Form 10-Q Okta, Inc. For: Jul 31

September 8, 2017 6:08 AM
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________________________ 
FORM 10-Q
_____________________________________ 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2017
OR
TRANSITION REPORT PURSUANT TO SECTION 13 MOR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-38044
_____________________________________ 
Okta, Inc.
(Exact Name of Registrant as Specified in Its Charter)
_____________________________________ 
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
 
 
 
26-4175727
(I.R.S. Employer
Identification Number)
 
 
301 Brannan Street
San Francisco, California 94107
(Address of Principal executive offices)
 
 
Registrant’s telephone number, including area code: (888) 722-7871
___________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨ 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Yes ý No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
 
 
 
 
Accelerated filer 
¨
Non-accelerated filer 
ý
 
 
 
 
Smaller reporting company 
¨
(Do not check if a smaller reporting company)
 
 
 
 
 
Emerging growth company
ý
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨ No  ý
As of August 31, 2017, the number of shares of registrant’s Class A common stock outstanding was 19,261,581 and the number of shares of the registrant’s Class B common stock outstanding was 76,321,131.




Okta, Inc.
Table of Contents

 
 
Page No.
 
 
 
 
 
 




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 and market positioning. 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. The forward-looking statements are contained principally in “Management’s Discussion and Analysis of Financial Condition and Result of Operations” and “Risk Factors.”
Forward-looking statements are subject to a number of risks and uncertainties, many of which involve factors or circumstances that are beyond Okta’s control. Okta’s 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 the Company 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
(In thousands)
 
July 31, 2017
 
January 31, 2017
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
126,464

 
$
23,282

Short-term investments
86,755

 
14,390

Accounts receivable, net of allowances of $1,261 and $1,306
35,304

 
34,544

Deferred commissions
13,279

 
13,549

Prepaid expenses and other current assets
12,884

 
7,025

Total current assets
274,686

 
92,790

Property and equipment, net
13,302

 
11,026

Deferred commissions, noncurrent
9,248

 
10,050

Intangible assets, net
11,051

 
9,155

Goodwill
6,282

 
2,630

Other assets
1,658

 
4,984

Total assets
$
316,227

 
$
130,635

Liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit)
 

 
 
Current liabilities:
 

 
 
Accounts payable
$
9,848

 
$
11,897

Accrued expenses and other current liabilities
4,399

 
5,853

Accrued compensation
11,334

 
9,866

Deferred revenue
127,218

 
108,012

Total current liabilities
152,799

 
135,628

Deferred revenue, noncurrent
4,108

 
5,711

Other liabilities, noncurrent
6,451

 
4,947

Total liabilities
163,358

 
146,286

Commitments and contingencies (Note 8)


 


Redeemable convertible preferred stock

 
227,954

Stockholders’ equity (deficit):
 

 
 
Preferred stock



Class A common stock
2

 

Class B common stock
8

 
2

Additional paid-in capital
496,801

 
44,469

Accumulated other comprehensive income (loss)
70

 
(167
)
Accumulated deficit
(344,012
)
 
(287,909
)
Total stockholders’ equity (deficit)
152,869

 
(243,605
)
Total liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit)
$
316,227

 
$
130,635


See notes to condensed consolidated financial statements.

4



OKTA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Revenue
 
 
 
 
 
 
 
Subscription
$
56,080

 
$
33,439

 
$
104,437

 
$
61,002

Professional services and other
4,915

 
3,997

 
9,565

 
8,221

Total revenue
60,995

 
37,436

 
114,002

 
69,223

Cost of revenue
 

 
 

 
 
 
 
Subscription
12,691

 
8,466

 
23,848

 
15,926

Professional services and other
6,991

 
5,314

 
13,297

 
10,233

Total cost of revenue
19,682

 
13,780

 
37,145

 
26,159

Gross profit
41,313

 
23,656

 
76,857

 
43,064

Operating expenses
 

 
 

 
 
 
 
Research and development
16,923

 
9,655

 
32,282

 
18,421

Sales and marketing
39,597

 
28,421

 
76,777

 
54,822

General and administrative
11,948

 
6,142

 
23,587

 
13,087

Total operating expenses
68,468

 
44,218

 
132,646

 
86,330

Operating loss
(27,155
)
 
(20,562
)
 
(55,789
)
 
(43,266
)
Other income, net
382

 
56

 
363

 
88

Loss before income taxes
(26,773
)
 
(20,506
)
 
(55,426
)
 
(43,178
)
Provision for income taxes
229

 
95

 
477

 
176

Net loss
$
(27,002
)
 
$
(20,601
)
 
$
(55,903
)
 
$
(43,354
)
 
 

 
 

 
 
 
 
Net loss per share attributable to common stockholders, basic and diluted
$
(0.29
)
 
$
(1.10
)
 
$
(0.83
)
 
$
(2.32
)
 
 

 
 

 
 
 
 
Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted
93,576

 
18,802

 
67,125

 
18,687

See notes to condensed consolidated financial statements.


5



OKTA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(unaudited)
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Net loss
$
(27,002
)
 
$
(20,601
)
 
$
(55,903
)
 
$
(43,354
)
Net change in unrealized gains (losses) on available-for-sale securities
(12
)
 
2

 
(12
)
 
34

Foreign currency translation adjustments
181

 
(102
)
 
249

 
(55
)
Other comprehensive income (loss)
169

 
(100
)
 
237

 
(21
)
Comprehensive loss
$
(26,833
)
 
$
(20,701
)
 
$
(55,666
)
 
$
(43,375
)

See notes to condensed consolidated financial statements.


6



OKTA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
 
Six Months Ended July 31,
 
2017
 
2016
 
 
 
 
Operating activities:
 
 
 
Net loss
$
(55,903
)
 
$
(43,354
)
Adjustments to reconcile net loss to net cash used in operating activities:
 

 
 

Depreciation, amortization and accretion
3,288

 
1,972

Stock-based compensation
20,884

 
7,033

Amortization of deferred commissions
8,333

 
6,389

Other
689

 
(114
)
Changes in operating assets and liabilities:
 

 
 

Accounts receivable
(1,311
)
 
690

Deferred commissions
(7,261
)
 
(6,122
)
Prepaid expenses and other assets
(5,940
)
 
(3,403
)
Accounts payable
1,183

 
1,650

Accrued compensation
2,562

 
(2,901
)
Accrued expenses and other liabilities
(52
)
 
(169
)
Deferred revenue
17,604

 
11,456

Net cash used in operating activities
(15,924
)
 
(26,873
)
Investing activities:
 

 
 

Capitalization of internal-use software costs
(2,743
)
 
(2,325
)
Purchases of property and equipment and other
(5,156
)
 
(3,029
)
Purchases of securities available for sale
(86,776
)
 

Proceeds from sales of securities available for sale
1,538

 
2,207

Proceeds from maturities and redemption of securities available for sale
12,835

 
5,000

Net cash provided by (used in) investing activities
(80,302
)
 
1,853

Financing activities:
 

 
 

Proceeds from initial public offering, net of underwriters' discounts and commissions
199,948

 

Payments of deferred offering costs
(4,038
)
 
(806
)
Proceeds from stock option exercises, net of repurchases, and other
3,916

 
660

Principal payments on financing arrangements
(273
)
 
(143
)
Net cash provided by (used in) financing activities
199,553

 
(289
)
Effects of changes in foreign currency exchange rates on cash and cash equivalents
134

 
(54
)
Net increase (decrease) in cash, cash equivalents and restricted cash
103,461

 
(25,363
)
Cash, cash equivalents and restricted cash at beginning of year
23,282

 
58,081

Cash, cash equivalents and restricted cash at end of year
$
126,743

 
$
32,718

 
 
 
 
Supplementary cash flow disclosure:
 

 
 

Non-cash investing and financing activities:
 
 
 
Vesting of early exercised common stock options
$
693

 
$
707

Issuance of common stock in connection with warrant exercises
272

 

Deferred offering costs, accrued but not yet paid

 
207

Property and equipment and other, accrued but not yet paid
271

 
987

Issuance of common stock in connection with business combination
2,160

 

Conversion of redeemable convertible preferred stock to common stock
228,362

 

Reconciliation of cash, cash equivalents and restricted cash within the condensed consolidated balance sheets to the amounts shown in the statements of cash flows above:
 
 
 
Cash and cash equivalents
$
126,464

 
$
28,835

Restricted cash, noncurrent included in Other Assets
279

 
3,883

Total cash, cash equivalents and restricted cash
$
126,743

 
$
32,718

 See notes to condensed consolidated financial statements.

7



OKTA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Overview and Basis of Presentation
Description of Business
Okta, Inc. (the Company) pioneered identity in the cloud. The Okta Identity Cloud enables customers to secure their users and connect them to technology, anywhere, anytime and from any device. The Company was originally incorporated in January 2009 as SaaSure Inc., a California corporation, and, in April 2010, the Company reincorporated in Delaware as Okta, Inc. The Company is headquartered in San Francisco, California.
Initial Public Offering
In April 2017, the Company completed an initial public offering (IPO), in which the Company issued and sold 12,650,000 shares of its newly authorized Class A common stock, which included 1,650,000 shares sold pursuant to the exercise by the underwriters’ option to purchase additional shares at a public offering price of $17.00 per share. The Company received aggregate proceeds of $200.0 million from the IPO, net of underwriters’ discounts and commissions, before deducting offering costs of approximately $5.6 million. Immediately prior to the completion of the IPO, all shares of common stock then outstanding were reclassified as Class B common stock, and all shares of redeemable convertible preferred stock then outstanding were converted into 59,491,640 shares of common stock on a one-to-one basis and then reclassified into Class B common stock. See Note 9 for additional details.
As of July 31, 2017, 16,934,899 shares of the Company’s Class A common stock and 78,552,887 shares of Class B common stock were outstanding. The Class A common stock outstanding includes the shares issued in the IPO and shares converted from Class B common stock upon exercise of stock options subsequent to the IPO.
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 U.S. generally accepted accounting principles (GAAP) and applicable rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. All intercompany balances and transactions have been eliminated in consolidation.
The condensed consolidated balance sheet as of January 31, 2017, 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 balance sheet, statements of operations, statements of comprehensive loss and the statements of cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full fiscal year ending January 31, 2018 or any future period.
The Company’s fiscal year ends on January 31. References to fiscal 2018, for example, refer to the fiscal year ending January 31, 2018.
The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s final prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on April 7, 2017 (the Prospectus).

8


2. Summary of Significant Accounting Policies
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 and judgments involve revenue recognition with respect to the determination of the relative selling prices for the Company’s services, determination of the fair value of the Company’s common stock prior to the completion of the IPO, valuation of the Company’s stock-based awards, valuation of deferred income tax assets and contingencies.
Significant Accounting Policies
The Company’s significant accounting policies are discussed in “Index to Consolidated Financial Statements-Note 2. Summary of Significant Accounting Policies” in the Prospectus. There have been no significant changes to these policies for the six months ended July 31, 2017, except as noted below:
Stock-Based Compensation
All stock-based compensation to employees, including the purchase rights issued under the Company's 2017 Employee Stock Purchase Plan (ESPP), is based on the fair value of the awards on the date of grant. Prior to the IPO, the fair value of the Company’s common stock was determined by the estimated fair value of the Company’s common stock at the time of grant. After the IPO, the fair value is determined using the market closing price of its Class A common stock on the date of grant. The Company uses the Black-Scholes option pricing model to measure the fair value of its stock options and the purchase rights issued under the ESPP and equity awards issued to non-employees. The unvested options issued to non-employees are remeasured to fair value at the end of each reporting period. This cost is recognized as an expense following the straight-line attribution method, over the requisite service period, for stock options, restricted stock units (RSUs) and restricted stock, and over the offering period, for the purchase rights issued under the ESPP. Prior to adoption of ASU 2016-09, the stock-based compensation was recorded net of estimated forfeitures.
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” This new guidance was intended to simplify several areas of accounting for stock-based compensation arrangements, including the accounting for income taxes, the classification of excess tax benefits on the statement of cash flows and the accounting for forfeitures. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. The Company adopted this guidance in the three months ended April 30, 2017. The new guidance allows entities to account for forfeitures as they occur. The Company elected to account for forfeitures as they occur and adopted this provision on a modified retrospective basis. An adjustment of $0.2 million representing cumulative prior years’ impact was recognized as an adjustment to decrease retained earnings in the period of adoption. The adoption of the amendments related to the accounting for income taxes and classification of excess tax benefits on the statement of cash flows were adopted prospectively. See Note 11 for further details of the effects of adoption of the new accounting standard on income taxes. Adoption of all other changes in the new guidance did not have a significant impact on the Company's consolidated financial statements.
Net Loss per Share
The Company computes basic and diluted net loss per share attributable to common stockholders in conformity with the two-class method required for participating securities. Under the two-class method, basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase, without consideration for potentially dilutive securities as they do not share in losses. The diluted net loss per share attributable to common stockholders is computed giving effect to all potential dilutive common stock equivalents outstanding for the period. For purposes of this calculation, options to purchase common stock, unvested RSUs, employee stock purchase plan, shares subject to repurchase from early exercised options, and common stock and restricted stock issued in connection with certain business combinations are considered

9


common stock equivalents but have been excluded from the calculation of diluted net loss per share attributable to common stockholders as the effect is antidilutive.
Since the Company's IPO, Class A and Class B common stock are the only outstanding equity of the Company. The rights of the holders of Class A and Class B common stock are identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote per share and each share of Class B common stock is entitled to 10 votes per share. Shares of Class B common stock may be converted into Class A common stock at any time at the option of the stockholder on a one-for-one basis, and are automatically converted into Class A common stock upon sale or transfer, subject to certain limited exceptions. Shares of Class A common stock are not convertible.
New Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09) and has modified the standard thereafter. The standard replaces existing revenue recognition rules with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. ASU 2014-09, as amended, becomes effective for the Company on February 1, 2018. The standard permits the use of either the retrospective or modified retrospective transition method. Under the retrospective transition method, the standard applies to contracts in all reporting periods presented. Under the modified retrospective transition method, the standard applies only to contracts still open as of February 1, 2018, recognizing in beginning retained earnings an adjustment for the cumulative effect of the change and providing additional disclosures comparing results to previous rules. The Company is currently evaluating the retrospective transition method.
Upon initial evaluation, the Company believes the key changes in the standard that may impact its accounting for revenue recognition include contract modifications. In addition, the requirement to defer incremental contract acquisition costs and recognize them over the contract period or expected customer life will affect the Company’s determination of the related period of benefit for amortization purposes and have a material impact on accounting for sales commissions for the periods presented. The Company has assigned internal resources, engaged a third-party service provider and is currently evaluating the impacts of planned systems implementations. The Company will continue to evaluate and analyze all other aspects of Topic 606 that may impact it.
In January 2016, the FASB issued ASU No. 2016-01 (Subtopic 825-10), Financial Instruments Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01), which primarily affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The accounting for other financial instruments, such as loans, investments in debt securities and financial liabilities is largely unchanged. ASU 2016-01 is effective for fiscal years, beginning after December 15, 2018 and interim periods in fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact of the adoption on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02 (Topic 842), Leases (ASU 2016-02), which supersedes the guidance in topic ASC 840, Leases. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. ASU 2016-02 is effective for fiscal years beginning after December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business (ASU 2017-04), which amends the guidance of FASB Accounting Standards Codification Topic 805, “Business Combinations,” adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. This guidance is effective for annual and interim periods beginning after December 15, 2017, and early adoption is permitted under certain circumstances. The Company has not early adopted this guidance and is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

10


In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment (ASU 2017-04), which removes the second step of the goodwill impairment test that requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This guidance is effective for interim and annual reporting periods beginning after December 15, 2019 and will be applied prospectively. Management does not expect the adoption of this guidance to have any impact on the Company’s consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718) Scope of Modification Accounting (ASU 2017-09), which clarifies which changes to the terms or conditions of a share-based payment award are subject to the guidance on modification accounting. Entities would apply the modification accounting guidance unless the value, vesting requirements and classification of a share-based payment award are the same immediately before and after a change to the terms or conditions of the award. This guidance is effective for annual and interim periods beginning after December 15, 2017, and would be applied prospectively to awards modified on or after the effective date. Early adoption is permitted. The Company has not early adopted this guidance and is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.
3. Business Combinations
On February 17, 2017, the Company acquired the rights to hire certain employees and a non-exclusive intellectual property license from Stormpath, Inc. (Stormpath), a privately-held technology company which had built a user management and authentication service for software development teams. The transaction has been accounted for as a business combination and is expected to enhance the Company’s product offerings and service by leveraging the talents of the engineering teams. The total consideration of $3.7 million, consisting of 200,000 shares of common stock valued at $2.2 million issued to Stormpath and replacement awards of $1.5 million issued to the hired employees, was recognized as goodwill. See Note 10 for further details on replacement awards issued in this transaction. Goodwill is not deductible for tax purposes.
Pro forma results of operations for the transaction have not been presented as they were not material to the condensed consolidated statements of operations.
In addition, the Company issued an incremental 800,000 shares of restricted common stock valued at $8.6 million to Stormpath in connection with the transaction. These shares of restricted common stock will vest ratably on the first and second anniversaries of the transaction date upon achieving the respective performance conditions, including the continued employment of certain employees with Okta and the wind down of the Stormpath, Inc. entity. The aggregate fair value, as determined on the date of the transaction, of the shares of restricted common stock will be recognized as post-combination stock-based compensation in the statement of operations over two years based on an accelerated attribution method. See Note 10 for further details.

11



4. Cash Equivalents and Short-Term Investments
The amortized costs, unrealized gains and losses and estimated fair values of the Company’s cash equivalents and short-term investments as of July 31, 2017 and January 31, 2017 were as follows (in thousands):
 
 
As of July 31, 2017
 
(unaudited)
 
Amortized
Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Estimated
Fair Value 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
95,495

 
$

 
$

 
$
95,495

Commercial paper
15,020

 

 

 
15,020

U.S. treasury securities
4,996

 

 

 
4,996

Total cash equivalents
$
115,511

 
$

 
$

 
$
115,511

Investments:
 

 
 

 
 

 
 

Commercial paper
18,913

 

 

 
18,913

U.S. treasury securities
45,083

 
1

 
(3
)
 
45,081

Corporate debt securities
22,771

 
1

 
(11
)
 
22,761

Total short-term investments
$
86,767

 
$
2

 
$
(14
)
 
$
86,755

Total
$
202,278

 
$
2

 
$
(14
)
 
$
202,266


 
As of January 31, 2017
 
Amortized
Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Estimated
Fair Value 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
10,565

 
$

 
$

 
$
10,565

Investments:
 
 
 

 
 

 
 

Asset-backed securities
1,538

 

 

 
1,538

Corporate debt securities
12,842

 
13

 
(3
)
 
12,852

Total short-term investments
$
14,380

 
$
13

 
$
(3
)
 
$
14,390

Total
$
24,945

 
$
13

 
$
(3
)
 
$
24,955

All short-term investments were designated as available-for-sale securities as of July 31, 2017 and January 31, 2017.
The Company had 15 and five short-term investments in unrealized loss positions as of July 31, 2017 and January 31, 2017, 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, 2017 or 2016.
For available-for-sale debt securities that have unrealized losses, the Company evaluates whether (i) it has the intention to sell any of these investments and (ii) whether it is not more likely than not that it will be required to sell any of these available-for-sale debt securities before recovery of the entire amortized cost basis. Based on this evaluation, the Company determined that there were no other-than-temporary impairments associated with short-term investments as of July 31, 2017 and January 31, 2017.

12



The following tables present the contractual maturities of the Company’s short-term investments as of July 31, 2017 and January 31, 2017 (in thousands):
 
 
As of July 31, 2017
 
(unaudited)
 
Amortized
Cost
 
Estimated
Fair Value
Due within one year
$
58,288

 
$
58,276

Due between one to five years
28,479

 
28,479

 
$
86,767

 
$
86,755

 
As of January 31, 2017
 
Amortized
Cost
 
Estimated
Fair Value
Due within one year
$
12,842

 
$
12,852

Due between one to five years
1,538

 
1,538

 
$
14,380

 
$
14,390

5. Fair Value Measurements
The Company measures its financial assets at fair value each reporting period using a fair value hierarchy that prioritizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Three levels of inputs may be used to measure as follows:
Level 1-Valuations based on observable inputs that reflect quoted prices for identical assets or liabilities in active markets.
Level 2-Valuations based on 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.

13



Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents information about the Company’s financial assets and liabilities that are measured at fair value on a recurring basis using the above input categories (in thousands):
  
 
As of July 31, 2017
 
(unaudited)
 
Level 1
 
Level 2 
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
95,495

 
$

 
$

 
$
95,495

Commercial paper

 
15,020

 

 
15,020

U.S. treasury securities

 
4,996

 

 
4,996

Total cash equivalents
$
95,495

 
$
20,016

 
$

 
$
115,511

Short-term investments:
 

 
 

 
 

 
 

Commercial paper
$

 
$
18,913

 
$

 
$
18,913

U.S. treasury securities

 
45,081

 

 
45,081

Corporate debt securities

 
22,761

 

 
22,761

Total short-term investments

 
86,755

 

 
86,755

Total cash equivalents and short-term investments
$
95,495

 
$
106,771

 
$

 
$
202,266


 
As of January 31, 2017
 
Level 1
 
Level 2 
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
10,565

 
$

 
$

 
$
10,565

Short-term investments:
 

 
 

 
 

 
 

Asset-backed securities
$

 
$
1,538

 
$

 
$
1,538

Corporate debt securities

 
12,852

 

 
12,852

Total short-term investments

 
14,390

 

 
14,390

Total cash equivalents and short-term investments
$
10,565

 
$
14,390

 
$

 
$
24,955

Liabilities:
 
 
 
 
 
 
 
Series B redeemable convertible preferred stock warrant
$

 
$

 
$
304

 
$
304


Level 3 instruments consist solely of the Company’s Series B redeemable convertible preferred stock warrant liability. During the three months ended April 30, 2017, the Series B redeemable convertible preferred stock warrant was exercised, the corresponding warrant liability was remeasured to fair value, recognized in other income, net in the condensed consolidated statements of operations, and reclassified to additional paid-in capital.
The change in the fair value of the Series B redeemable convertible preferred stock warrant was as follows (in thousands):
Balance at January 31, 2017
$
304

Increase in fair value of warrant through exercise date
103

Reclassification of remaining warrant liability to additional paid-in capital
(407
)
Balance at July 31, 2017
$


14



The Company had no transfers between levels of the fair value hierarchy of its assets measured at fair value.
The carrying amounts of certain financial instruments, including cash held in banks, accounts receivable, accounts payable and the financing arrangements (see Note 7) approximate fair value due to their short-term maturities and are excluded from the fair value table above.
6. Goodwill and Intangible Assets, net
Goodwill
During the three months ended April 30, 2017, the Company recorded $3.7 million of goodwill related to its transaction with Stormpath (see Note 3). As of July 31, 2017 and January 31, 2017, goodwill was $6.3 million and $2.6 million, respectively. No goodwill impairments were recorded during the three and six months ended July 31, 2017 and 2016, respectively.
Intangible Assets, net
Intangible assets consisted of the following (in thousands):  
 
As of July 31, 2017
 
(unaudited)
 
Gross
 
Accumulated Amortization
 
Net
Capitalized internal-use software costs
$
14,178

 
$
(3,744
)
 
$
10,434

Software licenses
1,023

 
(406
)
 
617

Purchased developed technology
570

 
(570
)
 

 
$
15,771

 
$
(4,720
)
 
$
11,051

 
As of January 31, 2017
 
Gross
 
Accumulated Amortization
 
Net
Capitalized internal-use software costs
$
10,859

 
$
(2,487
)
 
$
8,372

Software licenses
1,093

 
(314
)
 
779

Purchased developed technology
570

 
(566
)
 
4

 
$
12,522

 
$
(3,367
)
 
$
9,155

The Company capitalized $1.9 million and $1.2 million of internal-use software costs in the three months ended July 31, 2017 and 2016, respectively, and $3.3 million and $2.6 million in the six months ended July 31, 2017 and 2016, respectively. Included in the total amounts capitalized are stock-based compensation expense of $0.4 million and $0.1 million in the three months ended July 31, 2017 and 2016, respectively, and $0.6 million and $0.2 million in the six months ended July 31, 2017 and 2016, respectively.
Amortization expense was $0.7 million and $0.4 million for the three months ended July 31, 2017 and 2016, respectively, and $1.4 million and $0.7 million for the six months ended July 31, 2017 and 2016, respectively.
7. Debt and Financing Arrangements
Loan and Security Agreement
On March 10, 2014, the Company entered into a line of credit and term loan agreement with Silicon Valley Bank (SVB) in the amounts of $5.0 million and $10.0 million, respectively. On June 17, 2015, the Company expanded its line of credit from $5.0 million to $20.0 million and extended the term by one year to mature on March 10, 2017. The term loan facility expired during the year ended January 31, 2015 and no amounts were drawn. On November 21, 2016, the Company amended the agreement to extend the maturity date to November 21, 2018 and increase the borrowing capacity of the line of credit (Revolving Line) to $40.0 million. The available amount, not to exceed $40.0 million, is based on certain revenue metrics and is reduced by letters of credit totaling $5.4 million as of July 31, 2017 and January 31, 2017 established in connection with facility lease agreements.

15



Proceeds from loans made under the Revolving Line may be borrowed, repaid and reborrowed until November 21, 2018. Repayment of any outstanding proceeds are payable on November 21, 2018, but may be prepaid without penalty. Borrowings under the Revolving Line bear interest at an annual rate based on the one-year Prime rate plus a spread of 0.75%. Interest is payable quarterly. The Company is required to pay a quarterly facility fee to SVB of 0.15% per annum on the average undrawn portion available under the facility plus balances of outstanding letters of credits. Additionally, the Company is required to pay an upfront, one-time, commitment fee of $0.1 million and annual anniversary fees of $0.1 million on the amendment’s first and second anniversary dates.
As of July 31, 2017 and January 31, 2017, no amounts had been drawn under the Revolving Line and the Company was in compliance with all covenants pursuant to the loan and security agreement.
As part of the initial loan agreement, upon closing, the Company granted SVB a warrant to purchase 187,500 shares of common stock at $1.40 per share, with a potential to acquire up to an additional 112,500 shares of common stock at the same price, which right would be triggered upon future amounts drawn under the loan agreement. No additional amounts were drawn under the credit facility and as such, the conditional warrant to acquire up to an additional 112,500 shares was not issued. The fair value of the common stock warrant at the time of issuance was recorded as debt issuance costs. Upon exercise of the warrant in March 2017, 168,750 shares were issued and 18,750 shares were withheld by the Company in lieu of cash exercise.
Financing Arrangements
In May 2015, the Company purchased software and related maintenance and support from a third party under a financing arrangement with a gross value of $0.9 million at an implicit interest rate of 5.0%. The financed obligation will be due in April 2018, and as of July 31, 2017 and January 31, 2017, $0.3 million and $0.4 million, respectively, was outstanding under this obligation.
In January 2017, the Company acquired additional software licenses from a third party under a separate financing arrangement with a gross value of $0.4 million at an implicit interest rate of 4.5%. The financed obligation will be due in January 2019 and as of July 31, 2017 and January 31, 2017, $0.2 million and $0.4 million respectively, was outstanding under this obligation.
8. Commitments and Contingencies
Leases
The Company leases office space under noncancelable operating leases for its San Francisco, California headquarters, as well as its offices in San Jose, California; Bellevue, Washington; London, England; Sydney, Australia; and Toronto, Canada. These office leases expire on various dates through August 2026.
Certain facility lease agreements contain rent holidays, allowances and rent escalation provisions. For these leases, the Company recognizes the related rental expense on a straight-line basis over the lease period of the facility and records the difference between amounts charged to operations and amounts paid as deferred rent. These rent holidays, allowances and rent escalations are considered in determining the straight-line expense to be recorded over the lease term. Deferred rent was $5.0 million and $4.8 million as of July 31, 2017 and January 31, 2017, respectively, and the current and noncurrent portions are included in accrued expenses and other current liabilities and other liabilities, noncurrent, respectively, in the condensed consolidated balance sheets. Rent expense was $2.5 million and $1.9 million for the three months ended July 31, 2017 and 2016, respectively, and $4.7 million and $3.6 million for the six months ended July 31, 2017 and 2016, respectively.
In conjunction with the execution of the leases, letters of credit in the aggregate amount of $5.4 million were issued and outstanding as of July 31, 2017 and January 31, 2017, respectively. No draws have been made under such letters of credit.
In July 2017, the Company entered into a non-cancellable contractual agreement with a third-party provider of datacenter hosting facilities for a period of three years. Future annual commitments under this agreement are $10.0 million.

16



As of July 31, 2017, the future minimum lease payments by fiscal year under the financing arrangements and various operating leases are as follows (in thousands):  
 
Financing
Arrangements 
 
Operating
Leases
 
Purchase Obligations
 
Total
Remainder of 2018
$
289

 
$
5,772

 
$
5,095

 
$
11,156

2019
212

 
11,902

 
10,301

 
22,415

2020

 
8,496

 
10,301

 
18,797

2021

 
5,108

 
4,167

 
9,275

2022

 
4,725

 

 
4,725

Thereafter

 
10,449

 

 
10,449

Total minimum lease payments
$
501

 
$
46,452

 
$
29,864

 
$
76,817

Less: amount representing interest
(35
)
 

 

 
(35
)
Present value of minimum lease payments
$
466

 
$
46,452

 
$
29,864

 
$
76,782

Legal Matters
From time to time in the normal course of business, the Company may be subject to various legal matters such as threatened or pending claims or proceedings. There were no such material matters as of July 31, 2017.
9. Stockholders’ Equity (Deficit)
Redeemable Convertible Preferred Stock
Immediately prior to the completion of the IPO, all shares of redeemable convertible preferred stock then outstanding were converted into 59,491,640 shares of common stock on a one-to-one basis and then immediately reclassified into Class B common stock. As of July 31, 2017, there were no shares of redeemable convertible preferred stock issued and outstanding.
Common Stock
Immediately prior to the completion of the IPO, all shares of common stock then outstanding were reclassified into Class B common stock. Shares offered and sold in the IPO consisted of the newly authorized shares of Class A common stock.
As of July 31, 2017, the Company had authorized 1,000,000,000 shares of Class A common stock and had authorized 120,000,000 shares of Class B common stock, each with par value $0.0001 per share. As of January 31, 2017, the Company had authorized 120,000,000 shares of common stock with par value $0.0001 per share. As of July 31, 2017, 16,934,899 shares of Class A common stock and 78,552,887 shares of Class B common stock were issued and outstanding.
Holders of Class A and Class B common stock are entitled to one vote per share and 10 votes per share, respectively, and the shares of Class A common stock and Class B common stock are identical, except for voting and conversion rights.
10. Employee Incentive Plans
The Company’s equity incentive plans provide for granting stock options, RSUs and restricted stock awards to employees, consultants, officers and directors. In addition, the Company offers an ESPP to eligible employees.
Stock-based compensation expense by award type was as follows (in thousands):

17



 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2017
 
2016
 
2017
 
2016
Stock options
$
6,127

 
$
3,664

 
$
12,152

 
$
7,033

RSUs
1,435

 

 
1,501

 

ESPP
2,015

 

 
2,800

 

Restricted stock awards
768

 

 
1,520

 

Restricted common stock
1,633

 

 
2,911

 

Total
$
11,978

 
$
3,664

 
$
20,884

 
$
7,033

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,
 
2017
 
2016
 
2017
 
2016
Cost of revenue
 
 
 
 
 
 
 
Subscription
$
1,056

 
$
446

 
$
1,742

 
$
839

Professional services and other
738

 
313

 
1,207

 
586

Research and development
4,438

 
736

 
7,739

 
1,354

Sales and marketing
3,021

 
1,412

 
5,396

 
2,766

General and administrative
2,725

 
757

 
4,800

 
1,488

Total
$
11,978

 
$
3,664

 
$
20,884

 
$
7,033

Stock-based compensation expense recorded to research and development in the condensed consolidated statements of operations exclude amounts that were capitalized related to internal-use software for the three and six months ended July 31, 2017 and 2016. See Note 6 for further details.
Equity Incentive Plans
The Company has two equity incentive plans: the 2009 Stock Plan (2009 Plan) and the 2017 Equity Incentive Plan (2017 Plan). Upon the completion of the Company’s IPO in April 2017, the Company ceased granting equity under the 2009 Plan, and all shares that remained available for future issuance under the 2009 Plan at that time were transferred to the 2017 Plan. As of July 31, 2017, 33,360,239 options to purchase Class B common stock granted under the 2009 Plan remain outstanding.
Stock Options
A summary of the Company’s stock option activity and related information is as follows:  
 
Number of
Options 
 
Weighted-
Average
Exercise
Price 
 
Weighted-
Average
Remaining
Contractual
Term (Years)
 
Aggregate
Intrinsic Value
(in thousands)
Outstanding as of January 31, 2017
32,866,862

 
$
6.01

 
8.2
 
$
145,570

Granted
2,596,568

 
11.03

 
 
 
 
Exercised
(1,285,555
)
 
3.04

 
 
 
 
Canceled
(817,636
)
 
7.55

 
 
 
 
Outstanding as of July 31, 2017
33,360,239

 
$
6.48

 
7.9
 
$
516,132

As of July 31, 2017
 
 
 
 
 
 
 
Vested and exercisable
14,864,075

 
$
4.16

 
6.8
 
$
264,429


18



No stock options were granted in the three months ended July 31, 2017. The weighted-average grant-date fair value of options granted was $3.91 for the three months ended July 31, 2016, and $5.36 and $3.86 for the six months ended July 31, 2017 and 2016, respectively. The aggregate fair value of stock options vested was $8.4 million, and $3.3 million for the three months ended July 31, 2017 and 2016, respectively, and $13.0 million and $5.9 million for the six months ended July 31, 2017 and 2016, respectively. The intrinsic value of the options exercised, which represents the difference between the fair market value of the Company’s common stock on the date of exercise and the exercise price of each option, was $5.3 million and $1.3 million for the three months ended July 31, 2017 and 2016, respectively, and $19.3 million and $1.7 million for the six months ended July 31, 2017 and 2016, respectively.
As of July 31, 2017, there was a total of $67.4 million of unrecognized stock-based compensation expense, which is expected to be recognized over a weighted-average period of 3.0 years.
The Company used the Black-Scholes option pricing model to estimate the fair value of stock options granted with the following assumptions:
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
(unaudited) 
Expected volatility
 
42.9%-43.8%
 
40.3%-40.5%
 
42.9%-44.3%
Expected term (in years)
 
5.8-6.4
 
6.0-6.4
 
5.8-6.4
Risk-free interest rate
 
1.13%-1.50%
 
2.06%-2.21%
 
1.13%-1.54%
Expected dividend yield
 
 
 
Options Subject to Early Exercise
Prior to the IPO, at the discretion of the board of directors, certain options were exercisable immediately at the date of grant but subject to a repurchase right, under which the Company may buy back any unvested shares at their original exercise price in the event of an employee’s termination prior to full vesting. The consideration received for an exercise of an unvested option is considered to be a deposit of the exercise price and the related dollar amount is recorded as a liability. The liabilities are reclassified into equity as the awards vest. As of July 31, 2017 and January 31, 2017, the Company had $1.7 million and $2.2 million, respectively, recorded in accrued expenses and other current liabilities related to early exercises of options to acquire 323,574 and 467,180 shares of Class B common stock, respectively.
Restricted Stock Units
The Company granted 2,161,102 and 2,219,927 RSUs with an aggregate fair value of $50.6 million and $51.6 million in the three and six months ended July 31, 2017, respectively, of which all are unvested and outstanding as of July 31, 2017. As of July 31, 2017, there was $49.8 million of unrecognized compensation cost related to unvested RSUs, which is expected to be recognized over a weighted-average period of 3.8 years.
Equity Awards Issued in Connection with Business Combinations
In connection with the Stormpath transaction, the Company issued 800,000 shares of restricted common stock to Stormpath with an aggregate fair value of $8.6 million to be recognized as post combination stock-based compensation. The restricted common stock will vest ratably on the first and second anniversaries of the transaction date upon achievement of the respective performance conditions, including the continued employment of certain employees with the Company and the wind down of the Stormpath, Inc. entity. The stock-based compensation expense related to the restricted common stock has a requisite service period of two years and will be recognized using an accelerated attribution method due to the existence of performance conditions.
As of July 31, 2017, there was $5.7 million of unrecognized compensation expense related to restricted common stock which is expected to be recognized over the remaining weighted average life of 1.1 years. These shares of restricted common stock were separately authorized by the Company’s board of directors, and did not reduce the number of shares available for future issuance under the 2009 Plan or the 2017 Plan.

19



The Company separately entered into retention arrangements with certain employees of Stormpath and issued 598,500 restricted stock awards under the 2009 Plan with an aggregate fair value of $6.6 million with performance conditions, including continued employment of certain employees with the Company and the wind down of the Stormpath, Inc. entity. The restricted stock awards will vest ratably over two or three years from the transaction date. Additionally, the Company granted 518,900 service-based stock options under the 2009 Plan to certain Stormpath employees with an aggregate fair value of $2.5 million to vest ratably over the requisite four-year service period.
The restricted stock awards and stock options offered directly to Stormpath employees for employment with the Company are deemed replacement awards and a portion of such awards are considered compensation for pre-combination service. Of the $9.1 million total aggregate fair value of the awards, $1.5 million is related to pre-combination service and is recognized as goodwill and a reduction to the post-combination compensation expense. The post-combination expenses for the restricted stock awards and stock options are $5.5 million and $2.1 million, respectively. The expense related to the restricted stock awards will be recognized over two or three years based on an accelerated attribution method. The expense for the stock options will be recognized ratably over the requisite service period.
As of July 31, 2017, there was $4.0 million of unrecognized compensation expense related to unvested restricted stock awards, which is expected to be recognized over the remaining weighted average life of 1.6 years.
As of July 31, 2017, there was $1.9 million of unrecognized compensation cost related to unvested stock options, which is expected to be recognized over the remaining weighted average life of 2.5 years. The related stock options expense and activity are included within the Stock Options discussions above.
All of these shares are outstanding as of July 31, 2017.
Employee Stock Purchase Plan
In February 2017, the Company’s board of directors adopted, and in March 2017, the Company’s stockholders approved the 2017 Employee Stock Purchase Plan, or the ESPP, which became effective prior to the completion of the IPO. The ESPP initially reserves and authorizes the issuance of up to a total of 3,000,000 shares of Class A common stock to participating employees. Except for the initial offering period, the ESPP provides for 12-month offering periods beginning June 21 and December 21 of each year, and each offering period will consist of two six-month purchase periods. The initial offering period began April 7, 2017 and will end on June 20, 2018.
On each purchase date, eligible employees will purchase the shares at a price per share equal to 85% of the lesser of (1) the fair market value of our stock on the offering date or (2) the fair market value of our stock on the purchase date.
As of July 31, 2017, there was $8.6 million of unrecognized stock-based compensation expense related to the ESPP that is expected to be recognized over the remaining term of the initial offering period.
The Company estimated the fair value of ESPP purchase rights using a Black-Scholes option pricing model with the following assumptions:
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2017
 
2017
 
 
 
 
 
(unaudited)
Expected volatility
31.8%-34.2%
 
31.8%-37.4%
Expected term (in years)
0.5-1.0
 
0.5-1.2
Risk-free interest rate
1.12%-1.22%
 
0.95%-1.22%
Expected dividend yield
 
11. Income Taxes
For the three and six months ended July 31, 2017, the Company recorded a tax provision of $0.2 million and $0.5 million on a pretax loss of $26.8 million and $55.4 million, respectively. The effective tax rate for the three and six months ended July 31, 2017 was (0.9)%. The effective tax rates differ from the statutory rates primarily as a

20



result of providing no benefit on pretax losses incurred in the United States, as the Company has determined that the benefit of the losses is not more likely than not to be realized.
For the three and six months ended July 31, 2016, the Company recorded a tax provision of $0.1 million and $0.2 million on a pretax loss of $20.5 million and $43.2 million, respectively. The effective tax rates for the three and six months ended July 31, 2016 were (0.5)% and (0.4)%, respectively. The effective tax rates differ from the statutory rates primarily as a result of providing no benefit on pretax losses incurred in the United States, as the Company has determined that the benefit of the losses is not more likely than not to be realized.
The Company adopted ASU 2016-09, Compensation - Stock Compensation (Topic 718), effective February 1, 2017. Upon adoption, the Company recorded a retrospective increase of $0.3 million in gross U.S. deferred tax assets for previously unrecognized excess tax benefits that existed as of January 31, 2017, and a corresponding increase of $0.3 million in valuation allowance against these deferred tax assets, as the Company’s U.S. deferred tax assets are subject to a full valuation allowance. As such, the net impact to the Company’s retained earnings was zero. The adopted guidance requires all of the tax effects related to share-based payments to be recorded through the income statement. The Company’s income tax rate may fluctuate based upon its stock price and the amount of stock options exercised and equity awards vested in a particular quarter.
12. Net Loss Per Share
The following table presents the calculation of basic and diluted net loss per share (dollars in thousands, except per share data):  
 
Three Months Ended July 31,
 
2017
 
2016
 
Class A
 
Class B
 
Class A
 
Class B
 
 
 
 
 
 
 
 
 
(unaudited)
Numerator:
 
 
 
 
 
 
 
Net loss
$
(4,227
)
 
$
(22,775
)
 
$

 
$
(20,601
)
Denominator:
 
 
 
 
 
 
 
Weighted-average shares outstanding - basic and diluted
14,650

 
78,926

 

 
18,802

Net loss per share attributable to common stockholders - basic and diluted:
$
(0.29
)
 
$
(0.29
)
 
$

 
$
(1.10
)
 
Six Months Ended July 31,
 
2017
 
2016
 
Class A
 
Class B
 
Class A
 
Class B
 
 
 
 
 
 
 
 
 
(unaudited)
Numerator:
 
 
 
 
 
 
 
Net loss
$
(7,546
)
 
$
(48,357
)
 
$

 
$
(43,354
)
Denominator:
 
 
 
 
 
 
 
Weighted-average shares outstanding - basic and diluted
9,061

 
58,064

 

 
18,687

Net loss per share attributable to common stockholders - basic and diluted:
$
(0.83
)
 
$
(0.83
)
 
$

 
$
(2.32
)

21



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,
 
2017
 
2016
 
 
 
 
Conversion of convertible preferred stock

 
59,465

Conversion of common stock warrant

 
188

Conversion of convertible preferred stock warrant

 
29

Restricted common stock issued and outstanding
800

 

Issued and outstanding stock options
33,360

 
30,501

Unvested RSUs issued and outstanding
2,210

 

Unvested restricted stock awards issued and outstanding
599

 

Shares committed under the ESPP
1,082

 

Unvested shares subject to repurchase
324

 
603

 
38,375

 
90,786

13. Related Party Transactions
Certain members of the board of directors serve as directors of and/or are executive officers of and, in some cases, are investors in, companies that are customers or vendors of the Company. Certain of the Company’s executive officers also serve as directors of or serve in an advisory capacity to companies that are customers or vendors of the Company. Related party transactions were not material as of and for the three and six months ended July 31, 2017 and 2016.

22



14. Subsequent Events

In August 2017, the Company executed an amendment to its San Jose lease to add space and extend the lease term through August 2024. The incremental commitment for the additional space is $6.3 million with tenant improvements up to $0.8 million.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Prospectus. As discussed in the section titled “Note About Forward-Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” under Part II, Item 1A in this Quarterly Report on Form 10-Q and in our Prospectus. Our fiscal year ends January 31.
Overview
Okta is the leading independent provider of identity for the enterprise. Okta pioneered identity in the cloud. The Okta Identity Cloud is our category-defining platform that enables our customers to securely connect people to technology, anywhere, anytime and from any device. Every business day, over two million people use Okta to securely access a wide range of cloud applications, websites, mobile applications and services from a multitude of devices. Workforces sign into our platform to seamlessly access the applications they need to do their most important work. Organizations use our platform to provide their customers with more modern experiences online and via mobile devices, and to connect with partners to streamline their operations. Developers leverage our platform to securely embed identity into their software.
Our approach to identity eliminates duplicative, sprawling credentials and disparate authentication policies, allowing our customers to simplify and scale their IT infrastructures more efficiently as the number of users, devices, clouds and other technologies in their ecosystem grows. With the Okta Identity Cloud, our customers are able to achieve fast time to value, lower costs and increase efficiency while improving compliance and providing security that is persistent, perimeter-less and context-aware. These benefits are delivered through multiple products on a unified platform, superior cloud architecture and our vast and increasing network of integrations.
We founded the company in 2009 to reinvent identity for the modern cloud era. From the beginning, we recognized that identity is the foundation for connections and trust between users and technology. Since our inception, we have consistently innovated to enhance our platform and expand our product offerings.
In parallel to this product innovation, we have rapidly expanded the breadth and depth of the Okta Application Network, which provides customers with a pre-integrated set of cloud, mobile and web applications that spans the functionality of our products. As of July 31, 2017, we had over 5,000 integrations with third-party software applications.
We offer our platform through a SaaS business model. We focus on adding and retaining customers and increasing their spending with us through expanding the number of users who access our platform and up-selling additional products. We sell our solution directly through our field and inside sales teams, as well as indirectly through channel partners. Our subscription fees include the use of our service and our technical support and management of our platform. We base subscription fees primarily on the products used and the number of users on our platform, both internal and external. We typically invoice customers in advance in annual installments for subscriptions to our platform.

23



Components of Results of Operations
Revenue
Subscription Revenue.    Subscription revenue primarily consists of fees for access to our cloud-based platform and related support. We generate subscription fees pursuant to noncancelable contracts. Subscription revenue is driven primarily by the number of customers, the number of users per customer and the products used. We typically invoice customers in advance in annual installments for subscriptions to our platform. We recognize subscription revenue ratably over the term of the subscription period beginning on the date access to our platform is provided, provided all other revenue recognition criteria have been met.
Professional Services and Other.    Professional services revenue includes fees from assisting customers in implementing and optimizing the use of our products. These services include application configuration, system integration and training services.
We generally invoice customers monthly as the work is performed for time and materials arrangements. We generally have standalone value for our professional services and recognize revenue for the estimated fair value as a separate unit of accounting as services are performed or for those fixed-fee contracts, upon completion of the services.
Overhead Allocation and Employee Compensation Costs
We allocate shared costs, such as facilities (including rent, utilities and depreciation on equipment shared by all departments), information technology costs, and recruiting costs to all departments based on headcount. As such, allocated shared costs are reflected in each cost of revenue and operating expense category. Employee compensation costs include salaries, bonuses, benefits and stock-based compensation for each operating expense category and sales commissions for sales and marketing.
Cost of Revenue and Gross Margin
Cost of Subscription Revenue.    Cost of subscription revenue primarily consists of expenses related to hosting our services and providing support. These expenses include employee-related costs for employees associated with our cloud-based infrastructure and our customer support organizations, third-party hosting fees, software and maintenance costs, outside services associated with the delivery of our subscription services, travel-related costs, amortization expense associated with capitalized internal-use software and acquired technology, and allocated overhead.
We intend to continue to invest additional resources in our platform infrastructure and our platform support organizations. As we continue to invest in technology innovation, we expect to have increased capitalized internal-use software costs and related amortization. We expect our investment in technology to expand the capability of our platform enabling us to improve our gross margin over time. The level and timing of investment in these areas could affect our cost of subscription revenue in the future.
Cost of Professional Services and Other.    Cost of professional services consists primarily of employee-related costs for our professional services delivery team, travel-related costs, and costs of outside services associated with supplementing our internal staff. The cost of providing professional services has historically been higher than the associated revenue we generate.
Gross Margin.    Gross margin is gross profit expressed as a percentage of total revenue. Our gross margin may fluctuate from period to period as our revenue fluctuates, and as a result of the timing and amount of investments to expand our hosting capacity, our continued efforts to build platform support and professional services teams, increased stock-based compensation expenses, as well as the amortization of costs associated with capitalized internal-use software and acquired intangible assets.
Operating Expenses
Research and Development.    Research and development expenses consist primarily of employee compensation costs and overhead allocation. We believe that continued investment in our platform is important for our growth. We expect our research and development expenses will increase in absolute dollars as our business grows.

24



Sales and Marketing.    Sales and marketing expenses consist primarily of employee compensation costs, costs of general marketing activities and promotional activities, travel-related expenses and allocated overhead. Commissions earned by our sales force that are direct and incremental and can be associated specifically with a noncancelable subscription contract are deferred and amortized over the same period that revenue is recognized for the related noncancelable contract. We expect our sales and marketing expenses will increase in absolute dollars and continue to be our largest operating expense category for the foreseeable future as we expand our sales and marketing efforts. However, we expect our sales and marketing expenses to decrease as a percentage of our revenue as our revenue grows.
General and Administrative.    General and administrative expenses consist primarily of employee compensation costs for finance, accounting, legal and human resources personnel. In addition, general and administrative expenses include non-personnel costs, such as legal and other professional fees, and all other supporting corporate expenses not allocated to other departments.
We expect to incur additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations pursuant to the rules and regulations of the Securities and Exchange Commission (SEC), and increased expenses for insurance, investor relations and professional services. We expect our general and administrative expenses will increase in absolute dollars as our business grows.
Other Income, Net
Other income, net consists of interest income from our investment holdings, and expenses resulting from the revaluation of our redeemable convertible preferred stock warrant liability and interest expense.
Provision for Income Taxes
Provision for income taxes consists of U.S. federal and state income taxes and income taxes in certain foreign jurisdictions in which we conduct business. We maintain a full valuation allowance on our federal and state deferred tax assets as we have concluded that it is not more likely than not that the deferred assets will be realized.

25



Results of Operations
The following tables set forth our results of operations for the periods presented in dollars and as a percentage of our revenue:
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Revenue
 
 
 
 
 
 
 
Subscription
$
56,080

 
$
33,439

 
$
104,437

 
$
61,002

Professional services and other
4,915

 
3,997

 
9,565

 
8,221

Total revenue
60,995

 
37,436

 
114,002

 
69,223

Cost of revenue
 

 
 

 
 
 
 
Subscription(1)
12,691

 
8,466

 
23,848

 
15,926

Professional services and other(1)
6,991

 
5,314

 
13,297

 
10,233

Total cost of revenue
19,682

 
13,780

 
37,145

 
26,159

Gross profit
41,313

 
23,656

 
76,857

 
43,064

Operating expenses
 

 
 

 
 
 
 
Research and development(1)
16,923

 
9,655

 
32,282

 
18,421

Sales and marketing(1)
39,597

 
28,421

 
76,777

 
54,822

General and administrative(1)
11,948

 
6,142

 
23,587

 
13,087

Total operating expenses
68,468

 
44,218

 
132,646

 
86,330

Operating loss
(27,155
)
 
(20,562
)
 
(55,789
)
 
(43,266
)
Other income, net
382

 
56

 
363

 
88

Loss before income taxes
(26,773
)
 
(20,506
)
 
(55,426
)
 
(43,178
)
Provision for income taxes
229

 
95

 
477

 
176

Net loss
$
(27,002
)
 
$
(20,601
)
 
$
(55,903
)
 
$
(43,354
)
_______________________________
(1)     Includes stock-based compensation expense as follows:
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Cost of subscription revenue
$
1,056

 
$
446

 
$
1,742

 
$
839

Cost of professional services and other
738

 
313

 
1,207

 
586

Research and development
4,438

 
736

 
7,739

 
1,354

Sales and marketing
3,021

 
1,412

 
5,396

 
2,766

General and administrative
2,725

 
757

 
4,800

 
1,488

Total stock-based compensation expense
$
11,978

 
$
3,664

 
$
20,884

 
$
7,033


26



 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2017
 
2016
 
2017
 
2016
Revenue
 
 
 
 
 
 
 
Subscription
92
 %
 
89
 %
 
92
 %
 
88
 %
Professional services and other
8

 
11

 
8

 
12

Total revenue
100

 
100

 
100

 
100

Cost of revenue
 
 
 
 
 
 
 
Subscription
21

 
23

 
21

 
23

Professional services and other
11

 
14

 
12

 
15

Total cost of revenue
32

 
37

 
33

 
38

Gross profit
68

 
63

 
67

 
62

Operating expenses
 
 
 
 
 
 
 
Research and development
28

 
26

 
28

 
27

Sales and marketing
64

 
76

 
67

 
79

General and administrative
20

 
16

 
21

 
19

Total operating expenses
112

 
118

 
116

 
125

Operating loss
(45
)
 
(55
)
 
(49
)
 
(63
)
Other income, net
1

 

 

 

Loss before income taxes
(44
)
 
(55
)
 
(49
)
 
(63
)
Provision for income taxes

 

 

 

Net loss
(44
)%
 
(55
)%
 
(49
)%
 
(63
)%
Comparison of the Three Months Ended July 31, 2017 and 2016
Revenue
 
Three Months Ended July 31,
 
 
 
2017
 
2016
 
$ Change
 
% Change  
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Revenue:
 
 
 
 
 
 
 
Subscription
$
56,080

 
$
33,439

 
$
22,641

 
68
%
Professional services and other
4,915

 
3,997

 
918

 
23

Total revenue
$
60,995

 
$
37,436

 
$
23,559

 
63

 
 
 
 
 
 
 
 
Percentage of revenue:
 

 
 
 
 

 
 

Subscription
92
%
 
89
%
 
 

 
 

Professional services and other
8

 
11

 
 

 
 

Total
100
%
 
100
%
 
 

 
 

Subscription revenue increased by $22.6 million, or 68%, for the three months ended July 31, 2017 compared to the three months ended July 31, 2016. The increase was primarily due to the addition of new customers who also have greater Annual Contract Value (ACV) as well as an increase in users and sales of additional products to existing customers as reflected by our Dollar-Based Retention Rate of 123% as of July 31, 2017, an increase from 120% as of July 31, 2016.
Professional services and other revenue increased by $0.9 million, or 23%, for the three months ended July 31, 2017 compared to the three months ended July 31, 2016. The increase in professional services revenue primarily related to an increase in implementation services priced on a time and material basis, associated with an increase in the number of new customers purchasing our subscription services.

27



Cost of Revenue, Gross Profit and Gross Margin
 
Three Months Ended July 31,
 
 
 
2017
 
2016
 
$ Change
 
% Change  
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Cost of revenue:
 
 
 
 
 
 
 
Subscription
$
12,691

 
$
8,466

 
$
4,225

 
50
%
Professional services and other
6,991

 
5,314

 
1,677

 
32

Total cost of revenue
$
19,682

 
$
13,780

 
$
5,902

 
43

Gross profit
$
41,313

 
$
23,656

 
$
17,657

 
75

 
 
 
 
 
 
 
 
Gross margin:
 

 
 
 
 

 
 

Subscription
77
 %
 
75
 %
 
 

 
 

Professional services and other
(42
)
 
(33
)
 
 

 
 

Total gross margin
68

 
63

 
 

 
 

Cost of subscription revenue increased by $4.2 million, or 50%, for the three months ended July 31, 2017 compared to the three months ended July 31, 2016, primarily due to an increase of $2.0 million in employee compensation costs related to higher headcount to support the growth in our subscription services and an increase of $1.0 million in data center costs as we increased capacity to support our growth.
Our gross margin for subscription revenue increased from 75% during the three months ended July 31, 2016 to 77% during the three months ended July 31, 2017, due to economies of scale as our subscription revenue increased. While our gross margins for subscription revenue may fluctuate in the near-term as we invest in our growth, we expect our subscription revenue gross margin to increase over time as we achieve additional economies of scale.
Cost of professional services and other revenue increased by $1.7 million, or 32%, for the three months ended July 31, 2017, compared to the three months ended July 31, 2016, primarily due to an increase of $1.5 million in employee compensation costs related to higher headcount.
Our gross margin for professional services and other revenue decreased to (42)% during the three months ended July 31, 2017 from (33)% during the three months ended July 31, 2016 due to the shift during the year ended January 31, 2016 to price our professional services on a time and materials basis. Professional services and other revenue during the three months ended July 31, 2016 included $1.8 million of professional services that were recognized on a completed contract basis, for which a significant portion of the related costs were incurred in earlier periods. Professional services and other revenue during the three months ended July 31, 2017 included professional services that were predominately recognized on a time and materials basis, for which the related costs were incurred in the same period.
Operating Expenses
Research and Development Expenses
 
Three Months Ended July 31,
 
 
 
2017
 
2016
 
$ Change
 
% Change  
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Research and development
$
16,923

 
$
9,655

 
$
7,268

 
75
%
Percentage of revenue
28
%
 
26
%
 
 

 
 

Research and development expenses increased $7.3 million, or 75%, for the three months ended July 31, 2017 compared to the three months ended July 31, 2016. The increase was primarily due to an increase of $6.9 million in employee compensation costs due to higher headcount and the post combination compensation expense related to the equity awards issued in connection with business combination. Additionally, allocated overhead costs

28



increased by $0.6 million driven by higher headcount. These increases were partially offset by an increase of $0.7 million of capitalized internal-use software costs.

Sales and Marketing Expenses
 
Three Months Ended July 31,
 
 
 
2017
 
2016
 
$ Change
 
% Change  
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Sales and marketing
$
39,597

 
$
28,421

 
$
11,176

 
39
%
Percentage of revenue
64
%
 
76
%
 
 

 
 

Sales and marketing expenses increased $11.2 million, or 39%, for the three months ended July 31, 2017 compared to the three months ended July 31, 2016. The increase was primarily due to an increase of $8.3 million in employee compensation costs related to headcount growth, an increase of $0.6 million related to marketing and event costs primarily driven by increases in demand generation programs, advertising, sponsorships and brand awareness efforts aimed at acquiring new customers and an increase of $1.3 million in allocated overhead costs.
General and Administrative Expenses
 
Three Months Ended July 31,
 
 
 
2017
 
2016
 
$ Change
 
% Change  
 
 
 
 
 
 
 
 
 
(dollars in thousands)
General and administrative
$
11,948

 
$
6,142

 
$
5,806

 
95
%
Percentage of revenue
20
%
 
16
%
 
 

 
 

General and administrative expenses increased $5.8 million, or 95%, for the three months ended July 31, 2017 compared to the three months ended July 31, 2016. The increase was primarily due to an increase of $4.4 million in employee compensation costs primarily related to higher headcount to support our continued growth, an increase of $0.9 million in costs from professional services comprised primarily of legal, accounting, and consulting fees and an increase of $0.6 million in allocated overhead costs.
Comparison of the Six Months Ended July 31, 2017 and 2016
Revenue
 
Six Months Ended July 31,
 
 
 
2017
 
2016
 
$ Change
 
% Change  
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Revenue:
 
 
 
 
 
 
 
Subscription
$
104,437

 
$
61,002

 
$
43,435

 
71
%
Professional services and other
9,565

 
8,221

 
1,344

 
16

Total revenue
$
114,002

 
$
69,223

 
$
44,779

 
65

 
 
 
 
 
 
 
 
Percentage of revenue:
 

 
 
 
 

 
 

Subscription
92
%
 
88
%
 
 

 
 

Professional services and other
8

 
12

 
 

 
 

Total
100
%
 
100
%
 
 

 
 

Subscription revenue increased by $43.4 million, or 71%, for the six months ended July 31, 2017 compared to the six months ended July 31, 2016. The increase was primarily due to the addition of new customers who also have greater ACV, as well as an increase in users and sales of additional products to existing customers as

29



reflected by our Dollar-Based Retention Rate of 123% as of July 31, 2017, an increase from 120% as of July 31, 2016.
Professional services and other revenue increased by $1.3 million, or 16%, for the six months ended July 31, 2017 compared to the six months ended July 31, 2016. The increase in professional services revenue primarily related to an increase in implementation services priced on a time and material basis, associated with an increase in the number of new customers purchasing our subscription services.
Cost of Revenue, Gross Profit and Gross Margin
 
Six Months Ended July 31,
 
 
 
2017
 
2016
 
$ Change
 
% Change  
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Cost of revenue:
 
 
 
 
 
 
 
Subscription
$
23,848

 
$
15,926

 
$
7,922

 
50
%
Professional services and other
13,297

 
10,233

 
3,064

 
30

Total cost of revenue
$
37,145

 
$
26,159

 
$
10,986

 
42

Gross profit
$
76,857

 
$
43,064

 
$
33,793

 
78

 
 
 
 
 </