Published: 2021-09-02 00:00:00 ET

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Description of Business

Okta, Inc. (the “Company”) is the leading independent identity management platform for the enterprise. The Okta Identity Cloud enables the Company’s customers to securely connect the right people to the right technologies and services at the right time. The Company was incorporated in January 2009 as Saasure Inc., a California corporation, and was later reincorporated in April 2010 under the name Okta, Inc. as a Delaware corporation. The Company is headquartered in San Francisco, California.

Basis of Presentation and Principles of Consolidation

The accompanying 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”). All intercompany balances and transactions have been eliminated in consolidation.

The condensed consolidated balance sheet as of January 31, 2021, included herein, was derived from the audited financial statements as of that date. The unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly 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, 2022 or any future period. The condensed consolidated financial statements include the results of operations for Auth0, Inc. from the acquisition date of May 3, 2021 to July 31, 2021. See Note 3 for additional details.

The Company’s fiscal year ends on January 31. References to fiscal 2022, for example, refer to the fiscal year ending January 31, 2022.

The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 4, 2021.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. The Company bases its estimates on historical experience and on other assumptions that its management believes are reasonable under the circumstances. Actual results could vary from those estimates. The Company’s most significant estimates include the stand alone selling price (“SSP”) for each distinct performance obligation included in customer contracts with multiple performance obligations, the determination of the period of benefit for deferred commissions, the determination of the effective interest rate of the liability components of its convertible senior notes, the determination of the incremental borrowing rate used for operating lease liabilities, the valuation of deferred income tax assets, the valuation of goodwill and acquired intangible assets and their useful lives and the valuation of certain equity awards assumed.

In March 2020, the World Health Organization (“WHO”) declared the outbreak of the novel coronavirus (“COVID-19”) a pandemic, which has spread across the globe. The Company considered the impact of COVID-19 on the assumptions and estimates used and determined that there were no material adverse impacts on the condensed consolidated financial statements for the three and six months ended July 31, 2021 and 2020. As events continue to evolve and additional information becomes available, the Company’s assumptions and estimates may change materially in future periods.

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Significant Accounting Policies

The Company’s significant accounting policies are discussed in “Note 2. Summary of Significant Accounting Policies” in Item 8. Financial Statements and Supplementary Data of its Form 10-K for the fiscal year ended January 31, 2021. The Company has updated and further described its accounting policies for business combinations and strategic investments below. There have been no other significant changes to the Company’s significant accounting policies for the six months ended July 31, 2021.

Business Combinations

When the Company acquires a business, the purchase price is allocated to the net tangible and identifiable intangible assets acquired based on their estimated fair values. Any residual purchase price is recorded as goodwill. The allocation of the purchase price requires management to make significant estimates in determining the fair values of assets acquired and liabilities assumed, especially with respect to intangible assets. These estimates can include, but are not limited to:

•future expected cash flows from subscription contracts, professional services contracts, other customer contracts and acquired developed technologies;

•historical and expected customer attrition rates and anticipated growth in revenue from acquired customers;

•royalty rates applied to acquired developed technology platforms and other intangible assets;

•obsolescence curves and other useful life assumptions, such as the period of time and intended use of acquired intangible assets in the Company’s product offerings;

•discount rates;

•uncertain tax positions and tax-related valuation allowances; and

•fair value of assumed equity awards.

These estimates are inherently uncertain and unpredictable, and unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results. During the measurement period, which may be up to one year from the acquisition date, adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed may be recorded, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations.

Strategic Investments

The Company holds strategic equity investments in privately held companies that are included in Other assets on the condensed 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 condensed consolidated statements of operations.

In determining the estimated fair value of its strategic investments in privately held companies, the Company uses the most recent data available to the Company. Valuations of privately held securities are inherently complex due to the lack of readily available market data and require the use of judgment. The determination of whether an orderly transaction is for an identical or similar investment requires significant Company judgment. In its evaluation, the Company considers factors such as differences in the rights and preferences of the investments and the extent to which those differences would affect the fair values of those investments. The Company’s impairment analysis encompasses an assessment of both qualitative and quantitative factors including the investee's financial metrics, market acceptance of the investee's product or technology, general market conditions and liquidity considerations.

Recent Accounting Pronouncements Not Yet Adopted

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU

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On May 3, 2021, the Company acquired all outstanding shares of privately-held Auth0, an Identity-as-a-Service company. The Company expects to combine Auth0’s developer-centric identity solution with the Company’s Okta Identity Cloud to drive synergies, product options and value for current and future customers. The acquisition date fair value of the consideration transferred for Auth0 was approximately $5,671.0 million, which consisted of the following (in thousands):

			Estimated Fair Value
			(unaudited)
Cash			$	257,010
Common stock issued			5,175,623
Fair value of outstanding employee equity awards assumed			238,389
Total consideration			$	5,671,022

Cash consideration of $257.0 million includes $3.8 million held back as partial security for post-closing true-up adjustments as well as indemnification claims made within one year of the acquisition date.

Approximately 19.2 million shares of common stock valued at $5,175.6 million were issued to selling stockholders, which includes approximately 1.1 million shares valued at $294.6 million held back as partial security for post-closing true-up adjustments as well as any indemnification claims made within one year of the acquisition date.

The Company entered into revesting agreements with Auth0’s founders pursuant to which approximately 1.2 million additional shares of Okta’s Class A common stock issued to the founders as of the closing date will vest over three years. The $332.1 million fair value of the unvested restricted stock is not included as purchase consideration above, as it has a post-combination service requirement and will be accounted for separately from the business combination as stock compensation expense.

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The Company issued replacement equity awards with a fair value of $655.1 million, of which $238.4 million was allocated to the purchase consideration as it is attributable to pre-combination services rendered and $416.7 million was allocated to post-combination services and will be expensed over the remaining service periods as stock-based compensation. The fair value of the stock options assumed by the Company was determined using the Black-Scholes option pricing model. The Company also converted certain equity awards to unvested restricted cash awards totaling $13.5 million that will be expensed over the remaining service periods.

See Note 12 for a discussion of amounts related to post-combination services that will be expensed over the remaining service periods as stock-based compensation.

Acquisition costs of $29.0 million related to Auth0 were expensed by the Company in general and administrative expenses in its condensed consolidated statement of operations for the three and six months ended July 31, 2021.

The transaction was accounted for as a business combination. The total purchase price of $5,671.0 million was allocated using information currently available to the Company. As a result, the Company may continue to adjust the preliminary purchase price allocation after obtaining more information regarding asset valuations, liabilities assumed, and revisions of preliminary estimates. Preliminary allocation of the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values is as follows (in thousands):

			Estimated Fair Value
			(unaudited)
Cash and cash equivalents			$	107,425
Accounts receivable			28,572
Prepaid expenses and other current assets			12,748
Property and equipment, net			1,928
Operating lease right-of-use assets			6,873
Other assets			6,375
Intangible assets			334,300
Accounts payable			(3,610)
Accrued expenses and other current liabilities			(10,946)
Accrued compensation			(19,187)
Deferred revenue			(65,339)
Operating lease liabilities, noncurrent			(5,694)
Other liabilities, noncurrent			(12,515)
Net assets acquired			$	380,930

The excess of purchase consideration over the fair value of the net tangible assets and identifiable intangible assets acquired was $5,290.1 million and was recorded as goodwill, which is primarily attributable to expected synergies in sales opportunities across complementary products, customers and geographies, cross-selling opportunities, and improvements in the selling process. None of the goodwill is expected to be deductible for U.S. federal income tax purposes.

The estimated useful lives and fair values of the identifiable intangible assets are as follows (in thousands):

Preliminary Estimate Useful Life (in years)

Amount

(unaudited)

Developed technology

5 years

$

172,000

Customer relationships

2 - 6 years

140,900

Trade name

5 years

21,400

Total identifiable intangible assets

$

334,300

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Developed technology represents the estimated fair value of the features underlying the Auth0 products as well as the platform supporting and providing services to Auth0 customers. Customer relationships represents the estimated fair value of the underlying relationships with Auth0 customers, including the fair value of unbilled and unrecognized contracts yet to be fulfilled. Trade name represents the estimated fair value of the Auth0 brand.

Revenue and earnings of Auth0 included in the Company’s consolidated income statement from the acquisition date through July 31, 2021 are as follows (in thousands):

For the period

May 3, 2021 to July 31, 2021

(unaudited)

Revenue

$

37,606

Net loss

(150,335)

Pro forma consolidated revenue and earnings for the three and six months ended July 31, 2021 and 2020, calculated as if Auth0 had been acquired as of February 1, 2020 are as follows (in thousands):

			Pro Forma Consolidated Statement of Operations Data
			Three Months Ended July 31,												Six Months Ended July 31,
			2021						2020						2021						2020
			(unaudited)
Revenue			$	320,532					$	225,596					$	610,295					$	428,668
Net loss			(214,738)						(158,167)						(414,569)						(346,400)

The pro forma financial information for all periods presented above has been calculated after adjusting the results of Auth0 to reflect certain business combination and one-time accounting effects such as fair value adjustment of deferred revenue, amortization expense from acquired intangible assets, stock-based compensation expense for unvested equity awards assumed, deferred commissions, release of deferred tax asset valuation allowance and acquisition costs as though the acquisition occurred as of the beginning of the Company’s fiscal 2021. The historical consolidated financial information has been adjusted in the pro forma combined financial results to give effect to pro forma events that are directly attributable to the business combination, reasonably estimable and factually supportable. The pro forma financial information is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of the Company’s fiscal 2021.

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Cash Equivalents and Short-term Investments

The amortized cost, unrealized gain (loss) and estimated fair value of the Company’s cash equivalents and short-term investments as of July 31, 2021 and January 31, 2021 were as follows (in thousands):  

			As of July 31, 2021
			Amortized Cost						Unrealized Gain						Unrealized Loss						Estimated Fair Value
			(unaudited)
Cash equivalents:
Money market funds			$	58,546					$	—					$	—					$	58,546
Total cash equivalents			58,546						—						—						58,546
Short-term investments:
U.S. treasury securities			2,021,561						810						(56)						2,022,315
Corporate debt securities			221,267						101						(45)						221,323
Total short-term investments			2,242,828						911						(101)						2,243,638
Total			$	2,301,374					$	911					$	(101)					$	2,302,184

			As of January 31, 2021
			Amortized Cost						Unrealized Gain						Unrealized Loss						Estimated Fair Value
Cash equivalents:
Money market funds			$	311,257					$	—					$	—					$	311,257
Total cash equivalents			311,257						—						—						311,257
Short-term investments:
U.S. treasury securities			1,888,882						1,571						(22)						1,890,431
Corporate debt securities			230,726						429						(2)						231,153
Total short-term investments			2,119,608						2,000						(24)						2,121,584
Total			$	2,430,865					$	2,000					$	(24)					$	2,432,841

All short-term investments were designated as available-for-sale securities as of July 31, 2021 and January 31, 2021.

The following table presents the contractual maturities of the Company’s short-term investments as of July 31, 2021 (in thousands):

			As of July 31, 2021
			Amortized Cost						Estimated Fair Value
			(unaudited)
Due within one year			$	1,312,391					$	1,312,979
Due between one to five years			930,437						930,659
Total			$	2,242,828					$	2,243,638

As of July 31, 2021 and January 31, 2021, the Company included nil of unsettled purchases of short-term investments in Accrued expenses and other current liabilities on the condensed consolidated balance sheets and included $50.0 million and $31.0 million, respectively, of unsettled maturities of short-term investments in Prepaid expenses and other current assets on the condensed consolidated balance sheets.

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The Company included $8.4 million and $10.5 million of interest receivable in Prepaid expenses and other current assets on the condensed consolidated balance sheets as of July 31, 2021 and January 31, 2021, respectively. The Company did not recognize an allowance for credit losses against interest receivable as of July 31, 2021 and January 31, 2021 because such potential losses were not material.

The Company had 53 and 10 short-term investments in unrealized loss positions as of July 31, 2021 and January 31, 2021, respectively. There were no material gross unrealized gains or losses from available-for-sale securities and no material realized gains or losses from available-for-sale securities that were reclassified out of accumulated other comprehensive income for the three and six months ended July 31, 2021 or 2020.

For available-for-sale debt securities that have unrealized losses, the Company evaluates whether (i) the Company has the intention to sell any of these investments, (ii) it is not more likely than not that the Company will be required to sell any of these available-for-sale debt securities before recovery of the entire amortized cost basis and (iii) the decline in the fair value of the investment is due to credit or non-credit related factors. Based on this evaluation, the Company determined that for short-term investments, there were no material credit or non-credit related impairments as of July 31, 2021 and January 31, 2021.

Strategic Investments

The Company's investments also include strategic equity investments in privately held companies, which do not have a readily determinable fair value. As of July 31, 2021 and January 31, 2021, the balance of such strategic investments was $10.3 million and $3.1 million, respectively.

During the three and six months ended July 31, 2021, the Company recorded $2.4 million and $5.3 million, respectively, of realized gain and unrealized adjustments in the carrying values of strategic investments. All gains and losses on strategic investments, whether realized or unrealized, are recognized in Interest and other, net on the condensed consolidated statements of operations.

The Company measures its financial assets at fair value each reporting period using a fair value hierarchy that prioritizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Three levels of inputs may be used to measure as follows:

Level 1—Valuations based on observable inputs that reflect quoted prices for identical assets or liabilities in active markets.

Level 2—Valuations based on other inputs that are directly or indirectly observable in the marketplace.

Level 3—Valuations based on unobservable inputs that are supported by little or no market activity.

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents information about the Company’s financial assets that were measured at fair value on a recurring basis using the above input categories (in thousands):  

			As of July 31, 2021
			Level 1						Level 2						Level 3						Total
			(unaudited)
Assets:
Cash equivalents:
Money market funds			$	58,546					$	—					$	—					$	58,546
Total cash equivalents			58,546						—						—						58,546
Short-term investments:
U.S. treasury securities			—						2,022,315						—						2,022,315
Corporate debt securities			—						221,323						—						221,323
Total short-term investments			—						2,243,638						—						2,243,638
Total cash equivalents and short-term investments			$	58,546					$	2,243,638					$	—					$	2,302,184

			As of January 31, 2021
			Level 1						Level 2						Level 3						Total
Assets:
Cash equivalents:
Money market funds			$	311,257					$	—					$	—					$	311,257
Total cash equivalents			311,257						—						—						311,257
Short-term investments:
U.S. treasury securities			—						1,890,431						—						1,890,431
Corporate debt securities			—						231,153						—						231,153
Total short-term investments			—						2,121,584						—						2,121,584
Total cash equivalents and short-term investments			$	311,257					$	2,121,584					$	—					$	2,432,841

The carrying amounts of certain financial instruments, including cash held in banks, accounts receivable and accounts payable, approximate fair value due to their short-term maturities and are excluded from the fair value table above.

Fair Value Measurements of Other Financial Instruments

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments that are not recorded at fair value on the condensed consolidated balance sheets (in thousands):

			As of July 31, 2021
			Net Carrying Amount (1)						Estimated Fair Value
			(unaudited)
2023 convertible senior notes			$	15,868					$	86,375
2025 convertible senior notes			$	902,955					$	1,550,924
2026 convertible senior notes			$	890,431					$	1,457,752

(1)     Before unamortized debt issuance costs.

The principal amounts of the 2023 convertible senior notes (“2023 Notes”), the 2025 convertible senior notes (“2025 Notes”), and the 2026 convertible senior notes (“2026 Notes”, and together with the 2023 Notes and 2025 Notes, the “Notes”) are $17.2 million, $1,060.0 million, and $1,150.0 million, respectively. The difference between the principal amounts and the respective net carrying amounts, before unamortized debt issuance costs, represents the unamortized debt discount (See Note 9 for additional details). The estimated fair values of the Notes, which are

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Goodwill

As of July 31, 2021 and January 31, 2021, goodwill was $5,338.1 million and $48.0 million, respectively. During the three months ended July 31, 2021, the Company recorded $5,290.1 million of goodwill in connection with the Auth0 acquisition that was completed in May 2021. See Note 3 for further details. No goodwill impairments were recorded during the three and six months ended July 31, 2021 and 2020.

Intangible Assets, net

Intangible assets consisted of the following (in thousands):  

			As of July 31, 2021
			Gross						Accumulated Amortization																		Net
			(unaudited)
Capitalized internal-use software costs			$	30,819					$	(21,966)																	$	8,853
Purchased developed technology			200,800						(24,415)																		176,385
Customer relationships			140,900						(8,800)																		132,100
Trade name			21,400						(1,070)																		20,330
Software licenses			239						(121)																		118
			$	394,158					$	(56,372)																	$	337,786

			As of January 31, 2021
			Gross						Accumulated Amortization																		Net
Capitalized internal-use software costs			$	30,259					$	(19,478)																	$	10,781
Purchased developed technology			28,800						(12,694)																		16,106
Software licenses			126						(4)																		122
			$	59,185					$	(32,176)																	$	27,009

During the three months ended July 31, 2021, the Company recorded $334.3 million of intangible assets in connection with the Auth0 acquisition. See Note 3 for further details.

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The weighted-average remaining useful lives of the Company’s acquired intangible assets are as follows:

Weighted-Average Remaining Useful Life

July 31, 2021

January 31, 2021

(unaudited)

Purchased developed technology

4.6 years

3.1 years

Customer relationships

4.4 years

—

Trade name

4.8 years

—

Amortization expense of intangible assets for the three months ended July 31, 2021 and 2020 was $21.3 million and $2.8 million, respectively, and $24.2 million and $5.6 million for the six months ended July 31, 2021 and 2020, respectively.

The expected future amortization expense for acquired intangible assets in connection with the Auth0 acquisition, as of July 31, 2021, is as follows (in thousands):

Fiscal Period:			(unaudited)
Remaining six months of fiscal 2022			$	36,939
Fiscal 2023			73,878
Fiscal 2024			64,391
Fiscal 2025			61,228
Fiscal 2026			59,222
Thereafter			20,172
Total amortization expense			$	315,830

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 July 31, 2021 and 2020 that was included in the deferred revenue balances at the beginning of the respective periods was $245.4 million and $165.0 million, respectively, and $359.3 million and $261.9 million in the six months ended July 31, 2021 and 2020, respectively. Professional services and other revenue recognized in the three and six months ended July 31, 2021 and 2020 from deferred revenue balances at the beginning of the respective periods was not material.

Transaction Price Allocated to the Remaining Performance Obligations

Transaction price allocated to the remaining performance obligations represents all future, non-cancelable contracted revenue that has not yet been recognized, inclusive of deferred revenue that has been invoiced and non-cancelable amounts that will be invoiced and recognized as revenue in future periods.

As of July 31, 2021, total remaining non-cancelable performance obligations under the Company’s subscription contracts with customers was approximately $2,236.4 million. Of this amount, the Company expects to recognize revenue of approximately $1,098.5 million, or 49%, 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 July 31, 2021 were not material.

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2023 Convertible Senior Notes

The 2023 Notes are senior, unsecured obligations of the Company, and bear interest at a fixed rate of 0.25% per year. Interest is payable in cash semi-annually in arrears on February 15 and August 15 of each year, beginning on August 15, 2018. The 2023 Notes mature on February 15, 2023 unless earlier repurchased or converted. The Company may not redeem the 2023 Notes prior to maturity. The total net proceeds from the 2023 Notes, after deducting initial purchasers’ discounts and debt issuance costs, was $335.0 million.

In September 2019, the Company used part of the net proceeds from the issuance of the 2025 Notes to repurchase a portion of the 2023 Notes, which consisted of a repurchase of $224.4 million aggregate principal amount of the 2023 Notes in privately-negotiated transactions, for aggregate consideration of $604.8 million, consisting of approximately $224.4 million in cash and approximately 3.0 million shares of Class A common stock (“First Partial Repurchase of 2023 Notes”). The $604.8 million in aggregate consideration was allocated between the debt and equity components in the amounts of $197.7 million and $407.1 million respectively, using an effective interest rate of 4.00% to determine the fair value of the liability component. As of the repurchase date, the carrying value of the notes subject to the First Partial Repurchase of 2023 Notes, net of unamortized debt discount and issuance costs, was $183.1 million. The First Partial Repurchase of 2023 Notes resulted in a $14.6 million loss on early debt extinguishment during the year ended January 31, 2020, of which $3.8 million consisted of unamortized debt issuance costs.

In June 2020, the Company used part of the net proceeds from the issuance of the 2026 Notes to repurchase a portion of the 2023 Notes, which consisted of a repurchase of $69.9 million aggregate principal amount of the 2023 Notes in privately-negotiated transactions, for aggregate consideration of $260.5 million, consisting of approximately $0.2 million in cash and approximately 1.4 million shares of Class A common stock (“Second Partial Repurchase of 2023 Notes”, and together with the First Partial Repurchase of 2023 Notes, the “2023 Notes Partial Repurchases”). The $260.5 million in aggregate consideration was allocated between the debt and equity components in the amounts of $61.8 million and $198.7 million respectively, using an effective interest rate of 4.90% to determine the fair value of the liability component. As of the repurchase date, the carrying value of the notes subject to the Second Partial Repurchase of 2023 Notes, net of unamortized debt discount and issuance costs, was $59.6 million. The Second Partial Repurchase of 2023 Notes resulted in a $2.2 million loss on early debt extinguishment during the year ended January 31, 2021, of which $1.0 million consisted of unamortized debt issuance costs.

The interest rates used in the 2023 Notes Partial Repurchases were based on the income and market based approaches used to determine the effective interest rate of the 2025 Notes and 2026 Notes, adjusted for the remaining tenor of the 2023 Notes. As of July 31, 2021, $17.2 million of principal remained outstanding on the 2023 Notes.

The terms of the 2023 Notes are governed by an Indenture by and between the Company and Wilmington Trust, National Association, as Trustee (the “2023 Indenture”). Upon conversion, the 2023 Notes may be settled in cash, shares of Class A common stock or a combination of cash and shares of Class A common stock, at the Company’s election.

The 2023 Notes are convertible at an initial conversion rate of 20.6795 shares of Class A common stock per $1,000 principal amount of the 2023 Notes, which is equal to an initial conversion price of approximately $48.36 per share of Class A common stock, subject to adjustment under certain circumstances in accordance with the terms of the 2023 Indenture. Prior to the close of business on the business day immediately preceding October 15, 2022, holders of the 2023 Notes may convert all or a portion of their 2023 Notes only in multiples of $1,000 principal amount, under the following circumstances:

•during any fiscal quarter commencing after the fiscal quarter ending on April 30, 2018 (and only during such fiscal quarter), if the last reported sale price of Class A common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price of the 2023 Notes on each applicable trading day;

•during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the 2023 Notes for each trading day of that five consecutive trading day

---

period was less than 98% of the product of the last reported sale price of Class A common stock and the conversion rate on such trading day; or

•upon the occurrence of specified corporate events, as described in the 2023 Indenture.

On or after October 15, 2022 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their 2023 Notes regardless of the foregoing circumstances. For at least 20 trading days during the period of 30 consecutive trading days ended July 31, 2021, the last reported sale price of the Company’s common stock was equal to or exceeded 130% of the conversion price of the 2023 Notes on each applicable trading day. As a result, the 2023 Notes are convertible at the option of the holders during the fiscal quarter ending October 31, 2021 and were classified as current liabilities on the condensed consolidated balance sheet as of July 31, 2021.

During the six months ended July 31, 2021, the Company issued approximately 0.5 million shares of Class A common stock and paid an immaterial amount in cash to settle approximately $23.0 million principal amount of 2023 Notes. The loss on early note conversion was not material. During the three months ended July 31, 2021, the Company received additional conversion requests, and an immaterial aggregate principal amount of the 2023 Notes was settled in cash during the fiscal quarter ending October 31, 2021. No requests to convert material amounts of the 2023 Notes are currently outstanding.

Holders of the 2023 Notes who convert their 2023 Notes in connection with certain corporate events that constitute a make-whole fundamental change (as defined in the 2023 Indenture) are, under certain circumstances, entitled to an increase in the conversion rate. Additionally, in the event of a corporate event that constitutes a fundamental change (as defined in the 2023 Indenture), holders of the 2023 Notes may require the Company to repurchase all or a portion of their 2023 Notes at a price equal to 100% of the principal amount of the 2023 Notes being repurchased, plus any accrued and unpaid interest.

In accounting for the issuance of the 2023 Notes, the Company separated the 2023 Notes into liability and equity components, using an effective interest rate of 5.68% to determine the fair value of the liability component. This interest rate was based on both an income and a market based approach. For the income approach, the Company used a convertible bond pricing model, which included several assumptions including volatility and the risk-free rate. For the market approach, the Company observed the price of the Note Hedges (see below) it purchased for its 2023 Notes and also performed an evaluation of issuances of convertible debt securities by other companies with similar credit risk ratings at the time of issuance. The following table sets forth total interest expense recognized related to the 2023 Notes (in thousands):

			Three Months Ended July 31,												Six Months Ended July 31,
			2021						2020						2021						2020
			(unaudited)
Contractual interest expense			$	14					$	52					$	34					$	127
Amortization of debt issuance costs			24						90						62						217
Amortization of debt discount			241						958						624						2,328
Total			$	279					$	1,100					$	720					$	2,672

Total initial issuance costs of $10.0 million related to the 2023 Notes were allocated between liability and equity in the same proportion as the allocation of the total proceeds to the liability and equity components. Issuance costs attributable to the liability component are being amortized to interest expense over the respective term of the 2023 Notes using the effective interest rate method. The issuance costs attributable to the equity component were netted against the respective equity component in Additional paid-in capital. The Company initially recorded liability issuance costs of $7.7 million and equity issuance costs of $2.3 million.

---

The 2023 Notes, net consisted of the following (in thousands):

			As of July 31, 2021
			(unaudited)
Liability component:
Principal			$	17,230
Less: unamortized debt issuance costs and debt discount			(1,507)
Net carrying amount			$	15,723
			As of July 31, 2021
			(unaudited)
Equity component:
2023 Notes			$	3,993
Less: issuance costs			(116)
Carrying amount of the equity component(1)			$	3,877

(1) Included in the condensed consolidated balance sheets within Additional paid-in capital.

Note Hedges

In connection with the pricing of the 2023 Notes, the Company entered into convertible note hedges with respect to its Class A common stock (the “Note Hedges”). The Note Hedges are purchased call options that give the Company the option to purchase, subject to anti-dilution adjustments substantially identical to those in the 2023 Notes, approximately 7.1 million shares of its Class A common stock for approximately $48.36 per share (subject to adjustment), corresponding to the approximate initial conversion price of the 2023 Notes, exercisable upon conversion of the 2023 Notes. The Note Hedges will expire in 2023, if not exercised earlier. The Note Hedges are intended to offset potential dilution to the Company’s Class A common stock and/or offset the potential cash payments that the Company could be required to make in excess of the principal amount upon any conversion of the 2023 Notes under certain circumstances. The Note Hedges are separate transactions and are not part of the terms of the 2023 Notes.

The Company paid an aggregate amount of $80.0 million for the Note Hedges. The amount paid for the Note Hedges was recorded as a reduction to Additional paid-in capital in the condensed consolidated balance sheets.

In September 2019 and in June 2020, and in connection with the First Partial Repurchase of 2023 Notes and Second Partial Repurchase of 2023 Notes, the Company terminated Note Hedges corresponding to approximately 4.6 million and 1.4 million shares for cash proceeds of $405.9 million and $195.0 million, respectively. The proceeds were recorded as an increase to Additional paid-in capital in the condensed consolidated balance sheets.

During the six months ended July 31, 2021, the Company exercised and net-share-settled Note Hedges corresponding to approximately $20.0 million principal amount of 2023 Notes and received approximately 0.3 million shares of Class A common stock and an immaterial cash payment. As of July 31, 2021, the Company had additionally exercised Note Hedges corresponding to approximately $3.0 million principal amount of 2023 Notes that are expected to be net-share-settled in the three months ending October 31, 2021.

As of July 31, 2021, Note Hedges giving the Company the option to purchase approximately 0.4 million shares (subject to adjustment), which excludes the exercised portion expected to be net-share-settled in the three months ending October 31, 2021, remained outstanding.

---

Warrants

In connection with the issuance of the 2023 Notes, the Company also entered into separate warrant transactions pursuant to which it sold net-share-settled (or, at the Company’s election subject to certain conditions, cash-settled) warrants (the “Warrants”) to acquire, subject to anti-dilution adjustments, up to approximately 7.1 million shares over 80 scheduled trading days beginning in May 2023 of the Company’s Class A common stock at an initial exercise price of approximately $68.06 per share (subject to adjustment). If the Warrants are not exercised on their exercise dates, they will expire. If the market value per share of the Company’s Class A common stock exceeds the applicable exercise price of the Warrants, the Warrants could have a dilutive effect on the Company’s Class A common stock unless, subject to the terms of the Warrants, the Company elects to cash settle the Warrants. The Warrants are separate transactions and are not part of the terms of the 2023 Notes or the Note Hedges.

The Company received aggregate proceeds of $52.4 million from the sale of the Warrants in connection with the 2023 Notes. The proceeds from the sale of the Warrants were recorded as an increase to Additional paid-in capital in the condensed consolidated balance sheets.

In September 2019 and in June 2020, and in connection with the First Partial Repurchase of 2023 Notes and Second Partial Repurchase of 2023 Notes, the Company terminated Warrants corresponding to approximately 4.6 million and 1.4 million shares for total cash payments of $358.6 million and $175.4 million, respectively. The termination payments were recorded as a decrease to Additional paid-in capital in the condensed consolidated balance sheets.

As of July 31, 2021, Warrants to acquire up to approximately 1.0 million shares (subject to adjustment) remained outstanding.

2025 Convertible Senior Notes

The 2025 Notes are senior, unsecured obligations of the Company, and bear interest at a fixed rate of 0.125% per year. Interest is payable in cash semi-annually in arrears on March 1 and September 1 of each year, beginning on March 1, 2020. The 2025 Notes mature on September 1, 2025 unless earlier redeemed, repurchased or converted. The total net proceeds from the 2025 Notes, after deducting initial purchasers’ discounts and debt issuance costs, were $1,040.7 million.

The terms of the 2025 Notes are governed by an Indenture by and between the Company and Wilmington Trust, National Association, as Trustee (the “2025 Indenture”). Upon conversion, the 2025 Notes may be settled in 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.

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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 July 31, 2021, the conditions allowing holders of the 2025 Notes to convert during the three months ending October 31, 2021 were not met, and as a result, the 2025 Notes were classified as noncurrent liabilities as of July 31, 2021. No requests to convert material amounts of the 2025 Notes are currently outstanding.

The Company may redeem for cash all or any portion of the 2025 Notes, at its option, on or after September 6, 2022, if the last reported sale price of the Company’s Class A common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on and including the trading day preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the 2025 Notes to be redeemed, plus any accrued and unpaid interest to, but excluding, the redemption date. During the three months ended July 31, 2021, the Company did not redeem any of the 2025 Notes.

Holders of the 2025 Notes who convert their 2025 Notes in connection with certain corporate events that constitute a make-whole fundamental change (as defined in the 2025 Indenture) or in connection with the Company’s issuance of a redemption notice are, under certain circumstances, entitled to an increase in the conversion rate. Additionally, in the event of a corporate event that constitutes a fundamental change (as defined in the 2025 Indenture), holders of the 2025 Notes may require the Company to repurchase all or a portion of their 2025 Notes at a price equal to 100% of the principal amount of the 2025 Notes being repurchased, plus any accrued and unpaid interest.

In accounting for the issuance of the 2025 Notes, the Company separated the 2025 Notes into liability and equity components using an effective interest rate of 4.10% to determine the fair value of the liability component. This interest rate was based on both an income and a market based approach. For the income approach, the Company used a convertible bond pricing model, which included several assumptions including volatility and the risk-free rate. For the market approach, the Company performed an evaluation of issuances of convertible debt securities by other companies with similar credit risk ratings at the time of issuance. The following table sets forth total interest expense recognized related to the 2025 Notes (in thousands):

			Three Months Ended July 31,												Six Months Ended July 31,
			2021						2020						2021						2020
			(unaudited)
Contractual interest expense			$	331					$	331					$	662					$	662
Amortization of debt issuance costs			568						518						1,124						1,024
Amortization of debt discount			8,790						8,440						17,490						16,794
Total			$	9,689					$	9,289					$	19,276					$	18,480

Total issuance costs of $19.3 million related to the 2025 Notes were allocated between liability and equity in the same proportion as the allocation of the total proceeds to the liability and equity components. Issuance costs attributable to the liability component are being amortized to interest expense over the respective term of the 2025 Notes using the effective interest rate method. The issuance costs attributable to the equity component were netted against the respective equity component in Additional paid-in capital. The Company recorded liability issuance costs of $15.3 million and equity issuance costs of $4.0 million.

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The 2025 Notes, net consisted of the following (in thousands):

			As of July 31, 2021
			(unaudited)
Liability component:
Principal			$	1,059,997
Less: unamortized debt issuance costs and debt discount			(168,354)
Net carrying amount			$	891,643
			At Issuance
Equity component:
2025 Notes			$	221,387
Less: issuance costs			(4,040)
Carrying amount of the equity component(1)			$	217,347

(1) Included in the condensed consolidated balance sheets within Additional paid-in capital.

2025 Capped Calls

In connection with the pricing of the 2025 Notes, the Company entered into capped call transactions with respect to its Class A common stock (the “2025 Capped Calls”). The 2025 Capped Calls are purchased call options that give the Company the option to purchase, subject to anti-dilution adjustments substantially identical to those in the 2025 Notes, approximately 5.6 million shares of its Class A common stock for approximately $188.71 per share (subject to adjustment), corresponding to the approximate initial conversion price of the 2025 Notes, exercisable upon conversion of the 2025 Notes. The 2025 Capped Calls have initial cap prices of $255.88 per share (subject to adjustment) and will expire in 2025, if not exercised earlier. The 2025 Capped Calls are intended to offset potential dilution to the Company’s Class A common stock and/or offset the potential cash payments that the Company could be required to make in excess of the principal amount upon any conversion of the 2025 Notes under certain circumstances. The 2025 Capped Calls are separate transactions and are not part of the terms of the 2025 Notes.

The Company paid an aggregate amount of $74.1 million for the 2025 Capped Calls. The amount paid for the 2025 Capped Calls was recorded as a reduction to Additional paid-in capital in the condensed consolidated balance sheets.

2026 Convertible Senior Notes

The 2026 Notes are senior, unsecured obligations of the Company, and bear interest at a fixed rate of 0.375% per year. Interest is payable in cash semi-annually in arrears on June 15 and December 15 of each year, beginning on December 15, 2020. The 2026 Notes mature on June 15, 2026 unless earlier redeemed, repurchased or converted. The total net proceeds from the 2026 Notes, after deducting initial purchasers’ discounts and debt issuance costs, were $1,134.8 million.

The terms of the 2026 Notes are governed by an Indenture by and between the Company and Wilmington Trust, National Association, as Trustee (the “2026 Indenture”, and together with the 2023 Indenture and 2025 Indenture, the “Indentures”). 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 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

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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 July 31, 2021, the conditions allowing holders of the 2026 Notes to convert were not met.

The Company may redeem for cash all or any portion of the 2026 Notes, at its option, on or after June 20, 2023, if the last reported sale price of the Company’s Class A common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period ending on and including the trading day preceding the date on which the Company provides notice of redemption price equal to 100% of the principal amount of the notes to be redeemed, plus any accrued and unpaid interest to, but excluding, the redemption date. During the three months ended July 31, 2021, the Company did not redeem any of the 2026 Notes.

Holders of the 2026 Notes who convert their 2026 Notes in connection with certain corporate events that constitute a make-whole fundamental change (as defined in the 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 Indenture), holders of the 2026 Notes may require the Company to repurchase all or a portion of their 2026 Notes at a price equal to 100% of the principal amount of the 2026 Notes being repurchased, plus any accrued and unpaid interest.

In accounting for the issuance of the 2026 Notes, the Company separated the 2026 Notes into liability and equity components using an effective interest rate of 5.75% to determine the fair value of the liability component. This interest rate was based on both an income and a market based approach. For the income approach, the Company used a convertible bond pricing model, which included several assumptions including volatility, the risk-free rate and observable trading activity for the Company’s existing Notes. For the market approach, the Company performed an evaluation of issuances of convertible debt securities by other companies with similar credit risk ratings at the time of issuance. The following table sets forth total interest expense recognized related to the 2026 Notes (in thousands):

			Three Months Ended July 31,												Six Months Ended July 31,
			2021						2020						2021						2020
			(unaudited)
Contractual interest expense			$	1,078					$	575					$	2,156					$	575
Amortization of debt issuance costs			352						165						692						165
Amortization of debt discount			11,474						5,802						22,788						5,802
Total			$	12,904					$	6,542					$	25,636					$	6,542

Total issuance costs of $15.2 million related to the 2026 Notes were allocated between liability and equity in the same proportion as the allocation of the total proceeds to the liability and equity components. Issuance costs attributable to the liability component are being amortized to interest expense over the respective term of the 2026 Notes using the effective interest rate method. The issuance costs attributable to the equity component were netted against the respective equity component in Additional paid-in capital. The Company recorded liability issuance costs of $11.1 million and equity issuance costs of $4.1 million.

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The 2026 Notes, net consisted of the following (in thousands):

			As of July 31, 2021
			(unaudited)
Liability component:
Principal			$	1,150,000
Less: unamortized debt issuance costs and debt discount			(269,132)
Net carrying amount			$	880,868
			At Issuance
Equity component:
2026 Notes			$	310,311
Less: issuance costs			(4,090)
Carrying amount of the equity component(1)			$	306,221

(1) Included in the condensed consolidated balance sheets within Additional paid-in capital.

2026 Capped Calls

In connection with the pricing of the 2026 Notes, the Company entered into capped call transactions with respect to its Class A common stock (the “2026 Capped Calls”). The 2026 Capped Calls are purchased call options that give the Company the option to purchase, subject to anti-dilution adjustments substantially identical to those in the 2026 Notes, approximately 4.8 million shares of its Class A common stock for approximately $238.60 per share (subject to adjustment), corresponding to the approximate initial conversion price of the 2026 Notes, exercisable upon conversion of the 2026 Notes. The 2026 Capped Calls have initial cap prices of $360.14 per share (subject to adjustment) and will expire in 2026, if not exercised earlier. The 2026 Capped Calls are intended to offset potential dilution to the Company’s Class A common stock and/or offset the potential cash payments that the Company could be required to make in excess of the principal amount upon any conversion of the 2026 Notes under certain circumstances. The 2026 Capped Calls are separate transactions and are not part of the terms of the 2026 Notes.

The Company has entered into various non-cancelable office space operating leases with original lease periods expiring between 2023 and 2028. These leases do not contain material variable rent payments, residual value guarantees, covenants or other restrictions.

Operating lease costs were as follows (in thousands):

			Three Months Ended July 31,												Six Months Ended July 31,
			2021						2020						2021						2020
			(unaudited)
Operating lease cost(1)			$	9,621					$	8,334					$	18,458					$	15,704

(1) Amounts are presented exclusive of sublease income and include short-term leases, which are immaterial.

The weighted-average remaining term of the Company’s operating leases was 6.3 years and 6.8 years as of July 31, 2021 and January 31, 2021, respectively, and the weighted-average discount rate used to measure the present value of the operating lease liabilities was 5.5% and 5.6%, respectively.

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Maturities of the Company’s operating lease liabilities, which do not include short-term leases, were as follows (in thousands):

						As of July 31, 2021
						(unaudited)
2022						$	17,409
2023						40,744
2024						40,588
2025						37,622
2026						27,711
Thereafter						73,135
Total lease payments						237,209
Less imputed interest						(39,227)
Total operating lease liabilities						$	197,982

Cash payments included in the measurement of the Company’s operating lease liabilities were $10.0 million and $7.8 million for the three months ended July 31, 2021 and 2020, respectively, and $19.1 million and $15.0 million in the six months ended July 31, 2021 and 2020, respectively.

Letters of Credit

In conjunction with the execution of certain office space operating leases, letters of credit in the aggregate amount of $10.8 million and $11.2 million were issued and outstanding as of July 31, 2021 and January 31, 2021, respectively. No draws have been made under such letters of credit. Noncurrent restricted cash of $8.6 million associated with these letters of credit is included in Other assets on the condensed consolidated balance sheets as of July 31, 2021 and January 31, 2021.

Legal Matters

The Company’s equity incentive plans provide for granting stock options, restricted stock units (“RSUs”) and restricted stock awards to employees, consultants, officers and directors. In addition, the Company offers an Employee Stock Purchase Plan (“ESPP”) to eligible employees.

Stock-based compensation expense was recorded in the following cost and expense categories in the Company’s condensed consolidated statements of operations (in thousands):  

			Three Months Ended July 31,												Six Months Ended July 31,
			2021						2020						2021						2020
			(unaudited)
Cost of revenue
Subscription			$	13,138					$	5,164					$	20,388					$	9,139
Professional services and other			3,161						2,000						5,503						3,811
Research and development			53,332						14,953						73,425						26,888
Sales and marketing			41,288						13,165						62,354						24,325
General and administrative			76,795						13,112						90,156						21,959
Total			$	187,714					$	48,394					$	251,826					$	86,122

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Equity Incentive Plans

The Company has two equity incentive plans: the 2009 Stock Plan (“2009 Plan”) and the 2017 Equity Incentive Plan (“2017 Plan”). In addition, the Company assumed Auth0, Inc. equity incentive plans as described below. All shares that remain available for future grants are under the 2017 Plan. As of July 31, 2021, options to purchase 2,849,312 shares of Class A common stock and 6,227,690 shares of Class B common stock remained outstanding.

Shares of common stock reserved for future issuance were as follows:

			As of
			July 31, 2021
			(unaudited)
Stock options and unvested RSUs outstanding			14,379,018
Available for future stock option and RSU grants			24,393,449
Available for ESPP			5,854,767
			44,627,234

Stock Options

A summary of the Company’s stock option activity and related information was as follows:  

			Number of Options						Weighted- Average Exercise Price						Weighted- Average Remaining Contractual Term (Years)						Aggregate Intrinsic  Value (in thousands)
Outstanding as of January 31, 2021			8,250,113						$	18.93					5.6						$	1,980,668
Granted			2,547,223						92.82
Exercised			(1,566,592)						20.73
Canceled			(153,742)						141.64
Outstanding as of July 31, 2021 (unaudited)			9,077,002						$	37.28					5.8						$	1,928,223
As of July 31, 2021
Vested and exercisable (unaudited)			7,062,746						$	12.33					5.0						$	1,663,336

As of July 31, 2021, there was a total of $293.8 million of unrecognized stock-based compensation expense related to options, which is being recognized over a weighted-average period of 2.7 years.

Restricted Stock Units

A summary of the Company’s RSU activity and related information was as follows:  

			Number of RSUs						Weighted- Average Grant Date Fair Value Per Share
Outstanding as of January 31, 2021			4,452,107						$	122.90
Granted			2,644,626						244.77
Vested			(1,324,228)						120.10
Forfeited			(470,489)						145.19
Outstanding as of July 31, 2021 (unaudited)			5,302,016						$	182.44

As of July 31, 2021, there was $881.8 million of unrecognized stock-based compensation expense related to unvested RSUs, which is being recognized over a weighted-average period of 2.7 years based on vesting under the award service conditions.

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Equity Awards Issued in Connection with Business Combination

In connection with the May 3, 2021 Auth0 acquisition described in Note 3, the Company assumed the Auth0, Inc. 2014 Equity Incentive Plan and the Auth0, Inc. Phantom Unit Plan (together, the “Auth0 Plans”) and certain outstanding options to purchase Auth0 common stock, RSUs settleable into shares of Auth0 common stock, and phantom units under the Auth0 Plans. Certain assumed securities were converted into options (which in certain instances were automatically net exercised) or RSUs, as applicable, for shares of the Company’s Class A common stock, subject to adjustment as set forth in the Merger Agreement. Such assumed and converted options and RSUs will continue to be outstanding and will be governed by the provisions of the Auth0 Plans.

Activity under the Auth0 Plans is included in the summaries of stock option and RSU activity above. Included in the Granted total in the stock options activity table above are 1,850,079 options assumed at a weighted average exercise price per share of $24.21. Included in the Granted total in the RSU activity table above are 743,718 RSUs assumed at a weighted average grant date fair value per share of $269.70.

The Company entered into revesting agreements with Auth0’s founders pursuant to which 1,231,372 restricted shares of Okta’s Class A common stock with a fair value per share of $269.70 issued to the founders as of the closing date will vest over three years. As of July 31, 2021, there was $305.1 million of unrecognized stock-based compensation expense related to unvested restricted stock, which is being recognized over a weighted-average period of 2.8 years based on vesting under the award service conditions.

Employee Stock Purchase Plan

The ESPP provides for 12-month offering periods beginning June 21 and December 21 of each year, and each offering period consists of up to two six-month purchase periods.

The Company estimated the fair value of ESPP purchase rights using a Black-Scholes option pricing model with the following assumptions:

			Three and Six Months Ended July 31,
			2021						2020
			(unaudited)
Expected volatility			47%- 48%						50% - 54%
Expected term (in years)			0.5 - 1.0						0.5 - 1.0
Risk-free interest rate			0.06% - 0.09%						0.17% - 0.18%
Expected dividend yield			—						—

During the three and six months ended July 31, 2021, the Company’s employees purchased 88,160 shares of its Class A common stock under the ESPP. The shares were purchased at a weighted-average purchase price of $197.60 per share, with total proceeds of $17.4 million.

As of July 31, 2021, there was $16.5 million of unrecognized stock-based compensation expense related to the ESPP that is expected to be recognized over an average vesting period of 0.8 years.

For the three and six months ended July 31, 2021, the Company recorded a tax benefit of $7.5 million and $7.5 million on pretax losses of $284.1 million and $393.4 million, respectively. The effective tax rate for the three and six months ended July 31, 2021 was approximately 2.6% and 1.9%, respectively. The effective tax rate differs from the statutory rate primarily as a result of not recognizing deferred tax assets for U.S. losses due to a full valuation allowance against U.S. deferred tax assets, release of the valuation allowance in the United States in connection with the Auth0 acquisition, a remeasurement of deferred tax assets in connection with a tax rate change in the United Kingdom, and excess tax benefits from stock-based compensation in the United Kingdom. The tax benefit was partially offset by income tax expense in profitable foreign jurisdictions and U.S. state taxes.

For the three and six months ended July 31, 2020, the Company recorded a tax benefit of $0.4 million and $0.8 million on pretax losses of $60.5 million and $118.6 million, respectively. The effective tax rate for the three and six months ended July 31, 2020 was 0.7%. The effective tax rate differs from the statutory rate primarily as a result of not recognizing deferred tax assets for U.S. losses due to a full valuation allowance against U.S. deferred tax

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The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share data):  

			Three Months Ended July 31,																								Six Months Ended July 31,
			2021												2020												2021												2020
			Class A						Class B						Class A						Class B						Class A						Class B						Class A						Class B
			(unaudited)
Numerator:
Net loss			$	(263,151)					$	(13,531)					$	(56,090)					$	(4,010)					$	(364,976)					$	(20,938)					$	(109,774)					$	(7,988)
Denominator:
Weighted-average shares outstanding, basic and diluted			143,955						7,402						117,891						8,428						134,031						7,689						116,449						8,473
Net loss per share, basic and diluted			$	(1.83)					$	(1.83)					$	(0.48)					$	(0.48)					$	(2.72)					$	(2.72)					$	(0.94)					$	(0.94)

As the Company was in a loss position for all periods presented, basic net loss per share is the same as diluted net loss per share as the inclusion of all potential common shares outstanding would have been anti-dilutive. Potentially dilutive securities that were not included in the diluted per share calculations because they would be anti-dilutive were as follows (in thousands):  

			As of July 31,
			2021						2020
			(unaudited)
Issued and outstanding stock options			9,077						9,919
Unvested RSUs issued and outstanding			5,302						5,262
Unvested restricted stock awards issued and outstanding			1,231						—
Shares committed under the ESPP			227						141
Shares related to the 2023 Notes			356						1,048
Shares subject to warrants related to the issuance of the 2023 Notes			1,048						1,048
Shares related to the 2025 Notes			5,617						5,617
Shares related to the 2026 Notes			4,820						4,820
			27,678						27,855

The Company uses the if-converted method for calculating any potential dilutive effect of the conversion options embedded in the Notes on diluted net income per share, if applicable. The conversion options of the 2023, 2025 and 2026 Notes are dilutive in periods of net income on a weighted average basis using an assumed conversion date equal to the later of the beginning of the reporting period and the date of issuance of the respective Notes. The exercise rights of the Warrants will have a dilutive impact on net income per share of common stock under the treasury-stock method when the average market price per share of the Company’s Class A common stock for a given period exceeds the conversion price of $68.06 per share. During the three months ended July 31, 2021, the average price per share of the Company’s Class A common stock exceeded the exercise price of the Warrants; however, since the Company is in a net loss position, there was no dilutive effect during any period presented.

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