10-Q 1 box-10q_20181031.htm 10-Q 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

)