s purposes.
DREL00096.9 1
4.Termination Fee. On or before the Give-Back Date, Tenant shall pay to Landlord the sum of Thirty-Two Million Dollars ($32,000,000) (which sum represents and may be hereinafter referred to as the “Termination Fee”); provided, however, Tenant may deduct from such payment the sum of the monthly Base Rent applicable to the Give-Back Space for the seven (7) full calendar months following the Give-Back Date (i.e., a total of $5,269,700.23); and in the event of such deduction, Tenant shall continue to pay the monthly Base Rent otherwise applicable to the Give-Back Space for seven (7) full calendar months following the Give-Back Date in accordance with the schedule set forth on Exhibit B attached hereto “as if” Tenant were still leasing the Give-Back Space (i.e., meaning hypothetically, solely for the purpose of determining the monthly payment amount). Tenant’s payment to Landlord of the sum equal to such seven (7) months of Base Rent for the Give-Back Space shall serve as a credit against the Termination Fee such that upon Tenant’s payment of all seven (7) months of Base Rent for the Give-Back Space, Tenant shall have paid to Landlord the entire Termination Fee of Thirty-Two Million Dollars ($32,000,000).
5.TENANT IMPROVEMENT ALLOWANCE. Tenant shall pay to Landlord the sum of Ten Million Four Hundred Ninety-Six Thousand Four Hundred Sixty Dollars ($10,496,460) (the “TIA Contribution,” which TIA Contribution is in addition to the Termination Fee) as Tenant’s contribution towards the tenant improvement allowance which Landlord will be committing to Subtenant pursuant to the Direct Lease. Tenant shall pay to Landlord the TIA Contribution as follows: (i) fifty percent (50%) of the TIA Contribution (i.e., $5,248,230) shall be paid concurrently with Tenant’s payment of the Termination Fee, and fifty percent (50%) of the TIA Contribution shall be due and payable on or before January 7, 2022.
6.DESCRIPTION OF THE PREMISES. Effective as of the Give-Back Date, the description of the Premises set forth in Section 2.2 of the Summary of Basic Lease Information of the Existing Lease (the “Summary”) is hereby deleted in its entirety and replaced with the following
| 2.2. Premises: | 604,185 rentable square feet of space, including approximately 2,381 rentable square feet of space on the ground floor of the North Building (the “North Building L1 Space”), but expressly excluding approximately 12,289 rentable square feet of retail space in the North Tower (the “Retail Space”), all as is further set forth in Exhibit A-1 to this Lease. The rentable square footage of each floor of the Premises is set forth on Exhibit A-1 attached hereto. | ||||
DREL00096.9 2
7.TENANT’S SHARE OF DIRECT EXPENSES. Effective as of the Give-Back Date, the description of Tenant’s Share set forth in Section 6 of the Summary is hereby deleted in its entirety and replaced with the following:
6. Tenant’s Share (Article 4): | 100% of the North Building 51.15% of the North Tower 100% of the South Building 100% of the South Tower *Tenant’s Share shall be determined separately for each Building and shall be equal to 100% for each of the South Building and South Tower regardless of the rentable square footage of the Retail Space; and specifically with respect to the North Tower the allocation of Direct Expenses shall be subject to the Retail Space “Cost Pool” (as that term is defined in Section 4.3.2 below). The rentable square footage of each floor of the Premises is as set forth on Exhibit A-1 attached hereto. | ||||
8.Permitted Use. Section 7 of the Summary of the Original Lease is hereby deleted and replaced in its entirety with the following:
7. Permitted Use (Article 5): | General office use together with ancillary uses consistent with high-tech, multi-tenant first-class office and life-science buildings, subject to the terms and conditions set forth in Section 5.1 of this Lease. | ||||
9.Tax Expenses. Section 4.2.5.1 of the Original Lease is hereby amended and restated as follows:
4.2.5.1 “Tax Expenses” shall mean all federal, state, county, or local governmental or municipal taxes, fees, charges or other impositions of every kind and nature, whether general, special, ordinary or extraordinary, (including, without limitation, real estate taxes, general and special assessments, transit taxes, leasehold taxes or taxes based upon the receipt of the Rent payable hereunder or by other tenants of the Project, including gross receipts or sales taxes applicable to the receipt of such Rent, unless required to be paid by Tenant or other tenants of the Project, personal property taxes imposed upon the fixtures, machinery, equipment, apparatus, systems and equipment, appurtenances, furniture and other personal property used in connection with the Project, or any portion thereof), which shall be paid or accrued during any Expense Year (without regard to any different fiscal year used by such governmental or municipal authority) because of or in connection with the ownership, leasing and operation of the Project, or any portion thereof (including, without limitation, the land upon which the Buildings, including the Parking Facilities, are located). Notwithstanding anything set forth above to the contrary, (i) any gross receipts or sales taxes payable by Landlord and applicable to Landlord’s receipt of Rent (or any other consideration) payable by Tenant or any other tenant of the Project shall not be included as a Tax Expense hereunder, but shall be passed through to Tenant or any such other tenant of the Project as a tax for which Tenant or any such other tenant is directly responsible in accordance with the terms of Section 4.5 of this Lease and shall be determined on the basis of the Rent payable by Tenant or any such other tenant, as the case may be; and (ii) Tax Expenses shall not include taxes levied against or determined on the basis of the equipment, furniture, fixtures, or personal property of Tenant or other tenants of the Project, but any such taxes shall be payable by Tenant in accordance with Section 4.5 of the Lease and by such other tenants in accordance with similar provisions of their respective leases. For the sake of
DREL00096.9 3
clarity, any gross receipts or sales taxes applicable to the receipt of Rent or any other consideration (inclusive of any so-called “Proposition C”) levied, assessed or imposed because of this Eighth Amendment (e.g., as to Landlord’s receipt of the Termination Fee and TIA Contribution) shall be paid by Tenant.
10.Cost Pools. Section 4.3.2 of the Original Lease is hereby amended and restated as follows:
4.3.2 Cost Pools. The parties acknowledge that certain of the costs and expenses incurred in connection with the Project (i.e., the Direct Expenses) should be separately allocated to the office space, the Retail Space and Lab Space. As used herein, Lab Space shall mean and refer to any portion of the Project leased directly by Landlord that is improved for use as laboratory space. Direct Expenses shall be allocated between the office space, Retail Space and Lab Space (each, a “Cost Pool”) based on the estimated benefit derived by the space which is the subject of the Cost Pool, and such allocations shall be reasonably determined by Landlord. Accordingly, Direct Expenses shall be charged to the Lab Space, Retail Space and office space by virtue of the creation of Cost Pools. Direct Expenses which apply equally to the Lab Space, Retail Space and the office space (such as Landlord’s insurance costs, [except to the extent that any insurer expressly imposes a surcharge for, or Landlord requires additional coverages as a consequence of, Lab Space, in which case such surcharge or the cost of such additional coverage shall be allocated to the Lab Space Cost Pool]),as reasonably determined by Landlord, shall be allocated to the Lab Space Cost Pool, office space Cost Pool and the Retail Space Cost Pool, based on the square footage of each of those spaces, respectively, compared to the total square footage of the applicable Building. After the date of this Lease, Landlord may reasonably establish additional Cost Pools in connection with any new leases of the Project. Any costs allocated to a Cost Pool (e.g., Retail Space Cost Pool) which does not include a portion of the Premises shall be excluded from the definition of Direct Expenses for the purposes of this Lease.
11.Bicycle Storage Area. Section 5.3 and Section 5.3.1 of the Original Lease are hereby amended and restated as follows:
5.3 Tenant’s Bicycles. Tenant’s employees shall be permitted to bring their bicycles (“Bicycles”) into portions of the Buildings designated by Landlord on a non-exclusive basis, and with appropriate Improvements or Alterations providing for Bicycle storage, subject to the provisions of this Section 5.3, and such additional reasonable rules and regulations as may be promulgated by Landlord from time to time (in Landlord’s reasonable discretion) that do not unreasonably interfere with Tenant’s or other tenant’s ability to park their respective Bicycles as contemplated herein and provided to Tenant and other tenants, and only to the extent such Bicycles are used on a daily basis for commuting to and from work by such employees of Tenant and other tenants of the Buildings. AT NO TIME ARE RIDERS ALLOWED TO RIDE ANY BICYCLE IN THE PREMISES, THE PARKING FACILITIES OR THE BUILDINGS. Storage of any Bicycle anywhere on the Project other than as expressly set forth in this Section 5.3 is prohibited. Tenant shall keep its employees informed of these rules and regulations and any modifications thereto.
5.3.1 Bicycle Storage Area. As part of the construction of the Base, Shell and Core, Landlord installed a secured bicycle storage area within the Parking Facilities that accommodates at least two hundred (200) Bicycles (the
DREL00096.9 4
“Bicycle Storage Area”). Tenant shall have the non-exclusive right to utilize the Bicycle Storage Area for day use parking of Bicycles by Tenant and Tenant’s employees, visitors, invitees and sublessees. Any references in the Lease to the Landlord Bicycle Storage Area shall hereafter mean and refer to the Bicycle Storage Area. Effective as of the Give-Back Date, Tenant’s assumption (in line 4 of Section 10.1 of the Original Lease) of all risk of damage to property or injury to persons in, upon or about the Bicycle Storage Area and Tenant’s indemnification from and against Loss incurred in connection with or arising from any cause in, on or about the Bicycle Storage Area shall no longer apply to Tenant’s use of the Bicycle Storage Area, and the words “the Bicycle Storage Area” shall be deleted from lines 4 and 13 of Section 10.1 of the Original Lease. Other than the Bicycle Storage Area, Tenant and Tenant’s employees, visitors, invitees and sublessees shall not be entitled to use any secured bicycle storage areas constructed by Landlord at the Project. Motorized vehicles of any kind, including motorcycles and mopeds, are prohibited in the Bicycle Storage Area, as is the storage of any property other than Bicycles. Each rider shall use the Bicycle Storage Area at is sole risk. Landlord specifically reserves the right to reasonably change the location, size, configuration, design, layout and all other aspects of the Bicycle Storage Area at any time (provided that no such action will materially diminish the capacity of the Bicycle Storage Area on other than a temporary basis), and Tenant acknowledges and agrees that Landlord may, without incurring any liability to Tenant and without any abatement of Rent under this Lease, from time to time, temporarily close-off or restrict access to the Bicycle Storage Area for purposes of permitting or facilitating any such construction, alteration or improvements. Landlord has no obligation to provide any security whatsoever in connection with the Bicycle Storage Area except as expressly set forth in this Section 5.3.1. Landlord shall provide twenty-four (24) hours per day, seven (7) days per week, reasonable access control services for the Bicycle Storage Area in a manner materially consistent with the services provided by landlords of Comparable Buildings. Notwithstanding the foregoing, Landlord shall in no case be liable for personal injury or property damage for any error with regard to the admission to or exclusion from the Bicycle Storage Area of any person. Upon the expiration or earlier termination of this Lease, Tenant shall have removed all Bicycles belonging to its employees from the Bicycle Storage Area and Tenant, at Tenant’s sole cost and expense, shall repair all damage to the Bicycle Storage Area caused by the removal of Tenant’s property therefrom, and if Tenant fails to repair such damage, Landlord may undertake such repair on account of Tenant and Tenant shall pay to Landlord upon demand the cost of such repair. If Tenant fails to remove any Bicycles at the expiration or earlier termination of this Lease, Landlord may dispose of said Bicycles in such lawful manner as it shall determine in its sole and absolute discretion.
12.Services and Utilities. The following corresponding Sections of Article 6 of the Existing Lease shall be deleted and amended and restated in their entirety as follows:
6.1.1 HVAC. In accordance with the “Base Building” definition as provided in Section 1 of the Work Letter, each of the North Complex and South Complex was equipped with a heating and air conditioning (“HVAC”) system serving the applicable Buildings within the North Complex and South Complex (collectively, the “BB HVAC System”). Subject to limitations imposed by all governmental ordinances, rules, regulations and guidelines applicable thereto, Landlord shall provide BB HVAC System service for normal comfort for normal office use in the Premises, assuming an office occupancy density no greater than one (1) person for any 125 rentable square feet of space, from 8:00
DREL00096.9 5
A.M. to 6:00 P.M. Monday through Friday (the “Building Hours”), except for the date of observation of New Year’s Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, Christmas Day and, at Landlord’s discretion, other locally or nationally recognized holidays (collectively, the “Holidays”). Tenant shall cooperate fully with Landlord at all times and abide by all regulations and requirements that Landlord may reasonably prescribe for the proper functioning and protection of the BB HVAC System. If Tenant desires to use HVAC during hours other than Building Hours, Tenant shall give Landlord’s property management office such prior notice (which shall be via telephone or an on-line system), if any, as Landlord reasonably shall from time to time establish as appropriate, of Tenant’s desired use of HVAC, and Landlord shall supply such HVAC to Tenant at such hourly cost to Tenant (which shall be treated as Additional Rent) as Landlord shall from time to time establish, provided that such costs shall be Landlord’s good faith estimate of the cost of providing such service with no markup for profit to Landlord.
6.1.9 Access Control. As part of the construction of the Base Buildings, Landlord installed an access-control system for the Buildings and Parking Facilities, including, without limitation, door access controls, lobby turnstiles and elevator access controls; provided that the parties acknowledge that the North Lobby shall be open to the public and under Landlord’s control per Section 13(a) below and except as otherwise provided therein, and access will not be restricted during general business hours. Landlord shall not be obligated to provide any other security equipment. Notwithstanding any provision to the contrary set forth in this Lease, in no case, shall Landlord be liable for personal injury or property damage for any lack of security in the Building or for any error with regard to the admission to or exclusion from the Buildings or Project of any person.
6.1.13 Existing Generators. As part of the construction of the Project, Landlord installed three (3) generators for the Project (each and all related equipment defined collectively herein as a “Generator”). Two (2) of the Generators are identified as “TG-01 for the North Loading Dock” and “STG-01 for the South Loading Dock” and include all of the electrical equipment associated with such Generators (more particularly described on Schedule 6.1.13 attached hereto), and all connections (cables, cable trays, etc.) attached to each such Generator. Pursuant to and subject to and in accordance with the terms of the Seventh Amendment, as of June 1, 2018, Tenant was granted the exclusive right to use and control the Generators identified as “TG-01 for the North Loading Dock” and “STG-01 for the South Loading Dock”. As a consequence of the Direct Lease and the North Complex becoming a multi-tenant portion of the Project, from and after the Give-Back Date the use and control of the Generator identified as “TG-01 for the North Loading Dock” (the “Non-exclusive Generator”) is being surrendered by Tenant and turned back to Landlord; and Tenant shall continue to have the exclusive right to use and control the Generator identified as “STG-01 for the South Loading Dock” (the “Tenant Generator”). Therefore, from and after the Give-Back Date the following terms and conditions shall apply to such Generators and shall supersede the terms of Section 2 of the Seventh Amendment.
6.1.13.1 Nonexclusive Generator. Effective as of the Give-Back Date, Tenant shall surrender the Nonexclusive Generator to Landlord in the same condition as the Nonexclusive Generator was in as of the date of the Seventh Amendment, reasonable wear and tear excepted, with all permits current (and Tenant shall transfer to Landlord all permits maintained by Tenant in connection with the Nonexclusive Generator as soon as is reasonably practicable following the Give-Back Date). From and after the Give-Back Date (subject to the Transition Plan), (i) Landlord shall maintain and repair the Nonexclusive Generator in good
DREL00096.9 6
condition and repair, and in compliance with all Applicable Laws (including the maintenance of all applicable permits), at Landlord’s sole cost and expense during the Lease Term (but passed through to Tenant and other tenants of the North Complex as part of Operating Expenses), and Landlord shall maintain all permits and warranties associated with the Nonexclusive Generator; and (ii) Tenant shall have the non-exclusive right to use Tenant’s pro rata share of the Nonexclusive Generator and maintain connections (cables, cable trays, etc.) (the "Generator Facilities") from the Nonexclusive Generator to the portion of the Remaining Premises located in the North Complex as such Generator Facilities exist as of the Give-Back Date (and as may hereafter be modified, subject to Landlord’s review and approval) and in compliance with Applicable Laws. The costs and expenses incurred by Landlord as a result of or in connection with operation, use, repairs, and maintenance of the Nonexclusive Generator, including costs for fuel, and depreciation (as reasonably determined by Landlord) shall be passed through to tenants and occupants of the North Complex (including Tenant) based on its pro rata share.
1.6.13.2 Tenant Generator. Tenant shall continue to have the exclusive right to use and control the Tenant Generator plus all of the electrical equipment associated with such Generator. When delivered to Tenant, the Tenant Generator was taken in its existing, “as is” condition, and Tenant hereby agrees and acknowledges that neither Landlord nor any agent of Landlord then made or has since made any representation or warranty regarding the condition of the Tenant Generator. Landlord shall not be liable for any damages whatsoever resulting from any failure in operation of the Tenant Generator, or the failure of the Tenant Generator to provide suitable or adequate back-up power, including but not limited to, loss of profits, loss of rents or other revenues, loss of business opportunity, loss of goodwill or loss of use, in each case, however occurring, or loss to inventory, business, accounting and other records of every kind and description kept at the Premises and any and all income derived or derivable therefrom. In the event that Landlord shall incur any costs as a result of or in connection with the rights granted to Tenant herein with respect to the Tenant Generator, Tenant shall reimburse Landlord for the same within forty-five (45) days of request. Tenant shall not be charged any additional rental or other costs for the use of the locations in which the Tenant Generator is located. Tenant shall maintain and repair the Tenant Generator in good condition and repair, and in compliance with all Applicable Laws (including the maintenance of all applicable permits), at Tenant’s sole cost and expense during the Lease Term, and without the need for request from Landlord, Tenant shall provide copies of all maintenance and repair records and all permits and warranties to Landlord. Tenant’s obligations with respect to the Premises, including the insurance and indemnification obligations contained in Article 10 above, shall apply to Tenant’s use of the Tenant Generator and, in addition, Tenant shall maintain, at Tenant’s cost, industry standard “boiler and machinery” insurance coverage with respect thereto. Tenant shall surrender the Tenant Generator (and shall transfer to Landlord all permits maintained by Tenant in connection with the Tenant Generator during the Lease Term and all warranties then in effect) concurrent with the surrender of the Premises to Landlord as required hereunder in the same condition as the Tenant Generator was in as of the date of the Seventh Amendment, reasonable wear and tear excepted, with all permits current. Tenant shall indemnify, defend, protect, and hold harmless Landlord, its partners, subpartners and their respective officers, agents, servants, employees, and independent contractors from any and all loss, cost, damage, expense and liability (including, without limitation, court costs and reasonable attorneys’ fees) incurred in connection with or arising from any cause related to or connected with the installation, use, operation, repair and/or removal of the Tenant Generator and/or any acts, omissions or negligence of Tenant or of any person claiming by, through or under Tenant, or of the contractors, agents, servants, employees, invitees, guests or licensees of Tenant or any such person, in connection with the Tenant Generator or any breach of the terms of this Section 6.1.13.2, provided that the terms of the foregoing indemnity shall not apply to the negligence or willful misconduct of Landlord. In the event that Tenant shall fail to comply with the requirements set forth herein, without limitation of Landlord’s other remedies, (i) Landlord shall have the right to terminate Tenant’s rights with respect to the Tenant Generator, and (ii)
DREL00096.9 7
Landlord shall have the right, at Tenant’s sole cost and expense, to cure such breach, in which event Tenant shall be obligated to pay Landlord, within forty-five (45) days of request, the amount expended by Landlord, plus Landlord’s standard administration fee. The rights granted to Tenant hereunder shall be personal to the Original Tenant and any Permitted Assignee Transferee (and may not be utilized by or assigned to any other assignee, sublessee or any other transferee).
13.TRANSITION TO A MULTI-TENANT PROJECT. In order to transition the Project from a single-tenant Project under the control and management of Tenant to a multi-tenant Project (specifically, as to the North Complex) under the control and management of Landlord, Tenant shall work with Landlord cooperatively and in good faith to accomplish an orderly turnover of management control from Tenant to Landlord of the following various aspects and areas of the Project:
(a)The North Lobby (including without limitation, responsibility for janitorial service, security, HVAC, repairs and maintenance, and reception services in the North Building and turnstiles in the North Tower [excluding, however, the “Little r” turnstiles in the North Tower, which will continue to be controlled by Tenant])).
(b)The Roof Deck (as defined in Section 22.1 of the Lease) shall be Common Area. Tenant acknowledges and agrees that other tenants of the Project can only access the Roof Deck through a portion of Tenant’s Premises located on floor 7 of the North Tower, and Tenant will cooperate with Landlord to establish a path of travel for tenants and their employees and invitees to be able to enjoy ingress and egress to and from the Roof Deck. The Roof Deck is more particularly addressed in Section 17 of this Eighth Amendment.
(c)Bicycle Storage Area, as more particularly addressed in Section 11 of this Eighth Amendment.
(d)Janitorial services for the Common Areas within the North Complex (including, without limitation, the North Lobby).
(e)Shafts within the North Tower shall be Common Areas (provided, however, that the floor area of each floor of the North Complex shall not be revised as a result of any such shafts being considered as Common Area).
(f)Generators serving the North Complex, as more particularly addressed in Section 12 of this Eighth Amendment.
(g)Building card readers/ access control responsibilities (i) within the Give-Back Space, (ii) within the Common Areas of the North Complex (including without limitation all card readers associated with elevator access control), and (iii) the exterior doors of the North Complex (including without limitation all card readers associated with the Roof Deck) shall be relinquished as of the Give-Back Date, and Tenant shall cooperate with Landlord in transitioning management control of all such card readers as soon as is reasonably practicable after the Give-Back Date, including, without limitation, Tenant arranging for, and causing, its vendor (i.e., BEI Construction) to assist Landlord’s vendor (i.e., Johnson Controls) to facilitate the expeditious turnover of such management control to Landlord.
(h)Minimum point of entry (MPOE) for the North Complex.
DREL00096.9 8
(i)Lutron system controller within the Give-Back Space and the Common Areas of the North Complex shall be relinquished as of the Give-Back Date, and Tenant shall cooperate with Landlord to facilitate the expeditious turnover of such management control to Landlord (including the separation of such system between the Premises and other areas under Tenant’s control and the Give Back Space and areas under Landlord’s control).
(j)Mechanical, electrical and plumbing (MEP) systems serving the Give Back Space and the Common Areas within the North Complex [including, without limitation, the terminal units (i.e., the VAVs) serving the Give-Back Space and the Common Areas within the North Complex], and Tenant shall cooperate with Landlord to facilitate the expeditious turnover of such management control to Landlord of such systems.
(k)Signage changes, as more particularly addressed in Section 18 of this Eighth Amendment.
(l)Health & Safety compliance requirements, and Tenant shall cooperate with Landlord in promptly delivering to Landlord all health and safety compliance related documents and notification requirements relating to the North Complex in Tenant’s possession or control.
(m)Emergency preparedness and response, and Tenant shall cooperate with Landlord in promptly delivering to Landlord all emergency preparedness plans and related materials and notification requirements relating to the North Complex in Tenant’s possession or control.
(n)Security guard services, and Tenant shall cooperate with Landlord in transitioning to Landlord all security services relating to the Common Areas within the North Complex.
When fully implemented, Landlord shall have control and management (including maintenance and repair) responsibility for all of the foregoing described aspects and areas of the Project. Tenant shall, at its cost, remain obligated to perform all obligations in accordance with the Existing Lease (insofar as Tenant’s surrender and/or restoration obligations thereunder) with respect to such aspects and areas of the Project until the turnover to Landlord of each of such specific aspects and areas of the Project has been accomplished. The orderly transition to Landlord of the turnover of control and management responsibility will occur during the ensuing one hundred twenty (120) days following the Give-Back Date (which period may be referred to as the “Transition Period”). Landlord and Tenant shall work together cooperatively to accomplish an orderly transition within the Transition Period of each and every one of the various aspects and areas of the Project as identified above, and as such transitions are completed, Landlord and Tenant shall acknowledge the same in writing, memorializing the effective date of such turnover to Landlord.
14.Assignment and Subletting. The following shall be added to Section 14.2 of this Existing Lease.
14.2.6 The proposed Transfer would cause a violation of another lease for space in the Project, or would give an occupant of the Project a right to cancel its lease; or
14.2.7 Either the proposed Transferee, or any person or entity which directly or indirectly, controls, is controlled by, or is under common control with, the proposed Transferee, is then currently engaged in active negotiations with Landlord, or has negotiated with Landlord during the five (5) month period
DREL00096.9 9
immediately preceding the Transfer Notice, for space within the Project (and, in such latter instance, Landlord has (or reasonably anticipates it will have) available space in the Project suitable to meet such proposed Transferee’s occupancy needs).
15.Base Rent.
(a)Prior to the Give-Back Date, Tenant shall continue to pay to Landlord all Rent payable under the Existing Lease with respect to the Premises (i.e., the Give-Back Space and the Remaining Premises) and all other costs and expenses payable under the Existing Lease in accordance with its terms.
(b)Effective as of the Give-Back Date and in addition to Additional Rent and all other costs and expenses payable by Tenant pursuant to the Lease, Tenant shall pay the following monthly Base Rent for the Remaining Premises, in accordance with the terms of the Lease:
DREL00096.9 10
| PERIOD | ANNUAL BASE RENT | MONTHLY BASE RENT | MONTHLY BASE RENT PER RENTABLE SQUARE FOOT | ||||||||
| Give-Back Date to 11/30/21 | $39,740,751.721 | $3,311,729.312 | $65.78 | ||||||||
12/01/21 to 11/30/22 (LY 4)3 | $40,932,974.27 | $3,411,081.19 | $67.75 | ||||||||
| 12/01/22 to 11/30/23 (LY 5) | $42,160,963.50 | $3,513,413.63 | $69.78 | ||||||||
| 12/01/23 to 11/30/24 (LY 6) | $43,425,792.40 | $3,618,816.03 | $71.88 | ||||||||
| 12/01/24 to 11/30/25 (LY 7) | $44,728,566.18 | $3,727,380.52 | $74.03 | ||||||||
| 12/01/25 to 11/30/26 (LY8) | $46,070,423.16 | $3,839,201.93 | $76.25 | ||||||||
| 12/01/26 to 11/30/27 (LY 9) | $47,452,535.86 | $3,954,377.99 | $78.54 | ||||||||
| 12/01/27 to 11/30/28 (LY 10) | $48,876,111.93 | $4,073,009.33 | $80.90 | ||||||||
| 12/01/28 to 11/30/29 (LY 11) | $50,342,395.29 | $4,195,199.61 | $83.32 | ||||||||
| 12/01/29 to 11/30/30 (LY 12) | $51,852,667.15 | $4,321,055.60 | $85.82 | ||||||||
| 12/01/30 to 11/30/31 (LY 13) | $53,408,247.16 | $4,450,687.26 | $88.40 | ||||||||
| 12/01/31 to 11/30/32 (LY14) | $55,010,494.58 | $4,584,207.88 | $91.05 | ||||||||
| 12/01/32 to 11/30/33 (LY 15) | $56,660,809.420 | $4,721,734.12 | $93.78 | ||||||||
16.ADDITIONAL RENT.
(a)Prior to the Give-Back Date, and in addition to the monthly Base Rent set forth in the Existing Lease, Tenant shall continue to pay Tenant’s Share of Direct Expenses, and all other additional rent payable under the terms of the Existing Lease, pursuant to the terms and conditions of the Lease.
1 Annual Base Rent amount if based on 12 months, but if Give-Back Date is November 1, 2021, then Tenant shall only be obligated to pay Monthly Base Rent for one month before Base Rent adjustment occurs.
2 This schedule does not include Tenant’s payment of Monthly Base Rent for seven (7) months as to the Give-Back Space, which sum shall serve as a credit against the Termination Fee as provided in Section 4 of this Eighth Amendment.
3 LY = Lease Year.
DREL00096.9 11
(b)Effective as of the Give-Back Date and in addition to the monthly Base Rent set forth in Section 5(b) of this Eighth Amendment, Tenant shall pay Tenant’s Share of Direct Expenses with respect to the Remaining Premises, and all other additional rent payable under the terms of the Lease, pursuant to the terms and conditions of the Lease. Effective as of the Give-Back Date, Tenant’s Share of Direct Expenses shall be 51.15 % of the North Tower and 100% of the North Building, South Building and South Tower.
17.Roof Deck. Article 22 of the Existing Lease shall be deleted and replaced with the following:
22.1 In General. Tenant shall have the right to use, on a non-exclusive basis, the roof deck located on the seventh (7th) floor of the North Building (the “Roof Deck”), which Roof Deck shall, for purposes of this Lease, be deemed part of the Common Areas. Tenant’s use of the Roof Deck shall be subject to such reasonable rules and regulations as may be prescribed by Landlord from time to time. Tenant shall not make any improvements or alterations to the Roof Deck, nor shall Tenant be permitted to install or place on the Roof Deck any furniture, fixtures, plants, graphics, signs or insignias or other items of any kind whatsoever.
22.2 Landlord Use Rights. Landlord shall have the right to temporarily close the Roof Deck or limit access thereto from time to time (i) in connection with Landlord’s maintenance or repair of the Roof Deck or Buildings and (ii) for other reasonable purposes, including, without limitation, for events hosted on behalf of or for Landlord (collectively, “Landlord Use Rights”).
22.3 Other Terms. Landlord and Tenant acknowledge and agree that (i) Tenant shall be responsible for supervising and controlling access to the Roof Deck by Tenant’s employees, officers, directors, shareholders, agents, representatives, contractors and invitees (the “Roof Deck Users”); and (ii) Landlord is not responsible for supervising and controlling access to the Roof Deck, except in connection with Landlord’s exercise of Landlord’s Use Rights. Except to the extent arising as a consequence of the negligence or willful misconduct of Landlord: (a) Tenant assumes the risk for any Loss arising out of the use or misuse of the Roof Deck by Tenant’s Roof Deck Users, and Tenant releases and discharges Landlord from and against any such loss, claim, damage or liability; (b) Tenant further agrees to indemnify, defend and hold Landlord and the Landlord Parties, harmless from and against any and all losses and claims relating to or arising out of the use or misuse of the Roof Deck by Tenant or Tenant’s Roof Deck Users. Except to the extent arising as a consequence of the negligence or willful misconduct of Tenant: (A) Landlord assumes the risk for any Loss arising out of the use or misuse of the Roof Deck by Landlord’s Roof Deck Users, and Landlord releases and discharges Tenant from and against any such Loss; (B) Landlord further agrees to indemnify, defend and hold Tenant and the Tenant Parties, harmless from and against any and all Losses relating to or arising out of the use or misuse of the Roof Deck by Landlord or Landlord’s Roof Deck Users. Neither party shall have any liability or responsibility to monitor the use, or manner of use, by the Roof Deck Users of the other party.
18.Signs. Sections 23.3 and 23.5 of the Existing Lease shall be deleted and replaced with the following:
23.3 Lobby Signage. Original Tenant and any Permitted Transferee Assignee, at Tenant’s sole cost and expense, shall have the non-exclusive right to install, repair and maintain its name and/or logo in the North Lobby and the South
DREL00096.9 12
Lobby. Any such installation, repair and/or maintenance shall be subject to compliance with Applicable Laws and Landlord’s prior approval of any such signs (including the size and location of any such signs), which approval shall not be unreasonably withheld, conditioned or delayed. In any event, Tenant shall be entitled to building standard signage in the lobby directory of the North Complex and the South Complex throughout the Lease Term.
23.5 Exterior Signage. Throughout the Lease Term, as the same may be extended, so long as Tenant satisfies the Minimum Signage Threshold, Original Tenant and any Permitted Transferee Assignee, at Tenant’s sole cost and expense, shall have the non-exclusive right (except to the extent provided below) to install, repair and maintain (i) its name and logo on any monument sign installed by Landlord (in Landlord’s sole discretion) and associated with a particular Building in which all or a portion of the Premises is located (provided that Tenant hereby acknowledges and agrees that no monument sign exists as of the date of this Lease, and Landlord has no obligation to install any monument sign for any Building), and (ii) Tenant’s pro rata share of signs applicable to the office space of the Project generally, and exclusive signage rights for exterior signage that pertains to a particular Building, which Tenant is then leasing the entirety of, which exterior signs may be Tenant’s name and/or logo. The location of all exterior signs available for office tenants of the Project are shown on Exhibit J attached hereto. Landlord shall work with Tenant to obtain City and other required approvals of such monument and exterior signs. Any such installation, repair and/or maintenance (including the exact location thereof) shall be subject to compliance with Applicable Laws, the Underlying Documents and Landlord’s prior approval, which approval shall not be unreasonably withheld, conditioned or delayed. Notwithstanding anything to the contrary set forth herein, Landlord shall be entitled to grant any retail tenants the rights to install their standard building sign package, including, eyebrow signage, blade signage, and store front signage, on or about their premises, and may grant such retail tenants monument signage rights, with the name and/or logo of such tenant located below Tenant’s name and logo on any shared monument sign. The anticipated size, types and locations of retail signage are set forth on Exhibit J-1 attached hereto; provided that the exact size, types and locations of such signage shall be reasonably determined by Landlord in consultation with Tenant (but such consultation shall not be required if Landlord does not depart from the signage shown on Exhibit J-1) and subject to City and other required approvals and the Underlying Documents. In addition, Landlord may grant exterior signage rights to other tenants of the Project, based on the locations of signage shown on Exhibit J attached hereto. The term “Minimum Signage Threshold” shall mean that the Original Tenant and/or its Permitted Transferee Assignee shall not have, in the aggregate, subleased (pursuant to a sublease or subleases then in effect) more than, twenty-five percent (25%) of the rentable square footage of the then-existing Premises.
19.Tenant Parking. The first sentence of Section 28.1 of the Existing Lease shall be amended and restated (from and after the Give-Back Date) as follows: “Subject to the terms of this Article 28, Tenant shall be obligated to rent from Landlord the amount of parking passes set forth in Section 9 of the Summary (the “Parking Passes”), on a monthly basis throughout the Lease Term, which Parking Passes shall pertain to the Project parking facilities (“Parking Facilities”).” Further, from and after the Give-Back Date, Tenant shall not have the right to install additional electrical vehicle charging stations in the Parking Facilities. In addition, and for the avoidance of doubt, Landlord and Tenant acknowledge and agree that (i) Tenant has previously exercised its right under Section 28.1 of the Existing Lease to decrease the number of
DREL00096.9 13
Parking Passes rented by Tenant by 103; and (ii) therefore, as of the Give-Back Date, the number of Parking Passes rented by Tenant is and shall be 501 Parking Passes (i.e., 604 [1 Parking Pass per 1,000 rsf of the Remaining Premises] - 103 [Give-Back Parking Passes] = 501 Parking Passes).
20.Shuttle Service. Section 29.40 of the Existing Lease shall be deleted and replaced with the following:
29.40 Shuttle Service. Subject to the provisions of this Section 29.40, so long as no Default is continuing, Landlord shall operate (or provide for the operation of), throughout the Lease Term, a shuttle service (the “Shuttle Service”) at the Project, for non-exclusive use by Tenant’s employees at the Project (“Shuttle Service Riders”) in common with other tenants and occupants of the Project. The use of the Shuttle Service shall be subject to the reasonable rules and regulations reasonably established from time to time by Landlord, and/or the operator of the Shuttle Service, provided that any such rules and regulations do not expressly contradict any of the terms set forth in this Section 29.40. Landlord will reasonably designate (a) the hours of operation of the Shuttle Service, which shall at least include the hours of 8 a.m. through 10:30 a.m. and 4:30 p.m. through 7:30 p.m., five (5) days a week (excluding weekends and holidays) (the “Shuttle Service Hours”), (b) the frequency of stops, and (c) designated routes, which shall include stops at the nearest BART Station and CalTrain Station. Landlord and Tenant acknowledge that the use of the Shuttle Service by the Shuttle Service Riders shall be at their own risk. Landlord agrees that, if Tenant so elects and appoints a representative, Landlord shall meet and confer with Tenant’s representative from time to time regarding the manner in which the Shuttle Service is operated, including the Shuttle Service Hours, the number and capacity of shuttles, and the designated routes of the Shuttle Service; provided, however, any suggestions or requests made by Tenant’s representative shall not be binding on Landlord, but shall be taken into reasonable consideration. There shall be no fee payable by the Shuttle Service Riders for use of the Shuttle Service and the cost of the Shuttle Service shall be excluded from the Operating Expenses of the Project, as set forth in Section 4.2.4(l) above.
21.Civil Code Section 1938 Disclosure. For purposes of Section 1938(a) of the California Civil Code, Landlord hereby discloses to Tenant, and Tenant hereby acknowledges, that neither the Building, the Complex nor the Premises has undergone inspection by a Certified Access Specialist (CASp) (defined by California Civil Code Section 55.52) retained by Landlord or Tenant. Pursuant to California Civil Code Section 1938, Tenant is hereby notified as follows: “A Certified Access Specialist (CASp) can inspect the subject premises and determine whether the subject premises comply with all of the applicable construction-related accessibility standards under state law. Although state law does not require a CASp inspection of the subject premises, the commercial property owner or lessor may not prohibit the lessee or tenant from obtaining a CASp inspection of the subject premises for the occupancy of the lessee or tenant, if requested by lessee or tenant. The parties shall mutually agree on the arrangements for the time and manner of any CASp inspection, the payment of the fee for the CASp inspection and the cost of making any repairs necessary to correct violations of construction-related accessibility standards within the premises.”
22.Prohibited Persons; Foreign Corrupt Practices Act and Anti-Money Laundering. Neither (i) Tenant nor any of its officers, directors or managers, or (ii) to Tenant’s knowledge, any of Tenant’s affiliates, nor any of their respective members, partners, other equity holders (excluding any holders of any publicly traded stock or other equity interests of Tenant, if any), officers, directors or managers is, nor during the Lease Term will they become, a person or
DREL00096.9 14
entity with whom U.S. persons or entities are restricted from doing business under (a) the Patriot Act (as defined below), (b) any other requirements contained in the rules and regulations of the Office of Foreign Assets Control, Department of the Treasury (“OFAC”) (including any “blocked” person or entity listed in the Annex to Executive Order Nos. 12947, 13099 and 13224 and any modifications thereto or thereof or any other person or entity named on OFAC’s Specially Designated Blocked Persons List) or (c) any other U.S. statute, Executive Order (including the September 24, 2001, Executive Order Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit or Support Terrorism) or other governmental action (collectively, “Prohibited Persons”). Tenant is not entering into this Eighth Amendment, directly or indirectly, in violation of any laws relating to drug trafficking, money laundering or predicate crimes to money laundering. As used herein, “Patriot Act” shall mean the USA Patriot Act of 2001, 107 Public Law 56 (October 26, 2001) and all other statutes, orders, rules and regulations of the U.S. government and its various executive departments, agencies and offices interpreting and implementing the Patriot Act.
23.Required Approvals. Notwithstanding anything contained herein, the parties hereto acknowledge and agree that the effectiveness of this Eighth Amendment is contingent upon the approval of this Eighth Amendment by the current mortgagee of the Project.
24.Brokers. Tenant represents and warrants to Landlord that with the exception of CBRE, Inc. (“Broker”) it has not engaged any other broker, finder or other person who would be entitled to any commission or fees in respect of the negotiation, execution or delivery of this Eighth Amendment, and shall indemnify, defend and hold harmless Landlord against any loss, cost, liability or expense incurred by Landlord as a result of any claim asserted by any such broker, finder or other person on the basis of any arrangements or agreements made or alleged to have been made by or on behalf of Tenant. The Broker shall be compensated pursuant to the terms of separate express written agreements specifying the commission amounts and the terms of payment.
25.No Further Modification. Except as set forth in this Eighth Amendment, all of the terms and provisions of the Existing Lease shall remain unmodified and in full force and effect. In the event of any conflict between the terms and conditions of the Existing Lease and the terms and conditions of this Eighth Amendment, the terms and conditions of this Eighth Amendment shall prevail.
26.Counterparts. This Eighth Amendment may be executed in counterparts, each of which shall constitute an original, and all of which, together, shall constitute one document.
27.Signatures. The parties hereto consent and agree that this Eighth Amendment may be signed and/or transmitted by facsimile, e-mail of a .pdf document or using electronic signature technology (e.g., via DocuSign or similar electronic signature technology), and that such signed electronic record shall be valid and as effective to bind the party so signing as a paper copy bearing such party’s handwritten signature. The parties further consent and agree that (1) to the extent a party signs this Eighth Amendment using electronic signature technology, by clicking “SIGN”, such party is signing this Eighth Amendment electronically, and (2) the electronic signatures appearing on this Eighth Amendment shall be treated, for purposes of validity, enforceability and admissibility, the same as handwritten signatures.
28.Authorization. The individuals signing on behalf of each party hereby represents and warrants that such individual has the capacity set forth on the signature pages hereof and has full power and authority to bind such party to the terms hereof.
(SIGNATURES ON NEXT PAGE)
DREL00096.9 15
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written.
“LANDLORD” KRE EXCHANGE OWNER LLC, a Delaware limited liability company By: /s/ Daniel Rudin Print Name: Daniel Rudin Title: Authorized Signatory | “TENANT” DROPBOX, INC., a Delaware corporation By: /s/ Tim Regan Print Name: Tim Regan Title: CFO | ||||
16
EXHIBIT A
GIVE-BACK SPACE
Floors 8, 9, 10, 11 and 12, in their entirety, of the North Tower
Exhibit A
EXHIBIT A-1
RENTABLE SQUARE FOOTAGE OF EACH FLOOR OF THE PREMISES
| BUILDING | LEVEL | RENTABLE SQUARE FEET PER FLOOR | BLDG RENTABLE SQUARE FEET | COMPLEX RENTABLE SQUARE FEET | ||||||||||
| BLDG1 NORTH TOWER | L1 | 12,289.09* | 299,255.17 | 424,454.69 | ||||||||||
| L2 | 23,421.33 | |||||||||||||
| L3 | 23,439.15 | |||||||||||||
| L4 | 27,338.28 | |||||||||||||
| L5 | 24,618.21 | |||||||||||||
| L6 | 27,596.04 | |||||||||||||
| L7 | 26,657.33 | |||||||||||||
| L8 | 26,577.07** | |||||||||||||
| L9 | 26,577.07** | |||||||||||||
| L10 | 26,913.87** | |||||||||||||
| L11 | 26,913.87** | |||||||||||||
| L12 | 26,913.87** | |||||||||||||
| BLDG 2 NORTH BUILDING | L1 | 2,381.03 | 125,199.52 | |||||||||||
| L2 | 11,816.12 | |||||||||||||
| L3 | 11,788.80 | |||||||||||||
| L4 | 33,664.07 | |||||||||||||
| L5 | 32,816.33 | |||||||||||||
| L6 | 32,733.18 | |||||||||||||
| BLDG3 SOUTH TOWER | L1 | 807.73 | 259,551.05 | 325,915.63 | ||||||||||
| L2 | 464.45 | |||||||||||||
| L3 | 1,591.71 | |||||||||||||
| L4 | 30,104.76 | |||||||||||||
| L5 | 29,549.59 | |||||||||||||
| L6 | 29,550.77 | |||||||||||||
| L7 | 29,486.99 | |||||||||||||
| L8 | 29,543.96 | |||||||||||||
| L9 | 29,543.96 | |||||||||||||
| L10 | 26,302.38 | |||||||||||||
| L11 | 26,302.38 | |||||||||||||
| L12 | 26,302.38 | |||||||||||||
| BLDG4 SOUTH BUILDING | L1 | 12,564.47 | 66,364.58 | |||||||||||
| L2 | 0.00 | |||||||||||||
| L3 | 13,986.84 | |||||||||||||
| L4 | 13,313.33 | |||||||||||||
| L5 | 13,337.09 | |||||||||||||
| L6 | 13,162.86 | |||||||||||||
| TOTAL OVERALL BUILDING FLOOR AREA | 750,370.32 | |||||||||||||
| *Retail Space, not part of the Premises. | ||||||||||||||
| **Give-Back Space, not part of the Premises. | ||||||||||||||
Exhibit A-1
EXHIBIT B
Effective as of the Give-Back Date, Tenant shall pay the following monthly payments:
| PERIOD | MONTHLY PAYMENT AMOUNT 4 | ANNUAL “BASE RENT” PER RENTABLE SQUARE FOOT | ||||||
| Give-Back Date to 11/30/21 | $733,973.23 | $65.78 | ||||||
| 12/01/21 to 5/31/22 | $755,954.50 | $67.75 | ||||||
4The seven (7) monthly payments reflected in this schedule total $5,269,700.23. If the Give-Back Date occurs after November 1, 2021, the Monthly Payment Amount shall not be prorated. These payments will be credited against the Termination Fee.
2
Exhibit 21.1
Subsidiaries of Registrant
Name of Subsidiary | Jurisdiction of Incorporation | ||||
Dropbox Canada Limited | British Columbia | ||||
Dropbox Holding, LLC | Delaware | ||||
| Hypertools, Inc. | Delaware | ||||
Orcinus Holdings, LLC | Delaware | ||||
CloudOn, Inc. | Delaware | ||||
CloudOn, Ltd. | Israel | ||||
| DocSend, Inc. | Delaware | ||||
Dropbox Australia Pty Ltd. | Australia | ||||
Dropbox France S.A.S | France | ||||
Dropbox Germany GmbH | Germany | ||||
Dropbox International Unlimited Company | Ireland | ||||
Dropbox Japan KK | Japan | ||||
Dropbox Mexico S. de R.L. de C.V | Mexico | ||||
Dropbox Netherlands B.V. | Netherlands | ||||
Dropbox Singapore Pte. Ltd. | Singapore | ||||
Dropbox Sweden AB | Sweden | ||||
Dropbox UK Online Ltd. | United Kingdom | ||||
Dropbox UK Online Ltd. Zweigniederlassung Hamburg | Germany | ||||
JN Projects, Inc. (d/b/a HelloSign) | Delaware | ||||
Valt Inc. | Delaware | ||||
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following Registration Statements:
(1) Registration Statement (Form S-8 No. 333-255665) of Dropbox, Inc., pertaining to the 2013 Stock Plan and 2015 Stock Option and Grant Plan of DocSend, Inc.,
(2) Registration Statement (Form S-8 No. 333-253304) of Dropbox, Inc., pertaining to the 2018 Equity Incentive Plan of Dropbox, Inc.,
(3) Registration Statement (Form S-8 No. 333-236570) of Dropbox, Inc., pertaining to the 2018 Equity Incentive Plan of Dropbox, Inc.,
(4) Registration Statement (Form S-8 No. 333-229924) of Dropbox, Inc., pertaining to the 2011 Equity Incentive Plan of JN Projects, Inc.,
(5) Registration Statement (Form S-8 No. 333-229842) of Dropbox, Inc., pertaining to the 2018 Equity Incentive Plan of Dropbox, Inc., and
(6) Registration Statement (Form S-8 No. 333-223863) of Dropbox, Inc., pertaining to the 2008 Equity Incentive Plan of Dropbox, Inc., 2017 Equity Incentive Plan of Dropbox, Inc., 2018 Equity Incentive Plan of Dropbox, Inc., and 2018 Employee Stock Purchase Plan of Dropbox, Inc.;
of our reports dated February 18, 2022, with respect to the consolidated financial statements of Dropbox, Inc. and the effectiveness of internal control over financial reporting of Dropbox, Inc. included in this Annual Report (Form 10-K) of Dropbox, Inc. for the year ended December 31, 2021.
/s/ Ernst & Young LLP
San Francisco, California
February 18, 2022
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO
EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a),
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Andrew W. Houston, certify that:
1.I have reviewed this Annual Report on Form 10-K of Dropbox, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: February 18, 2022
| DROPBOX, INC. | ||||||||
| By: | /s/ Andrew W. Houston | |||||||
| Name: | Andrew W. Houston | |||||||
| Title: | Chief Executive Officer (Principal Executive Officer) | |||||||
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO
EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a),
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Timothy J. Regan, certify that:
1.I have reviewed this Annual Report on Form 10-K of Dropbox, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: February 18, 2022
| DROPBOX, INC. | ||||||||
| By: | /s/ Timothy J. Regan | |||||||
| Name: | Timothy J. Regan | |||||||
| Title: | Chief Financial Officer (Principal Accounting and Financial Officer) | |||||||
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350), Andrew W. Houston, Chief Executive Officer of Dropbox, Inc.. (the “Company”), and Timothy J. Regan, Chief Financial Officer of the Company, each hereby certifies that, to the best of his knowledge:
1.The Company’s Annual Report on Form 10-K for the year ended December 31, 2021, to which this Certification is attached as Exhibit 32.1 (the “Periodic Report”), fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act; and
2.The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: February 18, 2022
/s/ Andrew W. Houston | |||||
| Andrew W. Houston | |||||
| Chief Executive Officer | |||||
| (Principal Executive Officer) | |||||
/s/ Timothy J. Regan | |||||
| Timothy J. Regan | |||||
| Chief Financial Officer | |||||
| (Principal Accounting and Financial Officer) | |||||