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


FORM 10-Q

(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019

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

Commission File Number 001-38434

 

Dropbox, Inc.
(Exact name of Registrant as specified in its charter)
 
Delaware
 
26-0138832
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
Dropbox, Inc.
333 Brannan Street
San Francisco, California 94107
(415) 857-6800
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)
 

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 x 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 x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
  
Accelerated filer
¨
 
 
 
Non-accelerated filer
x
  
Smaller reporting company
¨
 
 
 
 
 
 
 
Emerging growth company
¨

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

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

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



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


As of May 6, 2019, there were 227,146,748 shares of the registrants’ Class A common stock outstanding (which excludes 14,733,333 shares of Class A common stock subject to restricted stock awards that were granted pursuant to the Co-Founder Grants, and vest upon the satisfaction of a service condition and achievement of certain stock price goals), 242,146,748 shares of the registrant’s Class B common stock outstanding, and no shares of the registrant’s Class C common stock outstanding.



Table of Contents

TABLE OF CONTENTS

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

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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which statements involve substantial risk and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

our ability to retain and upgrade paying users;

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

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

our ability to achieve or maintain profitability;

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

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

our ability to effectively integrate our platform with others;

our ability to compete successfully in competitive markets;

our ability to respond to rapid technological changes;

our expectations and management of future growth;

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

our ability to attract large organizations as users;

our ability to offer high-quality customer support;

our ability to manage our international expansion;

our ability to attract and retain key personnel and highly qualified personnel;

our ability to protect our brand;

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

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

our ability to successfully identify, acquire, and integrate companies and assets.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.
You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a

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very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.
The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.

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PART I. FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS

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

As of

March 31, 2019

December 31, 2018
 
 
 
 
Assets



Current assets:



Cash and cash equivalents
$
359.2


$
519.3

Short-term investments
556.0


570.0

Trade and other receivables, net
34.1


28.6

Prepaid expenses and other current assets
58.3


92.3

Total current assets
1,007.6


1,210.2

Property and equipment, net
340.9


310.6

Operating lease right-of-use asset
430.4

 

Intangible assets, net
57.4


14.7

Goodwill
230.4


96.5

Other assets
61.9


62.1

Total assets
$
2,128.6


$
1,694.1

Liabilities and stockholders’ equity



Current liabilities:



Accounts payable
$
27.4


$
33.3

Accrued and other current liabilities
148.8


164.5

Accrued compensation and benefits
36.4


80.9

Operating lease liability
74.1

 

Finance lease obligation
70.7


73.8

Deferred revenue
508.4


485.0

Total current liabilities
865.8


837.5

Operating lease liability, non-current
441.5

 

Finance lease obligation, non-current
106.7


89.9

Other non-current liabilities(1)
9.7


89.9

Total liabilities
1,423.7


1,017.3

Commitments and contingencies (Note 10)



Stockholders’ equity:



Additional paid-in capital
2,377.8


2,337.5

Accumulated deficit
(1,674.7
)

(1,659.5
)
Accumulated other comprehensive income (loss)
1.8


(1.2
)
Total stockholders’ equity
704.9


676.8

Total liabilities and stockholders’ equity
$
2,128.6


$
1,694.1


(1) As of December 31, 2018 the Company had non-current deferred rent of $81.0 million. As of March 31, 2019, deferred rent is now included in the determination of the Company's operating lease right-of-use asset due to the adoption of ASC 842.

See accompanying Notes to Condensed Consolidated Financial Statements.

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

Three months ended
March 31,

2019

2018
 
 
 
 
Revenue
$
385.6


$
316.3

Cost of revenue(1)(2)
98.4


120.6

Gross profit
287.2


195.7

Operating expenses(1)(2):



Research and development
150.0


378.5

Sales and marketing
101.5


157.0

General and administrative
57.0


126.1

Total operating expenses
308.5


661.6

Loss from operations
(21.3
)

(465.9
)
Interest income (expense), net
3.7


(1.2
)
Other income, net
4.2


3.4

Loss before income taxes
(13.4
)

(463.7
)
Benefit from (provision for) income taxes
5.7


(1.8
)
Net loss
$
(7.7
)

$
(465.5
)
Net loss per share attributable to common stockholders, basic and diluted
$
(0.02
)

$
(2.13
)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted
410.5


218.8

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

 
Three months ended
March 31,
 
2019
 
2018
 
 
 
 
Cost of revenue
$
3.0

 
$
37.8

Research and development
30.5

 
282.9

Sales and marketing
7.1

 
72.4

General and administrative
15.0

 
93.4


(2) 
During the three months ended March 31, 2018, the Company recognized the cumulative unrecognized stock-based compensation of $418.7 million related to two-tier restricted stock units upon the effectiveness of the registration statement for the Company's IPO. See Note 1, "Description of the Business and Summary of Significant Accounting Policies" for further information.

See accompanying Notes to Condensed Consolidated Financial Statements.

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DROPBOX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In millions)
(Unaudited)
 
Three months ended
March 31,
 
2019
 
2018
 
 
 
 
Net loss
$
(7.7
)
 
$
(465.5
)
Other comprehensive income (loss), net of tax:
 
 
 
Change in foreign currency translation adjustments
1.1

 
1.5

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

 
(0.1
)
Total other comprehensive income (loss), net of tax
$
3.0

 
$
1.4

Comprehensive loss
$
(4.7
)
 
$
(464.1
)

See accompanying Notes to Condensed Consolidated Financial Statements.

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

 
Three months ended March 31, 2018
 
Convertible
preferred stock
 
Class A and Class B common stock
 
Additional
paid-in
capital
 
Accumulated
deficit
 
Accumulated
other
comprehensive
income (loss)
 
Total
stockholders’
equity
 
Shares
 
Amount
 
Shares
 
Amount
 
Balance at December 31, 2017
147.6

 
$
615.3

 
196.8

 
$

 
$
533.1

 
$
(1,049.7
)
 
$
4.2

 
$
102.9

Release of restricted stock units

 

 
30.6

 

 

 

 

 

Shares repurchased for tax withholdings on release of restricted stock

 

 
(11.8
)
 

 
(162.1
)
 
(85.2
)
 

 
(247.3
)
Conversion of preferred stock to common stock in connection with initial public offering
(147.6
)
 
(615.3
)
 
147.6

 

 
615.3

 

 

 

Issuance of common stock in connection with initial public offering and private placement, net of underwriters' discounts and commissions and issuance costs

 

 
31.6

 

 
631.3

 

 

 
631.3

Exercise of stock options and awards

 

 
0.2

 

 
0.8

 

 

 
0.8

Stock-based compensation

 

 

 

 
486.5

 

 

 
486.5

Other comprehensive income

 

 

 

 

 

 
1.4

 
1.4

Net loss

 

 

 

 

 
(465.5
)
 

 
(465.5
)
Balance at March 31, 2018

 
$

 
395.0

 

 
$
2,104.9

 
$
(1,600.4
)
 
$
5.6

 
$
510.1



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Three months ended March 31, 2019
 
Convertible
preferred stock
 
Class A and Class B common stock
 
Additional
paid-in
capital
 
Accumulated
deficit
 
Accumulated
other
comprehensive
income (loss)
 
Total
stockholders’
equity
 
Shares
 
Amount
 
Shares
 
Amount
 
Balance at December 31, 2018

 
$

 
409.6

 
$

 
$
2,337.5

 
$
(1,659.5
)
 
$
(1.2
)
 
$
676.8

Cumulative-effect adjustment from adoption of ASC 842

 

 

 

 

 
1.0

 

 
1.0

Release of restricted stock units

 

 
2.6

 

 

 

 

 

Shares repurchased for tax withholdings on release of restricted stock

 

 
(1.0
)
 

 
(17.0
)
 
(8.5
)
 

 
(25.5
)
Exercise of stock options and awards

 

 
0.2

 

 
0.9

 

 

 
0.9

Assumed stock options in connection with acquisition

 

 

 

 
0.8

 

 

 
0.8

Stock-based compensation

 

 

 

 
55.6

 

 

 
55.6

Other comprehensive income

 

 

 

 

 

 
3.0

 
3.0

Net loss

 

 

 

 

 
(7.7
)
 

 
(7.7
)
Balance at March 31, 2019

 
$

 
411.4

 
$

 
$
2,377.8

 
$
(1,674.7
)
 
$
1.8

 
$
704.9


See accompanying Notes to Condensed Consolidated Financial Statements.


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DROPBOX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Three months ended March 31,
 
2019
 
2018
 
 
 
 
Cash flow from operating activities
 
 
 
Net loss
$
(7.7
)
 
$
(465.5
)
Adjustments to reconcile net loss to net cash provided by operating activities:

 

Depreciation and amortization
45.8

 
35.9

Stock-based compensation
55.6

 
486.5

Amortization of deferred commissions
3.9

 
2.4

Other
(4.4
)
 
(0.6
)
Changes in operating assets and liabilities:

 

Trade and other receivables, net
(5.1
)
 
3.6

Prepaid expenses and other current assets
(14.2
)
 
(1.5
)
Other assets
11.2

 
(5.7
)
Accounts payable
(5.2
)
 
(2.8
)
Accrued and other current liabilities
10.0

 
8.8

Accrued compensation and benefits
(45.9
)
 
(26.2
)
Deferred revenue
18.6

 
26.7

Other non-current liabilities
(13.2
)
 
0.2

Tenant improvement allowance reimbursement
13.8

 

Net cash provided by operating activities
63.2

 
61.8

Cash flow from investing activities
 
 
 
Capital expenditures
(29.7
)
 
(9.9
)
Cash paid for business combinations, net of cash acquired
(172.1
)
 

Purchases of short-term investments
(153.0
)
 
(180.8
)
Proceeds from sales of short-term investments
110.2

 

Proceeds from maturities of short-term investments
66.6

 

Other
4.7

 
(2.4
)
Net cash used in investing activities
(173.3
)
 
(193.1
)
Cash flow from financing activities
 
 
 
Proceeds from initial public offering and private placement, net of underwriters' discounts and commissions

 
638.2

Payments of deferred offering costs

 
(0.9
)
Shares repurchased for tax withholdings on release of restricted stock
(25.5
)
 
(241.2
)
Proceeds from issuance of common stock, net of repurchases
0.9

 
0.8

Principal payments on finance lease obligations
(26.2
)
 
(29.8
)
Other
(0.2
)
 
(2.1
)
Net cash (used in) provided by financing activities
(51.0
)
 
365.0

Effect of exchange rate changes on cash and cash equivalents
1.0

 
1.6

Change in cash and cash equivalents
(160.1
)
 
235.3

Cash and cash equivalents—beginning of period
519.3

 
430.0

Cash and cash equivalents—end of period
$
359.2

 
$
665.3

 
 
 
 
Supplemental cash flow data:
 
 
 
Property and equipment acquired under finance leases
$
39.9

 
$
25.5


See accompanying Notes to Condensed Consolidated Financial Statements.

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



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

Business
Dropbox, Inc. (the “Company” or “Dropbox”) is a global collaboration platform. Dropbox was incorporated in May 2007 as Evenflow, Inc., a Delaware corporation, and changed its name to Dropbox, Inc. in October 2009. The Company is headquartered in San Francisco, California.

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

The condensed consolidated balance sheet as of December 31, 2018 included herein was derived from the audited financial statements as of that date. The unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the balance sheets, statements of operations, statements of comprehensive loss, statements of stockholders' equity and the statements of cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full fiscal year ended December 31, 2019 or any future period.

The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto as of and for the year ended December 31, 2018, included in the Company's Annual Report on Form 10-K on file with the SEC ("Annual Report").

Initial public offering and private placement
On March 27, 2018, the Company closed its initial public offering ("IPO"), in which the Company issued and sold 26,822,409 shares of Class A common stock at $21.00 per share. The Company received aggregate proceeds of $538.2 million, net of underwriters' discounts and commissions, before deducting offering costs of $6.9 million, net of reimbursements.

Immediately prior to the closing of the Company’s IPO, 147,310,563 shares of convertible preferred stock outstanding converted into an equivalent number of shares of Class B common stock. Further, pursuant to transfer agreements with certain of the Company’s stockholders, 258,620 shares of the Company’s convertible preferred stock and 2,609,951 shares of the Company’s Class B common stock automatically converted into an equivalent number of shares of Class A common stock. 

Immediately subsequent to the closing of the Company's IPO, Salesforce Ventures LLC purchased 4,761,905 shares of Class A common stock from the Company at $21.00 per share. The Company received aggregate proceeds of $100.0 million and did not pay any underwriting discounts or commissions with respect to the shares that were sold in the private placement.

On March 28, 2018, the underwriters exercised their option to purchase an additional 5,400,000 shares of the Company's Class A common stock at $21.00 per share. This transaction closed on April 3, 2018, resulting in additional proceeds of $108.4 million, net of underwriters' discounts and commissions.

The Company’s net proceeds from the IPO, the concurrent private placement, and underwriters' option totaled $746.6 million, before deducting offering costs of $6.9 million, net of reimbursements.

Upon the effectiveness of the registration statement for the Company's IPO, which was March 22, 2018, the liquidity event-related performance vesting condition, referred to as the Performance Vesting Condition, associated with the Company's two-tier restricted stock units ("RSUs") was satisfied. As a result, the Company recognized the cumulative unrecognized stock-based compensation related to its two-tier RSUs using the accelerated attribution method of $418.7 million attributable to service prior to such effective date.


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


During the first quarter of 2018, the Company's Board of Directors approved the acceleration of the Performance Vesting Condition for which the service condition was satisfied, to occur upon the effectiveness of the registration statement for the Company's IPO, rather than six months following an IPO. As a result, the Company released 26.8 million shares of common stock underlying the two-tier RSUs for which the Performance Vesting Condition was satisfied, and recorded $13.9 million in employer related payroll tax expenses associated with these same awards.

Stock split
On March 7, 2018, the Company effected a 1-for-1.5 reverse stock split of its capital stock. All of the share and per share information referenced throughout the condensed consolidated financial statements and notes to the condensed consolidated financial statements have been retroactively adjusted to reflect this reverse stock split.

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

The Company’s most significant estimates and judgments involve the estimation of the fair value of market-based awards and the valuation of acquired intangible assets and goodwill from business combinations.

Financial information about segments and geographic areas
The Company manages its operations and allocates resources as a single operating segment. Further, the Company manages, monitors, and reports its financials as a single reporting segment. The Company’s chief operating decision-maker is its Chief Executive Officer, who reviews financial information presented on a consolidated basis for purposes of making operating decisions, assessing financial performance, and allocating resources. See Note 16, "Geographic Areas" for information regarding the Company’s long-lived assets and revenue by geography.

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

Gains and losses realized from foreign currency transactions (those transactions denominated in currencies other than the foreign subsidiaries’ functional currency) are included in other income (expense), net. Monetary assets and liabilities are remeasured using foreign currency exchange rates at the end of the period, and non-monetary assets are remeasured based on historical exchange rates. The Company recorded immaterial net foreign currency transaction gains during the three months ended March 31, 2019 and 2018, respectively.

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


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


The Company’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 $222.6 million and $188.2 million of revenue during the three months ended March 31, 2019, and 2018, respectively, that was included in the deferred revenue balances at the beginning of their respective periods.

As of March 31, 2019, future estimated revenue related to performance obligations that were unsatisfied or partially unsatisfied was $549.8 million. The substantial majority of the unsatisfied performance obligations will be satisfied over the next twelve months.

Stock-based compensation
The Company has granted RSUs to its employees and members of the Board of Directors under the 2008 Equity Incentive Plan (“2008 Plan”), the 2017 Equity Incentive Plan (“2017 Plan”), and the 2018 Equity Incentive Plan ("2018 Plan"). The Company had two types of RSUs outstanding as of March 31, 2019:

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

Two-tier RSUs, which have both a service-based vesting condition and a Performance Vesting Condition. The service-based vesting period for these awards is typically four years with a cliff vesting period of one year and continue to vest monthly thereafter. Upon satisfaction of the Performance Vesting Condition, these awards vest quarterly. The Performance Vesting Condition was satisfied on the effectiveness of the registration statement related to the Company's IPO. Prior to August 2015, the Company granted two-tier RSUs under the 2008 Plan. The last grant date for two-tier RSUs was in May 2015. The Company recognizes compensation expense associated with two-tier RSUs using the accelerated attribution method over the requisite service period.

The Performance Vesting Condition for the two-tier RSUs was satisfied upon the effectiveness of the registration statement related to the Company's IPO, which was March 22, 2018. On that date, the Company recognized the cumulative unrecognized expense of the two-tier RSUs, using the accelerated attribution method, which is included in the Company's results for the three months ended March 31, 2018. See "—Initial public offering and private placement” for further discussion.

Since August 2015, the Company has granted one-tier RSUs as the only stock-based payment awards to its employees, with the exception of awards granted to its co-founders, and has not granted any stock options to employees since then. The fair values of the common stock underlying the RSUs granted in periods prior to the date of the Company's IPO were determined by the Board of Directors, with input from management and contemporaneous third-party valuations, which were performed at

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


least quarterly. For valuations after the Company's IPO, the Board of Directors determines the fair value of each share of underlying common stock based on the closing price of the Company's Class A common stock as reported on the Nasdaq Global Select Market on the date of the grant.

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

In December 2017, the Board of Directors approved a grant to the Company’s co-founders of restricted stock awards (“RSAs”) with respect to 14.7 million shares of Class A Common Stock in the aggregate (collectively, the “Co-Founder Grants”), of which 10.3 million RSAs were granted to Mr. Houston, the Company’s co-founder and Chief Executive Officer, and 4.4 million RSAs were granted to Mr. Ferdowsi, the Company’s co-founder and Director. These Co-Founder Grants have service-based, market-based, and performance-based vesting conditions. The Company estimated the grant date fair value of the Co-Founder Grants using a model based on multiple stock price paths developed through the use of a Monte Carlo simulation that incorporates into the valuation the possibility that the Stock Price Targets may not be satisfied. See Note 12, "Stockholders' Equity" for further information.

Cash and cash equivalents
Cash consists primarily of cash on deposit with banks and includes amounts in transit from payment processors for credit and debit card transactions, which typically settle within five business days. Cash equivalents include highly liquid investments purchased with an original maturity date of 90 days or less from the date of purchase.

Short-term investments
The Company’s short-term investments are primarily comprised of corporate notes and obligations, U.S. treasury securities, certificates of deposits, U.S. agency obligations, and commercial paper. 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 condensed consolidated balance sheets.

The Company's short-term investments are classified as available-for-sale securities and are recorded at fair value each reporting period. Unrealized gains and losses on these short-term investments are reported as a separate component of accumulated other comprehensive income (loss) in the condensed consolidated balance sheets until realized. Interest income is reported within interest income (expense), net in the condensed consolidated statements of operations. The Company periodically evaluates its short-term investments to assess whether those with unrealized loss positions are other-than-temporarily impaired. The Company considers various factors in determining whether to recognize an impairment charge, including the length of time the investment has been in a loss position, the extent to which the fair value is less than the Company’s cost basis, and the financial condition and near-term prospects of the investee. Realized gains and losses are determined based on the specific identification method and are reported in other income (expense), net in the condensed consolidated statements of operations. If the Company determines that the decline in an investment’s fair value is other-than-temporary, the difference is recognized as an impairment loss in the condensed consolidated statements of operations.

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

Trade accounts receivables are typically unsecured and are derived from revenue earned from customers located around the world. Two customers accounted for 13% and 41% of total trade and other receivables, net as of March 31, 2019. Two customers accounted for 14% and 23% of total trade and other receivables, net as of December 31, 2018. No customer accounted for more than 10% of the Company’s revenue in the periods presented.

Non-trade receivables

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


The Company records non-trade receivables to reflect amounts due for activities outside of its subscription agreements, such as receivables resulting from tenant improvement allowances prior to the adoption of ASC 842. Non-trade receivables totaled $10.3 million and $46.2 million, as of March 31, 2019 and December 31, 2018, respectively, and are classified within prepaid expenses and other current assets and other assets in the accompanying condensed consolidated balance sheets. See "—Lease obligations” for further discussion.

Deferred commissions, net
Deferred commissions, net is stated as gross deferred commissions less accumulated amortization. Sales commissions earned by the Company’s sales force and third-party resellers, as well as related payroll taxes, are considered to be incremental and recoverable costs of obtaining a contract with a customer. These amounts have been capitalized as deferred commissions within prepaid and other current assets and other assets on the condensed consolidated balance sheets. The Company deferred incremental costs of obtaining a contract of $7.3 million and $9.8 million during the three months ended March 31, 2019 and 2018, respectively.

Deferred commissions, net included in prepaid and other current assets were $15.9 million and $14.5 million as of March 31, 2019 and December 31, 2018, respectively. Deferred commissions, net included in other assets were $40.3 million and $38.3 million as of March 31, 2019 and December 31, 2018, respectively.

Deferred commissions are typically amortized over a period of benefit of five years. The period of benefit was estimated by considering factors such as historical customer attrition rates, the useful life of the Company’s technology, and the impact of competition in its industry. Amortized costs were $3.9 million and $2.4 million for the three months ended March 31, 2019 and 2018, respectively. Amortized costs are included in sales and marketing expense in the accompanying condensed consolidated statements of operations. There was no impairment loss in relation to the deferred costs for any period presented.

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

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

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

Lease obligations
The Company leases office space, datacenters, and equipment under non-cancelable finance and operating leases with various expiration dates through 2033. 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 straight-line 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

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


generally uses the base, non-cancelable, lease term when recognizing the lease assets and liabilities, unless it is reasonably certain that the option will be exercised.

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

The Company leases certain equipment from various third parties, through equipment financing 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 and the related amortization of assets under finance leases is included in depreciation and amortization expense in the Company’s condensed consolidated statements of operations. Initial asset values and finance lease obligations are based on the present value of future minimum lease payments.

The Company’s finance lease agreements may contain lease and non-lease components. The non-lease components include payments for support on infrastructure equipment obtained via finance leases, which when not significant in relation to the overall agreement, are combined with the lease components and accounted for together as a single lease component.
Business combinations
The Company uses best estimates and assumptions to assign a fair value to the tangible and intangible assets acquired and liabilities assumed in business combinations as of the acquisition date. These estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed may be recorded, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s consolidated statements of operations.
    
Long-lived assets, including goodwill and other acquired intangible assets, net
The Company evaluates the recoverability of its property and equipment and finite-lived intangible assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. The evaluation is performed at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If such review determines that the carrying amount of specific property and equipment or intangible assets is not recoverable, the carrying amount of such assets is reduced to its fair value.

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

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

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

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

A valuation allowance is provided against deferred tax assets unless it is more likely than not that they will be realized based on all available positive and negative evidence. Such evidence includes, but is not limited to, recent cumulative earnings

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


or losses, expectations of future taxable income by taxing jurisdiction, and the carry-forward periods available for the utilization of deferred tax assets.

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

Although the Company believes that it has adequately reserved for its uncertain tax positions, it can provide no assurance that the final tax outcome of these matters will not be materially different. The Company evaluates its uncertain tax positions on a regular basis and evaluations are based on a number of factors, including changes in facts and circumstances, changes in tax law, such as the 2017 Tax Cuts and Jobs Act ("2017 Tax Reform Act"), 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 June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes will result in more timely recognition of credit losses. The guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of adopting ASU No. 2016-13.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), which amends disclosure requirements for fair value measurements by requiring new disclosures, modifying existing requirements, and eliminating others. The amendments are the result of a broader disclosure project, which aims to improve the effectiveness of disclosures. ASU No. 2018-13 is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption to have a significant impact on its disclosures and is currently evaluating the timing of adopting ASU No. 2018-13.

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



In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40), Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. Under existing U.S. GAAP, there is diversity in practice in accounting for the costs of implementing cloud computing arrangements that are service contracts. The amendments in ASU No. 2018-15 amend the definition of a hosting arrangement and requires a customer in a hosting arrangement that is a service contract to capitalize certain costs as if the arrangement were an internal-use software project. The guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact and timing of adopting ASU No. 2018-15.

Recently adopted accounting pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Most prominent among the changes in the standard is the recognition of right-of-use assets (“ROU assets”) and lease liabilities by lessees for certain leases classified as operating leases under current GAAP. The Company has made the policy election to not recognize a lease liability or right-of-use asset for short-term operating leases.  

The Company adopted the standard as of January 1, 2019, using the modified retrospective approach and has elected to use the optional transition method which allows the Company to apply the guidance of ASC 840, including disclosure requirements, in the comparative periods presented. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classification related to agreements entered prior to adoption.  

The most significant impact was the recognition of ROU assets and lease liabilities for operating leases. The adoption of the new standard resulted in the recording of additional operating ROU assets and lease liabilities of approximately $431.7 million and $502.4 million, respectively, as of January 1, 2019.

The accounting for finance leases remained unchanged, except for the accounting for certain non-lease components. Lease and non-lease components will be accounted for as a single lease component if the non-lease component is determined to be insignificant to the total agreement.

The cumulative impact of transition to retained earnings, recorded as of the adoption date, was not material. The standard did not materially impact consolidated net earnings and had no impact on cash flows.

In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. Under existing U.S. GAAP, the effects of changes in tax rates and laws on deferred tax balances are recorded as a component of income tax expense in the period in which the law was enacted. When deferred tax balances related to items originally recorded in accumulated other comprehensive income are adjusted, certain tax effects become stranded in accumulated other comprehensive income. The amendments in ASU No. 2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the 2017 Tax Reform Act. The amendments in ASU No. 2018-02 also require certain disclosures about stranded tax effects. The Company adopted ASU No. 2018-02 on January 1, 2019. The adoption of the standard did not have a material impact on the Company's condensed consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting. Under existing U.S. GAAP, the measurement date for equity awards granted to nonemployees is the earlier of the performance commitment date or the date the performance is complete. The amendments in ASU No. 2018-07 allow for measurement of these awards on the grant date, consistent with equity awards granted to employees. The Company adopted ASU No. 2018-07 on January 1, 2019. The adoption of the standard did not have a material impact on the Company's condensed consolidated financial statements.



19

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


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

The amortized cost, unrealized gains and losses and estimated fair value of the Company's cash, cash equivalents and short-term investments as of March 31, 2019 and December 31, 2018 consisted of the following:

As of March 31, 2019

Amortized Cost
 
Unrealized Gain
 
Unrealized Loss
 
Estimated Fair Value
 
 
 
 
 
 
 
 
Cash
$
109.8

 
$

 
$

 
$
109.8

Cash equivalents:


 


 


 


Money market funds
226.9

 

 

 
226.9

Commercial paper
19.5

 

 

 
19.5

Corporate notes and obligations
3.0

 

 

 
3.0

Total cash and cash equivalents
$
359.2

 
$

 
$

 
$
359.2

Investments
 
 
 
 
 
 
 
Corporate notes and obligations
244.7

 
0.6

 

 
245.3

U.S. Treasury securities
193.0

 

 
(0.1
)
 
192.9

Certificates of deposit
52.2

 

 

 
52.2

U.S. agency obligations
38.5

 

 

 
38.5

Commercial Paper
27.1

 

 

 
27.1

Total short-term investments
555.5

 
0.6

 
(0.1
)
 
556.0

Total
$
914.7

 
$
0.6

 
$
(0.1
)
 
$
915.2



As of December 31, 2018

Amortized cost
 
Unrealized gain
 
Unrealized loss
 
Estimated fair value
 
 
 
 
 
 
 
 
Cash
$
103.0

 
$

 
$

 
$
103.0

Cash equivalents
 
 

 

 

Money market funds
355.5

 

 

 
355.5

U.S. Treasury securities
33.4

 

 

 
$
33.4

Commercial paper
27.4

 

 

 
27.4

Total cash and cash equivalents
$
519.3

 
$

 
$

 
$
519.3

Short-term investments

 

 

 

Corporate notes and obligations
269.6

 
0.1

 
(0.5
)
 
269.2

U.S. Treasury securities
176.0

 

 
(0.1
)
 
175.9

Certificates of deposit
70.6

 

 

 
70.6

U.S. agency obligations
37.1

 

 

 
37.1

Commercial paper
17.2

 

 

 
17.2

Total short-term investments
570.5

 
0.1

 
(0.6
)
 
570.0

Total
$
1,089.8

 
$
0.1

 
$
(0.6
)
 
$
1,089.3


Included in cash and cash equivalents is cash in transit from payment processors for credit and debit card transactions of $15.8 million and $11.9 million as of March 31, 2019 and December 31, 2018, respectively.

All short-term investments were designated as available-for-sale securities as of March 31, 2019 and December 31, 2018.

The following table presents the contractual maturities of the Company’s short-term investments as of March 31, 2019:

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


 
As of March 31, 2019
 
Amortized cost
 
Estimated fair value
 
 
 
 
Due within one year
$
337.9

 
$
338.1

Due between one to three years
217.6

 
217.9

Total
$
555.5

 
$
556.0


The Company had 65 short-term investments in unrealized loss positions as of March 31, 2019. There were no material gross unrealized losses from available-for-sale securities and no material realized gains or losses from available-for-sale securities that were reclassified out of accumulated other comprehensive income for the three months ended March 31, 2019 and 2018.

For investments in available-for-sale debt securities that have unrealized losses, the Company evaluates whether (i) it has the intention to sell any of these investments and (ii) whether it is not more likely than not that it will be required to sell any of these investments before recovery of the entire amortized cost basis. Based on this evaluation, the Company determined that there were no other-than-temporary impairments associated with short-term investments as of March 31, 2019.

The Company recorded $6.2 million and $1.4 million in interest income from its cash, cash equivalents and short-term investments for the three months ended March 31, 2019 and 2018, respectively.

Note 3.
Fair Value Measurements

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

The following table presents information about the Company’s financial instruments that are measured at fair value on a recurring basis using the input categories discussed in Note 1:   
 
As of March 31, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
Money market funds
$
226.9

 
$

 
$

 
$
226.9

Commercial paper

 
19.5

 

 
19.5

Corporate notes and obligations

 
3.0

 

 
3.0

Total cash equivalents
$
226.9

 
$
22.5

 
$

 
$
249.4

Short-term investments
 
 
 
 
 
 
 
Corporate notes and obligations

 
245.3

 

 
245.3

U.S. Treasury securities

 
192.9

 

 
192.9

Certificates of deposit

 
52.2

 

 
52.2

U.S. agency obligations

 
38.5

 

 
38.5

Commercial paper

 
27.1

 

 
27.1

Total short-term investments

 
556.0

 

 
556.0

Total cash equivalents and short-term investments
$
226.9

 
$
578.5

 
$

 
$
805.4



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


 
As of December 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
Money market funds
$
355.5

 
$

 
$

 
$
355.5

U.S. Treasury securities

 
33.4

 

 
33.4

Commercial paper

 
27.4

 

 
27.4

Total cash equivalents
$
355.5

 
$
60.8

 
$

 
$
416.3

Short-term investments
 
 
 
 
 
 
 
Corporate notes and obligations

 
269.2

 

 
269.2

U.S. treasury securities

 
175.9

 

 
175.9

Certificates of deposit

 
70.6

 

 
70.6

U.S agency obligations

 
37.1

 

 
37.1

Commercial paper

 
17.2

 

 
17.2

Total short-term investments

 
$
570.0

 

 
570.0

Total cash equivalents and short-term investments
$
355.5

 
$
630.8

 
$

 
$
986.3


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.

Note 4.
Property and Equipment, Net

Property and equipment, net consisted of the following:

 
As of
 
March 31, 2019
 
December 31, 2018
 
 
 
 
Datacenter and other computer equipment
$
682.8

 
$
667.4

Furniture and fixtures
24.8

 
23.8

Leasehold improvements
153.8

 
150.5

Construction in process
60.6

 
32.8

Total property and equipment
922.0

 
874.5

Accumulated depreciation and amortization
(581.1
)
 
(563.9
)
Property and equipment, net
$
340.9

 
$
310.6


The Company leases certain infrastructure from various third parties, through equipment financing leases. Infrastructure assets as of March 31, 2019 and December 31, 2018, respectively included a total of $360.2 million and $362.8 million acquired under financing lease agreements. These leases are capitalized in property and equipment, and the related amortization of assets under financing leases is included in depreciation and amortization expense. The accumulated depreciation of the infrastructure under financing leases totaled $196.2 million and $211.7 million as of March 31, 2019 and December 31, 2018, respectively.

Construction in process includes costs primarily related to construction of leasehold improvements for office buildings and datacenters.


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


Depreciation expense related to property and equipment was $43.1 million and $34.1 million for the three months ended March 31, 2019 and 2018, respectively.

Note 5.
Business Combinations

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.

The purchase consideration transferred consisted of the following:
 
Purchase consideration
Cash paid to common and preferred stockholders and vested option holders
$
175.2

Transaction costs paid by Dropbox on behalf of HelloSign
2.4

Fair value of assumed HelloSign options attributable to pre-combination services (1)
0.8

Purchase price adjustments
(0.8
)
Total purchase consideration
$
177.6


(1) The fair value of option assumed were based upon the Black-Scholes option-pricing model.

In addition to the total purchase consideration above, the Company has compensation agreements with key HelloSign personnel consisting of $48.5 million in future cash payments subject to on-going employee service. The related expense will be recognized within research and development expenses over the required service period of three years, while the related payments will begin in the first quarter of 2020 if the requisite service is provided.

The purchase consideration was preliminarily 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
$
5.5

Short-term investments
7.8

Acquisition-related intangible assets
44.6

Accounts receivable, prepaid and other assets
5.0

Total assets acquired
$
62.9

 
 
Liabilities assumed:
 
Accounts payable, accrued and other liabilities
$
6.3

Deferred revenue
4.8

Deferred tax liability
6.9

Total liabilities assumed
18.0

Net assets acquired, excluding goodwill
44.9

Total purchase consideration
177.6

Estimated goodwill (2)
$
132.7


(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.


23

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DROPBOX, INC.
NOTES TO UNAUDITED CONDENSED 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
$
20.5

 
4.9
Developed technology
19.6

 
5.0
Trade name
4.5

 
5.0
Total acquisition-related intangible assets
$
44.6

 
 

The fair values of the acquisition-related intangibles were determined using the following methodologies: the multi-period excess earnings method, replacement cost method, and the relief from royalty method, for customer relationships, 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 4.9 years.

One-time acquisition-related diligence costs of $1.0 million were expensed within general and administrative expenses as incurred during the three months ended March 31, 2019.

Note 6.
Intangible Assets
Intangible assets consisted of the following:
 
 
As of March 31,
 
As of December 31,
 
Weighted-
average
remaining
useful life
(In years)
 
2019
 
2018
 
Developed technology
$
25.0

 
$
47.0

 
4.9
Customer relationships
20.5

 

 
4.8
Software
20.0

 
19.2

 
2.2
Patents
13.0

 
13.0

 
7.9
Assembled workforce in asset acquisitions
12.6

 
12.6

 
1.6
Licenses
4.6

 
4.6

 
2.2
Trademarks and trade names
5.2

 
0.7

 
4.9
Other
3.3

 
3.3

 
6.0
Total intangibles
104.2

 
100.4

 
 
Accumulated amortization
(46.8
)
 
(85.7
)
 
 
Intangible assets, net
$
57.4

 
$
14.7

 

During the three months ended March 31, 2019 the Company retired $41.7 million in fully amortized developed technology assets.
Amortization expense was $2.8 million and $1.8 million for the three months ended March 31, 2019 and 2018, respectively.


24

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DROPBOX, INC.
NOTES TO UNAUDITED CONDENSED 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 March 31, 2019, is as follows:
 
 
 
Remaining nine months of Fiscal 2019
$
10.8

2020
13.6

2021
11.3

2022
8.0

2023
7.7

Thereafter
6.0

Total
$
57.4


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, 2018
$
96.5

HelloSign acquisition
132.7

Effect of foreign currency translation
1.2

Balance at March 31, 2019
$
230.4


The goodwill acquired from HelloSign is carried in U.S. dollars, while goodwill from previous acquisitions is denominated in other foreign currencies.

Goodwill amounts are not amortized, but tested for impairment on an annual basis. There was no impairment of goodwill as of March 31, 2019 and December 31, 2018.

Note 8.
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 (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 its 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. The Company may from time to time request increases in its borrowing capacity under the revolving credit facility of up to $275.0 million, provided no event of default has occurred or is continuing or would result from such increase. In conjunction with the amendment, the Company paid upfront issuance fees of $0.4 million, which are being amortized over the remaining term of the agreement.

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 with letters of credit issued under the revolving credit facility, which accrues at a rate of 1.5% 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 LIBOR plus a spread of 1.50% or at an alternative base rate plus a spread of 0.50%.

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



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 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 March 31, 2019 and December 31, 2018, respectively.

The Company had an aggregate of $68.9 million of letters of credit outstanding under the revolving credit facility as of March 31, 2019, and the Company’s total available borrowing capacity under the revolving credit facility was $656.1 million as of March 31, 2019. The Company’s letters of credit expire between April of 2019 and April of 2022.

Note 9.
Leases

The Company has operating leases for corporate offices and datacenters, and finance leases for infrastructure equipment. The Company’s leases have remaining lease terms of 1 year to 15 years, some of which include options to extend the leases for up to 5 years.

The Company also has subleases of former corporate offices. Subleases have remaining lease terms of 3 to 4 years.  Sublease income, which is recorded as a reduction of rental expense, was $1.9 million and $3.5 million for the three months ended March 31, 2019 and 2018, respectively.

The components of single lease cost were as follows:

 
Three months ended
 
March 31, 2019
 
March 31, 2018
Operating lease cost (1)
$
22.1

 
$
21.9

Finance lease cost:

 
 
     Amortization of assets under finance lease
21.7

 
21.7

     Interest
2.2

 
1.9

Total finance lease cost
$
23.9

 
$
23.6

(1) Is presented gross of sublease income and includes short-term leases, which are immaterial

Other information related to leases was as follows:

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


 
Three months ended
 
March 31, 2019
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
$
23.0

     Payments for finance leases included in cash from operating activities
$
2.2

     Payments for finance leases included in cash from financing activities
$
26.2

Assets obtained in exchange for lease obligations:
 
     Operating leases
$
14.5

     Finance leases
$
39.9

 
 
Weighted Average Remaining Lease Term (in years)
 
     Operating leases
9.7

     Finance leases
2.8

 
 
Weighted Average Discount Rate
 
     Operating leases
4.4
%
     Finance leases
5.1
%

Future minimum lease payments under non-cancellable leases as of March 31, 2019 were as follows:
Year ending December 31,
Operating leases(1)
 
Finance leases
2019 (excluding the three months ended March 31, 2019)
$
64.8

 
$
64.2

2020
84.6

 
56.2

2021
77.6

 
41.1

2022
70.3

 
27.4

2023
53.4

 
2.2

Thereafter
357.0

 

Total future minimum lease payments
707.7

 
191.1

Less imputed interest
(163.6
)
 
(13.7
)
Less tenant improvement receivables
(28.5
)
 

Total liability
$
515.6

 
$
177.4


(1) Consists of future non-cancelable minimum rental payments under operating leases for the Company’s corporate offices and datacenters where the Company has possession, excluding rent payments from the Company’s sub-tenants and variable operating expenses. As of March 31, 2019, the Company is entitled to non-cancelable rent payments from its sub-tenants of $40.6 million, which will be collected over the next 4 years.

In 2017, the Company entered into a lease agreement for office space in San Francisco, California, to serve as its new corporate headquarters. The Company took initial possession of the first phase of its new corporate headquarters in June 2018, and began to recognize single lease cost. In that same period, the Company recorded a lease incentive obligation related to tenant improvement reimbursements associated with the first phase. The lease incentive obligation is recorded net against the Company's operating right-of-use asset and was $42.6 million as of March 31, 2019. The Company expects to start making recurring rental payments under the lease in the third quarter of 2019. The Company's total expected minimum obligations for all three phases of the lease are $843.1 million, which 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.  In the three months ended March 31, 2019, the Company collected tenant improvement reimbursements from the landlord totaling $13.8 million.

27

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



As of March 31, 2019, the Company had commitments of $408.3 million for operating leases that have not yet commenced, and therefore are not included in the right-of-use asset or operating lease liability.  These operating leases will commence between 2019 and 2021 with lease terms of 4 years to 15 years.

Note 10.
Commitments and Contingencies

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.

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.

Other commitments
Other commitments include payments to third-party vendors for services related to the Company’s infrastructure, infrastructure warranty contracts, asset retirement obligations for office modifications, and a note payable related to financing of infrastructure. There have been no material changes in the Company's other commitments, as disclosed in the Annual Report.

Note 11.
Accrued and Other Current Liabilities
Accrued and other current liabilities consisted of the following:
 
As of
 
March 31, 2019
 
December 31, 2018
 
 
 
 
Non-income taxes payable
$
83.9

 
$
75.7

Accrued legal and other external fees
34.2

 
28.1

Deferred rent

 
41.0

Income taxes payable
(0.1
)
 
0.3

Other accrued and current liabilities
30.8

 
19.4

Total accrued and other current liabilities
$
148.8

 
$
164.5


The decrease in deferred rent from December 31, 2018 is due to the Company's adoption of ASC 842 on January 1, 2019 using the modified retrospective approach. As of March 31, 2019, deferred rent reduces the Company's operating right-of-use asset. See Note 9 "Leases" for additional discussion.

Note 12.
Stockholders’ 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

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


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. During the three months ended March 31, 2019, holders of 11.8 million shares of Class B common stock voluntarily converted into an equivalent number of shares of Class A common stock.

As of March 31, 2019, 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. As of March 31, 2019, 224.1 million shares of Class A common stock, 187.3 million shares of Class B common stock, and no shares of Class C common stock were issued and outstanding. As of December 31, 2018, 211.0 million shares of Class A common stock, 198.6 million shares of Class B common stock, and no shares of Class C common stock were issued and outstanding. Class A shares issued and outstanding as of March 31, 2019 and December 31, 2018 exclude 14.7 million unvested restricted stock awards granted to the Company’s co-founders. See "Co-Founder Grants" section below for further details.

Convertible preferred stock
Immediately prior to the closing of the Company’s IPO, all of the 147.3 million shares of convertible preferred stock converted into an equivalent number of shares of Class B common stock. Further, pursuant to transfer agreements with certain of the Company’s stockholders, 0.3 million shares of the Company’s convertible preferred stock automatically converted into an equivalent number of shares of Class A common stock. 

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.

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 HelloSign, the Company assumed unvested stock options that had been granted under the HelloSign's 2011 Equity Incentive Plan.

As of March 31, 2019, there were 25.4 million stock-based awards issued and outstanding and 79.2 million shares available for issuance under the 2008 Equity Incentive Plan, HelloSign's Equity Incentive Plan, the 2017 Equity Incentive Plan, and the 2018 Plan (collectively, the "Plans").


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Table of Contents
DROPBOX, INC.
NOTES TO UNAUDITED CONDENSED 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 three months ended March 31, 2019:

 
 
 
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
shares
outstanding under the Plans
 
Weighted-
average
grant date
fair value
per share
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
57.1

 
1.3

 
$
14.68

 
5.0
 
$
9.1

 
25.0

 
$
18.68

Additional shares authorized
21.2

 

 

 
 
 
 
 

 

Stock options assumed
0.9

 
0.9

 
6.02

 
 
 
 
 

 

Options exercised and RSUs released

 
(0.2
)
 
5.15

 
 
 
 
 
(2.6
)
 
17.42

Options and RSUs canceled
1.5

 

 

 
 
 
 
 
(1.5
)
 
17.19

Shares repurchased for tax withholdings on release of restricted stock
1.0

 

 

 
 
 
 
 

 
17.42

Restricted stock and options granted
(2.5
)
 
0.2

 
22.63

 
 
 
 
 
2.3

 
23.79

Balance at March 31, 2019
79.2

 
2.2

 
$
12.45

 
5.1
 
$
21.7

 
23.2

 
$
19.44

Vested at March 31, 2019
 
 
1.1

 
$
15.71

 
5.1
 
$
7.7

 

 
$

Unvested at March 31, 2019
 
 
1.1

 
$
9.22

 
 
 
$
14.0

 
23.2

 
$
19.44


The following table summarizes information about the pre-tax intrinsic value of options exercised during the three months ended March 31, 2019 and 2018:

 
Three months ended March 31,
 
2019
 
2018
 
 
 
 
Intrinsic value of options exercised
$
3.1

 
$
1.7


As of March 31, 2019, unamortized stock-based compensation related to unvested stock options, restricted stock awards (excluding the Co-Founder Grants), and RSUs was $447.8 million. The weighted-average period over which such compensation expense will be recognized if the requisite service is provided is approximately 3.0 years as of March 31, 2019.

The total fair value of released RSUs, as of their respective vesting dates, during the three months ended March 31, 2019 and 2018 were $67.9 million and $643.3 million, respectively.

Assumed stock options
In connection with the acquisition of HelloSign 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:


30

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


Expected volatility
51.6
%
Expected term (in years)
3.4 - 7.0

Risk-free interest rate
2.42% - 2.51%

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.

The estimated weighted-average grant date fair value for stock options assumed was $21.60 per share and total fair value of $19.4 million, of which, $18.6 million will be recognized as post-combination stock-based compensation expense.

Co-Founder Grants
In December 2017, the Board of Directors approved a grant to the Company’s co-founders of non-Plan RSAs with respect to 14.7 million shares of Class A Common Stock in the aggregate (collectively, the “Co-Founder Grants”), of which 10.3 million RSAs were granted to Mr. Houston, the Company’s co-founder and Chief Executive Officer, and 4.4 million RSAs were granted to Mr. Ferdowsi, the Company’s co-founder and Director. These Co-Founder Grants have service-based, market-based, and performance-based vesting conditions. The 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. However, the Co-Founder Grants are not considered a participating security for purposes of calculating net loss per share attributable to common stockholders in Note 13, "Net Loss Per Share", as the right to the cumulative declared dividends is forfeitable if the service condition is not met.

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.

The Company calculated the grant date fair value of the Co-Founder Grants based on multiple stock price paths developed through the use of a Monte Carlo simulation. A Monte Carlo simulation also calculates a derived service period for each of the nine vesting tranches, which is the measure of the expected time to achieve each Stock Price Target. A Monte Carlo simulation requires the use of various assumptions, including the underlying stock price, volatility, and the risk-free interest rate as of the valuation date, corresponding to the length of time remaining in the performance period, and expected dividend yield. The weighted-average grant date fair value of each Co-Founder Grant was estimated to be $10.60 per share. The weighted-average derived service period of each Co-Founder Grant was estimated to be 5.2 years, and ranged from 2.9 - 6.9 years. The Company will recognize aggregate stock-based compensation expense of $156.2 million over the derived service period of each tranche using the accelerated attribution method as long as the co-founders satisfy their service-based vesting conditions. If the Stock Price Targets are met sooner than the derived service period, the Company will adjust its stock-based compensation to reflect the cumulative expense associated

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


with the vested awards. The Company will recognize expense if the requisite service is provided, regardless of whether the market conditions are achieved.

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 Company recognized $8.6 million and $10.6 million in stock-based compensation related to the Co-Founder Grants during the three months ended March 31, 2019 and 2018, respectively. As of March 31, 2019, unamortized stock-based compensation expense related to the Co-Founder Grants was $119.3 million.

Award modifications
During the year ended December 31, 2017, the Company's Board of Directors voted to approve a modification of vesting schedules for certain unvested one-tier and two-tier RSUs to align the vesting schedules for all RSUs to vest once per quarter. The modification was effective February 15, 2018, which resulted in accelerated vesting of impacted RSUs that had met their service requirement as of that date. As a result, the Company recognized an incremental $10.0 million in stock-based compensation during the first quarter of 2018 related to these modified one-tier and two-tier RSUs.

Note 13.
Net Loss Per Share

The Company computes net 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 losses. Before the IPO, the Company’s outstanding securities also included convertible preferred stock. The holders of convertible preferred stock did not have a contractual obligation to share in the Company’s losses, and as a result, net losses were not allocated to these securities.

The following table sets forth the calculation of basic and diluted net loss per share attributable to common stockholders during the periods presented. The shares issued in the IPO and the shares of Class A and Class B common stock issued upon conversion of the outstanding shares of convertible preferred stock in the IPO are included in the table below weighted for the period outstanding in the three months ended March 31, 2018. Additionally, the voluntary conversions of Class B common stock into Class A common stock are included in the table below weighted for the period outstanding in the three months ended March 31, 2019:

 
Three months ended March 31,
 
2019
 
2018
 
Class A
 
Class B
 
Class A
 
Class B
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net loss attributable to common stockholders
$
(4.0
)
 
$
(3.7
)
 
$
(30.8
)
 
$
(434.7
)
Denominator:
 
 
 
 
 
 
 
Weighted-average number of common shares outstanding used in computing basic and diluted net loss per common share
215.1

 
195.4

 
14.5

 
204.3

Net loss per common share, basic and diluted
$
(0.02
)
 
$
(0.02
)
 
$
(2.13
)
 
$
(2.13
)

Since the Company was in a loss position for all periods presented, basic net loss per share attributable to common stockholders is the same as diluted net loss per share for all periods as the inclusion of all potential common shares outstanding would have been anti-dilutive. 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:

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


 
Three months ended
March 31,
 
2019
 
2018
 
 
 
 
Restricted stock units
24.6

 
56.3

Options to purchase shares of common stock
1.8

 
4.9

Co-Founder Grants
14.7

 
14.7

Total
41.1

 
75.9


Note 14.
Income Taxes

The Company computed the year-to-date income tax provision by applying the estimated annual effective tax rate to the year-to-date pre-tax loss and adjusted for discrete tax items in the period. The Company's income tax was a benefit of $5.7 million for the three months ended March 31, 2019, and an expense of $1.8 million for the three months ended March 31, 2018.

Income tax benefit for the three months ended March 31, 2019 was primarily attributable to the tax benefit from the acquisition of HelloSign.

During the three months ended March 31, 2019, the Company recorded a deferred tax liability of $6.9 million to reflect the tax effect of the assets and liabilities recorded in the acquisition of HelloSign. As a result of the acquisition of HelloSign, the Company recorded a one-time benefit of $6.9 million to recognize previously unrecognized deferred tax assets, which are now more-likely-than-not to be realized as a result of the net deferred tax liability recorded in the transaction. For further discussion of the HelloSign acquisition, see Note 5 "Business Combinations".

For the periods presented, the difference between the U.S. statutory rate and the Company's effective tax rate is primarily due to the full valuation allowance on its U.S. and Irish deferred tax assets. The effective tax rate is also impacted by earnings realized in foreign jurisdictions with statutory tax rates lower than the federal statutory tax rate.

The Company periodically evaluates the realizability of its net deferred tax assets based on all available evidence, both positive and negative. The realization of net deferred tax assets is dependent on the Company's ability to generate sufficient future taxable income during periods prior to the expiration of tax attributes to fully utilize these assets. As of March 31, 2019, the Company continues to maintain a full valuation allowance on its deferred tax assets in the U.S. and Ireland. However, the Company has partially benefited from its deferred tax assets due to the recognition of forecasted future income which is more likely than not to be earned in one of its foreign jurisdictions.

The Company is subject to income tax audits in the U.S. and foreign jurisdictions. The Company records liabilities related to uncertain tax positions and believes that it has provided adequate reserves for income tax uncertainties in all open tax years. Unrecognized tax benefits increased by approximately $3.6 million for the three months ended March 31, 2019, of which $0.6 million, if recognized, would affect the Company's effective tax rate.

Note 15.
Related Party Transactions

Dropbox Charitable Foundation
During the year ended December 31, 2016, two of the Company’s controlling shareholders formed the Dropbox Charitable Foundation, a Delaware non-stock corporation (the “Foundation”). The primary purpose of the Foundation is to engage in charitable and educational activities within the meaning of Section 501(c)(3) of the Code. The Foundation is governed by a Board of Directors, a majority of which are independent. Both shareholders made contributions to the Foundation during the year ended December 31, 2016, comprised entirely of shares of Dropbox common stock. The Company has not consolidated the Foundation in the accompanying condensed consolidated financial statements, as the Company does not have control of the entity.

There were no contributions to the Foundation during the three months ended March 31, 2019 and 2018, respectively.

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



Note 16.
Geographic Areas

Long-lived assets
The following table sets forth long-lived assets by geographic area:

 
As of
 
March 31, 2019
 
December 31, 2018
 
 
 
 
United States
$
324.9

 
$
293.6

International(1)
16.0

 
17.0

Total property and equipment, net
$
340.9

 
$
310.6

(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 March 31, 2019 and December 31, 2018.

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 three months ended March 31, 2019 and 2018.

 
Three months ended March 31,
 
2019
 
2018
 
 
 
 
United States
$
197.1

 
$
161.6

International(1)
188.5

 
154.7

Total revenue
$
385.6

 
$
316.3

(1) 
No single country outside of the United States accounted for more than 10% of total revenue during the three months ended March 31, 2019 and 2018, respectively.

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ITEM 2. 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 our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K. As discussed in the section titled “Note About Forward-Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” under Part II, Item 1A in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K. Our fiscal year ends December 31.

Overview
Our modern economy runs on knowledge. Today, knowledge lives in the cloud as digital content, and Dropbox is a global collaboration platform where more and more of this content is created, accessed, and shared with the world. We serve more than 500 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. 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.

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 13.2 million paying users.

Our Subscription Plans
We generate revenue from individuals, 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 a Standard, Advanced, or Enterprise team plan. Each team 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. 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. 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 fiscal 2019, we acquired HelloSign, an e-signature and document workflow platform. The acquisition of HelloSign expands our content collaboration capabilities to include additional business-critical workflows. 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 of a certain number of licenses, but can also have hundreds of users. Customers can choose between an annual or monthly plan, with a small number of large organizations on multi-year plans. HelloSign also typically bills customers at the beginning of their respective terms and recognizes revenue ratably over the subscription period. HelloSign primarily sells within the United States and sells only in U.S. dollars


Our Customers
Our customer base is highly diversified, and in the period presented, no customer accounted for more than 1% of our revenue. Our customers include individuals, 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,

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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.


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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. We actively encourage our registered users to become paying users through in-product prompts and notifications, time-limited free trials of paid subscription plans, email campaigns, and lifecycle marketing.

Upgrade and expand existing customers

We offer a range of paid subscription plans, from Plus and Professional 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.

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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.

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 acquired HelloSign in the first quarter of fiscal 2019. 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 March 31, 2019, December 31, 2018, and March 31, 2018.

 
As of
 
March 31, 2019
 
December 31, 2018
 
March 31, 2018
 
 
 
 
 
 
 
(In millions)
Paying users
13.2

 
12.7

 
11.5


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.

In 2017, we launched our Dropbox Business Advanced plan. At the time of launch, we grandfathered existing Dropbox Business teams into the Dropbox Business Advanced plan at their legacy price. During the second quarter of 2018, a significant portion of those grandfathered teams renewed at a higher price. As a result of these renewals, and combined with an increased mix of sales towards our higher-priced subscription plans, we experienced an increase in our average revenue per paying user for the three months ended March 31, 2019, compared to the three months ended March 31, 2018.

The below table sets forth our ARPU for the three months ended March 31, 2019 and 2018.

 
Three months ended March 31,
 
2019
 
2018
 
 
 
 
ARPU
$
121.04

 
$
114.30


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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, and may be calculated differently by other companies in our industry, limiting its usefulness as a comparative measure.

Our FCF decreased for the three months ended March 31, 2019, compared to the three months ended March 31, 2018, primarily due to higher capital expenditures related to our office and datacenter build-outs and an increase in our annual bonus payout. The decrease was partially offset by 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.

We expect our FCF to fluctuate in future periods as we purchase infrastructure equipment to support our user base and invest in our new and existing office spaces, including our new corporate headquarters, to support our plans for growth. These activities, along with certain increased operating expenses as described below, may result in a decrease in FCF as a percentage of revenue in future periods.

The following is a reconciliation of FCF to the most comparable GAAP measure, net cash provided by operating activities:
 
Three months ended March 31,
 
2019
 
2018
 
 
 
 
 
(In millions)
Net cash provided by operating activities
$
63.2

 
$
61.8

Capital expenditures
(29.7
)
 
(9.9
)
Free cash flow
$
33.5

 
$
51.9


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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.

Our revenue is driven primarily by the number of paying users and the price we charge for access to our platform, which varies based on the type of plan to which a customer subscribes. 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, also known as Basic 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. As we continue to increase the utilization of our internal infrastructure, we generally expect our gross margin, to remain relatively constant in the near term and to increase modestly in 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. 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 to hire 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 vary 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 user, 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 increase

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in absolute dollars in future periods and vary 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 grants of restricted stock made to our co-founders. We expect that general and administrative expenses will increase in absolute dollars in future periods and vary from period to period as a percentage of revenue.

Interest income (expense), net