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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q

(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from       to
Commission file number: 001-38926
Slack Technologies, Inc.
(Exact name of registrant as specified in its charter)

Delaware 26-4400325
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
500 Howard Street
San Francisco, California 94105
(Address of principle executive offices including zip code)

(415) 630-7943
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Class A Common Stock, $0.0001 par value per share
WORK
The New York Stock Exchange
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 or No.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes or No.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See 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
Smaller reporting company
Emerging growth company
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes or  No
There were 483,125,892 shares of the registrant’s Class A common stock outstanding and 87,398,710 shares of the registrant’s Class B common stock outstanding as of August 17, 2020.







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NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws, which are statements that involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “shall,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:
the effect of uncertainties related to the global COVID-19 pandemic on U.S. and global economies, our business, results of operations, financial condition, demand for Slack, sales cycles, customer retention, and the health of our customers' businesses;
our future financial performance, including our revenue, cost of revenue, and operating expenses;
our ability to maintain the security and availability of Slack;
our ability to increase the number of organizations on Slack and paid customers;
our ability to grow or maintain our Net Dollar Retention Rate;
our ability to achieve widespread adoption;
our ability to optimize the pricing for Slack;
our ability to effectively manage our growth and future expenses;
our ability to maintain our network of partners;
our ability to enhance Slack to respond to new technologies and requirements of organizations on Slack;
our estimated market opportunity;
the future benefits to be derived from new third-party applications and integrations;
our ability to maintain, protect, and enhance our intellectual property;
our ability to comply with modified or new laws and regulations applying to our business;
the attraction and retention of qualified employees and key personnel;
our anticipated investments in sales and marketing and research and development;
the sufficiency of our cash, cash equivalents, and investments to meet our liquidity needs;
our ability to service the interest on our convertible notes and repay such notes, to the extent required;
our ability to successfully defend litigation brought against us; and
the increased expenses associated with being a public company.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.
You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. The results, events, and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.
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The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and you are cautioned not to unduly rely upon these statements.
_________________

Unless the context requires otherwise, we are referring to Slack Technologies, Inc. together with its subsidiaries when we use the terms the “Company,” “we,” “our,” or “us.”
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SLACK TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
As of
July 31, 2020 January 31, 2020
ASSETS
Current assets:
Cash and cash equivalents $ 1,316,395  $ 498,999 
Marketable securities 216,957  269,593 
Accounts receivable, net
111,950  145,844 
Prepaid expenses and other current assets 58,340  55,967 
Total current assets 1,703,642  970,403 
Restricted cash 38,490  38,490 
Strategic investments 42,826  28,814 
Property and equipment, net 98,729  102,340 
Operating lease right-of-use assets 185,911  197,830 
Intangible assets, net 18,019  13,530 
Goodwill 76,204  48,598 
Other assets 37,306  41,701 
Total assets $ 2,201,127  $ 1,441,706 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 12,778  $ 16,893 
Accrued compensation and benefits 68,154  65,196 
Accrued expenses and other current liabilities 23,823  32,123 
Operating lease liability 30,707  30,465 
Deferred revenue 382,675  375,263 
Total current liabilities 518,137  519,940 
Convertible senior notes, net 630,326   
Operating lease liability, noncurrent 185,166  196,378 
Deferred revenue, noncurrent 732  1,451 
Other liabilities 67  38 
Total liabilities 1,334,428  717,807 
Commitments and contingencies (Note 8)
Stockholders’ equity:
Common stock
57  56 
Additional paid-in-capital 2,235,200  1,945,446 
Accumulated other comprehensive income (loss) 929  (71)
Accumulated deficit (1,386,680) (1,236,621)
Total Slack Technologies, Inc. stockholders’ equity 849,506  708,810 
Noncontrolling interest 17,193  15,089 
Total stockholders’ equity 866,699  723,899 
Total liabilities and stockholders’ equity $ 2,201,127  $ 1,441,706 
See accompanying notes to condensed consolidated financial statements.
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SLACK TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended July 31, Six Months Ended July 31,
2020 2019 2020 2019
Revenue $ 215,864  $ 144,973  $ 417,514  $ 279,794 
Cost of revenue 28,387  31,106  53,989  49,680 
Gross profit 187,477  113,867  363,525  230,114 
Operating expenses:
Research and development 94,201  217,769  185,426  268,872 
Sales and marketing 109,122  136,392  219,442  203,230 
General and administrative 52,788  123,356  103,442  160,100 
Total operating expenses 256,111  477,517  508,310  632,202 
Loss from operations (68,634) (363,650) (144,785) (402,088)
Interest expense (11,552) (208) (14,394) (321)
Interest income and other income, net 6,952  3,319  11,660  10,509 
Loss before income taxes (73,234) (360,539) (147,519) (391,900)
Provision (benefit) for income taxes (81) (923) 61  (403)
Net loss (73,153) (359,616) (147,580) (391,497)
Net income (loss) attributable to noncontrolling interest 1,695  (54) 2,479  1,397 
Net loss attributable to Slack $ (74,848) $ (359,562) $ (150,059) $ (392,894)
Basic and diluted net loss per share:
Net loss per share attributable to Slack common stockholders, basic and diluted $ (0.13) $ (0.98) $ (0.27) $ (1.58)
Weighted-average shares used in computing net loss per share attributable to Slack common stockholders, basic and diluted 564,351  368,533  560,921  249,222 

See accompanying notes to condensed consolidated financial statements.
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SLACK TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
Three Months Ended July 31, Six Months Ended July 31,
2020 2019 2020 2019
Net loss $ (73,153) $ (359,616) $ (147,580) $ (391,497)
Other comprehensive income (loss), net of tax:
Change in unrealized gain or loss on marketable securities 75  (41) 1,000  379 
Other comprehensive income (loss), net of tax 75  (41) 1,000  379 
Comprehensive loss (73,078) (359,657) (146,580) (391,118)
Comprehensive income (loss) attributable to noncontrolling interest 1,695  (54) 2,479  1,397 
Comprehensive loss attributable to Slack $ (74,773) $ (359,603) $ (149,059) $ (392,515)
See accompanying notes to condensed consolidated financial statements.
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SLACK TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
Common Stock Additional Paid-In-Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Noncontrolling Interest  Total Stockholders' Equity
Shares Amount
Balance at January 31, 2020 555,360  $ 56  $ 1,945,446  $ (71) $ (1,236,621) $ 15,089  $ 723,899 
Exercise of stock options 1,062    1,932        1,932 
Vesting of early exercised stock options     2        2 
Issuance of common stock upon settlement of restricted stock units (RSUs) 4,724             
Equity component of convertible senior notes, net of issuance costs     223,622        223,622 
Purchases of capped calls related to convertible senior notes     (105,570)       (105,570)
Other comprehensive income       925      925 
Issuance of common stock for employee share purchase plan 820    16,610        16,610 
Stock-based compensation     53,711        53,711 
Net income (loss)         (75,211) 784  (74,427)
Balance at April 30, 2020 561,966  56  2,135,753  854  (1,311,832) 15,873  840,704 
Exercise of stock options 766    1,693        1,693 
Vesting of early exercised stock options     972        972 
Issuance of common stock upon settlement of restricted stock units (RSUs) 5,016  1  (1)        
Other comprehensive income       75      75 
Distributions to noncontrolling interest holders           (375) (375)
Shares issued related to a business combination 1,660    39,495        39,495 
Stock-based compensation     57,288        57,288 
Net income (loss)         (74,848) 1,695  (73,153)
Balance at July 31, 2020 569,408  $ 57  $ 2,235,200  $ 929  $ (1,386,680) $ 17,193  $ 866,699 

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Convertible Preferred Stock Common Stock Additional Paid-In-Capital Accumulated Other Comprehensive Loss Accumulated Deficit Noncontrolling Interest  Total Stockholders' Equity
Shares Amount Shares Amount
Balance at January 31, 2019 373,372  $ 1,392,101  127,573  $ 13  $ 105,633  $ (498) $ (665,563) $ 9,920  $ 841,606 
Exercise of stock options     2,694    2,907        2,907 
Vesting of early exercised stock options         88        88 
Issuance of restricted stock awards (RSAs)     505             
Other comprehensive income           420      420 
Stock-based compensation         3,639        3,639 
Net income (loss)             (33,332) 1,451  (31,881)
Balance at April 30, 2019 373,372  1,392,101  130,772  13  112,267  (78) (698,895) 11,371  816,779 
Exercise of stock options     8,046  1  6,804        6,805 
Vesting of early exercised stock options         69        69 
Cancellation of restricted stock awards (RSAs)     (10)            
Repurchase of early exercised stock options     (2)            
Conversion of convertible preferred stock to common stock in connection with direct listing (373,372) (1,392,101) 373,372  37  1,392,064         
Issuance of common stock upon settlement of restricted stock units (RSUs)     30,388  3  (3)        
Other comprehensive loss           (41)     (41)
Stock-based compensation         285,787        285,787 
Net loss             (359,562) (54) (359,616)
Balance at July 31, 2019   $   542,566  $ 54  $ 1,796,988  $ (119) $ (1,058,457) $ 11,317  $ 749,783 
See accompanying notes to condensed consolidated financial statements.
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SLACK TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended July 31,
2020 2019
Cash flows from operating activities:
Net loss $ (147,580) $ (391,497)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization 13,641  12,657 
Stock-based compensation 110,999  289,426 
Amortization of debt discount and issuance costs 12,619   
Noncash operating lease expense 17,343   
Amortization of deferred contract acquisition costs 6,898  3,290 
Net amortization of bond premium (discount) on debt securities available for sale 381  (1,736)
Change in fair value of strategic investments (5,820) (2,884)
Other non-cash charges (218) (359)
Changes in operating assets and liabilities:
Accounts receivable 33,548  15,258 
Prepaid expenses and other assets (4,539) (10,161)
Accounts payable (4,038) (1,436)
Operating lease liabilities (16,371)  
Accrued compensation and benefits 2,955  19,758 
Deferred revenue 5,703  44,650 
Other current and long-term liabilities (2,321) 9,229 
Net cash provided by (used in) operating activities 23,200  (13,805)
Cash flows from investing activities:
Purchases of marketable securities (100,302) (59,553)
Maturities of marketable securities 147,913  268,951 
Sales of marketable securities 5,650  166,074 
Net cash acquired from a business combination 6,571   
Purchases of property and equipment (8,743) (28,269)
Purchase of strategic investments (9,025) (5,470)
Proceeds from liquidation of strategic investments 789  2,858 
Net cash provided by investing activities 42,853  344,591 
Cash flows from financing activities:
Proceeds from issuance of convertible senior notes, net of issuance costs 841,329   
Purchases of capped calls related to convertible senior notes (105,570)  
Proceeds from exercise of stock options 4,599  10,275 
Payments of contingent consideration for acquisitions (5,250) (5,000)
Issuance of common stock for employee stock purchase plan 16,610   
Distributions to noncontrolling interest holders (375)  
Other financing activities   (556)
Net cash provided by financing activities 751,343  4,719 
Net increase in cash, cash equivalents and restricted cash 817,396  335,505 
Cash, cash equivalents and restricted cash at beginning of period 537,489  201,260 
Cash, cash equivalents and restricted cash at end of period $ 1,354,885  $ 536,765 
Supplemental disclosure of cash flow information:
Cash paid for income taxes
$ 1,894  $ 455 
Non-cash investing and financing activities:
Increase (decrease) in purchases of property and equipment included in liabilities
$ (1,349) $ 1,476 
Fair value of common stock issued as consideration for a business combination
$ 39,495  $  
Vesting of early exercised stock options
$ 974  $ 157 
Unrealized short-term gain on marketable securities
$ 991  $ 505 
See accompanying notes to condensed consolidated financial statements.
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SLACK TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
Note 1.    Description of Business and Summary of Significant Accounting Policies
Business
Slack Technologies, Inc. (the “Company” or “Slack”) operates a business technology software platform that brings together people, applications, and data and sells its offering under a software-as-a-service model. The Company was incorporated in Delaware in 2009 as Tiny Speck, Inc. In 2014, the Company changed its name to Slack Technologies, Inc. and publicly launched its current offering. The Company is headquartered in San Francisco, California.
Fiscal Year
The Company’s fiscal year ends on January 31. References to fiscal year 2021, for example, refer to the fiscal year ended January 31, 2021.
Basis of Presentation and Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”), regarding interim financial reporting. The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned and majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated financial statements include 100% of the accounts of wholly owned and majority-owned subsidiaries and the ownership interest of minority investors is recorded as noncontrolling interest.
The unaudited condensed consolidated balance sheet as of January 31, 2020 included herein was derived from the audited financial statements as of that date, but does not include all disclosures, including certain notes required by U.S. GAAP on an annual reporting basis. In management's opinion, the unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the balance sheets, statements of comprehensive loss, statements of stockholders’ equity, and 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 or any future period.
These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K filed with the SEC on March 12, 2020.
Convertible Senior Notes
In April 2020, the Company issued $862.5 million aggregate principal amount of 0.50% convertible senior notes due April 15, 2025 in a private offering, including the initial purchasers’ exercise in full of their option to purchase additional notes (the “Notes”). See Note 7 for additional details.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. These estimates are based on information available as of the date of the condensed consolidated financial statements. On a regular basis, management evaluates these estimates and assumptions; however, actual results could materially differ from these estimates due to risks and uncertainties, including uncertainty in the current economic environment related to the outbreak of the novel coronavirus pandemic (“COVID-19”).
The Company’s most significant estimates and judgments involve revenue recognition, stock-based compensation including the estimation of fair value of common stock, valuation of strategic investments, valuation of acquired goodwill and intangibles from acquisitions, period of benefit for deferred contract acquisition costs, fair value of the liability and equity components of the Notes, and uncertain tax positions.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk primarily consist of cash and cash equivalents, restricted cash, marketable securities, and accounts receivable. For cash, cash equivalents, restricted cash, and marketable securities, the Company is exposed to credit risk in the event of default by the financial institutions to the extent of
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the amounts recorded on the accompanying condensed consolidated balance sheets that are in excess of federal insurance limits. For accounts receivable, the Company is exposed to credit risk in the event of nonpayment by customers to the extent of the amounts recorded on the accompanying condensed consolidated balance sheets. The Company sells its services to a wide variety of customers. If the financial condition or results of operations of any significant customers deteriorates substantially, operating results could be adversely affected. To reduce credit risk, management performs credit evaluations of the financial condition of significant customers. The Company does not require collateral from its credit customers and maintains reserves for estimated credit losses on customer accounts when considered necessary. Actual credit losses may differ from the Company’s estimates.
No customer accounted for 10% or greater of total accounts receivable as of July 31, 2020 and January 31, 2020. There were no customers representing 10% or greater of revenue for the three and six months ended July 31, 2020 and 2019.
Summary of Significant Accounting Policies
The Company’s significant accounting policies are discussed in “Index to Consolidated Financial Statements–Note 1. Description of Business and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements in its Annual Report on Form 10-K filed with the SEC on March 12, 2020. There have been no significant changes to these policies during the six months ended July 31, 2020, except for the accounting policy for the Notes issued in April 2020.
Convertible Senior Notes
The Notes are accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 470-20, Debt with Conversion and Other Options. Pursuant to ASC Subtopic 470-20, issuers of certain convertible debt instruments, such as the Notes, that have a net settlement feature and may be settled wholly or partially in cash upon conversion are required to separately account for the liability (debt) and equity (conversion option) components of the instrument. The carrying amount of the liability component of the instrument is computed by estimating the fair value of a similar liability without the conversion option using a market-based approach. The amount of the equity component is then calculated by deducting the fair value of the liability component from the principal amount of the instrument. The difference between the principal amount and the liability component represents a debt discount that is amortized to interest expense over the respective term of the Notes using the effective interest rate method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. In accounting for the issuance costs related to the Notes, the allocation of issuance costs incurred between the liability and equity components was based on their relative values.
Recently Adopted Accounting Standards
In June 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments, which requires an entity to utilize a new impairment model known as the current expected credit loss (“CECL”) model to estimate its “expected credit loss” and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in more timely recognition of credit losses. This guidance also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities. The Company adopted Topic 326 as of February 1, 2020. The adoption of this new standard did not have a material impact on the accompanying condensed consolidated financial statements as credit losses are not expected to be significant based on historical collection trends, the financial condition of payment partners, and external market factors. The Company will continue to actively monitor the impact of the COVID-19 on expected credit losses.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the accounting for implementation costs incurred in a hosting arrangement that is a service contract with the accounting for implementation costs incurred to develop or obtain internal-use software under ASC 350-40, in order to determine which costs to capitalize and recognize as an asset and which costs to expense. The Company adopted ASU No. 2018-15 as of February 1, 2020 using a prospective transition approach. The adoption of this new standard did not have a material impact on the accompanying condensed consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes which simplifies the accounting for income taxes by removing certain exceptions to the general principles of income taxes and reducing the cost and complexity in accounting for income taxes. The Company early adopted ASU No. 2019-12 as of February 1, 2020 using the prospective transition approach. The adoption of this new standard did not have a material impact on the accompanying condensed consolidated financial statements.
Recently Issued Accounting Standards Not Yet Adopted
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In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. ASU No. 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and it also simplifies the diluted earnings per share calculation in certain areas. ASU No. 2020-06 is effective for public companies for annual periods beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted for annual periods beginning after December 15, 2020, and interim periods within those fiscal years. The Company is currently evaluating the impact of this standard on its condensed consolidated financial statements and related disclosures.
Note 2.    Revenue and Contract Costs
Contract Balances
Contract liabilities consist of deferred revenue. The changes in deferred revenue were as follows (in thousands):
Three Months Ended July 31, 2020 Six Months Ended July 31, 2020
Balance, beginning of period $ 381,073  $ 376,714 
Billings 217,208  423,217 
Deferred revenue assumed in the Rimeto acquisition 990  990 
Revenue (215,864) (417,514)
Balance, end of period $ 383,407  $ 383,407 
The majority of revenue recognized in the three months ended July 31, 2020 was from the deferred revenue balance as of April 30, 2020. The majority of revenue recognized in the six months ended July 31, 2020 was from the deferred revenue balance as of January 31, 2020.
Remaining Performance Obligations
The Company applies the practical expedient in ASC 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one year or less, which applies primarily to its monthly and annual subscription contracts. As of July 31, 2020, the remaining performance obligations that were unsatisfied or partially unsatisfied at the end of the reporting period were $388.5 million, of which 57% is expected to be recognized in the twelve months following July 31, 2020, with the balance to be recognized as revenue thereafter.
Disaggregation of Revenue
The following table shows the Company’s revenue by geographic areas, as determined based on the billing address of its customers (in thousands):
Three Months Ended July 31, Six Months Ended July 31,
2020 2019 2020 2019
United States $ 134,214  $ 90,734  $ 259,601  $ 175,063 
International 81,650  54,239  157,913  104,731 
Total $ 215,864  $ 144,973  $ 417,514  $ 279,794 
No individual foreign country contributed in excess of 10% of revenue for the three months or six months ended July 31, 2020 and 2019.
Deferred Contract Acquisition Costs, Net
The Company deferred incremental costs of obtaining a contract of $5.4 million and $6.0 million for the three months ended July 31, 2020 and 2019, respectively, and $18.0 million and $10.8 million for the six months ended July 31, 2020 and 2019, respectively. Deferred contract acquisition costs, net included in prepaid expenses and other current assets were $15.6 million and $11.2 million as of July 31, 2020 and January 31, 2020, respectively. Deferred contract acquisition costs, net included in other assets were $28.1 million and $21.4 million as of July 31, 2020 and January 31, 2020, respectively.
Amortized deferred contract acquisition costs were $3.8 million and $1.8 million for the three months ended July 31, 2020
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and 2019, respectively, and $6.9 million and $3.3 million for the six months ended July 31, 2020 and 2019, respectively. There was no impairment loss in relation to the deferred contract acquisition costs for any period presented in the accompanying condensed consolidated statements of operations.
Note 3.    Fair Value Measurements
The Company’s money market funds and sweep account are classified within Level 1 of the fair value hierarchy because they are valued using quoted prices in active markets. The Company’s commercial paper, U.S. agency and government securities, international government securities, certificates of deposit, and corporate bonds are classified within Level 2 of the fair value hierarchy because they have been valued using inputs other than quoted prices in active markets that are observable directly or indirectly. The Company’s strategic investments in privately held companies are classified within Level 3 of the fair value hierarchy because they have been valued using unobservable inputs for which the Company has been required to develop its own assumptions. Realized and unrealized gains and losses relating to the strategic investments are recorded in other income (expense), net in the accompanying condensed consolidated statements of operations.
The following tables provide the financial instruments measured at fair value on a recurring basis, within the fair value hierarchy (in thousands):
As of July 31, 2020 Level 1 Level 2 Level 3 Total
Cash equivalents:
Money market funds $ 757,213  $   $   $ 757,213 
Certificates of deposit   145,318    145,318 
Total cash equivalents $ 757,213  $ 145,318  $   $ 902,531 
Marketable securities:
Certificates of deposit $   $ 7,560  $   $ 7,560 
Commercial paper   14,990    14,990 
U.S. agency securities   40,377    40,377 
U.S. government securities   30,263    30,263 
International government securities   8,104    8,104 
Corporate bonds   115,663    115,663 
Total marketable securities $   $ 216,957  $   $ 216,957 
Noncurrent assets:
Strategic investments $   $   $ 42,826  $ 42,826 

As of January 31, 2020 Level 1 Level 2 Level 3 Total
Cash equivalents:
Money market funds $ 357,524  $   $   $ 357,524 
Commercial paper   69,882    69,882 
Total cash equivalents $ 357,524  $ 69,882  $   $ 427,406 
Marketable securities:
Commercial paper $   $ 19,795  $   $ 19,795 
U.S. agency securities   29,515    29,515 
U.S. government securities   97,172    97,172 
International government securities   8,115    8,115 
Corporate bonds   114,996    114,996 
Total marketable securities $   $ 269,593  $   $ 269,593 
Noncurrent assets:
Strategic investments $   $   $ 28,814  $ 28,814 
The following table presents additional information about Level 3 assets measured at fair value on a recurring basis (in
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thousands):
Three Months Ended July 31, Six Months Ended July 31,
2020 2019 2020 2019
Balance at beginning of period $ 34,470  $ 15,266  $ 28,814  $ 12,334 
Purchases 5,007  2,370  9,025  5,470 
Proceeds from liquidation (833)   (833) (3,193)
Realized gains 484    184  2,693 
Unrealized gains (losses) relating to investments still held at reporting date 3,698  (140) 5,636  192 
Balance at end of period $ 42,826  $ 17,496  $ 42,826  $ 17,496 
Convertible Senior Notes
As of July 31, 2020, the fair value of the Notes was approximately $1.04 billion. The fair value was determined based on the quoted price for the Notes in an inactive market on the last trading day of the reporting period and is considered as Level 2 in the fair value hierarchy.
Note 4. Business Combination
On June 29, 2020, the Company completed its acquisition of all issued and outstanding shares of Rimeto Inc. (“Rimeto”), a provider of an enterprise directory platform that enables users to stay connected with detailed employee profiles and information. The Company effected the business combination by issuing 1,659,715 shares of its Class A common stock, of which 740,837 shares are subject to a re-vesting restriction over four years from the closing of the acquisition. Post-combination stock-based compensation for the re-vesting restricted stock, net of fair value of the pre-combination service portion, which is recorded as purchase price, is $11.4 million and is being ratably recognized over the requisite service period of four years. The acquisition date fair value of the purchase price was $40.1 million, which consisted of the following (in thousands):
Fair Value
Cash $ 653 
Fair value of Class A common stock transferred 28,060 
Fair value of the pre-combination service portion of restricted stock 11,435 
Total purchase price $ 40,148 
The following table presents the preliminary purchase price allocation recorded in the Company’s condensed consolidated balance sheet as of July 31, 2020 (in thousands):
Fair Value
Cash and cash equivalents $ 7,224 
Accounts receivable and other assets 732 
Operating lease right-of-use assets 616 
Intangible assets 7,000 
Goodwill 27,606 
Accounts payable and other liabilities (464)
Operating lease liability (637)
Deferred revenue (990)
Deferred tax liability (939)
Total purchase price $ 40,148 
The acquisition was accounted for as a business combination and the total purchase price was allocated to the net tangible and intangible assets and liabilities based on their fair values on the acquisition date and the excess was recorded as goodwill. The values assigned to the assets acquired and liabilities assumed are based on preliminary estimates of fair value available as of the date of this Quarterly Report on Form 10-Q and may be adjusted during the measurement period of up to 12 months from the date of acquisition as further information becomes available. Any changes in the fair values of the assets acquired and
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liabilities assumed during the measurement period may result in adjustments to goodwill. As of July 31, 2020, the primary area that remains preliminary relates to the valuation of certain tax-related items.
The goodwill was primarily attributed to the value of synergies created with the Company’s current and future offerings and the value of the assembled workforce. The Company anticipates both goodwill and intangible assets to be fully deductible for income tax purposes.
The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition (in thousands):
Fair Value Useful Life
Developed technology $ 4,900  3 years
Customer relationships 2,100  3 years
Total identifiable intangible assets $ 7,000 
In connection with the acquisition, the Company agreed to grant restricted stock units (“RSUs”) to Rimeto employees who joined the Company upon the effective date of the acquisition, with a value totaling approximately $19.0 million. The amount will be ratably recognized as stock-based compensation over the requisite service period of four years.
The Company incurred costs related to this acquisition of $1.5 million that were recorded in general and administrative expenses in the accompanying condensed consolidated statements of operations for the three and six months ended July 31, 2020.
Note 5.    Balance Sheet Components
Cash, Cash Equivalents, and Marketable Securities
The following tables summarize the amortized cost, unrealized gains and losses, and estimated fair value of cash, cash equivalents, and marketable securities consisting of the following (in thousands):
As of July 31, 2020 Amortized
cost
Unrealized
gains
Unrealized
losses
Fair value
Cash and cash equivalents:
Cash $ 413,864  $   $   $ 413,864 
Money market funds 757,213      757,213 
Certificates of deposit 145,318      145,318 
Total cash and cash equivalents 1,316,395      1,316,395 
Marketable securities:
Certificates of deposit 7,500  60    7,560 
Commercial paper 14,944  46    14,990 
U.S. agency securities 40,160  217    40,377 
U.S. government securities 30,089  174    30,263 
International government securities 8,095  9    8,104 
Corporate bonds 114,896  767    115,663 
Total marketable securities 215,684  1,273    216,957 
Total cash, cash equivalents and marketable securities $ 1,532,079  $ 1,273  $   $ 1,533,352 

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As of January 31, 2020 Amortized
cost
Unrealized
gains
Unrealized
losses
Fair value
Cash and cash equivalents:
Cash $ 71,593  $   $   $ 71,593 
Money market funds 357,524      357,524 
Commercial paper 69,891    (9) 69,882 
Total cash and cash equivalents 499,008    (9) 498,999 
Marketable securities:
Commercial paper 19,799  4  (8) 19,795 
U.S. agency securities 29,460  55    29,515 
U.S. government securities 97,071  102  (1) 97,172 
International government securities 8,109  6    8,115 
Corporate bonds 114,871  139  (14) 114,996 
Total marketable securities 269,310  306  (23) 269,593 
Total cash, cash equivalents and marketable securities $ 768,318  $ 306  $ (32) $ 768,592 
The Company periodically evaluates its investments for other-than-temporary declines in fair value. The unrealized losses on the available-for-sale securities were primarily due to unfavorable changes in interest rates subsequent to the initial purchase of these securities. Gross unrealized losses of the Company’s available-for-sale securities that have been in a continuous unrealized loss position for twelve months or longer were none and immaterial as of July 31, 2020 and January 31, 2020, respectively. The Company expects to recover the full carrying value of its available-for-sale securities in an unrealized loss position as it does not intend or anticipate a need to sell these securities prior to recovering the associated unrealized losses. The Company also expects any credit losses would be immaterial based on the high-grade credit rating for each of such available-for-sale securities. As a result, the Company does not consider any portion of the unrealized losses as of July 31, 2020 or January 31, 2020 to represent an other-than temporary impairment or credit losses.
The following table classifies marketable securities by contractual maturities (in thousands):
As of
July 31, 2020 January 31, 2020
Due in one year $ 157,970  $ 190,344 
Due in one to two years 58,987  79,249 
Total $ 216,957  $ 269,593 
Property and Equipment, Net
The following is a summary of the Company’s property and equipment by category (in thousands):
As of
July 31, 2020 January 31, 2020
Leasehold improvements $ 102,562  $ 98,770 
Furniture and fixtures 28,347  27,384 
Capitalized internal-use software costs 4,241  4,241 
Computer equipment 3,783  3,183 
Construction in progress 7,792  10,345 
Property and equipment, gross 146,725  143,923 
Less: accumulated depreciation and amortization (47,996) (41,583)
Property and equipment, net $ 98,729  $ 102,340 

Depreciation and amortization expense was $5.6 million and $5.8 million for the three months ended July 31, 2020 and 2019, respectively. Depreciation and amortization expense was $11.1 million and $10.6 million for the six months ended July 31, 2020 and 2019, respectively.
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Goodwill
As of July 31, 2020 and January 31, 2020, goodwill was $76.2 million and $48.6 million, respectively. During the six months ended July 31, 2020, the Company recorded $27.6 million of goodwill in connection with the Rimeto acquisition that was completed in June 2020. See Note 4 for further details. No goodwill impairments were recorded for any period presented in the accompanying condensed consolidated statements of operations.
Intangible Assets, Net
Intangible assets consist of the following (in thousands):
July 31, 2020 Weighted-average
remaining
amortization period
Gross carrying
amount
Accumulated
amortization
Net carrying
amount
Customer relationships 4.5 years $ 11,200  $ 2,713  $ 8,487 
Developed technology 2.3 years 13,427  6,228  7,199 
Patents 4.4 years 2,500  292  2,208 
Assembled workforce 0.2 years 1,198  1,073  125 
Total $ 28,325  $ 10,306  $ 18,019 

January 31, 2020 Weighted-average
remaining
amortization period
Gross carrying
amount
Accumulated
amortization
Net carrying
amount
Customer relationships 5.5 years $ 9,100  $ 2,004  $ 7,096 
Developed technology 1.6 years 8,527  4,976  3,551 
Patents 4.9 years 2,500  42  2,458 
Assembled workforce 0.7 years 1,198  773  425 
Total $ 21,325  $ 7,795  $ 13,530 

Amortization expense of intangible assets was $1.4 million and $1.1 million for the three months ended July 31, 2020 and 2019, respectively. Amortization expense of intangible assets was $2.5 million and $2.1 million for the six months ended July 31, 2020 and 2019, respectively.
As of July 31, 2020, expected amortization expense relating to intangible assets for each of the next five fiscal years and thereafter is as follows (in thousands):
Year ending January 31,
2021 (6 months remaining) $ 3,308 
2022 5,452 
2023 4,133 
2024 2,772 
2025 1,758 
Thereafter 596 
Total $ 18,019 

Note 6.    Operating Leases
The Company leases real estate facilities under non-cancelable operating leases with various expiration dates through fiscal year 2031.
For the three months ended July 31, 2020, the Company recorded operating lease costs of $10.9 million including variable operating lease costs of $1.6 million and short-term leases of $0.8 million. For the six months ended July 31, 2020, the Company recorded operating lease costs of $21.8 million, including variable operating lease costs of $2.9 million and short-
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term leases of $1.5 million.
The following table sets forth a summary of and other information pertaining to the Company’s operating leases (dollars in thousands):
Six Months Ended July 31, 2020
Operating cash flows used for operating leases $ 16,371 
Operating lease liabilities arising from obtaining ROU assets $ 637 
Weighted average remaining terms 8.1 years
Weighted average discount rate 5.2  %
Rent expense, net of sublease income under ASC 840, was $8.7 million and $17.0 million for the three and six month ended July 31, 2019, respectively.
Future minimum lease payments under non-cancelable operating leases with initial lease terms in excess of one year as of July 31, 2020 as follows (in thousands):
Year ending January 31,
2021 (6 months remaining) $ 13,475 
2022 38,196 
2023 51,810 
2024 50,421 
2025 52,880 
Thereafter 263,278 
Gross lease payments 470,060 
Less: Imputed interest (57,602)
Less: Tenant improvement receivables (14,022)
Less: Leases executed but not yet commenced (182,563)
Present value of lease liabilities $ 215,873 

As of July 31, 2020, the Company had commitments of $182.6 million for non-cancelable operating leases of real estate facilities that have not yet commenced, and therefore are not included in the ROU assets or operating lease liabilities. These operating leases will commence in fiscal year 2021 with lease terms of 9.9 years to 12.0 years.
Note 7.    Debt and Financing Arrangements
Convertible Senior Notes
On April 9, 2020, the Company issued $862.5 million in aggregate principal amount of the Notes in a private offering pursuant to an Indenture dated April 9, 2020 (the “Indenture”), including the initial purchasers’ exercise in full of their option to purchase an additional $112.5 million principal amount of the Notes. The total net proceeds from the debt offering, after deducting initial purchaser discounts and debt issuance costs, paid or payable were $841.3 million.
The Notes are senior, unsecured obligations of the Company and will accrue interest payable semiannually in arrears on April 15 and October 15 of each year, beginning on October 15, 2020, at a rate of 0.50% per year. The Notes will mature on April 15, 2025, unless earlier converted, redeemed, or repurchased. The Notes are convertible into cash, shares of the Company’s Class A common stock or a combination of cash and shares of the Company’s Class A common stock, at the Company’s election.
Holders of the Notes may convert all or any portion of their Notes at their option at any time prior to the close of business on January 14, 2025 only under the following circumstances:
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During any fiscal quarter commencing after the fiscal quarter ending on July 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 a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
During the five business day period after any ten consecutive trading day period (the “measurement period”) in which the “trading price” (as defined in the Indenture) per $1,000 principal amount of Notes for each trading day of the measurement 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 each such trading day; or
Upon the occurrence of specified corporate events.
On or after January 15, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity date, a holder may convert all or any portion of its Notes at any time, regardless of the foregoing.
The conditions allowing holders of the Notes to convert have not been met since the Company issued the Notes on April 9, 2020.
The conversion rate was initially 32.2630 shares of the Company’s Class A common stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of approximately $31.00 per share of the Company’s Class A common stock). The conversion rate is subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date, the Company will, in certain circumstances, increase the conversion rate for a holder who elects to convert its Notes in connection with such a corporate event.
The Company may not redeem the Notes prior to April 20, 2023. The Company may redeem for cash all or any portion of the Notes, at its option, on a redemption date occurring on or after April 20, 2023 and on or before the 21st scheduled trading day immediately before the maturity date, 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 immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the Notes.
If the Company undergoes a fundamental change (as defined in the Indenture), holders may require the Company to repurchase for cash all or any portion of their Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
The Indenture contains customary terms and covenants, including that upon certain events of default occurring and continuing, either the Trustee or the holders of not less than 25% in aggregate principal amount of the Notes then outstanding may declare the entire principal amount of all the Notes plus accrued special interest, if any, to be immediately due and payable.
The Notes are the Company’s general unsecured obligations and rank senior in right of payment to all of the Company’s indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment with all of the Company’s liabilities that are not so subordinated; effectively junior to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of the Company’s subsidiaries.
In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated using a discount rate of 6.85%, which was determined by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was $229.2 million and was determined by deducting the fair value of the liability component from the par value of the Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the liability component over its carrying amount, or the debt discount, is amortized to interest expense at an annual effective interest rate over the contractual terms of the Notes.
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As of July 31, 2020, the net carrying amount of the liability component of the Notes was as follows (in thousands):
Principal $ 862,500 
Less: unamortized discount (217,282)
Less: unamortized issuance costs (14,892)
Net carrying amount $ 630,326 
As of July 31, 2020, the net carrying amount of the equity component of the Notes was as follows (in thousands):
Proceeds allocated to the conversion options (debt discount) $ 229,249 
Less: issuance costs (5,627)
Carrying amount of the equity component $ 223,622 

The following table sets forth the interest expense recognized related to the Notes (in thousands):