Item 1. Financial Statements
Item 1.
Financial Statements (unaudited)
4
Condensed Consolidated Balance Sheets as of April 30, 2023 and January 31, 2023
4
Condensed Consolidated Statements of Operations for the Three Months Ended April 30, 2023 and 2022
5
Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended April 30, 2023 and 2022
6
Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended April 30, 2023 and 2022
7
Condensed Consolidated Statements of Cash Flows for the Three Months Ended April 30, 2023 and 2022
8
Notes to Condensed Consolidated Financial Statements
9
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
17
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
29
Item 4.
Controls and Procedures
30
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings
31
Item 1A.
Risk Factors
31
Item 6.
Exhibits
63
Signatures
65
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, including but not limited to, statements regarding our financial outlook, product development, business strategy, plans, market trends, opportunities, positioning and the macroeconomic environment. These forward-looking statements are made as of the date they were first issued and were based on current expectations, estimates, forecasts and projections as well as the beliefs and assumptions of management. Words such as “expect,” “anticipate,” “should,” “believe,” “hope,” “target,” “project,” “goals,” “estimate,” “potential,” “predict,” “may,” “will,” “might,” “could,” “intend,” “shall” and variations of these terms or the negative of these terms and similar expressions are intended to identify these forward-looking statements, although not all forward-looking statements include these identifying words. The forward-looking statements are contained principally in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors.”
Forward-looking statements contained in this Form 10-Q include, but are not limited to, statements about:
• our future financial performance, including our revenue, costs of revenue, gross profits, margins and operating expenses;
• the impact of general economic, business and market conditions, including general economic downturn or recession, market volatility, and the inflation and interest rate environment;
• trends in our key business metrics;
• our growth strategy and ability to compete;
• the sufficiency of our cash and cash equivalents, investments and cash provided by sales of our products and services to meet our liquidity needs;
• market or other opportunities arising from business combinations; and
• the impact of recent accounting pronouncements on our financial statements.
Forward-looking statements are subject to a number of risks and uncertainties, many of which involve factors or circumstances that are beyond our control. Our actual results could differ materially from those stated or implied in forward-looking statements due to a number of factors, including but not limited to, risks detailed in “Risk Factors” in this Quarterly Report on Form 10-Q as well as other documents that may be filed by us from time to time with the Securities and Exchange Commission. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, except as required by law, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results or to changes in our expectations.
PART I
Item. 1 Financial Statements
OKTA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in millions, shares in thousands, except per share data)
April 30,
2023 January 31,
2023
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 125 $ 264
Short-term investments 2,245 2,316
Accounts receivable, net of allowances of $ 7 and $ 8
290 481
Deferred commissions 95 92
Prepaid expenses and other current assets 88 76
Total current assets 2,843 3,229
Property and equipment, net 54 59
Operating lease right-of-use assets 114 122
Deferred commissions, noncurrent 208 210
Intangible assets, net 227 241
Goodwill 5,406 5,400
Other assets 48 46
Total assets $ 8,900 $ 9,307
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 10 $ 12
Accrued expenses and other current liabilities 91 112
Accrued compensation 88 99
Deferred revenue 1,173 1,242
Total current liabilities 1,362 1,465
Convertible senior notes, net, noncurrent 1,831 2,193
Operating lease liabilities, noncurrent 134 142
Deferred revenue, noncurrent 14 18
Other liabilities, noncurrent 25 23
Total liabilities 3,366 3,841
Commitments and contingencies (Note 8)
Stockholders’ equity:
Preferred stock, par value $ 0.0001 per share; 100,000 shares authorized; no shares issued and outstanding as of April 30, 2023 and January 31, 2023
— —
Class A Common stock, par value $ 0.0001 per share; 1,000,000 shares authorized; 155,044 and 154,009 shares issued and outstanding as of April 30, 2023 and January 31, 2023, respectively
— —
Class B Common stock, par value $ 0.0001 per share; 120,000 shares authorized; 7,300 shares issued and outstanding as of April 30, 2023 and January 31, 2023
— —
Additional paid-in capital 8,148 7,974
Accumulated other comprehensive loss ( 20 ) ( 33 )
Accumulated deficit ( 2,594 ) ( 2,475 )
Total stockholders’ equity 5,534 5,466
Total liabilities and stockholders' equity $ 8,900 $ 9,307
See Notes to Condensed Consolidated Financial Statements.
4
OKTA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in millions, shares in thousands, except per share data)
(unaudited)
Three Months Ended
April 30,
2023 2022
Revenue:
Subscription $ 503 $ 398
Professional services and other 15 17
Total revenue 518 415
Cost of revenue:
Subscription 122 111
Professional services and other 20 20
Total cost of revenue 142 131
Gross profit 376 284
Operating expenses:
Research and development 163 162
Sales and marketing 256 252
General and administrative 110 110
Restructuring and other charges 7 —
Total operating expenses 536 524
Operating loss ( 160 ) ( 240 )
Interest expense ( 3 ) ( 3 )
Interest income and other, net 17 2
Gain on early extinguishment of debt 31 —
Interest and other, net 45 ( 1 )
Loss before provision for income taxes ( 115 ) ( 241 )
Provision for income taxes 4 2
Net loss $ ( 119 ) $ ( 243 )
Net loss per share, basic and diluted $ ( 0.74 ) $ ( 1.56 )
Weighted-average shares used to compute net loss per share, basic and diluted 161,323 155,875
See Notes to Condensed Consolidated Financial Statements.
5
OKTA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in millions)
(unaudited)
Three Months Ended
April 30,
2023 2022
Net loss $ ( 119 ) $ ( 243 )
Other comprehensive income (loss):
Net change in unrealized gains or losses on available-for-sale securities 11 ( 17 )
Foreign currency translation adjustments 2 ( 7 )
Other comprehensive income (loss) 13 ( 24 )
Comprehensive loss $ ( 106 ) $ ( 267 )
See Notes to Condensed Consolidated Financial Statements.
6
OKTA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in millions)
(unaudited)
Three Months Ended
April 30,
2023 2022
Common stock and additional paid-in capital:
Balance, beginning of period $ 7,974 $ 7,750
Adjustments from adoption of Accounting Standards Update No. 2020-06 — ( 528 )
Issuance of common stock upon exercise of stock options and other activity, net 8 7
Stock-based compensation 166 171
Settlement of convertible senior notes — 12
Balance, end of period 8,148 7,412
Accumulated deficit:
Balance, beginning of period ( 2,475 ) ( 1,816 )
Adjustments from adoption of Accounting Standards Update No. 2020-06 — 156
Net loss ( 119 ) ( 243 )
Balance, end of period ( 2,594 ) ( 1,903 )
Accumulated other comprehensive loss:
Balance, beginning of period ( 33 ) ( 12 )
Other comprehensive income (loss) 13 ( 24 )
Balance, end of period ( 20 ) ( 36 )
Total stockholders’ equity $ 5,534 $ 5,473
See Notes to Condensed Consolidated Financial Statements.
7
OKTA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
Three Months Ended
April 30,
2023 2022
Cash flows from operating activities:
Net loss $ ( 119 ) $ ( 243 )
Adjustments to reconcile net loss to net cash provided by operating activities:
Stock-based compensation 166 171
Depreciation, amortization and accretion 25 30
Amortization of debt issuance costs 1 1
Amortization of deferred commissions 23 19
Deferred income taxes 1 —
Lease impairment charges 8 —
Gain on early extinguishment of debt ( 31 ) —
Net gain on strategic investments — ( 1 )
Other, net 2 —
Changes in operating assets and liabilities:
Accounts receivable 191 139
Deferred commissions ( 25 ) ( 22 )
Prepaid expenses and other assets ( 13 ) ( 13 )
Operating lease right-of-use assets 6 7
Accounts payable ( 2 ) 15
Accrued compensation ( 11 ) ( 60 )
Accrued expenses and other liabilities ( 9 ) 9
Operating lease liabilities ( 10 ) ( 8 )
Deferred revenue ( 74 ) ( 25 )
Net cash provided by operating activities 129 19
Cash flows from investing activities:
Capitalized software ( 5 ) ( 3 )
Purchases of property and equipment — ( 5 )
Purchases of securities available-for-sale and other ( 431 ) ( 306 )
Proceeds from maturities and redemption of securities available-for-sale 456 231
Proceeds from sales of securities available-for-sale and other 61 —
Purchases of intangible assets — ( 1 )
Payments for business acquisitions, net of cash acquired ( 22 ) ( 4 )
Net cash provided by (used in) investing activities 59 ( 88 )
Cash flows from financing activities:
Payments for repurchases of convertible senior notes ( 332 ) —
Proceeds from stock option exercises, net of repurchases 6 5
Net cash provided by (used in) financing activities ( 326 ) 5
Effects of changes in foreign currency exchange rates on cash, cash equivalents and restricted cash 1 ( 5 )
Net decrease in cash, cash equivalents and restricted cash ( 137 ) ( 69 )
Cash, cash equivalents and restricted cash at beginning of period 271 273
Cash, cash equivalents and restricted cash at end of period $ 134 $ 204
Supplementary cash flow disclosure:
Cash paid during the period for:
Operating leases 12 11
Non-cash activities:
Issuance of common stock for conversions of convertible senior notes — 40
Benefit from exercise of hedges related to convertible senior notes 2 5
Operating lease right-of-use assets exchanged for lease liabilities 4 4
Reconciliation of cash, cash equivalents and restricted cash within the condensed consolidated balance sheets to the amounts shown in the condensed consolidated statements of cash flows above:
Cash and cash equivalents $ 125 $ 194
Restricted cash, current included in prepaid expenses and other current assets 1 2
Restricted cash, noncurrent included in other assets 8 8
Total cash, cash equivalents and restricted cash $ 134 $ 204
See Notes to Condensed Consolidated Financial Statements.
8
OKTA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Overview and Basis of Presentation
Description of Business
Okta, Inc. (the “Company”) is the leading independent identity provider. The 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. Employees and contractors sign into the Workforce Identity Cloud to seamlessly and securely access the applications they need to do their most important work. Developers leverage the Workforce Identity and Customer Identity Clouds to securely and efficiently embed identity into the software they build, allowing them to innovate and focus on their core missions. Organizations use the Company’s Identity Platform to collaborate with their partners, and to provide their customers with more modern and secure experiences in the cloud and via mobile devices. The Company was incorporated in January 2009 as Saasure Inc., a California corporation, and was later reincorporated in April 2010 under the name Okta, Inc. as a Delaware corporation. The Company is headquartered in San Francisco, California.
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements, which include the accounts of the Company and its wholly owned subsidiaries, have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim periods. Accordingly, they do not include all of the financial information and footnotes required by GAAP for complete financial statements. All intercompany balances and transactions have been eliminated in consolidation. The Company conducts business globally and is managed, operated and organized by major functional departments that operate on a consolidated basis. As a result, the Company operates in one reportable segment.
The condensed consolidated balance sheet as of January 31, 2023, included herein, was derived from the audited financial statements as of that date. In the opinion of the Company’s management, the unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary for a fair statement of the results of operations for the interim periods presented but are not necessarily indicative of the results of operations to be anticipated for the full fiscal year ending January 31, 2024 or any future period.
The Company’s fiscal year ends on January 31. References to fiscal 2024, for example, refer to the fiscal year ending January 31, 2024.
The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 3, 2023.
Use of Estimates
The preparation of condensed 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 condensed 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.
2. Accounting Standards and Significant Accounting Policies
Significant Accounting Policies
For a summary of the Company’s significant accounting policies refer to “Note 2. Summary of Significant Accounting Policies” of its Annual Report on Form 10-K for the fiscal year ended January 31, 2023.
9
OKTA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
3. 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. The Company recognized non-cash lease impairment charges of $ 14 million in the year ended January 31, 2023. In the three months ended April 30, 2023, the Company recognized an additional $ 8 million of non-cash lease impairment charges as a result of the real estate optimization plan. 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 involved a reduction of the Company’s workforce by approximately 300 full-time employees.
The Restructuring Plan was substantially complete by the first quarter of fiscal 2024 and the Company recognized aggregate restructuring costs of $ 15 million in the fourth quarter of fiscal 2023.
The following table summarizes the Company’s restructuring liability that is included in Accrued expenses and other current liabilities on the condensed consolidated balance sheet:
Severance and termination benefit costs
(dollars in millions)
Balance as of January 31, 2023 $ 15
Cash payments ( 14 )
Balance as of April 30, 2023 $ 1
4. Cash Equivalents and Investments
Cash Equivalents and Short-term Investments
In estimating fair value, the Company uses a three-tier fair value hierarchy 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.
10
OKTA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following tables present the amortized cost, unrealized gain (loss) and estimated fair value of cash equivalents and short-term investments:
As of April 30, 2023
Amortized
Cost
Unrealized
Gain
Unrealized
Loss
Estimated
Fair Value
(dollars in millions)
Level 1:
Cash equivalents:
Money market funds $ 12 $ — $ — $ 12
Total cash equivalents 12 — — 12
Level 2:
Short-term investments (Available-for-sale):
U.S. treasury securities 2,155 1 ( 12 ) 2,144
Corporate debt securities 102 — ( 1 ) 101
Total short-term investments 2,257 1 ( 13 ) 2,245
Total $ 2,269 $ 1 $ ( 13 ) $ 2,257
As of January 31, 2023
Amortized
Cost
Unrealized
Gain
Unrealized
Loss
Estimated
Fair Value
(dollars in millions)
Level 1:
Cash equivalents:
Money market funds $ 133 $ — $ — $ 133
Total cash equivalents 133 — — 133
Level 2:
Short-term investments (Available-for-sale):
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
The following table presents the contractual maturities of the Company’s short-term investments:
As of April 30, 2023
Amortized
Cost
Estimated
Fair Value
(dollars in millions)
Due within one year $ 1,960 $ 1,949
Due between one to five years 297 296
Total $ 2,257 $ 2,245
Interest receivable of $ 15 million and $ 10 million is included in Prepaid expenses and other current assets on the condensed consolidated balance sheets as of April 30, 2023 and January 31, 2023, respectively.
11
OKTA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following table presents the fair values and unrealized losses related to the Company’s investments in available-for-sale debt securities classified by length of time that the securities have been in a continuous unrealized loss position as of April 30, 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 $ 1,212 $ ( 4 ) $ 679 $ ( 8 ) $ 1,891 $ ( 12 )
Corporate debt securities — — 83 ( 1 ) 83 ( 1 )
Total $ 1,212 $ ( 4 ) $ 762 $ ( 9 ) $ 1,974 $ ( 13 )
The Company had 139 and 159 short-term investments in unrealized loss positions as of April 30, 2023 and January 31, 2023, 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 April 30, 2023 and January 31, 2023.
Strategic Investments
Strategic investments primarily include equity investments in privately-held companies, which do not have a readily determinable fair value. As of April 30, 2023 and January 31, 2023, the balance of strategic investments was $ 26 million and $ 25 million, respectively.
5. Deferred Commissions
Sales commissions capitalized as contract costs totaled $ 25 million and $ 21 million in the three months ended April 30, 2023 and 2022, respectively. Amortization of contract costs totaled $ 23 million and $ 19 million for the three months ended April 30, 2023 and 2022, respectively.
6. Deferred Revenue and Performance Obligations
Deferred Revenue
Deferred revenue, which is a contract liability, consists primarily of payments received and accounts receivable recorded in advance of revenue recognition under the Company’s contracts with customers and is recognized as the revenue recognition criteria are met.
Subscription revenue recognized during the three months ended April 30, 2023 and 2022 that was included in the deferred revenue balances at the beginning of the respective periods was $ 467 million and $ 362 million, respectively. Professional services and other revenue recognized during the three months ended April 30, 2023 and 2022 that was included in the deferred revenue balances at the beginning of the respective periods was $ 4 million and $ 6 million, respectively.
Transaction Price Allocated to the Remaining Performance Obligations
Transaction price allocated to the remaining performance obligations (“RPO”) represents all future, non-cancelable contracted revenue that has not yet been recognized, inclusive of deferred revenue that has been invoiced and non-cancelable amounts that will be invoiced and recognized as revenue in future periods.
Total remaining non-cancelable performance obligations under subscription contracts with customers was approximately $ 2,942 million as of April 30, 2023 . Of this amount, the Company expects to recognize revenue of approximately $ 1,701 million, or 58 %, 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 April 30, 2023 were not material.
12
OKTA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
7. Convertible Senior Notes, Net
Convertible Senior Notes
The 2025 convertible senior notes (“2025 Notes”) and the 2026 convertible senior notes (“2026 Notes” and together with the 2025 Notes, the “Notes”) are recorded at face value less unamortized debt issuance costs.
During the three months ended April 30, 2023, the Company repurchased $ 366 million principal amount of the 2025 Notes for $ 332 million in cash resulting in a gain on early extinguishment of debt of $ 31 million, net of unamortized debt issuance costs.
The net carrying amount of the Notes consisted of the following:
As of April 30, 2023 As of January 31, 2023
(dollars in millions)
2025 Notes:
Principal $ 694 $ 1,060
Less: unamortized debt issuance costs ( 5 ) ( 8 )
Net carrying amount $ 689 $ 1,052
2026 Notes:
Principal $ 1,150 $ 1,150
Less: unamortized debt issuance costs ( 8 ) ( 9 )
Net carrying amount $ 1,142 $ 1,141
Fair Value Measurements
The following table presents the principal amounts and estimated fair values of the Notes, which are not recorded at fair value on the condensed consolidated balance sheets:
As of April 30, 2023
Principal Amount Estimated Fair Value
(dollars in millions)
2025 Notes $ 694 $ 606
2026 Notes $ 1,150 $ 972
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.
Warrants
In February 2018, the Company sold net-share-settled (or, at the Company’s election subject to certain conditions, cash-settled) warrants (the “Warrants”) to acquire shares of the Company’s Class A common stock at an initial exercise price of approximately $ 68.06 per share. The Warrants may be exercised over 80 scheduled trading days beginning on May 15, 2023 and will expire if they are not exercised on their respective exercise dates. The Company has elected to cash settle the warrants.
As of April 30, 2023, Warrants to acquire up to approximately 1 million shares remained outstanding.
8. 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 were issued and outstanding as of April 30, 2023 and January 31, 2023. 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 condensed consolidated balance sheets as of April 30, 2023 and January 31, 2023.
13
OKTA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
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, Inc. (“Auth0”). The lawsuit seeks an order certifying the lawsuit as a class action and unspecified damages. The defendants moved to dismiss the amended complaint. On March 31, 2023, the court issued an order granting in part and denying in part the motion to dismiss. The court dismissed in full the claims based on plaintiff’s allegations related to the Company’s cybersecurity controls and vulnerability to data breaches, and dismissed in part and denied in part the claims based on allegations related to the Auth0 integration. Discovery will proceed with respect to the issues remaining in the case.
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 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. On February 22, 2023, the court entered a stipulated order consolidating the derivative actions, appointing co-lead counsel for plaintiffs, and staying the consolidated derivative actions during the pendency of the motion to dismiss in the securities class action lawsuit. The consolidated derivative action is captioned In re Okta, Inc. Stockholder Derivative Litigation , No. 3:22-cv-07480. On May 9, 2023, the court entered a stipulated order continuing the stay.
On April 14, 2023, another shareholder filed a substantially similar derivative lawsuit in the United States District Court for the District of Delaware against certain of the Company’s current and former executive officers and directors, captioned Buono v. McKinnon et al. , No. 1:23-cv-00413. No parties have been served.
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
To date, the Company has not incurred significant costs and has not accrued any material liabilities in the accompanying condensed consolidated financial statements as a result of its warranty and indemnification obligations.
9. Employee Incentive Plans
The Company’s equity incentive plans provide for granting stock options, restricted stock units (“RSUs”), restricted stock awards (“RSAs”) to employees, consultants, officers and directors and restricted stock units with market-based vesting conditions to certain executives. In addition, the Company offers an Employee Stock Purchase Plan (“ESPP”) to eligible employees.
14
OKTA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Stock-based compensation expense was recorded in the following cost and expense categories in the Company’s condensed consolidated statements of operations:
Three Months Ended
April 30,
2023 2022
(dollars in millions)
Cost of revenue
Subscription $ 16 $ 17
Professional services and other 4 4
Research and development 68 70
Sales and marketing 38 39
General and administrative 40 41
Total $ 166 $ 171
The following table presents total unrecognized stock-based compensation expense related to outstanding equity awards as of April 30, 2023:
Unrecognized Stock-based Compensation Expense
(in millions) Weighted-average remaining period
(in years)
Unvested RSUs $ 1,372 2.9 years
Unvested RSAs 113 1.0 year
Unvested stock options 66 1.6 years
ESPP 16 0.5 years
Total $ 1,567
Market-based Restricted Stock Units
In March 2023, the Company granted market-based RSUs to certain members of management. The target number of market-based RSUs granted was 192,843 . One-third of these market-based RSUs vest over each of a one-, two- and three-year performance period, each starting on February 1, 2023. 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 $ 149.78 average 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.
10. Income Taxes
For the three months ended April 30, 2023, the Company recorded a tax provision of $ 4 million on a pretax loss of $ 115 million. The effective tax rate for the three months ended April 30, 2023 was approximately ( 3.6 )%. The effective tax rate differs from the statutory rate primarily as a result of a full valuation allowance against U.S. deferred tax assets, the tax effect of foreign operations, and U.S. federal and state taxes.
The Tax Cuts and Jobs Act enacted on December 22, 2017 amended Internal Revenue Code Section 174 to require that specific research and experimental (“R&E”) expenditures be capitalized and amortized over five years (U.S. R&E) or fifteen years (non-U.S. R&E) beginning in the Company's fiscal 2023. As a result, the Company may be required to utilize some of its federal and state tax attributes and there may be increases to cash taxes or tax expense.
For the three months ended April 30, 2022, the Company recorded a tax provision of $ 2 million on a pretax loss of $ 241 million. The effective tax rate for the three months ended April 30, 2022 was approximately ( 0.8 )%. The effective tax rate differs from the statutory rate primarily as a result of a full valuation allowance against U.S.
15
OKTA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
deferred tax assets, the tax effect of foreign operations, U.S. state taxes and excess tax benefits from stock-based compensation in the United Kingdom.
11. 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:
Three Months Ended
April 30,
2023 2022
Class A Class B Class A Class B
(dollars in millions, shares in thousands, except per share data)
Numerator:
Net loss $ ( 114 ) $ ( 5 ) $ ( 232 ) $ ( 11 )
Denominator:
Weighted-average shares outstanding, basic and diluted 154,023 7,300 148,898 6,977
Net loss per share, basic and diluted $ ( 0.74 ) $ ( 0.74 ) $ ( 1.56 ) $ ( 1.56 )
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:
As of April 30,
2023 2022
(shares in thousands)
Issued and outstanding stock options 5,865 7,569
Unvested RSUs issued and outstanding 12,339 8,347
Unvested market-based RSUs issued and outstanding 502 116
Unvested RSAs issued and outstanding 525 1,269
Shares committed under the ESPP 864 232
Shares related to the 2023 Notes — 108
Shares subject to warrants related to the issuance of the 2023 Notes 1,048 1,048
Shares related to the 2025 Notes 3,679 5,617
Shares related to the 2026 Notes 4,820 4,820
29,642 29,126
16
OKTA, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.