box-10q_20181031.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 31, 2018  

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 001-36805

 

Box, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

20-2714444

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

900 Jefferson Ave.

Redwood City, California 94063

(Address of principal executive offices and Zip Code)

(877) 729-4269

(Registrant’s telephone number, including area code)

 

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 definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

  

Small 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 13(a) of the Exchange Act. 

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

As of November 30, 2018, the number of shares of the registrant’s Class A common stock outstanding was 143,405,095.

 

 

 

 


 

TABLE OF CONTENTS

 

 

 

PART I – FINANCIAL INFORMATION

 

Page

Item 1.

 

Financial Statements (Unaudited)

 

5

 

 

Condensed Consolidated Balance Sheets as of October 31, 2018 and January 31, 2018

 

5

 

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended October 31, 2018 and 2017

 

6

 

 

Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended October 31, 2018 and 2017

 

7

 

 

Condensed Consolidated Statements of Cash Flows for the Three and Nine Months Ended October 31, 2018 and 2017

 

8

 

 

Notes to Condensed Consolidated Financial Statements

 

9

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

29

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

45

Item 4.

 

Controls and Procedures

 

45

 

 

PART II – OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

46

Item 1A.

 

Risk Factors

 

46

Item 6.

 

Exhibits

 

65

 

 

Signatures

 

67

 

2


 

SPECIAL NOTE REGARDING 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 risks 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 future financial and operating results; including expectations regarding revenues, deferred revenue, billings, gross margins and operating income;

 

our ability to maintain an adequate rate of revenue and billings growth and our expectations regarding such growth;

 

our market opportunity, business plan and ability to effectively manage our growth;

 

our ability to achieve profitability and positive cash flow;

 

our ability to achieve our long-term margin objectives;

 

our expectations regarding our revenue mix;

 

costs associated with defending intellectual property infringement and other claims and the frequency of such claims;

 

our ability to attract and retain end-customers;

 

our ability to further penetrate our existing customer base;

 

our expectations regarding our retention rate;

 

our ability to displace existing products in established markets;

 

our ability to expand our leadership position as a cloud content management platform;

 

our ability to timely and effectively scale and adapt our existing technology;

 

our ability to innovate new products and features and bring them to market in a timely manner and the expected benefits to customers and potential customers of our products;

 

our investment strategy, including our plans to further invest in our business, including investment in research and development, sales and marketing, our datacenter infrastructure and our professional services organization, and our ability to effectively manage such investments;

 

our ability to expand internationally;

 

expectations about competition and its effect in our market and our ability to compete;

 

the effects of seasonal trends on our operating results;

 

use of non-GAAP financial measures;

 

our belief regarding the sufficiency of our cash, cash equivalents and our credit facilities to meet our working capital and capital expenditure needs for at least the next 12 months;

 

our expectations concerning relationships with third parties;

 

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

 

our ability to realize the anticipated benefits of our partnerships with third parties;

 

the effects of new laws, policies, taxes and regulations on our business;

 

management’s plans, beliefs and objectives, including the importance of our brand and culture on our business;

 

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

 

future acquisitions of or investments in complementary companies, products, services or technologies and our ability to successfully integrate such companies or assets.

3


 

These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those 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, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results or to changes in our expectations, except as required by law.

You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed with the SEC as exhibits to this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance, and events and circumstances may be materially different from what we expect.

 

 

4


 

PART I — FINANCIAL INFORMATION

 

 

Item 1. Financial Statements

BOX, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

 

 

October 31,

 

 

January 31,

 

 

 

2018

 

 

2018

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

200,104

 

 

$

208,076

 

Accounts receivable, net of allowance of $2,213 and $1,856

 

 

105,714

 

 

 

162,133

 

Prepaid expenses and other current assets

 

 

15,037

 

 

 

11,391

 

Deferred commissions

 

 

18,772

 

 

 

17,589

 

Total current assets

 

 

339,627

 

 

 

399,189

 

Property and equipment, net

 

 

133,374

 

 

 

123,977

 

Intangible assets, net

 

 

 

 

 

24

 

Goodwill

 

 

18,740

 

 

 

16,293

 

Restricted cash

 

 

238

 

 

 

350

 

Deferred commissions, non-current

 

 

47,379

 

 

 

8,330

 

Other long-term assets

 

 

7,529

 

 

 

5,403

 

Total assets

 

$

546,887

 

 

$

553,566

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

14,038

 

 

$

17,036

 

Accrued compensation and benefits

 

 

23,077

 

 

 

37,707

 

Accrued expenses and other current liabilities

 

 

32,048

 

 

 

26,198

 

Capital lease obligations

 

 

24,285

 

 

 

18,844

 

Deferred revenue

 

 

281,289

 

 

 

291,902

 

Deferred rent

 

 

3,251

 

 

 

2,280

 

Total current liabilities

 

 

377,988

 

 

 

393,967

 

Debt, non-current

 

 

40,000

 

 

 

40,000

 

Capital lease obligations, non-current

 

 

33,965

 

 

 

26,980

 

Deferred revenue, non-current

 

 

19,952

 

 

 

29,021

 

Deferred rent, non-current

 

 

45,160

 

 

 

45,882

 

Other long-term liabilities

 

 

4,176

 

 

 

2,748

 

Total liabilities

 

 

521,241

 

 

 

538,598

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock

 

 

14

 

 

 

13

 

Additional paid-in capital

 

 

1,141,100

 

 

 

1,054,932

 

Treasury stock

 

 

(1,177

)

 

 

(1,177

)

Accumulated other comprehensive (loss) income

 

 

(87

)

 

 

288

 

Accumulated deficit

 

 

(1,114,204

)

 

 

(1,039,088

)

Total stockholders’ equity

 

 

25,646

 

 

 

14,968

 

Total liabilities and stockholders’ equity

 

$

546,887

 

 

$

553,566

 

 

See notes to condensed consolidated financial statements.

5


 

BOX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

October 31,

 

 

October 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenue

 

$

155,944

 

 

$

129,304

 

 

$

444,673

 

 

$

369,467

 

Cost of revenue

 

 

44,724

 

 

 

34,471

 

 

 

126,397

 

 

 

99,972

 

Gross profit

 

 

111,220

 

 

 

94,833

 

 

 

318,276

 

 

 

269,495

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

42,310

 

 

 

34,812

 

 

 

122,388

 

 

 

102,388

 

Sales and marketing

 

 

84,490

 

 

 

81,670

 

 

 

238,472

 

 

 

225,604

 

General and administrative

 

 

23,884

 

 

 

20,910

 

 

 

69,959

 

 

 

63,037

 

Total operating expenses

 

 

150,684

 

 

 

137,392

 

 

 

430,819

 

 

 

391,029

 

Loss from operations

 

 

(39,464

)

 

 

(42,559

)

 

 

(112,543

)

 

 

(121,534

)

Interest expense, net

 

 

(47

)

 

 

(287

)

 

 

(208

)

 

 

(802

)

Other (loss) income, net

 

 

(321

)

 

 

277

 

 

 

(1,243

)

 

 

560

 

Loss before provision for income taxes

 

 

(39,832

)

 

 

(42,569

)

 

 

(113,994

)

 

 

(121,776

)

Provision for income taxes

 

 

364

 

 

 

355

 

 

 

924

 

 

 

519

 

Net loss

 

$

(40,196

)

 

$

(42,924

)

 

$

(114,918

)

 

$

(122,295

)

Net loss per common share, basic and diluted

 

$

(0.28

)

 

$

(0.32

)

 

$

(0.82

)

 

$

(0.92

)

Weighted-average shares used to compute net loss per share,

   basic and diluted

 

 

142,366

 

 

 

134,636

 

 

 

140,559

 

 

 

133,044

 

 

See notes to condensed consolidated financial statements.

6


 

BOX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

October 31,

 

 

October 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net loss

 

$

(40,196

)

 

$

(42,924

)

 

$

(114,918

)

 

$

(122,295

)

Changes in foreign currency translation adjustment*

 

 

(89

)

 

 

(88

)

 

 

(375

)

 

 

90

 

Comprehensive loss

 

$

(40,285

)

 

$

(43,012

)

 

$

(115,293

)

 

$

(122,205

)

 

*

Tax effect was not material

See notes to condensed consolidated financial statements.

7


 

BOX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

October 31,

 

 

October 31,

 

 

 

 

2018

 

 

2017 (as adjusted)

 

*

2018

 

 

2017 (as adjusted)

 

*

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(40,196

)

 

$

(42,924

)

 

$

(114,918

)

 

$

(122,295

)

 

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

11,433

 

 

 

9,913

 

 

 

34,677

 

 

 

29,250

 

 

Stock-based compensation expense

 

 

31,790

 

 

 

25,523

 

 

 

89,086

 

 

 

72,536

 

 

Amortization of deferred commissions

 

 

4,516

 

 

 

5,393

 

 

 

12,231

 

 

 

15,751

 

 

Loss on disposal of property and equipment

 

 

586

 

 

 

 

 

 

586

 

 

 

 

 

Other

 

 

(18

)

 

 

(124

)

 

 

(13

)

 

 

(83

)

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

9,065

 

 

 

12,023

 

 

 

57,001

 

 

 

24,245

 

 

Deferred commissions

 

 

(9,753

)

 

 

(4,616

)

 

 

(23,057

)

 

 

(13,235

)

 

Prepaid expenses and other assets

 

 

350

 

 

 

2,746

 

 

 

(4,583

)

 

 

(3,197

)

 

Accounts payable

 

 

959

 

 

 

(2,592

)

 

 

(246

)

 

 

4,469

 

 

Accrued expenses and other liabilities

 

 

(1,552

)

 

 

(4,828

)

 

 

(17,156

)

 

 

(8,721

)

 

Deferred rent

 

 

(88

)

 

 

1,413

 

 

 

249

 

 

 

3,132

 

 

Deferred revenue

 

 

(276

)

 

 

12,167

 

 

 

(9,868

)

 

 

11,022

 

 

Net cash provided by operating activities

 

 

6,816

 

 

 

14,094

 

 

 

23,989

 

 

 

12,874

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(5,247

)

 

 

(3,003

)

 

 

(12,613

)

 

 

(4,800

)

 

Capitalized internal-use software costs

 

 

(1,343

)

 

 

 

 

 

(1,343

)

 

 

 

 

Proceeds from sale of property and equipment

 

 

1

 

 

 

2

 

 

 

2

 

 

 

31

 

 

Acquisitions

 

 

 

 

 

 

 

 

(458

)

 

 

 

 

Net cash used in investing activities

 

 

(6,589

)

 

 

(3,001

)

 

 

(14,412

)

 

 

(4,769

)

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

2,145

 

 

 

4,002

 

 

 

14,976

 

 

 

9,415

 

 

Proceeds from issuances of common stock under employee stock purchase plan

 

 

10,015

 

 

 

8,640

 

 

 

21,861

 

 

 

17,521

 

 

Employee payroll taxes paid related to net share settlement of restricted

   stock units

 

 

(11,596

)

 

 

(11,284

)

 

 

(36,901

)

 

 

(26,219

)

 

Acquisition related contingent consideration

 

 

 

 

 

 

 

 

 

 

 

(991

)

 

Payments of capital lease obligations

 

 

(4,290

)

 

 

(4,781

)

 

 

(17,192

)

 

 

(12,693

)

 

Net cash used in financing activities

 

 

(3,726

)

 

 

(3,423

)

 

 

(17,256

)

 

 

(12,967

)

 

Effect of exchange rate changes on cash, cash equivalents, and restricted cash

 

 

(123

)

 

 

(88

)

 

 

(405

)

 

 

90

 

 

Net (decrease) increase in cash, cash equivalents, and restricted cash

 

 

(3,622

)

 

 

7,582

 

 

 

(8,084

)

 

 

(4,772

)

 

Cash, cash equivalents, and restricted cash, beginning of period

 

 

203,964

 

 

 

191,818

 

 

 

208,426

 

 

 

204,172

 

 

Cash, cash equivalents, and restricted cash, end of period

 

$

200,342

 

 

$

199,400

 

 

$

200,342

 

 

$

199,400

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for interest, net of amounts capitalized

 

$

623

 

 

$

527

 

 

$

1,795

 

 

$

1,416

 

 

Cash paid for income taxes, net of tax refunds

 

 

501

 

 

 

425

 

 

 

1,493

 

 

 

1,158

 

 

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND

   FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in accrued equipment purchases

 

$

5,115

 

 

$

1,714

 

 

$

2,938

 

 

$

2,604

 

 

Purchases of property and equipment under capital lease

 

 

9,230

 

 

 

6,194

 

 

 

27,751

 

 

 

21,875

 

 

Change in unpaid tax related to capital lease

 

 

253

 

 

 

160

 

 

 

488

 

 

 

595

 

 

Issuance of common stock in connection with acquisitions

 

 

 

 

 

 

 

 

1,053

 

 

 

 

 

Contingent consideration accruals in connection with acquisitions

 

 

 

 

 

 

 

 

936

 

 

 

 

 

Timing of settlement of stock options exercise

 

 

 

 

 

520

 

 

 

 

 

 

520

 

 

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH

   INFORMATION:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

$

203,726

 

 

$

165,275

 

 

$

208,076

 

 

$

177,391

 

 

Restricted cash, beginning of period

 

 

238

 

 

 

26,543

 

 

 

350

 

 

 

26,781

 

 

Cash, cash equivalents, and restricted cash, beginning of period

 

$

203,964

 

 

$

191,818

 

 

$

208,426

 

 

$

204,172

 

 

Cash and cash equivalents, end of period

 

$

200,104

 

 

$

172,857

 

 

$

200,104

 

 

$

172,857

 

 

Restricted cash, end of period

 

 

238

 

 

 

26,543

 

 

 

238

 

 

 

26,543

 

 

Cash, cash equivalents, and restricted cash, end of period

 

$

200,342

 

 

$

199,400

 

 

$

200,342

 

 

$

199,400

 

 

 

*

Adjusted due to the adoption of ASU 2016-18

 

See notes to condensed consolidated financial statements.

 

 

8


 

BOX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1. Description of Business and Basis of Presentation

Description of Business

We were incorporated in the state of Washington in April 2005, and were reincorporated in the state of Delaware in March 2008. We changed our name from Box.Net, Inc. to Box, Inc. in November 2011. Box provides a leading cloud content management platform that enables organizations of all sizes to securely manage cloud content while allowing easy, secure access and sharing of this content from anywhere, on any device.

Basis of Presentation

The accompanying condensed consolidated balance sheet as of October 31, 2018 and the condensed consolidated statements of operations, the condensed consolidated statements of comprehensive loss and the condensed consolidated statements of cash flows for the three and nine months ended October 31, 2018 and 2017, respectively, are unaudited. The condensed consolidated balance sheet data as of January 31, 2018 was derived from the audited consolidated financial statements that are included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2018 (the “Form 10-K”), which was filed with the Securities and Exchange Commission (the “SEC”) on March 22, 2018. The accompanying statements should be read in conjunction with the audited consolidated financial statements and related notes contained in our Form 10-K. Other than items discussed under Use of Estimates, Recently Adopted Accounting Pronouncements, and Summary of Significant Accounting Policies, there have been no other material changes to our critical accounting policies and estimates during the nine months ended October 31, 2018 from those disclosed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K.

The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the financial information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of our management, the unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements in the Form 10-K, and include all adjustments necessary for the fair presentation of our balance sheet as of October 31, 2018, and our results of operations, including our comprehensive loss, and our cash flows for the three and nine months ended October 31, 2018 and 2017. All adjustments are of a normal recurring nature. The results for the three and nine months ended October 31, 2018 are not necessarily indicative of the results to be expected for any subsequent quarter or for the fiscal year ending January 31, 2019.

Certain prior period amounts reported in our condensed consolidated financial statements and notes thereto have been reclassified to conform to the current year presentation. Such reclassifications did not affect total revenues, operating income, or net income.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make, on an ongoing basis, estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ from these estimates. Such estimates include, but are not limited to, the determination of the allowance for accounts receivable, fair value of acquired intangible assets and goodwill, useful lives of acquired intangible assets and property and equipment, estimate of standalone selling price allocation included in contracts with multiple performance obligations, the estimated expected benefit period for deferred commissions, observable price changes of non-marketable equity securities, fair values of stock-based awards, legal contingencies, and the provision for income taxes, including related reserves, among others. Management bases its estimates on historical experience and on various other assumptions which management believes to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. 

In accordance with our property and equipment policy, we review the estimated useful lives of our fixed assets on an ongoing basis. The most recent review indicated that the actual lives of certain furniture and fixtures were longer than previously estimated useful lives used for depreciation purposes in our financial statements. As a result, effective September 1, 2018, we changed the estimated useful lives of certain furniture and fixtures to better reflect the estimated periods during which these assets will remain in service. The estimated useful lives of these assets previously depreciated for three years have now been increased to five years. This change was made prospectively for all existing furniture and fixtures as of September 1, 2018 and will continue to apply to all future furniture and fixtures purchased thereafter. The effect of this change in estimate in the current period to net income and earnings per share was not material.

9


BOX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Certain Risks and Concentrations

Our financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, and accounts receivable. Although we deposit our cash with multiple financial institutions, our deposits, at times, may exceed deposit insurance coverage limits.

We sell to a broad range of customers, including resellers. Our revenue is derived substantially from the United States across a multitude of industries. Accounts receivable are derived from the delivery of our services to customers primarily located in the United States. We accept and settle our accounts receivable using credit cards, electronic payments and checks. A majority of our lower dollar value invoices are settled by credit card on or near the date of the invoice. We do not require collateral from customers to secure accounts receivable. We maintain an allowance for doubtful accounts based upon the expected collectability, which takes into consideration specific customer creditworthiness and current economic trends. We believe collections of our accounts receivable are reasonably assured based on the size, industry diversification, financial condition and past transaction history of our customers. As of October 31, 2018 and January 31, 2018, one reseller, which is also a customer, accounted for more than 10% of total accounts receivable. One reseller, which is also a customer, represented over 10% of revenue for the three and nine months ended October 31, 2018. No single customer represented over 10% of revenue for the three and nine months ended October 31, 2017.

We serve our customers and users from datacenter facilities operated by third parties. In order to reduce the risk of down time of our subscription services, we have established datacenters and third-party cloud computing and hosting providers in various locations in the United States and abroad. We have internal procedures to restore services in the event of disaster at any one of our current datacenter facilities. Even with these procedures for disaster recovery in place, our cloud services could be significantly interrupted during the implementation of the procedures to restore services.

Geographic Locations

For the three months ended October 31, 2018, revenue attributable to customers in the United States and customers outside the United States was 75% and 25%, respectively. For the nine months ended October 31, 2018, revenue attributable to customers in the United States and customers outside the United States was 76% and 24%, respectively. For the three and nine months ended October 31, 2017, revenue attributable to customers in the United States and customers outside the United States was 79% and 21%, respectively. No other country outside of the United States comprised 10% or greater of our revenue for any of the periods presented.  

Substantially all of our net assets are located in the United States. As of October 31, 2018 and January 31, 2018, property and equipment located in the United States was 91% and 95%, respectively.

Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09 and its related amendments regarding Accounting Standards Codification Topic 606 (ASC Topic 606), Revenue from Contracts with Customers. The standard provides principles for recognizing revenue for the transfer of promised goods or services to customers with the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also provides guidance on the recognition of incremental costs related to obtaining customer contracts. We adopted ASC Topic 606, effective February 1, 2018, utilizing the modified retrospective method. This approach was applied to contracts that were not completed as of February 1, 2018, and the corresponding incremental costs of obtaining those contracts, which resulted in a cumulative effect adjustment to the opening balance of accumulative deficit at date of adoption. The adoption of this ASU primarily impacts the timing of our revenue recognition for certain sales contracts, the capitalization and amortization of incremental costs of obtaining a contract, and related disclosures. The reported results for fiscal year 2019 reflect the application of ASC Topic 606, while the reported results for fiscal year 2018 are not adjusted and continue to be reported under ASC Topic 605.

Adoption Impact of ASC Topic 606 on the Opening Balance Sheet as of February 1, 2018

Under ASC Topic 606, there is a change in the timing of revenue recognition for certain sales contracts primarily due to the removal of the contingent revenue limitation pursuant to ASC Topic 605.

10


BOX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Under ASC Topic 606, we capitalize costs based on the definition of incremental costs of obtaining a contract and commence amortization upon the transfer of services to the customer. Such costs are generally amortized over five years, which represents a longer period over which we had previously amortized, in order to align to an estimated expected benefit period under ASC Topic 606. Additionally, the scope of costs capitalized under ASC Topic 606 is significantly broader than the scope prior to ASC Topic 606, resulting in additional costs being capitalized. 

The adoption of ASC Topic 606 had no impact on our cash flows from operations. 

The following table summarizes the adjustments made to accounts on the condensed consolidated balance sheet as of February 1, 2018 as a result of applying the modified retrospective method to adopt ASC Topic 606 (in thousands):

 

 

 

As Reported

 

 

Adjustments

 

 

As Adjusted

 

 

 

January 31,

2018

 

 

Revenue

Recognition

 

 

Incremental Costs

of Obtaining a

Contract

 

 

February 1,

2018

 

Accounts receivable*

 

$

162,133

 

 

$

582

 

 

 

 

 

 

$

162,715

 

Deferred commissions

 

 

17,589

 

 

 

 

 

 

$

(3,449

)

 

 

14,140

 

Deferred commissions, non-current**

 

 

8,330

 

 

 

 

 

 

 

32,855

 

 

 

41,185

 

Deferred revenue

 

 

291,902

 

 

 

(8,483

)

 

 

 

 

 

 

283,419

 

Deferred revenue, non-current

 

 

29,021

 

 

 

(1,331

)

 

 

 

 

 

 

27,690

 

Accumulated deficit

 

 

(1,039,088

)

 

 

10,396

 

 

 

29,406

 

 

 

(999,286

)

 

 

*

Contract assets are reported as part of accounts receivable upon the adoption of ASC Topic 606.

 

**

As of January 31, 2018, deferred commissions, non-current was reported as part of other long-term assets. The condensed consolidated balance sheet as of January 31, 2018 was reclassified to conform to the current period presentation.

The decrease of deferred revenue and increase to deferred commissions as of February 1, 2018 resulted in additional deferred tax liabilities that reduced our net deferred tax asset position. The net deferred tax assets in the jurisdictions impacted by the adoption of ASC Topic 606 were fully reserved and, accordingly, this impact was offset by a corresponding reduction to the valuation allowance with no resulting net impact to our net assets or accumulated deficit.

In addition, the adoption of the ASC Topic 606 resulted in changes to our accounting estimates and policies for revenue recognition, deferred commissions, deferred revenue, and accounts receivable and related allowance. Please see Summary of Significant Accounting Policies for a discussion of our updated policies.

Ongoing ASC Topic 606 Financial Statement Impact as of and for the three and nine months ended October 31, 2018

Refer to “Note 2. Revenue” for the ongoing ASC Topic 606 impact on the condensed consolidated financial statement line items as of and for the three and nine months ended October 31, 2018.

11


BOX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash. ASU 2016-18 requires entities to show the changes in cash, cash equivalents, and restricted cash in the statement of cash flows. Entities will no longer present transfers between cash and cash equivalents and restricted cash in the statement of cash flows. We adopted ASU 2016-18, effective February 1, 2018, utilizing the retrospective transition method to each period presented. The adoption of ASU 2016-18 had a material impact on our prior period consolidated statements of cash flows. We revised the prior period cash flows from operating activities, beginning cash and cash equivalents balance, and ending cash and cash equivalents balance to reflect the change in presentation of restricted cash. The cash flows from operating activities for fiscal year 2018 and fiscal year 2017 have been adjusted to $35.4 million and negative $2.4 million, as compared to the previously recorded $61.8 million and negative $1.2 million, respectively. As of October 31, 2018 and January 31, 2018, our restricted cash balance was not material. For the nine months ended October 31, 2018, as a result of the adoption of ASU 2016-18, the release of restricted cash, which was not material, was not reported as a cash inflow on our condensed consolidated statements of cash flows. For the three months ended October 31, 2018, we did not have any changes to our restricted cash balance. As indicated in the table below, for the nine months ended October 31, 2017, the adoption of ASU 2016-18 decreases cash flows from operating activities by $0.2 million; for the three months ended October 31, 2017, the adoption of ASU 2016-18 did not impact cash flows from operating activities.

 

 

 

Three Months Ended October 31, 2017

 

 

 

Nine Months Ended October 31, 2017

 

 

 

As Reported

 

 

Adjustments

 

 

As Adjusted

 

 

 

As Reported

 

 

Adjustments

 

 

As Adjusted

 

Changes in operating assets and

   liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prepaid expenses and other assets*

 

$

2,746

 

 

$

 

 

$

2,746

 

 

 

$

(2,959

)

 

$

(238

)

 

$

(3,197

)

Net cash provided by operating activities

 

 

14,094

 

 

 

 

 

 

14,094

 

 

 

 

13,112

 

 

 

(238

)

 

 

12,874

 

Net increase (decrease) in cash, cash

   equivalents, and restricted cash

 

 

7,582

 

 

 

 

 

 

7,582

 

 

 

 

(4,534

)

 

 

(238

)

 

 

(4,772

)

Cash, cash equivalents, and restricted

   cash, beginning of period

 

 

165,275

 

 

 

26,543

 

 

 

191,818

 

 

 

 

177,391

 

 

 

26,781

 

 

 

204,172

 

Cash, cash equivalents, and restricted

   cash, end of period

 

 

172,857

 

 

 

26,543

 

 

 

199,400

 

 

 

 

172,857

 

 

 

26,543

 

 

 

199,400

 

 

*

Changes in restricted cash were included as part of prepaid expenses and other assets.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, and its related amendments in February 2018, ASU 2018-03, Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 requires entities to measure equity instruments at fair value and recognize any changes in fair value within the statement of operations. We adopted ASU 2016-01 and 2018-03 effective February 1, 2018 on a prospective basis for our privately held strategic equity securities without readily determinable fair values. We elected the measurement alternative to record these investments at cost and to adjust for impairments and observable price changes with a same or similar security from the same issuer within the statement of operations. We assess our strategic investments portfolio quarterly for impairment. If the investment is considered to be other-than-temporarily impaired, we will record the investment at fair value by recognizing an impairment through the statement of operations and establishing a new carrying value for the investment. For the three and nine months ended October 31, 2018, there was no adjustment for impairment or observable price change on the $0.1 million carrying value, which was included in other long-term assets on the condensed consolidated balance sheet.

In addition, the adoption of the ASU 2016-01 and 2018-03 resulted in changes to our accounting policies for fair value of financial instruments. Please see Summary of Significant Accounting Policies for a discussion of our updated policies.

In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, to align the accounting for share-based payment awards issued to employees and nonemployees, particularly with regard to the measurement date and the impact of performance conditions. The new guidance requires equity-classified share-based payment awards issued to nonemployees to be measured on the grant date, instead of being remeasured through the performance completion date under the current guidance. We elected to early adopt ASU 2018-07 effective May 1, 2018. The new guidance is applied to all new equity-classified share-based payment awards issued to nonemployees after the date of adoption. In addition, for all previously issued equity-classified share-based payment awards to nonemployees for which a measurement date was not established by the adoption date, these awards were remeasured at fair value as of the adoption date. The adoption did not result in a material impact on our condensed consolidated financial statements.

12


BOX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

In October 2016, the FASB issued ASU 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory, related to the accounting for income tax effects on intra-entity asset transfers of assets other than inventory. The new guidance requires reporting entities to recognize tax expense from the sale of assets when the transfer occurs, even though the pre-tax effects of the transaction are eliminated in consolidation. We adopted ASU 2016-16 in the first quarter of fiscal year 2019 on a modified retrospective basis. The adoption did not result in a material impact on our condensed consolidated financial statements. 

In August 2018, the FASB issued ASU 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 new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and host arrangements that include an internal-use software license) in accordance with Subtopic 350-40. We elected to early adopt ASU 2018-15 in the third quarter of fiscal year 2019 on a prospective basis. We further clarified our accounting policy with regards to internal-use software costs to reflect ASU 2018-15 under Summary of Significant Accounting Policies. Refer to Note 4 for the ongoing disclosure and impact on our condensed consolidated financial statements.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases, which was further clarified by ASU 2018-10, Codification Improvements to Topic 842, Leases, and ASU 2018-11, Leases – Targeted Improvements, both issued in July 2018. ASU 2016-02 requires lessees to record most leases on their balance sheet while recognizing expense in a manner similar to current lease accounting guidance. ASU 2016-02 states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. ASU 2018-10 provides narrow amendments to clarify certain aspects of guidance related to ASU 2016-02. ASU 2018-11 adds a transition option for all entities, which allows entities to opt to continue to apply the legacy guidance in ASC 840, “Leases”, including its disclosure requirements, in the comparative periods presented in the year they adopt the new leases standard. Entities that elect this transition option will still be required to adopt the new leases standard using the modified retrospective transition method required by the standard, but they will recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest period presented.

The new accounting guidance is effective for us beginning February 1, 2019; we have not elected to adopt this standard earlier. We currently anticipate adopting the standard using the modified retrospective method with an option to not restate comparative periods in the period of adoption. We are in the process of implementing changes to our systems, processes and controls, in conjunction with our review of existing lease agreements, in order to adopt the new standard in our first quarter of fiscal 2020. While we expect an increase to the reported assets and liabilities due to substantially all of our operating leases designated in “Note 7. Commitments and Contingencies” upon adoption, we have not yet determined the full impact that the adoption of this standard will have on our consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments- Credit Losses. ASU 2016-13 replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For trade receivables, loans, and other financial instruments, we will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. The new standard is effective for us beginning February 1, 2020, with early adoption permitted for annual periods beginning after February 1, 2019, and interim periods therein. Application of the amendments is through a cumulative-effect adjustment to retained earnings as of the effective date. We are currently evaluating the impact of this new standard on our consolidated financial statements.

Summary of Significant Accounting Policies

Except for the accounting policies for revenue recognition, deferred commissions, deferred revenue, accounts receivable and related allowance, fair value of financial instruments, and internal-use software costs detailed under Summary of Significant Accounting Policies, there have been no other material changes to our critical accounting policies and estimates during the nine months ended October 31, 2018 from those disclosed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the fiscal year ended January 31, 2018.

13


BOX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Revenue Recognition

We derive our revenue primarily from three sources: (1) subscription revenue, which is comprised of subscription fees from customers who have access to our cloud content management platform and other subscription-based services, which all include routine customer support; (2) revenue from customers purchasing our premier services package; and (3) revenue from professional services such as implementing best practice use cases, project management and implementation consulting services.

Revenue is recognized when control of these services are transferred to a customer. The amount of revenue recognized reflects the consideration we expect to be entitled to in exchange for those services.

We determine revenue recognition 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 we, satisfy a performance obligation

Subscription and Premier Services Revenues

Subscription and premier services revenue are generally recognized on a ratable basis over the contract term beginning on the date that our service is made available to the customer.

We typically invoice our customers at the beginning of the term, in multiyear, annual, quarterly or monthly installments. Our subscription and premier services contracts generally range from one to three years in length, are typically non-cancellable and do not contain refund-type provisions. Revenue is presented net of sales and other taxes we collect on behalf of governmental authorities.

Professional Services

Professional services are generally billed on a fixed price basis, for which revenue is recognized over time based on the proportion performed.

Contracts with Multiple Performance Obligations

Our contracts can include multiple performance obligations which may consist of some or all of subscription services, premier services, and professional services. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. We determine the standalone selling prices based on our overall pricing objectives, taking into consideration discounting practices, the size and volume of our transactions, the customer demographic, the geographic area where services are sold, price lists, our go-to-market strategy, historical standalone sales and contract prices.

Deferred Commissions

Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions for new contracts are deferred and then amortized on a straight-line basis over a period of benefit that we have estimated to be five years. We determined the period of benefit by taking into consideration our customer contracts, our technology and other factors. Sales commissions for renewal contracts are deferred and then amortized on a straight-line basis over the related contractual renewal period. Amortization expense is included in sales and marketing expenses on the condensed consolidated statements of operations.

We apply the practical expedient in ASC Topic 606 to expense costs as incurred for sales commissions when the amortization period would have been one year or less.

14


BOX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Deferred Revenue

Deferred revenue consists of billings and payments received in advance of revenue recognition generated by our subscription services, premier services, and professional services described above. ASC Topic 606 introduced the concept of contract liabilities, which is substantially similar to deferred revenue under previous accounting guidance.

Accounts Receivable and Related Allowance

Accounts receivable are recorded at the invoiced amounts and do not bear interest. We maintain an allowance for estimated losses inherent in our accounts receivable portfolio. We assess the collectability of the accounts by taking into consideration the aging of our trade receivables, historical experience, and management judgment. We write off trade receivables against the allowance when management determines a balance is uncollectible and no longer intends to actively pursue collection of the receivable. We record a contract asset when revenue is recognized in advance of invoicing. Contract assets are presented within accounts receivable on the condensed consolidated balance sheets.

Fair Value of Financial Instruments

Our financial assets and financial liabilities which may include cash equivalents, marketable securities, and restricted cash, are measured and recorded at fair value on a recurring basis.

Non-marketable equity securities include our privately held strategic equity securities without readily determinable fair values. We record these privately held strategic equity securities without readily determinable fair values using a measurement alternative which measures the securities at cost minus impairment, if any, plus or minus changes resulting from qualifying observable price changes with a same or similar security from the same issuer. Our non-marketable equity securities are recorded at fair value only if an impairment or observable price adjustment is recognized in the current period. If an observable price adjustment or impairment is recognized on our non-marketable equity securities, we classify these assets as Level 3 within the fair value hierarchy based on the nature of the fair value inputs.

Our other current financial assets have fair values which approximate their carrying value due to their short-term maturities.

Internal-Use Software Costs

We capitalize costs to develop software for internal use incurred during the application development stage. Costs related to preliminary project activities and post implementation activities are expensed as incurred. Once an application has reached the development stage, management has authorized and committed to the funding of the software project, it is probable the project will be completed and the software will be used to perform the function intended, internal and external costs are capitalized until the application is substantially complete and ready for its intended use. Capitalized qualifying costs are amortized on a straight-line basis when the software is ready for its intended use.

We capitalize qualifying implementation costs incurred in a hosting arrangement that is a service contract based on the existing guidance for internal-use software, where external and internal costs incurred during the application development stage of implementation would generally be capitalized and costs during the preliminary project and post implementation stages would generally be expensed as incurred. We amortize capitalized qualifying implementation costs on a straight-line basis over the term of the associated hosting arrangement when the module or component of the hosting arrangement is ready for its intended use. The amortization of capitalized qualifying implementation cost is presented in the same line item as fees for the associated hosting arrangement in the condensed consolidated statements of operations.

Note 2. Revenue

Impact of ASC Topic 606 on Condensed Consolidated Financial Statement Line Items

The adoption of ASC Topic 606 impacted revenue recognition and incremental costs of obtaining a contract on our condensed consolidated balance sheet as of October 31, 2018 and statement of operations for the three and nine months ended October 31, 2018. There was no impact on the total cash provided by operating activities for the three and nine months ended October 31, 2018. Refer to Note 1 for a description of the primary impacts resulting from the adoption of ASC Topic 606. 

15


BOX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

The following tables present the amount by which each condensed consolidated financial statement line item is affected as of and for the three and nine months ended October 31, 2018 by ASC Topic 606 (in thousands, except per share data):

 

 

 

October 31, 2018

 

 

 

As Reported

 

 

Balances

without

adoption of

ASC Topic 606

 

 

Effect of Change

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable*

 

$

105,714

 

 

$

105,498

 

 

$

216

 

Deferred commissions

 

 

18,772

 

 

 

14,912

 

 

 

3,860

 

Deferred commissions, non-current

 

 

47,379

 

 

 

6,658

 

 

 

40,721

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue

 

 

281,289

 

 

 

282,491

 

 

 

(1,202

)

Deferred revenue, non-current

 

 

19,952

 

 

 

20,955

 

 

 

(1,003

)

Accumulated deficit

 

 

(1,114,204

)

 

 

(1,161,206

)

 

 

47,002

 

 

*

Contract assets are reported as part of accounts receivable upon the adoption of ASC Topic 606.

 

 

Three Months Ended October 31, 2018

 

 

 

Nine Months Ended October 31, 2018

 

 

As Reported

 

 

Balances

without

adoption of

ASC Topic 606

 

 

Effect of Change

 

 

 

As Reported

 

 

Balances

without

adoption of

ASC Topic 606

 

 

Effect of Change

 

Revenue

$

155,944

 

 

$

158,454

 

 

$

(2,510

)

 

 

$

444,673

 

 

$

452,648

 

 

$

(7,975

)

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

84,490

 

 

 

89,821

 

 

 

(5,331

)

 

 

 

238,472

 

 

 

253,647

 

 

 

(15,175

)

Loss from operations

 

(39,464

)

 

 

(42,285

)

 

 

2,821

 

 

 

 

(112,543

)

 

 

(119,743

)

 

 

7,200

 

Net loss

 

(40,196

)

 

 

(43,017

)

 

 

2,821

 

 

 

 

(114,918

)

 

 

(122,118

)

 

 

7,200

 

Net loss per common share, basic

   and diluted

$

(0.28

)

 

$

(0.30

)

 

$

0.02

 

 

 

$

(0.82

)

 

$

(0.87

)

 

$

0.05

 

Weighted-average shares used to

   compute net loss per share, basic

   and diluted

 

142,366

 

 

 

142,366

 

 

 

142,366

 

 

 

 

140,559

 

 

 

140,559

 

 

 

140,559

 

 

 

Three Months Ended October 31, 2018

 

 

 

Nine Months Ended October 31, 2018

 

 

As Reported

 

 

Balances

without

adoption of

ASC Topic 606

 

 

Effect of Change

 

 

 

As Reported

 

 

Balances

without

adoption of

ASC Topic 606

 

 

Effect of Change

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(40,196

)

 

$

(43,017

)

 

$

2,821

 

 

 

$

(114,918

)

 

$

(122,118

)

 

$

7,200

 

Adjustments to reconcile net loss to net cash

   provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of deferred commissions

 

4,516

 

 

 

6,177

 

 

 

(1,661

)

 

 

 

12,231

 

 

 

18,119

 

 

 

(5,888

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

9,065

 

 

 

9,124

 

 

 

(59

)

 

 

 

57,001

 

 

 

56,635

 

 

 

366

 

Deferred commissions

 

(9,753

)

 

 

(6,083

)

 

 

(3,670

)

 

 

 

(23,057

)

 

 

(13,770

)

 

 

(9,287

)

Deferred revenue

 

(276

)

 

 

(2,845

)

 

 

2,569

 

 

 

 

(9,868

)

 

 

(17,477

)

 

 

7,609

 

Net cash provided by

   operating activities

 

6,816

 

 

 

6,816

 

 

 

 

 

 

 

23,989

 

 

 

23,989

 

 

 

 

 

16


BOX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Contract Assets

Contract assets, which are presented within accounts receivable, were $0.2 million as of October 31, 2018.

Deferred Revenue

Deferred revenue was $301.2 million as of October 31, 2018. $120.1 million of revenue was recognized during the three months ended October 31, 2018 that was included in the deferred revenue balance as of July 31, 2018. $252.1 million of revenue was recognized during the nine months ended October 31, 2018 that was included in the deferred revenue balance as of February 1, 2018.

Transaction Price Allocated to the Remaining Performance Obligations

As of October 31, 2018, approximately $607.4 million of revenue is expected to be recognized from remaining performance obligations for subscription contracts. We expect to recognize revenue on 66% of these remaining performance obligations over the next 12 months, with the balance recognized thereafter.

Note 3. Fair Value Measurements

We define fair value as the exchange price that would be received from selling an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We measure our financial assets and liabilities at fair value at each reporting period using a fair value hierarchy which requires us to maximize the use of observable inputs and minimize 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. Three levels of inputs may be used to measure fair value:

 

Level 1—Observable inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

 

Level 2—Observable inputs are quoted prices for similar assets and liabilities in active markets or inputs other than quoted prices that are observable for the assets or liabilities, either directly or indirectly through market corroboration, for substantially the full term of the financial instruments.

 

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. These inputs are based on our own assumptions used to measure assets and liabilities at fair value and require significant management judgment or estimation.

We measure restricted cash at fair value on a recurring basis. We classify this asset within Level 1 or Level 2 because they are valued using either quoted market prices for identical assets or inputs other than quoted prices that are directly or indirectly observable in the market, including readily-available pricing sources for the identical underlying security which may not be actively traded. Restricted cash in the form of certificates of deposits related to our leases was not material as of October 31, 2018 and January 31, 2018, which was classified within Level 2.

Note 4. Balance Sheet Components

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following (in thousands):

 

 

 

October 31,

 

 

January 31,

 

 

 

2018

 

 

2018

 

Prepaid expenses

 

$

11,652

 

 

$

8,494

 

Other current assets

 

 

3,385

 

 

 

2,897

 

Total prepaid expenses and other current assets

 

$

15,037

 

 

$

11,391

 

17


BOX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Property and Equipment, Net

Property and equipment, net consisted of the following (in thousands):

 

 

 

October 31,

 

 

January 31,

 

 

 

2018

 

 

2018

 

Servers

 

$

195,594

 

 

$

170,422

 

Leasehold improvements

 

 

76,789

 

 

 

72,599

 

Computer hardware and software

 

 

19,711

 

 

 

14,558

 

Furniture and fixtures

 

 

13,625

 

 

 

14,254

 

Construction in progress

 

 

14,867

 

 

 

7,348

 

Total property and equipment

 

 

320,586

 

 

 

279,181

 

Less: accumulated depreciation

 

 

(187,212

)

 

 

(155,204

)

Total property and equipment, net

 

$

133,374

 

 

$

123,977

 

 

As of October 31, 2018, the gross carrying amount of property and equipment included $100.7 million of servers and $5.7 million of construction in progress acquired under capital leases, and the accumulated depreciation of property and equipment acquired under these capital leases was $47.1 million. As of January 31, 2018, the gross carrying amount of property and equipment included $74.7 million of servers and related equipment and $3.7 million of construction in progress acquired under capital leases, and the accumulated depreciation of property and equipment acquired under these capital leases was $29.1 million.

Depreciation expense related to property and equipment was $11.4 million and $9.9 million for the three months ended October 31, 2018 and 2017, respectively, and $34.7 million and $28.8 million for the nine months ended October 31, 2018 and 2017, respectively. Included in these amounts was depreciation expense for servers acquired under capital leases in the amount of $6.6 million and $4.9 million for the three months ended October 31, 2018 and 2017, respectively and $19.0 million and $13.3 million for nine months ended October 31, 2018 and 2017, respectively. Construction in progress primarily consists of servers and networking equipment and storage infrastructure being provisioned in our datacenter facilities. In addition, the amounts of interest capitalized to property and equipment were not material for the three and nine months ended October 31, 2018 and 2017.  

Other Long-term Assets

Other long-term assets consisted of the following (in thousands):

 

 

 

October 31,

 

 

January 31,

 

 

 

2018

 

 

2018

 

Deposits, non-current

 

$

2,593

 

 

$

2,934

 

Other assets, non-current

 

 

4,936

 

 

 

2,469

 

Other long-term assets

 

$

7,529

 

 

$

5,403

 

Internal-Use Software Costs

As of October 31, 2018, we capitalized $1.3 million in qualifying costs to develop software for internal use associated with the development of additional significant features and functionality to our products as part of other long-term assets. There were no material qualifying costs as of January 31, 2018. We have not incurred any amortization of the capitalized amounts for any of the periods presented.

As of October 31, 2018, we capitalized $1.6 million in qualifying implementation costs incurred in a hosting arrangement that is a service contract, which is presented in the same line item as prepayment of the fees for the associated hosting arrangement in the condensed consolidated balance sheets. There were no material qualifying costs as of January 31, 2018. The amortization of the capitalized implementation cost is not material for any of the periods presented.

 

18


BOX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 5. Business Combinations

Other Business Combinations and Similar Transactions

During fiscal year 2019, we entered into agreements to hire certain employees from three privately-held technology companies for total aggregate consideration of $2.4 million paid in a mix of cash and shares of our Class A common stock. We accounted for these transactions as business combinations. The entire consideration for these transactions was allocated to goodwill. Goodwill is primarily attributable to the enhancement of the Box user experience and the value of hired personnel. The aggregate amount of contingent consideration payments related to indemnification was not material. The aggregate transaction costs associated with these transactions were not material. Goodwill is deductible for U.S. income tax purposes.

Results of operations for these business combinations have been included in our condensed consolidated statements of operations subsequent to the transaction completion date and were not material. Pro forma results of operations for these transactions have not been presented because they were also not material to the consolidated results of operations.

Note 6. Goodwill and Intangible Assets

Goodwill

There was no goodwill activity for the three months ended October 31, 2018. Goodwill activity for the nine months ended October 31, 2018 is reflected in the following table (in thousands):

 

Balance as of January 31, 2018

 

$

16,293

 

Goodwill acquired

 

 

2,447

 

Balance as of October 31, 2018

 

$

18,740

 

Intangible Assets

We have not incurred any intangible amortization expense for the three months ended October 31, 2018, as all intangible assets were fully amortized as of July 31, 2018. Intangible amortization expense was not material for the nine months ended October 31, 2018. For the three and nine months ended October 31, 2017, intangible amortization expense was not material. Amortization of acquired technology is included in cost of revenue and amortization for trade names is included in general and administrative expenses in the condensed consolidated statements of operations.

Note 7. Commitments and Contingencies

Letters of Credit

As of October 31, 2018 and January 31, 2018, we had letters of credit in the aggregate amount of $26.8 million and $26.4 million, respectively, in connection with our operating leases, which were primarily issued under the available sublimit of $30.0 million in conjunction with a secured credit agreement entered on November 27, 2017.  Refer to Note 8 for additional details related to the secured credit agreement mentioned.

Leases

We have entered into various non-cancellable operating lease agreements for certain of our offices and datacenters with lease periods expiring primarily between fiscal years 2020 and 2029. Certain of these arrangements have free or escalating rent payment provisions and optional renewal clauses. We are also committed to pay a portion of the actual operating expenses under certain of these lease agreements. These operating expenses are not included in the table below.  

19


BOX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

We also entered into various capital lease arrangements to obtain servers and related equipment for our operations. These agreements typically have an initial term of three to four years. The leases are secured by the underlying leased servers and related equipment.

As of October 31, 2018, future minimum lease payments under non-cancellable capital and operating leases are as follows (in thousands):

 

Years ending January 31:

 

Capital

Leases

 

 

Operating

Leases, net of

Sublease Income

 

Remainder of 2019

 

$

8,799

 

 

$

8,764

 

2020

 

 

21,979

 

 

 

35,221

 

2021

 

 

17,794

 

 

 

35,907

 

2022

 

 

9,740

 

 

 

34,146

 

2023

 

 

2,376

 

 

 

26,361

 

Thereafter

 

 

 

 

 

142,922

 

Total minimum lease payments

 

$

60,688

 

 

$

283,321

 

Less: amount representing interest

 

 

(2,438

)

 

 

 

 

Present value of minimum lease payments

 

$

58,250

 

 

 

 

 

We sublease certain floors of our Redwood City, San Francisco, and London offices. These subleases have terms ranging from 25 to 55 months that will expire at various dates by fiscal year 2023. Non-cancellable sublease proceeds for the years ending January 31, 2019, 2020, 2021, 2022, and 2023 of $1.9 million, $8.2 million, $7.5 million, $5.1 million, and $4.2 million, respectively, are included in the table above.

We establish assets and liabilities for the present value of estimated future costs to return certain of our leased facilities to their original condition. Such assets are depreciated over the lease period into operating expense, and the recorded liabilities are accreted to the future value of the estimated restoration costs. We did not have material asset retirement obligations as of October 31, 2018 and January 31, 2018.

We recognize rent expense under our operating leases on a straight-line basis. Rent expense totaled $8.8 million and $8.1 million, net of sublease income of $1.8 million and $1.9 million for the three months ended October 31, 2018 and 2017, respectively, and rent expense totaled $25.4 million and $20.3 million, net of sublease income of $5.7 million and $5.6 million for the nine months ended October 31, 2018 and 2017, respectively.

Purchase Obligations

As of October 31, 2018, future payments under non-cancellable contractual purchases, which relate primarily to infrastructure services, datacenter operations, and sales and marketing activities, are as follows (in thousands):

 

Years ending January 31:

 

 

 

 

Remainder of 2019

 

$

10,761

 

2020

 

 

47,478

 

2021

 

 

12,267

 

2022

 

 

2,280

 

2023

 

 

1,315

 

Thereafter

 

 

694

 

 

 

$

74,795

 

 

20


BOX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Legal Matters

From time to time, we are a party to litigation and subject to claims that arise in the ordinary course of business. We investigate these claims as they arise and accrue estimates for resolution of legal and other contingencies when losses are probable and estimable. Although the results of litigation and claims cannot be predicted with certainty, we believe there was not at least a reasonable possibility that we had incurred a material loss with respect to such loss contingencies as of October 31, 2018.

Indemnification

We include service level commitments to our customers warranting certain levels of uptime reliability and performance and permitting those customers to receive credits in the event that we fail to meet those levels. In addition, our customer contracts often include (i) specific obligations that we maintain the availability of the customer’s data through our service and that we secure customer content against unauthorized access or loss, and (ii) indemnity provisions whereby we indemnify our customers for third-party claims asserted against them that result from our failure to maintain the availability of their content or securing the same from unauthorized access or loss. To date, we have not incurred any material costs as a result of such commitments.

Our arrangements generally include certain provisions for indemnifying customers against liabilities if our products or services infringe a third party’s intellectual property rights. It is not possible to determine the maximum potential amount under these indemnification obligations due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. To date, we have not incurred any material costs as a result of such obligations and have not accrued any material liabilities related to such obligations on the condensed consolidated financial statements. In addition, we indemnify our officers, directors and certain key employees while they are serving in good faith in their respective capacities. To date, there have been no claims under any indemnification provisions.

Note 8. Debt

Line of Credit

In December 2015, we entered into a revolving credit facility (December 2015 Facility), which provided for a revolving loan facility in the amount of up to $40.0 million originally maturing in December 2017. In February 2017, we amended the December 2015 Facility to extend the maturity date to December 2018. On November 27, 2017, we paid in full all amounts outstanding under the December 2015 Facility, including the outstanding principal balance of $40.0 million, and terminated the December 2015 Facility and all related loan and collateral documents, in conjunction with entering into a secured credit agreement (November 2017 Facility) with a different lender with a maturity date of November 27, 2020.

The December 2015 Facility was denominated in U.S. dollars and, depending on certain conditions, each borrowing was subject to a floating interest rate equal to either the prime rate plus a spread of 0.25% to 2.75% or a reserve adjusted LIBOR rate (based on one, three or six-month interest periods) plus a spread of 1.25% to 3.75%. Although no minimum deposit was required for the December 2015 Facility, we were eligible for the lowest interest rate if we maintained at least $40 million in deposits with the lender.  In addition, there was an annual fee of 0.2% on the total commitment amount. We drew $40.0 million at 1.82% (six month LIBOR plus 1.25%). Borrowings under the December 2015 Facility were collateralized by substantially all of our assets in the United States. The December 2015 Facility also contained various covenants, including covenants related to the delivery of financial and other information, the maintenance of quarterly financial covenants, as well as customary limitations on dispositions, mergers or consolidations and other corporate activities. In February 2017, we amended the December 2015 Facility to extend the maturity date to December 2018. Interest expense, net of capitalized interest costs, for the periods presented is not material.

21


BOX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

The November 2017 Facility provides for an $85.0 million revolving credit facility, with a sublimit of $30.0 million available for the issuance of letters of credit. The proceeds of the revolving loans may be used for general corporate purposes. The revolving loans accrue interest at a prime rate plus a margin of 0.25% or, at our option, a LIBOR rate (based on one, three or six-month interest periods) plus a margin of 1.00%.  Interest on the revolving loans is payable quarterly in arrears with respect to loans based on the prime rate and at the end of an interest period in the case of loans based on the LIBOR rate (or at each three-month interval if the interest period is longer than three months).  Borrowings under the November 2017 Facility are collateralized by substantially all of our assets. The November 2017 Facility requires us to comply with a maximum leverage ratio and a minimum liquidity requirement.  Additionally, the November 2017 Facility contains customary affirmative and negative covenants, including covenants limiting our, and our subsidiaries’, ability to, among other things, grant liens, incur debt, pay dividends or distributions on the capital stock, effect certain mergers, make investments, dispose of assets and enter into transactions with affiliates, in each case subject to customary exceptions for a credit facility of the size and type of the November 2017 Facility.

On November 29, 2017, the restrictions on our certificates of deposits that previously collateralized existing letters of credit were released as the letters of credit were included under the November 2017 Facility letter of credit sublimit. As such, we released $26.1 million from restricted cash to cash and cash equivalents. Refer to Note 7 for additional details on the letters of credit and Note 3 for additional details on restricted cash in the form of certificates of deposits.

As of October 31, 2018, we were in compliance with all financial covenants.

In connection with the above credit facilities, for the three and nine months ended October 31, 2018 and 2017, interest expense, net of capitalized interest costs, was not material. During the same periods, the amounts of interest capitalized were not material. Interest expense in connection with the above credit facilities may include interest charges for our line of credit, amortization of issuance costs, and unused commitment fees on our line of credit.

 

Note 9. Stockholders’ Equity

Material modification of rights of security holders

On June 14, 2018, all of our outstanding shares of Class B common stock automatically converted into the same number of shares of Class A common stock pursuant to the terms of our Amended and Restated Certificate of Incorporation. No additional shares of Class B common stock will be issued following such conversion. The conversion occurred pursuant to Article IV of the Amended and Restated Certificate of Incorporation, which provided that each one share of Class B common stock would convert automatically, without any further action, into one share of Class A common stock on the first trading day falling on or after the date on which the outstanding shares of Class B common stock represent less than 5% of the aggregate number of shares of the then outstanding Class A common stock and Class B common stock. On June 15, 2018, we filed a certificate with the Secretary of State of the State of Delaware effecting the retirement and cancellation of our Class B common stock. This certificate of retirement had the additional effect of eliminating the authorized Class B common stock, thereby reducing the total number of our authorized shares of common stock by 200,000,000.

Our Class A and Class B common stock are referred to as common stock throughout the notes to the financial statements, unless otherwise noted. After June 14, 2018, common stock refers to our Class A common stock.

Common stock

As of October 31, 2018, we had authorized 1,000,000,000 shares of Class A common stock, par value of $0.0001 per share. As of October 31, 2018, 143,387,495 shares of Class A common stock were issued and outstanding.

As of January 31, 2018, we had authorized 1,000,000,000 shares of Class A common stock and 200,000,000 shares of Class B common stock, each at par value of $0.0001 per share. As of January 31, 2018, 125,933,323 shares of Class A common stock and 11,383,525 shares of Class B common stock were issued and outstanding.

22


BOX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Preferred stock

As of October 31, 2018 and January 31, 2018, we had authorized 100,000,000 shares of undesignated preferred stock, par value of $0.0001 per share. No shares issued and outstanding in the same respective periods.

Note 10. Stock-Based Compensation

2015 Equity Incentive Plan

In January 2015, our board of directors adopted the 2015 Equity Incentive Plan (2015 Plan), which became effective prior to the completion of our initial public offering (IPO). A total of 12,200,000 shares of Class A common stock was initially reserved for issuance pursuant to future awards under the 2015 Plan. On the first day of each fiscal year, shares available for issuance are increased based on the provisions of the 2015 Plan. Any shares subject to outstanding awards under our 2006 Equity Incentive Plan (2006 Plan) or 2011 Equity Incentive Plan (2011 Plan) that are cancelled or repurchased subsequent to the 2015 Plan’s effective date are returned to the pool of shares reserved for issuance under the 2015 Plan. Awards granted under the 2015 Plan may be (i) incentive stock options, (ii) nonstatutory stock options, (iii) restricted stock units, (iv) restricted stock awards or (v) stock appreciation rights, as determined by our board of directors at the time of grant. Twenty-five percent of each grant of stock options and restricted stock units generally vest one year from the vesting commencement date and continue to vest (a) in the case of options, 1/48th per month thereafter, and (b) in the case of restricted stock units, 1/16th per quarter thereafter. As of October 31, 2018, 18,518,116 shares were reserved for future issuance under the 2015 Plan.

2015 Employee Stock Purchase Plan

In January 2015, our board of directors adopted the 2015 Employee Stock Purchase Plan (2015 ESPP), which became effective prior to the completion of our IPO. A total of 2,500,000 shares of Class A common stock was initially reserved for issuance under the 2015 ESPP. On the first day of each fiscal year, shares available for issuance are increased based on the provisions of the 2015 ESPP. The 2015 ESPP allows eligible employees to purchase shares of our Class A common stock at a discount of up to 15% through payroll deductions of their eligible compensation, subject to any plan limitations. The 2015 ESPP provides for 24-month offering periods beginning March 16 and September 16 of each year, and each offering period consists of four six-month purchase periods.

On each purchase date, eligible employees may purchase our stock at a price per share equal to 85% of the lesser of (1) the fair market value of our stock on the offering date or (2) the fair market value of our stock on the purchase date. In the event the price is lower on the last day of any purchase price period, in addition to using that price as the basis for that purchase period, the offering period resets and the new lower price becomes the new offering price for a new 24 month offering period. As of October 31, 2018, 1,957,913 shares were reserved for future issuance under the 2015 ESPP.

Stock Options

The following table summarizes the stock option activity under the equity incentive plans and related information:

 

 

 

Shares Subject to Options Outstanding

 

 

Weighted-Average

 

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

Remaining

 

 

 

 

 

 

 

 

 

 

 

Average Exercise

 

 

Contractual Life

 

 

Aggregate

 

 

 

Shares

 

 

Price

 

 

(Years)

 

 

Intrinsic Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Balance as of January 31, 2018

 

 

10,843,120

 

 

$

8.32

 

 

 

5.74

 

 

$

150,922

 

Options granted

 

 

717,658

 

 

 

20.78

 

 

 

 

 

 

 

 

 

Options exercised

 

 

(1,745,370

)

 

 

8.58

 

 

 

 

 

 

 

 

 

Options forfeited/cancelled

 

 

(461,801

)

 

 

14.10

 

 

 

 

 

 

 

 

 

Balance as of October 31, 2018

 

 

9,353,607

 

 

$

8.94

 

 

 

5.20

 

 

$

87,143

 

Vested and expected to vest as of October 31, 2018

 

 

9,281,847

 

 

$

8.87

 

 

 

5.17

 

 

$

87,071

 

Exercisable as of October 31, 2018

 

 

7,788,714

 

 

$

7.04

 

 

 

4.50

 

 

$

85,578

 

 

 

23


BOX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

The aggregate intrinsic value of options vested and expected to vest and exercisable as of October 31, 2018 is calculated based on the difference between the exercise price and the current fair value of our common stock. The aggregate intrinsic value of exercised options for the nine months ended October 31, 2018 and 2017 was $27.5 million and $18.8 million, respectively. The aggregate estimated fair value of stock options granted to employees that vested for the nine months ended October 31, 2018 and 2017 was $5.6 million and $7.2 million, respectively. The weighted-average grant date fair value of options granted to employees during the nine months ended October 31, 2018 and 2017 was $8.24 and $7.04 per share, respectively.

As of October 31, 2018, there was $9.0 million of unrecognized stock-based compensation expense related to outstanding stock options granted to employees that is expected to be recognized over a weighted-average period of 2.59 years. Out of the total unrecognized stock-based compensation expense, as of October 31, 2018, $3.8 million related to outstanding performance-based stock option, based on the probable market-based performance goals and service condition at that date, which is expected to be recognized over a weighted-average period of 3.29 years.

Performance-Based Stock Options

In April 2017, the compensation committee of our board of directors approved and granted 475,000 performance-based stock options under the 2015 Plan to certain executive officers where vesting is subject to both the continued employment of the participant and the achievement of market-based performance goals established by the compensation committee. Subject to both the continued employment of the participant and the achievement of market-based performance goals established by the compensation committee, 25% of the performance-based options vest one year from the vesting commencement date, and 1/48th continue to vest each month thereafter. The total amount of compensation expense recognized is based on the number of shares that we determine are probable of vesting and is recognized over the vesting term of the awards. Of the 475,000 performance-based stock options, 250,000 were forfeited in connection with a participant’s resignation of employment during the three months ended October 31, 2017. During fiscal year 2019, the market-based performance goals were met. The performance-based stock options are vesting based on the continued employment of the participant. The grant date fair value of these awards was determined using a Monte Carlo valuation model and the related stock-based compensation expense is recognized based on an accelerated attribution method.

In April 2018, the compensation committee of our board of directors approved and granted 650,000 performance-based stock options under the 2015 Plan to certain executive officers where vesting is subject to both the continued employment of the participant and the achievement of market-based performance goals established by the compensation committee. Subject to both the continued employment of the participant and the achievement of market-based performance goals established by the compensation committee, 25% of the performance-based options vest one year from the vesting commencement date, and 1/48th continue to vest each month thereafter. The total amount of compensation expense recognized is based on the number of shares that we determine are probable of vesting and is recognized over the vesting term of the awards. As of October 31, 2018, the market-based performance goals were not met. The grant date fair value of these awards was determined using a Monte Carlo valuation model and the related stock-based compensation expense is recognized based on an accelerated attribution method.

Restricted Stock Units

The following table summarizes the restricted stock unit activity under the equity incentive plans and related information:

 

 

 

Number of

 

 

Weighted-

 

 

 

Restricted

 

 

Average

 

 

 

Stock Units

 

 

Grant Date

 

 

 

Outstanding

 

 

Fair Value

 

Unvested balance - January 31, 2018

 

 

14,619,252

 

 

$

16.42

 

Granted

 

 

9,298,770

 

 

 

22.58

 

Vested, net of shares withheld for employee payroll taxes

 

 

(2,656,081

)

 

 

16.51

 

Forfeited/cancelled

 

 

(2,922,723

)

 

 

17.41

 

Unvested balance - October 31, 2018

 

 

18,339,218

 

 

$

19.38

 

24


BOX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

 

As of October 31, 2018, there was $273.1 million of unrecognized stock-based compensation expense related to outstanding restricted stock units granted to employees that is expected to be recognized over a weighted-average period of 3.08 years.

 

2015 ESPP

As of October 31, 2018, there was $16.8 million of unrecognized stock-based compensation expense related to the 2015 ESPP that is expected to be recognized over the remaining term of the respective offering periods.

Stock-Based Compensation

The following table summarizes the components of stock-based compensation expense recognized in the condensed consolidated statements of operations (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

October 31,

 

 

October 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Cost of revenue

 

$

3,598

 

 

$

2,814

 

 

$

10,280

 

 

$

7,945

 

Research and development

 

 

12,043

 

 

 

9,705

 

 

 

33,668

 

 

 

28,419

 

Sales and marketing

 

 

9,708

 

 

 

8,208

 

 

 

27,701

 

 

 

23,882

 

General and administrative

 

 

6,441

 

 

 

4,796

 

 

 

17,437

 

 

 

12,290

 

Total stock-based compensation

 

$

31,790

 

 

$

25,523

 

 

$

89,086

 

 

$

72,536

 

Determination of Fair Value

We estimated the fair value of employee stock options and 2015 ESPP purchase rights using a Black-Scholes option pricing model with the following assumptions.

 

 

 

Three Months Ended

Nine Months Ended

 

 

 

October 31,

 

 

October 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Employee Stock Options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expected term (in years)

 

 

 

 

 

 

5.8

 

 

 

 

 

 

 

6.1

 

 

 

5.5

 

-

 

5.8

 

 

 

5.5

 

-

 

6.1

 

Risk-free interest rate

 

 

 

 

 

3.1%

 

 

 

 

 

 

2.0%

 

 

2.8%

 

-

3.1%

 

 

1.8%

 

-

2.1%

 

Volatility

 

 

 

 

 

45%

 

 

 

 

 

 

39%

 

 

 

 

 

 

45%

 

 

38%

 

-

40%

 

Dividend yield

 

 

 

 

 

0%

 

 

 

 

 

 

0%

 

 

 

 

 

 

0%

 

 

 

 

 

 

0%

 

Employee Stock Purchase Plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expected term (in years)

 

 

0.5

 

-

 

2.0

 

 

 

0.5

 

-

 

2.0

 

 

 

0.5

 

-

 

2.0

 

 

 

0.5

 

-

 

2.0

 

Risk-free interest rate

 

2.3%

 

-

2.8%

 

 

1.2%

 

-

1.4%

 

 

2.0%

 

-

2.8%

 

 

0.9%

 

-

1.4%

 

Volatility

 

40%

 

-

48%

 

 

29%

 

-

40%

 

 

37%

 

-

50%

 

 

28%

 

-

43%

 

Dividend yield

 

 

 

 

 

0%

 

 

 

 

 

 

0%

 

 

 

 

 

 

0%

 

 

 

 

 

 

0%

 

 

The assumptions used in the Black-Scholes option pricing model were determined as follows:

Fair Value of Common Stock. We use the market closing price for our Class A common stock as reported on the New York Stock Exchange to determine the fair value of our common stock at each grant date.

Expected Term. The expected term represents the period that our share-based awards are expected to be outstanding. The expected term assumptions were determined based on the vesting terms, exercise terms and contractual lives of the options and 2015 ESPP purchase rights.

25


BOX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Expected Volatility. We estimate the expected volatility of the stock option grants and 2015 ESPP purchase rights based on the historical volatility of our Class A common stock over a period equivalent to the expected term of the stock option grants and 2015 ESPP purchase rights, respectively.

Risk-free Interest Rate. The risk-free rate that we use is based on the implied yield available on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the stock options and 2015 ESPP purchase rights.

Dividend Yield. We have never declared or paid any cash dividends and do not plan to pay cash dividends in the foreseeable future, and, therefore, use an expected dividend yield of zero.

 

 

Note 11. Net Loss per Share

On June 14, 2018, all of our outstanding shares of Class B common stock automatically converted into the same number of shares of Class A common stock pursuant to the terms of our Amended and Restated Certificate of Incorporation. No additional shares of Class B common stock will be issued following such conversion. Refer to Note 9 for additional details related to the conversion of Class B common stock.

For periods where there were Class B shares outstanding, we calculate our basic and diluted net loss per share in conformity with the two-class method required for companies with participating securities. Under the two-class method, basic net loss per share is calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding for the period, less shares subject to repurchase. The diluted net loss per share is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period. For purposes of this calculation, options to purchase common stock, restricted stock units, shares issuable pursuant to our employee stock purchase plan, shares subject to repurchase from early exercised options and unvested restricted stock, and contingently issuable shares are considered common stock equivalents but have been excluded from the calculation of diluted net loss per share as their effect is antidilutive.

The rights, including the liquidation and dividend rights, of the holders of our Class A and Class B common stock are identical, except with respect to voting and conversion. As the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis and the resulting net loss per share will, therefore, be the same for both Class A and Class B common stock on an individual or combined basis. We did not present dilutive net loss per share on an as-if converted basis because the impact was not dilutive.

26


BOX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

The following table sets forth the computation of basic and diluted net loss per share (in thousands, except per share amounts):

 

 

 

Three Months Ended October 31,

 

 

 

2018

 

 

2017

 

 

 

Class A

 

 

Class B

 

 

Class A

 

 

Class B

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(40,196

)

 

$

 

 

$

(35,061

)

 

$

(7,863

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of shares outstanding—basic

   and diluted

 

 

142,366

 

 

 

 

 

 

109,972

 

 

 

24,664

 

Net loss per share—basic and diluted

 

$

(0.28

)

 

$

 

 

$

(0.32

)

 

$

(0.32

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended October 31,

 

 

 

2018

 

 

2017

 

 

 

Class A

 

 

Class B

 

 

Class A

 

 

Class B

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(110,868

)

 

$

(4,050

)

 

$

(84,998

)

 

$

(37,297

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of shares outstanding—basic

   and diluted

 

 

135,605

 

 

 

4,954

 

 

 

92,469

 

 

 

40,575

 

Net loss per share—basic and diluted

 

$

(0.82

)

 

$

(0.82

)

 

$

(0.92

)

 

$

(0.92

)

 

The following weighted-average outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share for the periods presented because the impact of including them would have been antidilutive (in thousands):

 

 

 

Three Months Ended October 31,

 

 

Nine Months Ended October 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Options to purchase common stock

 

 

9,488

 

 

 

11,997

 

 

 

10,026

 

 

 

12,094

 

Restricted stock units

 

 

14,791

 

 

 

13,962

 

 

 

14,474

 

 

 

13,382

 

Employee stock purchase plan

 

 

1,679

 

 

 

1,845

 

 

 

1,131

 

 

 

3,437

 

Repurchasable shares from early-exercised options and

   unvested restricted stock

 

 

 

 

 

164

 

 

 

 

 

 

206

 

Contingently issuable common stock

 

 

 

 

 

52

 

 

 

 

 

 

55

 

 

 

 

25,958

 

 

 

28,020

 

 

 

25,631

 

 

 

29,174

 

 

27


BOX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 12. Income Taxes

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”). The Tax Act reduces the U.S. federal corporate tax rate from 34% to 21%, imposes a one-time repatriation tax, and numerous other provisions transitioning to a territorial system. The changes included in the Tax Act are broad and complex. The SEC has issued SAB 118 that would allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. Our initial accounting for the transition tax was not complete as of January 31, 2018 because there was uncertainty regarding the calculation of the amounts subject to the tax. We completed our analysis of the transition tax and related interpretive guidance during the third quarter of fiscal year 2019. No significant measurement period adjustment to our initial accounting was required. We will continue to evaluate the remaining provisional amounts recorded for the year ended January 31, 2019 throughout the remainder of the measurement period.

The Tax Act also includes provisions for Global Intangible Low-Taxed Income (“GILTI”) wherein taxes on foreign income are imposed in excess of a deemed return on tangible assets of foreign corporations. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make the related election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. At October 31, 2018, we do not expect the GILTI to have a material impact on future earnings due to our NOLs and valuation allowance position. We will account for the impact of the GILTI in the period we become subject to its provisions. 

Utilization of the federal and state NOLs may be subject to substantial annual limitation due to the ownership change limitations provided by Section 382 of the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.

We evaluate tax positions for recognition using a more-likely-than-not recognition threshold, and those tax positions eligible for recognition are measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon the effective settlement with a taxing authority that has full knowledge of all relevant information.

We file tax returns in the United States for federal, California, and other states. All tax years remain open to examination for both federal and state purposes as a result of our net operating loss and credit carryforwards. We began to file foreign tax returns in the United Kingdom starting with the year ended January 31, 2013, in France, Germany and Japan starting with the year ended January 31, 2014, in Canada starting with the year ended January 31, 2015, and in Australia, Sweden, and Netherlands starting with the year ended January 31, 2016. Certain tax years remain open to examination.

As a result of our adoption of ASC Topic 606 as of February 1, 2018, the $9.8 million decrease of deferred revenue and the $29.4 million increase to deferred commissions resulted in additional deferred tax liabilities that reduced our net deferred tax asset position. The net deferred tax assets in the jurisdictions impacted by the adoption of ASC Topic 606 were fully reserved and, accordingly, this impact was offset by a corresponding reduction to the valuation allowance with no resulting net impact to our net assets or accumulated deficit.

We believe that we have provided adequate reserves for our income tax uncertainties in all open tax years. We do not expect our gross unrecognized tax benefits to change significantly over the next 12 months.

Note 13. Segments

Our chief operating decision maker reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. As such, we have a single reporting segment and operating unit structure. Since we operate in one operating segment, all required segment information can be found in the condensed consolidated financial statements.

 

28


 

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with the condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed in the section titled “Risk Factors” and in other parts of this Quarterly Report on Form 10-Q.

Overview

Box provides a leading cloud content management platform that enables organizations of all sizes to securely manage their content while allowing easy, secure access and sharing of this content from anywhere, on any device. With our Software-as-a-Service (SaaS) cloud content management platform, users can collaborate on content both internally and with external parties, automate content-driven business processes, develop custom applications, and implement data protection, security and compliance features to comply with legal and regulatory requirements, internal policies and industry standards and regulations. Our platform enables a broad set of business use cases across an enterprise, across multiple file formats and media types, and user experiences. Our platform integrates with leading enterprise business applications, and is compatible with multiple application environments, operating systems and devices, ensuring that workers have access to their critical business content whenever and wherever they need it.

We were founded and publicly launched our platform in 2005 with a simple but powerful idea: to make it incredibly easy for people to securely manage, share and collaborate on their most important content online. In 2006, we introduced a free version of our product in order to rapidly grow our user base, and we surpassed one million registered users by July 2007. As users began to bring our solution into the workplace, we learned that businesses were eager for a solution to empower user-friendly content sharing and collaboration in a secure, manageable way. Starting in 2007, we began enhancing our platform to serve businesses and large enterprises, which meant expanding our business functionality with features such as our administrative console, identity integration, activity reporting and full-text search. To further satisfy the requirements of IT departments in large organizations, we began to invest heavily in enhancing the security of our platform. Also in 2007, we began to build an enterprise sales team. The continual evolution of our platform features allowed our sales team to sell into increasingly larger organizations. To empower users to work securely from anywhere, we built native applications for all major mobile platforms. The introduction of our iPad application in 2010 further accelerated enterprise adoption of our platform. In 2012, we introduced our Box OneCloud platform and our Box Embed framework to encourage developers and independent software vendors (ISVs) to build powerful applications that connect to Box, furthering the reach of the Box service. We continued to innovate by expanding our offerings to include Box KeySafe, a solution that builds on top of Box’s strong encryption and security capabilities to give customers greater control over the encryption keys used to secure the file contents that are stored with Box; Box Governance, which gives customers a better way to comply with regulatory policies, satisfy e-discovery requests and effectively manage sensitive business information; Box Zones, which gives global customers the ability to store their data locally in certain regions; Box Platform, which further enables customers and partners to build enterprise apps using the Box Platform; Box Relay, which allows our end users to easily build, manage and track their own workflows; and Box GxP Validation, which is a new approach for maintaining always-on GxP compliance in the cloud for both regulated and unregulated content. We continued to expand our international presence as we moved to a new European headquarters in London’s Tech City in 2017 and a new office in Tokyo in 2018.

We offer our solution to our customers as a subscription-based service, with subscription fees based on the requirements of our customers, including the number of users and functionality deployed. The majority of our customers subscribe to our service through one-year contracts, although we also offer our services for terms ranging from one month to three years or more. We typically invoice our customers at the beginning of the term, in multiyear, annual, quarterly or monthly installments. We recognize subscription and premier services revenue ratably over the contract term beginning on the date that our service is made available to the customer.

Our objective is to build an enduring business that creates sustainable revenue and earnings growth over the long term. To best achieve this objective, we focus on growing the number of users and paying organizations through direct field sales, direct inside sales, indirect channel sales and through word-of-mouth by individual users, some of whom use our services at no cost. Individual users and organizations can also simply sign up to use our solution on our website. We believe this approach not only helps us build a critical mass of users but also has a viral effect within organizations as more of their employees use our service and encourage their IT professionals to deploy our services to a broader user base.

29


 

We have achieved significant growth in a short period of time. Our user base includes 63.5 million registered users. We define a registered user as a Box account that has been provisioned a unique user identification number. As of October 31, 2018, 19% of our registered users were paying users who registered as part of a larger enterprise or business account or by using a paid personal account. As of October 31, 2018, we had over 90,000 paying organizations, and our solution was offered in 24 languages. We define paying organizations as separate and distinct buying entities, such as a company, an educational or government institution, or a distinct business unit of a large corporation, that have entered into a subscription agreement with us to utilize our services.

Organizations typically purchase our solution in the following ways: (i) employees in one or more small groups within the organization may individually purchase our service; (ii) organizations may purchase IT-sponsored, enterprise-level agreements with deployments for specific, targeted use cases ranging from tens to thousands of user seats; (iii) organizations may purchase IT- sponsored, enterprise-level agreements where the number of user seats sold is intended to accommodate and enable nearly all information workers within the organization in whatever use cases they desire to adopt over the term of the subscription; and (iv) organizations may purchase our Box Platform service to create custom business applications for their internal use and extended ecosystem of customers, suppliers and partners.

We intend to continue scaling our organization to meet the increasingly complex needs of our customers. Our sales and customer success teams are organized to efficiently serve organizations ranging from small businesses to the world’s largest global organizations. We have invested, and expect to continue to invest in our sales and marketing teams to sell our services around the world, as well as in our development efforts to deliver additional features and capabilities of our cloud services to address our customers’ evolving needs. We also expect to continue to make investments in both our infrastructure to meet the needs of our growing global user base and our professional services organization (Box Consulting) to address the strategic needs of our customers in more complex deployments and to drive broader adoption across a wide array of use cases. As a result of our continuing investments to scale our business in each of these areas, we do not expect to be profitable for the foreseeable future.

For the nine months ended October 31, 2018 and 2017, our revenue was $444.7 million and $369.5 million, respectively, representing year-over-year growth of 20%, and our net losses were $114.9 million and $122.3 million, respectively. For the nine months ended October 31, 2018 and 2017, revenue from customers outside the United States represented 24% and 21% of our revenue, respectively. Box is headquartered in Redwood City, California and operates offices across the United States, Europe, and Asia.

Our Business Model

Our business model focuses on maximizing the lifetime value of a customer relationship. We make significant investments in acquiring new customers and believe that we will be able to achieve a positive return on these investments by retaining customers, cross-selling our add-on products and expanding the size of our deployments within our customer base over time. In connection with the acquisition of new customers, we incur and recognize significant upfront costs. These costs include sales and marketing costs associated with acquiring new customers, such as sales commission expenses, only a portion of which are deferred and then amortized over a period of benefit, and marketing costs, which are expensed as incurred. Due to our subscription model, we recognize revenue ratably over the term of the contract, which commences when control of these services are transferred to a customer. Although our objective is for each customer to be profitable for us over the duration of our relationship, the costs we incur with respect to any customer relationship, whether a new customer or an expansion within an existing customer, may exceed revenue in earlier periods because we recognize those costs faster than we recognize the associated revenue.

Because of these dynamics, we experience a range of profitability with our customers depending in large part upon their current stage of the customer phase. We generally incur higher sales and marketing expenses for new customers and existing customers who are still in an expanding stage. For new customers, our associated sales and marketing expenses typically exceed the first year revenue we recognize from those customers. For customers who are expanding their use of Box, we incur various associated marketing expenses as well as sales commission expenses, though we typically recognize higher revenue than sales and marketing expenses. For typical customers who are renewing their Box subscriptions, our associated sales and marketing expenses are significantly less than the revenue we recognize from those customers. These differences are primarily driven by the higher compensation we provide to our sales force for new customers and customer subscription expansions compared to the compensation we provide to our sales force for routine subscription renewals by customers. In addition, our sales and marketing expenses, even after considering deferred direct compensation we provide to our sales force, are generally higher for acquiring new customers versus expansions or renewals of existing customer subscriptions. We believe that, over time, as our existing customer base grows and a relatively higher percentage of our revenue is attributable to renewals versus new or expanding Box deployments, we will experience lower associated sales and marketing expenses as a percentage of revenue.

30


 

Key Business Metrics

We use the key metrics below for financial and operational decision-making and as a means to evaluate period-to-period comparisons. We believe that these key metrics provide meaningful supplemental information regarding our performance. We believe that both management and investors benefit from referring to these key metrics in assessing our performance and when planning, forecasting, and analyzing future periods. These key metrics also facilitate management's internal comparisons to our historical performance as well as comparisons to certain competitors' operating results. We believe these key metrics are useful to investors both because (1) they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making and (2) they are used by institutional investors and the analyst community to help analyze the health of our business. 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

October 31,

 

 

October 31,

 

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

Billings (in thousands)

 

$

155,609

 

 

$

141,471

 

 

$

435,171

 

 

$

380,489

 

 

Billings growth rate

 

 

10

%

 

 

26

%

 

 

14

%

 

 

29

%

 

Free cash flow (in thousands)

 

 

(4,064

)

 

 

6,310

 

*

 

(7,159

)

 

 

(4,619

)

*

Retention rate (period end)

 

 

108

%

 

 

112

%

 

 

108

%

 

 

112

%

 

 

 

*

Adjusted due to the adoption of ASU 2016-18

Billings

Billings represent our revenue plus the changes in deferred revenue and contract assets in the period. Billings we record in any particular period primarily reflect sales to new customers plus subscription renewals and expansion within existing customers, and represent amounts invoiced for all of our products and professional services. We typically invoice our customers at the beginning of the term, in multiyear, annual, quarterly or monthly installments. If the customer negotiates to pay the full subscription amount at the beginning of the period, the total subscription amount for the entire term will be reflected in billings. If the customer negotiates to be invoiced annually or more frequently, only the amount billed for such period will be included in billings.

Billings help investors better understand our sales activity for a particular period, which is not necessarily reflected in our revenue given that we recognize subscription revenue ratably over the contract term. We consider billings a significant performance measure and after adjusting for any shifts in relative payment frequencies, a leading indicator of future revenue. We monitor billings to manage our business, make planning decisions, evaluate our performance and allocate resources. We believe that billings offer valuable supplemental information regarding the performance of our business and will help investors better understand the sales volumes and performance of our business. Although we consider billings to be a significant performance measure, we do not consider it to be a non-GAAP financial measure given that it is calculated using exclusively revenue, deferred revenue, and contract assets, all of which are financial measures calculated in accordance with GAAP.

Billings increased 14% in the nine months ended October 31, 2018 over the nine months ended October 31, 2017. The increase in billings was primarily driven by the addition of new customers, expansion of the number of users within existing customers, and strong attach rates of add-on products, partially offset by a higher enhanced developer fee from one of our resellers in the prior period. 

Our use of billings has certain limitations as an analytical tool and should not be considered in isolation or as a substitute for revenue or an analysis of our results as reported under GAAP. Billings are recognized when invoiced, while the related subscription and premier services revenue is recognized over the contract term. Also, other companies, including companies in our industry, may not use billings, may calculate billings differently, may have different billing frequencies, or may use other financial measures to evaluate their performance, all of which could reduce the usefulness of billings as a comparative measure.

Over time, we expect to continue to normalize payment durations such that, aside from the impact from the enhanced developer fee, we expect our billings growth and revenue growth to correlate with one another. In addition, as we have gained and expect to continue to gain more traction with large enterprise customers, we also anticipate our quarterly billings to increasingly concentrate in the back half of our fiscal year, especially in the fourth quarter.

31


 

A calculation of billings starting with revenue, the most directly comparable GAAP financial measure, is presented below (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

October 31,

 

 

October 31,

 

 

 

 

2018

 

*

2017

 

**

2018

 

*

2017

 

**

GAAP revenue

 

$

155,944

 

 

$

129,304

 

 

$

444,673

 

 

$

369,467

 

 

Deferred revenue, end of period

 

 

301,241

 

 

 

253,006

 

 

 

301,241

 

 

 

253,006

 

 

Less: deferred revenue, beginning of period

 

 

(301,517

)

 

 

(240,839

)

 

 

(311,109

)

***

 

(241,984

)

 

Contract assets, beginning of period****

 

 

157

 

 

 

 

 

 

582

 

 

 

 

 

Less: contract assets, end of period****

 

 

(216

)

 

 

 

 

 

(216

)

 

 

 

 

Billings

 

$

155,609

 

 

$

141,471

 

 

$

435,171

 

 

$

380,489

 

 

 

 

*

As reported under ASC Topic 606

 

**

As reported under ASC Topic 605

 

***

Balance as of February 1, 2018 upon the adoption of ASC Topic 606

 

****

Contract assets are reported as part of accounts receivable upon the adoption of ASC Topic 606.

 

Free Cash Flow

We define free cash flow as cash flows from ​operating activities less purchases of property and equipment, principal payments of capital lease obligations, capitalized internal-use software costs, and other items that did not or are not expected to require cash settlement and that management considers to be outside ​of our core business. We specifically identify other adjusting ​items in ​our reconciliation of GAAP to non-GAAP ​financial measures. Prior to our adoption of ASU 2016-18, Statement of Cash Flows: Restricted Cash, historically, we excluded the use and release of restricted cash to guarantee a significant letter of credit for our Redwood City ​​headquarters from our free cash flow. We consider free cash flow to be a profitability and liquidity measure that provides useful information to management and investors about the amount of cash generated by the business that can possibly be used for investing in our business and strengthening the​ balance sheet; but it is not intended to represent the residual cash flow available for discretionary expenditures. A reconciliation of free cash flow to cash provided by operating activities, its nearest GAAP equivalent, is presented in the non-GAAP Financial Measures section of this report. The presentation of free cash flow is also not meant to be considered in isolation or as an alternative to cash flows from operating activities as a measure of liquidity.

Free cash flow for the nine months ended October 31, 2018 and October 31, 2017 was negative $7.2 million and negative $4.6 million, respectively. The decrease in free cash flow was primarily driven by an increase in capital expenditures of $7.8 million, an increase in capital lease obligation principal payments of $4.5 million, and an increase of capitalized internal-use software costs of $1.3 million, partially offset by an increase in cash flows provided by operating activities of $11.1 million. The primary factors affecting the increase in cash flows provided by operating activities included an increase in non-cash charges of $19.1 million and changes in our operating assets and liabilities of $15.4 million and improvement of our net loss. The increase in capital expenditures was primarily related to our facilities investments in Austin, Tokyo, New York, and London. The increase in capital lease payments was due to our continued investment in our data center operations.

Retention Rate

Retention rate is defined as the net percentage of Total Account Value (TAV) retained from existing customers, including expansion. We calculate our retention rate as of a period end by starting with the TAV from customers with contract value of $5,000 or more as of 12 months prior to such period end (Prior Period TAV) and a subscription term of at least 12 months. We then calculate TAV from these same customers as of the current period end (Current Period TAV). Finally, we divide the Current Period TAV by the Prior Period TAV to arrive at our retention rate. We believe our retention rate is an important metric that provides insight into the long-term value of our subscription agreements and our ability to retain and grow revenue from our customer base. We focus on contracts that have a value of $5,000 or more because, over time, these customers give us the best indicator for the growth of our business and the potential for incremental business as they renew and expand their deployments, and contracts with these customers represented a substantial majority of our revenue for the nine months ended October 31, 2018. Retention rate is an operational metric and there is no comparable GAAP financial measure to which we can reconcile this particular key metric.

32


 

Our retention rate was approximately 108% and 112% as of October 31, 2018 and 2017, respectively. The calculation of our retention rate reflects both net user expansion and the loss of customers who do not renew their subscriptions with us, which was below 5% of the Prior Period TAV. Our strong retention rates were primarily attributable to strong seat growth in existing customers and strong attach rates of add-on products. We believe our go-to-market efforts to deliver a solution sales strategy and our investments in product, Customer Success, and Box Consulting have been a significant factor in our strong customer retention results. As we penetrate customer accounts, we expect our retention rate to remain above 100% for the foreseeable future.

 

Components of Results of Operations

Revenue

We derive our revenue primarily from three sources: (1) subscription revenue, which is comprised of subscription fees from customers who have access to our cloud content management platform and other subscription-based services, which all include routine customer support; (2) revenue from customers purchasing our premier services package; and (3) revenue from professional services such as implementing best practice use cases, project management and implementation consulting services.

To date, practically all of our revenue has been derived from subscription and premier services. Subscription and premier services revenue are driven primarily by the number of customers, the number of seats sold to each customer and the price of our services.

Subscription and premier services revenue are generally recognized on a ratable basis over the contract term beginning on the date that our service is made available to the customer. Our subscription and premier services contracts are typically non-cancellable and do not contain refund-type provisions. The majority of our customers subscribe to our service through one-year contracts, although we also offer our services for terms ranging between one month to three years or more.

Professional services are generally billed on a fixed price basis, for which revenue is recognized over time based on the proportion performed. Professional services revenue was not material for all periods presented.

We typically invoice our customers at the beginning of the term, in multiyear, annual, quarterly or monthly installments. Our subscription and premier services contracts generally range from one to three years in length, are typically non-cancellable and do not contain refund-type provisions.

Revenue is presented net of sales and other taxes we collect on behalf of governmental authorities.

Cost of Revenue

Our cost of revenue consists primarily of costs related to providing our subscription services to our paying customers, including employee compensation and related expenses for datacenter operations, customer support and professional services personnel, payments to outside technology service providers, depreciation of servers and equipment, security services and other tools, as well as amortization expense associated with capitalized internal-use software and acquired technology. We allocate overhead such as rent, information technology costs and employee benefit costs to all departments based on headcount. As such, general overhead expenses are reflected in cost of revenue and each of the operating expense categories set forth below. We expect our cost of revenue to increase in dollars and may increase as a percentage of revenue as we expect to offer new capabilities to our customers which requires upfront investments and to expand our datacenter operations and customer support to support the growth of our business, our customer base, as well as our international expansion.

Operating Expenses

Our operating expenses consist of research and development, sales and marketing, and general and administrative expenses. Personnel costs are the most significant component of each category of operating expenses. Operating expenses also include allocated overhead costs for facilities, information technology costs, and employee benefit costs.

Research and Development. Research and development expense consists primarily of employee compensation and related expenses, as well as allocated overhead. Our research and development efforts are focused on scaling our platform, building an ecosystem of best of breed applications and platforms, and adding enterprise grade features, functionality and advanced security, workflow automation, as well as artificial intelligence and machine learning capabilities to enhance the ease of use of our cloud content management services. We expect our research and development expense to increase in dollars but remain stable as a percentage of revenue over time, even as we continue to make significant enhancements to our products and services.

33


 

Sales and Marketing. Sales and marketing expense consists primarily of employee compensation and related expenses, sales commissions, marketing programs, travel-related expenses, as well as allocated overhead. Marketing programs include but are not limited to advertising, events, corporate communications, brand building, and product marketing. Sales and marketing expense also consists of datacenter and customer support costs related to providing our cloud-based services to our free users. We market and sell our cloud content management services worldwide through our direct sales organization and through indirect distribution channels such as strategic resellers. We expect our sales and marketing expense to continue to increase in dollars but decrease as a percentage of revenue over time as we continue to focus on improving sales force productivity while increasing the size of our sales and marketing organization to capture strong demand globally and expand our international presence.

General and Administrative. General and administrative expense consists primarily of employee compensation and related expenses for administrative functions including finance, legal, human resources, recruiting, information systems, security, and compliance, fees for external professional services and cloud based enterprise systems, as well as allocated overhead. External professional services fees are primarily comprised of outside legal, accounting, temporary services, audit and outsourcing services. We expect our general and administrative expense to increase in dollars but to decrease as a percentage of revenue over time as we benefit from even greater operational efficiencies.

Interest Expense, Net

Interest expense, net consists of interest expense and interest income. Interest expense may consist of interest charges for our line of credit, unused commitment fees on our line of credit, fees on our letters of credit, the amortization of capitalized debt issuance costs, and interest expense related to capital leases. Interest income may consist of interest earned on our cash, cash equivalents, marketable securities, and restricted cash. We have historically invested our cash in overnight deposits, certified deposits, short term, investment-grade corporate debt, marketable securities and asset backed securities.

Other (Loss) Income, Net

Other (loss) income, net consists primarily of gains and losses from foreign currency transactions and other income and expense.

Provision for Income Taxes

Provision for income taxes consists primarily of income taxes in certain foreign jurisdictions in which we conduct business and state income taxes in the United States and, as applicable, changes in our deferred taxes and related valuation allowance positions and uncertain tax positions.

34


 

Results of Operations

The following tables set forth our results of operations for the periods presented in dollars and as a percentage of our revenue:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

October 31,

 

 

October 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

 

(in thousands)

 

Revenue

 

$

155,944

 

 

$

129,304

 

 

$

444,673

 

 

$

369,467

 

Cost of revenue(1)(2)

 

 

44,724

 

 

 

34,471

 

 

 

126,397

 

 

 

99,972

 

Gross profit

 

 

111,220

 

 

 

94,833

 

 

 

318,276

 

 

 

269,495

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development(2)

 

 

42,310

 

 

 

34,812

 

 

 

122,388

 

 

 

102,388

 

Sales and marketing(1)(2)

 

 

84,490

 

 

 

81,670

 

 

 

238,472

 

 

 

225,604

 

General and administrative(1)(2)

 

 

23,884

 

 

 

20,910

 

 

 

69,959

 

 

 

63,037

 

Total operating expenses

 

 

150,684

 

 

 

137,392

 

 

 

430,819

 

 

 

391,029

 

Loss from operations

 

 

(39,464

)

 

 

(42,559

)

 

 

(112,543

)

 

 

(121,534

)

Interest expense, net

 

 

(47

)

 

 

(287

)

 

 

(208

)

 

 

(802

)

Other (loss) income, net

 

 

(321

)

 

 

277

 

 

 

(1,243

)

 

 

560

 

Loss before provision for income taxes

 

 

(39,832

)

 

 

(42,569

)

 

 

(113,994

)

 

 

(121,776

)

Provision for income taxes

 

 

364

 

 

 

355

 

 

 

924

 

 

 

519

 

Net loss

 

$

(40,196

)

 

$

(42,924

)

 

$

(114,918

)

 

$

(122,295

)

Net loss per common share, basic and diluted

 

$

(0.28

)

 

$

(0.32

)

 

$

(0.82

)

 

$

(0.92

)

Weighted-average shares used to compute net loss per share,

   basic and diluted

 

 

142,366

 

 

 

134,636

 

 

 

140,559

 

 

 

133,044

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)     Includes intangible assets amortization as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

October 31,

 

 

October 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

 

(in thousands)

 

Cost of revenue

 

$

 

 

$

 

 

$

 

 

$

365

 

Sales and marketing

 

 

 

 

 

 

 

 

9

 

 

 

 

General and administrative

 

 

 

 

 

39

 

 

 

15

 

 

 

116

 

Total intangible assets amortization

 

$

 

 

$

39

 

 

$

24

 

 

$

481

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2)     Includes stock-based compensation expense as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

October 31,

 

 

October 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

 

(in thousands)

 

Cost of revenue

 

$

3,598

 

 

$

2,814

 

 

$

10,280

 

 

$

7,945

 

Research and development

 

 

12,043

 

 

 

9,705

 

 

 

33,668

 

 

 

28,419

 

Sales and marketing

 

 

9,708

 

 

 

8,208

 

 

 

27,701

 

 

 

23,882

 

General and administrative

 

 

6,441

 

 

 

4,796

 

 

 

17,437

 

 

 

12,290

 

Total stock-based compensation

 

$

31,790

 

 

$

25,523

 

 

$

89,086

 

 

$

72,536

 

35


 

 

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

 

October 31,

 

 

 

October 31,

 

 

 

 

2018

 

 

 

2017

 

 

 

2018

 

 

 

2017

 

 

Percentage of Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

100

 

%

 

 

100

 

%

 

 

100

 

%

 

 

100

 

%

Cost of revenue(1)(2)

 

 

29

 

 

 

 

27

 

 

 

 

28

 

 

 

 

27

 

 

Gross profit

 

 

71

 

 

 

 

73

 

 

 

 

72

 

 

 

 

73

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development(2)

 

 

27

 

 

 

 

27

 

 

 

 

27

 

 

 

 

28

 

 

Sales and marketing(1)(2)

 

 

54

 

 

 

 

63

 

 

 

 

54

 

 

 

 

61

 

 

General and administrative(1)(2)

 

 

15

 

 

 

 

16

 

 

 

 

16

 

 

 

 

17

 

 

Total operating expenses

 

 

96

 

 

 

 

106

 

 

 

 

97

 

 

 

 

106

 

 

Loss from operations

 

 

(25

)

 

 

 

(33

)

 

 

 

(25

)

 

 

 

(33

)

 

Interest expense, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (loss) income, net

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

Loss before provision for income taxes

 

 

(25

)

 

 

 

(33

)

 

 

 

(26

)

 

 

 

(33

)

 

Provision for income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

(25

)

%

 

 

(33

)

%

 

 

(26

)

%

 

 

(33

)

%

 

(1)     Includes intangible assets amortization as follows*:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

 

October 31,

 

 

 

October 31,

 

 

 

 

2018

 

 

 

2017

 

 

 

2018

 

 

 

2017

 

 

Cost of revenue

 

 

 

%

 

 

 

%

 

 

 

%

 

 

 

%

Sales and marketing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total intangible assets amortization

 

 

 

%

 

 

 

%

 

 

 

%

 

 

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2)     Includes stock-based compensation expense as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

 

October 31,

 

 

 

October 31,

 

 

 

 

2018

 

 

 

2017

 

 

 

2018

 

 

 

2017

 

 

Cost of revenue

 

 

2

 

%

 

 

2

 

%

 

 

2

 

%

 

 

2

 

%

Research and development

 

 

8

 

 

 

 

8

 

 

 

 

8

 

 

 

 

8

 

 

Sales and marketing

 

 

6

 

 

 

 

6

 

 

 

 

6

 

 

 

 

7

 

 

General and administrative

 

 

4

 

 

 

 

4

 

 

 

 

4

 

 

 

 

3

 

 

Total stock-based compensation

 

 

20

 

%

 

 

20

 

%

 

 

20

 

%

 

 

20

 

%

 

 

*

Not material to any periods presented.

Comparison of the Three Months Ended October 31, 2018 and 2017

Revenue

 

 

 

Three Months Ended

 

 

 

 

 

 

October 31,

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

 

 

(dollars in thousands)

 

Revenue

 

$

155,944

 

 

$

129,304

 

 

$

26,640

 

 

 

21

%

 

36


 

Revenue was $155.9 million for the three months ended October 31, 2018, compared to $129.3 million for the three months ended October 31, 2017, representing an increase of $26.6 million, or 21%. The increase would otherwise be 23% under ASC Topic 605 had we not adopted ASC Topic 606. The increase in revenue was primarily driven by an increase in subscription services. The increase in subscription services was primarily due to the addition of new customers, as the number of paying organizations increased by 13% from October 31, 2017 to October 31, 2018, and strong attach rates of add-on products, which strengthened our price per seat. Also, in this period, we experienced strong renewals from, and expansion within, existing customers as they broadened their deployment of our product offerings, as reflected in our retention rate of 108% as of October 31, 2018.

Cost of Revenue

 

 

 

Three Months Ended

 

 

 

 

 

 

October 31,

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

 

 

(dollars in thousands)

 

Cost of revenue

 

$

44,724

 

 

$

34,471

 

 

$

10,253

 

 

 

30

%

Percentage of revenue

 

 

29

%

 

 

27

%

 

 

 

 

 

 

 

 

 

Cost of revenue was $44.7 million, or 29% of revenue, for the three months ended October 31, 2018, compared to $34.5 million, or 27% of revenue, for the three months ended October 31, 2017, representing an increase of $10.3 million, or 30%. The increase in absolute dollars was primarily due to an increase of $2.9 million in employee and related costs and an increase of $0.8 million in stock-based compensation expense primarily driven by the increase in headcount from 258 as of October 31, 2017 to 306 as of October 31, 2018, an increase of $2.6 million in datacenter and hosted data service costs. In addition, there was a net increase of $1.0 million in depreciation primarily related to additional data center equipment and an increase of $0.9 million in allocated costs attributable mainly to increased facilities and infrastructure costs. Cost of revenue as a percentage of revenue increased two points year-over-year. As we continue to optimize infrastructure efficiencies and expand our data center infrastructure to support the growth in our paying customers, we expect our cost of revenue spending in absolute dollars and as a percentage of revenue to increase during the remainder of the fiscal year ending January 31, 2019.

Research and Development

 

 

 

Three Months Ended

 

 

 

 

 

 

October 31,

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

 

 

(dollars in thousands)

 

Research and development

 

$

42,310

 

 

$

34,812

 

 

$

7,498

 

 

 

22

%

Percentage of revenue

 

 

27

%

 

 

27

%

 

 

 

 

 

 

 

 

 

Research and development expenses were $42.3 million, or 27% of revenue, for the three months ended October 31, 2018, compared to $34.8 million, or 27% of revenue, for the three months ended October 31, 2017, representing an increase of $7.5 million, or 22%. The increase in absolute dollars was primarily due to an increase of $4.7 million in employee and related costs and an increase of $2.3 million in stock-based compensation expense primarily driven by the increase in headcount from 333 employees as of October 31, 2017 to 401 employees as of October 31, 2018. In addition, there was an increase of $1.1 million related to outside agency costs and consulting services. The increase in research and development expenses was partially offset by a $1.3 million increase of capitalized internal-use software costs associated with the development of additional significant features and functionality to our products during the same period. Research and development expense as a percentage of revenue remained stable year-over-year. We expect our research and development expense to increase in dollars but remain essentially stable as a percentage of revenue over time, even as we continue to make significant enhancements to our products and services and expand our advanced security, intelligence, and workflow automation capabilities.

Sales and Marketing

 

 

 

Three Months Ended

 

 

 

 

 

 

October 31,

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

 

 

(dollars in thousands)

 

Sales and marketing

 

$

84,490

 

 

$

81,670

 

 

$

2,820

 

 

 

3

%

Percentage of revenue

 

 

54

%

 

 

63

%

 

 

 

 

 

 

 

 

 

37


 

Sales and marketing expenses were $84.5 million, or 54% of revenue, for the three months ended October 31, 2018, compared to $81.7 million, or 63% of revenue, for the three months ended October 31, 2017, representing an increase of $2.8 million, or 3%. The increase in absolute dollars was primarily due to an increase of $4.0 million in employee and related costs and an increase of $1.5 million in stock-based compensation expense primarily driven by the increase in headcount from 859 employees as of October 31, 2017 to 948 employees as of October 31, 2018. In addition, there was an increase of $2.2 million in allocated costs attributable mainly to increased facilities and infrastructure costs. The increase in sales and marketing expenses was partially offset by a $4.0 million decrease of commission costs due to the adoption of ASC Topic 606. Sales and marketing expenses as a percentage of revenue decreased nine points year-over-year due to the adoption of ASC Topic 606 and our focus on sales and marketing productivity. We expect to continue to invest aggressively to capture our large market opportunity globally and capitalize on our competitive position with continued focus on our long-term margin objectives. Over time, as our existing customer base grows and a relatively higher percentage of our revenue is attributable to renewals versus new or expanding Box deployments, we expect that sales and marketing expenses will continue to decrease as a percentage of revenue.

General and Administrative

 

 

 

Three Months Ended

 

 

 

 

 

 

October 31,

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

 

 

(dollars in thousands)

 

General and administrative

 

$

23,884

 

 

$

20,910

 

 

$

2,974

 

 

 

14

%

Percentage of revenue

 

 

15

%

 

 

16

%

 

 

 

 

 

 

 

 

 

General and administrative expenses were $23.9 million, or 15% of revenue, for the three months ended October 31, 2018, compared to $20.9 million, or 16% of revenue, for the three months ended October 31, 2017, representing an increase of $3.0 million, or 14%. The increase in absolute dollars was primarily due to an increase of $1.6 million in both stock-based compensation expense and employee and related costs primarily driven by the increase in headcount from 276 employees as of October 31, 2017 to 313 employees as of October 31, 2018 as well as an increase in equity grants. In addition, there was an increase of $1.0 million in outside agency and contractor costs. Despite an increase in absolute dollars, general and administrative expense as a percentage of revenue decreased one point year-over-year as we continued to benefit from greater operational efficiency and scale.

 

Comparison of the Nine Months Ended October 31, 2018 and 2017

Revenue

 

 

 

Nine Months Ended

 

 

 

 

 

 

October 31,

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

 

 

(dollars in thousands)

 

Revenue

 

$

444,673

 

 

$

369,467

 

 

$

75,206

 

 

 

20

%

 

Revenue was $444.7 million for the nine months ended October 31, 2018, compared to $369.5 million for the nine months ended October 31, 2017, representing an increase of $75.2 million, or 20%. The increase would otherwise be 23% under ASC Topic 605 had we not adopted ASC Topic 606. The increase in revenue was primarily driven by an increase in subscription services. The increase in subscription services was primarily due to the addition of new customers, as the number of paying organizations increased by 13% from October 31, 2017 to October 31, 2018, and strong attach rates of add-on products, which strengthened our price per seat. Also, in this period, we experienced strong renewals from, and expansion within, existing customers as they broadened their deployment of our product offerings, as reflected in our retention rate of 108% as of October 31, 2018.

Cost of Revenue

 

 

 

Nine Months Ended

 

 

 

 

 

 

October 31,

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

 

 

(dollars in thousands)

 

Cost of revenue

 

$

126,397

 

 

$

99,972

 

 

$

26,425

 

 

 

26

%

Percentage of revenue

 

 

28

%

 

 

27

%

 

 

 

 

 

 

 

 

 

38


 

Cost of revenue was $126.4 million, or 28% of revenue, for the nine months ended October 31, 2018, compared to $100.0 million, or 27% of revenue, for the nine months ended October 31, 2017, representing an increase of $26.4 million, or 26%. The increase in absolute dollars was primarily due to an increase of $7.2 million in employee and related costs and an increase of $2.3 million in stock-based compensation expense primarily driven by the increase in headcount from 258 as of October 31, 2017 to 306 as of October 31, 2018 and the timing of employee equity grants from prior periods. In addition, there was a net increase of $4.4 million in depreciation primarily related to additional data center equipment, an increase of $3.5 million in datacenter and hosted data service costs, an increase of $3.0 million in rent primarily related to the expansion of data centers, an increase of $1.7 million in allocated costs attributable mainly to increased facilities and infrastructure costs and a $1.4 million increase in enterprise subscription software. Cost of revenue as a percentage of revenue increased one point year-over-year. As we continue to optimize infrastructure efficiencies and expand our data center infrastructure to support the growth in our paying customers, we expect our cost of revenue spending in absolute dollars and as a percentage of revenue to increase during the remainder of the fiscal year ending January 31, 2019.

Research and Development

 

 

 

Nine Months Ended

 

 

 

 

 

 

October 31,

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

 

 

(dollars in thousands)

 

Research and development

 

$

122,388

 

 

$

102,388

 

 

$

20,000

 

 

 

20

%

Percentage of revenue

 

 

27

%

 

 

28

%

 

 

 

 

 

 

 

 

 

Research and development expenses were $122.4 million, or 27% of revenue, for the nine months ended October 31, 2018, compared to $102.4 million, or 28% of revenue, for the nine months ended October 31, 2017, representing an increase of $20.0 million, or 20%. The increase in absolute dollars was primarily due to an increase of $12.5 million in employee and related costs and an increase of $5.2 million in stock-based compensation expense primarily driven by the increase in headcount from 333 employees as of October 31, 2017 to 401 employees as of October 31, 2018 and the timing of employee equity grants from prior periods. In addition, there was an increase of $2.5 million in allocated costs attributable mainly to increased facilities and infrastructure costs and an increase of $1.3 million related to outside agency costs and consulting services. The increase in research and development expenses was partially offset by a $1.3 million increase of capitalized internal-use software costs associated with the development of additional significant features and functionality to our products during the same period. Research and development expense as a percentage of revenue decreased one point year-over-year. We continue to invest in enhancing our product and services, develop new products, and further differentiate our offerings. We expect our research and development expense to increase in dollars but remain essentially stable as a percentage of revenue over time, even as we continue to make significant enhancements to our products and services and expand our advanced security, intelligence, and workflow automation capabilities.

Sales and Marketing

 

 

 

Nine Months Ended

 

 

 

 

 

 

October 31,

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

 

 

(dollars in thousands)

 

Sales and marketing

 

$

238,472

 

 

$

225,604

 

 

$

12,868

 

 

 

6

%

Percentage of revenue

 

 

54

%

 

 

61

%

 

 

 

 

 

 

 

 

 

Sales and marketing expenses were $238.5 million, or 54% of revenue, for the nine months ended October 31, 2018, compared to $225.6 million, or 61% of revenue, for the nine months ended October 31, 2017, representing an increase of $12.9 million, or 6%. The increase in absolute dollars was primarily due to an increase of $15.7 million in employee and related costs and an increase of $3.8 million in stock-based compensation expense primarily driven by the increase in headcount from 859 employees as of October 31, 2017 to 948 employees as of October 31, 2018 and the timing of employee equity grants from prior periods. In addition, there was an increase of $7.6 million in allocated costs attributable mainly to increased facilities and infrastructure costs. The increase in sales and marketing expenses was partially offset by a $11.5 million decrease of commission costs due to the adoption of ASC Topic 606, and a $2.7 million decrease in datacenter and customer support costs to support our free users. Sales and marketing expenses as a percentage of revenue decreased seven points year-over-year due to the adoption of ASC Topic 606, our focus on sales and marketing productivity, and a decrease in cost to support our free users. We expect to continue to invest aggressively to capture our large market opportunity globally and capitalize on our competitive position with continued focus on our long-term margin objectives. Over time, as our existing customer base grows and a relatively higher percentage of our revenue is attributable to renewals versus new or expanding Box deployments, we expect that sales and marketing expenses will continue to decrease as a percentage of revenue.

39


 

General and Administrative

 

 

 

Nine Months Ended

 

 

 

 

 

 

October 31,

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

 

 

(dollars in thousands)

 

General and administrative

 

$

69,959

 

 

$

63,037

 

 

$

6,922

 

 

 

11

%

Percentage of revenue

 

 

16

%

 

 

17

%

 

 

 

 

 

 

 

 

 

General and administrative expenses were $70.0 million, or 16% of revenue, for the nine months ended October 31, 2018, compared to $63.0 million, or 17% of revenue, for the nine months ended October 31, 2017, representing an increase of $6.9 million, or 11%. The increase in absolute dollars was primarily due to an increase of $5.1 million in stock-based compensation expense and an increase of $3.8 million in employee and related costs primarily driven by the increase in headcount from 276 employees as of October 31, 2017 to 313 employees as of October 31, 2018, an increase in equity grants, and the timing of employee equity grants from prior periods. Despite an increase in absolute dollars, general and administrative expense as a percentage of revenue decreased one point year-over-year as we continued to benefit from greater operational efficiency and scale.

Liquidity and Capital Resources

 

 

 

Nine Months Ended

 

 

 

October 31,

 

 

 

2018

 

 

2017 (as adjusted)*

 

 

 

(in thousands)

 

Net cash provided by operating activities

 

$

23,989

 

 

$

12,874

 

Net cash used in investing activities

 

 

(14,412

)

 

 

(4,769

)

Net cash used in financing activities

 

 

(17,256

)

 

 

(12,967

)

 

 

*

Adjusted due to the adoption of ASCU 2016-18

As of October 31, 2018, we had cash, cash equivalents, and restricted cash of $200.3 million. Our cash, cash equivalents, and restricted cash are comprised primarily of overnight cash deposits and certificates of deposits. Since our inception, we have financed our operations primarily through equity, cash generated from sales and, to a lesser extent, debt financing. We believe our existing cash and cash equivalents, together with our capital leases and credit facilities, will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. Our future capital requirements will depend on many factors including our growth rate, subscription renewal activity, billing frequency, the timing and extent of spending to support development efforts, the expansion of sales and marketing and international operation activities, the introduction of new and enhanced services offerings, and the continuing market acceptance of our services. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition would be adversely affected.

In December 2015, we entered into a revolving credit facility (December 2015 Facility), which provided for a revolving loan facility in the amount of up to $40.0 million, originally maturing in December 2017. In February 2017, we amended the December 2015 Facility to extend the maturity date to December 2018. On November 27, 2017, we paid in full all amounts outstanding under the December 2015 Facility, including the outstanding principal balance of $40.0 million, and terminated the December 2015 Facility and all related loan and collateral documents, in conjunction with entering into a secured credit agreement (November 2017 Facility) with a different lender with a maturity date of November 27, 2020.

The December 2015 Facility was denominated in U.S. dollars and, depending on certain conditions, each borrowing was subject to a floating interest rate equal to either the prime rate plus a spread of 0.25% to 2.75% or a reserve adjusted LIBOR rate (based on one, three or six-month interest periods) plus a spread of 1.25% to 3.75%. Although no minimum deposit was required for the December 2015 Facility, we were eligible for the lowest interest rate if we maintained at least $40 million in deposits with the lender.  In addition, there was an annual fee of 0.2% on the total commitment amount. At closing, we drew $40.0 million at 1.82% (six month LIBOR plus 1.25%) which we used to repay the outstanding principal balance under our secured revolving credit facility entered in August 2013. Borrowings under the December 2015 Facility were collateralized by substantially all of our assets in the United States. It also contained various covenants, including covenants related to the delivery of financial and other information, the maintenance of quarterly financial covenants, as well as customary limitations on dispositions, mergers or consolidations and other corporate activities.

40


 

The November 2017 Facility provides for an $85.0 million revolving credit facility, with a sublimit of $30.0 million available for the issuance of letters of credit. The proceeds of the revolving loans may be used for general corporate purposes. The revolving loans accrue interest at a prime rate plus a margin of 0.25% or, at our option, a LIBOR rate (based on one, three or six-month interest periods) plus a margin of 1.00%.  Interest on the revolving loans is payable quarterly in arrears with respect to loans based on the prime rate and at the end of an interest period in the case of loans based on the LIBOR rate (or at each three-month interval if the interest period is longer than three months).  Borrowings under the November 2017 Facility are collateralized by substantially all of our assets. The November 2017 Facility requires us to comply with a maximum leverage ratio and a minimum liquidity requirement.  Additionally, the November 2017 Facility contains customary affirmative and negative covenants, including covenants limiting our, and our subsidiaries’, ability to, among other things, grant liens, incur debt, pay dividends or distributions on the capital stock, effect certain mergers, make investments, dispose of assets and enter into transactions with affiliates, in each case subject to customary exceptions for a credit facility of the size and type of the November 2017 Facility.

On November 29, 2017, the restrictions on our certificates of deposits that collateralized the letters of credit were released as the letters of credit were included under the November 2017 Facility sublimit. As such, we released $26.1 million from restricted cash to cash and cash equivalents.

Operating Activities

For the nine months ended October 31, 2018, cash provided by operating activities was $24.0 million. The primary factors affecting our operating cash flows during this period were our net loss of $114.9 million, offset by non-cash charges of $89.1 million for stock-based compensation, $34.7 million for depreciation and amortization of our property and equipment and intangible assets, $12.2 million for amortization of deferred commissions, and net cash inflows of $2.3 million provided by changes in our operating assets and liabilities.

The primary drivers for the changes in operating assets and liabilities include a $57.0 million decrease in accounts receivable that was primarily due to the seasonality of our billings and relative timing of our cash collections, a $23.1 million increase in deferred commissions primarily due to the adoption of ASC Topic 606 in addition to new and expanded deployments with paying customers during this period, a $17.2 million decrease in accrued expenses and other liabilities primarily attributable to timing of compensation and benefits payments and timing of invoice payments, and a $9.9 million decrease in deferred revenue that was primarily due to increasing seasonality in our sales cycle concentrated in the back half of our fiscal year, predominantly in the last quarter, and continued focus on annual payment durations over multi-year prepayments.

Investing Activities

Cash used in investing activities of $14.4 million for the nine months ended October 31, 2018 was primarily due to our facilities capacity expansions in Austin, Tokyo, New York, and London, as well as capital expenditures in connection with fixed asset purchases to support our increased headcount. In addition, there was an increase of $1.3 million in capitalized internal-use software costs associated with the development of additional significant features and functionality to our products.

Financing Activities

Cash used in financing activities of $17.3 million for the nine months ended October 31, 2018 was primarily due to $36.9 million of employee payroll taxes paid related to net share settlement of restricted stock units reflecting an increase in the valuation of our share price and $17.2 million of payments of capital lease obligations, partially offset by $21.9 million of proceeds from issuances of common stock under the 2015 ESPP and $15.0 million of proceeds from the exercise of stock options.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations and commitments as of October 31, 2018:

 

 

 

 

 

 

 

Payments Due by Period

(in thousands)

 

 

 

 

 

 

 

Less Than 1

 

 

 

 

 

 

 

 

 

 

More Than

 

 

 

Total

 

 

Year

 

 

1-3 Years

 

 

3-5 Years

 

 

5 Years

 

Debt(1)

 

$

43,234

 

 

$

1,564

 

 

$

41,670

 

 

$

 

 

$

 

Operating lease obligations, net of sublease income

   amounts(2)

 

 

283,321

 

 

 

34,964

 

 

 

71,761

 

 

 

56,051

 

 

 

120,545

 

Capital leases(3)

 

 

60,688

 

 

 

25,737

 

 

 

30,797

 

 

 

4,154

 

 

 

 

Purchase obligations(4)

 

 

74,795

 

 

 

45,723

 

 

 

26,650

 

 

 

2,238

 

 

 

184

 

Total

 

$

462,038

 

 

$

107,988

 

 

$

170,878

 

 

$

62,443

 

 

$

120,729

 

 

(1)

Includes interest and unused commitment fees on our line of credit under the November 2017 Facility.

41


 

(2)

Includes operating lease obligations for our buildings and certain data centers. As of October 31, 2018, we expected to receive sublease income of $26.9 million over the next four years from tenants in certain of our leased facilities. The amounts set forth in the table above are net of these sublease income amounts.

(3)

Includes obligations related to our datacenter hardware.

(4)

Purchase obligations relate primarily to infrastructure services, datacenter operations, and sales and marketing activities.

Off-Balance Sheet Arrangements

Through October 31, 2018, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.

Except for items discussed under Use of Estimates, Recently Adopted Accounting Pronouncements, and Summary of Significant Accounting Policies under Part I, Item 1. Financial Statements—Note 1, there have been no material changes to our critical accounting policies and estimates during the nine months ended October 31, 2018 from those disclosed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended January 31, 2018.

Recent Accounting Pronouncements

Refer to Part I, Item 1. Financial Statements—Note 1 for information regarding the effect of new accounting pronouncements on our financial statements.

Non-GAAP Financial Measures

Regulation S-K Item 10(e), “Use of Non-GAAP Financial Measures in Commission Filings,” defines and prescribes the conditions for use of non-GAAP financial information. Our measures of non-GAAP operating loss, non-GAAP operating margin, non-GAAP net loss, non-GAAP net loss per share, and free cash flow (collectively, the non-GAAP financial measures) each meet the definition of a non-GAAP financial measure.

We use these non-GAAP financial measures and our key metrics for financial and operational decision-making and as a means to evaluate period-to-period comparisons. We believe that these non-GAAP financial measures and key metrics provide meaningful supplemental information regarding our performance by excluding certain expenses that may not be indicative of our recurring core business operating results. We believe that both management and investors benefit from referring to these non-GAAP financial measures and key metrics in assessing our performance and when planning, forecasting, and analyzing future periods. These non-GAAP financial measures and key metrics also facilitate management’s internal comparisons to our historical performance as well as comparisons to our competitors’ operating results. We believe these non-GAAP financial measures and key metrics are useful to investors both because (1) they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making and (2) they are used by our institutional investors and the analyst community to help them analyze the health of our business.

42


 

Non-GAAP operating loss and non-GAAP operating margin

We define non-GAAP operating loss as operating loss excluding expenses related to stock-based compensation, intangible assets amortization, and as applicable, other special items. We specifically identify other adjusting items in our reconciliation of GAAP to non-GAAP operating loss. Non-GAAP operating margin is defined as non-GAAP operating loss divided by revenue. Similarly, the same adjusting items specified in our reconciliation of GAAP to non-GAAP operating loss are also excluded from the calculation of non-GAAP operating margin. Although stock-based compensation is an important aspect of the compensation of Box’s employees and executives, determining the fair value of certain of the stock-based instruments we utilize involves a high degree of judgment and estimation and the expense recorded may bear little resemblance to the actual value realized upon the vesting or future exercise of the related stock-based awards. Furthermore, unlike cash compensation, the value of stock options, which is an element of our ongoing stock-based compensation expense, is determined using a complex formula that incorporates factors, such as market volatility, that are beyond our control. For restricted share unit awards, the amount of stock-based compensation expenses is not reflective of the value ultimately received by the grant recipients. Management believes it is useful to exclude stock-based compensation in order to better understand the long-term performance of our core business and to facilitate comparison of our results to those of peer companies. Management also views amortization of acquisition-related intangible assets, such as the amortization of the cost associated with an acquired company’s research and development efforts, trade names and customer relationships, as items arising from pre-acquisition activities determined at the time of an acquisition. While these intangible assets are continually evaluated for impairment, amortization of the cost of acquired intangible assets is a static expense, one that is not typically affected by operations during any particular period. We further exclude legal settlement and related costs because they are considered by management to be special items outside our core operating results.

Non-GAAP net loss and net loss per share

We define non-GAAP net loss as net loss excluding expenses related to stock-based compensation, intangible assets amortization and as applicable, other special items. We specifically identify other​ adjusting ​items in ​our reconciliation of GAAP to non-GAAP net loss. These items include expenses related to certain litigation because they are considered by management to be special items outside our core operating results. We define non-GAAP net loss per share as non-GAAP net loss divided by the weighted average outstanding shares. Similarly, the same adjusting items specified in our reconciliation of GAAP to non-GAAP net loss are also excluded from the calculation of non-GAAP net loss per share.

Free Cash Flow

We define free cash flow as cash flows from​ operating activities less purchases of property and equipment, principal payments of capital lease obligations, capitalized internal-use software costs, and other items that did not or are not expected to require cash settlement and that management considers to be outside ​of our core business. We specifically identify other adjusting ​items in ​our reconciliation of GAAP to non-GAAP ​financial measures. Prior to our adoption of ASU 2016-18, Statement of Cash Flows: Restricted Cash, historically, we excluded the use and release of restricted cash to guarantee a significant letter of credit for ​our Redwood City ​​headquarters from our free cash flow. We consider free cash flow to be a profitability and liquidity measure that provides useful information to management and investors about the amount of cash generated by the business that can possibly be used for investing in our business and strengthening the​ balance sheet; but it is not intended to represent the residual cash flow available for discretionary expenditures. A reconciliation of free cash flow to cash provided by operating activities, its nearest GAAP equivalent, is presented in the non-GAAP Financial Measures section of this report. The presentation of free cash flow is also not meant to be considered in isolation or as an alternative to cash flows from operating activities as a measure of liquidity.

Limitations on the use of non-GAAP financial measures

A limitation of our non-GAAP financial measures is that they do not have uniform definitions. Our definitions will likely differ from the definitions used by other companies, including peer companies, and therefore comparability may be limited. Thus, our non-GAAP financial measures should be considered in addition to, not as a substitute for, or in isolation from, measures prepared in accordance with GAAP. Additionally, in the case of stock-based compensation expense, if we did not pay a portion of compensation in the form of stock-based compensation expense, the cash salary expense included in costs of revenue and operating expenses would be higher which would affect our cash position.

We compensate for these limitations by reconciling non-GAAP financial measures to the most comparable GAAP financial measures. We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure and to view our non-GAAP financial measures in conjunction with the most comparable GAAP financial measures.

43


 

Our reconciliation of the non-GAAP financial measures for the three and nine months ended October 31, 2018 and 2017 are as follows (in thousands, except per share data and percentages):

 

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

 

October 31,

 

 

 

October 31,

 

 

 

 

2018

 

*

 

2017

 

**

 

2018

 

*

 

2017

 

**

GAAP operating loss

 

$

(39,464

)

 

 

$

(42,559

)

 

 

$

(112,543

)

 

 

$

(121,534

)

 

Stock-based compensation

 

 

31,790

 

 

 

 

25,523

 

 

 

 

89,086

 

 

 

 

72,536

 

 

Intangible assets amortization

 

 

 

 

 

 

39

 

 

 

 

24

 

 

 

 

481

 

 

Non-GAAP operating loss

 

$

(7,674

)

 

 

$

(16,997

)

 

 

$

(23,433

)

 

 

$

(48,517

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GAAP operating margin

 

 

(25

)

%

 

 

(33

)

%

 

 

(25

)

%

 

 

(33

)

%

Stock-based compensation

 

 

20

 

 

 

 

20

 

 

 

 

20

 

 

 

 

20

 

 

Intangible assets amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP operating margin

 

 

(5

)

%

 

 

(13

)

%

 

 

(5

)

%

 

 

(13

)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GAAP net loss

 

$

(40,196

)

 

 

$

(42,924

)

 

 

$

(114,918

)

 

 

$

(122,295

)

 

Stock-based compensation

 

 

31,790

 

 

 

 

25,523

 

 

 

 

89,086

 

 

 

 

72,536

 

 

Intangible assets amortization

 

 

 

 

 

 

39

 

 

 

 

24

 

 

 

 

481

 

 

Non-GAAP net loss

 

$

(8,406

)

 

 

$

(17,362

)

 

 

$

(25,808

)

 

 

$

(49,278

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GAAP net loss per share, basic and diluted

 

$

(0.28

)

 

 

$

(0.32

)

 

 

$

(0.82

)

 

 

$

(0.92

)

 

Stock-based compensation

 

 

0.22

 

 

 

 

0.19

 

 

 

 

0.64

 

 

 

 

0.55

 

 

Intangible assets amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP net loss per share, basic and diluted

 

$

(0.06

)

 

 

$

(0.13

)

 

 

$

(0.18

)

 

 

$

(0.37

)

 

Weighted-average shares used to compute net loss per

   share, basic and diluted

 

 

142,366

 

 

 

 

134,636

 

 

 

 

140,559

 

 

 

 

133,044

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

6,816

 

 

 

$

14,094

 

***

 

$

23,989

 

 

 

$

12,874

 

***

Purchases of property and equipment

 

 

(5,247

)

 

 

 

(3,003

)

 

 

 

(12,613

)

 

 

 

(4,800

)

 

Payments of capital lease obligations

 

 

(4,290

)

 

 

 

(4,781

)

 

 

 

(17,192

)

 

 

 

(12,693

)

 

Capitalized internal-use software costs

 

 

(1,343

)

 

 

 

 

 

 

 

(1,343

)

 

 

 

 

 

Free cash flow

 

$

(4,064

)

 

 

$

6,310

 

***

 

$

(7,159

)

 

 

$

(4,619

)

***

Net cash used in investing activities

 

$

(6,589

)

 

 

$

(3,001

)

 

 

$

(14,412

)

 

 

$

(4,769

)

 

Net cash used in financing activities

 

$

(3,726

)

 

 

$

(3,423

)

 

 

$

(17,256

)

 

 

$

(12,967

)

 

 

 

*

As reported under ASC Topic 606

 

**

As reported under ASC Topic 605

 

***

Adjusted due to the adoption of ASCU 2016-18

 

 

44


 

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

We had cash, cash equivalents, and restricted cash of $200.3 million as of October 31, 2018. Our cash equivalents and restricted cash primarily consist of overnight deposits and certificates of deposits. All restricted cash is recorded at its estimated fair value. We do not expect our operating results or cash flows to be materially affected by a sudden change in market interest rates and we do not enter into investments for trading or speculative purposes.

Interest rate risk also reflects our exposure to movements in interest rates associated with the November 2017 Facility. As of October 31, 2018, we had total debt outstanding with a carrying amount of $40.0 million which approximates fair value. The revolving loans accrue interest at a prime rate plus a margin of 0.25% or, at our option, a LIBOR rate (based on one, three or six-month interest periods) plus a margin of 1.00%. A hypothetical 10% increase or decrease in interest rates of October 31, 2018 under the November 2017 Facility would not have a material impact on the fair value of our outstanding debt.

Foreign Currency Risk

Our sales contracts are denominated predominantly in U.S. dollars. We support sales contracts denominated in 16 foreign currencies and consequently, our customer billings denominated in foreign currencies are subject to foreign currency exchange risk. 11 of the 16 currencies are only offered at this time through our online sales experience and are required to be settled by credit cards; accordingly, our foreign currency exposure on these transactions is limited only to ordinary credit card settlement timeframes. A portion of our operating expenses are incurred outside the United States and are denominated in foreign currencies, which are also subject to fluctuations due to changes in foreign currency exchange rates. Additionally, fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our statement of operations. To date we have managed our foreign currency risk by maintaining offsetting assets and liabilities and minimizing non-USD cash balances in non-USD functional entities, and have not entered into derivatives or hedging transactions as our exposure to foreign currency exchange rates has not been material to our historical operating results; however, we may do so in the future if our exposure to foreign currency should become more significant. We incurred $1.3 million foreign exchange losses in the nine months ended October 31, 2018; we did not incur any material foreign exchange gains or losses in the nine months ended October 31, 2017.

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

45


 

PART II – OTHER INFORMATION

 

 

Item 1. LEGAL PROCEEDINGS

From time to time, we are a party to litigation and subject to claims that arise in the ordinary course of business. We investigate these claims as they arise and accrue estimates for resolution of legal and other contingencies when losses are probable and estimable. Although the results of litigation and claims cannot be predicted with certainty, we believe there was not at least a reasonable possibility that we had incurred a material loss with respect to such loss contingencies as of October 31, 2018.

 

 

Item 1A. RISK FACTORS

Investing in our Class A common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this Quarterly Report on Form 10-Q, including in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our condensed consolidated financial statements and related notes, before making a decision to invest in our Class A common stock. If any of the risks actually occur, our business, financial condition, operating results and prospects could be materially and adversely affected. In that event, the market price of our Class A common stock could decline, and you could lose part or all of your investment.

Risks Related to Our Business and Our Industry

We have a history of cumulative losses, and we do not expect to be profitable for the foreseeable future.

We have incurred significant losses in each period since our inception in 2005. We incurred net losses of $155.0 million, $151.8 million and $202.9 million in our fiscal years ended January 31, 2018, 2017 and 2016, respectively, and $114.9 million in the nine months ended October 31, 2018. As of October 31, 2018, we had an accumulated deficit of $1.1 billion. These losses and accumulated deficit reflect the substantial investments we made to acquire new customers and develop our services. We intend to continue scaling our business to increase our number of users and paying organizations and to meet the increasingly complex needs of our customers. We have invested, and expect to continue to invest, in our sales and marketing organizations to sell our services around the world and in our product development organization to deliver additional features and capabilities of our cloud services to address our customers’ evolving needs. We also expect to continue to make significant investments in our infrastructure and in our professional service organization as we focus on customer success. As a result of our continuing investments to scale our business in each of these areas, we do not expect to be profitable for the foreseeable future. Furthermore, to the extent we are successful in increasing our customer base, we will also incur increased losses due to upfront costs associated with acquiring new customers, particularly as a result of the limited free trial version of our service, and the nature of subscription revenue which is generally recognized ratably over the term of the subscription period, which is typically one year, although we also offer our services for terms ranging from one month to three years or more. We cannot assure you that we will achieve profitability in the future or that, if we do become profitable, we will sustain profitability.

The market in which we participate is intensely competitive, and if we do not compete effectively, our operating results could be harmed.

The market for cloud content management services is fragmented, rapidly evolving and highly competitive, with relatively low barriers to entry for certain applications and services. Many of our competitors and potential competitors are larger and have greater name recognition, substantially longer operating histories, larger marketing budgets and significantly greater resources than we do. Our primary competitors in the cloud content management market include, but are not limited to, Microsoft and Open Text (Documentum). In the enterprise file sync and share market, our primary competitors include, but are not limited to, Microsoft, Google and, to a lesser extent, Dropbox. With the introduction of new technologies and market entrants, we expect competition to continue to intensify in the future. If we fail to compete effectively, our business will be harmed. Some of our principal competitors offer their products or services at a lower price or for free, which has resulted in pricing pressures on our business. If we are unable to achieve our target pricing levels, our operating results would be negatively impacted. In addition, pricing pressures and increased competition generally could result in reduced sales, lower margins, losses or the failure of our services to achieve or maintain widespread market acceptance, any of which could harm our business.

Many of our competitors are able to devote greater resources to the development, promotion and sale of their products or services. In addition, many of our competitors have established marketing relationships and major distribution agreements with channel partners, consultants, system integrators and resellers. Moreover, many software vendors could bundle products or offer them at lower prices as part of a broader product sale or enterprise license arrangement. Some competitors may offer products or services that address one or a number of business execution functions at lower prices or with greater depth than our services. As a result, our competitors may be able to respond more quickly and effectively to new or changing opportunities, technologies, standards or customer requirements. Furthermore, some potential customers, particularly large enterprises, may elect to develop their own internal solutions. For any of these reasons, we may not be able to compete successfully against our current and future competitors.

46


 

If the market for cloud-based enterprise service declines or develops more slowly than we expect, our business could be adversely affected.

The market for cloud-based enterprise services is not as mature as the on-premise enterprise software market, and it is uncertain whether a cloud-based service like ours will achieve and sustain high levels of customer demand and market acceptance. Because we derive, and expect to continue to derive, substantially all of our revenue and cash flows from sales of our cloud content management solutions, our success will depend to a substantial extent on the widespread adoption of cloud computing in general and of cloud-based content management services in particular. Many organizations have invested substantial personnel and financial resources to integrate traditional enterprise software into their organizations and, therefore, may be reluctant or unwilling to migrate to a cloud-based model for storing, accessing, sharing and managing their content. It is difficult to predict customer adoption rates and demand for our services, the future growth rate and size of the cloud computing market or the entry of competitive services. The expansion of the cloud content management market depends on a number of factors, including the cost, performance and perceived value associated with cloud computing, as well as the ability of companies that provide cloud-based services to address security and privacy concerns. If we or other providers of cloud-based services experience security incidents, loss or corruption of customer data, disruptions in delivery of services, network outages, disruptions in the availability of the internet or other problems, the market for cloud-based services as a whole, including our services, may be negatively affected. If cloud-based services do not achieve widespread adoption, or there is a reduction in demand for cloud-based services caused by a lack of customer acceptance, technological challenges, weakening economic or political conditions, security or privacy concerns, competing technologies and products, decreases in corporate spending or otherwise, it could result in decreased revenue, harm our growth rates, and adversely affect our business and operating results.

We have experienced rapid growth. If we fail to manage our growth effectively, we may be unable to execute our business plan, maintain high levels of service or adequately address competitive challenges.

We have experienced a period of rapid growth in our operations, employee headcount, and the size of our customer base. You should not consider our recent growth as indicative of our future performance. However, we anticipate that we will continue to expand our operations and employee headcount in the near term, including internationally. This growth has placed, and future growth will place, a significant strain on our management, administrative, operational and financial infrastructure. Our success will depend in part on our ability to manage this growth effectively. To manage the expected growth of our operations and personnel, we will need to continue to improve our operational, financial and management controls, as well as our reporting systems and procedures. Failure to effectively manage our growth could result in difficulty or delays in deploying customers, declines in quality or customer satisfaction, increases in costs, difficulties in introducing new features or other operational difficulties. Any of these difficulties could adversely impact our business performance and operating results.

Our business depends substantially on customers renewing their subscriptions with us and expanding their use of our services. Any decline in our customer renewals or failure to convince our customers to broaden their use of our services would harm our future operating results.

In order for us to maintain or improve our operating results, it is important that our customers renew their subscriptions with us when their existing subscription term expires. Our customers have no obligation to renew their subscriptions upon expiration, and we cannot assure you that customers will renew subscriptions at the same or higher level of service, if at all. Although our retention rate remains high, it has decreased over time, and may continue to decrease in the future, as some of our customers have elected not to renew their subscriptions with us.

Our retention rate may decline or fluctuate as a result of a number of factors, including our customers’ satisfaction or dissatisfaction with our services, the effectiveness of our customer support services, the performance of our partners and resellers, our pricing, the prices of competing products or services, mergers and acquisitions affecting our customer base, the effects of global economic conditions or reductions in our customers’ spending levels. If our customers do not renew their subscriptions, purchase fewer seats, renew them on less favorable terms or fail to purchase new product offerings, our revenue may decline, and we may not realize improved operating results from our customer base.

In addition, the growth of our business depends in part on our customers expanding their use of our services. The use of our cloud content management platform often expands within an organization as new users are added or as additional services are purchased by or for other departments within an organization. Further, as we have introduced new services throughout our operating history, our existing customers have constituted a significant portion of the users of such services. If we are unable to encourage our customers to broaden their use of our services, our operating results may be adversely affected.

47


 

If we are not able to successfully launch new products and services, or provide enhancements or modifications to our existing products and services, our business could be adversely affected.

Our industry is marked by rapid technological developments and new and enhanced applications and services. If we are unable to provide enhancements and new features for our existing services or offer new services that achieve market acceptance or that keep pace with rapid technological developments, our business could be adversely affected. For example, Box Platform, which allows our customers to leverage Box’s powerful content services within their own custom applications, Box KeySafe, a solution that builds on top of Box’s strong encryption and security capabilities to give customers greater control over the encryption keys used to secure the file contents that are stored with Box, Box Zones, which gives global customers the ability to store their data locally in certain regions, Box Governance, which gives customers a better way to comply with regulatory policies, satisfy e-discovery requests and effectively manage sensitive business information, and Box Skills, currently in beta, which enables customers to leverage a variety of machine learning tools to accelerate their business processes and helping extract meaning from customers unstructured content. The success of any new products and services, enhancements, or modifications to existing products and services depends on several factors, including the timely completion, introduction and market acceptance of such enhancements, products or services. Failure in this regard may significantly impair our revenue growth and our future financial results. In addition, because our services are designed to operate on a variety of systems, we will need to continuously modify and enhance our services to keep pace with changes in internet-related hardware, mobile operating systems such as iOS and Android, and other software, communication, browser and database technologies. We may not be successful in either developing these modifications and enhancements or in bringing them to market in a timely fashion. Furthermore, modifications to existing platforms or technologies will increase our research and development expenses. Any failure of our services to operate effectively with existing or future network platforms and technologies could reduce the demand for our services, result in customer dissatisfaction and adversely affect our business.

Actual or perceived security vulnerabilities in our services or any breaches of our security controls and unauthorized access to a customer’s data could harm our business and operating results.

The services we offer involve the storage of large amounts of our customers’ sensitive and proprietary information across a broad industry spectrum. Cyber attacks and other malicious internet-based activity continue to increase in frequency and in magnitude generally, and cloud-based content collaboration services have been targeted in the past. These increasing threats are being driven by a variety of sources including nation-state sponsored espionage and hacking activities, industrial espionage, organized crime, sophisticated organizations and hacking groups and individuals. These sources can also implement social engineering techniques to induce our partners, users, employees or customers to disclose passwords or other sensitive information or take other actions to gain access to our users’ data. Additionally, hackers that acquire user account information at other companies can attempt to use that information to compromise our users’ accounts if an account shares the same sensitive information such as passwords. As we increase our customer base and our brand becomes more widely known and recognized, and as our service is used in more heavily regulated industries where there may be a greater concentration of sensitive and protected data, such as healthcare, government, life sciences, and financial services, we may become more of a target for these malicious third parties.  

If our security measures are or are believed to be inadequate or breached as a result of third-party action, employee negligence, error or malfeasance, product defects, social engineering techniques or otherwise, and this results in, or is believed to result in, the disruption of the confidentiality, integrity or availability of our customers’ data, we could incur significant liability to our customers and to individuals or organizations whose information is being stored by our customers, and our business may suffer and our reputation or competitive position may be damaged. Techniques used to obtain unauthorized access to, or to sabotage, systems or networks, are constantly evolving and generally are not recognized until launched against a target. Therefore, we may be unable to anticipate these techniques, react in a timely manner, or implement adequate preventive measures. We also expect to incur significant costs in an effort to detect and prevent security breaches and other security-related incidents, and we may face increased costs in the event of an actual or perceived security breach or other security-related incident. Additionally, our service providers may suffer, or be perceived to suffer, data security breaches or other incidents that may compromise data stored or processed for us that may give rise to any of the foregoing.

48


 

Our customer contracts often include (i) specific obligations that we maintain the availability of the customer’s data through our service and that we secure customer content against unauthorized access or loss, and (ii) provisions whereby we indemnify our customers for third-party claims asserted against them that result from our failure to maintain the availability of their content or securing the same from unauthorized access or loss. While our customer contracts contain limitations on our liability in connection with these obligations and indemnities, if an actual or perceived security breach occurs, the market perception of the effectiveness of our security measures could be harmed, we could be subject to indemnity or damage claims in certain customer contracts, and we could lose future sales and customers, any of which could harm our business and operating results. Furthermore, while our errors and omissions insurance policies include liability coverage for certain of these matters, if we experienced a widespread security breach or other incident that impacted a significant number of our customers to whom we owe indemnity obligations, we could be subject to indemnity claims or other damages that exceed our insurance coverage. We also cannot be certain that our insurance coverage will be adequate for data handling or data security liabilities actually incurred, that insurance will continue to be available to us on economically reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, including our financial condition, operating results, and reputation.

Our sales to government entities are subject to a number of additional challenges and risks.

We sell to U.S. federal and state and foreign government customers, and we may increase sales to government entities in the future. Sales to government entities are subject to a number of additional challenges and risks. Selling to government entities can be highly competitive, expensive and time consuming, often requiring significant upfront time and expense without any assurance that these efforts will generate a sale. Government certification requirements may change, or we may lose one or more government certifications, and in doing so restrict our ability to sell into the government sector until we have attained revised certifications. Government demand and payment for our products and services are affected by public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely affecting public sector demand for our solutions. Government entities may also have statutory, contractual or other legal rights to terminate contracts with us for convenience or due to a default, and any such termination may adversely affect our future operating results.

As a substantial portion of our sales efforts are increasingly targeted at enterprise customers, our sales cycle may become longer and more expensive, we may encounter greater pricing pressure and implementation and customization challenges, and we may have to delay revenue recognition for more complicated transactions, all of which could harm our business and operating results.

As a substantial portion of our sales efforts are increasingly targeted at enterprise customers, we face greater costs, longer sales cycles and less predictability in the completion of some of our sales. In this market segment, the customer’s decision to use our services may be an enterprise-wide decision, in which case these types of sales require us to provide greater levels of customer education regarding the uses and benefits of our services, as well as education regarding security, privacy, and data protection laws and regulations, especially for those customers in more heavily regulated industries or those with significant international operations. In addition, larger enterprises may demand more customization, integration and support services, and features. As a result of these factors, these sales opportunities may require us to devote greater sales support and professional services resources to these customers, which could increase our costs, lengthen our sales cycle and leave fewer sales support and professional services resources for other customers. This would potentially require us to delay revenue recognition on some of these transactions until the technical or implementation requirements have been met. Professional services may also be performed by a third party or a combination of our own staff and a third party. Our strategy is to work with third parties to increase the breadth of capability and depth of capacity for delivery of these services to our customers. If a customer is not satisfied with the quality or interoperability of our services with their own IT environment, we could incur additional costs to address the situation, which could adversely affect our margins. Moreover, any customer dissatisfaction with our services could damage our ability to encourage broader adoption of our services by that customer. In addition, any negative publicity resulting from such situations, regardless of its accuracy, may further damage our business by affecting our ability to compete for new business with current and prospective customers.

Privacy concerns and laws or other domestic or foreign regulations may reduce the effectiveness of our services and harm our business.

Users can use our services to store identifying information or information that otherwise is considered personal information. Federal, state and foreign government bodies and agencies have adopted or are considering adopting laws and regulations regarding the collection, use and disclosure of personal information obtained from consumers and other individuals. Foreign data protection, privacy, consumer protection and other laws and regulations, particularly in Europe, are often more restrictive than those in the United States. The costs of compliance with, and other burdens imposed by, such laws and regulations that are applicable to our business or the businesses of our customers may limit the use and adoption of our services and reduce overall demand for them.

49


 

These U.S. federal and state and foreign laws and regulations, which can be enforced by private parties or governmental entities, are constantly evolving and can be subject to significant change. A number of new laws coming into effect and/or proposals pending before federal, state and foreign legislative and regulatory bodies could affect our business. For example, the European Commission has enacted a General Data Protection Regulation (GDPR) that became effective in May 2018, superseding prior EU data protection legislation, imposing more stringent EU data protection requirements, and providing for greater penalties for noncompliance of up to the greater of 20 million euros or four percent of a company’s global revenue. The GDPR imposes new obligations on companies regarding the handling of personal data. If we are unable to develop and offer services that meet our legal duties or help our customers meet their obligations under the GDPR or other laws or regulations relating to privacy, data protection, or information security, we may experience reduced demand for our services and become subject to significant fines and penalties, all of which would harm our business. Additionally, in October 2015, the European Court of Justice invalidated the U.S.-EU Safe Harbor framework that had been in place since 2000, which allowed companies to meet certain European legal requirements for the transfer of personal data from the European Economic Area (EEA) to the United States. Although U.S. and EU authorities reached a political agreement on February 2, 2016, regarding a new means for legitimizing personal data transfers from the EEA to the United States, the EU-U.S. Privacy Shield, it is facing mounting legal challenges. It is unclear what effect these challenges to the EU-U.S. Privacy Shield will have and whether it or the related Swiss-EU Privacy Shield will continue to function as an appropriate means for us to legitimize personal data transfers from the EEA or Switzerland to the U.S. Additionally, California recently enacted legislation, the California Consumer Privacy Act, or CCPA, that will, among other things, require covered companies to provide new disclosures to California consumers, and afford such consumers new abilities to opt-out of certain sales of personal information, when it goes into effect on January 1, 2020. Legislators have stated that they intend to propose amendments to the CCPA before it goes into effect, and it remains unclear what, if any, modifications will be made to this legislation or how it will be interpreted. We cannot yet predict the impact of the CCPA on our business or operations, but it may require us to modify our data processing practices and policies and to incur substantial costs and expenses in an effort to comply. There also have been a number of recent legislative proposals in the United States, at both the federal and state level, that would impose new obligations in areas such as privacy and liability for copyright infringement by third parties. In June 2016, the United Kingdom voted to leave the European Union, commonly referred to as “Brexit,” which could also lead to further legislative and regulatory changes by the planned exit date of March 2019. The UK Data Protection Act that substantially implements the GDPR became law in May 2018. It remains unclear, however, how United Kingdom data protection laws or regulations will develop in the medium to longer term and how data transfers to and from the United Kingdom will be regulated. In addition, some countries are considering or have enacted legislation requiring local storage and processing of data that could increase the cost and complexity of delivering our services.

These existing and proposed laws and regulations can be costly to comply with, can delay or impede the development or adoption of our products and services, reduce the overall demand for our products and services, increase our operating costs, require significant management time and attention, slow the pace at which we close (or prevent us from closing) sales transactions. Additionally, any actual or alleged noncompliance with these laws and regulations could result in negative publicity and subject us to investigations, claims or other remedies, including demands that we modify or cease existing business practices, and expose us to significant fines, penalties and other damages.

Furthermore, government agencies may seek to access sensitive information that our users upload to Box, or restrict users’ access to Box. Laws and regulations relating to government access and restrictions are evolving, and compliance with such laws and regulations could limit adoption of our services by users and create burdens on our business. Moreover, regulatory investigations into our compliance with privacy-related laws and regulations could increase our costs and divert management attention.

If we are not able to satisfy data protection, security, privacy, and other government- and industry-specific requirements, our growth could be harmed.

There are a number of data protection, security, privacy and other government- and industry-specific requirements, including those that require companies to notify individuals of data security incidents involving certain types of personal data. Security compromises experienced by our competitors, by our customers or by us may lead to public disclosures, which could harm our reputation, erode customer confidence in the effectiveness of our security measures, negatively impact our ability to attract new customers, or cause existing customers to elect not to renew their agreements with us. In addition, some of the industries we serve have industry-specific requirements relating to compliance with certain security and regulatory standards, such as GxP and FedRAMP, and those required by HIPAA, FINRA, and the HITECH Act. As we expand into new industry verticals and regions, we will likely need to comply with these and other new requirements to compete effectively. If we cannot adequately comply or if we incur a violation of one or more of these requirements, our growth could be adversely impacted, and we could incur significant liability and our reputation and business could be harmed.

50


 

Because we recognize revenue from subscriptions for our services over the term of the subscription, downturns or upturns in new business may not be immediately reflected in our operating results.

We generally recognize revenue from customers ratably over the terms of their subscription agreements, which are typically one year, although we also offer our services for terms ranging from one month to three years or more. As a result, most of the revenue we report in each quarter is the result of subscription agreements entered into during prior quarters. Consequently, a decline in new or renewed subscriptions in any one quarter may not be reflected in our revenue results for that quarter. However, any such decline will negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in sales, our failure to achieve our internal sales targets, a decline in the market acceptance of our services, or potential decreases in our retention rate may not be fully reflected in our operating results until future periods. Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from additional sales must be recognized over the applicable subscription term.

Our platform must integrate with a variety of operating systems and software applications that are developed by others, and if we are unable to ensure that our solutions interoperate with such systems and applications, our service may become less competitive, and our operating results may be harmed.

We offer our services across a variety of operating systems and through the internet. We are dependent on the interoperability of our platform with third-party mobile devices, tablets, desktop and mobile operating systems, as well as web browsers that we do not control. Any changes in such systems, devices or web browsers that degrade the functionality of our services or give preferential treatment to competitive services could adversely affect usage of our services. In order for us to deliver high quality services, it is important that these services work well with a range of operating systems, networks, devices, web browsers and standards that we do not control. In addition, because a substantial number of our users access our services through mobile devices, we are particularly dependent on the interoperability of our services with mobile devices and operating systems. We may not be successful in developing relationships with key participants in the mobile industry or in developing services that operate effectively with these operating systems, networks, devices, web browsers and standards. In the event that it is difficult for our users to access and use our services, our user growth may be harmed, and our business and operating results could be adversely affected.

If we are unable to attract new customers or expand deployments with existing customers at rates that are consistent with our expectations, our future revenue and operating results could be adversely impacted.

In order for us to improve our operating results and continue to grow our business, it is important that we continue to attract new customers and expand deployment of our solutions and products with existing customers. To the extent we are successful in increasing our customer base, we could incur increased losses because costs associated with new customers are generally incurred up front, while revenue is recognized ratably over the term of our subscription services. Alternatively, to the extent we are unsuccessful in increasing our customer base, we could also incur increased losses as costs associated with marketing programs and new products intended to attract new customers would not be offset by incremental revenue and cash flow. Furthermore, if our customers do not expand their deployment of our services or purchase new products from us, our revenue may grow more slowly than we expect. All of these factors could negatively impact our future revenue and operating results.

Our quarterly results may fluctuate significantly and may not fully reflect the underlying performance of our business.

Our quarterly operating results, including the levels of our revenue, billings, gross margin, profitability, cash flow, and deferred revenue, may vary significantly in the future, and period-to-period comparisons of our operating results may not be meaningful. Accordingly, the results of any one quarter should not be relied upon as an indication of future performance. Our quarterly financial results may fluctuate as a result of a variety of factors, many of which are outside of our control and, as a result, may not fully reflect the underlying performance of our business. Fluctuations in quarterly results may negatively impact the value of our Class A common stock. Factors that may cause fluctuations in our quarterly financial results include, but are not limited to:

 

our ability to attract new customers;

 

our ability to convert users of our limited free version to paying customers;

 

the addition or loss of large customers, including through acquisitions or consolidations;

 

changes in our retention rate;

 

the timing of revenue recognition;

 

the impact on billings of shifting our focus to annual (rather than multi-year) payment frequencies from our customers;

 

the amount and timing of operating expenses related to the maintenance and expansion of our business, operations and infrastructure;

51


 

 

network or service outages, internet disruptions, the availability of our service, security breaches or perceived security breaches;

 

general economic, industry and market conditions;

 

increases or decreases in the number of features or capabilities in our services or pricing changes upon any renewals of customer agreements;

 

changes in our go to market strategies and/or pricing policies and/or those of our competitors;

 

seasonal variations in our billings results and sales of our services, which have historically been highest in the fourth quarter of our fiscal year;

 

the timing and success of new services and product introductions by us and our competitors or any other change in the competitive dynamics of our industry, including consolidation or new entrants among competitors, customers or strategic partners;

 

changes in usage or adoption rates of the internet and content management services, including outside the United States;

 

the success of our strategic partnerships, including the performance of our resellers; and

 

the timing of expenses related to the development or acquisition of technologies or businesses and potential future charges for impairment of goodwill from acquired companies.

One of our marketing strategies is to offer a limited free version of our service, and we may not be able to realize the benefits of this strategy.

We offer a limited version of our service to users free of charge in order to promote additional usage, brand and product awareness, and adoption. Many users never convert from a free version to a paid version of our service. Our marketing strategy also depends in part on persuading users who use the free version of our service within their organizations to convince decision-makers to purchase and deploy our service. To the extent that these users do not become, or do not lead others to become, paying customers, we will not realize the intended benefits of this marketing strategy, and our ability to grow our business and revenue may be harmed.

If we fail to effectively manage our technical operations infrastructure, our customers may experience service outages and delays in the deployment of our services, which may adversely affect our business.

We have experienced significant growth in the number of users and the amount of data that our operations infrastructure supports. We seek to maintain sufficient excess capacity in our operations infrastructure to meet the needs of all of our customers. We also seek to maintain excess capacity to facilitate the rapid provisioning of new customer deployments and the expansion of existing customer deployments. In addition, we need to properly manage our technological operations infrastructure in order to support version control, changes in hardware and software parameters and the evolution of our services. However, the provision of new hosting infrastructure requires significant lead-time. We have experienced, and may in the future experience, website disruptions, incidents of data corruption, service outages and other performance problems. These problems may be caused by a variety of factors, including infrastructure changes, changes to our core services architecture, changes to our infrastructure necessitated by legal and compliance requirements governing the storage and transmission of data, human or software errors, viruses, security attacks, fraud, spikes in customer usage, primary and redundant hardware or connectivity failures, dependent data center and other service provider failures and denial of service issues. In some instances, we may not be able to identify the cause or causes of these performance problems within an acceptable period of time, which may harm our reputation and operating results. Furthermore, if we encounter any of these problems in the future, our customers may lose access to important data or experience data corruption or service outages that may subject us to financial penalties, other liabilities and customer losses. If our operations infrastructure fails to keep pace with increased sales, customers may experience delays as we seek to obtain additional capacity, which could adversely affect our reputation and our business.

52


 

Interruptions or delays in service from our third-party datacenter hosting facilities and cloud computing and hosting providers could impair the delivery of our services and harm our business.

We currently store and process our customers’ information within three third-party datacenter hosting facilities located in Northern California and in third-party cloud computing and hosting facilities inside and outside of the United States. As part of our current disaster recovery arrangements, our production environment and metadata related to our customers’ data is currently replicated in near real time in a facility located in Las Vegas, Nevada. In addition, all of our customers’ data is typically replicated on a third-party storage platform located inside and outside of the United States. These facilities may be located in areas prone to natural disasters and may experience events such as earthquakes, floods, fires, power loss, telecommunications failures and similar events. They may also be subject to break-ins, sabotage, intentional acts of vandalism, cyber-attacks and similar misconduct. Any damage to, or failure of, our systems generally, or those of the third-party cloud computing and hosting providers, could result in interruptions in our service. Interruptions in our service may reduce our revenue, cause us to issue credits or pay penalties, cause customers to terminate their subscriptions and adversely affect our renewal rate and our ability to attract new customers. In addition, we may not have adequate insurance coverage to compensate for losses from a major interruption. Our business will also be harmed if our customers and potential customers believe our service is unreliable. Despite precautions taken at these facilities, the occurrence of a natural disaster, an act of terrorism, an armed conflict, a decision to close the facilities without adequate notice or other unanticipated problems at these facilities could result in lengthy interruptions in our service or cause us to not comply with certification requirements. Even with the disaster recovery arrangements, we have never performed a full live failover of our services and, in an actual disaster, we could learn our recovery arrangements are not sufficient to address all possible scenarios and our service could be interrupted for a longer period than expected. For example, in February 2018, we experienced a service outage when one of our data centers lost power and the back-up power generators failed to function properly. As we continue to add datacenters, increase our dependence on third-party cloud computing and hosting providers, and add capacity in our existing datacenters, we may move or transfer our data and our customers’ data. Despite precautions taken during this process, any unsuccessful data transfers may impair the delivery of our service. Further, as we continue to grow and scale our business to meet the needs of our customers, additional burdens may be placed on our hosting and computing facilities. In particular, a rapid expansion of our business could cause our network or systems to fail.

If we overestimate or underestimate our data center capacity requirements, our operating results could be adversely affected.

Only a small percentage of our customers that are organizations currently use our service as a way to organize all of their internal files. In particular, larger organizations and enterprises typically use our service to connect people and their most important information so that they are able to get work done more efficiently. However, over time, we may experience an increase in customers that look to Box as their complete content management solution. The costs associated with leasing and maintaining our data centers already constitute a significant portion of our capital and operating expenses. We continuously evaluate our short- and long-term data center capacity requirements to ensure adequate capacity for new and existing customers while minimizing unnecessary excess capacity costs. If we overestimate the demand for our cloud content management service and therefore secure excess data center capacity, or if we are unable to meet our contractual minimum commitments, our operating margins could be reduced. If we underestimate our data center capacity requirements, we may not be able to service the expanding needs of new and existing customers and may be required to limit new customer acquisition, which would impair our revenue growth. Furthermore, regardless of our ability to appropriately manage our data center capacity requirements, an increase in the number of organizations, in particular large businesses and enterprises, that use our service as a larger component of their content storage requirements, could result in lower gross and operating margins or otherwise have an adverse impact on our financial condition and operating results.

We depend on highly skilled personnel to grow and operate our business, and if we are unable to hire, retain and motivate our personnel, we may not be able to grow effectively.

Our future success depends upon our continued ability to identify, hire, develop, motivate and retain highly skilled personnel, including senior management, engineers, designers, product managers, sales representatives, and customer support representatives. Our ability to execute efficiently is dependent upon contributions from our employees, including our senior management team and, in particular, Aaron Levie, our co-founder, Chairman and Chief Executive Officer. In addition, occasionally, there may be changes in our senior management team that may be disruptive to our business. For example, in May 2018, David Leeb was appointed as our General Counsel and Corporate Secretary. If our senior management team, including any new hires that we may make, fails to work together effectively and to execute on our plans and strategies on a timely basis, our business could be harmed.

53


 

Our growth strategy also depends on our ability to expand our organization with highly skilled personnel. Identifying, recruiting, training and integrating qualified individuals will require significant time, expense and attention. In addition to hiring new employees, we must continue to focus on retaining our best employees. Many of our employees may be able to receive significant proceeds from sales of our equity in the public markets, which may reduce their motivation to continue to work for us. Competition for highly skilled personnel is intense, particularly in the San Francisco Bay Area, where our headquarters is located. We may need to invest significant amounts of cash and equity to attract and retain new employees, and we may never realize returns on these investments. Changes to U.S. immigration and work authorization laws and regulations, including those that restrain the flow of technical and professional talent, can be significantly affected by political forces and levels of economic activity. Our international expansion and our business in general may be materially adversely affected if legislative or administrative changes to immigration or visa laws and regulations impair our hiring processes and goals or projects involving personnel who are not citizens of the country where the work is to be performed.

If we are not able to effectively add and retain employees, our ability to achieve our strategic objectives will be adversely impacted, and our business will be harmed.

We may be sued by third parties for alleged infringement of their proprietary rights.

There is considerable patent and other intellectual property development activity in our industry. Our success depends on our not infringing upon the valid intellectual property rights of others. Our competitors, as well as a number of other entities, including non-practicing entities, and individuals, may own or claim to own intellectual property relating to our industry.

From time to time, certain other third parties have claimed that we are infringing upon their intellectual property rights, and we may be found to be infringing upon such rights. In addition, we cannot assure you that actions by other third parties alleging infringement by us of third-party patents will not be asserted or prosecuted against us. In the future, others may claim that our services and underlying technology infringe or violate their intellectual property rights. However, we may be unaware of the intellectual property rights that others may claim cover some or all of our technology or services. Any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us from offering our services, or require that we comply with other unfavorable terms. We may also be obligated to indemnify our customers or business partners or pay substantial settlement costs, including royalty payments, in connection with any such claim or litigation and to obtain licenses, modify services, or refund fees, which could be costly. Even if we were to prevail in such a dispute, any litigation regarding our intellectual property could be costly and time consuming and divert the attention of our management and key personnel from our business operations. During the course of any litigation, we may make announcements regarding the results of hearings and motions, and other interim developments. If securities analysts or investors regard these announcements as negative, the market price of our common stock may decline.

Any failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and our brand.

Our success and ability to compete depend in part on our intellectual property. We primarily rely on copyright, trade secret and trademark laws, trade secret protection and confidentiality or license agreements with our employees, customers, partners and others to protect our intellectual property rights. However, the steps we take to protect our intellectual property rights may be inadequate. We may not be able to obtain any further patents, and our pending applications may not result in the issuance of patents. We may also have to expend significant resources to obtain additional patents as we expand our international operations.

In order to protect our intellectual property rights, we may be required to spend significant resources to monitor and protect these rights. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming and distracting to management and may result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights. Accordingly, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property. Our failure to secure, protect and enforce our intellectual property rights could materially adversely affect our brand and adversely impact our business.

54


 

We rely on third parties for certain financial and operational services essential to our ability to manage our business. A failure or disruption in these services could materially and adversely affect our ability to manage our business effectively.

We rely on third parties for certain essential financial and operational services. Traditionally, the vast majority of these services have been provided by large enterprise software vendors who license their software to customers. However, we receive many of these services on a subscription basis from various software-as-a-service companies that are smaller and have shorter operating histories than traditional software vendors. Moreover, these vendors provide their services to us via a cloud-based model instead of software that is installed on our premises. We depend upon these vendors to provide us with services that are always available and are free of errors or defects that could cause disruptions in our business processes, and any failure by these vendors to do so, or any disruptions in networks or the availability of the internet, would adversely affect our ability to operate and manage our operations.

We are subject to governmental export controls that could impair our ability to compete in international markets due to licensing requirements and economic sanctions programs that subject us to liability if we are not in full compliance with applicable laws.

Certain of our services are subject to export controls, including the U.S. Department of Commerce’s Export Administration Regulations and various economic and trade sanction regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Controls. The provision of our products and services must comply with these laws. The U.S. export control laws and U.S. economic sanctions laws include prohibitions on the sale or supply of certain products and services to U.S. embargoed or sanctioned countries, governments, persons and entities and also require authorization for the export of encryption items. In addition, various countries regulate the import of certain encryption technology, including through import permitting and licensing requirements, and have enacted laws that could limit our ability to distribute our services or could limit our customers’ ability to implement our services in those countries.

Although we take precautions to prevent our services from being provided in violation of such laws, our solutions may have been in the past, and could in the future be, provided inadvertently in violation of such laws, despite the precautions we take. If we fail to comply with these laws, we and our employees could be subject to civil or criminal penalties, including the possible loss of export privileges, monetary penalties, and, in extreme cases, imprisonment of responsible employees for knowing and willful violations of these laws. We may also be adversely affected through penalties, reputational harm, loss of access to certain markets, or otherwise.

Changes in tariffs, sanctions, international treaties, export/import laws and other trade restrictions may delay the introduction and sale of our services in international markets, prevent our customers with international operations from deploying our services or, in some cases, prevent the export or import of our services to certain countries, governments, persons or entities altogether. Any change in export or import regulations, economic sanctions or related laws, shift in the enforcement or scope of existing regulations, or change in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use of our services, or in our decreased ability to export or sell our services to existing or potential customers with international operations. Any decrease in the use of our services or limitation on our ability to export or sell our services would likely adversely affect our business, financial condition and operating results.

We focus on product innovation and user engagement rather than short-term operating results.

We focus heavily on developing and launching new and innovative products and features, as well as on improving the user experience for our services. We also focus on growing the number of users and paying organizations through inside sales, outbound sales, field sales, channel sales and through word-of-mouth by individual users, some of whom use our services at no cost. We prioritize innovation and the experience for users on our platform, as well as the growth of our user base, over short-term operating results. We frequently make product and service decisions that may reduce our short-term operating results if we believe that the decisions are consistent with our goals to improve the user experience and to develop innovative features that we feel our users desire. These decisions may not be consistent with the short-term expectations of investors and may not produce the long-term benefits that we expect.

We provide service level commitments under our subscription agreements. If we fail to meet these contractual commitments, we could be obligated to provide credits or refunds for prepaid amounts related to unused subscription services or face subscription terminations, which could adversely affect our revenue. Furthermore, any failure in our delivery of high-quality customer support services may adversely affect our relationships with our customers and our financial results.

Our subscription agreements with customers provide certain service level commitments. If we are unable to meet the stated service level commitments or suffer periods of downtime that exceed the periods allowed under our customer agreements, we may be obligated to provide these customers with service credits which could significantly impact our revenue in the period in which the downtime occurs and the credits could be due.   For example, in February 2018, we experienced a service outage when one of our data centers lost power and the back-up power generators failed to function properly. As a result of this service outage, we issued credits to certain customers. We could also face subscription terminations, which could significantly impact both our current and future revenue. Any extended service outages could also adversely affect our reputation, which would also impact our future revenue and operating results.

55


 

Our customers depend on our customer success organization to resolve technical issues relating to our services. We may be unable to respond quickly enough to accommodate short-term increases in customer demand for support services. Increased customer demand for these services, without corresponding revenue, could increase costs and adversely affect our operating results. In addition, our sales process is highly dependent on the ease of use of our services, on our reputation and on positive recommendations from our existing customers. Any failure to maintain high-quality customer support, or a market perception that we do not maintain high-quality support, could adversely affect our reputation and our ability to sell our services to existing and prospective customers.

Our services are becoming increasingly mission-critical for our customers and if these services fail to perform properly or if we are unable to scale our services to meet the needs of our customers, our reputation could be adversely affected, our market share could decline and we could be subject to liability claims.

Our core services and our expanded offerings such as Box KeySafe, Box Governance and Box Platform are becoming increasingly mission-critical to our customers’ internal and external business operations, as well as their ability to comply with legal requirements, regulations, and standards such as GxP, FINRA, HIPAA, and FedRAMP. These services and offerings are inherently complex and may contain material defects or errors. Any defects either in functionality or that cause interruptions in the availability of our services, as well as user error, could result in:

 

loss or delayed market acceptance and sales;

 

breach of contract or warranty claims;

 

issuance of sales credits or refunds for prepaid amounts related to unused subscription services;

 

loss of customers;

 

diversion of development and customer service resources; and

 

harm to our reputation.

The costs incurred in correcting any material defects or errors might be substantial and could adversely affect our operating results. Further, our errors and omissions insurance may be inadequate or may not be available in the future on acceptable terms, or at all. In addition, our insurance may not cover all claims made against us and defending a lawsuit, regardless of its merit, could be costly and divert management’s attention.

Because of the large amount of data that we collect and manage, it is possible that hardware failures, software errors, errors in our systems, user errors, or internet outages could result in data loss or corruption that our customers regard as significant. Furthermore, the availability or performance of our services could be adversely affected by a number of factors, including customers’ inability to access the internet, the failure of our network or software systems, security breaches or variability in customer traffic for our services. We have been required and, in the future, may be required to issue credits or refunds for prepaid amounts related to unused services or otherwise be liable to our customers for damages they may incur resulting from some of these events. In addition to potential liability, if we experience interruptions in the availability of our services, our reputation could be adversely affected, which could result in the loss of customers. For example, our customers access our services through their internet service providers. If a service provider fails to provide sufficient capacity to support our services or otherwise experiences service outages, such failure could interrupt our customers’ access to our services, adversely affect their perception of our services’ reliability and consequently reduce our revenue.

Furthermore, we will need to ensure that our services can scale to meet the needs of our customers, particularly as we continue to focus on larger enterprise customers. If we are not able to provide our services at the scale required by our customers, potential customers may not adopt our solution and existing customers may not renew their agreements with us.

If the prices we charge for our services are unacceptable to our customers, our operating results will be harmed.

As the market for our services matures, or as new or existing competitors introduce new products or services that compete with ours, we may experience pricing pressure and be unable to renew our agreements with existing customers or attract new customers at prices that are consistent with our pricing model and operating budget. If this were to occur, it is possible that we would have to change our pricing model or reduce our prices, which could harm our revenue, gross margin and operating results.

56


 

Sales to customers outside the United States or with international operations expose us to risks inherent in international sales.

A key element of our growth strategy is to expand our international operations and develop a worldwide customer base. To date, we have not realized a substantial portion of our revenue from customers outside of the United States. Operating in international markets requires significant resources and management attention and will subject us to regulatory, economic, geographic, social, and political risks that are different from those in the United States. Because of our limited experience with international operations and significant differences between international and U.S. markets, our international expansion efforts may not be successful in creating demand for our services outside of the United States or in effectively selling subscriptions to our services in all of the international markets we enter. In addition, we will face specific risks in doing business internationally that could adversely affect our business, including:

 

the need to localize and adapt our services for specific countries, including translation into foreign languages and associated expenses;

 

laws (and changes to such laws) relating to privacy, data protection and data transfer that, among other things, could require that customer data be stored and processed in a designated territory;

 

difficulties in staffing and managing foreign operations;

 

different pricing environments, longer sales cycles and longer accounts receivable payment cycles and collections issues;

 

new and different sources of competition;

 

weaker protection for intellectual property and other legal rights than in the United States and practical difficulties in enforcing intellectual property and other rights outside of the United States;

 

laws and business practices favoring local competitors;

 

changes in the geopolitical environment, the perception of doing business with U.S. based companies, and changes in regulatory requirements that impact our operating strategies, access to global markets or hiring;

 

compliance challenges related to the complexity of multiple, conflicting and changing governmental laws and regulations, including employment, tax, privacy and data protection laws and regulations;

 

increased financial accounting and reporting burdens and complexities;

 

restrictions on the transfer of funds;

 

adverse tax consequences; and

 

unstable regional, economic, social and political conditions.

We sell our services and incur operating expenses in various currencies. Therefore, fluctuations in the value of the U.S. dollar and foreign currencies may impact our operating results when translated into U.S. dollars. We currently manage our exchange rate risk by matching foreign currency assets with payables and by maintaining minimal non-USD cash reserves, but we do not have any other hedging programs in place to limit the risk of exchange rate fluctuation. In the future, however, to the extent our foreign currency exposures become more material, we may elect to deploy normal and customary hedging practices designed to more proactively mitigate such exposure. We cannot be certain such practice will ultimately be available and/or effective at mitigating all foreign currency risk to which we are exposed. If we are unsuccessful in detecting material exposures in a timely manner, our deployed hedging strategies are not effective, or there are no hedging strategies available for certain exposures that are prudent given the risks associated and the potential mitigation of the underlying exposure achieved, our operating results or financial position could be adversely affected in the future.

We are also monitoring developments related to Brexit, which could have significant implications for our business. Brexit could lead to economic and legal uncertainty, including significant volatility in global stock markets and currency exchange rates, and differing laws and regulations as the United Kingdom determines which European Union laws to replace or replicate. Any of these effects of Brexit, among others, could adversely affect our operations in the United Kingdom and our financial results.

Failure to adequately expand our direct sales force and successfully maintain our online sales experience will impede our growth.

We will need to continue to expand and optimize our sales infrastructure in order to grow our customer base and our business. We plan to continue to expand our direct sales force, both domestically and internationally. Identifying and recruiting qualified personnel and training them requires significant time, expense and attention. Our business may be adversely affected if our efforts to expand and train our direct sales force do not generate a corresponding increase in revenue. If we are unable to hire, develop and retain talented sales personnel or if new direct sales personnel are unable to achieve desired productivity levels in a reasonable period of time, we may not be able to realize the intended benefits of this investment or increase our revenue.

57


 

We maintain our Box website to efficiently service our high volume, low dollar customer transactions and certain customer inquiries. Our goal is to continue to evolve this online experience so it effectively serves the increasing and changing needs of our growing customer base. If we are unable to maintain the effectiveness of our online solution to meet the future needs of our online customers, we could see reduced online sales volumes as well as a decrease in our sales efficiency, which could adversely affect our results of operations.

If we are unable to maintain and promote our brand, our business and operating results may be harmed.

We believe that maintaining and promoting our brand is critical to expanding our customer base. Maintaining and promoting our brand will depend largely on our ability to continue to provide useful, reliable and innovative services, which we may not do successfully. We may introduce new features, products, services or terms of service that our customers do not like, which may negatively affect our brand and reputation. Additionally, the actions of third parties may affect our brand and reputation if customers do not have a positive experience using third-party apps or other services that are integrated with Box. Maintaining and enhancing our brand may require us to make substantial investments, and these investments may not achieve the desired goals. If we fail to successfully promote and maintain our brand or if we incur excessive expenses in this effort, our business and operating results could be adversely affected.

Our growth depends in part on the success of our strategic relationships with third parties.

In order to grow our business, we anticipate that we will continue to depend on our relationships with third parties, such as alliance partners, resellers, distributors, system integrators and developers. For example, we have entered into agreements with partners such as AT&T, IBM, Microsoft and Google to market, resell, integrate with or endorse our services. Identifying partners and resellers, and negotiating and documenting relationships with them, requires significant time and resources. Also, we depend on our ecosystem of system integrators, partners and developers to create applications that will integrate with our platform or permit us to integrate with their product offerings. Our competitors may be effective in providing incentives to third parties to favor their products or services, or to prevent or reduce subscriptions to our services. In some cases, we also compete directly with our partners’ product offerings, and if these partners stop reselling or endorsing our services or impede our ability to integrate our services with their products, our business and operating results could be adversely affected. In addition, acquisitions of our partners by our competitors could result in a decrease in the number of current and potential customers, as our partners may no longer facilitate the adoption of our services by potential customers.

If we are unsuccessful in establishing or maintaining our relationships with third parties, or realize the anticipated benefits from such partnerships, our ability to compete in the marketplace or to grow our revenue could be impaired and our operating results may suffer. Even if we are successful, we cannot assure you that these relationships will result in increased customer usage of our services or increased revenue.

Furthermore, if our partners and resellers fail to perform as expected, our reputation may be harmed and our business and operating results could be adversely affected.

We depend on our ecosystem of system integrators, partners and developers to create applications that will integrate with our platform or to allow us to integrate with their products.

We depend on our ecosystem of system integrators, partners and developers to create applications that will integrate with our platform and to allow us to integrate with their products. This presents certain risks to our business, including:

 

we cannot provide any assurance that these third-party applications and products meet the same quality standards that we apply to our own development efforts, and to the extent that they contain bugs or defects, they may create disruptions in our customers’ use of our services or negatively affect our brand;

 

we do not currently provide support for software applications developed by our partner ecosystem, and users may be left without support and potentially cease using our services if these system integrators and developers do not provide adequate support for their applications;

 

we cannot provide any assurance that we will be able to successfully integrate our services with our partners’ products or that our partners will continue to provide us the right to do so; and

 

these system integrators, partners and developers may not possess the appropriate intellectual property rights to develop and share their applications.

58


 

Many of these risks are not within our control to prevent, and our brand may be damaged if these applications do not perform to our users’ satisfaction and that dissatisfaction is attributed to us.

Our company culture has contributed to our success, and if we cannot maintain this culture as we grow, we could lose the innovation, creativity and teamwork fostered by our culture, and our business may be harmed.

We believe that our culture has been and will continue to be a key contributor to our success. We expect to continue to hire additional employees as we expand our business. If we do not continue to develop our company culture or maintain our core values as we grow and evolve both in the United States and abroad, we may be unable to foster the innovation, creativity and teamwork we believe we need to support our growth.

Our services contain open source software, and we license some of our software through open source projects, which may pose particular risks to our proprietary software, products, and services in a manner that could have a negative impact on our business.

We use open source software in our services and will use open source software in the future. In addition, we regularly contribute software source code to open source projects under open source licenses or release internal software projects under open source licenses, and anticipate doing so in the future. The terms of many open source licenses to which we are subject have not been interpreted by U.S. or foreign courts, and there is a risk that open source software licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to provide or distribute our services. Additionally, we may from time to time face claims from third parties claiming ownership of, or demanding release of, the open source software or derivative works that we developed using such software, which could include our proprietary source code, or otherwise seeking to enforce the terms of the applicable open source license. These claims could result in litigation and could require us to make our software source code freely available, purchase a costly license or cease offering the implicated services unless and until we can re-engineer them to avoid infringement. This re-engineering process could require significant additional research and development resources, and we may not be able to complete it successfully. In addition to risks related to license requirements, use of certain open source software can lead to greater risks than use of third-party commercial software, as open source code may contain bugs or other defects and open source licensors generally do not provide warranties or controls on the functionality or origin of software. Additionally, because any software source code we contribute to open source projects is publicly available, our ability to protect our intellectual property rights with respect to such software source code may be limited or lost entirely, and we are unable to prevent our competitors or others from using such contributed software source code. Any of these risks could be difficult to eliminate or manage, and, if not addressed, could have a negative effect on our business, financial condition and operating results.

We have a limited operating history at our current scale, which makes it difficult to predict our future operating results.

We were incorporated and introduced our first service in 2005. As a result of our limited operating history, particularly at our current scale, our ability to accurately forecast our future operating results is limited and subject to a number of uncertainties. We have encountered, and will continue to encounter, risks and uncertainties frequently experienced by growing companies in rapidly changing industries, such as the risks and uncertainties described herein. If our assumptions regarding these risks and uncertainties (which we use to plan our business) are incorrect or change due to changes in our markets, or if we do not address these risks and uncertainties successfully, our operating and financial results could differ materially from our expectations, and our business could suffer.

Future acquisitions and investments could disrupt our business and harm our financial condition and operating results.

Our success will depend, in part, on our ability to expand our services and grow our business in response to changing technologies, customer demands, and competitive pressures. In some circumstances, we may choose to do so through the acquisition of complementary businesses, teams of employees, and technologies rather than through internal development. The identification of suitable acquisition candidates can be difficult, time-consuming and costly, and we may not be able to successfully complete or integrate identified acquisitions. The risks we face in connection with acquisitions include:

 

diversion of management time and focus from operating our business to addressing acquisition integration challenges;

 

coordination of research and development and sales and marketing functions;

 

retention of key employees from the acquired company;

 

cultural challenges associated with integrating employees from the acquired company into our organization;

59


 

 

integration of the acquired company’s accounting, management information, human resources and other administrative systems, as well as the acquired operations, technology and rights into our offerings, and any unanticipated expenses related to such integration;

 

the need to implement or improve controls, procedures, and policies at a business that prior to the acquisition may have lacked effective controls, procedures and policies;

 

liability for activities of the acquired company before the acquisition, including intellectual property infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities;

 

completing the transaction and achieving the anticipated benefits of the acquisition within the expected timeframe or at all;

 

unanticipated write-offs, expenses, charges or risks associated with the transaction; and

 

litigation or other claims in connection with the acquired company, including claims from terminated employees, customers, former stockholders or other third parties, which may differ from or be more significant than the risks our business faces.

Our failure to address these risks or other problems encountered in connection with our past or future acquisitions and investments could cause us to fail to realize the anticipated benefits of these acquisitions or investments, cause us to incur unanticipated liabilities, and harm our business generally. Future acquisitions could also result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities, amortization expenses, incremental operating expenses or the write-off of goodwill, any of which could harm our financial condition or operating results.

We may require additional capital to support our operations or the growth of our business, and we cannot be certain that this capital will be available on reasonable terms when required, or at all.

On occasion, we may need additional financing to operate or grow our business. Our ability to obtain additional financing, if and when required, will depend on investor and lender demand, our operating performance, the condition of the capital markets and other factors. We cannot guarantee that additional financing will be available to us on favorable terms when required, or at all. If we raise additional funds through the issuance of equity, equity-linked or debt securities, those securities may have rights, preferences or privileges senior to the rights of our Class A common stock, and our existing stockholders may experience dilution. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support the operation or growth of our business could be significantly impaired and our operating results may be harmed.

Financing agreements we are party to or may become party to may contain operating and financial covenants that restrict our business and financing activities.

Our existing credit agreement contains certain operating and financial restrictions and covenants that may restrict our and our subsidiaries’ ability to, among other things, incur indebtedness, grant liens on our assets, make loans investments, consummate certain merger and consolidation transactions, dispose of assets and enter into affiliate transactions, subject in each case to customary exceptions. We are also required to comply with a minimum liquidity covenant and a maximum leverage ratio. These restrictions and covenants, as well as those contained in any future financing agreements that we may enter into, may restrict our ability to finance our operations, engage in, expand or otherwise pursue our business activities and strategies. Our ability to comply with these covenants may be affected by events beyond our control, and breaches of these covenants could result in a default under the credit agreement and any future financial agreements that we may enter into and under other arrangements containing cross-default provisions. If not waived, defaults could cause our outstanding indebtedness under our credit agreement and any future financing agreements that we may enter into to become immediately due and payable, and permit our lenders to terminate their lending commitments and to foreclose upon any collateral securing such indebtedness.

Adverse economic conditions may negatively impact our business.

Our business depends on the overall demand for cloud content management services and on the economic health of our current and prospective customers. The United States and other key international economies have experienced cyclical downturns from time to time that have resulted in a significant weakening of the economy, more limited availability of credit, a reduction in business confidence and activity, and other difficulties that may affect one or more of the industries to which we sell our services. Uncertainty about economic conditions in the United States, Europe and other key markets for our services could cause customers to delay or reduce their information technology spending. This could result in reductions in sales of our services, longer sales cycles, reductions in subscription duration and value, slower adoption of new technologies and increased price competition. Any of these events would likely have an adverse effect on our business, operating results and financial position. In addition, there can be no assurance that cloud content management and collaboration spending levels will increase following any recovery.

60


 

Changes in laws and regulations related to the internet or changes in the internet infrastructure itself, or disruption in access to the internet or critical services on which the internet depends, may diminish the demand for our services, and could have a negative impact on our business.

The future success of our business depends upon the continued use and availability of the internet as a primary medium for commerce, communication and business services. Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting the use of the internet as a commercial medium. The adoption of any laws or regulations that could adversely affect the growth, popularity or use of the internet, including laws or practices limiting internet neutrality, could decrease the demand for, or the usage of, our products and services, increase our cost of doing business, adversely affect our operating results, and require us to modify our services in order to comply with these changes. In addition, government agencies or private organizations may begin to impose taxes, fees or other charges for accessing the internet or commerce conducted via the internet. These laws or charges could limit the growth of internet-related commerce or communications generally, or result in reductions in the demand for internet-based services such as ours.

For example, in December 2017, the Federal Communications Commission voted to repeal the “net neutrality” rules and return to a “light-touch” regulatory framework. However, the repeal has not yet taken effect and a number of parties have already stated their intent to appeal this order; thus, the future impact of such repeal and any challenge thereto remains uncertain. The rules were designed to ensure that all online content is treated the same by internet service providers and other companies that provide broadband services. Should the repeal of net neutrality rules take effect, access to or demand for our services could be hindered, we could incur greater operating expenses, and our business and results of operations.

In addition, the use of the internet and, in particular, the cloud as a business tool could be adversely affected due to delays in the development or adoption of new standards and protocols to handle increased demands of internet activity, security, reliability, cost, ease of use, accessibility, and quality of service. The performance of the internet and its acceptance as a business tool have been adversely affected by “viruses,” “worms”, “denial of service attacks” and similar malicious activity. The internet has also experienced a variety of outages, disruptions and other delays as a result of this malicious activity targeted at critical internet infrastructure. These service disruptions could diminish the overall attractiveness to existing and potential customers of services that depend on the internet and could cause demand for our services to suffer.

We employ third-party software for use in or with our services, and the inability to maintain licenses to this software, or errors in the software, could result in increased costs, or reduced service levels, which would adversely affect our business.

Our services incorporate certain third-party software obtained under open source licenses or licenses from other companies. We anticipate that we will continue to rely on such third-party software and development tools in the future. Although we believe that there are commercially reasonable alternatives to the third-party software we currently license, this may not always be the case, or it may be difficult or costly to replace. In addition, integration of the software used in our services with new third-party software may require significant work and require substantial investment of our time and resources. Also, to the extent that our services depend upon the successful operation of third-party software in conjunction with our software, any undetected errors or defects in this third-party software could prevent the deployment or impair the functionality of our services, delay the introduction of new services introductions, result in a failure of our services, and injure our reputation. For example, we discovered that a bug in a third-party software library we use in our services caused a very small subset of certain files uploaded during a short period of time (from mid-December 2017 to early January 2018) to be stored in a partially-corrupted state. Our use of additional or alternative third-party software would require us to enter into additional license agreements with third parties.

If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.

As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, the Sarbanes-Oxley Act and the listing standards of the New York Stock Exchange (NYSE). We expect that compliance with these rules and regulations will continue to increase our legal, accounting and financial compliance costs, make some activities more difficult, time consuming and costly, and place significant strain on our personnel, systems and resources.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures, and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file with the SEC is properly recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. We are also continuing to improve our internal control over financial reporting. We have expended, and anticipate that we will continue to expend, significant resources in order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting.

61


 

Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business, including increased complexity resulting from our international expansion. Further, weaknesses in our disclosure controls or our internal control over financial reporting may be discovered in the future. Additionally, to the extent that we acquire other businesses, the acquired company may not have a sufficiently robust system of internal controls and we may uncover new deficiencies. Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting could also adversely affect the results of management reports and independent registered public accounting firm audits of our internal control over financial reporting that we are required to include in our periodic reports that we file with the SEC. Ineffective disclosure controls and procedures, and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the market price of our Class A common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the NYSE.

Any failure to maintain effective disclosure controls and internal control over financial reporting could have a material and adverse effect on our business and operating results, and cause a decline in the market price of our Class A common stock.

Failure to comply with anti-bribery, anti-corruption, and anti-money laundering laws could subject us to penalties and other adverse consequences.

We are subject to the Foreign Corrupt Practices Act, or the FCPA, the U.K. Bribery Act and other anti-corruption, anti-bribery and anti-money laundering laws in various jurisdictions both domestic and abroad. In addition to our own sales force, we also leverage third parties to sell our products and services and conduct our business abroad. We and our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and may be held liable for the corrupt or other illegal activities of these third-party business partners and intermediaries, our employees, representatives, contractors, channel partners, and agents, even if we do not explicitly authorize such activities. While we have policies and procedures to address compliance with such laws, we cannot assure you that our employees and agents will not take actions in violation of our policies or applicable law, for which we may be ultimately held responsible. Any violation of the FCPA or other applicable anti-bribery, anti-corruption laws, and anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations, loss of export privileges, severe criminal or civil sanctions, or suspension or debarment from U.S. government contracts, all of which may have an adverse effect on our reputation, business, operating results and prospects.

Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.

As of January 31, 2018, we had U.S. federal net operating loss carryforwards of approximately $624.7 million, state net operating loss carryforwards of approximately $613.7 million, and foreign net operating loss carryforwards of approximately $214.7 million. Under Sections 382 and 383 of Internal Revenue Code of 1986, as amended (Code), if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes, such as research tax credits, to offset its post-change income and taxes may be limited. In general, an “ownership change” occurs if there is a cumulative change in our ownership by “5% shareholders” that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under state tax laws. We have in the past experienced an ownership change which has impacted our ability to fully realize the benefit of these net operating loss carryforwards. If we experience additional ownership changes as a result of future transactions in our stock, then we may be further limited in our ability to use our net operating loss carryforwards and other tax assets to reduce taxes owed on the net taxable income that we earn. Any such limitations on the ability to use our net operating loss carryforwards and other tax assets could adversely impact our business, financial condition and operating results.  On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”). The Tax Act reduces the U.S. federal corporate tax rate from 34% to 21%, imposes a one-time repatriation tax, and numerous other provisions transitioning to a territorial system. The changes included in the Tax Act are broad and complex. The Tax Act contains several base broadening provisions that became effective as of the year ended January 31, 2019 that we do not expect to have a material impact on future earnings due to our NOLs and valuation allowance position. As of October 31, 2018, we have completed our accounting for the effects of tax reform as they relate to the one-time transition tax. We will continue to evaluate the remaining provisional amounts recorded for the year ended January 31, 2019 throughout the remainder of the measurement period.

62


 

Tax laws or regulations could be enacted or changed and existing tax laws or regulations could be applied to us or to our customers in a manner that could increase the costs of our services and adversely impact our business.

The application of federal, state, local and international tax laws to services provided electronically is unclear and continuously evolving. Income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted or amended at any time, such as the Tax Act in the United States, possibly with retroactive effect, and could be applied solely or disproportionately to services provided over the internet. These enactments or amendments could adversely affect our sales activity due to the inherent cost increase the taxes would represent and ultimately result in a negative impact on our operating results and cash flows.

In addition, existing tax laws, statutes, rules, regulations or ordinances could be interpreted or applied adversely to us, possibly with retroactive effect, which could require us or our customers to pay additional tax amounts, as well as require us or our customers to pay fines or penalties, as well as interest for past amounts. If we are unsuccessful in collecting such taxes due from our customers, we could be held liable for such costs, thereby adversely impacting our operating results and cash flows.

We may be subject to additional tax liabilities.

We are subject to income, sales, use, value added and other taxes in the United States and other countries in which we conduct business, and such laws and rates vary by jurisdiction. Certain jurisdictions in which we do not collect sales, use, value added or other taxes on our sales may assert that such taxes are applicable, which could result in tax assessments, penalties and interest, and we may be required to collect such taxes in the future. Significant judgment is required in determining our worldwide provision for income taxes. These determinations are highly complex and require detailed analysis of the available information and applicable statutes and regulatory materials. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical tax practices, provisions and accruals. If we receive an adverse ruling as a result of an audit, or we unilaterally determine that we have misinterpreted provisions of the tax regulations to which we are subject, there could be a material effect on our tax provision, net loss or cash flows in the period or periods for which that determination is made. In addition, liabilities associated with taxes are often subject to an extended or indefinite statute of limitations period. Therefore, we may be subject to additional tax liability (including penalties and interest) for a particular year for extended periods of time.

Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.

Generally accepted accounting principles (GAAP) in the United States are subject to interpretation by the Financial Accounting Standards Board (FASB), the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change. For example, in May 2014, the FASB issued accounting standards update No. 2014-09 (ASC Topic 606), Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under U.S. GAAP which we adopted effective February 1, 2018. In addition, were we to change our critical accounting estimates, including the timing of recognition of subscription revenue and other revenue sources, our results of operations could be significantly impacted. These or other changes in accounting principles could adversely affect our financial results. See Part I, Item 1. Financial Statements—Note 1 for information regarding the effect of new accounting pronouncements on our financial statements. Any difficulties in implementing these pronouncements could cause us to fail to meet our financial reporting obligations, which could result in regulatory discipline and harm investors’ confidence in us.

Risks Related to Ownership of Our Class A Common Stock

Anti-takeover provisions contained in our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law, could impair a takeover attempt.

Our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law contain provisions which could have the effect of rendering more difficult, delaying or preventing an acquisition deemed undesirable by our board of directors. Among other things, our amended and restated certificate of incorporation and amended and restated bylaws include provisions:

 

creating a classified board of directors whose members serve staggered three-year terms;

 

authorizing “blank check” preferred stock, which could be issued by our board of directors without stockholder approval and may contain voting, liquidation, dividend and other rights superior to our common stock;

 

limiting the liability of, and providing indemnification to, our directors and officers;

63


 

 

limiting the ability of our stockholders to call and bring business before special meetings;

 

requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors; and

 

controlling the procedures for the conduct and scheduling of board directors and stockholder meetings.

These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.

As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, which prevents certain stockholders holding more than 15% of our outstanding capital stock from engaging in certain business combinations without approval of the holders of at least two-thirds of our outstanding common stock not held by such stockholder.

Any provision of our amended and restated certificate of incorporation, amended and restated bylaws or Delaware law that has the effect of delaying, preventing or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our capital stock, and could also affect the price that some investors are willing to pay for our Class A common stock.

The market price of our Class A common stock has been and may continue to be volatile, and you could lose all or part of your investment.

The market price of our Class A common stock has been and may continue to be subject to wide fluctuations in response to various factors, some of which are beyond our control and may not be related to our operating performance. For example, from November 1, 2017 through October 31, 2018, the closing price of our Class A common stock ranged from $17.26 per share to $29.01 per share. In addition to the factors discussed in this “Risk Factors” section and elsewhere in this Form 10-Q, factors that could cause fluctuations in the market price of our Class A common stock include the following:

 

price and volume fluctuations in the overall stock market from time to time;

 

volatility in the market prices and trading volumes of technology stocks;

 

changes in operating performance and stock market valuations of other technology companies generally or those in our industry in particular;

 

sales of shares of our Class A common stock by us or our stockholders;

 

failure of securities analysts to maintain coverage and/or to provide accurate consensus results of us, changes in financial estimates by securities analysts who follow us, or our failure to meet these estimates or the expectations of investors;

 

the financial projections we may provide to the public, any changes in those projections or our failure to meet those projections;

 

announcements by us or our competitors of new products or services;

 

the public’s reaction to our press releases, other public announcements and filings with the SEC;

 

rumors and market speculation involving us or other companies in our industry;

 

actual or anticipated changes in our operating results or fluctuations in our operating results;

 

actual or anticipated developments in our business, our competitors’ businesses or the competitive landscape generally;

 

litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors;

 

developments or disputes concerning our intellectual property or other proprietary rights;

 

announced or completed acquisitions of businesses or technologies by us or our competitors;

 

new laws or regulations or new interpretations of existing laws or regulations applicable to our business;

 

changes in accounting standards, policies, guidelines, interpretations or principles;

64


 

 

actions instituted by activist shareholders or others;

 

any significant change in our management; and

 

general economic conditions and slow or negative growth of our markets.

In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

If securities or industry analysts do not publish or cease publishing research or reports about us, our business, our market or our competitors, or if they adversely change their recommendations regarding our Class A common stock, the market price of our Class A common stock and trading volume could decline.

The trading market for our Class A common stock is influenced, to some extent, by the research and reports that securities or industry analysts publish about us, our business, our market or our competitors. If any of the analysts who cover us adversely change their recommendations regarding our Class A common stock or provide more favorable recommendations about our competitors, the market price of our Class A common stock would likely decline. If any of the analysts who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the market price of our Class A common stock or trading volume to decline.

We do not expect to declare any dividends in the foreseeable future.

We do not anticipate declaring any cash dividends to holders of our Class A common stock in the foreseeable future. Consequently, investors may need to rely on sales of our Class A common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase shares of our Class A common stock.

Items 2, 3, 4 and 5 are not applicable and have been omitted.

Item 6. EXHIBITS

The documents listed in the Exhibit Index of this Quarterly Report on Form 10-Q are incorporated by reference or are filed with this Quarterly Report on Form 10-Q, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K).

 

 

65


 

EXHIBIT INDEX

 

Exhibit

  

 

  

Incorporated by Reference

Number

  

Exhibit Description

  

Form

 

File No.

 

Exhibit

 

Filing Date

 

  31.1

  

 

Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

 

 

 

 

  31.2

  

 

Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

  

 

  

 

  

 

  

 

 

  32.1*

  

 

Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

  

 

  

 

  

 

  

 

 

101.INS

  

 

XBRL Instance Document.

  

 

  

 

  

 

  

 

 

101.SCH

  

 

XBRL Taxonomy Schema Linkbase Document.

  

 

  

 

  

 

  

 

 

101.DEF

  

 

XBRL Taxonomy Definition Linkbase Document.

  

 

  

 

  

 

  

 

 

101.CAL

  

 

XBRL Taxonomy Calculation Linkbase Document.

  

 

  

 

  

 

  

 

 

101.LAB

  

 

XBRL Taxonomy Labels Linkbase Document.

  

 

  

 

  

 

  

 

 

101.PRE

  

 

XBRL Taxonomy Presentation Linkbase Document.

  

 

  

 

  

 

  

 

 

*

The certifications attached as Exhibit 32.1 that accompany this Quarterly Report on Form 10-Q, are deemed furnished and not filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Box, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.

66


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: December 6, 2018

 

BOX, INC.

 

By:

 

/s/ Aaron Levie

 

 

Aaron Levie

 

 

Chairman and Chief Executive Officer

 

 

(Principal Executive Officer)

 

By:

 

/s/ Dylan Smith

 

 

Dylan Smith

 

 

Chief Financial Officer

 

 

(Principal Financial Officer)

 

67