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 ) 73 Consolidated Balance Sheets 76 Consolidated Statements of Operations 77 Consolidated Statements of Comprehensive Loss 78 Consolidated Statements of Stockholders’ Equity 79 Consolidated Statements of Cash Flows 81 Notes to Consolidated Financial Statements 83 72 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, 2023 and 2022, the related consolidated statements of operations, comprehensive loss, stockholders' equity, and cash flows for each of the three years in the period ended January 31, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended January 31, 2023, 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, 2023, 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 3, 2023 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 Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 73 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. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2013. San Jose, California March 3, 2023 74 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, 2023, 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, 2023, based on the COSO criteria. 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, 2023 and 2022, the related consolidated statements of operations, comprehensive loss, stockholders' equity, and cash flows for each of the three years in the period ended January 31, 2023, and the related notes and our report dated March 3, 2023 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. /s/ Ernst & Young LLP San Jose, California March 3, 2023 75 OKTA, INC. CONSOLIDATED BALANCE SHEETS (dollars in millions, shares in thousands, except per share data) As of January 31, 2023 2022 Assets Current assets: Cash and cash equivalents $ 264 $ 260 Short-term investments 2,316 2,242 Accounts receivable, net of allowances of $ 8 and $ 4 481 398 Deferred commissions 92 75 Prepaid expenses and other current assets 76 66 Total current assets 3,229 3,041 Property and equipment, net 59 65 Operating lease right-of-use assets 122 148 Deferred commissions, noncurrent 210 191 Intangible assets, net 241 317 Goodwill 5,400 5,401 Other assets 46 43 Total assets $ 9,307 $ 9,206 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 12 $ 20 Accrued expenses and other current liabilities 112 90 Accrued compensation 99 144 Convertible senior notes, net — 16 Deferred revenue 1,242 973 Total current liabilities 1,465 1,243 Convertible senior notes, net, noncurrent 2,193 1,816 Operating lease liabilities, noncurrent 142 171 Deferred revenue, noncurrent 18 23 Other liabilities, noncurrent 23 31 Total liabilities 3,841 3,284 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, 2023 and 2022. — — Class A Common stock, par value $ 0.0001 per share; 1,000,000 shares authorized; 154,009 and 149,624 shares issued and outstanding as of January 31, 2023 and 2022, respectively. — — Class B Common stock, par value $ 0.0001 per share; 120,000 shares authorized; 7,300 and 6,978 shares issued and outstanding as of January 31, 2023 and 2022, respectively. — — Additional paid-in capital 7,974 7,750 Accumulated other comprehensive loss ( 33 ) ( 12 ) Accumulated deficit ( 2,475 ) ( 1,816 ) Total stockholders’ equity 5,466 5,922 Total liabilities and stockholders’ equity $ 9,307 $ 9,206 See Notes to Consolidated Financial Statements. 76 OKTA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (dollars in millions, shares in thousands, except per share data) Year Ended January 31, 2023 2022 2021 Revenue Subscription $ 1,794 $ 1,249 $ 797 Professional services and other 64 51 38 Total revenue 1,858 1,300 835 Cost of revenue Subscription 464 329 170 Professional services and other 82 67 48 Total cost of revenue 546 396 218 Gross profit 1,312 904 617 Operating expenses Research and development 620 469 223 Sales and marketing 1,066 771 427 General and administrative 409 432 171 Restructuring and other charges 29 — — Total operating expenses 2,124 1,672 821 Operating loss ( 812 ) ( 768 ) ( 204 ) Interest expense ( 11 ) ( 91 ) ( 73 ) Interest income and other, net 22 9 13 Loss on early extinguishment and conversion of debt — — ( 2 ) Interest and other, net 11 ( 82 ) ( 62 ) Loss before provision for (benefit from) income taxes ( 801 ) ( 850 ) ( 266 ) Provision for (benefit from) income taxes 14 ( 2 ) — Net loss $ ( 815 ) $ ( 848 ) $ ( 266 ) Net loss per share, basic and diluted $ ( 5.16 ) $ ( 5.73 ) $ ( 2.09 ) Weighted-average shares used to compute net loss per share, basic and diluted 158,023 148,036 127,212 See Notes to Consolidated Financial Statements. 77 OKTA, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in millions) Year Ended January 31, 2023 2022 2021 Net loss $ ( 815 ) $ ( 848 ) $ ( 266 ) Other comprehensive income (loss): Net change in unrealized gains or losses on available-for-sale securities ( 12 ) ( 14 ) 1 Foreign currency translation adjustments ( 9 ) ( 3 ) 3 Other comprehensive income (loss) ( 21 ) ( 17 ) 4 Comprehensive loss $ ( 836 ) $ ( 865 ) $ ( 262 ) See Notes to Consolidated Financial Statements. 78 OKTA, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (dollars in millions, shares in thousands) Class A Common Stock Class B Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity Shares Amount Shares Amount Balances as of January 31, 2020 113,990 $ — 8,648 $ — $ 1,106 $ 1 $ ( 702 ) $ 405 Issuance of common stock upon exercise of stock options and other activity, net 4,114 — 254 — 46 — — 46 Issuance of common stock under employee stock purchase plan, net of cancellations 247 — — — 26 — — 26 Issuance of common stock for settlement of restricted stock units 2,109 — — — — — — — Issuance of common stock for bonus settlement 86 — — — 10 — — 10 Issuance of common stock pursuant to charitable donation 43 — — — 9 — — 9 Conversion of Class B common stock to Class A common stock 743 — ( 743 ) — — — — — Exercise of hedges related to convertible senior notes ( 168 ) — — — — — — — Equity component of convertible senior notes, net of issuance costs — — — — 306 — — 306 Equity component of early extinguishment and conversion of convertible senior notes 1,660 — — — 70 — — 70 Proceeds from hedges related to convertible senior notes — — — — 195 — — 195 Payments for warrants related to convertible senior notes — — — — ( 175 ) — — ( 175 ) Purchases of capped calls related to convertible senior notes — — — — ( 134 ) — — ( 134 ) Stock-based compensation — — — — 197 — — 197 Other comprehensive income — — — — — 4 — 4 Net loss — — — — — — ( 266 ) ( 266 ) Balances as of January 31, 2021 122,824 $ — 8,159 $ — $ 1,656 $ 5 $ ( 968 ) $ 693 Issuance of common stock in connection with business combinations 19,190 — — — 5,409 — — 5,409 Issuance of common stock in connection with business combinations subject to future vesting 1,269 — — — — — — — Issuance of common stock upon exercise of stock options and other activity, net 2,552 — 2 — 54 — — 54 Issuance of common stock under employee stock purchase plan, net of cancellations 186 — — — 36 — — 36 Issuance of common stock for settlement of restricted stock units 2,294 — — — — — — — Issuance of common stock pursuant to charitable donation 30 — — — 7 — — 7 Conversion of Class B common stock to Class A common stock 1,183 — ( 1,183 ) — — — — — Equity component of early extinguishment and conversion of convertible senior notes 476 — — — 21 — — 21 Proceeds from hedges related to convertible senior notes ( 380 ) — — — — — — — Stock-based compensation — — — — 567 — — 567 Other comprehensive loss — — — — — ( 17 ) — ( 17 ) Net loss — — — — — — ( 848 ) ( 848 ) Balances as of January 31, 2022 149,624 $ — 6,978 $ — $ 7,750 $ ( 12 ) $ ( 1,816 ) $ 5,922 79 Class A Common Stock Class B Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity Shares Amount Shares Amount Adjustments from adoption of ASU 2020-06 — — — — ( 528 ) — 156 ( 372 ) Forfeiture of unvested common stock issued in connection with business combinations ( 14 ) — — — — — — — Issuance of common stock upon exercise of stock options and other activity, net 965 — 451 — 17 — — 17 Issuance of common stock under employee stock purchase plan, net of cancellations 492 — — — 31 — — 31 Issuance of common stock for settlement of restricted stock units 2,555 — — — — — — — Issuance of common stock pursuant to charitable donation 42 — — — 4 — — 4 Conversion of Class B common stock to Class A common stock 129 — ( 129 ) — — — — — Settlement of convertible senior notes 356 — — — 17 — — 17 Proceeds from hedges related to convertible senior notes ( 140 ) — — — — — — — Stock-based compensation — — — — 683 — — 683 Other comprehensive loss — — — — — ( 21 ) — ( 21 ) Net loss — — — — — — ( 815 ) ( 815 ) Balances as of January 31, 2023 154,009 $ — 7,300 $ — $ 7,974 $ ( 33 ) $ ( 2,475 ) $ 5,466 See Notes to Consolidated Financial Statements. 80 OKTA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions) Year Ended January 31, 2023 2022 2021 Cash flows from operating activities: Net loss $ ( 815 ) $ ( 848 ) $ ( 266 ) Adjustments to reconcile net loss to net cash provided by operating activities: Stock-based compensation 677 566 195 Depreciation, amortization and accretion 114 108 37 Amortization of debt discount and issuance costs 6 86 68 Amortization of deferred commissions 84 57 40 Deferred income taxes 7 ( 6 ) ( 1 ) Non-cash charitable contributions 4 7 9 Lease impairment charges 14 — 3 Loss on early extinguishment and conversion of debt — — 2 (Gain) loss on strategic investments ( 1 ) ( 8 ) 1 Other, net 3 2 2 Changes in operating assets and liabilities: Accounts receivable ( 87 ) ( 175 ) ( 66 ) Deferred commissions ( 122 ) ( 171 ) ( 81 ) Prepaid expenses and other assets ( 13 ) ( 7 ) ( 13 ) Operating lease right-of-use assets 27 23 19 Accounts payable ( 6 ) 7 4 Accrued compensation ( 44 ) 50 44 Accrued expenses and other liabilities 8 21 6 Operating lease liabilities ( 34 ) ( 24 ) ( 17 ) Deferred revenue 264 416 142 Net cash provided by operating activities 86 104 128 Cash flows from investing activities: Capitalization of internal-use software costs ( 9 ) ( 4 ) ( 4 ) Purchases of property and equipment ( 12 ) ( 13 ) ( 13 ) Purchases of securities available for sale and other ( 1,411 ) ( 1,847 ) ( 2,029 ) Proceeds from maturities and redemption of securities available for sale 1,308 1,482 535 Proceeds from sales of securities available for sale and other — 230 206 Payments for business acquisitions, net of cash acquired ( 4 ) ( 215 ) — Purchase of intangible assets ( 2 ) — — Net cash used in investing activities ( 130 ) ( 367 ) ( 1,305 ) Cash flows from financing activities: Proceeds from issuance of convertible senior notes, net of issuance costs — — 1,135 Proceeds from hedges related to convertible senior notes — — 195 Payments for warrants related to convertible senior notes — — ( 175 ) Purchases of capped calls related to convertible senior notes — — ( 134 ) Proceeds from stock option exercises, net of repurchases 17 53 45 Proceeds from shares issued in connection with employee stock purchase plan 31 36 26 Net cash provided by financing activities 48 89 1,092 Effects of changes in foreign currency exchange rates on cash, cash equivalents and restricted cash ( 6 ) ( 2 ) 2 Net decrease in cash, cash equivalents and restricted cash ( 2 ) ( 176 ) ( 83 ) Cash, cash equivalents and restricted cash at beginning of year 273 449 532 Cash, cash equivalents and restricted cash at end of year $ 271 $ 273 $ 449 81 Year Ended January 31, 2023 2022 2021 Supplementary cash flow disclosure: Cash paid during the period for: Interest $ 6 $ 6 $ 4 Income taxes 8 3 1 Non-cash investing and financing activities: Issuance of common stock and value of equity awards assumed in connection with business combination — 5,409 — Issuance of common stock for repurchases and conversions of convertible senior notes 47 126 308 Benefit from exercise of hedges related to convertible senior notes 18 92 37 Operating lease right-of-use assets exchanged for lease liabilities 11 22 46 Issuance of common stock for bonus settlement — — 10 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 $ 264 $ 260 $ 435 Restricted cash, current included in prepaid expenses and other current assets — 5 5 Restricted cash, noncurrent included in other assets 7 8 9 Total cash, cash equivalents and restricted cash $ 271 $ 273 $ 449 See Notes to Consolidated Financial Statements. 82 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 Company's Workforce Identity and Customer Identity Clouds are powered by the Company's Identity Platform enabling customers to securely connect the right people to the right technologies and services at the right time, and developers to securely and efficiently embed identity into the software they build, allowing them to innovate and focus on their core mission. 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. All intercompany balances and transactions have been eliminated in consolidation. The Company conducts business globally and is managed, operated and organized by major functional departments that operate on a consolidated basis. As result, the Company operates in one reportable segment. The Company’s fiscal year ends on January 31. References to fiscal 2023, for example, refer to the fiscal year ended January 31, 2023. 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 the aggregate cash flow classifications as previously reported. In fiscal 2023, the Company elected to change its presentation of dollars from thousands to millions. As a result, the sum of the components reported in millions may not equal the total amount reported in millions due to rounding. In addition, percentages presented may not add to their respective totals or recalculate due to rounding. Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires 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. Estimates are based on historical experience and on other assumptions that management believes are reasonable under the circumstances. Actual results could vary from those estimates. The Company’s most significant estimates include the valuation of deferred income tax assets, uncertain tax positions, assets and liabilities acquired in business combinations, and loss contingencies related to litigation. 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 income (loss) within the consolidated statements of stockholders’ equity. Foreign currency transaction gains and losses are included in interest and other, net in the consolidated statements of operations and were not material in fiscal 2023, 2022 or 2021. 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. 2. Summary of Significant Accounting Policies Revenue Recognition Revenue is derived 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 arrangements are generally non-cancellable and non-refundable. Furthermore, if a customer reduces the contracted 83 OKTA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) usage or service level, the customer has no right of refund. The 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. Revenue recognition is determined 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 performance obligations are satisfied. The Company recognizes revenue net of any applicable value added or sales tax. 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 Professional services principally consist of customer-specific requests for application integrations, user interface enhancements and other customer-specific requests. Revenue for 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 standalone selling price ("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. Pricing objectives, market conditions or other factors may change in the future resulting in changes to standalone selling prices that could impact the timing or amount of revenue recognition. 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. Deferred Commissions Sales commissions earned by the Company’s sales force are generally 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 is 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. 84 OKTA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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 , as determined by considering the average contractual term for renewal contracts. Sales commissions capitalized as contract costs totaled $ 121 million and $ 171 million in fiscal 2023 and 2022, respectively. Amortization of contract costs was $ 84 million, $ 57 million and $ 40 million in fiscal 2023, 2022 and 2021, respectively. Amortization expense is included in sales and marketing expenses in the accompanying consolidated statements of operations. 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. Research and Development Research and development expense incurred in the normal course of business is expensed as incurred. Software Development Costs Qualifying internally-developed software development costs, including the associated stock-based compensation expenses, are capitalized during the application development stage, as long as management has authorized and committed to funding the project, it is probable the project will be completed and the software will be used to perform the function intended. Capitalization of such costs ceases once the project is substantially complete and ready for its intended use. Capitalized software development costs are included in Intangible assets, net on the consolidated balance sheets and are amortized on a straight-line basis over an expected useful life of 3 years. Advertising Expenses Advertising costs are expensed as incurred. Advertising expense was $ 77 million, $ 79 million, and $ 33 million in fiscal 2023, 2022 and 2021, respectively. Restructuring and Other Charges Restructuring generally includes significant actions involving employee-related severance charges, facilities consolidation and contract termination costs. Employee-related severance charges are largely based upon substantive severance plans, while some are mandated requirements in certain foreign jurisdictions. Severance costs generally include severance payments, outplacement services, health insurance coverage and legal costs. These charges are reflected in the period when both the actions are probable, at the balance sheet date, and the amounts are reasonably estimable. Right-of-use asset impairments are recognized on the date the premises have been vacated or the Company have ceased-use of the leased facilities. Actual results may differ from the Company's estimates and assumptions. Restructuring liabilities are classified in accrued expenses and other current liabilities in the consolidated balance sheets. Stock-Based Compensation 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 RSUs with market-based vesting conditions to certain executives. In addition, the Company offers an ESPP to eligible employees. Stock-based compensation expense related to stock awards (including stock options, RSUs, market-based RSUs, and ESPP) is measured based on the fair value of the awards granted and recognized as an expense over the requisite service period. The fair value of each option and ESPP awards are estimated on the grant date using the Black-Scholes option pricing model which requires the use of various assumptions, including the expected term of the award, the expected volatility of the price of the underlying common stock, risk-free interest rates, and expected dividend yield 85 OKTA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) of the underlying common stock. Stock-based compensation expense is recognized following the straight-line attribution method over the requisite service period for options, and over the offering period for ESPP awards. The expected term of the Company’s stock options granted to employees has been determined utilizing the simplified method due to lack of historical exercise data. The expected volatility has been determined using a weighted-average of the historical volatility measures of a group of guideline companies and the Company's own historical volatility. The risk-free interest rate used is based on the U.S. Treasury yield in effect at the time of grant for a period consistent with the expected term of the award. The expected dividend is assumed to be zero as the Company has never declared or paid any cash dividends and do not currently intend to declare dividends in the foreseeable future. The fair value of each RSU award is based on the fair value of the underlying common stock as of the grant date. Stock-based compensation expense is recognized on a straight-line basis over the requisite service period, generally four years . The fair value of each market-based RSU award is measured using a Monte Carlo simulation valuation model which requires the use of various assumptions, including the stock price volatility and risk-free interest rate as of the valuation date corresponding to the length of time remaining in the performance period. Stock-based compensation expense for awards with market conditions is recognized over the requisite service period using the accelerated attribution method and is not reversed if the market condition is not met. The assumptions used to determine the fair value of the stock awards represent management's best estimates. These estimates involve inherent uncertainties and the application of management's judgment. Forfeitures are accounted for as they occur. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax basis. Deferred tax assets are also recognized for operating losses and tax credit carry forwards. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Management considers all positive and negative evidence in evaluating the Company’s ability to realize its deferred tax assets, for example its historical results and forecasts of future ability to realize its deferred tax assets, including forecasts of future taxable income by jurisdiction. Deferred tax assets and liabilities are measured using enacted tax rates applicable in the years in which they are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax law is recognized in the provision for income taxes in the period that includes the enactment date. The Company does not provide for income taxes on undistributed earnings of subsidiaries that are intended to be indefinitely reinvested. Where the Company does not intend to indefinitely reinvest subsidiary earnings, income and withholding taxes, as applicable, are provided on such undistributed earnings. The calculation of tax liabilities involves dealing with uncertainties in the application of complex tax regulations. The Company determines if the weight of available evidence indicates that it is more likely than not that a tax position will be sustained on tax audit, assuming that all issues are audited and resolution of any related appeals or litigation processes are considered. The tax benefit is then measured as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The reserves for uncertain tax positions are adjusted as facts and circumstances change, for example on closing of a tax audit, expiration of statutes of limitation on potential assessments or refinement of an estimate. To the extent that the final outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such a determination is made. The provisions for income taxes include the impact of reserves for uncertain tax positions, along with the related interest and penalties. 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, 2023 and 2022. 86 OKTA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) As of January 31, 2023 and 2022, the Company's long-term restricted cash balance was $ 7 million and $ 8 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 impairment. 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 primarily 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 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 and available data. 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. The Company assesses collectibility by reviewing accounts receivable on an aggregated basis where similar characteristics exist and on an individual basis when specific customers with collectibility issues are identified. 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. 87 OKTA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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 Computers and equipment 3 years Furniture and fixtures 7 years Leasehold improvements Shorter of estimated useful life or remaining lease term Business Combinations Business combinations are accounted for under the acquisition method of accounting, which requires the acquired assets, including separately identifiable intangible assets, and assumed liabilities to be recorded as of the acquisition date at their respective estimated fair values. Any excess of the purchase price over the fair value of the assets acquired, including separately identifiable intangible assets and liabilities assumed, is recorded as goodwill. The determination of the fair value of assets acquired and liabilities assumed involves assessments of factors such as the expected future cash flows associated with individual assets and liabilities and appropriate discount rates at the date of the acquisition. Significant management inputs used in the estimation of fair value of assets acquired and liabilities assumed include, but are not limited to, expected future cash flows, future changes in technology, estimated replacement costs, discount rates and assumptions about the period of time the brand will continue to be used in the Company’s product portfolio. Where appropriate, external advisers are consulted to assist in the determination of fair value. For non-observable market values, fair value has been determined using acceptable valuation methods. The results of operations for businesses acquired are included in the financial statements from the acquisition date. Acquisition-related expenses and post-acquisition restructuring costs are recognized separately from the business combination and are expensed as incurred. Goodwill and Other Long-Lived Assets Goodwill represents the excess of the purchase price over the estimated fair value of net assets of businesses acquired in a business combination. Goodwill amounts are not amortized. Goodwill is tested for impairment annually on the first day of the fourth quarter of each fiscal year, or whenever events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable. The Company operates as a single operating segment. Management has the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of the Company is less than the carrying amount, including goodwill. If it is determined that it is more likely than not that the fair value of the Company is less than the carrying amount, a quantitative assessment is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit. The Company also has the option to bypass the qualitative assessment, and perform the quantitative assessment. No goodwill impairments were recorded during the years presented. 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. Intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives. 88 OKTA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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 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 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"), rent expense is recorded in the consolidated statements of operations on a straight-line basis over the lease term and records variable lease payments as incurred. Loss Contingencies The Company is periodically involved in various legal claims and proceedings. The Company routinely reviews the status of each significant matter and assesses its potential financial exposure. If the potential loss from any matter is considered probable and the amount can be reasonably estimated, the Company records a liability for the estimated loss. If either or both of the criteria for recording the liability are not met, the Company assesses whether there is at least a reasonable possibility that a loss, or additional losses, may have been incurred. If there is a reasonable possibility that a loss may have been incurred, the Company discloses the estimate of the amount of loss or range of loss, discloses that the amount is immaterial, or discloses that an estimate of loss cannot be made, as applicable. Because of inherent uncertainties related to these legal matters, the Company bases its loss accruals on the best information available at the time. As additional information becomes available, the Company reassesses its potential liability and may review its estimates. Actual outcomes of these legal and regulatory proceedings may differ materially from the Company’s estimates. Concentrations of Risk Financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments and accounts receivable. The Company's short-term investments are primarily intended to facilitate liquidity and capital preservation and consist predominately of highly liquid investment-grade fixed-income securities, diversified among industries and individual issuers. The Company's policy is designed to limit exposure from any particular issuer or institution. Credit risk arising from accounts receivable is mitigated due to the large number of customers and their dispersion across various industries and geographies. For the periods presented, there were no customers that represented more than 10% of the Company's accounts receivable balance or total revenue. The Company serves customers and users from data center facilities located across various different physical locations, such as the U.S., Europe and Asia-Pacific, most of which are operated by a single third party. The Company has disaster recovery protocols at the third-party service providers. Even with these procedures for disaster recovery in place, access to the Company's service could be significantly interrupted, resulting in an adverse effect on its operating results and financial condition. Net Loss per Share Basic and diluted net loss per share attributable to common stockholders is computed 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 without consideration for potentially dilutive securities as they do not share in losses. The diluted net loss per share attributable to common 89 OKTA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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 RSUs, unvested common stock and restricted stock issued in connection with certain business combinations, convertible senior notes and warrants are considered 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. The rights of the holders of the Company's Class A and Class B common stock are identical, except with respect to voting and conversion rights. See Note 15 for additional details. Recently Adopted Accounting Pronouncements ASU No. 2020-06 The Company adopted ASU 2020-06, effective February 1, 2022, using the modified retrospective method. The prior period consolidated financial statements have not been retrospectively adjusted and continue to be reported under the accounting standards in effect for those periods. The new guidance 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, the guidance 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, the guidance 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 the new guidance. The Company recognized a cumulative effect of initially applying the guidance 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 the new guidance resulted in the following changes to the Company’s 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 millions) Liabilities Convertible senior notes, net $ 16 $ 1 $ 17 Convertible senior notes, net, noncurrent 1,816 372 2,188 Other liabilities, noncurrent 31 ( 1 ) 30 Stockholders’ equity Additional paid-in capital 7,750 ( 528 ) 7,222 Accumulated deficit ( 1,816 ) 156 ( 1,660 ) In addition, the adoption of the new guidance resulted in a decrease in reported net interest expense of approximately $ 85 million and a decrease in basic and diluted net loss per share of $ 0.54 in fiscal 2023. ASU No. 2021-08 The Company adopted the Financial Accounting Standards Board ("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 the latest revenue guidance. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements. 90 OKTA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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. The new guidance 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 the new guidance did not have a material impact on the Company’s consolidated financial statements. 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. Total consideration transferred for Auth0 was $ 5,671 million, including approximately 19 million shares of common stock valued at $ 5,176 million, cash of $ 257 million, and assumed outstanding equity awards with vested fair value of $ 238 million. Cash consideration of $ 4 million and approximately 1 million shares valued at $ 295 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 fiscal 2023. The Company incurred $ 29 million of acquisition-related costs, which were recorded as general and administrative expenses in its consolidated statement of operations in fiscal 2022. The transaction was accounted for as a business combination. The total purchase price of $ 5,671 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 assets acquired and liabilities assumed was $ 5,290 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 atSpoke, a modern workplace operations platform. The acquisition date cash consideration for atSpoke was approximately $ 79 million, of which $ 13 million of consideration was held back as partial security for any adjustments and indemnification obligations and was paid within 18 months of the closing date. The Company recorded $ 18 million for developed technology intangible assets with an estimated useful life of 3 years and recorded $ 62 million of goodwill. The Company incurred $ 1 million of acquisition-related costs, which were recorded as general and administrative expenses in its consolidated statement of operations in fiscal 2022. 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 January 31, 2023 Amortized Cost Unrealized Gain Unrealized Loss Estimated Fair Value (dollars in millions) Cash equivalents: Money market funds $ 133 $ — $ — $ 133 Total cash equivalents 133 — — 133 Short-term investments: U.S. treasury securities 2,207 — ( 22 ) 2,185 Corporate debt securities 133 — ( 2 ) 131 Total short-term investments 2,340 — ( 24 ) 2,316 Total $ 2,473 $ — $ ( 24 ) $ 2,449 91 OKTA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) As of January 31, 2022 Amortized Cost Unrealized Gain Unrealized Loss Estimated Fair Value (dollars in millions) Cash equivalents: Money market funds $ 152 $ — $ — $ 152 Total cash equivalents 152 — — 152 Short-term investments: U.S. treasury securities 1,922 — ( 9 ) 1,913 Corporate debt securities 331 — ( 2 ) 329 Total short-term investments 2,253 — ( 11 ) 2,242 Total $ 2,405 $ — $ ( 11 ) $ 2,394 All short-term investments were designated as available-for-sale securities as of January 31, 2023 and 2022. The following table presents the contractual maturities of the Company's short-term investments: As of January 31, 2023 Amortized Cost Estimated Fair Value (dollars in millions) Due within one year $ 2,097 $ 2,076 Due between one to five years 243 240 Total $ 2,340 $ 2,316 Interest receivable of $ 10 million and $ 6 million is included in Prepaid expenses and other current assets on the consolidated balance sheets as of January 31, 2023 and 2022, respectively. 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 January 31, 2023: 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 millions) U.S. treasury securities $ 1,204 $ ( 9 ) $ 846 $ ( 13 ) $ 2,050 $ ( 22 ) Corporate debt securities 13 — 114 ( 2 ) 127 ( 2 ) Total $ 1,217 $ ( 9 ) $ 960 $ ( 15 ) $ 2,177 $ ( 24 ) The Company had 159 and 193 short-term investments in unrealized loss positions as of January 31, 2023 and 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. There were no material credit or non-credit related impairments for short-term investments as of January 31, 2023 and 2022. Strategic Investments Strategic investments primarily include equity investments in privately held companies, which do not have a readily determinable fair value. As of January 31, 2023 and 2022, the balance of strategic investments was $ 25 million and $ 15 million, respectively. 92 OKTA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 5. Fair Value Measurements Financial assets are measured 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 tables present information about financial assets that were measured at fair value on a recurring basis using the above input categories: As of January 31, 2023 Level 1 Level 2 Level 3 Total (dollars in millions) Assets: Cash equivalents: Money market funds $ 133 $ — $ — $ 133 Total cash equivalents 133 — — 133 Short-term investments: U.S. treasury securities — 2,185 — 2,185 Corporate debt securities — 131 — 131 Total short-term investments — 2,316 — 2,316 Total cash equivalents and short-term investments $ 133 $ 2,316 $ — $ 2,449 As of January 31, 2022 Level 1 Level 2 Level 3 Total (dollars in millions) Assets: Cash equivalents: Money market funds $ 152 $ — $ — $ 152 Total cash equivalents 152 — — 152 Short-term investments: U.S. treasury securities — 1,913 — 1,913 Corporate debt securities — 329 — 329 Total short-term investments — 2,242 — 2,242 Total cash equivalents and short-term investments $ 152 $ 2,242 $ — $ 2,394 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. 93 OKTA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Fair Value Measurements of Other Financial Instruments The following table presents the principal amounts and estimated fair values of financial instruments that are not recorded at fair value on the consolidated balance sheets: As of January 31, 2023 Principal Amount Estimated Fair Value (dollars in millions) 2025 convertible senior notes $ 1,060 $ 933 2026 convertible senior notes $ 1,150 $ 981 The Notes are recorded at face value less unamortized debt issuance costs (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. 6. Goodwill and Intangible Assets, net Goodwill As of January 31, 2023 and 2022, goodwill was $ 5,400 million and $ 5,401 million, respectively. No goodwill impairments were recorded during fiscal 2023, 2022 and 2021. Intangible Assets, net Intangible assets consisted of the following: As of January 31, 2023 Gross Accumulated Amortization Net (dollars in millions) Capitalized internal-use software costs $ 48 $ ( 28 ) $ 20 Purchased developed technology 220 ( 93 ) 127 Customer relationships 141 ( 62 ) 79 Trade name 21 ( 7 ) 14 Software licenses 1 — 1 $ 431 $ ( 190 ) $ 241 As of January 31, 2022 Gross Accumulated Amortization Net (dollars in millions) Capitalized internal-use software costs $ 36 $ ( 24 ) $ 12 Purchased developed technology 220 ( 48 ) 172 Customer relationships 141 ( 26 ) 115 Trade name 21 ( 3 ) 18 $ 418 $ ( 101 ) $ 317 94 OKTA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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, 2023 2022 Purchased developed technology 3.0 years 4.0 years Customer relationships 3.4 years 4.0 years Trade name 3.3 years 4.3 years As of January 31, 2023, estimated remaining amortization expense for the intangible assets by fiscal year was as follows: Remaining Amortization (dollars in millions) 2024 $ 84 2025 72 2026 63 2027 20 2028 2 Thereafter — Total $ 241 Amortization expense of intangible assets was $ 93 million, $ 69 million and $ 11 million in fiscal 2023, 2022 and 2021, respectively. 7. Balance Sheet Components Property and Equipment, net Property and equipment consisted of the following: As of January 31, 2023 2022 (dollars in millions) Computers and equipment $ — $ 1 Furniture and fixtures 19 17 Leasehold improvements 88 82 Property and equipment, gross 107 100 Less accumulated depreciation ( 48 ) ( 35 ) Property and equipment, net $ 59 $ 65 Depreciation expense was $ 12 million in fiscal 2023 and 2022, and $ 9 million in fiscal 2021. 95 OKTA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consisted of the following: As of January 31, 2023 2022 (dollars in millions) Accrued expenses $ 67 $ 48 Accrued taxes payable 5 7 Operating lease liabilities 32 27 Other 8 8 Accrued expenses and other current liabilities $ 112 $ 90 Other Liabilities, Noncurrent Other liabilities, noncurrent consisted of the following: As of January 31, 2023 2022 (dollars in millions) Deferred tax liabilities $ 12 $ 9 Other 11 22 Other liabilities, noncurrent $ 23 $ 31 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 fiscal 2023 and 2022 included $ 952 million and $ 495 million, respectively, from deferred revenue balances at the beginning of the respective periods. Professional services and other revenue recognized in fiscal 2023 and 2022 from deferred revenue balances at the beginning of the respective periods was $ 14 million and $ 7 million, respectively. 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. Total remaining non-cancelable performance obligations under subscription contracts with customers was approximately $ 3,007 million as of January 31, 2023. Of this amount, the Company expects to recognize revenue of approximately $ 1,684 million, or 56 %, 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, 2023 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 outstanding 2023 Notes matured on February 15, 2023. 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 96 OKTA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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. As of January 31, 2023, an immaterial amount of 2023 Notes remained outstanding. During fiscal 2023, the Company issued approximately 0.4 million shares of Class A common stock and paid an immaterial amount in cash to settle approximately $ 17 million principal amount of 2023 Notes. As of January 31, 2023, the effective interest rate on the 2023 Notes was 0.85 %. As of January 31, 2022 and 2021, prior to the adoption of ASU 2020-06, the effective interest rate on the liability component of the 2023 Notes was 5.68 %. Interest expense recognized related to the 2023 Notes was immaterial during fiscal 2023, 2022 and 2021. The net carrying amount of the 2023 Notes consisted of the following: As of January 31, 2023 As of January 31, 2022 (dollars in millions) Liability component: Principal $ — $ 17 Less: unamortized debt issuance costs and debt discount (1) — ( 1 ) Net carrying amount $ — $ 16 Equity component: (1) 2023 Notes $ — $ 4 Less: issuance costs — — Carrying amount of the equity component (2) $ — $ 4 (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 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 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 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 Note Hedges meet the criteria for classification as equity and, as such, are not remeasured each reporting period. During fiscal 2023, the Company exercised and net-share-settled Note Hedges corresponding to approximately $ 12 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 January 31, 2023, Note Hedges giving the Company the option to purchase approximately 0.1 million shares (subject to adjustment) remained outstanding. 97 OKTA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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 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). 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 Warrants meet the criteria for classification as equity and, as such, are not remeasured each reporting period. As of January 31, 2023, Warrants to acquire up to approximately 1 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 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 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, 2023, the conditions allowing holders of the 2025 Notes to convert during the three months ending April 30, 2023 were not met, and as a result, the 2025 Notes were classified as noncurrent liabilities as of January 31, 2023. 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 98 OKTA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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. 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. As of January 31, 2023, the effective interest rate on the 2025 Notes was 0.43 %. As of January 31, 2022 and 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: Year Ended January 31, 2023 2022 2021 (dollars in millions) Contractual interest expense $ 1 $ 1 $ 1 Amortization of debt issuance costs 3 2 2 Amortization of debt discount (1) — 36 34 Total $ 4 $ 39 $ 37 (1) Not applicable subsequent to the adoption of ASU 2020-06. The net carrying amount of the 2025 Notes consisted of the following: As of January 31, 2023 As of January 31, 2022 (dollars in millions) Liability component: Principal $ 1,060 $ 1,060 Less: unamortized debt issuance costs and debt discount (1) ( 8 ) ( 149 ) Net carrying amount $ 1,052 $ 911 Equity component: (1) 2025 Notes $ — $ 221 Less: issuance costs — ( 4 ) Carrying amount of the equity component (2) $ — $ 217 (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 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 are purchased call options that give the Company the option to purchase approximately 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 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 2025 Capped Calls meet the criteria for classification as equity and, as such, are not remeasured each reporting period. 99 OKTA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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 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 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 three months ended January 31, 2023, the conditions allowing holders of the 2026 Notes to convert during the three months ending April 30, 2023 were not met, and as a result, the 2026 Notes were classified as noncurrent liabilities as of January 31, 2023. 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. 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. 100 OKTA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) As of January 31, 2023, the effective interest rate on the 2026 Notes was 0.60 %. As of January 31, 2022 and 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: Year Ended January 31, 2023 2022 2021 (dollars in millions) Contractual interest expense $ 4 $ 4 $ 3 Amortization of debt issuance costs 3 1 1 Amortization of debt discount (1) — 46 27 Total $ 7 $ 51 $ 31 (1) Not applicable subsequent to the adoption of ASU 2020-06. The net carrying amount of the 2026 Notes consisted of the following: As of January 31, 2023 As of January 31, 2022 (dollars in millions) Liability component: Principal $ 1,150 $ 1,150 Less: unamortized debt issuance costs and debt discount (1) ( 9 ) ( 245 ) Net carrying amount $ 1,141 $ 905 Equity component: (1) 2026 Notes $ — $ 310 Less: issuance costs — ( 4 ) Carrying amount of the equity component (2) $ — $ 306 (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 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 are purchased call options that give the Company the option to purchase approximately 5 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 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 2026 Capped Calls meet the criteria for classification as equity and, as such, are not remeasured each reporting period. 10. Leases The Company has entered into various non-cancelable office space operating leases with original lease periods expiring between 2023 and 2029. These leases do not contain material variable rent payments, residual value guarantees, financial 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. 101 OKTA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Operating lease costs were as follows: Year Ended January 31, 2023 2022 2021 (dollars in millions) Operating lease costs (1) $ 40 $ 38 $ 33 (1) Amounts are presented exclusive of sublease income and include short-term leases, which are immaterial. The weighted-average remaining term of operating leases was 5.1 years and 5.9 years as of January 31, 2023 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 % as of January 31, 2023 and January 31, 2022, respectively. Maturities of operating lease liabilities, which do not include short-term leases, were as follows: As of January 31, 2023 Fiscal Year Ending January 31: (dollars in millions) 2024 $ 43 2025 42 2026 32 2027 31 2028 31 Thereafter 24 Total lease payments 203 Less imputed interest ( 26 ) Less tenant improvement allowances not yet incurred ( 2 ) Total operating lease liabilities $ 175 Cash payments made related to operating lease liabilities were $ 44 million and $ 40 million in fiscal 2023 and 2022, respectively. 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 $ 6 million and $ 9 million were issued and outstanding as of January 31, 2023 and January 31, 2022, respectively. No draws have been made under such letters of credit. Noncurrent restricted cash of $ 6 million associated with these letters of credit is included in Other assets on the consolidated balance sheets as of January 31, 2023 and January 31, 2022. 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. On May 20, 2022, a purported shareholder filed a putative class action lawsuit in the United States District Court for the Northern District of California against the Company and certain of its executive officers, captioned In re Okta, Inc. Securities Litigation, No. 3:22-cv-02990. The lawsuit asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, alleging that the defendants made false or misleading statements or omissions concerning the Company’s cybersecurity controls, vulnerability to data breaches, and the Company’s integration of Auth0. The lawsuit seeks an order certifying the lawsuit as a class action and unspecified damages. Additionally, two purported shareholders filed derivative lawsuits on behalf of the Company in the United States District Court for the Northern District of California against certain of its current and former executive officers and directors, captioned O’Dell v. McKinnon et al. , No. 3:22-cv-07480 (filed Nov. 28, 2022), and LR Trust v. McKinnon et al ., No. 3:22-cv-08627 (filed Dec. 13, 2022). The lawsuits allege, among other things, that the defendants breached their fiduciary duties by making false or misleading statements or omissions concerning the 102 OKTA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Company’s cybersecurity controls, vulnerability to data breaches, and the Company’s integration of Auth0. The lawsuits seek orders permitting the plaintiffs to maintain this action derivatively on behalf of the Company, awarding unspecified damages allegedly sustained by the Company, awarding restitution from the individual defendants, and requiring the Company to make certain reforms to its corporate governance and controls. The Company intends to defend these lawsuits vigorously. At this time, the Company is unable to predict the outcome or estimate the amount of loss or range of losses that could potentially result from these lawsuits. 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. Agreements with customers and other third parties may include indemnification or other provisions under which the Company agrees to indemnify or otherwise be liable to them for losses suffered or incurred as a result of claims of intellectual property infringement, damages caused by us to property or persons, or other liabilities relating to or arising from the use of the Company’s platform or other acts or omissions. The Company cannot reasonably estimate potential payment obligations as a result of indemnification claims because it cannot predict when and under what circumstances they may be incurred. As a result, no material liabilities have been recognized in the accompanying consolidated financial statements related to these indemnification obligations. 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. As of January 31, 2023, shares of common stock reserved for future issuance were as follows: As of January 31, 2023 (shares in thousands) Options and unvested RSUs outstanding 15,728 Available for future stock option and RSU grants 25,228 Available for ESPP 6,831 47,787 103 OKTA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Awards Issued as Charitable Contributions During fiscal 2023, 2022 and 2021, the Company issued 41,250 , 30,000 and 42,500 shares, respectively, of Class A common stock as charitable contributions and recognized $ 4 million, $ 7 million and $ 9 million, respectively, as general and administrative expense in the consolidated statements of operations. 13. Employee Incentive Plans Equity Incentive Plans The Company has two equity incentive plans: the 2009 Stock Plan (“2009 Plan”) and the 2017 Equity Incentive Plan (“2017 Plan”). All shares that remain available for future grants are under the 2017 Plan. As of January 31, 2023, options to purchase 1,758,264 shares of Class A common stock and 4,594,675 shares of Class B common stock remained outstanding. The Company’s equity incentive plans provide for granting stock options, RSUs, restricted stock awards to employees, consultants, officers and directors and RSUs with market-based vesting conditions to certain executives. In addition, the Company offers an ESPP to eligible employees. Stock-based compensation expense by award type was as follows: Year Ended January 31, 2023 2022 2021 (dollars in millions) Stock options $ 82 $ 132 $ 21 RSUs 464 335 164 ESPP 19 15 10 Restricted stock awards 112 84 — Total $ 677 $ 566 $ 195 Stock-based compensation expense was recorded in the following cost and expense categories in the consolidated statements of operations: Year Ended January 31, 2023 2022 2021 (dollars in millions) Cost of revenue: Subscription $ 69 $ 49 $ 21 Professional services and other 14 12 9 Research and development 275 193 63 Sales and marketing 159 136 53 General and administrative 160 176 49 Total $ 677 $ 566 $ 195 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. 104 OKTA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) A summary of stock option activity and related information was as follows: Number of Options (in thousands) Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (Years) Aggregate Intrinsic Value (in millions) Outstanding as of January 31, 2022 7,984 $ 39.59 5.2 $ 1,314 Exercised ( 1,416 ) 11.92 Expired ( 26 ) 189.80 Forfeited ( 189 ) 80.67 Outstanding as of January 31, 2023 6,353 $ 43.92 4.3 $ 331 As of January 31, 2023 Vested and expected to vest 6,353 $ 43.92 4.3 $ 331 Vested and exercisable 5,729 $ 29.75 3.9 $ 323 No options were granted during fiscal 2023. The weighted-average grant-date fair value of options granted was $ 211.58 and $ 63.32 during fiscal 2022 and 2021, respectively. The total grant-date fair value of stock options vested was $ 104 million, $ 314 million and $ 20 million during fiscal 2023, 2022 and 2021, 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 $ 108 million, $ 545 million and $ 772 million during fiscal 2023, 2022 and 2021, respectively. As of January 31, 2023 and January 31, 2022, there was a total of $ 90 million and $ 210 million, respectively, of unrecognized stock-based compensation expense related to options, which is being recognized over a weighted-average period of 1.8 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, 2023 2022 2021 Expected volatility — % 46 % 45 % Expected term (in years) 0.0 6.3 6.3 Risk-free interest rate — % 1.03 % 0.37 % - 0.44 % Expected dividend yield — — — Restricted Stock Units A summary of RSU activity (inclusive of market-based RSUs) and related information was as follows: Number of RSUs (in thousands) Weighted- Average Grant Date Fair Value Per Share Outstanding as of January 31, 2022 6,226 $ 207.26 Granted 7,194 111.84 Vested ( 2,556 ) 180.81 Forfeited ( 1,489 ) 191.40 Outstanding as of January 31, 2023 9,375 $ 143.77 The Company granted 7,194,187 RSUs with an aggregate fair value of $ 805 million during fiscal 2023. As of January 31, 2023 and 2022, there was a total of $ 1,200 million and $ 1,152 million, respectively, of unrecognized stock-based compensation expense related to unvested RSUs, which is being recognized over a weighted-average period of 3.0 years, based on vesting under the award service conditions. The total fair value of RSUs vested during fiscal 2023, 2022 and 2021 was $ 229 million, $ 531 million and $ 410 million, respectively. 105 OKTA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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. Restricted Stock Awards Issued in Connection with Business Combinations In fiscal 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 January 31, 2023, there was $ 141 million of unrecognized stock-based compensation expense related to unvested restricted shares, which is being recognized over a weighted-average period of 1.3 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 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: Year Ended January 31, 2023 2022 2021 Expected volatility 63 % - 90 % 44 % - 48 % 48 % - 54 % Expected term (in years) 0.5 - 1.0 0.5 - 1.0 0.5 - 1.0 Risk-free interest rate 2.46 % - 4.67 % 0.06 % - 0.29 % 0.09 % - 0.18 % Expected dividend yield — — — During fiscal 2023, the Company's employees purchased 491,965 shares of its Class A common stock under the ESPP. The shares were purchased at a weighted-average purchase price of $ 63.97 per share, with proceeds of $ 31 million. During fiscal 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 $ 36 million. As of January 31, 2023 and January 31, 2022, there was $ 26 million and $ 17 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. Employee Defined Contribution Plan The Company has a qualified defined contribution plan under Section 401(k) of the Internal Revenue Code covering eligible employees. A portion of employee contributions are matched up to a fixed maximum dollar amount per year per employee. The Company began matching contributions in fiscal 2023. Matching contributions to the plan were $ 21 million during fiscal 2023. 106 OKTA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 14. Income Taxes The domestic and foreign components of pre-tax loss for fiscal 2023, 2022 and 2021 were as follows: Year Ended January 31, 2023 2022 2021 (dollars in millions) Domestic $ ( 834 ) $ ( 904 ) $ ( 282 ) Foreign 33 54 16 Loss before provision for (benefit from) income taxes $ ( 801 ) $ ( 850 ) $ ( 266 ) The components of the provision for (benefit from) income taxes for fiscal 2023, 2022 and 2021 were as follows: Year Ended January 31, 2023 2022 2021 (dollars in millions) Current: Federal $ — $ — $ — State 2 — — Foreign 5 4 1 Total current provision for income taxes 7 4 1 Deferred: Federal — ( 8 ) — State — ( 1 ) — Foreign 7 3 ( 1 ) Total deferred provision for (benefit from) income taxes 7 ( 6 ) ( 1 ) Total provision for (benefit from) income taxes $ 14 $ ( 2 ) $ — For fiscal 2023, the income tax expense resulted primarily from income tax expense related to profitable foreign jurisdictions, the tax impact of shortfalls from stock-based compensation in the United Kingdom, and state taxes. For fiscal 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 fiscal 2021, the income tax expense from profitable jurisdictions was partially offset by excess tax benefits from stock-based compensation in the United Kingdom. The following is a reconciliation of the statutory federal income tax rate to the Company’s effective tax rate for fiscal 2023, 2022 and 2021: Year Ended January 31, 2023 2022 2021 Tax at federal statutory rate 21.0 % 21.0 % 21.0 % State income taxes, net of federal benefit 3.6 3.9 4.1 Change in valuation allowance ( 9.9 ) ( 36.1 ) ( 101.0 ) Stock-based compensation ( 12.3 ) 8.4 70.2 Research and development credits 2.6 3.6 6.4 Non-deductible expenses ( 5.4 ) — — Other, net ( 1.2 ) ( 0.6 ) ( 0.8 ) Effective tax rate ( 1.6 ) % 0.2 % ( 0.1 ) % 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 fiscal 2023. The capitalization of R&E expenditures resulted in a deferred tax asset of $ 189 million. Additionally, the effective tax rate was impacted by ( 5.4 )% due to 107 OKTA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) certain tax deductions being disavowed, which further resulted in the utilization of federal and state tax attributes to offset this impact. The tax effects of temporary differences and related deferred tax assets and liabilities as of January 31, 2023 and 2022 were as follows: As of January 31, 2023 2022 (dollars in millions) Deferred tax assets: Net operating loss carryforwards $ 817 $ 955 Capitalized research expenditures 189 — Stock-based compensation 52 48 Operating lease liabilities 43 50 Other reserves and accruals 31 40 Research and development and other credits 113 92 Total deferred tax assets 1,245 1,185 Valuation allowance ( 1,078 ) ( 904 ) Total deferred tax assets, net 167 281 Deferred tax liabilities: Convertible debt — ( 91 ) Deferred commissions ( 77 ) ( 68 ) Other deferred tax liabilities ( 5 ) ( 3 ) Operating lease right-of-use assets ( 31 ) ( 37 ) Depreciation and amortization ( 56 ) ( 78 ) Total deferred tax liabilities ( 169 ) ( 277 ) Net deferred tax assets (liabilities) $ ( 2 ) $ 4 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 $ 174 million and $ 349 million during fiscal 2023 and 2022, respectively. As of January 31, 2023, the Company had approximately $ 3,208 million of federal and $ 2,108 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, 2023, the Company had approximately $ 46 million of UK net operating losses which do not expire. As of January 31, 2023, the Company had federal research and development tax credit carryforwards of $ 98 million and California research and development tax credit carryforwards of $ 65 million. The federal research and development credits will start to expire in 2030 while the California research and development credits do not expire. 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 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. 108 OKTA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) A reconciliation of beginning and ending amount of unrecognized tax benefit was as follows: Year Ended January 31, 2023 2022 2021 (dollars in millions) Gross amount of unrecognized tax benefits as of the beginning of the year $ 37 $ 22 $ 16 Additions based on tax positions related to a prior year 1 5 — Additions based on tax positions related to current year 7 10 7 Reductions based on tax positions taken in a prior year ( 2 ) — ( 1 ) Gross amount of unrecognized tax benefits as of the end of the year $ 43 $ 37 $ 22 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 the 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 2017 and forward. As of January 31, 2023 and 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, 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, 2023, 2022 and 2021, 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, 2023 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. The following table presents the calculation of basic and diluted net loss per share: Year Ended January 31, 2023 2022 2021 Class A Class B Class A Class B Class A Class B (dollars in millions, shares in thousands, except per share data) Numerator: Net loss $ ( 778 ) $ ( 37 ) $ ( 806 ) $ ( 42 ) $ ( 249 ) $ ( 17 ) Denominator: Weighted-average shares outstanding, basic and diluted 150,891 7,132 140,684 7,352 118,882 8,330 Net loss per share, basic and diluted $ ( 5.16 ) $ ( 5.16 ) $ ( 5.73 ) $ ( 5.73 ) $ ( 2.09 ) $ ( 2.09 ) 109 OKTA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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: Year Ended January 31, 2023 2022 2021 (shares in thousands) Issued and outstanding stock options 6,353 7,984 8,250 Unvested RSUs issued and outstanding 9,317 6,226 4,452 Unvested market-based RSUs issued and outstanding 116 — — Unvested restricted stock awards issued and outstanding 627 1,269 — Shares committed under the ESPP 921 253 137 Shares related to the 2023 Notes — 356 832 Shares subject to warrants related to the issuance of the 2023 Notes 1,048 1,048 1,048 Shares related to the 2025 Notes 5,617 5,617 5,617 Shares related to the 2026 Notes 4,820 4,820 4,820 28,819 27,573 25,156 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. 16. Restructuring and Other Charges During the third quarter of fiscal 2023, 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 non-cash lease impairment charges. 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. During the fourth quarter of fiscal 2023, the Company approved a restructuring plan (the “Restructuring Plan”) intended to reduce operating expenses and improve profitability. The Restructuring Plan involves a reduction of the Company’s workforce by approximately 300 full-time employees. The Restructuring Plan is expected to be substantially complete by the first quarter of fiscal 2024. Aggregate restructuring costs associated with the Restructuring Plan are estimated to be approximately $ 15 million. The charges that the Company expects to incur throughout the completion of its Restructuring Plan are subject to a number of assumptions, including local law requirements in various jurisdictions, and the actual remaining expenses may differ from the original estimates. The following table summarizes the Company’s restructuring and other charges during the period: Year Ended January 31, 2023 (dollars in millions) Severance and termination benefit costs $ 15 Lease impairment charges 14 Total $ 29 110 OKTA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The following table summarizes the Company’s restructuring liability that is included in accrued expenses and other current liabilities on the consolidated balance sheet: Severance and termination benefit costs (dollars in millions) Balance as of January 31, 2022 $ — Restructuring charges 15 Cash payments — Balance as of January 31, 2023 $ 15 17. Geographical Information Revenue by location is determined by the billing address of the customer. The following table sets forth revenue by geographic area: Year Ended January 31, 2023 2022 2021 (dollars in millions) United States $ 1,456 $ 1,036 $ 702 International 402 264 133 Total $ 1,858 $ 1,300 $ 835 Other than the United States, no individual country exceeded 10% of total revenue for fiscal 2023, 2022 and 2021. Property and equipment by geographic location is based on the location of the legal entity that owns the asset. As of January 31, 2023 and 2022, substantially all of the Company’s property and equipment was located in the United States. 111 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.