Okta, Inc. 10-Q

Item 1. Financial Statements (unaudited) 4 Condensed Consolidated Balance Sheets as of October 31, 2022 and January 31, 2022 5 Condensed Consolidated Statements of Operations for the Three and Nine Months Ended October 31, 2022 and 2021 6 Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended October 31, 2022 and 2021 7 Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended October 31, 2022 and 2021 8 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October 31, 2022 and 2021 9 Notes to Condensed Consolidated Financial Statements 10 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 27 Item 3. Quantitative and Qualitative Disclosures about Market Risk 46 Item 4. Controls and Procedures 48 PART II. OTHER INFORMATION Item 1. Legal Proceedings 49 Item 1A. Risk Factors 49 Item 6. Exhibits 84 Signatures 86 FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, including but not limited to, statements regarding our financial outlook, product development, business strategy, plans, market trends, opportunities, positioning, the anticipated impact on our business of the COVID-19 pandemic and related public health measures, and the macroeconomic environment. These forward-looking statements are made as of the date they were first issued and were based on current expectations, estimates, forecasts and projections as well as the beliefs and assumptions of management. Words such as “expect,” “anticipate,” “should,” “believe,” “hope,” “target,” “project,” “goals,” “estimate,” “potential,” “predict,” “may,” “will,” “might,” “could,” “intend,” “shall” and variations of these terms or the negative of these terms and similar expressions are intended to identify these forward-looking statements, although not all forward-looking statements include these identifying words. The forward-looking statements are contained principally in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors.” Forward-looking statements contained in this Form 10-Q include, but are not limited to, statements about: • our future financial performance, including our revenue, costs of revenue, gross profits, margins and operating expenses; • the impact of macroeconomic conditions, including the inflation and interest rate environment, and political, economic and social instability; • our ability to successfully integrate and realize the benefits of strategic acquisitions or investments, including our acquisition of Auth0, Inc. (“Auth0”); • trends in our key business metrics; • the impact of the global COVID-19 pandemic on our business and operations; • the sufficiency of our cash and cash equivalents, investments and cash provided by sales of our products and services to meet our liquidity needs; • market or other opportunities arising from business combinations; and • the impact of recent accounting pronouncements on our financial statements. Forward-looking statements are subject to a number of risks and uncertainties, many of which involve factors or circumstances that are beyond our control. Our actual results could differ materially from those stated or implied in forward-looking statements due to a number of factors, including but not limited to, risks detailed in “Risk Factors” in this Quarterly Report on Form 10-Q as well as other documents that may be filed by us from time to time with the Securities and Exchange Commission. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, except as required by law, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results or to changes in our expectations. PART I Item. 1 Financial Statements 4 OKTA, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except per share data) October 31, 2022 January 31, 2022 (unaudited) Assets Current assets: Cash and cash equivalents $ 249,624 $ 260,134 Short-term investments 2,223,538 2,241,657 Accounts receivable, net of allowances of $ 7,609 and $ 4,359 380,754 397,509 Deferred commissions 84,454 74,728 Prepaid expenses and other current assets 68,567 66,605 Total current assets 3,006,937 3,040,633 Property and equipment, net 60,884 65,488 Operating lease right-of-use assets 125,207 147,940 Deferred commissions, noncurrent 195,146 191,029 Intangible assets, net 261,825 316,968 Goodwill 5,400,275 5,401,343 Other assets 43,462 42,294 Total assets $ 9,093,736 $ 9,205,695 Liabilities and stockholders' equity Current liabilities: Accounts payable $ 49,122 $ 20,203 Accrued expenses and other current liabilities 100,086 89,315 Accrued compensation 110,399 143,805 Convertible senior notes, net 5,217 16,194 Deferred revenue 1,044,622 973,289 Total current liabilities 1,309,446 1,242,806 Convertible senior notes, net, noncurrent 2,191,547 1,815,714 Operating lease liabilities, noncurrent 148,906 170,611 Deferred revenue, noncurrent 17,833 22,933 Other liabilities, noncurrent 18,392 31,775 Total liabilities 3,686,124 3,283,839 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 October 31, 2022 and January 31, 2022 — — Class A common stock, par value $ 0.0001 per share; 1,000,000 shares authorized; 152,744 and 149,624 shares issued and outstanding as of October 31, 2022 and January 31, 2022, respectively 15 15 Class B common stock, par value $ 0.0001 per share; 120,000 shares authorized; 7,393 and 6,978 shares issued and outstanding as of October 31, 2022 and January 31, 2022, respectively 1 1 Additional paid-in capital 7,785,753 7,749,716 Accumulated other comprehensive loss ( 56,064 ) ( 12,009 ) Accumulated deficit ( 2,322,093 ) ( 1,815,867 ) Total stockholders’ equity 5,407,612 5,921,856 Total liabilities and stockholders' equity $ 9,093,736 $ 9,205,695 See Notes to Condensed Consolidated Financial Statements. 5 OKTA, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (unaudited) Three Months Ended October 31, Nine Months Ended October 31, 2022 2021 2022 2021 Revenue: Subscription $ 465,856 $ 336,702 $ 1,299,181 $ 879,881 Professional services and other 15,186 13,978 48,611 37,305 Total revenue 481,042 350,680 1,347,792 917,186 Cost of revenue: Subscription 117,306 91,048 344,524 227,903 Professional services and other 20,347 18,626 61,988 49,000 Total cost of revenue 137,653 109,674 406,512 276,903 Gross profit 343,389 241,006 941,280 640,283 Operating expenses: Research and development 148,484 130,535 465,971 321,805 Sales and marketing 289,984 203,878 807,110 548,749 General and administrative 111,520 105,149 322,549 322,406 Total operating expenses 549,988 439,562 1,595,630 1,192,960 Operating loss ( 206,599 ) ( 198,556 ) ( 654,350 ) ( 552,677 ) Interest expense ( 2,805 ) ( 23,144 ) ( 8,588 ) ( 68,776 ) Interest income and other, net 4,235 1,056 10,660 7,622 Loss on conversion of debt — — — ( 179 ) Interest and other, net 1,430 ( 22,088 ) 2,072 ( 61,333 ) Loss before provision for (benefit from) income taxes ( 205,169 ) ( 220,644 ) ( 652,278 ) ( 614,010 ) Provision for (benefit from) income taxes 3,728 667 9,804 ( 6,785 ) Net loss $ ( 208,897 ) $ ( 221,311 ) $ ( 662,082 ) $ ( 607,225 ) Net loss per share, basic and diluted $ ( 1.32 ) $ ( 1.44 ) $ ( 4.21 ) $ ( 4.17 ) Weighted-average shares used to compute net loss per share, basic and diluted 158,708 153,756 157,344 145,782 See Notes to Condensed Consolidated Financial Statements. 6 OKTA, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (In thousands) (unaudited) Three Months Ended October 31, Nine Months Ended October 31, 2022 2021 2022 2021 Net loss $ ( 208,897 ) $ ( 221,311 ) $ ( 662,082 ) $ ( 607,225 ) Other comprehensive loss: Net change in unrealized gains or losses on available-for-sale securities ( 7,896 ) ( 2,998 ) ( 26,595 ) ( 4,164 ) Foreign currency translation adjustments ( 6,982 ) ( 973 ) ( 17,460 ) ( 822 ) Other comprehensive loss ( 14,878 ) ( 3,971 ) ( 44,055 ) ( 4,986 ) Comprehensive loss $ ( 223,775 ) $ ( 225,282 ) $ ( 706,137 ) $ ( 612,211 ) See Notes to Condensed Consolidated Financial Statements. 7 OKTA, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands) (unaudited) Three Months Ended October 31, Nine Months Ended October 31, 2022 2021 2022 2021 Common stock and additional paid-in capital: Balance, beginning of period $ 7,607,398 $ 7,391,185 $ 7,749,732 $ 1,656,109 Adjustments from adoption of ASU 2020-06 — — ( 527,444 ) — Issuance of common stock and value of equity awards assumed in connection with business combination — — — 5,409,344 Issuance of common stock upon exercise of stock options and other activity, net 6,088 11,208 36,039 64,119 Stock-based compensation 172,283 156,447 515,507 408,482 Settlement of convertible senior notes — ( 8 ) 11,934 20,776 Proceeds from hedges related to convertible senior notes — — 1 2 Balance, end of period 7,785,769 7,558,832 7,785,769 7,558,832 Accumulated deficit: Balance, beginning of period ( 2,113,196 ) ( 1,353,370 ) ( 1,815,867 ) ( 967,456 ) Adjustments from adoption of ASU 2020-06 — — 155,856 — Net loss ( 208,897 ) ( 221,311 ) ( 662,082 ) ( 607,225 ) Balance, end of period ( 2,322,093 ) ( 1,574,681 ) ( 2,322,093 ) ( 1,574,681 ) Accumulated other comprehensive income: Balance, beginning of period ( 41,186 ) 4,375 ( 12,009 ) 5,390 Other comprehensive loss ( 14,878 ) ( 3,971 ) ( 44,055 ) ( 4,986 ) Balance, end of period ( 56,064 ) 404 ( 56,064 ) 404 Total stockholders’ equity $ 5,407,612 $ 5,984,555 $ 5,407,612 $ 5,984,555 See Notes to Condensed Consolidated Financial Statements. 8 OKTA, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (unaudited) Nine Months Ended October 31, 2022 2021 Cash flows from operating activities: Net loss $ ( 662,082 ) $ ( 607,225 ) Adjustments to reconcile net loss to net cash provided by operating activities: Stock-based compensation 511,687 407,611 Depreciation, amortization and accretion 87,999 76,631 Amortization of debt discount and issuance costs 4,340 64,478 Amortization of deferred commissions 60,791 40,041 Deferred income taxes 3,383 ( 13,606 ) Non-cash charitable contributions 2,469 5,649 Lease impairment charges 14,461 — Loss on conversion of debt — 179 Net gain on strategic investments ( 1,873 ) ( 5,665 ) Other, net 1,872 ( 267 ) Changes in operating assets and liabilities: Accounts receivable 14,968 ( 29,561 ) Deferred commissions ( 82,589 ) ( 92,183 ) Prepaid expenses and other assets ( 3,989 ) 5,356 Operating lease right-of-use assets 20,659 16,564 Accounts payable 29,794 ( 195 ) Accrued compensation ( 30,629 ) 19,488 Accrued expenses and other liabilities ( 5,950 ) 22,537 Operating lease liabilities ( 21,782 ) ( 17,280 ) Deferred revenue 66,233 198,035 Net cash provided by operating activities 9,762 90,587 Cash flows from investing activities: Capitalization of internal-use software costs ( 7,773 ) ( 2,348 ) Purchases of property and equipment ( 9,377 ) ( 5,800 ) Purchases of securities available for sale and other ( 872,035 ) ( 1,333,504 ) Proceeds from maturities and redemption of securities available for sale 848,519 1,118,448 Proceeds from sales of securities available for sale and other — 228,344 Purchases of intangible assets ( 2,497 ) ( 113 ) Payments for business acquisitions, net of cash acquired ( 4,060 ) ( 215,129 ) Net cash used in investing activities ( 47,223 ) ( 210,102 ) Cash flows from financing activities: Payments for conversions of convertible senior notes ( 6 ) ( 26 ) Proceeds from hedges related to convertible senior notes 1 2 Proceeds from stock option exercises 14,610 41,054 Proceeds from shares issued in connection with employee stock purchase plan 18,960 17,417 Net cash provided by financing activities 33,565 58,447 Effects of changes in foreign currency exchange rates on cash, cash equivalents and restricted cash ( 9,747 ) ( 494 ) Net decrease in cash, cash equivalents and restricted cash ( 13,643 ) ( 61,562 ) Cash, cash equivalents and restricted cash at beginning of period 272,656 448,630 Cash, cash equivalents and restricted cash at end of period $ 259,013 $ 387,068 Supplementary cash flow disclosure: Cash paid during the period for: Interest $ 3,509 $ 3,548 Income taxes 5,445 2,550 Non-cash activities: Issuance of common stock and value of equity awards assumed in connection with business combination — 5,409,344 Issuance of common stock for conversions of convertible senior notes 39,564 126,144 Benefit from exercise of hedges related to convertible senior notes 17,502 92,097 Operating lease right-of-use assets exchanged for lease liabilities 8,442 21,518 Reconciliation of cash, cash equivalents and restricted cash within the condensed consolidated balance sheets to the amounts shown in the condensed consolidated statements of cash flows above: Cash and cash equivalents $ 249,624 $ 372,372 Restricted cash, current included in prepaid expenses and other current assets 2,204 5,136 Restricted cash, noncurrent included in other assets 7,185 9,560 Total cash, cash equivalents and restricted cash $ 259,013 $ 387,068 See Notes to Condensed Consolidated Financial Statements. 9 OKTA, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. Overview and Basis of Presentation Description of Business Okta, Inc. (the “Company”) is the leading independent identity provider. The Okta Workforce Identity and Customer Identity Clouds enable 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 unaudited condensed 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”) for interim periods. Accordingly, they do not include all of the financial information and footnotes required by GAAP for complete financial statements. All intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated balance sheet as of January 31, 2022, included herein, was derived from the audited financial statements as of that date. In the opinion of the Company’s management, the unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary for a fair statement of the results of operations for the interim periods presented but are not necessarily indicative of the results of operations to be anticipated for the full fiscal year ending January 31, 2023 or any future period. The Company’s fiscal year ends on January 31. References to fiscal 2023, for example, refer to the fiscal year ending January 31, 2023. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 7, 2022. Certain reclassifications of components of prior period investing cash flows have been made in the condensed consolidated statements of cash flows to conform to the current period presentation. These reclassifications had no impact on the aggregate cash flow classifications as previously reported. Use of Estimates The preparation of condensed 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 condensed 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 stand-alone selling price (“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 incremental borrowing rate used for operating lease liabilities, the valuation of deferred income tax assets, the valuation of goodwill and acquired intangible assets and their useful lives and the valuation of certain equity awards assumed. 2. Accounting Standards and Significant Accounting Policies Significant Accounting Policies The Company’s significant accounting policies are discussed in “Note 2. Summary of Significant Accounting Policies” in Item 8. Financial Statements and Supplementary Data of its Form 10-K for the fiscal year ended January 31, 2022. The Company no longer considers the accounting policy for its convertible senior notes to be a significant accounting policy due to the adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2020-06 effective February 1, 2022, which simplified the accounting for convertible instruments. 10 OKTA, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) Recently Adopted Accounting Pronouncements ASU No. 2020-06 The Company adopted the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), effective February 1, 2022, using the modified retrospective method. The prior period condensed consolidated financial statements have not been retrospectively adjusted and continue to be reported under the accounting standards in effect for those periods. ASU 2020-06 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, no longer requires separately presenting in equity an embedded conversion feature for such debt. Similarly, the embedded conversion feature is no longer amortized into income as interest expense over the life of the instrument. Instead, the convertible debt instrument is accounted for wholly as debt unless (1) a convertible instrument contains features that require bifurcation as a derivative, 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 prior to the adoption of ASU 2020-06. The Company recognized a cumulative effect of initially applying the ASU as an adjustment to the February 1, 2022 opening balance of accumulated deficit. Due to the elimination of the equity conversion component of the Company’s convertible senior notes outstanding as of February 1, 2022, additional paid-in capital was reduced. The elimination of the equity conversion component had the effect of increasing the Company’s net debt balance. The reduction of other liabilities is related to changes to the Company’s deferred tax liabilities. The adoption of ASU 2020-06 resulted in the following changes to the Company’s condensed consolidated balance sheet as of February 1, 2022: Balance at January 31, 2022 Adjustments from Adoption of ASU 2020-06 Balance at February 1, 2022 (dollars in thousands) Liabilities Convertible senior notes, net $ 16,194 $ 927 $ 17,121 Convertible senior notes, net, noncurrent 1,815,714 371,527 2,187,241 Other liabilities, noncurrent 31,775 ( 866 ) 30,909 Stockholders’ equity Additional paid-in capital 7,749,716 ( 527,444 ) 7,222,272 Accumulated deficit ( 1,815,867 ) 155,856 ( 1,660,011 ) In addition, the adoption of ASU 2020-06 resulted in a decrease in reported net interest expense of approximately $ 21.2 million and $ 63.0 million and a decrease in basic and diluted net loss per share of $ 0.13 and $ 0.40 , for the three and nine months ended October 31, 2022, respectively. ASU No. 2021-08 The Company adopted 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”), effective February 1, 2022, on a prospective basis. The update requires contract assets and contract liabilities acquired in a business combination be recognized and measured in accordance with ASC Topic 606, Revenue from Contracts with Customers. The adoption of ASU 2021-08 did not have a material impact on the Company’s condensed consolidated financial statements. 11 OKTA, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) ASU No. 2021-04 The Company adopted the FASB issued ASU No. 2021-04, Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU 2021-04”), effective February 1, 2022, on a prospective basis. ASU 2021-04 addresses specific guidance related to modifications or exchanges of freestanding equity-classified written call options (such as warrants) by specifying the accounting for various modification scenarios. The adoption of ASU 2021-04 did not have a material impact on the Company’s condensed consolidated financial statements. 3. Business Combinations Acquisition of Auth0 On May 3, 2021, the Company acquired all outstanding shares of privately-held Auth0, Inc. (“Auth0”), an Identity-as-a-Service company. Total consideration transferred for Auth0 was $ 5,671.0 million, including approximately 19.2 million shares of common stock valued at $ 5,175.6 million, cash of $ 257.0 million, and assumed outstanding equity awards with vested fair value of $ 238.4 million. Cash consideration of $ 3.8 million and approximately 1.1 million shares valued at $ 294.6 million were 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 consideration held back was paid in full during the nine months ended October 31, 2022. The Company incurred $ 29.0 million of acquisition-related costs, which were recorded as general and administrative expenses in its condensed consolidated statement of operations for the nine months ended October 31, 2021. The transaction was accounted for as a business combination. The total purchase price of $ 5,671.0 million was allocated to the tangible and identifiable intangible assets and liabilities based on their estimated fair values. 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. Acquisition of atSpoke On August 2, 2021, the Company acquired all issued and outstanding capital stock of privately-held Townsend Street Labs, Inc. (“atSpoke”), a modern workplace operations platform. 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 recorded $ 62.2 million of goodwill. The Company incurred $ 0.9 million of acquisition-related costs, which were recorded as general and administrative expenses in its condensed consolidated statement of operations in the nine months ended October 31, 2021. 12 OKTA, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 4. Cash Equivalents and Investments Cash Equivalents and Short-term Investments The following tables present the amortized cost, unrealized gain (loss) and estimated fair value of cash equivalents and short-term investments: As of October 31, 2022 Amortized Cost Unrealized Gain Unrealized Loss Estimated Fair Value (dollars in thousands) Cash equivalents: Money market funds $ 91,598 $ — $ — $ 91,598 Total cash equivalents 91,598 — — 91,598 Short-term investments: U.S. treasury securities 2,032,380 — ( 34,840 ) 1,997,540 Corporate debt securities 229,491 — ( 3,493 ) 225,998 Total short-term investments 2,261,871 — ( 38,333 ) 2,223,538 Total $ 2,353,469 $ — $ ( 38,333 ) $ 2,315,136 As of January 31, 2022 Amortized Cost Unrealized Gain Unrealized Loss Estimated Fair Value (dollars in thousands) 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 All short-term investments were designated as available-for-sale securities as of October 31, 2022 and January 31, 2022. The following table presents the contractual maturities of the Company’s short-term investments: As of October 31, 2022 Amortized Cost Estimated Fair Value (dollars in thousands) Due within one year $ 1,925,930 $ 1,896,477 Due between one to five years 335,941 327,061 Total $ 2,261,871 $ 2,223,538 Interest receivable of $ 8.9 million and $ 6.0 million is included in Prepaid expenses and other current assets on the condensed consolidated balance sheets as of October 31, 2022 and January 31, 2022, respectively. 13 OKTA, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) The following table presents the fair values and unrealized losses related to the Company’s 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 October 31, 2022: Less Than 12 Months More Than 12 Months Total Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses (dollars in thousands) U.S. treasury securities $ 1,129,711 $ ( 19,305 ) $ 867,829 $ ( 15,535 ) $ 1,997,540 $ ( 34,840 ) Corporate debt securities 66,040 ( 1,035 ) 159,958 ( 2,458 ) 225,998 ( 3,493 ) Total $ 1,195,751 $ ( 20,340 ) $ 1,027,787 $ ( 17,993 ) $ 2,223,538 $ ( 38,333 ) The Company had 189 and 193 short-term investments in unrealized loss positions as of October 31, 2022 and January 31, 2022, respectively. 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 October 31, 2022 and January 31, 2022. Strategic Investments The Company's strategic investments primarily include equity investments in privately-held companies, which do not have a readily determinable fair value. As of October 31, 2022 and January 31, 2022, the balance of strategic investments was $ 23.6 million and $ 15.3 million, respectively. 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. 14 OKTA, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) Assets and Liabilities Measured at Fair Value on a Recurring Basis The following tables present information about the Company’s financial assets that were measured at fair value on a recurring basis using the above input categories: As of October 31, 2022 Level 1 Level 2 Level 3 Total (dollars in thousands) Assets: Cash equivalents: Money market funds $ 91,598 $ — $ — $ 91,598 Total cash equivalents 91,598 — — 91,598 Short-term investments: U.S. treasury securities — 1,997,540 — 1,997,540 Corporate debt securities — 225,998 — 225,998 Total short-term investments — 2,223,538 — 2,223,538 Total cash equivalents and short-term investments $ 91,598 $ 2,223,538 $ — $ 2,315,136 As of January 31, 2022 Level 1 Level 2 Level 3 Total (dollars in thousands) 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 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 tables above. Fair Value Measurements of Other Financial Instruments The following table presents the principal amounts and estimated fair values of the Company’s financial instruments that are not recorded at fair value on the condensed consolidated balance sheets: As of October 31, 2022 Principal Amount Estimated Fair Value (dollars in thousands) 2023 convertible senior notes $ 5,226 $ 6,001 2025 convertible senior notes 1,059,997 887,747 2026 convertible senior notes 1,150,000 925,635 The 2023 convertible senior notes (“2023 Notes”), the 2025 convertible senior notes (“2025 Notes”), and the 2026 convertible senior notes (“2026 Notes”, and together with the 2023 Notes and 2025 Notes, the “Notes”) are recorded at face value less unamortized debt issuance costs (See Note 9 for additional details). The estimated fair 15 OKTA, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 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. 6. Deferred Commissions Sales commissions capitalized as contract costs totaled $ 32.5 million and $ 35.7 million in the three months ended October 31, 2022 and 2021, respectively, and $ 81.9 million and $ 90.6 million in the nine months ended October 31, 2022 and 2021, respectively. Amortization of contract costs was $ 21.3 million and $ 14.9 million for the three months ended October 31, 2022 and 2021, respectively, and $ 60.8 million and $ 40.0 million for the nine months ended October 31, 2022 and 2021, respectively. 7. Goodwill and Intangible Assets, net Goodwill As of October 31, 2022 and January 31, 2022, goodwill was $ 5,400.3 million and $ 5,401.3 million, respectively. No goodwill impairments were recorded during the three and nine months ended October 31, 2022 and 2021. Intangible Assets, net Intangible assets consisted of the following: As of October 31, 2022 Gross Accumulated Amortization Net (dollars in thousands) Capitalized internal-use software costs $ 48,016 $ ( 28,607 ) $ 19,409 Purchased developed technology 219,800 ( 81,187 ) 138,613 Customer relationships 140,900 ( 52,798 ) 88,102 Trade name 21,400 ( 6,420 ) 14,980 Software licenses 1,797 ( 1,076 ) 721 $ 431,913 $ ( 170,088 ) $ 261,825 As of January 31, 2022 Gross Accumulated Amortization Net (dollars in thousands) 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 16 OKTA, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) The weighted-average remaining useful lives of the Company’s acquired intangible assets are as follows: Weighted-Average Remaining Useful Life As of October 31, 2022 As of January 31, 2022 Purchased developed technology 3.3 years 4.0 years Customer relationships 3.5 years 4.0 years Trade name 3.5 years 4.3 years Amortization expense of intangible assets for the three months ended October 31, 2022 and 2021 was $ 23.3 million and $ 22.4 million, respectively, and $ 69.2 million and $ 46.6 million for the nine months ended October 31, 2022 and 2021, respectively. 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 three months ended October 31, 2022 and 2021 that was included in the deferred revenue balances at the beginning of the respective periods was $ 417.8 million and $ 299.9 million, respectively, and $ 858.0 million and $ 459.4 million in the nine months ended October 31, 2022 and 2021, respectively. Professional services and other revenue recognized during the three months ended October 31, 2022 and 2021 that was included in the deferred revenue balances at the beginning of the respective periods was $ 5.9 million and $ 4.5 million, respectively, and $ 12.9 million and $ 5.9 million in the nine months ended October 31, 2022 and 2021, respectively. Transaction Price Allocated to the Remaining Performance Obligations Transaction price allocated to the remaining performance obligations (“RPO”) 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 October 31, 2022, total remaining non-cancelable performance obligations under the Company’s subscription contracts with customers was approximately $ 2,852.8 million . Of this amount, the Company expects to recognize revenue of approximately $ 1,579.4 million, or 55 %, 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 October 31, 2022 were not material. 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. There have been no changes to the terms of the 2023 Notes, Note Hedges (as defined below), or Warrants (as defined below) from those disclosed in the Company’s Form 10-K for the fiscal year ended January 31, 2022. The 2023 Notes are currently convertible at the option of the holders, in whole or in part, as of October 15, 2022 until the close of business on the second scheduled trading day immediately preceding the maturity date, regardless of the conversion conditions. The 2023 Notes are classified as current liabilities on the condensed consolidated balance sheet as of October 31, 2022. 17 OKTA, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) As of October 31, 2022, $ 5.2 million of principal remained outstanding on the 2023 Notes. During the three months ended October 31, 2022, the Company did not settle any of the 2023 Notes and during the nine months ended October 31, 2022, the Company issued approximately 0.2 million shares of Class A common stock and paid an immaterial amount in cash to settle approximately $ 12.0 million principal amount of 2023 Notes. 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. As of October 31, 2022, the effective interest rate on the 2023 Notes was 0.85 %. As of October 31, 2021, prior to the adoption of ASU 2020-06, the effective interest rate on the liability component of the 2023 Notes was 5.68 %. The following table sets forth total interest expense recognized related to the 2023 Notes: Three Months Ended October 31, Nine Months Ended October 31, 2022 2021 2022 2021 (dollars in thousands) Contractual interest expense $ 3 $ 9 $ 14 $ 43 Amortization of debt issuance costs 8 22 35 84 Amortization of debt discount (1) — 213 — 837 Total $ 11 $ 244 $ 49 $ 964 (1) Not applicable subsequent to adoption of ASU 2020-06. The net carrying amount of the 2023 Notes consisted of the following: As of October 31, 2022 As of January 31, 2022 (dollars in thousands) Liability component: Principal $ 5,226 $ 17,228 Less: unamortized debt issuance costs and debt discount (1) ( 9 ) ( 1,034 ) Net carrying amount $ 5,217 $ 16,194 As of October 31, 2022 As of January 31, 2022 (dollars in thousands) Equity component: (1) 2023 Notes $ — $ 3,993 Less: issuance costs — ( 116 ) Carrying amount of the equity component (2) $ — $ 3,877 (1) Subsequent to the adoption of ASU 2020-06 under the modified retrospective method, the equity component and debt discount are eliminated. (2) Included in the January 31, 2022 condensed consolidated balance sheet within Additional paid-in capital. 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”). The Note Hedges are purchased call options that give the Company the option to purchase shares, subject to anti-dilution adjustments substantially identical to those in the 2023 Notes, 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 separate transactions and are not part of the terms of the 2023 Notes. During the three months ended October 31, 2022, the Company did not settle any Note Hedges and during the nine months ended October 31, 2022, the Company exercised and net-share-settled Note Hedges 18 OKTA, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) corresponding to approximately $ 12.0 million principal amount of 2023 Notes and received approximately 0.1 million shares of Class A common stock and an immaterial cash payment. As of October 31, 2022, Note Hedges giving the Company the option to purchase approximately 0.1 million shares (subject to adjustment) remained outstanding. Warrants In connection with the issuance of the 2023 Notes, the Company 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 (the “Warrants”) to acquire shares, subject to anti-dilution adjustments, 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). The Warrants are separate transactions and are not part of the terms of the 2023 Notes or the Note Hedges. As of October 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. There have been no changes to the terms of the 2025 Notes or 2025 Capped Calls (as defined below) from those disclosed in the Company’s Form 10-K for the fiscal year ended January 31, 2022. As of October 31, 2022, the conditions allowing holders of the 2025 Notes to convert were not met, and as a result, the 2025 Notes were classified as noncurrent liabilities on the condensed consolidated balance sheet. As of October 31, 2022, the effective interest rate on the 2025 Notes was 0.43 %. As of October 31, 2021, prior to the adoption of ASU 2020-06, the effective interest rate on the liability component of the 2025 Notes was 4.10 %. The following table sets forth total interest expense recognized related to the 2025 Notes: Three Months Ended October 31, Nine Months Ended October 31, 2022 2021 2022 2021 (dollars in thousands) Contractual interest expense $ 332 $ 332 $ 994 $ 994 Amortization of debt issuance costs 809 581 2,424 1,705 Amortization of debt discount (1) — 8,878 — 26,368 Total $ 1,141 $ 9,791 $ 3,418 $ 29,067 (1) Not applicable subsequent to adoption of ASU 2020-06. 19 OKTA, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) The net carrying amount of the 2025 Notes consisted of the following: As of October 31, 2022 As of January 31, 2022 (dollars in thousands) Liability component: Principal $ 1,059,997 $ 1,059,997 Less: unamortized debt issuance costs and debt discount (1) ( 9,239 ) ( 149,333 ) Net carrying amount $ 1,050,758 $ 910,664 As of October 31, 2022 As of January 31, 2022 (dollars in thousands) Equity component: (1) 2025 Notes $ — $ 221,387 Less: issuance costs — ( 4,040 ) Carrying amount of the equity component (2) $ — $ 217,347 (1) Subsequent to the adoption of ASU 2020-06 under the modified retrospective method, the equity component and debt discount are eliminated. (2) Included in the January 31, 2022 condensed consolidated balance sheet 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”). The 2025 Capped Calls are purchased call options that give the Company the option to purchase approximately 5.6 million shares, subject to anti-dilution adjustments substantially identical to those in the 2025 Notes, 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 separate transactions and are not part of the terms of the 2025 Notes. 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. There have been no changes to the terms of the 2026 Notes or 2026 Capped Calls (as defined below) from those disclosed in the Company’s Form 10-K for the fiscal year ended January 31, 2022. As of October 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 on the condensed consolidated balance sheet. 20 OKTA, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) As of October 31, 2022, the effective interest rate on the 2026 Notes was 0.60 %. As of October 31, 2021, prior to the adoption of ASU 2020-06, the effective interest rate on the liability component of the 2026 Notes was 5.75 %. The following table sets forth total interest expense recognized related to the 2026 Notes: Three Months Ended October 31, Nine Months Ended October 31, 2022 2021 2022 2021 (dollars in thousands) Contractual interest expense $ 1,078 $ 1,078 $ 3,234 $ 3,234 Amortization of debt issuance costs 628 364 1,881 1,056 Amortization of debt discount (1) — 11,640 — 34,428 Total $ 1,706 $ 13,082 $ 5,115 $ 38,718 (1) Not applicable subsequent to adoption of ASU 2020-06. The net carrying amount of the 2026 Notes consisted of the following: As of October 31, 2022 As of January 31, 2022 (dollars in thousands) Liability component: Principal $ 1,150,000 $ 1,150,000 Less: unamortized debt issuance costs and debt discount (1) ( 9,211 ) ( 244,950 ) Net carrying amount $ 1,140,789 $ 905,050 As of October 31, 2022 As of January 31, 2022 (dollars in thousands) Equity component: (1) 2026 Notes $ — $ 310,311 Less: issuance costs — ( 4,090 ) Carrying amount of the equity component (2) $ — $ 306,221 (1) Subsequent to the adoption of ASU 2020-06 under the modified retrospective method, the equity component and debt discount are eliminated. (2) Included in the January 31, 2022 condensed consolidated balance sheet 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”). The 2026 Capped Calls are purchased call options that give the Company the option to purchase approximately 4.8 million shares, subject to anti-dilution adjustments substantially identical to those in the 2026 Notes, 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 separate transactions and are not part of the terms of the 2026 Notes. 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, financial covenants or other restrictions. 21 OKTA, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) Operating lease costs were as follows: Three Months Ended October 31, Nine Months Ended October 31, 2022 2021 2022 2021 (dollars in thousands) Operating lease cost (1) $ 10,218 $ 9,677 $ 30,954 $ 28,135 (1) Amounts are presented exclusive of sublease income and include leases with an original term of 12 months or less (short-term leases), which are immaterial. The weighted-average remaining term of the Company’s operating leases was 5.3 years and 5.9 years as of October 31, 2022 and January 31, 2022, respectively, and the weighted-average discount rate used to measure the present value of the operating lease liabilities was 5.3 % and 5.5 %, respectively. Maturities of the Company’s operating lease liabilities, which do not include short-term leases, are as follows: As of October 31, 2022 Fiscal Year Ending January 31: (dollars in thousands) 2023 (remaining three months) $ 11,367 2024 44,971 2025 41,540 2026 31,309 2027 30,500 Thereafter 53,608 Total lease payments 213,295 Less imputed interest ( 27,876 ) Less tenant improvement allowances not yet recognized ( 1,979 ) Total operating lease liabilities $ 183,440 Cash payments made related to operating lease liabilities were $ 11.3 million and $ 10.3 million in the three months ended October 31, 2022 and 2021, respectively, and $ 29.5 million and $ 29.4 million in the nine months ended October 31, 2022 and 2021, respectively. During the three months ended October 31, 2022, the Company announced a real estate optimization plan which provided for closing duplicative sites and decommissioning underutilized offices and floors. As a result, the Company recognized $ 14.2 million of non-cash lease impairment charges included in general and administrative expenses on the condensed consolidated statement of operations for the three months ended October 31, 2022. The non-cash lease impairment charges represent the amount that the carrying value of the asset groups exceeded their estimated fair values. The asset groups primarily include operating lease right-of-use assets, leasehold improvements, and related property and equipment. To estimate the fair value of the asset group, the Company utilized a discounted cash flow approach using market participant assumptions of the expected cash flows and discount rate. 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 $ 8.5 million and $ 8.6 million were issued and outstanding as of October 31, 2022 and January 31, 2022, respectively. No draws have been made under such letters of credit. Noncurrent restricted cash of $ 6.3 million and $ 6.4 million associated with these letters of credit is included in Other assets on the condensed consolidated balance sheets as of October 31, 2022 and January 31, 2022, respectively. Purchase Obligations Except as discussed below, there were no significant changes in future minimum purchase obligations as disclosed in the Company’s audited consolidated financial statements for the year ended January 31, 2022. 22 OKTA, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) Effective July 2022, the Company terminated its existing agreement and entered into a new agreement with a cloud services provider with a total obligation of $ 450.0 million over a four-year period. 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 October 31, 2022. Warranties and Indemnification To date, the Company has not incurred significant costs and has not accrued any material liabilities in the accompanying condensed consolidated financial statements as a result of its warranty and indemnification obligations. 12. Employee Incentive Plans The Company’s equity incentive plans provide for granting stock options, restricted stock units (“RSUs”), restricted stock awards to employees, consultants, officers and directors and restricted stock units with market-based vesting conditions to certain executives. In addition, the Company offers an Employee Stock Purchase Plan (“ESPP”) to eligible employees. Stock-based compensation expense was recorded in the following cost and expense categories in the Company’s condensed consolidated statements of operations: Three Months Ended October 31, Nine Months Ended October 31, 2022 2021 2022 2021 (dollars in thousands) Cost of revenue Subscription $ 17,106 $ 13,455 $ 51,509 $ 33,843 Professional services and other 3,563 3,376 11,016 8,879 Research and development 69,208 56,573 208,330 129,998 Sales and marketing 41,515 39,248 120,299 101,602 General and administrative 39,593 43,133 120,533 133,289 Total $ 170,985 $ 155,785 $ 511,687 $ 407,611 Equity Incentive Plans The Company has two equity incentive plans: the 2009 Stock Plan and the 2017 Equity Incentive Plan (“2017 Plan”). In addition, the Company assumed Auth0 equity incentive plans. All shares that remain available for future grants are under the 2017 Plan. As of October 31, 2022, options to purchase 1,841,836 shares of Class A common stock and 4,787,688 shares of Class B common stock remained outstanding. Shares of common stock reserved for future issuance are as follows: As of October 31, 2022 Stock options and unvested RSUs outstanding 15,807,738 Available for future stock option and RSU grants 26,022,656 Available for ESPP 7,053,433 48,883,827 23 OKTA, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) Stock Options A summary of the Company’s stock option activity and related information is 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, 2022 7,984,078 $ 39.59 5.2 $ 1,314,031 Granted — — Exercised ( 1,177,880 ) 12.41 Expired ( 24,833 ) 195.71 Forfeited ( 151,841 ) 62.73 Outstanding as of October 31, 2022 6,629,524 $ 43.30 4.6 $ 249,207 As of October 31, 2022 Vested and exercisable 5,855,640 $ 27.07 4.1 $ 242,916 As of October 31, 2022, there was a total of $ 112.5 million of unrecognized stock-based compensation expense related to options, which is being recognized over a weighted-average period of 1.9 years. Restricted Stock Units A summary of the Company’s RSU activity (inclusive of market-based RSUs) and related information is as follows: Number of RSUs Weighted- Average Grant Date Fair Value Per Share Outstanding as of January 31, 2022 6,225,747 $ 207.26 Granted 6,087,249 121.08 Vested ( 1,956,194 ) 177.54 Forfeited ( 1,178,588 ) 195.91 Outstanding as of October 31, 2022 9,178,214 $ 157.90 As of October 31, 2022, there was $ 1,304.0 million of unrecognized stock-based compensation expense related to unvested RSUs, which is being recognized over a weighted-average period of 3.1 years based on vesting under the award service conditions. Market-based Restricted Stock Units In March 2022, the Company granted market-based RSUs to certain members of management. The target number of market-based RSUs granted was 58,150 . One-third of these market-based RSUs vest over each of a one-, two- and three-year performance period, each starting on February 1, 2022. The number of shares that can be earned ranges from 0 % to 200 % of the target number of shares based on the relative performance of the per share price of the Company’s common stock as compared to the Nasdaq Composite Index over the respective performance periods and subject to continuous employment through the vesting dates. The $ 244.73 grant date fair value per target market-based RSU was determined using a Monte Carlo simulation approach. Compensation expense for awards with market conditions is recognized over the service period using the accelerated attribution method and is not reversed if the market condition is not met. 24 OKTA, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) Restricted Stock Awards Issued in Connection with Business Combinations In fiscal year 2022, 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 October 31, 2022, there was $ 172.4 million of unrecognized stock-based compensation expense related to unvested restricted shares, which is being recognized over a weighted-average period of 1.5 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 ESPP contains a reset provision under which the offering period resets if the fair market value of the Company’s common stock on the purchase date is less than the fair market value on the offering date. The Company estimated the fair value of ESPP purchase rights using a Black-Scholes option pricing model with the following assumptions: Three Months Ended October 31, Nine Months Ended October 31, 2022 2021 2022 2021 Expected volatility — %- — % — % - — % 63 % - 78 % 47 % - 48 % Expected term (in years) 0 - 0 0 - 0 0.5 - 1.0 0.5 - 1.0 Risk-free interest rate — % - — % — % - — % 2.46 % - 2.92 % 0.06 % - 0.09 % Expected dividend yield — — — — During the nine months ended October 31, 2022, the Company’s employees purchased 269,814 shares of its Class A common stock under the ESPP. The shares were purchased at a weighted-average purchase price of $ 70.27 per share, with total proceeds of $ 19.0 million. As of October 31, 2022, there was $ 15.2 million of unrecognized stock-based compensation expense related to the ESPP that is expected to be recognized over a weighted-average vesting period of 0.6 years. 13. Income Taxes For the three and nine months ended October 31, 2022, the Company recorded a tax provision of $ 3.7 million and $ 9.8 million on pretax losses of $ 205.2 million and $ 652.3 million, respectively. The effective tax rate for the three and nine months ended October 31, 2022 was approximately ( 1.8 )% and ( 1.5 )%, respectively. The effective tax rate differs from the statutory rate primarily as a result of not recognizing the tax benefit for U.S. losses due to a full valuation allowance against U.S. deferred tax assets, the tax effect of foreign operations, U.S. state taxes, and stock-based compensation shortfalls in the United Kingdom. The Tax Cuts and Jobs Act enacted on December 22, 2017 amended Internal Revenue Code Section 174 to require that specific research and experimental (“R&E”) expenditures be capitalized and amortized over five years (U.S. R&E) or fifteen years (non-U.S. R&E) beginning in the Company's fiscal 2023. Although Congress has considered legislation that would defer, modify or repeal the capitalization and amortization requirement, to date the provision has not been deferred, repealed or otherwise modified. As a result, the Company may be required to utilize some of its federal and state tax attributes and there may be increases to cash taxes or tax expense. For the three and nine months ended October 31, 2021, the Company recorded a tax provision of $ 0.7 million and a tax benefit of $ 6.8 million on pretax losses of $ 220.6 million and $ 614.0 million, respectively. The effective tax rate for the three and nine months ended October 31, 2021 was approximately ( 0.3 )% and 1.1 %, respectively. The effective tax rate differs from the statutory rate primarily as a result of not recognizing deferred tax assets for U.S. losses due to a full valuation allowance against U.S. deferred tax assets, release of the valuation allowance in the United States in connection with the acquired businesses, a remeasurement of deferred tax assets in connection with a tax rate change in the United Kingdom, and excess tax benefits from stock-based compensation in the United 25 OKTA, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) Kingdom. The tax benefit for the nine months ended October 31, 2021 was partially offset by income tax expense in profitable foreign jurisdictions and U.S. state taxes. 14. Net Loss Per Share The following table presents the calculation of basic and diluted net loss per share: Three Months Ended October 31, Nine Months Ended October 31, 2022 2021 2022 2021 Class A Class B Class A Class B Class A Class B Class A Class B (dollars in thousands, except per share data) Numerator: Net loss $ ( 199,456 ) $ ( 9,441 ) $ ( 211,176 ) $ ( 10,135 ) $ ( 632,425 ) $ ( 29,657 ) $ ( 576,106 ) $ ( 31,119 ) Denominator: Weighted-average shares outstanding, basic and diluted 151,535 7,173 146,715 7,041 150,296 7,048 138,311 7,471 Net loss per share, basic and diluted $ ( 1.32 ) $ ( 1.32 ) $ ( 1.44 ) $ ( 1.44 ) $ ( 4.21 ) $ ( 4.21 ) $ ( 4.17 ) $ ( 4.17 ) 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 are not included in the diluted per share calculations because they would be anti-dilutive are as follows: As of October 31, 2022 2021 (in thousands) Issued and outstanding stock options 6,630 8,621 Unvested RSUs issued and outstanding 9,120 5,221 Unvested market-based RSUs issued and outstanding 116 — Unvested restricted stock awards issued and outstanding 743 1,269 Shares committed under the ESPP 597 213 Shares related to the 2023 Notes 108 356 Shares subject to warrants related to the issuance of the 2023 Notes 1,048 1,048 Shares related to the 2025 Notes 5,617 5,617 Shares related to the 2026 Notes 4,820 4,820 28,799 27,165 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 Notes, 2025 Notes 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. 26 OKTA, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS