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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 June 30, 2022

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 August 1, 2022, there were 286,195,054 shares of the registrants’ Class A common stock outstanding (which includes 8,266,666 shares of Class A common stock subject to restricted stock awards that were granted pursuant to the Co-Founder Grant, and vest upon the satisfaction of a service condition and achievement of certain stock price goals and 2,645,619 shares of Class A common stock subject to restricted stock awards that were granted to other Dropbox executives and vest upon the satisfaction of a service condition and as applicable, achievement of certain stock price goals), 82,605,670 shares of the registrant’s Class B common stock outstanding, and no shares of the registrant’s Class C common stock outstanding.




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 (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which statements involve substantial risk and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. Forward-looking statements contained in this 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, annual recurring revenue, average revenue per user, free cash flow, and the assumptions underlying such trends;

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

Our ability to compete successfully in competitive markets;

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

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

Our ability to effectively integrate our platform with others;

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

Our ability to achieve or maintain profitability;

Our expectations around future growth;

Our ability to successfully introduce new products and features;

Our ability to attract, retain, integrate, and manage key and other highly qualified personnel, including as a result of our transition to a Virtual First model with an increasingly distributed workforce;

Our ability to prevent security breaches and unauthorized access to customer data;

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

The effects of new or modified laws, policies, taxes, and regulations on our business;

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

The sufficiency of our cash and cash equivalents to meet our liquidity needs; and

Acquisitions of companies and assets.
2

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.



















3

SUMMARY OF RISK FACTORS

Below is a summary of the principal factors that could materially harm our business, operating results and/or financial condition, impair our future prospects or cause the price of our Class A common stock to decline. This summary does not address all of the risks that we face. Additional discussion of the risks summarized in this risk factor summary, and other risks that we face, can be found below under the heading “Risk Factors” and should be carefully considered, together with other information in this Form 10-Q and our other filings with the Securities and Exchange Commission ("SEC") before making an investment decision regarding our Class A common stock.

Our business depends on our ability to retain and upgrade paying users, and any decline in renewals or upgrades could adversely affect our future results of operations.

Our future growth could be harmed if we fail to attract new users or convert registered users to paying users.

Our business could be damaged, and we could be subject to liability if there is any unauthorized access to our data or our users' content, including through privacy and data security breaches or incidents.

We have a limited history of operating with a Virtual First workforce and the long-term impact on our financial results and business operations is uncertain.

We operate in competitive markets, and we must continue to compete effectively.

Our business depends upon the interoperability of our platform across devices, operating systems, and third-party applications that we do not control.

Our business could be harmed by any significant disruption of service on our platform or loss of content.

We generate revenue from sales of subscriptions to our platform, and any decline in demand for our platform or for content collaboration solutions in general could negatively impact our business.

Failure to respond to rapid technological changes, extend our platform, or develop new features or products may harm our ability to compete effectively, which would adversely affect our business.

The full extent of the impacts of the on-going COVID-19 pandemic on our business is currently unknown, but it may adversely affect our financial results as well as our business operations.

We may not successfully manage our growth or plan for future growth.

We depend on our key personnel and other highly qualified personnel, and if we fail to attract, integrate, and retain our personnel, and maintain our unique corporate culture, our business could be harmed.

Our lack of a significant outbound sales force may limit the potential growth of our business.

Our revenue growth rate has declined in recent periods and may continue to slow in the future.

We have a history of net losses, we may increase expenses in the future, and we may not be able to achieve or to maintain profitability.

Servicing our 2026 Notes and 2028 Notes (as defined below) may require a significant amount of cash, and we may not have sufficient cash flow or the ability to raise the funds necessary to satisfy our obligations under the 2026 Notes or 2028 Notes.


4

TABLE OF CONTENTS
Page
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 6.
5

PART I. FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS

DROPBOX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
As of
June 30, 2022December 31, 2021
Assets
Current assets:
Cash and cash equivalents$352.1 $533.0 
Short-term investments1,094.2 1,185.1 
Trade and other receivables, net46.7 49.6 
Prepaid expenses and other current assets100.1 82.1 
Total current assets1,593.1 1,849.8 
Property and equipment, net296.3 322.0 
Operating lease right-of-use asset396.8 413.9 
Intangible assets, net46.5 53.6 
Goodwill353.9 356.6 
Other assets72.2 95.4 
Total assets$2,758.8 $3,091.3 
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable$30.3 $25.7 
Accrued and other current liabilities147.7 140.8 
Accrued compensation and benefits73.5 139.1 
Operating lease liability77.3 78.3 
Finance lease obligation115.0 120.4 
Deferred revenue691.9 671.5 
Total current liabilities1,135.7 1,175.8 
Operating lease liability, non-current608.7 632.0 
Finance lease obligation, non-current142.9 167.7 
Convertible senior notes, net, non-current1,372.2 1,370.3 
Other non-current liabilities 42.2 39.4 
Total liabilities3,301.7 3,385.2 
Commitments and contingencies (Note 10)
Stockholders' deficit:
Additional paid-in-capital2,424.1 2,448.1 
Accumulated deficit(2,926.1)(2,739.4)
Accumulated other comprehensive loss(40.9)(2.6)
Total stockholders' deficit(542.9)(293.9)
Total liabilities and stockholders' deficit$2,758.8 $3,091.3 

See accompanying Notes to Condensed Consolidated Financial Statements.
6

DROPBOX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
(Unaudited)
Three Months Ended
June 30,
Six Months Ended
June 30,
2022202120222021
Revenue$572.7 $530.6 $1,135.1 $1,042.2 
Cost of revenue(1)
105.8 107.1 218.7 216.4 
Gross profit466.9 423.5 916.4 825.8 
Operating expenses(1)
Research and development215.0 185.5 425.8 366.7 
Sales and marketing105.0 100.8 200.7 203.5 
General and administrative55.3 52.8 108.8 111.4 
Impairment related to real estate assets(2)
8.7  8.7 17.3 
Total operating expenses384.0 339.1 744.0 698.9 
Income from operations82.9 84.4 172.4 126.9 
Interest expense, net(0.5)(0.9)(1.9)(2.1)
Other (expense) income, net(3.3)7.5 2.4 12.6 
Income before income taxes79.1 91.0 172.9 137.4 
Provision for income taxes(17.1)(3.0)(31.2)(1.8)
Net income$62.0 $88.0 $141.7 $135.6 
Net income per share-basic and diluted:
Basic net income per share $0.17 $0.23 $0.39 $0.34 
Diluted net income per share $0.17 $0.22 $0.38 $0.34 
Weighted-average shares used in computing net income per share attributable to common stockholders, basic364.1 388.4 367.4 393.3 
Weighted-average shares used in computing net income per share attributable to common stockholders, diluted 365.7 397.0 369.6 401.2 
(1) Includes stock-based compensation as follows:

Three Months Ended
June 30,
Six Months Ended
June 30,
2022202120222021
Cost of revenue$6.7 $5.9 $12.4 $11.3 
Research and development58.5 49.5 109.0 93.0 
Sales and marketing5.9 6.2 10.4 13.1 
General and administrative13.9 12.3 25.5 24.4 

(2) Includes impairment charges related to real estate assets as a result of the Company's decision to shift to a Virtual First work model. See Note 9 "Leases" for further information.

See accompanying Notes to Condensed Consolidated Financial Statements.
7

DROPBOX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
Three Months Ended
June 30,
Six Months Ended
June 30,
2022202120222021
Net income$62.0 $88.0 $141.7 $135.6 
Other comprehensive (loss) income:
Change in foreign currency translation adjustments(4.3)1.1 (5.5)(0.7)
Change in net unrealized gains and losses on short-term investments(8.5)0.1 (32.8)(4.4)
Total other comprehensive (loss) income$(12.8)$1.2 $(38.3)$(5.1)
Comprehensive income$49.2 $89.2 $103.4 $130.5 

See accompanying Notes to Condensed Consolidated Financial Statements.
8

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


Three Months Ended June 30, 2022Three Months Ended June 30, 2021
 Class A and Class B Common StockAdditional paid in capitalAccumulated
deficit
Accumulated other comprehensive lossTotal stockholders' deficitClass A and Class B common stockAdditional
paid-in
capital
Accumulated
deficit
Accumulated
other
comprehensive
income
Total stockholders' deficit
 SharesAmountSharesAmount
Balances at beginning of period367.0 $ $2,419.7 $(2,854.9)$(28.1)$(463.3)389.8 $ $2,420.2 $(2,507.8)$4.6 $(83.0)
Release of restricted stock units and awards3.4 — — — — — 3.1 — — — — — 
Shares withheld related to net share settlement of restricted stock units and awards(1.2)— (9.6)(15.1)— (24.7)(1.0)— (8.1)(18.8)— (26.9)
Repurchases of common stock (8.9)— (71.7)(118.1)— (189.8)(5.5)— (41.9)(108.9)— (150.8)
Exercise of stock options and awards— — 0.1 — — 0.1 0.1 — 2.6 — — 2.6 
Assumed stock options in connection with acquisition— — — — —  — — — — —  
Purchase of bond hedges in connection with issuance of convertible senior notes— — — — — — — — — — —  
Sale of warrants in connection with issuance of convertible senior notes— — — — —  — — — — —  
Tax benefit attributable to bond hedges purchased in connection with issuance of convertible senior notes— — 0.6 — — 0.6 — — 0.2 — — 0.2 
Stock-based compensation— — 85.0 — — 85.0 — — 73.9 — — 73.9 
Other comprehensive (loss) income— — — — (12.8)(12.8)— — — — 1.2 1.2 
Net income— — — 62.0 — 62.0 — — — 88.0 — 88.0 
Balances at end of period360.3 $ $2,424.1 $(2,926.1)$(40.9)$(542.9)386.5 $ $2,446.9 $(2,547.5)$5.8 $(94.8)

9

Six Months Ended June 30, 2022Six Months Ended June 30, 2021
 Class A and Class B Common StockAdditional paid in capitalAccumulated
deficit
Accumulated other comprehensive lossTotal stockholders' deficitClass A and Class B common stockAdditional
paid-in
capital
Accumulated
deficit
Accumulated
other
comprehensive
income
Total stockholders' deficit
 SharesAmountSharesAmount
Balances at beginning of period375.5 $ $2,448.1 $(2,739.4)$(2.6)$(293.9)405.7 $ $2,564.3 $(2,241.4)$10.9 $333.8 
Release of restricted stock units and awards7.3 — — — — — 6.9 — — — — — 
Shares withheld related to net share settlement of restricted stock units and awards(2.7)— (21.8)(39.6)— (61.4)(2.5)— (19.3)(43.4)— (62.7)
Repurchases of common stock (19.9)— (160.9)(288.8)— (449.7)(24.1)— (184.4)(398.3)— (582.7)
Exercise of stock options and awards0.1 — 0.3 — — 0.3 0.5 — 5.5 — — 5.5 
Assumed stock options in connection with acquisition— — — — —  — — 1.2 — — 1.2 
Purchase of bond hedges in connection with issuance of convertible senior notes— — — — — — — — (265.3)— — (265.3)
Sale of warrants in connection with issuance of convertible senior notes— — — — —  — — 202.9 — — 202.9 
Tax benefit attributable to bond hedges purchased in connection with issuance of convertible senior notes— — 1.1 — — 1.1 — — 0.2 — — 0.2 
Stock-based compensation— — 157.3 — — 157.3 — — 141.8 — — 141.8 
Other comprehensive loss— — — — (38.3)(38.3)— — — — (5.1)(5.1)
Net income— — — 141.7 — 141.7 — — — 135.6 — 135.6 
Balances at end of period360.3 $ $2,424.1 $(2,926.1)$(40.9)$(542.9)386.5 $ $2,446.9 $(2,547.5)$5.8 $(94.8)






See accompanying Notes to Condensed Consolidated Financial Statement
10

DROPBOX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Six Months Ended
June 30,
20222021
Cash flow from operating activities
Net income$141.7 $135.6 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization78.6 71.5 
Stock-based compensation157.3 141.8 
Impairment related to real estate assets8.7 17.3 
Amortization of debt issuance costs2.1 1.7 
Net gains on equity investments(5.0) 
Amortization of deferred commissions18.7 15.4 
Other3.3 (6.2)
Changes in operating assets and liabilities:
Trade and other receivables, net1.8 (8.6)
Prepaid expenses and other current assets(26.2)(23.8)
Other assets52.2 39.1 
Accounts payable1.4 12.2 
Accrued and other current liabilities15.8 (8.3)
Accrued compensation and benefits(65.2)(37.6)
Deferred revenue19.3 44.4 
Other non-current liabilities(56.5)(60.5)
Tenant improvement allowance reimbursement3.3 1.6 
Net cash provided by operating activities351.3 335.6 
Cash flow from investing activities
Capital expenditures(14.7)(10.8)
Business combinations, net of cash acquired (125.4)
Purchases of short-term investments(301.5)(693.7)
Proceeds from sales of short-term investments116.6 171.2 
Proceeds from maturities of short-term investments239.2 264.0 
Other9.5 17.5 
Net cash provided by (used in) investing activities49.1 (377.2)
Cash flow from financing activities
Proceeds from issuance of convertible senior notes 1,389.1 
Purchases of convertible note hedge in connection with issuance of convertible senior notes (265.3)
Proceeds from sale of warrants in connection with issuance of convertible senior notes 202.9 
Payments of debt issuance costs (23.7)
Payments for taxes related to net share settlement of restricted stock units and awards(61.4)(62.7)
Proceeds from issuance of common stock, net of taxes withheld0.3 5.5 
Principal payments on finance lease obligations(64.4)(50.7)
Common stock repurchases(449.7)(582.7)
Net cash (used in) provided by financing activities(575.2)612.4 
Effect of exchange rate changes on cash and cash equivalents(6.1)(0.4)
Change in cash and cash equivalents(180.9)570.4 
Cash and cash equivalents - beginning of period533.0 314.9 
Cash and cash equivalents - end of period$352.1 $885.3 
Supplemental cash flow data:
Property and equipment acquired under finance leases$34.1 $67.3 

See accompanying Notes to Condensed Consolidated Financial Statements.
11

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”) helps keep life organized and work moving. The Company was incorporated in May 2007 as Evenflow, Inc., a Delaware corporation, and changed its name to Dropbox, Inc. in October 2009. The Company is headquartered in San Francisco, California.

Basis of presentation and consolidation
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 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, 2021 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, statements of stockholders' deficit 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, 2022 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, 2021, 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 involve the valuation of acquired intangible assets and goodwill from business combinations as well as the valuation of right-of-use and other lease related assets.

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" to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q 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 loss, net of tax.

Gains and losses from foreign currency transactions (those transactions denominated in currencies other than the foreign subsidiaries’ functional currency) are included in other (expense) 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
12

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

exchange rates. The Company recorded net foreign currency transaction losses of $3.9 million and $1.0 million during the three and six months ended June 30, 2022, respectively, and net foreign currency transaction gains of $0.4 million and $0.6 million during the three and six months ended June 30, 2021, 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 $323.5 million and $511.1 million of revenue during the three and six months ended June 30, 2022, respectively, and recognized $298.2 million and $463.2 million of revenue during the three and six months ended June 30, 2021, respectively, that was included in the deferred revenue balances at the beginning of their respective periods.

As of June 30, 2022, future estimated revenue related to performance obligations that were unsatisfied or partially unsatisfied was $753.5 million. The substantial majority of the unsatisfied performance obligations will be satisfied over the next twelve months.

Stock-based compensation
The Company has primarily granted restricted stock units (“RSUs”) to its employees and members of the Board of Directors under the 2008 Equity Incentive Plan (“2008 Plan”), the 2017 Equity Incentive Plan (“2017 Plan”), and the 2018 Equity Incentive Plan (“2018 Plan” and together with the 2008 Plan and 2017 Plan, the "Dropbox Equity Incentive Plans”). Since August 2015, the Company has granted RSUs, which have a service based vesting condition over a four-year period vesting quarterly, as the only stock-based payment awards to its employees, with the exception of awards granted to its co-founders and certain executives, and has not granted any stock options to employees under the Dropbox Equity Incentive Plans. The Company recognizes compensation expense associated with RSUs on a straight-line basis over the requisite service period and accounts for forfeitures in the period in which they occur.

13

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

The Board of Directors determines the fair value of each share of underlying common stock based on the closing price of the Company's Class A common stock as reported on the Nasdaq Global Select Market on the date of the grant.

In connection with the acquisition of DocSend, Inc. (“DocSend”), the Company assumed unvested stock options and an immaterial number of unvested RSUs that had been granted under DocSend's 2013 Stock Plan and DocSend's 2015 Stock Option and Grant Plan. The fair value of the DocSend options assumed were based upon the Black-Scholes option-pricing model. See Note 12 "Stockholders' Deficit" to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further information.

In December 2017, the Board of Directors approved the Company’s Co-Founder Grant, consisting of 10.3 million shares of Class A Common Stock in the form of restricted stock awards ("RSAs") which were granted to Drew Houston, the Company’s co-founder and Chief Executive Officer. This Co-Founder Grant has service-based, market-based, and performance-based vesting conditions. The Co-Founder Grant is excluded from Class A common stock issued and outstanding until the satisfaction of these vesting conditions. The Company estimated the grant date fair value of the Co-Founder Grant 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. The first tranche of Mr. Houston's Co-Founder Grant vested in the fourth quarter of 2021. The stock-based compensation expense for Mr. Houston's Co-Founder Grant is recognized utilizing the accelerated attribution method over the requisite service period identified as the derived service period over which the market conditions are expected to be achieved, and is not reversed if the market conditions are not satisfied. Therefore no incremental stock-based compensation was recognized upon vesting of these RSAs. See Note 12, "Stockholders' Deficit" to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q 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. These costs, which are referred to as infrastructure costs, include depreciation of servers located in co-location facilities that the Company leases and operates, rent and facilities expense for those datacenters, network and bandwidth costs, support and maintenance costs for infrastructure equipment, and payments to third-party datacenter service providers. Cost of revenue also includes costs, such as salaries, bonuses, benefits, travel-related expenses, and stock-based compensation, which are referred to as employee-related costs, for employees whose primary responsibilities relate to supporting the Company’s infrastructure and delivering user support. Other non-employee costs included in cost of revenue include credit card fees related to processing customer transactions and allocated overhead, such as facilities, including rent, utilities, depreciation on leasehold improvements and other equipment shared by all departments, and shared information technology costs. In addition, cost of revenue includes amortization of developed technologies, professional fees related to user support initiatives, and property taxes related to the datacenters.

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

The Company monitors its credit risk by considering factors such as historical experience, credit ratings, current economic conditions, and reasonable and supportable forecasts.

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

14

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 short-term investments are recorded at fair value each reporting period. Unrealized gains and losses on these short-term investments are reported as a separate component of accumulated other comprehensive loss 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 (expense) 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 six months ended June 30, 2022. As of June 30, 2022 and December 31, 2021, no allowance for credit losses in short-term investments was recorded.

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 receivable are typically unsecured and are derived from revenue earned from customers located around the world. Two distribution partners accounted for 13% and 32% of total trade and other receivables, net as of June 30, 2022. Two distribution partners accounted for 14% and 29% of total trade and other receivables, net as of December 31, 2021. 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 $8.4 million and $16.0 million during the three and six months ended June 30, 2022 respectively and $4.9 million and $9.8 million during the three and six months ended June 30, 2021, respectively.

Deferred commissions, net included in prepaid and other current assets were $33.2 million and $30.8 million as of June 30, 2022 and December 31, 2021, respectively. Deferred commissions, net included in other assets were $29.5 million and $34.6 million as of June 30, 2022 and December 31, 2021, respectively.

Commissions related to new contracts are typically deferred and amortized over a period of benefit of five years. The period of benefit was estimated by considering factors such as historical customer attrition rates, the useful life of the Company’s technology, and the impact of competition in its industry. Commissions that are commensurate with renewal commissions are typically amortized over one year. Amortization of deferred commissions was $9.7 million and $18.7 million for the three and six months ended June 30, 2022, respectively and $7.7 million and $15.4 million for the three and six months ended June 30, 2021, respectively. Amortization of deferred commissions is included in sales and marketing expense in the accompanying condensed consolidated statements of operations. There was no material 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:

15

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 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.

As part of the Company's Virtual First strategy, Dropbox has retained a portion of its office space for in-person collaboration while the remainder will be subleased. The Company recorded impairment charges of $8.7 million during the three and six months ended June 30, 2022 and zero and $17.3 million during the three and six months ended June 30, 2021, respectively, related to other lease-related property and real estate assets. These impairment charges were recorded as a result of the Company's decision to move towards a Virtual First work model. See Note 9 "Leases" to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further information.

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.
16

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 goodwill or intangible assets for the periods presented in these condensed consolidated financial statements.

During the six months ended June 30, 2022 and 2021, the Company recorded impairment charges in conjunction with the Company's decision to move towards a Virtual First work model. See Note 9 "Leases" to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further information.

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, 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) benefit from 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.



17

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

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 October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires entities to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, Revenue from Contracts with Customers, instead of fair value at the acquisition date in accordance with Topic 805. The amendments in ASU 2021-08 will result in the acquirer recording acquired contract assets and liabilities on the same basis that would have been recorded by the acquiree before the acquisition under ASC Topic 606. The amendments in ASU 2021-08 are effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company is evaluating the effect of adopting this new accounting guidance.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which eliminates the accounting guidance on troubled debt restructurings for creditors in ASC 310-40 and amends the guidance on "vintage disclosures" to require disclosure of current-period gross write-offs by year of origination. The ASU also updates the requirements related to accounting for credit losses under ASC 326 and adds enhanced disclosures for creditors with respect to loan refinancings and restructurings for borrowers experiencing financial difficulty. The amendments in ASU 2022-02 are effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The Company does not expect the adoption of ASU 2022-02 to have a significant impact on its consolidated financial statements.
Recently adopted accounting pronouncements
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt - Modifications and Extinguishments (Subtopic 470-50), Compensation - Stock Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40) to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. The Company adopted ASU 2021-04 on January 1, 2022. The adoption of the standard did not have a material impact on the Company's condensed consolidated financial statements.

In July 2021, the FASB issued ASU 2021-05, Leases (Topic 842), which amends ASC 842 so that lessors are no longer required to recognize a selling loss upon commencement of a lease with variable lease payments that, prior to the amendments, would have been classified as a sales-type or direct financing lease. Furthermore, a lessor must classify as an operating lease any lease that would otherwise be classified as a sales-type or direct financing lease and that would result in the recognition of a selling loss at lease commencement, provided that the lease includes variable lease payments that do not depend on an index or rate. The Company adopted ASU 2021-05 on January 1, 2022. The adoption of the standard did not have a material impact on the Company's condensed consolidated financial statements.

18

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 June 30, 2022 and December 31, 2021 consisted of the following:

As of June 30, 2022
Amortized CostUnrealized GainUnrealized LossEstimated Fair Value
Cash$106.2 $— $— $106.2 
Cash equivalents
Money market funds222.4— — 222.4 
Commercial paper13.5— — 13.5 
Certificates of deposit10.0 10.0 
Total cash & cash equivalents$352.1 $— $— $352.1 
Short-term investments
Corporate notes and obligations513.6 (20.4)493.2
U.S. Treasury securities290.9 (11.2)279.7
Asset backed securities129.9 (5.5)124.4
Municipal securities72.00.1 (3.1)69.0
Commercial paper68.7  68.7
Certificates of deposit22.4  22.4
U.S. agency obligations16.6 (0.7)15.9
Foreign government obligations13.5 (0.4)13.1
Supranational securities8.0 (0.2)7.8
Total short-term investments1,135.6 0.1 (41.5)1,094.2 
Total$1,487.7 $0.1 $(41.5)$1,446.3 


19

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

As of December 31, 2021
Amortized CostUnrealized GainUnrealized LossEstimated Fair Value
Cash$142.7 $— $— $142.7 
Cash equivalents
Money market funds390.3— — 390.3 
Total cash & cash equivalents$533.0 $— $— $533.0 
Short-term investments
Corporate notes and obligations