Okta, Inc. 10-K

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Reports of Independent Registered Public Accounting Firm (PCAOB ID: 42 ) 74 Consolidated Balance Sheets 79 Consolidated Statements of Operations 80 Consolidated Statements of Comprehensive Loss 81 Consolidated Statements of Stockholders’ Equity (Deficit) 82 Consolidated Statements of Cash Flows 84 Notes to Consolidated Financial Statements 86 73 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Okta, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Okta, Inc. (the Company) as of January 31, 2022 and 2021, the related consolidated statements of operations, comprehensive loss, stockholders' equity (deficit), and cash flows for each of the three years in the period ended January 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at January 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended January 31, 2022, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of January 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 7, 2022 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. 74 Revenue recognition – Identifying and evaluating terms and conditions in contracts Description of the Matter As explained in Note 2 to the consolidated financial statements, the Company derives revenue from subscription fees and professional services fees. The Company’s arrangements are generally non-cancelable and non-refundable. In addition, the arrangements do not provide customers with the right to take possession of the software and, as a result, are accounted for as service arrangements. Subscription revenue, which includes support, is recognized on a straight-line basis over the non-cancelable contractual term of the arrangement, generally beginning on the date that the Company’s service is made available to the customer. Revenue for the Company’s professional services is recognized as services are performed in proportion to their pattern of transfer. Auditing the Company’s accounting for revenue recognition was challenging, specifically related to the appropriate identification and evaluation of non-standard terms and conditions. For example, certain non-standard terms and conditions required judgment to identify the distinct performance obligations and determine the timing of revenue recognition. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s internal controls over the identification and evaluation of terms and conditions in contracts that impact revenue recognition, including the identification of performance obligations and the determination of the timing of revenue recognition. This included testing relevant controls over the information systems that are used in the initiation, billing and recording of revenue transactions. Among other procedures, on a sample basis, we tested the completeness and accuracy of management’s identification and evaluation of the non-standard terms and conditions in contracts. We also tested amounts recognized pursuant to contractual terms and conditions by examining the relationship between revenue recognized and accounts receivable and related cash collections. Further, we selected a sample of contractual arrangements to test that management had properly assessed the impact of any non-standard terms on the identified performance obligations and timing of revenue recognition. Additionally, to verify completeness of non-standard terms and conditions, we obtained confirmations of terms and conditions for a sample of arrangements with customers. 75 Acquisition of Auth0 – Fair value of technology and customer-related intangible assets Description of the Matter As explained in Note 3 to the consolidated financial statements, the Company completed the acquisition of Auth0, a privately-held, Identity-as-a-Service company during fiscal 2022 for total consideration of $5.7 billion, which was accounted for as a business combination. Auditing the Company's accounting for its acquisition of Auth0 was complex due to the significant estimation required in determining the fair value of developed technology and customer relationship intangible assets, which were valued and recorded at $172.0 million and $140.9 million, respectively. The Company used discounted cash flow models to determine the value of developed technology and customer relationship intangible assets. The significant estimation was primarily due to the judgmental nature of the inputs to the valuation model and the sensitivity of the fair value to certain significant underlying assumptions, in particular, the projections of future revenue, including the impact of obsolescence curves for developed technology assets, expected customer attrition rates and anticipated growth in revenue from acquired customers. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company's controls over its accounting for acquisitions, such as controls over the recognition and measurement of developed technology and customer relationships intangible assets, including the valuation model and underlying assumptions used to develop such estimates. To test the estimated fair value of the developed technology and customer relationship intangible assets, our audit procedures included, among others, involvement of our valuation specialists to assist us in the evaluation of the valuation methodology used by the Company and procedures to test the assumptions used in the valuation, including the completeness and accuracy of the underlying data. We compared the revenue forecast assumptions, including the impact of technology obsolescence curves, expected customer attrition rates and anticipated growth in revenue from acquired customers, to current industry, market and economic trends, and to historical results of the acquired business and the Company. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2013. San Jose, California March 7, 2022 76 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Okta, Inc. Opinion on Internal Control Over Financial Reporting We have audited Okta, Inc.’s internal control over financial reporting as of January 31, 2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Okta, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of January 31, 2022, based on the COSO criteria. As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Auth0, Inc. which is included in the 2022 consolidated financial statements of the Company and constituted 2% of consolidated total assets and 11% of consolidated revenue for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Auth0, Inc. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of January 31, 2022 and 2021, the related consolidated statements of operations, comprehensive loss, stockholders' equity (deficit), and cash flows for each of the three years in the period ended January 31, 2022, and the related notes and our report dated March 7, 2022 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 77 /s/ Ernst & Young LLP San Jose, California March 7, 2022 78 OKTA, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except per share data) As of January 31, 2022 2021 Assets Current assets: Cash and cash equivalents $ 260,134 $ 434,607 Short-term investments 2,241,657 2,121,584 Accounts receivable, net of allowances of $ 4,359 and $ 3,451 397,509 194,818 Deferred commissions 74,728 45,949 Prepaid expenses and other current assets 66,605 81,609 Total current assets 3,040,633 2,878,567 Property and equipment, net 65,488 62,783 Operating lease right-of-use assets 147,940 149,604 Deferred commissions, noncurrent 191,029 108,555 Intangible assets, net 316,968 27,009 Goodwill 5,401,343 48,023 Other assets 42,294 24,256 Total assets $ 9,205,695 $ 3,298,797 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 20,203 $ 8,557 Accrued expenses and other current liabilities 89,315 53,729 Accrued compensation 143,805 71,906 Convertible senior notes, net 16,194 908,684 Deferred revenue 973,289 502,738 Total current liabilities 1,242,806 1,545,614 Convertible senior notes, net, noncurrent 1,815,714 857,387 Operating lease liabilities, noncurrent 170,611 179,518 Deferred revenue, noncurrent 22,933 10,860 Other liabilities, noncurrent 31,775 11,375 Total liabilities 3,283,839 2,604,754 Commitments and contingencies (Note 11) Stockholders’ equity: Preferred stock, par value $ 0.0001 per share; 100,000 shares authorized, no shares issued and outstanding as of January 31, 2022 and 2021 — — Class A Common stock, par value $ 0.0001 per share; 1,000,000 shares authorized; 149,624 and 122,824 shares issued and outstanding as of January 31, 2022 and 2021, respectively 15 12 Class B Common stock, par value $ 0.0001 per share; 120,000 shares authorized; 6,978 and 8,159 shares issued and outstanding as of January 31, 2022 and 2021, respectively 1 1 Additional paid-in capital 7,749,716 1,656,096 Accumulated other comprehensive income ( 12,009 ) 5,390 Accumulated deficit ( 1,815,867 ) ( 967,456 ) Total stockholders’ equity 5,921,856 694,043 Total liabilities and stockholders’ equity $ 9,205,695 $ 3,298,797 See Notes to Consolidated Financial Statements. 79 OKTA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) Year Ended January 31, 2022 2021 2020 Revenue Subscription $ 1,249,210 $ 796,613 $ 552,688 Professional services and other 50,991 38,811 33,379 Total revenue 1,300,201 835,424 586,067 Cost of revenue Subscription 329,131 170,095 116,445 Professional services and other 67,274 47,586 42,937 Total cost of revenue 396,405 217,681 159,382 Gross profit 903,796 617,743 426,685 Operating expenses Research and development 469,259 222,826 159,269 Sales and marketing 770,326 427,350 340,356 General and administrative 431,314 171,726 112,892 Total operating expenses 1,670,899 821,902 612,517 Operating loss ( 767,103 ) ( 204,159 ) ( 185,832 ) Interest expense ( 92,182 ) ( 72,660 ) ( 27,017 ) Interest income and other, net 9,768 12,891 17,089 Loss on early extinguishment and conversion of debt ( 179 ) ( 2,263 ) ( 14,572 ) Interest and other, net ( 82,593 ) ( 62,032 ) ( 24,500 ) Loss before provision for (benefit from) income taxes ( 849,696 ) ( 266,191 ) ( 210,332 ) Provision for (benefit from) income taxes ( 1,285 ) 141 ( 1,419 ) Net loss $ ( 848,411 ) $ ( 266,332 ) $ ( 208,913 ) Net loss per share, basic and diluted $ ( 5.73 ) $ ( 2.09 ) $ ( 1.78 ) Weighted-average shares used to compute net loss per share, basic and diluted 148,036 127,212 117,221 See Notes to Consolidated Financial Statements. 80 OKTA, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands) Year Ended January 31, 2022 2021 2020 Net loss $ ( 848,411 ) $ ( 266,332 ) $ ( 208,913 ) Other comprehensive income (loss): Net change in unrealized gains or losses on available-for-sale securities ( 13,713 ) 779 1,220 Foreign currency translation adjustments ( 3,686 ) 3,719 ( 9 ) Other comprehensive income (loss) ( 17,399 ) 4,498 1,211 Comprehensive loss $ ( 865,810 ) $ ( 261,834 ) $ ( 207,702 ) See Notes to Consolidated Financial Statements. 81 OKTA, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (dollars in thousands) Class A Common Stock Class B Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity (Deficit) Shares Amount Shares Amount Balances as of January 31, 2019 101,093,322 10 11,059,181 1 744,896 ( 319 ) ( 492,211 ) 252,377 Issuance of common stock upon exercise of stock options and other activity, net 5,323,410 1 100,007 — 45,731 — — 45,732 Issuance of common stock under employee stock purchase plan 322,795 — — — 18,767 — — 18,767 Issuance of common stock for settlement of RSUs 1,716,222 — — — — — — — Issuance of common stock for bonus settlement 34,600 — — — 2,809 — — 2,809 Issuance of common stock pursuant to charitable donation 15,000 — — — 1,746 — — 1,746 Conversion of Class B common stock to Class A common stock 2,511,409 — ( 2,511,409 ) — — — — — Equity component of convertible senior notes, net of issuance costs — — — — 217,347 — — 217,347 Equity component of early extinguishment of convertible senior notes 2,973,311 — — — ( 26,713 ) — — ( 26,713 ) Proceeds from hedges related to convertible senior notes — — — — 405,851 — — 405,851 Payments for warrants related to convertible senior notes — — — — ( 358,622 ) — — ( 358,622 ) Purchases of capped calls related to convertible senior notes — — — — ( 74,094 ) — — ( 74,094 ) Stock-based compensation — — — — 127,846 — — 127,846 Other comprehensive income — — — — — 1,211 — 1,211 Net loss — — — — — — ( 208,913 ) ( 208,913 ) Balances as of January 31, 2020 113,990,069 $ 11 8,647,779 $ 1 $ 1,105,564 $ 892 $ ( 701,124 ) $ 405,344 82 Class A Common Stock Class B Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity (Deficit) Shares Amount Shares Amount Issuance of common stock upon exercise of stock options and other activity, net 4,113,825 1 254,858 — 45,619 — — 45,620 Issuance of common stock under employee stock purchase plan, net of cancellations 247,131 — — — 25,911 — — 25,911 Issuance of common stock for settlement of RSUs 2,109,393 — — — — — — — Issuance of common stock for bonus settlement 85,701 — — — 9,818 — — 9,818 Issuance of common stock pursuant to charitable donation 42,500 — — — 9,292 — — 9,292 Conversion of Class B common stock to Class A common stock 743,190 — ( 743,190 ) — — — — — Exercise of hedges related to convertible senior notes ( 167,946 ) — — — — — — — Equity component of convertible senior notes, net of issuance costs — — — — 306,220 — — 306,220 Equity component of early extinguishment and conversion of convertible senior notes 1,660,104 — — — 70,493 — — 70,493 Proceeds from hedges related to convertible senior notes — — — — 195,046 — — 195,046 Payments for warrants related to convertible senior notes — — — — ( 175,399 ) — — ( 175,399 ) Purchases of capped calls related to convertible senior notes — — — — ( 133,975 ) — — ( 133,975 ) Stock-based compensation — — — — 197,507 — — 197,507 Other comprehensive income — — — — — 4,498 — 4,498 Net loss — — — — — — ( 266,332 ) ( 266,332 ) Balances as of January 31, 2021 122,823,967 $ 12 8,159,447 $ 1 $ 1,656,096 $ 5,390 $ ( 967,456 ) $ 694,043 Issuance of common stock in connection with business combinations 19,190,297 2 — — 5,409,342 — — 5,409,344 Issuance of common stock in connection with business combinations subject to future vesting 1,269,008 — — — — — — — Issuance of common stock upon exercise of stock options and other activity, net 2,552,466 1 1,673 — 53,534 — — 53,535 Issuance of common stock under employee stock purchase plan, net of cancellations 185,707 — — — 35,568 — — 35,568 Issuance of common stock for settlement of RSUs 2,294,313 — — — ( 13 ) — — ( 13 ) Issuance of common stock pursuant to charitable donation 30,000 — — — 7,238 — — 7,238 Conversion of Class B common stock to Class A common stock 1,182,628 — ( 1,182,628 ) — — — — — Equity component of early extinguishment and conversion of convertible senior notes 475,915 — — — 20,776 — — 20,776 Proceeds from hedges related to convertible senior notes ( 380,088 ) — — — 2 — — 2 Stock-based compensation — — — — 567,173 — — 567,173 Other comprehensive income — — — — — ( 17,399 ) — ( 17,399 ) Net loss — — — — — — ( 848,411 ) ( 848,411 ) Balances as of January 31, 2022 149,624,213 $ 15 6,978,492 $ 1 $ 7,749,716 $ ( 12,009 ) $ ( 1,815,867 ) $ 5,921,856 See Notes to Consolidated Financial Statements. 83 OKTA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended January 31, 2022 2021 2020 Cash flows from operating activities: Net loss $ ( 848,411 ) $ ( 266,332 ) $ ( 208,913 ) Adjustments to reconcile net loss to net cash provided by operating activities: Stock-based compensation 565,480 196,181 126,624 Depreciation, amortization and accretion 107,612 36,865 17,815 Amortization of debt discount and issuance costs 86,461 68,424 25,892 Amortization of deferred commissions 57,177 39,661 28,588 Deferred income taxes ( 6,157 ) ( 1,182 ) ( 2,253 ) Non-cash charitable contributions 7,238 9,292 1,746 Loss on early extinguishment and conversion of debt 179 2,263 14,572 (Gain) loss on strategic investments ( 7,609 ) 628 ( 130 ) Other, net 1,051 4,909 119 Changes in operating assets and liabilities: Accounts receivable ( 174,817 ) ( 66,373 ) ( 37,515 ) Deferred commissions ( 170,577 ) ( 81,016 ) ( 61,224 ) Prepaid expenses and other assets ( 6,758 ) ( 13,174 ) ( 4,080 ) Operating lease right-of-use assets 22,856 19,053 12,951 Accounts payable 6,764 4,081 1,689 Accrued compensation 50,309 44,157 23,034 Accrued expenses and other liabilities 21,391 5,527 9,972 Operating lease liabilities ( 24,455 ) ( 17,150 ) ( 9,716 ) Deferred revenue 416,385 142,148 116,432 Net cash provided by operating activities 104,119 127,962 55,603 Cash flows from investing activities: Capitalization of internal-use software costs ( 4,336 ) ( 4,159 ) ( 3,888 ) Purchases of property and equipment ( 12,310 ) ( 13,083 ) ( 15,442 ) Purchases of securities available for sale and other ( 1,846,709 ) ( 2,029,030 ) ( 999,387 ) Proceeds from maturities and redemption of securities available for sale 1,482,033 535,123 356,277 Proceeds from sales of securities available for sale and other 229,798 206,129 27,271 Payments for business acquisitions, net of cash acquired ( 215,175 ) — ( 44,283 ) Purchase of intangible assets ( 113 ) ( 126 ) ( 8,589 ) Net cash used in investing activities ( 366,812 ) ( 1,305,146 ) ( 688,041 ) Cash flows from financing activities: Proceeds from issuance of convertible senior notes, net of issuance costs — 1,134,841 1,040,660 Payments for repurchases and conversions of convertible senior notes ( 26 ) ( 446 ) ( 224,414 ) Proceeds from hedges related to convertible senior notes 2 195,046 405,851 Payments for warrants related to convertible senior notes — ( 175,399 ) ( 358,622 ) Purchases of capped calls related to convertible senior notes — ( 133,975 ) ( 74,094 ) Proceeds from stock option exercises, net of repurchases 53,522 45,620 45,363 Proceeds from shares issued in connection with employee stock purchase plan 35,568 25,911 18,767 Other, net — — ( 126 ) Net cash provided by financing activities 89,066 1,091,598 853,385 Effects of changes in foreign currency exchange rates on cash, cash equivalents and restricted cash ( 2,347 ) 2,263 ( 209 ) Net (decrease) increase in cash, cash equivalents and restricted cash ( 175,974 ) ( 83,323 ) 220,738 Cash, cash equivalents and restricted cash at beginning of year 448,630 531,953 311,215 Cash, cash equivalents and restricted cash at end of year $ 272,656 $ 448,630 $ 531,953 84 Year Ended January 31, 2022 2021 2020 Supplementary cash flow disclosure: Cash paid during the period for: Interest $ 5,704 $ 3,759 $ 862 Income taxes 3,116 978 1,123 Non-cash investing and financing activities: Issuance of common stock and value of equity awards assumed in connection with business combination 5,409,344 — — Issuance of common stock for repurchases and conversions of convertible senior notes 126,144 307,910 380,406 Benefit from exercise of hedges related to convertible senior notes 92,097 37,076 — Common stock issued as charitable contribution 7,238 9,292 1,746 Operating lease right-of-use assets exchanged for lease liabilities 21,518 45,611 16,832 Issuance of common stock for bonus settlement — 9,818 2,809 Reconciliation of cash, cash equivalents, and restricted cash within the consolidated balance sheets to the amounts shown in the statements of cash flows above: Cash and cash equivalents $ 260,134 $ 434,607 $ 520,048 Restricted cash, current included in prepaid expenses and other current assets 5,012 4,553 467 Restricted cash, noncurrent included in other assets 7,510 9,470 11,438 Total cash, cash equivalents and restricted cash $ 272,656 $ 448,630 $ 531,953 See Notes to Consolidated Financial Statements. 85 OKTA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Overview and Basis of Presentation Description of Business Okta, Inc. (the “Company”) is the leading independent identity provider. The Okta Identity Cloud enables the Company’s customers to securely connect the right people to the right technologies and services at the right time. The Company was incorporated in January 2009 as Saasure Inc., a California corporation, and was later reincorporated in April 2010 under the name Okta, Inc. as a Delaware corporation. The Company is headquartered in San Francisco, California. Basis of Presentation and Principles of Consolidation The accompanying consolidated financial statements, which include the accounts of the Company and its wholly owned subsidiaries, have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"). All intercompany balances and transactions have been eliminated in consolidation. The consolidated financial statements include the results of operations for acquired businesses from their acquisition dates to January 31, 2022. See Note 3 for additional details. The Company’s fiscal year ends on January 31. References to fiscal 2022, for example, refer to the fiscal year ended January 31, 2022. Certain reclassifications of components of prior period operating cash flows have been made in the consolidated statements of cash flows to conform to the current period presentation. These reclassifications had no impact on total operating cash flows as previously reported. Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. The Company bases its estimates on historical experience and on other assumptions that its management believes are reasonable under the circumstances. Actual results could vary from those estimates. The Company’s most significant estimates include the SSP for each distinct performance obligation included in customer contracts with multiple performance obligations, the determination of the period of benefit for deferred commissions, the determination of the effective interest rate of the liability components of its convertible senior notes, the determination of the incremental borrowing rate used for operating lease liabilities, the valuation of deferred income tax assets, the valuation of goodwill and acquired intangible assets, including their useful lives and the valuation of certain equity awards assumed. In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic, which has spread across the globe. The Company considered the impact of COVID-19 on the assumptions and estimates used and determined that there were no material adverse impacts on the consolidated financial statements for the years ended January 31, 2022 and 2021. As events continue to evolve and additional information becomes available, the Company’s assumptions and estimates may change materially in future periods. Foreign Currency The functional currencies of the Company’s foreign subsidiaries are the respective local currencies. Translation adjustments arising from the use of differing exchange rates from period to period are included in accumulated other comprehensive loss within the consolidated statements of redeemable convertible preferred stock and stockholders’ equity (deficit). Foreign currency transaction gains and losses are included in other expense, net in the consolidated statements of operations and were not material for the years ended January 31, 2022, 2021 or 2020. All assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the exchange rate on the balance sheet date. Revenue and expenses are translated at the average exchange rate during the period, and equity balances are translated using historical exchange rates. 86 2. Summary of Significant Accounting Policies Segment Information The Company operates in a single operating segment. The Company’s chief operating decision maker is its chief executive officer, who reviews financial information presented on a consolidated basis for purposes of making operating decisions, assessing financial performance and allocating resources. Revenue Recognition The Company derives revenue from subscription fees (which include support fees) and professional services fees. The Company sells subscriptions to its platform through arrangements that are generally one to five years in length. The Company’s arrangements are generally non-cancellable and non-refundable. Furthermore, if a customer reduces the contracted usage or service level, the customer has no right of refund. The Company’s subscription arrangements do not provide customers with the right to take possession of the software supporting the platform and, as a result, are accounted for as service arrangements. This revenue recognition policy is consistent for sales generated directly with customers and sales generated indirectly through channel partners. The Company determines 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; and • Recognition of revenue when, or as, the Company satisfies a performance obligation. Subscription Revenue Subscription revenue, which includes support, is recognized on a straight-line basis over the non-cancellable contractual term of the arrangement, generally beginning on the date that the Company’s service is made available to the customer. Professional Services Revenue The Company’s professional services principally consist of customer-specific requests for application integrations, user interface enhancements and other customer-specific requests. Revenue for the Company’s professional services is recognized as services are performed in proportion to their pattern of transfer. Contracts with Multiple Performance Obligations Some of the Company’s contracts with customers contain multiple performance obligations. For these contracts, the Company accounts for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative SSP basis. The Company determines SSP based on observable, if available, prices for those related services when sold separately. When such observable prices are not available, the Company determines SSP based on overarching pricing objectives and strategies, taking into consideration market conditions and other factors, including customer size, volume purchased, market and industry conditions, product-specific factors and historical sales of the deliverables. Deferred Revenue Deferred revenue consists primarily of payments received and accounts receivable recorded in advance of revenue recognition under the Company’s subscription and support services and professional services arrangements. The Company primarily invoices its customers for its subscription services arrangements annually in advance. The Company’s payment terms generally provide that customers pay the invoiced portion of the total arrangement fee within 30 days of the invoice date. Amounts anticipated to be recognized within one year of the balance sheet date are recorded as deferred revenue, current; the remaining portion is recorded as deferred revenue, noncurrent in the consolidated balance sheets. 87 Deferred Commissions Sales commissions earned by the Company’s sales force are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions for new revenue contracts, including incremental sales to existing customers, are deferred and then amortized on a straight-line basis over a period of benefit, which the Company has determined to be generally five years . The Company determined the period of benefit by taking into consideration the terms of its customer contracts, its technology and other factors. Sales commissions for renewal contracts (which are not considered commensurate with sales commissions for new revenue contracts and incremental sales to existing customers) are deferred and then amortized on a straight-line basis over the related period of benefit, which is generally two years . Amortization expense is included in sales and marketing expenses in the accompanying consolidated statements of operations. Sales commissions capitalized as contract costs totaled $ 170.7 million and $ 81.0 million in the years ended January 31, 2022 and 2021, respectively. Amortization of contract costs was $ 57.2 million, $ 39.7 million and $ 28.6 million for the years ended January 31, 2022, 2021 and 2020, respectively. There was no impairment loss in relation to the costs capitalized. Cost of Revenue Costs of revenue primarily consist of costs related to providing the Company’s cloud-based platform to its customers, including third-party hosting fees, amortization of capitalized internal-use software and finite-lived purchased developed technology, customer support, other employee-related expenses for security, technical operations and professional services staff, and allocated overhead costs. Cash, Cash Equivalents and Restricted Cash Cash and cash equivalents consist of cash on hand and highly liquid investments with original maturities of three months or less from the date of purchase. Cash equivalents generally consist of investments in money market funds. The fair market value of cash equivalents approximated their carrying value as of January 31, 2022 and 2021. As of January 31, 2022 and 2021, the Company's long-term restricted cash balance was $ 7.5 million and $ 9.5 million, respectively, primarily related to letters of credit for its facility lease agreements. Short-Term Investments The Company’s short-term investments comprise of U.S. treasury securities and corporate debt securities. The Company determines the appropriate classification of its short-term investments at the time of purchase and reevaluates such designation at each balance sheet date. The Company has classified and accounted for its short-term investments as available-for-sale securities as the Company may sell these securities at any time for use in its current operations or for other purposes, even prior to maturity. As a result, short-term investments, including securities with stated maturities beyond twelve months, are classified within current assets in the consolidated balance sheets. Available-for-sale securities are recorded at fair value each reporting period and are periodically evaluated for unrealized losses. For unrealized losses in securities that the Company intends to hold and will not more likely than not be required to sell before recovery, the Company further evaluates whether declines in fair value below amortized cost are due to credit or non-credit related factors. The Company considers credit related impairments to be changes in value that are driven by a change in the creditor’s ability to meet its payment obligations, and records an allowance and recognizes a corresponding loss in interest income and other, net when the impairment is incurred. Unrealized non-credit related losses and unrealized gains are reported as a separate component of accumulated other comprehensive loss in the consolidated balance sheets until realized. Realized gains and losses are determined based on the specific identification method and are reported in interest income and other, net in the consolidated statements of operations. Strategic Investments The Company's strategic investments consist of equity investments in privately held companies and are included in Other assets on the consolidated balance sheets. Investments in privately held companies without readily determinable fair values in which the Company does not own a controlling interest or have significant 88 influence over are measured using the measurement alternative. In applying the measurement alternative, the Company adjusts the carrying values of strategic investments based on observable price changes from orderly transactions for identical or similar investments of the same issuer. Additionally, the Company evaluates its strategic investments at least quarterly for impairment. Adjustments and impairments are recorded in Interest and other, net on the consolidated statements of operations. In determining the estimated fair value of its strategic investments in privately held companies, the Company uses the most recent data available to the Company. Valuations of privately held securities are inherently complex due to the lack of readily available market data and require the use of judgment. The determination of whether an orderly transaction is for an identical or similar investment requires significant Company judgment. In its evaluation, the Company considers factors such as differences in the rights and preferences of the investments and the extent to which those differences would affect the fair values of those investments. The Company’s impairment analysis encompasses an assessment of both qualitative and quantitative factors including the investee's financial metrics, market acceptance of the investee's product or technology, general market conditions and liquidity considerations. Accounts Receivable and Allowances Accounts receivable are recorded at the invoiced amount, net of allowances. These allowances are based on the Company’s assessment of the collectibility of accounts by considering the age of each outstanding invoice, the collection history of each customer, and an evaluation of current expected risk of credit loss based on current economic conditions and reasonable and supportable forecasts of future economic conditions over the life of the receivable. We assess collectibility by reviewing accounts receivable on an aggregated basis where similar characteristics exist and on an individual basis when we identify specific customers with collectibility issues. Amounts deemed uncollectible are recorded as an allowance in the consolidated balance sheets with an offsetting decrease in deferred revenue or a charge to general and administrative expense in the consolidated statements of operations. Property and Equipment Property and equipment, net, is stated at cost less accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the respective assets. Repairs and maintenance costs are expensed as incurred. The useful lives of property and equipment are as follows: Useful lives Capitalized internal-use software costs 3 years Computers and equipment 3 years Furniture and fixtures 7 years Leasehold improvements Shorter of estimated useful life or remaining lease term Business Combinations When the Company acquires a business, the purchase price is allocated to the net tangible and identifiable intangible assets acquired based on their estimated fair values. Any residual purchase price is recorded as goodwill. The allocation of the purchase price requires management to make significant estimates in determining the fair values of assets acquired and liabilities assumed, especially with respect to intangible assets. These estimates can include, but are not limited to: • future expected cash flows from subscription contracts, professional services contracts, other customer contracts and acquired developed technologies; • person hours required in recreating certain acquired technologies; • historical and expected customer attrition rates and anticipated growth in revenue from acquired customers; • royalty rates applied to acquired developed technology platforms and other intangible assets; • obsolescence curves and other useful life assumptions, such as the period of time and intended use of acquired intangible assets in the Company’s product offerings; 89 • discount rates; • uncertain tax positions and tax-related valuation allowances; and • fair value of assumed equity awards. These estimates are inherently uncertain and unpredictable, and unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results. During the measurement period, which may be up to one year from the acquisition date, adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed may be recorded, with the corresponding offset to goodwill. The Company continues to collect information and reevaluates these estimates and assumptions quarterly and records any adjustments to the Company's preliminary estimates to goodwill provided that the Company is within the measurement period. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations. Goodwill and Other Long-Lived Assets The excess of the purchase price over the estimated fair value of net assets of businesses acquired in a business combination is recognized as goodwill. Goodwill is tested for impairment annually on November 1 st or more frequently if certain indicators are present. Long-lived assets, such as property and equipment and finite-lived intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount to the estimated undiscounted future cash flows expected to be generated. If the carrying amount exceeds the undiscounted cash flows, the assets are determined to be impaired and an impairment charge is recognized as the amount by which the carrying amount exceeds its fair value. The Company amortizes intangible assets with finite lives on a straight-line basis over their estimated useful lives in cost of revenue in the consolidated statements of operations. Operating Leases and Incremental Borrowing Rate The Company leases office space under operating leases with expiration dates through 2029. The Company determines whether an arrangement constitutes a lease and records lease liabilities and right-of-use assets on its consolidated balance sheets at lease commencement. Lease liabilities are measured based on the present value of the total lease payments not yet paid, discounted based on the more readily determinable of either the rate implicit in the lease or the Company’s incremental borrowing rate, which is the estimated rate the Company would be required to pay for a collateralized borrowing equal to the total lease payments over the term of the lease. Lease liabilities due within twelve months are included within accrued expenses and other current liabilities on the Company's consolidated balance sheet. The estimation of the incremental borrowing rate is based on an estimate of the Company's unsecured borrowing rate for its Notes, adjusted for tenor and collateralized security features. Right-of-use assets are measured based on the corresponding lease liability adjusted for (i) payments made to the lessor at or before the commencement date, (ii) initial direct costs incurred and (iii) tenant incentives received, incurred or payable under the lease. Recognition of rent expense begins when the lessor makes the underlying asset available to the Company. The Company does not assume renewals or early terminations of its leases unless it is reasonably certain to exercise these options at commencement and does not allocate consideration between lease and non-lease components. For leases with a lease term of 12 months or less ("short-term leases"), the Company records rent expense in its consolidated statements of operations on a straight-line basis over the lease term and records variable lease payments as incurred. 90 Convertible Senior Notes The Company accounts for the issuance of convertible senior notes in accordance with FASB ASC 470-20, Debt with Conversion and Other Options. Pursuant to ASC 470-20, as the Notes have a net settlement feature and may be settled wholly or partially in cash upon conversion, the Company is required to separately account for the liability (debt) and equity (conversion option) components of the instrument. The carrying amount of the liability component is computed by estimating the fair value of a similar liability without the conversion option using income and market-based approaches. For the income-based approach, the Company uses a convertible bond pricing model that includes several assumptions such as volatility, the risk-free rate, and observable trading activity for the Company's existing Notes. For the market-based approach, the Company observes the price of derivative instruments purchased in conjunction with our convertible senior note issuances or the Company evaluates issuances of convertible debt securities by other companies with similar credit risk ratings at the time of issuance. The amount of the equity component is then calculated by deducting the fair value of the liability component from the principal amount of the instrument. This difference represents a debt discount that is amortized to interest expense over the respective terms of the Notes using an effective interest rate method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. In accounting for the issuance costs related to the Notes, the allocation of issuance costs incurred between the liability and equity components were based on their relative values. Similarly, in accordance with ASC 470-20, transactions involving contemporaneous exchanges of cash between the same debtor and creditor in connection with the issuance of a new debt obligation and satisfaction of an existing debt obligation by the debtor should be evaluated as a modification or an extinguishment depending on whether the exchange is determined to have substantially different terms. When the exchange is deemed to have substantially different terms due to a significant difference between the value of the conversion option immediately prior to and after the exchange, the transaction is accounted for as a debt extinguishment. Pursuant to ASC 470-20, total consideration for the satisfaction of an existing debt obligation is separated into liability and equity components by estimating the fair value of a similar liability without a conversion option and assigning the residual value to the equity component. The effective interest rate used to estimate the fair value of the liability component is based on the income and market based approaches used to determine the effective interest rate of the new debt obligation, adjusted for the remaining tenor of the extinguished debt. The difference between the fair value and the amortized carrying value of the extinguished debt, net of the proportionate amounts of unamortized debt discount and remaining unamortized debt issuance costs, is recorded as a gain or loss on extinguishment. Advertising Expenses Advertising costs are expensed as incurred. Advertising expense was $ 78.9 million, $ 33.1 million, and $ 17.0 million for the years ended January 31, 2022, 2021 and 2020. Income Taxes The Company accounts for income taxes in accordance with the liability method of accounting for income taxes. Under this method, the Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. The Company records a valuation allowance to reduce its deferred tax assets to the net amount that the Company believes is more likely than not to be realized. In assessing the need for a valuation allowance, the Company has considered all positive and negative evidence, including its historical levels of income, expectations of future taxable income and ongoing tax planning strategies. Because of the uncertainty of the realization of the U.S. deferred tax assets, the Company has recorded a full valuation allowance against its U.S. deferred tax assets. Realization of its deferred tax assets is dependent primarily upon future U.S. taxable income. The Company recognizes and measures tax benefits from uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken by determining if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained in an audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the 91 largest amount that is more than 50% likely to be realized upon ultimate settlement. Significant judgment is required to evaluate uncertain tax positions. Although the Company believes that it has adequately reserved for its uncertain tax positions, it can provide no assurance that the final tax outcome of these matters will not be materially different. The Company evaluates its uncertain tax position on a regular basis and evaluations are based on a number of factors, including changes in facts and circumstances, changes in tax law, correspondence with tax authorities during the course of an audit and effective settlement of audit issues. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact on the Company’s financial condition and results of operations. The provision for income taxes includes the effects of any accruals that the Company believes are appropriate, as well as the related net interest and penalties. Concentrations of Risk and Significant Customers The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments and accounts receivable. Cash and cash equivalents and short-term investments are currently held in three financial institutions and, at times, may exceed federally insured limits. As of January 31, 2022 and 2021 and for each of the three years ended January 31, 2022, no single customer represented greater than 10% of accounts receivable or greater than 10% of revenue, respectively. In order to reduce the risk of downtime of the Company’s subscription services, the Company uses data center facilities operated by a third-party located in Virginia, Oregon, Ohio, Germany, Ireland, Singapore, Sydney and Japan. The Company has internal procedures to restore services in the event of disaster at any of its current data center facilities. Even with these procedures for disaster recovery in place, the Company’s subscription services could be significantly interrupted during the time period following a disaster at one of its sites and the subsequent restoration of services at another site. Geographical Information Revenue by location is determined by the billing address of the customer. The following table sets forth revenue by geographic area (in thousands): Year Ended January 31, 2022 2021 2020 United States $ 1,036,389 $ 701,635 $ 494,529 International 263,812 133,789 91,538 Total $ 1,300,201 $ 835,424 $ 586,067 Other than the United States, no individual country exceeded 10% of total revenue for the years ended January 31, 2022, 2021 and 2020. Property and equipment by geographic location is based on the location of the legal entity that owns the asset. As of January 31, 2022 and 2021, substantially all of the Company’s property and equipment was located in the United States. Net Loss per Share The Company computes basic and diluted net loss per share attributable to common stockholders in conformity with the two-class method required for participating securities. Under the two-class method, basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase, without consideration for potentially dilutive securities as they do not share in losses. The diluted net loss per share attributable to common stockholders is computed giving effect to all potential dilutive common stock equivalents outstanding for the period. For purposes of this calculation, options to purchase common stock, unvested restricted stock units ("RSUs") purchase rights issued under the 2017 Employee Stock Purchase Plan shares subject to repurchase from early exercised options, unvested common stock and restricted stock issued in connection with certain business combinations, convertible senior notes and warrants are considered 92 common stock equivalents but have been excluded from the calculation of diluted net loss per share attributable to common stockholders as their effect is antidilutive. Since the Company's initial public offering, Class A and Class B common stock are the only outstanding equity of the Company. The rights of the holders of Class A and Class B common stock are identical, except with respect to voting and conversion rights. See Note 15 for additional details. Recently Issued Accounting Pronouncements Not Yet Adopted In August 2020, the FASB issued Accounting Standards Update (“ASU”) No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Among other changes, ASU 2020-06 removes from GAAP the liability and equity separation model for convertible instruments with a cash conversion feature, and as a result, after adoption, entities will no longer separately present in equity an embedded conversion feature for such debt. Similarly, the embedded conversion feature will no longer be amortized into income as interest expense over the life of the instrument. Instead, entities will account for a convertible debt instrument wholly as debt unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC Topic 815, Derivatives and Hedging, or (2) a convertible debt instrument was issued at a substantial premium. Additionally, ASU 2020-06 requires the application of the if-converted method to calculate the impact of convertible instruments on diluted earnings per share, which is consistent with the Company’s accounting treatment under the current standard. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021. The Company will adopt ASU 2020-06 effective February 1, 2022, using the modified retrospective method. In the consolidated balance sheets the adoption of the new standard is estimated to result in an increase of approximately $ 372 million to the total carrying value of the Company’s convertible senior notes, a decrease of approximately $ 527 million to additional paid-in capital and a cumulative-effect adjustment of approximately $ 155 million to the beginning balance of accumulated deficit as of February 1, 2022. In October 2021, the FASB issued ASU No. 2021-08 Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”), which requires entities to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC Topic 606, Revenue from Contracts with Customers, in order to align the recognition of a contract liability with the definition of a performance obligation. ASU 2021-08 is effective for interim and annual periods beginning after December 15, 2022, on a prospective basis, with early adoption permitted. The Company has elected to early adopt this standard effective February 1, 2022, with no material impact to its consolidated financial statements and related disclosures. 93 3. Business Combinations Acquisition of Auth0 On May 3, 2021, the Company acquired all outstanding shares of privately-held Auth0, an Identity-as-a-Service company. The Company expects to combine Auth0’s developer-centric identity solution with the Company’s Okta Identity Cloud to drive synergies, product options and value for current and future customers. The acquisition date fair value of the consideration transferred for Auth0 was approximately $ 5,671.0 million, which consisted of the following (in thousands): Estimated Fair Value Cash $ 257,010 Common stock issued 5,175,623 Fair value of outstanding employee equity awards assumed 238,389 Total consideration $ 5,671,022 Cash consideration of $ 257.0 million includes $ 3.8 million held back as partial security for post-closing true-up adjustments as well as indemnification claims made within one year of the acquisition date. Approximately 19.2 million shares of common stock valued at $ 5,175.6 million were issued to selling stockholders, which includes approximately 1.1 million shares valued at $ 294.6 million held back as partial security for post-closing true-up adjustments as well as any indemnification claims made within one year of the acquisition date. The Company entered into revesting agreements with Auth0’s founders pursuant to which approximately 1.2 million additional shares of Okta’s Class A common stock issued to the founders as of the closing date will vest over three years . The $ 332.1 million fair value of the unvested restricted stock is not included as purchase consideration above, as it has a post-combination service requirement and will be accounted for separately from the business combination as stock compensation expense. The Company issued replacement equity awards with a fair value of $ 655.1 million, of which $ 238.4 million was allocated to the purchase consideration as it is attributable to pre-combination services rendered and $ 416.7 million was allocated to post-combination services and will be expensed over the remaining service periods as stock-based compensation. The fair value of the stock options assumed by the Company was determined using the Black-Scholes option pricing model. The Company also converted certain equity awards to unvested restricted cash awards totaling $ 13.5 million that will be expensed over the remaining service periods. See Note 13 for further discussion of amounts related to post-combination services that will be expensed over the remaining service periods as stock-based compensation. Acquisition costs of $ 29.0 million related to Auth0 were expensed by the Company in general and administrative expenses in its consolidated statements of operations for the six months ended July 31, 2021. The transaction was accounted for as a business combination. The total purchase price of $ 5,671.0 million was allocated using information currently available to the Company and may be subject to change as additional information is received. The primary areas that remain preliminary relate to the fair values of income and non-income-based taxes and residual goodwill. The Company expects to finalize the valuation as soon as practicable, but no later than one year from the acquisition date. Preliminary allocation of the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values is as follows (in 94 thousands): Estimated Fair Value Cash and cash equivalents $ 107,425 Accounts receivable 28,572 Prepaid expenses and other current assets 12,748 Property and equipment, net 1,928 Operating lease right-of-use assets 6,873 Other assets 5,201 Intangible assets 334,300 Accounts payable ( 3,610 ) Accrued expenses and other current liabilities ( 10,946 ) Accrued compensation ( 19,187 ) Deferred revenue ( 65,339 ) Operating lease liabilities, noncurrent ( 5,694 ) Other liabilities, noncurrent ( 11,341 ) Net assets acquired $ 380,930 The excess of purchase consideration over the fair value of the net tangible assets and identifiable intangible assets acquired was $ 5,290.1 million and was recorded as goodwill, which is primarily attributable to expected synergies in sales opportunities across complementary products, customers and geographies, cross-selling opportunities, and improvements in the selling process. None of the goodwill is expected to be deductible for U.S. federal income tax purposes. The estimated useful lives and fair values of the identifiable intangible assets are as follows (in thousands): Preliminary Estimated Useful Life (in years) Amount Developed technology 5 years $ 172,000 Customer relationships 2 - 6 years 140,900 Trade name 5 years 21,400 Total identifiable intangible assets $ 334,300 Developed technology represents the estimated fair value of the features underlying the Auth0 products as well as the platform supporting and providing services to Auth0 customers. Customer relationships represents the estimated fair value of the underlying relationships with Auth0 customers, including the fair value of unbilled and unrecognized contracts yet to be fulfilled. Trade name represents the estimated fair value of the Auth0 brand. Revenue and earnings of Auth0 included in the Company’s consolidated income statement from the acquisition date through January 31, 2022 are as follows (in thousands): For the period May 3, 2021 to January 31, 2022 Revenue $ 139,679 Net loss ( 385,302 ) The unaudited pro forma consolidated revenue and earnings for the year ended January 31, 2022 and 2021, calculated as if Auth0 had been acquired as of February 1, 2020 are as follows (in thousands): 95 Pro Forma Consolidated Statement of Operations Data Year Ended January 31, 2022 2021 Revenue $ 1,349,779 $ 944,782 Net loss ( 846,694 ) ( 690,482 ) The pro forma financial information for all periods presented above has been calculated after adjusting the results of Auth0 to reflect certain business combination and one-time accounting effects such as the fair value adjustment of deferred revenue, amortization expense from acquired intangible assets, stock-based compensation expense for unvested equity awards assumed, deferred commissions, release of deferred tax asset valuation allowance and acquisition costs as though the acquisition occurred as of the beginning of the Company’s fiscal 2021. The historical consolidated financial information has been adjusted in the pro forma combined financial results to give effect to pro forma events that are directly attributable to the business combination, reasonably estimable and factually supportable. The pro forma financial information is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of the Company’s fiscal 2021. Acquisition of atSpoke On August 2, 2021, the Company acquired all issued and outstanding capital stock of Townsend Street Labs, Inc. (“atSpoke”), a modern workplace operations platform. The Company will incorporate atSpoke’s platform with Okta’s Identity Governance and Administration offering. The acquisition date cash consideration for atSpoke was approximately $ 79.3 million of which $ 13.4 million of consideration was held back as partial security for any adjustments and indemnification obligations and will be paid within 18 months of the closing date. The Company recorded $ 18.3 million for developed technology intangible assets with an estimated useful life of 3 years and preliminarily recorded $ 63.2 million of goodwill which is primarily attributed to the assembled workforce as well as the integration of atSpoke’s technology and the Company’s technology. None of the goodwill is expected to be deductible for U.S. federal income tax purposes. The Company may continue to adjust the preliminary purchase price allocation after obtaining more information primarily relating to income and non-income based taxes and residual goodwill through the measurement period. The Company incurred $ 0.9 million of acquisition-related costs, which were recorded as general and administrative expenses in its consolidated statements of operations in the quarter ended July 31, 2021. This acquisition did not have a material impact on the Company’s consolidated financial statements; therefore, historical and pro forma disclosures have not been presented. 96 4. Cash Equivalents and Investments Cash Equivalents and Short-term Investments The amortized cost, unrealized gain (loss) and estimated fair value of the Company’s cash equivalents and short-term investments as of January 31, 2022 and 2021 were as follows (in thousands): As of January 31, 2022 Amortized Cost Unrealized Gain Unrealized Loss Estimated Fair Value Cash equivalents: Money market funds $ 152,223 $ — $ — $ 152,223 Total cash equivalents 152,223 — — 152,223 Short-term investments: U.S. treasury securities 1,922,344 10 ( 10,166 ) 1,912,188 Corporate debt securities 331,050 — ( 1,581 ) 329,469 Total short-term investments 2,253,394 10 ( 11,747 ) 2,241,657 Total $ 2,405,617 $ 10 $ ( 11,747 ) $ 2,393,880 As of January 31, 2021 Amortized Cost Unrealized Gain Unrealized Loss Estimated Fair Value Cash equivalents: Money market funds $ 311,257 $ — $ — $ 311,257 Total cash equivalents 311,257 — — 311,257 Short-term investments: U.S. treasury securities 1,888,882 1,571 ( 22 ) 1,890,431 Corporate debt securities 230,726 429 ( 2 ) 231,153 Total short-term investments 2,119,608 2,000 ( 24 ) 2,121,584 Total $ 2,430,865 $ 2,000 $ ( 24 ) $ 2,432,841 All short-term investments were designated as available-for-sale securities as of January 31, 2022 and 2021. The following table presents the contractual maturities of the Company's short-term investments as of January 31, 2022 and 2021 (in thousands): As of January 31, 2022 Amortized Cost Estimated Fair Value Due within one year $ 1,267,801 $ 1,264,675 Due between one to five years 985,593 976,982 Total $ 2,253,394 $ 2,241,657 As of January 31, 2022 and 2021, the Company included nil of unsettled purchases of short-term investments in Accrued expenses and other current liabilities on the consolidated balance sheets and included nil and $ 31.0 million, respectively, of unsettled maturities of short-term investments in Prepaid expenses and other current assets on the consolidated balance sheets. The Company included $ 6.0 million and $ 10.5 million of interest receivable in Prepaid expenses and other current assets on the consolidated balance sheets as of January 31, 2022 and 2021, respectively. The Company did not recognize an allowance for credit losses against interest receivable as of January 31, 2022 and 2021 because such potential losses were not material. 97 The following table presents the fair values and unrealized losses related to our investments in available-for-sale debt securities classified by length of time that the securities have been in a continuous unrealized loss position as of January 31, 2022 (in thousands): Less Than 12 Months More Than 12 Months Total Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses U.S. treasury securities 1,801,985 ( 10,166 ) — — 1,801,985 ( 10,166 ) Corporate debt securities 319,767 ( 1,581 ) — — 319,767 ( 1,581 ) Total 2,121,752 ( 11,747 ) — — 2,121,752 ( 11,747 ) The Company had 193 and 10 short-term investments in unrealized loss positions as of January 31, 2022 and 2021, respectively. There were no material unrealized gains or losses from available-for-sale securities for the year ended January 31, 2020. There were no material realized gains or losses from available-for-sale securities that were reclassified out of accumulated other comprehensive income for the years ended January 31, 2022, 2021 and 2020. For available-for-sale debt securities that have unrealized losses, the Company evaluates whether (i) the Company has the intention to sell any of these investments, (ii) it is not more likely than not that the Company will be required to sell any of these available-for-sale debt securities before recovery of the entire amortized cost basis and (iii) the decline in the fair value of the investment is due to credit or non-credit related factors. Based on this evaluation, the Company determined that for short-term investments, there were no material credit or non-credit related impairments as of January 31, 2022 and 2021. Strategic Investments The Company's strategic investments include equity investments in privately held companies, which do not have a readily determinable fair value. As of January 31, 2022 and 2021, the balances of such strategic investments were $ 15.3 million and $ 3.1 million, respectively. During the year ended January 31, 2022, the Company recorded $ 7.6 million of realized gains and unrealized adjustments in the carrying values of strategic investments. Realized gains and losses and unrealized adjustments recognized during the years ended January 31, 2021 and 2020 were immaterial. All gains and losses on strategic investments, whether realized or unrealized, are recognized in Interest income and other, net on the consolidated statements of operations. 5. Fair Value Measurements The Company measures its financial assets at fair value each reporting period using a fair value hierarchy that prioritizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure as follows: Level 1—Valuations based on observable inputs that reflect quoted prices for identical assets or liabilities in active markets. Level 2—Valuations based on other inputs that are directly or indirectly observable in the marketplace. Level 3—Valuations based on unobservable inputs that are supported by little or no market activity. Assets and Liabilities Measured at Fair Value on a Recurring Basis The following table presents information about the Company’s financial assets that were measured at fair value on a recurring basis using the above input categories (in thousands): 98 As of January 31, 2022 Level 1 Level 2 Level 3 Total Assets: Cash equivalents: Money market funds $ 152,223 $ — $ — $ 152,223 Total cash equivalents 152,223 — — 152,223 Short-term investments: U.S. treasury securities — 1,912,188 — 1,912,188 Corporate debt securities — 329,469 — 329,469 Total short-term investments — 2,241,657 — 2,241,657 Total cash equivalents and short-term investments $ 152,223 $ 2,241,657 $ — $ 2,393,880 As of January 31, 2021 Level 1 Level 2 Level 3 Total Assets: Cash equivalents: Money market funds $ 311,257 $ — $ — $ 311,257 Total cash equivalents 311,257 — — 311,257 Short-term investments: U.S. treasury securities — 1,890,431 — 1,890,431 Corporate debt securities — 231,153 — 231,153 Total short-term investments — 2,121,584 — 2,121,584 Total cash equivalents and short-term investments $ 311,257 $ 2,121,584 $ — $ 2,432,841 The carrying amounts of certain financial instruments, including cash held in banks, accounts receivable and accounts payable approximate fair value due to their short-term maturities and are excluded from the fair value table above. Fair Value Measurements of Other Financial Instruments The following table presents the carrying amounts and estimated fair values of the Company's financial instruments that are not recorded at fair value on the consolidated balance sheets (in thousands): As of January 31, 2022 Net Carrying Amount (1) Estimated Fair Value 2023 convertible senior notes $ 16,295 $ 68,698 2025 convertible senior notes $ 920,799 $ 1,323,406 2026 convertible senior notes $ 913,875 $ 1,270,394 (1) Before unamortized debt issuance costs. The principal amounts of the 2023 Notes, the 2025 Notes and the 2026 Notes are $ 17.2 million, $ 1,060.0 million and $ 1,150.0 million, respectively. The difference between the principal amounts and the respective net carrying amounts before unamortized debt issuance costs represents the unamortized debt discount (See Note 9 for additional details). The estimated fair values of the Notes, which are Level 2 financial instruments, were determined based on the quoted bid prices of the Notes in an over-the-counter market on the last trading day of the reporting period. As of January 31, 2022, the difference between the net carrying amount of the Notes and their estimated fair values represented the equity conversion value premium the market assigned to the Notes. Based on the closing price of the Company's common stock of $ 197.89 on January 31, 2022, the if-converted values of the 2023 Notes and 2025 Notes exceeded the principal amounts of $ 17.2 million and $ 1,060.0 million by $ 53.3 million and $ 51.6 million, respectively. The if-converted value of the 2026 Notes was less than the principal amount of $ 1,150.0 million. 99 6. Goodwill and Intangible Assets, net Goodwill As of January 31, 2022 and 2021, goodwill was $ 5,401.3 million and $ 48.0 million, respectively. During the year ended January 31, 2022, the Company recorded goodwill of $ 5,290.1 million in connection with the Auth0 acquisition that was completed in May 2021 and $ 63.2 million in connection with the atSpoke acquisition that was completed in August 2021. See Note 3 for further details. No goodwill impairments were recorded during the years ended January 31, 2022, 2021 and 2020. Intangible Assets, net Intangible assets consisted of the following (in thousands): As of January 31, 2022 Gross Accumulated Amortization Net Capitalized internal-use software costs $ 36,319 $ ( 24,170 ) $ 12,149 Purchased developed technology 219,100 ( 47,085 ) 172,015 Customer relationships 140,900 ( 26,399 ) 114,501 Trade name 21,400 ( 3,210 ) 18,190 Software licenses 116 ( 3 ) 113 $ 417,835 $ ( 100,867 ) $ 316,968 As of January 31, 2021 Gross Accumulated Amortization Net Capitalized internal-use software costs $ 30,259 $ ( 19,478 ) $ 10,781 Purchased developed technology 28,800 ( 12,694 ) 16,106 Software licenses 126 ( 4 ) 122 $ 59,185 $ ( 32,176 ) $ 27,009 During the year ended January 31, 2022, the Company recorded intangible assets of $ 334.3 million and $ 18.3 million in connection with the Auth0 and atSpoke acquisitions, respectively. See Note 3 for further details. 100 The weighted-average remaining useful lives of the Company’s acquired intangible assets are as follows: Weighted-Average Remaining Useful Life As of January 31, 2022 2021 Purchased developed technology 4.0 years 3.1 years Customer relationships 4.0 years — Trade name 4.3 years — As of January 31, 2022, estimated remaining amortization expense for the intangible assets by fiscal year was as follows (in thousands): Remaining Amortization 2023 $ 90,221 2024 79,865 2025 67,183 2026 59,528 2027 18,788 Thereafter 1,383 Total $ 316,968 Amortization expense of intangible assets for the years ended January 31, 2022, 2021 and 2020 was $ 69.0 million, $ 11.1 million, and $ 10.6 million, respectively. 7. Balance Sheet Components Property and Equipment, net Property and equipment consisted of the following (in thousands): As of January 31, 2022 2021 Computers and equipment $ 1,273 $ 1,242 Furniture and fixtures 17,368 13,948 Leasehold improvements 81,066 69,862 Property and equipment, gross 99,707 85,052 Less accumulated depreciation ( 34,219 ) ( 22,269 ) Property and equipment, net $ 65,488 $ 62,783 Depreciation expense was $ 12.1 million, $ 9.4 million and $ 8.8 million for the years ended January 31, 2022, 2021 and 2020, respectively. 101 Allowances The Company’s accounts receivable allowances for the years ended January 31, 2022, 2021 and 2020 were as follows (in thousands): As of January 31, 2022 2021 2020 Balance, beginning of period $ 3,451 $ 1,166 $ 2,098 Additions (reductions) 2,898 3,252 ( 673 ) Write-offs ( 1,990 ) ( 967 ) ( 259 ) Balance, end of period $ 4,359 $ 3,451 $ 1,166 Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consisted of the following (in thousands): As of January 31, 2022 2021 Accrued expenses $ 48,305 $ 24,717 Accrued taxes payable 7,423 2,462 Operating lease liabilities 26,520 23,403 Other 7,067 3,147 Accrued expenses and other current liabilities $ 89,315 $ 53,729 Other Liabilities, Noncurrent Other liabilities, noncurrent consisted of the following (in thousands): As of January 31, 2022 2021 Deferred tax liabilities $ 9,416 $ 3,877 Other 22,359 7,498 Other liabilities, noncurrent $ 31,775 $ 11,375 8. Deferred Revenue and Performance Obligations Deferred Revenue Deferred revenue, which is a contract liability, consists primarily of payments received and accounts receivable recorded in advance of revenue recognition under the Company’s contracts with customers and is recognized as the revenue recognition criteria are met. Subscription revenue recognized during the years ended January 31, 2022 and 2021 that was included in the deferred revenue balances at the beginning of the respective periods was $ 494.7 million and $ 361.0 million, respectively. Professional services and other revenue recognized in the years ended January 31, 2022 and 2021 from deferred revenue balances at the beginning of the respective periods was not material. Transaction Price Allocated to the Remaining Performance Obligations Transaction price allocated to the remaining performance obligations represents all future, non-cancelable contracted revenue that has not yet been recognized, inclusive of deferred revenue that has been invoiced and non-cancelable amounts that will be invoiced and recognized as revenue in future periods. As of January 31, 2022, total remaining non-cancelable performance obligations under the Company’s subscription contracts with customers was approximately $ 2,694.3 million. Of this amount, the Company expects to recognize revenue of approximately $ 1,350.5 million, or 50 %, over the next 12 months, with the balance to be recognized as revenue thereafter. Remaining performance obligations for professional services and other contracts as of January 31, 2022 were not material. 102 9. Convertible Senior Notes, Net 2023 Convertible Senior Notes The 2023 Notes are senior, unsecured obligations of the Company, and bear interest at a fixed rate of 0.25 % per year. Interest is payable in cash semi-annually in arrears on February 15 and August 15 of each year, beginning on August 15, 2018. The 2023 Notes mature on February 15, 2023 unless earlier repurchased or converted. The Company may not redeem the 2023 Notes prior to maturity. The total net proceeds from the 2023 Notes, after deducting initial purchasers’ discounts and debt issuance costs, was $ 335.0 million. In September 2019, the Company used part of the net proceeds from the issuance of the 2025 Notes to repurchase a portion of the 2023 Notes, which consisted of a repurchase of $ 224.4 million aggregate principal amount of the 2023 Notes in privately-negotiated transactions for aggregate consideration of $ 604.8 million, consisting of approximately $ 224.4 million in cash and approximately 3.0 million shares of Class A common stock. The $ 604.8 million in aggregate consideration was allocated between the debt and equity components in the amounts of $ 197.7 million and $ 407.1 million, respectively, using an effective interest rate of 4.00 % to determine the fair value of the liability component. As of the repurchase date, the carrying value of the notes subject to the First Partial Repurchase of 2023 Notes, net of unamortized debt discount and issuance costs, was $ 183.1 million. The First Partial Repurchase of 2023 Notes resulted in a $ 14.6 million loss on early debt extinguishment during the year ended January 31, 2020, of which $ 3.8 million consisted of unamortized debt issuance costs. In June 2020, the Company used part of the net proceeds from the issuance of the 2026 Notes to repurchase a portion of the 2023 Notes, which consisted of a repurchase of $ 69.9 million aggregate principal amount of the 2023 Notes in privately-negotiated transactions, for aggregate consideration of $ 260.5 million, consisting of approximately $ 0.2 million in cash and approximately 1.4 million shares of Class A common stock. The $ 260.5 million in aggregate consideration was allocated between the debt and equity components in the amounts of $ 61.8 million and $ 198.7 million respectively, using an effective interest rate of 4.90 % to determine the fair value of the liability component. As of the repurchase date, the carrying value of the notes subject to the Second Partial Repurchase of 2023 Notes, net of unamortized debt discount and issuance costs, was $ 59.6 million. The Second Partial Repurchase of 2023 Notes resulted in a $ 2.2 million loss on early debt extinguishment during the year ended January 31, 2021, of which $ 1.0 million consisted of unamortized debt issuance costs. The interest rates used in the 2023 Notes Partial Repurchases were based on the income and market based approaches used to determine the effective interest rate of the 2025 Notes and 2026 Notes, adjusted for the remaining tenor of the 2023 Notes. As of January 31, 2022, $ 17.2 million of principal remained outstanding on the 2023 Notes. The terms of the 2023 Notes are governed by an Indenture by and between the Company and Wilmington Trust, National Association, as Trustee (the "2023 Indenture"). Upon conversion, the 2023 Notes may be settled in cash, shares of Class A common stock or a combination of cash and shares of Class A common stock, at the Company’s election. The 2023 Notes are convertible at an initial conversion rate of 20.6795 shares of Class A common stock per $1,000 principal amount of the 2023 Notes, which is equal to an initial conversion price of approximately $ 48.36 per share of Class A common stock, subject to adjustment under certain circumstances in accordance with the terms of the 2023 Indenture. Prior to the close of business on the business day immediately preceding October 15, 2022, holders of the 2023 Notes may convert all or a portion of their 2023 Notes only in multiples of $1,000 principal amount, under the following circumstances: • during any fiscal quarter commencing after the fiscal quarter ending on April 30, 2018 (and only during such fiscal quarter), if the last reported sale price of Class A common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130 % of the conversion price of the 2023 Notes on each applicable trading day; • during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the 2023 Notes for each trading day of that five consecutive trading day period was less than 98 % of the product of the last reported sale price of Class A common stock and the conversion rate on such trading day; or • upon the occurrence of specified corporate events, as described in the 2023 Indenture. 103 On or after October 15, 2022 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their 2023 Notes regardless of the foregoing circumstances. For at least 20 trading days during the period of 30 consecutive trading days ended January 31, 2022, the last reported sale price of the Company’s common stock was equal to or exceeded 130 % of the conversion price of the 2023 Notes on each applicable trading day. As a result, the 2023 Notes are convertible at the option of the holders during the fiscal quarter ending April 30, 2022 and were classified as current liabilities on the consolidated balance sheet as of January 31, 2022. During the year ended January 31, 2022, the Company issued approximately 0.5 million shares of Class A common stock and paid an immaterial amount in cash to settle approximately $ 23.0 million principal amount of 2023 Notes. The loss on early note conversion was not material. Subsequent to January 31, 2022, the Company received conversion requests for approximately $ 2.0 million aggregate principal amount of the 2023 Notes. Holders of the 2023 Notes who convert their 2023 Notes in connection with certain corporate events that constitute a make-whole fundamental change (as defined in the 2023 Indenture) are, under certain circumstances, entitled to an increase in the conversion rate. Additionally, in the event of a corporate event that constitutes a fundamental change (as defined in the 2023 Indenture), holders of the 2023 Notes may require the Company to repurchase all or a portion of their 2023 Notes at a price equal to 100 % of the principal amount of the 2023 Notes being repurchased, plus any accrued and unpaid interest. In accounting for the issuance of the 2023 Notes, the Company separated the 2023 Notes into liability and equity components, using an effective interest rate of 5.68 % to determine the fair value of the liability component. This interest rate was based on both an income and a market based approach. For the income approach, the Company used a convertible bond pricing model, which included several assumptions including volatility and the risk-free rate. For the market approach, the Company observed the price of the Note Hedges (see below) it purchased for its 2023 Notes and also performed an evaluation of issuances of convertible debt securities by other companies with similar credit risk ratings at the time of issuance. The following table sets forth total interest expense recognized related to the 2023 Notes (in thousands): Year Ended January 31, 2022 2021 Contractual interest expense $ 54 $ 180 Amortization of debt issuance costs 106 312 Amortization of debt discount 1,054 3,316 Total $ 1,214 $ 3,808 Total initial issuance costs of $ 10.0 million related to the 2023 Notes were allocated between liability and equity in the same proportion as the allocation of the total proceeds to the liability and equity components. Issuance costs attributable to the liability component are being amortized to interest expense over the respective term of the 2023 Notes using the effective interest rate method. The issuance costs attributable to the equity component were netted against the respective equity component in Additional paid-in capital. The Company initially recorded liability issuance costs of $ 7.7 million and equity issuance costs of $ 2.3 million. The 2023 Notes, net consisted of the following (in thousands): As of January 31, 2022 Liability component: Principal $ 17,228 Less: unamortized debt issuance costs and debt discount ( 1,034 ) Net carrying amount $ 16,194 Equity component: 2023 Notes $ 3,993 Less: issuance costs ( 116 ) Carrying amount of the equity component (1) $ 3,877 (1) Included in the consolidated balance sheets within Additional paid-in capital. 104 Note Hedges In connection with the pricing of the 2023 Notes, the Company entered into convertible note hedges with respect to its Class A common stock. The Note Hedges are purchased call options that give the Company the option to purchase, subject to anti-dilution adjustments substantially identical to those in the 2023 Notes, approximately 7.1 million shares of its Class A common stock for approximately $ 48.36 per share (subject to adjustment), corresponding to the approximate initial conversion price of the 2023 Notes, exercisable upon conversion of the 2023 Notes. The Note Hedges will expire in 2023, if not exercised earlier. The Note Hedges are intended to offset potential dilution to the Company’s Class A common stock and/or offset the potential cash payments that the Company could be required to make in excess of the principal amount upon any conversion of the 2023 Notes under certain circumstances. The Note Hedges are separate transactions and are not part of the terms of the 2023 Notes. The Company paid an aggregate amount of $ 80.0 million for the Note Hedges. The amount paid for the Note Hedges was recorded as a reduction to Additional paid-in capital in the consolidated balance sheets. In September 2019 and in June 2020, and in connection with the First Partial Repurchase of 2023 Notes and Second Partial Repurchase of 2023 Notes, the Company terminated Note Hedges corresponding to approximately 4.6 million and 1.4 million shares for cash proceeds of $ 405.9 million and $ 195.0 million, respectively. The proceeds were recorded as an increase to Additional paid-in capital in the consolidated balance sheets. During the year ended January 31, 2022, the Company exercised and net-share-settled Note Hedges corresponding to approximately $ 23.0 million principal amount of 2023 Notes and received approximately 0.4 million shares of Class A common stock and an immaterial cash payment. As of January 31, 2022, Note Hedges giving the Company the option to purchase approximately 0.4 million shares (subject to adjustment) remained outstanding. Warrants In connection with the issuance of the 2023 Notes, the Company also entered into separate warrant transactions pursuant to which it sold net-share-settled (or, at the Company’s election subject to certain conditions, cash-settled) warrants to acquire, subject to anti-dilution adjustments, up to approximately 7.1 million shares over 80 scheduled trading days beginning in May 2023 of the Company’s Class A common stock at an initial exercise price of approximately $ 68.06 per share (subject to adjustment). If the Warrants are not exercised on their exercise dates, they will expire. If the market value per share of the Company’s Class A common stock exceeds the applicable exercise price of the Warrants, the Warrants could have a dilutive effect on the Company’s Class A common stock unless, subject to the terms of the Warrants, the Company elects to cash settle the Warrants. The Warrants are separate transactions and are not part of the terms of the 2023 Notes or the Note Hedges. The Company received aggregate proceeds of $ 52.4 million from the sale of the Warrants in connection with the 2023 Notes. The proceeds from the sale of the Warrants were recorded as an increase to Additional paid-in capital in the consolidated balance sheets. In September 2019 and in June 2020, and in connection with the First Partial Repurchase of 2023 Notes and Second Partial Repurchase of 2023 Notes, the Company terminated Warrants corresponding to approximately 4.6 million and 1.4 million shares for total cash payments of $ 358.6 million and $ 175.4 million, respectively. The termination payments were recorded as a decrease to Additional paid-in capital in the consolidated balance sheets. As of January 31, 2022, Warrants to acquire up to approximately 1.0 million shares (subject to adjustment) remained outstanding. 2025 Convertible Senior Notes The 2025 Notes are senior, unsecured obligations of the Company, and bear interest at a fixed rate of 0.125 % per year. Interest is payable in cash semi-annually in arrears on March 1 and September 1 of each year, beginning on March 1, 2020. The 2025 Notes mature on September 1, 2025 unless earlier redeemed, repurchased or converted. The total net proceeds from the 2025 Notes, after deducting initial purchasers’ discounts and debt issuance costs, were $ 1,040.7 million. The terms of the 2025 Notes are governed by an Indenture by and between the Company and Wilmington Trust, National Association, as Trustee (the "2025 Indenture"). Upon conversion, the 2025 Notes may be settled in 105 cash, shares of Class A common stock or a combination of cash and shares of Class A common stock, at the Company’s election. The 2025 Notes are convertible at an initial conversion rate of 5.2991 shares of Class A common stock per $1,000 principal amount of the 2025 Notes, which is equal to an initial conversion price of approximately $ 188.71 per share of Class A common stock, subject to adjustment under certain circumstances in accordance with the terms of the 2025 Indenture. Prior to the close of business on the business day immediately preceding June 1, 2025, holders of the 2025 Notes may convert all or a portion of their 2025 Notes only in multiples of $1,000 principal amount, under the following circumstances: • during any fiscal quarter commencing after the fiscal quarter ending on January 31, 2020 (and only during such fiscal quarter), if the last reported sale price of Class A common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130 % of the conversion price of the 2025 Notes on each applicable trading day; • during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the 2025 Notes for each trading day of that five consecutive trading day period was less than 98 % of the product of the last reported sale price of Class A common stock and the conversion rate on such trading day; • if the Company calls the notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or • upon the occurrence of specified corporate events, as described in the 2025 Indenture. On or after June 1, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their 2025 Notes regardless of the foregoing circumstances. During the three months ended January 31, 2022, the conditions allowing holders of the 2025 Notes to convert during the three months ending April 30, 2022 were not met, and as a result, the 2025 Notes were classified as noncurrent liabilities as of January 31, 2022. The Company may redeem for cash all or any portion of the 2025 Notes, at its option, on or after September 6, 2022, if the last reported sale price of the Company’s Class A common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on and including the trading day preceding the date on which the Company provides notice of redemption at a redemption price equal to 100 % of the principal amount of the 2025 Notes to be redeemed, plus any accrued and unpaid interest to, but excluding, the redemption date. During the year ended January 31, 2022, the Company did not redeem any of the 2025 Notes. Holders of the 2025 Notes who convert their 2025 Notes in connection with certain corporate events that constitute a make-whole fundamental change (as defined in the 2025 Indenture) or in connection with the Company’s issuance of a redemption notice are, under certain circumstances, entitled to an increase in the conversion rate. Additionally, in the event of a corporate event that constitutes a fundamental change (as defined in the 2025 Indenture), holders of the 2025 Notes may require the Company to repurchase all or a portion of their 2025 Notes at a price equal to 100 % of the principal amount of the 2025 Notes being repurchased, plus any accrued and unpaid interest. In accounting for the issuance of the 2025 Notes, the Company separated the 2025 Notes into liability and equity components using an effective interest rate of 4.10 % to determine the fair value of the liability component. This interest rate was based on both an income and a market based approach. For the income approach, the Company used a convertible bond pricing model, which included several assumptions including volatility and the risk-free rate. For the market approach, the Company performed an evaluation of issuances of convertible debt securities by other companies with similar credit risk ratings at the time of issuance. The following table sets forth 106 total interest expense recognized related to the 2025 Notes (in thousands): Year Ended January 31, 2022 2021 Contractual interest expense $ 1,325 $ 1,325 Amortization of debt issuance costs 2,300 2,097 Amortization of debt discount 35,338 33,932 Total $ 38,963 $ 37,354 Total issuance costs of $ 19.3 million related to the 2025 Notes were allocated between liability and equity in the same proportion as the allocation of the total proceeds to the liability and equity components. Issuance costs attributable to the liability component are being amortized to interest expense over the respective term of the 2025 Notes using the effective interest rate method. The issuance costs attributable to the equity component were netted against the respective equity component in Additional paid-in capital. The Company recorded liability issuance costs of $ 15.3 million and equity issuance costs of $ 4.0 million. The 2025 Notes, net consisted of the following (in thousands): As of January 31, 2022 Liability component: Principal $ 1,059,997 Less: unamortized debt issuance costs and debt discount ( 149,333 ) Net carrying amount $ 910,664 Equity component: At Issuance 2025 Notes $ 221,387 Less: issuance costs ( 4,040 ) Carrying amount of the equity component (1) $ 217,347 (1) Included in the consolidated balance sheets within Additional paid-in capital. 2025 Capped Calls In connection with the pricing of the 2025 Notes, the Company entered into capped call transactions with respect to its Class A common stock. The 2025 Capped Calls are purchased call options that give the Company the option to purchase, subject to anti-dilution adjustments substantially identical to those in the 2025 Notes, approximately 5.6 million shares of its Class A common stock for approximately $ 188.71 per share (subject to adjustment), corresponding to the approximate initial conversion price of the 2025 Notes, exercisable upon conversion of the 2025 Notes. The 2025 Capped Calls have initial cap prices of $ 255.88 per share (subject to adjustment) and will expire in 2025, if not exercised earlier. The 2025 Capped Calls are intended to offset potential dilution to the Company’s Class A common stock and/or offset the potential cash payments that the Company could be required to make in excess of the principal amount upon any conversion of the 2025 Notes under certain circumstances. The 2025 Capped Calls are separate transactions and are not part of the terms of the 2025 Notes. The Company paid an aggregate amount of $ 74.1 million for the 2025 Capped Calls. The amount paid for the 2025 Capped Calls was recorded as a reduction to Additional paid-in capital in the consolidated balance sheets. 2026 Convertible Senior Notes The 2026 Notes are senior, unsecured obligations of the Company, and bear interest at a fixed rate of 0.375 % per year. Interest is payable in cash semi-annually in arrears on June 15 and December 15 of each year, beginning on December 15, 2020. The 2026 Notes mature on June 15, 2026 unless earlier redeemed, repurchased or converted. The total net proceeds from the 2026 Notes, after deducting initial purchasers’ discounts and debt issuance costs, were $ 1,134.8 million. The terms of the 2026 Notes are governed by an Indenture by and between the Company and Wilmington Trust, National Association, as Trustee (the "2026 Indenture"). Upon conversion, the 2026 Notes may be settled in 107 cash, shares of Class A common stock or a combination of cash and shares of Class A common stock, at the Company’s election. The 2026 Notes are convertible at an initial conversion rate of 4.1912 shares of Class A common stock per $1,000 principal amount of the 2026 Notes, which is equal to an initial conversion price of approximately $ 238.60 per share of Class A common stock, subject to adjustment under certain circumstances in accordance with the terms of the 2026 Indenture. Prior to the close of business on the business day immediately preceding March 15, 2026, holders of the 2026 Notes may convert all or a portion of their 2026 Notes only in multiples of $1,000 principal amount, under the following circumstances: • during any fiscal quarter commencing after the fiscal quarter ending on October 31, 2020 (and only during such fiscal quarter), if the last reported sale price of the Company's Class A common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130 % of the conversion price of the 2026 Notes on each applicable trading day; • during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the 2026 Notes for each trading day of that five consecutive trading day period was less than 98 % of the product of the last reported sale price of the Company's Class A common stock and the conversion rate on such trading day; • if the Company calls the notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or • upon the occurrence of specified corporate events, as described in the 2026 Indenture. On or after March 15, 2026 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their 2026 Notes regardless of the foregoing circumstances. During the year ended January 31, 2022, the conditions allowing holders of the 2026 Notes to convert were not met, and as a result, the 2026 Notes were classified as noncurrent liabilities as of January 31, 2022. The Company may redeem for cash all or any portion of the 2026 Notes, at its option, on or after June 20, 2023, if the last reported sale price of the Company’s Class A common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period ending on and including the trading day preceding the date on which the Company provides notice of redemption price equal to 100 % of the principal amount of the notes to be redeemed, plus any accrued and unpaid interest to, but excluding, the redemption date. During the year ended January 31, 2022, the Company did no t redeem any of the 2026 Notes. Holders of the 2026 Notes who convert their 2026 Notes in connection with certain corporate events that constitute a make-whole fundamental change (as defined in the 2026 Indenture) or in connection with the Company’s issuance of a redemption notice are, under certain circumstances, entitled to an increase in the conversion rate. Additionally, in the event of a corporate event that constitutes a fundamental change (as defined in the 2026 Indenture), holders of the 2026 Notes may require the Company to repurchase all or a portion of their 2026 Notes at a price equal to 100 % of the principal amount of the 2026 Notes being repurchased, plus any accrued and unpaid interest. In accounting for the issuance of the 2026 Notes, the Company separated the 2026 Notes into liability and equity components using an effective interest rate of 5.75 % to determine the fair value of the liability component. This interest rate was based on both an income and a market based approach. For the income approach, the Company used a convertible bond pricing model, which included several assumptions including volatility, the risk-free rate and observable trading activity for the Company’s existing Notes. For the market approach, the Company performed an evaluation of issuances of convertible debt securities by other companies with similar credit risk ratings at the time of issuance. The following table sets forth total interest expense recognized related to the 2026 108 Notes (in thousands): Year Ended January 31, 2022 2021 Contractual interest expense $ 4,313 $ 2,731 Amortization of debt issuance costs 1,431 813 Amortization of debt discount 46,232 27,954 Total $ 51,976 $ 31,498 Total issuance costs of $ 15.2 million related to the 2026 Notes were allocated between liability and equity in the same proportion as the allocation of the total proceeds to the liability and equity components. Issuance costs attributable to the liability component are being amortized to interest expense over the respective term of the 2026 Notes using the effective interest rate method. The issuance costs attributable to the equity component were netted against the respective equity component in Additional paid-in capital. The Company recorded liability issuance costs of $ 11.1 million and equity issuance costs of $ 4.1 million. The 2026 Notes, net consisted of the following (in thousands): As of January 31, 2022 Liability component: Principal $ 1,150,000 Less: unamortized debt issuance costs and debt discount ( 244,950 ) Net carrying amount $ 905,050 At Issuance Equity component: 2026 Notes $ 310,311 Less: issuance costs ( 4,090 ) Carrying amount of the equity component (1) $ 306,221 (1) Included in the consolidated balance sheets within Additional paid-in capital. 2026 Capped Calls In connection with the pricing of the 2026 Notes, the Company entered into capped call transactions with respect to its Class A common stock. The 2026 Capped Calls are purchased call options that give the Company the option to purchase, subject to anti-dilution adjustments substantially identical to those in the 2026 Notes, approximately 4.8 million shares of its Class A common stock for approximately $ 238.60 per share (subject to adjustment), corresponding to the approximate initial conversion price of the 2026 Notes, exercisable upon conversion of the 2026 Notes. The 2026 Capped Calls have initial cap prices of $ 360.14 per share (subject to adjustment) and will expire in 2026, if not exercised earlier. The 2026 Capped Calls are intended to offset potential dilution to the Company’s Class A common stock and/or offset the potential cash payments that the Company could be required to make in excess of the principal amount upon any conversion of the 2026 Notes under certain circumstances. The 2026 Capped Calls are separate transactions and are not part of the terms of the 2026 Notes. The Company paid an aggregate amount of $ 134.0 million for the 2026 Capped Calls. The amount paid for the 2026 Capped Calls was recorded as a reduction to Additional paid-in capital in the consolidated balance sheets. 109 10. Leases The Company has entered into various non-cancelable office space operating leases with original lease periods expiring between 2022 and 2029. These leases do not contain material variable rent payments, residual value guarantees, covenants or other restrictions. The Company's corporate headquarters lease in San Francisco has a 10 year term, which expires in October 2028. The Company is entitled to two five-year options to extend this lease, subject to certain requirements. Operating lease costs were as follows (in thousands): Year Ended January 31, 2022 2021 2020 Operating lease costs (1) $ 38,254 $ 33,076 $ 23,193 (1) Amounts are presented exclusive of sublease income and include short-term leases, which are immaterial. The weighted-average remaining term of the Company’s operating leases was 5.9 years and 6.8 years as of January 31, 2022 and January 31, 2021, respectively, and the weighted-average discount rate used to measure the present value of the operating lease liabilities was 5.5 % and 5.6 % as of January 31, 2022 and January 31, 2021, respectively. Maturities of the Company’s operating lease liabilities, which do not include short-term leases, were as follows (in thousands): As of January 31, 2022 2023 39,499 2024 43,535 2025 40,582 2026 30,493 2027 29,607 Thereafter 53,502 Total lease payments 237,218 Less imputed interest ( 37,633 ) Less tenant improvement allowances not yet incurred ( 2,454 ) Total operating lease liabilities $ 197,131 Cash payments included in the measurement of the Company’s operating lease liabilities were $ 39.6 million and $ 31.1 million for the years ended January 31, 2022 and January 31, 2021, respectively. As of January 31, 2022, the Company has $ 9.9 million of undiscounted future payments under new operating lease arrangements that have not yet commenced, which is excluded from the table above. These operating leases will commence in fiscal 2023 and have lease terms of 1.2 to 6.4 years. 11. Commitments and Contingencies Letters of Credit In conjunction with the execution of certain office space operating leases, letters of credit in the aggregate amount of $ 8.6 million and $ 11.2 million were issued and outstanding as of January 31, 2022 and January 31, 2021, respectively. No draws have been made under such letters of credit. Noncurrent restricted cash of $ 6.4 million and 110 $ 8.6 million associated with these letters of credit is included in Other assets on the consolidated balance sheets as of January 31, 2022 and January 31, 2021, respectively. Purchase Obligations As of January 31, 2022, future minimum purchase obligations, such as data center operations and sales and marketing activities, were as follows (in thousands): Purchase Obligations 2023 58,805 2024 53,657 2025 12,434 2026 1,755 2027 — Thereafter — Total contractual obligations $ 126,651 Legal Matters From time to time in the normal course of business, the Company may be subject to various legal matters such as threatened or pending claims or proceedings. There were no such material matters as of January 31, 2022 and 2021. Warranties and Indemnification The Company’s subscription services are generally warranted to perform materially in accordance with the Company’s online help documentation under normal use and circumstances. Additionally, the Company’s arrangements generally include provisions for indemnifying customers against liabilities if its subscription services infringe a third party’s intellectual property rights. Furthermore, the Company may also incur liabilities if it breaches the security or confidentiality obligations in its arrangements. To date, the Company has not incurred significant costs and has not accrued any material liabilities in the accompanying consolidated financial statements as a result of these obligations. The Company has entered into service-level agreements with a majority of its customers defining levels of uptime reliability and performance and permitting certain customers to receive credits for paid amounts related to subscription services when the Company fails to meet the defined levels of uptime. In very limited instances, the Company allows customers to early terminate their agreements in the event that the Company fails to meet those levels as they may constitute a breach of contract. If the customer did terminate, they would receive a refund of prepaid unused subscription fees. To date, the Company has not experienced any significant failures to meet defined levels of uptime reliability and performance as a result of those agreements and, as a result, the Company has not incurred significant costs and has not accrued any material liabilities in the accompanying consolidated financial statements as a result of these warranties. 12. Common Stock and Stockholders' Equity Common Stock Holders of Class A and Class B common stock are entitled to one vote per share and 10 votes per share, respectively, and the shares of Class A common stock and Class B common stock are identical, except for voting and conversion rights. Shares of Class B common stock may be converted into Class A common stock at any time at the option of the stockholder on a one -for-one basis, and are automatically converted into Class A common stock upon sale or transfer, subject to certain limited exceptions. Shares of Class A common stock are not convertible. In September 2019 and June 2020, in connection with the 2023 Notes Partial Repurchases, the Company issued approximately 3.0 million and 1.4 million shares of Class A common stock, respectively. In addition, during the year ended January 31, 2022, the Company issued approximately 0.5 million shares of Class A common stock in connection with 2023 Notes conversion requests and received approximately 0.4 million shares of Class A common stock from the settlement of Note Hedges. See Note 9 for additional details. 111 As of January 31, 2022, shares of common stock reserved for future issuance were as follows: As of January 31, 2022 Options and unvested RSUs outstanding 14,209,825 Available for future stock option and RSU grants 23,133,719 Available for ESPP 5,757,220 43,100,764 Awards Issued as Charitable Contributions During the years ended January 31, 2022, 2021 and 2020, the Company issued 30,000 , 42,500 and 15,000 shares, respectively, of Class A common stock as charitable contributions and recognized $ 7.2 million, $ 9.3 million and $ 1.7 million, respectively, as general and administrative expense in the consolidated statements of operations. 13. Employee Incentive Plans The Company’s equity incentive plans provide for granting stock options, RSUs and restricted stock awards to employees, consultants, officers and directors. In addition, the Company offers an ESPP to eligible employees. Stock-based compensation expense by award type was as follows (in thousands): Year Ended January 31, 2022 2021 2020 Stock options $ 132,130 $ 21,371 $ 21,888 RSUs 334,010 164,412 94,637 ESPP 15,024 10,373 9,408 Restricted stock awards 84,316 25 590 Restricted common stock — — 101 Total $ 565,480 $ 196,181 $ 126,624 Stock-based compensation expense was recorded in the following cost and expense categories in the Company’s consolidated statements of operations (in thousands): Year Ended January 31, 2022 2021 2020 Cost of revenue: Subscription $ 49,091 $ 21,895 $ 12,923 Professional services and other 12,324 8,083 7,164 Research and development 192,712 63,270 37,683 Sales and marketing 135,916 53,802 38,077 General and administrative 175,437 49,131 30,777 Total $ 565,480 $ 196,181 $ 126,624 Equity Incentive Plans The Company has two equity incentive plans: the 2009 Stock Plan (“2009 Plan”) and the 2017 Equity Incentive Plan (“2017 Plan”). In addition, the Company assumed Auth0, Inc. equity incentive plans as described below. All shares that remain available for future grants are under the 2017 Plan. As of January 31, 2022, options to purchase 2,339,467 shares of Class A common stock and 5,644,611 shares of Class B common stock remained outstanding. Stock Options Options issued under the Plan generally are exercisable for periods not to exceed ten years and generally vest over four years with 25 % vesting after one year and with the remainder vesting monthly thereafter in equal installments. Shares offered under the Plan may be: (i) authorized but unissued shares or (ii) treasury shares. 112 A summary of the Company’s stock option activity and related information was as follows: Number of Options Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (Years) Aggregate Intrinsic Value (in thousands) Outstanding as of January 31, 2021 8,250,113 $ 18.93 5.6 $ 1,980,668 Granted 2,565,055 93.95 Exercised ( 2,578,074 ) 21.02 Canceled ( 253,016 ) 106.41 Outstanding as of January 31, 2022 7,984,078 $ 39.59 5.2 $ 1,314,031 As of January 31, 2022 Vested and expected to vest 7,984,078 $ 39.59 5.2 $ 1,314,031 Vested and exercisable 6,467,950 $ 13.29 4.5 $ 1,194,987 The weighted-average grant-date fair value of options granted was $ 211.58 , $ 63.32 and $ 37.35 during the years ended January 31, 2022, 2021 and 2020, respectively. The total grant-date fair value of stock options vested was $ 314.2 million, $ 19.7 million and $ 23.7 million during the years ended January 31, 2022, 2021 and 2020, respectively. The intrinsic value of the options exercised, which represents the difference between the fair market value of the Company’s common stock on the date of exercise and the exercise price of each option, was $ 544.8 million, $ 772.3 million and $ 558.6 million for the years ended January 31, 2022, 2021 and 2020, respectively. As of January 31, 2022 and January 31, 2021, there was a total of $ 209.6 million and $ 31.1 million, respectively, of unrecognized stock-based compensation expense related to options, which is being recognized over a weighted-average period of 2.4 years. The Company used the Black-Scholes option pricing model to estimate the fair value of stock options granted with the following assumptions: Year Ended January 31, 2022 2021 2020 Expected volatility 46 % 45 % 43 % Expected term (in years) 6.3 6.3 6.3 Risk-free interest rate 1.03 % 0.37 % - 0.44 % 1.55 % - 2.27 % Expected dividend yield — — — Restricted Stock Units A summary of the Company’s RSU activity and related information was as follows: Number of RSUs Weighted- Average Grant Date Fair Value Per Share Outstanding as of January 31, 2021 4,452,107 $ 122.90 Granted 5,110,925 236.57 Vested ( 2,294,380 ) 125.75 Forfeited ( 1,042,905 ) 170.23 Outstanding as of January 31, 2022 6,225,747 $ 207.26 The Company granted 5,110,925 RSUs with an aggregate fair value of $ 1,209.1 million for the year ended January 31, 2022. As of January 31, 2022 and 2021, there was a total of $ 1,152.3 million and $ 502.8 million, respectively, of unrecognized stock-based compensation expense related to unvested RSUs, which is being recognized over a weighted-average period of 2.9 years, based on vesting under the award service conditions. The total fair value of RSUs vested during fiscal 2022, 2021 and 2020 was $ 531.4 million, $ 410.4 million and $ 193.9 million, respectively. 113 Equity Awards Issued in Connection with Business Combinations In connection with the May 3, 2021 Auth0 acquisition described in Note 3, the Company assumed the Auth0, Inc. 2014 Equity Incentive Plan and the Auth0, Inc. Phantom Unit Plan (together, the “Auth0 Plans”) and certain outstanding options to purchase Auth0 common stock, RSUs settleable into shares of Auth0 common stock, and phantom units under the Auth0 Plans. Certain assumed securities were converted into options (which in certain instances were automatically net exercised) or RSUs, as applicable, for shares of the Company’s Class A common stock, subject to adjustment as set forth in the Merger Agreement. Such assumed and converted options and RSUs will continue to be outstanding and will be governed by the provisions of the Auth0 Plans. Activity under the Auth0 Plans is included in the summaries of stock option and RSU activity above. Included in the Granted total in the stock options activity table above are 1,850,079 options assumed at a weighted-average exercise price per share of $ 24.21 . Included in the Granted total in the RSU activity table above are 743,718 RSUs assumed at a weighted-average grant date fair value per share of $ 269.70 . The Company entered into revesting agreements with the founders of the acquired businesses pursuant to which 1,269,008 restricted shares of Okta’s Class A common stock with a weighted-average fair value per share of $ 268.98 issued as of the respective closing dates will vest over 3 years. In connection with the business combinations, as of January 31, 2022, there was $ 257.0 million of unrecognized stock-based compensation expense related to unvested restricted shares, which is being recognized over a weighted-average period of 2.3 years based on vesting under the award service conditions. Employee Stock Purchase Plan The ESPP provides for 12-month offering periods beginning June 21 and December 21 of each year, and each offering period consists of up to two six-month purchase periods. The Company estimated the fair value of ESPP purchase rights using a Black-Scholes option pricing model with the following assumptions: Year Ended January 31, 2022 2021 2020 Expected volatility 44 % - 48 % 48 % - 54 % 43 % - 59 % Expected term (in years) 0.5 - 1.0 0.5 - 1.0 0.5 - 1.0 Risk-free interest rate 0.06 % - 0.29 % 0.09 % - 0.18 % 1.53 % - 2.05 % Expected dividend yield — — — During the year ended January 31, 2022, the Company's employees purchased 185,707 shares of its Class A common stock under the ESPP. The shares were purchased at a weighted-average purchase price of $ 191.54 per share, with proceeds of $ 35.6 million. During the year ended January 31, 2021, the Company's employees purchased 247,142 shares of its Class A common stock under the ESPP. The shares were purchased at a weighted-average purchase price of $ 104.84 per share, with proceeds of $ 25.9 million. As of January 31, 2022 and January 31, 2021, there was $ 16.5 million and $ 10.1 million, respectively, of unrecognized stock-based compensation expense related to the ESPP which is being recognized over a weighted-average vesting period of 0.7 years. 14. Income Taxes The domestic and foreign components of pre-tax loss for the years ended January 31, 2022, 2021 and 2020 were as follows (in thousands): Year Ended January 31, 2022 2021 2020 Domestic $ ( 903,227 ) $ ( 282,026 ) $ ( 220,846 ) Foreign 53,531 15,835 10,514 Loss before provision for (benefit from) income taxes $ ( 849,696 ) $ ( 266,191 ) $ ( 210,332 ) The components of the provision for (benefit from) income taxes for the years ended January 31, 2022, 2021 and 2020 were as follows (in thousands): 114 Year Ended January 31, 2022 2021 2020 Current: Federal $ 262 $ 11 $ 33 State 329 136 86 Foreign 4,210 1,294 822 Total current provision for income taxes 4,801 1,441 941 Deferred: Federal ( 7,407 ) 51 ( 518 ) State ( 1,335 ) 5 ( 406 ) Foreign 2,656 ( 1,356 ) ( 1,436 ) Total deferred benefit from income taxes ( 6,086 ) ( 1,300 ) ( 2,360 ) Total provision for (benefit from) income taxes $ ( 1,285 ) $ 141 $ ( 1,419 ) For the tax year ended January 31, 2022, the income tax benefit resulted from the release of valuation allowance in the United States in connection with acquisitions and excess tax benefits from stock-based compensation in the United Kingdom, offset by income tax expense related to profitable foreign jurisdictions. For the tax year ended January 31, 2021, the income tax expense from profitable jurisdictions was partially offset by excess tax benefits from stock-based compensation in the United Kingdom. For the tax year ended January 31, 2020, the income tax benefit resulted from the release of valuation allowance in the United States in connection with an acquisition and excess tax benefits from stock-based compensation in the United Kingdom. These income tax benefits and expense in these years were partially offset by foreign income taxes, state taxes and tax amortization of goodwill. 115 The following is a reconciliation of the statutory federal income tax rate to the Company’s effective tax rate for the years ended January 31, 2022, 2021 and 2020: Year Ended January 31, 2022 2021 2020 Tax at federal statutory rate 21.0 % 21.0 % 21.0 % State income taxes, net of federal benefit 3.9 4.1 4.0 Change in valuation allowance ( 36.1 ) ( 101.0 ) ( 100.1 ) Stock-based compensation 8.4 70.2 59.8 Research and development credits 3.6 6.4 18.0 Other, net ( 0.6 ) ( 0.8 ) ( 2.0 ) Effective tax rate 0.2 % ( 0.1 ) % 0.7 % The tax effects of temporary differences and related deferred tax assets and liabilities as of January 31, 2022 and 2021 were as follows (in thousands): As of January 31, 2022 2021 Deferred tax assets: Net operating loss carryforwards $ 955,272 $ 607,483 Stock-based compensation 48,254 18,952 Deferred revenue 4,630 1,144 Operating lease liabilities 49,669 51,702 Other reserves and accruals 28,631 16,586 Research and development and other credits 91,782 57,060 Disallowed interest 6,949 6,091 Total deferred tax assets 1,185,187 759,018 Valuation allowance ( 904,173 ) ( 555,199 ) Total deferred tax assets, net 281,014 203,819 Deferred tax liabilities: Convertible debt ( 91,530 ) ( 112,547 ) Deferred commissions ( 67,527 ) ( 38,710 ) Capitalized internal-use software costs ( 2,993 ) ( 2,691 ) Goodwill ( 195 ) ( 306 ) Operating lease right-of-use assets ( 36,713 ) ( 37,522 ) Depreciation and amortization ( 78,279 ) ( 8,522 ) Total deferred tax liabilities ( 277,237 ) ( 200,298 ) Net deferred tax assets $ 3,777 $ 3,521 As a result of continuing losses, the Company has determined that it is not more likely than not that it will realize the benefits of the U.S. deferred tax assets and, therefore, the Company has recorded a valuation allowance to reduce the carrying value of the U.S. deferred tax assets, net of U.S. deferred tax liabilities. The U.S. valuation allowance increased by $ 349.0 million and $ 193.6 million during the years ended January 31, 2022 and 2021, respectively. As of January 31, 2022, the Company had approximately $ 3,783.5 million of federal and $ 2,254.3 million of state net operating loss carryforwards available to offset future taxable income. If not utilized, the federal and state net operating loss carryforwards will begin to expire in 2029 and 2023, respectively. As of January 31, 2022, the Company had approximately $ 64.7 million of UK net operating losses which do not expire. As of January 31, 2022, the Company had federal research and development tax credit carryforwards of $ 80.2 million and California research and development tax credit carryforwards of $ 53.6 million. The federal research and development credits will start to expire in 2030 while the California research and development credits do not expire. 116 The Company’s ability to utilize the net operating loss and tax credit carryforwards in the future may be subject to substantial restrictions in the event of past or future ownership changes as defined in Section 382 of the Internal Revenue Code and similar state tax laws. Accounting guidance for income taxes requires a deferred tax liability to be established for the U.S. tax impact of undistributed earnings of foreign subsidiaries unless it can be shown that these earnings will be permanently reinvested outside the U.S. If the Company repatriated its accumulated foreign earnings, any deferred income taxes for the estimated U.S. income tax, foreign income tax, and applicable withholding taxes on earnings of subsidiaries is insignificant. The Company is subject to taxation in the United States and various states and foreign jurisdictions. On March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future use of net operating losses, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property, and the creation of certain refundable employee retention credits. The CARES Act did not have a material impact on the consolidated financial statements. A reconciliation of beginning and ending amount of unrecognized tax benefit was as follows (in thousands): Year Ended January 31, 2022 2021 2020 Gross amount of unrecognized tax benefits as of the beginning of the year $ 22,224 $ 15,987 $ 23,931 Additions based on tax positions related to a prior year 5,124 — 658 Additions based on tax positions related to current year 9,207 7,189 6,866 Reductions based on tax positions taken in a prior year — ( 952 ) ( 15,468 ) Gross amount of unrecognized tax benefits as of the end of the year $ 36,555 $ 22,224 $ 15,987 The Company is subject to taxation in the U.S. and various other state and foreign jurisdictions. As the Company has net operating loss carryforwards for U.S. federal and state jurisdictions, the statute of limitations is open for all years. For material foreign jurisdictions, the tax years open to examination include the tax years 2016 and forward. As of January 31, 2022, the Company has an immaterial amount of unrecognized tax benefits that if recognized would impact the effective tax rate. As of January 31, 2021 and 2020, the Company had no unrecognized tax benefits that if recognized would impact the effective tax rate. The Company's policy is to include interest and penalties related to unrecognized tax benefits within the provision for income taxes. As of January 31, 2022, 2021 and 2020 the Company has not accrued a material amount in interest and penalties related to unrecognized tax benefits. The Company does not have any significant uncertain tax positions as of January 31, 2022 for which it is reasonably possible that the positions will increase or decrease within the next twelve months. 15. Net Loss Per Share The Company computes net loss per share of common stock in conformity with the two-class method required for participating securities. 117 The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share data): Year Ended January 31, 2022 2021 2020 Class A Class B Class A Class B Class A Class B Numerator: Net loss $ ( 806,276 ) $ ( 42,135 ) $ ( 248,892 ) $ ( 17,440 ) $ ( 192,138 ) $ ( 16,775 ) Denominator: Weighted-average shares outstanding, basic and diluted 140,684 7,352 118,882 8,330 107,809 9,412 Net loss per share, basic and diluted $ ( 5.73 ) $ ( 5.73 ) $ ( 2.09 ) $ ( 2.09 ) $ ( 1.78 ) $ ( 1.78 ) As the Company was in a loss position for all periods presented, basic net loss per share is the same as diluted net loss per share as the inclusion of all potential common shares outstanding would have been anti-dilutive. Potentially dilutive securities that were not included in the diluted per share calculations because they would be anti-dilutive were as follows (in thousands): Year Ended January 31, 2022 2021 2020 Issued and outstanding stock options 7,984 8,250 12,359 Unvested RSUs issued and outstanding 6,226 4,452 4,893 Unvested restricted stock awards issued and outstanding 1,269 — 177 Unvested shares subject to repurchase — — 5 Shares committed under the ESPP 253 137 253 Shares related to the 2023 Notes 356 832 2,494 Shares subject to warrants related to the issuance of the 2023 Notes 1,048 1,048 2,494 Shares related to the 2025 Notes 5,617 5,617 5,617 Shares related to the 2026 Notes 4,820 4,820 — 27,573 25,156 28,292 The Company uses the if-converted method for calculating any potential dilutive effect of the conversion options embedded in the Notes on diluted net income per share, if applicable. The conversion options of the 2023, 2025 and 2026 Notes are dilutive in periods of net income on a weighted-average basis using an assumed conversion date equal to the later of the beginning of the reporting period and the date of issuance of the respective Notes. The exercise rights of the Warrants will have a dilutive impact on net income per share of common stock under the treasury-stock method when the average market price per share of the Company’s Class A common stock for a given period exceeds the conversion price of $ 68.06 per share. During the year ended January 31, 2022, the average price per share of the Company’s Class A common stock exceeded the exercise price of the Warrants; however, since the Company is in a net loss position there was no dilutive effect during any period presented. 118 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.