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

FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020

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

Commission File Number 001-38434

Dropbox, Inc.
(Exact name of Registrant as specified in its charter)
Delaware26-0138832
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification Number)
Dropbox, Inc.
1800 Owens Street
San Francisco, California 94158
(415) 857-6800
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of exchange on which registered
Class A Common Stock, par value $0.00001 per shareDBXThe NASDAQ Stock Market LLC
(Nasdaq Global Select Market)

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

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

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

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

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

As of November 2, 2020, there were 315,878,882 shares of the registrants’ Class A common stock outstanding (which excludes 10,333,333 shares of Class A common stock subject to restricted stock awards that were granted pursuant to the Co-Founder Grants, and vest upon the satisfaction of a service condition and achievement of certain stock price goals and 4,265,194 shares of Class A common stock subject to restricted stock awards that were granted to other Dropbox executives and vest upon the satisfaction of a service condition), 97,738,356 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
FORWARD-LOOKING STATEMENTS

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

our ability to retain and upgrade paying users;

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

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

our expectations regarding the challenges and anticipated benefits to our business from our shift to a Virtual First work model as well as the impact to our financial results and business operations as a result of this shift;

our expectations regarding the potential impacts of the outbreak of the COVID-19 pandemic and related public health measures, as well as the potential for a more permanent global shift to remote work, on our business, the business of our customers, suppliers and partners, and the economy;

our ability to compete successfully in competitive markets;

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

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

our ability to effectively integrate our platform with others;

our ability to respond to rapid technological changes, including our ability to take advantage of potential market opportunities arising from what we believe to be a more permanent shift towards remote work;

our ability to achieve or maintain profitability;

our expectations 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, retain, integrate, and manage key and other highly qualified personnel, including as we transition to a Virtual First model with an increasingly distributed workforce;

our capital allocation plans, including expected allocations of cash and timing for our share repurchases and other investments;

our ability to protect our brand;

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

2

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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 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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TABLE OF CONTENTS
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Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 6.
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PART I. FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS

DROPBOX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
As of
September 30, 2020December 31, 2019
Assets
Current assets:
Cash and cash equivalents$452.7 $551.3 
Short-term investments773.8 607.7 
Trade and other receivables, net49.6 36.7 
Prepaid expenses and other current assets54.1 47.5 
Total current assets1,330.2 1,243.2 
Property and equipment, net488.4 445.3 
Operating lease right-of-use asset705.9 657.9 
Intangible assets, net37.0 47.4 
Goodwill234.3 234.5 
Other assets66.5 70.9 
Total assets$2,862.3 $2,699.2 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable$29.5 $40.7 
Accrued and other current liabilities129.4 161.9 
Accrued compensation and benefits93.3 101.4 
Operating lease liability89.7 79.9 
Finance lease obligation86.4 76.7 
Deferred revenue598.6 554.2 
Total current liabilities1,026.9 1,014.8 
Operating lease liability, non-current777.3 711.9 
Finance lease obligation, non-current169.4 138.2 
Other non-current liabilities37.4 25.9 
Total liabilities2,011.0 1,890.8 
Commitments and contingencies (Note 10)
Stockholders’ equity:
Additional paid-in capital2,608.8 2,531.3 
Accumulated deficit(1,764.3)(1,726.2)
Accumulated other comprehensive income6.8 3.3 
Total stockholders’ equity851.3 808.4 
Total liabilities and stockholders’ equity$2,862.3 $2,699.2 

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
September 30,
Nine Months Ended
September 30,
2020201920202019
Revenue$487.4 $428.2 $1,409.8 $1,215.3 
Cost of revenue(1)
103.2 104.8 308.8 306.1 
Gross profit384.2 323.4 1,101.0 909.2 
Operating expenses(1)
Research and development183.3 172.8 550.9 485.2 
Sales and marketing105.8 108.2 312.9 317.0 
General and administrative65.1 61.0 167.6 180.9 
Total operating expenses354.2 342.0 1,031.4 983.1 
Income (loss) from operations30.0 (18.6)69.6 (73.9)
Interest income, net0.1 3.0 2.6 9.9 
Other income, net3.5 0.2 23.1 14.4 
Income (loss) before income taxes33.6 (15.4)95.3 (49.6)
Benefit from (provision for) income taxes(0.9)(1.6)(5.8)3.5 
Net income (loss)$32.7 $(17.0)$89.5 $(46.1)
Net income (loss) per share-basic and diluted:
Basic net income (loss) per share
$0.08 $(0.04)$0.22 $(0.11)
Diluted net income (loss) per share
$0.08 $(0.04)$0.21 $(0.11)
Weighted-average shares used in computing net income (loss) per share attributable to common stockholders, basic
414.2 414.4 415.2 412.4 
Weighted-average shares used in computing net income (loss) per share attributable to common stockholders, diluted
419.9 414.4 419.9 412.4 
(1) Includes stock-based compensation as follows (in millions):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Cost of revenue$4.6 $4.1 $12.6 $11.8 
Research and development46.9 38.9 131.1 107.1 
Sales and marketing8.9 7.7 25.1 23.6 
General and administrative(2)
15.3 17.5 23.3 49.4 

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

See accompanying Notes to Condensed Consolidated Financial Statements.
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DROPBOX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
(Unaudited)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Net income (loss)$32.7 $(17.0)$89.5 $(46.1)
Other comprehensive income (loss), net of tax:
Change in foreign currency translation adjustments   1.6 
Change in net unrealized gains (losses) on short-term investments(0.6)0.2 3.5 1.7 
Total other comprehensive income (loss), net of tax$(0.6)$0.2 $3.5 $3.3 
Comprehensive income (loss)$32.1 $(16.8)$93.0 $(42.8)

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 September 30, 2020Three Months Ended September 30, 2019
 Class A and Class B Common StockAdditional paid in capitalAccumulated
deficit
Accumulated other comprehensive income (loss)Total stockholders' equityClass A and Class B common stockAdditional
paid-in
capital
Accumulated
deficit
Accumulated
other
comprehensive
income (loss)
Total
stockholders’
equity
 SharesAmountSharesAmount
Balances at beginning of period413.8 $ $2,560.4 $(1,764.4)$7.4 $803.4 413.4 $ $2,428.4 $(1,700.1)$1.9 $730.2 
Release of restricted stock units and awards3.3 — — — — — 3.0 — — — — — 
Shares repurchased for tax withholdings on release of restricted stock units and awards(1.1)— (10.6)(11.9)— (22.5)(1.1)— (18.0)(1.0)— (19.0)
Repurchases of common stock (1.8)— (16.8)(20.7)— (37.5)— — — — — — 
Exercise of stock options and awards0.1 — 0.1 — — 0.1  —  — —  
Stock-based compensation— — 75.7 — — 75.7 — — 68.2 — — 68.2 
Other comprehensive income (loss)— — — — (0.6)(0.6)— — — — 0.2 0.2 
Net income (loss)— — — 32.7 — 32.7 — — — (17.0)— (17.0)
Balances at end of period414.3 $ $2,608.8 $(1,764.3)$6.8 $851.3 415.3 $ $2,478.6 $(1,718.1)$2.1 $762.6 





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Nine Months Ended September 30, 2020Nine Months Ended September 30, 2019
 Class A and Class B Common StockAdditional paid in capitalAccumulated
deficit
Accumulated other comprehensive income (loss)Total stockholders' equityClass A and Class B common stockAdditional
paid-in
capital
Accumulated
deficit
Accumulated
other
comprehensive
income (loss)
Total
stockholders’
equity
 SharesAmountSharesAmount
Balances at beginning of period417.0 $ $2,531.3 $(1,726.2)$3.3 $808.4 409.6 $ $2,337.5 $(1,659.5)$(1.2)$676.8 
Cumulative-effect adjustment from adoption of ASC 842— — — — — — — — — 1.0 — 1.0 
Release of restricted stock units and awards9.4 — — — — — 8.5 — — — — — 
Shares repurchased for tax withholdings on release of restricted stock units and awards(3.3)— (31.0)(35.5)— (66.5)(3.1)— (53.6)(13.5)— (67.1)
Repurchases of common stock(9.2)— (85.2)(92.1)— (177.3)— — — — — — 
Exercise of stock options and awards0.4 — 1.6 — — 1.6 0.3 — 2.0 — — 2.0 
Assumed stock options in connection with acquisition — — — — — — — — 0.8 — — 0.8 
Stock-based compensation— — 192.1 — — 192.1 — — 191.9 — — 191.9 
Other comprehensive income (loss)— — — — 3.5 3.5 — — — — 3.3 3.3 
Net income (loss)— — — 89.5 — 89.5 — — — (46.1)— (46.1)
Balances at end of period414.3 $ $2,608.8 $(1,764.3)$6.8 $851.3 415.3 $ $2,478.6 $(1,718.1)$2.1 $762.6 



See accompanying Notes to Condensed Consolidated Financial Statements.

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DROPBOX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Nine Months Ended September 30,
20202019
Cash flow from operating activities
Net income (loss)$89.5 $(46.1)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization120.5 132.5 
Stock-based compensation192.1 191.9 
Net gains on equity investments(17.5)(5.7)
Amortization of deferred commissions17.5 12.7 
Other(0.9)(8.3)
Changes in operating assets and liabilities:
Trade and other receivables, net(12.9)(9.5)
Prepaid expenses and other current assets(24.0)(26.1)
Other assets55.4 41.8 
Accounts payable(8.9)(2.4)
Accrued and other current liabilities(22.7)9.5 
Accrued compensation and benefits(8.1)(3.1)
Deferred revenue43.4 54.7 
Other non-current liabilities(42.6)(45.6)
Tenant improvement allowance reimbursement19.3 45.4 
Net cash provided by operating activities400.1 341.7 
Cash flow from investing activities
Capital expenditures(67.8)(110.6)
Business combinations, net of cash acquired (171.6)
Purchases of short-term investments(541.1)(582.7)
Proceeds from sales of short-term investments183.0 341.0 
Proceeds from maturities of short-term investments221.9 236.7 
Other12.4 8.4 
Net cash used in investing activities(191.6)(278.8)
Cash flow from financing activities
Shares repurchased for tax withholdings on release of restricted stock units and awards(66.5)(67.1)
Proceeds from issuance of common stock, net of repurchases1.6 2.0 
Principal payments on finance lease obligations(64.9)(71.8)
Common stock repurchases(177.3) 
Other(0.8)(0.4)
Net cash used in financing activities(307.9)(137.3)
Effect of exchange rate changes on cash and cash equivalents0.8 (1.7)
Change in cash and cash equivalents(98.6)(76.1)
Cash and cash equivalents - beginning of period551.3 519.3 
Cash and cash equivalents - end of period$452.7 $443.2 
Supplemental cash flow data:
Property and equipment acquired under finance leases
$105.9 $107.0 

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

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

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

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

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

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

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

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




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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)

Gains and losses realized from foreign currency transactions (those transactions denominated in currencies other than the foreign subsidiaries’ functional currency) are included in other income, net. Monetary assets and liabilities are remeasured using foreign currency exchange rates at the end of the period, and non-monetary assets are remeasured based on historical exchange rates. The Company recorded net foreign currency transaction gains of $2.1 million during the three and nine months ended September 30, 2020, respectively, and net foreign currency transaction losses of $0.6 million and $1.1 million during the three and nine months ended September 30, 2019, respectively.

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

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

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

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

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

The Company recognized $277.0 million and $522.7 million of revenue during the three and nine months ended September 30, 2020, respectively, and recognized $241.3 million and $452.9 million of revenue during the three and nine months ended September 30, 2019, respectively, that was included in the deferred revenue balances at the beginning of their respective periods.

As of September 30, 2020, future estimated revenue related to performance obligations that were unsatisfied or partially unsatisfied was $658.5 million. The substantial majority of the unsatisfied performance obligations will be satisfied over the next twelve months.

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

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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)

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

As of September 30, 2020, the Company only had one-tier RSUs outstanding under the Dropbox Equity Incentive Plans.

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

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

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

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

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

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

The Company's short-term investments are recorded at fair value each reporting period. Unrealized gains and losses on these short-term investments are reported as a separate component of accumulated other comprehensive income (loss) in the condensed consolidated balance sheets until realized. Unrealized gains and losses for any short-term investments that management intends to sell or it is more likely than not that management will be required to sell prior to their anticipated recovery are recorded in other income, net. The Company segments its portfolio based on the underlying risk profiles of the securities and has a zero-loss expectation for U.S. treasury and U.S. government agency securities. The Company regularly reviews the securities in an unrealized loss position and evaluates the current expected credit loss by considering factors such as credit ratings, issuer-specific factors, current economic conditions, and reasonable and supportable forecasts. The Company did not record any material credit losses during the three and nine months ended September 30, 2020.

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.

One distribution partner accounted for 44% of total trade and other receivables, net as of September 30, 2020. Two distribution partners accounted for 10% and 27% of total trade and other receivables, net as of December 31, 2019. No customer accounted for more than 10% of the Company’s revenue in the periods presented.

Deferred commissions, net
Deferred commissions, net is stated as gross deferred commissions less accumulated amortization. Sales commissions earned by the Company’s sales force and third-party resellers, as well as related payroll taxes, are considered to be incremental and recoverable costs of obtaining a contract with a customer. These amounts have been capitalized as deferred commissions within prepaid and other current assets and other assets on the condensed consolidated balance sheets. The Company deferred incremental costs of obtaining a contract of $8.6 and $27.6 million during the three and nine months ended September 30, 2020, respectively, and $7.4 million and $21.1 million during the three and nine months ended September 30, 2019, respectively.

Deferred commissions, net included in prepaid and other current assets were $25.3 million and $19.9 million as of September 30, 2020 and December 31, 2019, respectively. Deferred commissions, net included in other assets were $48.2 million and $43.5 million as of September 30, 2020 and December 31, 2019, respectively.

Deferred commissions are typically amortized over a period of benefit of five years. The period of benefit was estimated by considering factors such as historical customer attrition rates, the useful life of the Company’s technology, and the impact of competition in its industry. Amortized costs were $6.7 million and $17.5 million for the three and nine months ended September 30, 2020, respectively, and $4.6 million and $12.7 million for the three and nine months ended September 30, 2019, respectively. Amortized costs are included in sales and marketing expense in the accompanying condensed consolidated statements of operations. There was no impairment loss in relation to the deferred costs for any period presented.



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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)

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 equipmentUseful life
Buildings
20 to 30 years
Datacenter and other computer equipment
3 to 5 years
Office equipment and other
3 to 7 years
Leasehold improvementsLesser of estimated useful life or remaining lease term


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

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

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

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

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

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

Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s condensed consolidated statements of operations.

Long-lived assets, including goodwill and other acquired intangible assets, net
The Company evaluates the recoverability of its property and equipment and finite-lived intangible assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. The evaluation is performed at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If such review determines that the carrying amount of specific property and equipment or intangible assets is not recoverable, the carrying amount of such assets is reduced to its fair value.

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

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

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

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

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

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

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

participants at the measurement date. When determining fair value measurements for assets and liabilities, the Company considers the principal or most advantageous market in which it would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions, and credit risk. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

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

Recently adopted accounting pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. The Company adopted ASU No. 2016-13 on January 1, 2020 using the modified retrospective approach. The cumulative impact of transition to retained earnings, recorded as of the adoption date, was not material to the Company's consolidated financial statements. The Company did not record any material credit losses during the three and nine months ended September 30, 2020.

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

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

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


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 September 30, 2020 and December 31, 2019 consisted of the following:
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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 September 30, 2020
Amortized CostUnrealized GainUnrealized LossEstimated Fair Value
Cash$71.6 $— $— $71.6 
Cash equivalents
Money market funds371.2 — — 371.2 
Commercial paper6.0 — — 6.0 
Corporate notes and obligations2.9 — — 2.9 
Certificates of deposit1.0— — 1.0 
Total cash and cash equivalents$452.7 $— $— $452.7 
Short-term investments
Corporate notes and obligations389.3 3.0 (0.1)392.2 
U.S. Treasury securities205.3 1.3  206.6 
Asset backed securities84.0 0.7  84.7 
U.S. agency obligations37.00.1 37.1
Commercial paper24.5  24.5
Certificates of deposit16.5   16.5 
Foreign government obligations9.3  9.3
Municipal securities2.9  2.9
Total short-term investments768.8 5.1 (0.1)773.8 
Total$1,221.5 $5.1 $(0.1)$1,226.5 
As of December 31, 2019
Amortized costUnrealized gainUnrealized lossEstimated fair value
Cash$105.0 $— $— $105.0 
Cash equivalents:
Money market funds444.3 — — 444.3 
Commercial paper2.0 — — 2.0 
Total cash and cash equivalents$551.3 $— $— $551.3 
Short-term investments— 
Corporate notes and obligations285.5 1.2 (0.1)286.6 
U.S. Treasury securities171.0 0.3  171.3 
Asset backed securities53.8   53.8 
Certificates of deposit38.2   38.2 
U.S. agency obligations27.2   27.2 
Commercial paper24.2   24.2 
Supranational securities4.0   4.0 
Municipal securities2.4   2.4 
Total short-term investments606.3 1.5 (0.1)607.7 
Total$1,157.6 $1.5 $(0.1)$1,159.0 


Included in cash and cash equivalents is cash in transit from payment processors for credit and debit card transactions of $12.2 million and $11.5 million as of September 30, 2020 and December 31, 2019, 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)


All short-term investments were designated as available-for-sale securities as of September 30, 2020 and December 31, 2019.

The following table presents the contractual maturities of the Company’s short-term investments as of September 30, 2020:
As of September 30, 2020
Amortized costEstimated fair value
Due within one year348.3 349.2 
Due between one to three years347.3 350.9 
Due after three years73.2 73.7 
Total$768.8 $773.8 

The Company had 55 short-term investments in unrealized loss positions as of September 30, 2020. There were no material unrealized losses from available-for-sale securities and no material realized gains or losses from available-for-sale securities that were reclassified out of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2020.

As of September 30, 2020, the Company’s short-term investments portfolio consisted of eight security types, one of which was in an unrealized loss position. The Company’s corporate notes and obligations had unrealized losses of approximately $0.1 million as of September 30, 2020. Unrealized losses on corporate notes and obligations have not been recorded into income because management does not intend to sell nor will be required to sell these securities prior to their anticipated recovery, and for which the decline in fair value is largely due to changes in credit spreads. The credit ratings associated with the corporate notes and obligations are mostly unchanged, are highly rated and the issuers continue to make timely principal and interest payments.

The Company recorded interest income from its cash, cash equivalents, and short-term investments of $2.6 million and $10.4 million during the three and nine months ended September 30, 2020, respectively, and $5.7 million and $17.5 million during the three and nine months ended September 30, 2019, respectively.

Note 3.Fair Value Measurements

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

The following table presents information about the Company’s financial instruments that are measured at fair value on a recurring basis using the input categories discussed in Note 1:   
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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 September 30, 2020
Level 1Level 2Level 3Total
Cash equivalents
Money market funds$371.2 $ $ $371.2 
Commercial paper 6.0  6.0 
Corporate notes and obligations 2.9  2.9 
Certificates of deposit 1.0  1.0 
Total cash equivalents$371.2 $9.9 $ $381.1 
Short-term investments
Corporate notes and obligations 392.2  392.2 
U.S. Treasury securities 206.6  206.6 
Asset backed securities 84.7  84.7 
U.S. agency obligations 37.1