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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 April 30, 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 432,599,447 shares of the registrant’s Class A common stock outstanding and 131,098,885 shares of the registrant’s Class B common stock outstanding as of May 15, 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
April 30, 2020 January 31, 2020
ASSETS
Current assets:
Cash and cash equivalents $ 1,228,225    $ 498,999   
Marketable securities 296,744    269,593   
Accounts receivable, net
105,825    145,844   
Prepaid expenses and other current assets 54,895    55,967   
Total current assets 1,685,689    970,403   
Restricted cash 38,490    38,490   
Strategic investments 34,470    28,814   
Property and equipment, net 101,668    102,340   
Operating lease right-of-use assets 191,093    197,830   
Intangible assets, net 12,372    13,530   
Goodwill 48,598    48,598   
Other assets 46,172    41,701   
Total assets $ 2,158,552    $ 1,441,706   
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 12,965    $ 16,893   
Accrued compensation and benefits 51,868    65,196   
Accrued expenses and other current liabilities 31,699    32,123   
Operating lease liability 30,515    30,465   
Deferred revenue 380,022    375,263   
Total current liabilities 507,069    519,940   
Convertible senior notes, net 620,073    —   
Operating lease liability, noncurrent 189,652    196,378   
Deferred revenue, noncurrent 1,051    1,451   
Other liabilities   38   
Total liabilities 1,317,848    717,807   
Commitments and contingencies (Note 7)
Stockholders’ equity:
Common stock
56    56   
Additional paid-in-capital 2,135,753    1,945,446   
Accumulated other comprehensive income (loss) 854    (71)  
Accumulated deficit (1,311,832)   (1,236,621)  
Total Slack Technologies, Inc. stockholders’ equity 824,831    708,810   
Noncontrolling interest 15,873    15,089   
Total stockholders’ equity 840,704    723,899   
Total liabilities and stockholders’ equity $ 2,158,552    $ 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 April 30,
2020 2019
Revenue $ 201,650    $ 134,821   
Cost of revenue 25,602    18,574   
Gross profit 176,048    116,247   
Operating expenses:
Research and development 91,225    51,103   
Sales and marketing 110,320    66,838   
General and administrative 50,654    36,744   
Total operating expenses 252,199    154,685   
Loss from operations (76,151)   (38,438)  
Interest expense (2,842)   (113)  
Interest income and other income, net 4,708    7,190   
Loss before income taxes (74,285)   (31,361)  
Provision for income taxes 142    520   
Net loss (74,427)   (31,881)  
Net income attributable to noncontrolling interest 784    1,451   
Net loss attributable to Slack $ (75,211)   $ (33,332)  
Basic and diluted net loss per share:
Net loss per share attributable to Slack common stockholders, basic and diluted $ (0.13)   $ (0.26)  
Weighted-average shares used in computing net loss per share attributable to Slack common stockholders, basic and diluted 557,414    125,890   
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 April 30,
2020 2019
Net loss $ (74,427)   $ (31,881)  
Other comprehensive income, net of tax:
Change in unrealized gain or loss on marketable securities
925    420   
Other comprehensive income, net of tax
925    420   
Comprehensive loss (73,502)   (31,461)  
Comprehensive income attributable to noncontrolling interest
784    1,451   
Comprehensive loss attributable to Slack $ (74,286)   $ (32,912)  
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 —    —      —    —    —     
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   

Convertible Preferred Stock Common Stock Additional Paid-In-Capital Accumulated Other Comprehensive Income (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   
See accompanying notes to condensed consolidated financial statements.
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SLACK TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended April 30,
2020 2019
Cash flows from operating activities:
Net loss $ (74,427)   $ (31,881)  
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization 6,700    5,876   
Stock-based compensation 53,711    3,639   
Amortization of debt discount and issuance costs 2,366    —   
Noncash operating lease expense 8,732    —   
Amortization of deferred contract acquisition costs 3,143    1,463   
Net amortization of bond premium (discount) on debt securities available for sale 171    (1,081)  
Change in fair value of strategic investments (1,638)   (3,025)  
Other non-cash charges 592    37   
Changes in operating assets and liabilities:
Accounts receivable 39,470    15,620   
Prepaid expenses and other assets (6,561)   (6,462)  
Accounts payable (3,746)   (1,039)  
Operating lease liabilities (8,671)   —   
Accrued compensation and benefits (13,328)   (15,298)  
Deferred revenue 4,359    14,816   
Other current and long-term liabilities (2,144)   3,209   
Net cash provided by (used in) operating activities 8,729    (14,126)  
Cash flows from investing activities:
Purchases of marketable securities (100,302)   (24,907)  
Maturities of marketable securities 69,613    150,686   
Sales of marketable securities 4,289    —   
Purchases of property and equipment (5,046)   (20,077)  
Purchase of strategic investments (4,018)   (3,100)  
Proceeds from liquidation of strategic investments —    2,858   
Net cash provided by (used in) investing activities (35,464)   105,460   
Cash flows from financing activities:
Proceeds from issuance of convertible senior notes, net of issuance costs 842,016    —   
Purchases of capped calls related to convertible senior notes (105,570)   —   
Proceeds from exercise of stock options 2,905    2,385   
Issuance of common stock for employee stock purchase plan 16,610    —   
Net cash provided by financing activities 755,961    2,385   
Net increase in cash, cash equivalents and restricted cash 729,226    93,719   
Cash, cash equivalents and restricted cash at beginning of period 537,489    201,260   
Cash, cash equivalents and restricted cash at end of period $ 1,266,715    $ 294,979   
Supplemental disclosure of cash flow information:
Cash paid for income taxes
$ 990    $ 346   
Non-cash investing and financing activities:
Decrease in purchases of property and equipment included in liabilities
$ (177)   $ (8,664)  
Debt issuance costs, accrued but not yet paid
$ 687    $ —   
Vesting of early exercised stock options
$   $ 88   
Unrealized short-term gain on marketable securities
$ 910    $ 563   
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 6 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 recent 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 April 30, 2020 and January 31, 2020. There were no customers representing 10% or greater of revenue for the three months ended April 30, 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 three months ended April 30, 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.

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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
April 30, 2020
Balance, beginning of period $ 376,714   
Billings 206,009   
Revenue (201,650)  
Balance, end of period $ 381,073   
The majority of revenue recognized in the three months ended April 30, 2020 was from the deferred revenue balance as of January 31, 2020.
Remaining Performance Obligation
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 April 30, 2020, the remaining performance obligations that were unsatisfied or partially unsatisfied at the end of the reporting period were $379.1 million, of which 55% is expected to be recognized in the twelve months following April 30, 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 April 30,
2020 2019
United States $ 125,387    $ 84,329   
International 76,263    50,492   
Total $ 201,650    $ 134,821   
No individual foreign country contributed in excess of 10% of revenue for the three months ended April 30, 2020 and 2019.
Deferred Contract Acquisition Costs, Net
The Company deferred incremental costs of obtaining a contract of $12.6 million and $4.8 million for the three months ended April 30, 2020 and 2019, respectively. Deferred contract acquisition costs, net included in prepaid expenses and other current assets were $14.0 million and $11.2 million as of April 30, 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 April 30, 2020 and January 31, 2020, respectively.
Amortized deferred contract acquisition costs were $3.1 million and $1.5 million for the three months ended April 30, 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.
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The following tables provide the financial instruments measured at fair value on a recurring basis, within the fair value hierarchy (in thousands):
As of April 30, 2020 Level 1 Level 2 Level 3 Total
Cash equivalents:
Money market funds $ 865,452    $ —    $ —    $ 865,452   
Certificates of deposit —    115,000    —    115,000   
Commercial paper —    9,999    —    9,999   
Total cash equivalents $ 865,452    $ 124,999    $ —    $ 990,451   
Marketable securities:
Certificates of deposit $ —    $ 9,038    $ —    $ 9,038   
Commercial paper —    39,925    —    39,925   
U.S. agency securities —    44,725    —    44,725   
U.S. government securities —    60,468    —    60,468   
International government securities —    8,124    —    8,124   
Corporate bonds —    134,464    —    134,464   
Total marketable securities $ —    $ 296,744    $ —    $ 296,744   
Noncurrent assets:
Strategic investments $ —    $ —    $ 34,470    $ 34,470   

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 thousands):
Three Months Ended April 30,
2020 2019
Balance at beginning of period $ 28,814    $ 12,334   
Purchases 4,018    3,100   
Proceeds from liquidation —    (3,193)  
Realized gains (losses) (300)   2,693   
Unrealized gains relating to investments still held at reporting date 1,938    332   
Balance at end of period $ 34,470    $ 15,266   
Convertible Senior Notes
As of April 30, 2020, the fair value of the Notes was approximately $959.6 million. The fair value was determined based
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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.    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 April 30, 2020 Amortized
cost
Unrealized
gains
Unrealized
losses
Fair value
Cash and cash equivalents:
Cash $ 237,774    $ —    $ —    $ 237,774   
Money market funds 865,452    —    —    865,452   
Certificates of deposit 115,000    —    —    115,000   
Commercial paper 9,992      —    9,999   
Total cash and cash equivalents 1,228,218      —    1,228,225   
Marketable securities:
Certificates of deposit 9,000    38    —    9,038   
Commercial paper 39,805    120    —    39,925   
U.S. agency securities 44,460    273    (8)   44,725   
U.S. government securities 60,103    365    —    60,468   
International government securities 8,097    27    —    8,124   
Corporate bonds 134,088    426    (50)   134,464   
Total marketable securities 295,553    1,249    (58)   296,744   
Total cash, cash equivalents and marketable securities $ 1,523,771    $ 1,256    $ (58)   $ 1,524,969   

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      (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      —    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 immaterial as of April 30, 2020 and January 31, 2020. 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 April 30, 2020 or January 31, 2020 to represent an
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other-than temporary impairment or credit losses.
The following table classifies marketable securities by contractual maturities (in thousands):
As of
April 30, 2020 January 31, 2020
Due in one year $ 219,228    $ 190,344   
Due in one to two years 77,516    79,249   
Total $ 296,744    $ 269,593   
Property and Equipment, Net
The following is a summary of the Company’s property and equipment by category (in thousands):
As of
April 30, 2020 January 31, 2020
Leasehold improvements $ 95,868    $ 98,770   
Furniture and fixtures 26,492    27,384   
Capitalized internal-use software costs 4,241    4,241   
Computer equipment 3,454    3,183   
Construction in progress 14,134    10,345   
Property and equipment, gross 144,189    143,923   
Less: accumulated depreciation and amortization (42,521)   (41,583)  
Property and equipment, net $ 101,668    $ 102,340   

Depreciation and amortization expense was $5.5 million and $4.8 million for the three months ended April 30, 2020 and 2019, respectively.
Intangible Assets, Net
Intangible assets consist of the following (in thousands):
April 30, 2020 Weighted-average
remaining
amortization period
Gross carrying
amount
Accumulated
amortization
Net carrying
amount
Customer relationships 5.2 years $ 9,100    $ 2,329    $ 6,771   
Developed technology 1.3 years 8,527    5,534    2,993   
Patents 4.7 years 2,500    167    2,333   
Assembled workforce 0.5 years 1,198    923    275   
Total $ 21,325    $ 8,953    $ 12,372   

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 $1.2 million and $1.0 million for the three months ended April 30, 2020 and 2019, respectively.
As of April 30, 2020, expected amortization expense relating to intangible assets for each of the next five fiscal years and
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thereafter is as follows (in thousands):
Year ending January 31,
2021 (9 months remaining) $ 3,299   
2022 3,118   
2023 1,800   
2024 1,800   
2025 1,759   
Thereafter 596   
Total $ 12,372   

Note 5.    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 April 30, 2020, the Company recorded operating lease costs of $10.9 million including variable operating lease costs of $1.4 million and short-term leases of $0.8 million. The following table sets forth a summary of and other information pertaining to the Company’s operating leases for the three months ended April 30, 2020 (dollars in thousands):
Operating cash flows used for operating leases $ 8,671   
Operating lease liabilities arising from obtaining ROU assets $ —   
Weighted average remaining terms 8.3 years
Weighted average discount rate 5.2  %
Rent expense, net of sublease income under ASC 840 was $8.3 million for the three months ended April 30, 2019.
Future minimum lease payments under non-cancelable operating leases with initial lease terms in excess of one year as of April 30, 2020 as follows (in thousands):
Year ending January 31,
2021 (9 months remaining) $ 28,450   
2022 46,738   
2023 50,930   
2024 49,520   
2025 51,991   
Thereafter 252,944   
Gross lease payments 480,573   
Less: Imputed interest (61,081)  
Less: Tenant improvement receivables (14,177)  
Less: Leases executed but not yet commenced (185,148)  
Present value of lease liabilities $ 220,167   

As of April 30, 2020, the Company had commitments of $185.1 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 6.    Debt and Financing Arrangements
Convertible Senior Notes
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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 by us, 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:
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 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
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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.
As of April 30, 2020, the net carrying amount of the liability component of the Notes was as follows (in thousands):
Principal $ 862,500   
Less: unamortized discount (227,004)  
Less: unamortized issuance costs (15,423)  
Net carrying amount $ 620,073   
As of April 30, 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 for the three months ended April 30, 2020 (in thousands):
Contractual interest expense $ 252   
Amortization of debt discount 2,245   
Amortization of debt issuance costs 121   
Total interest expense related to the Senior Notes $ 2,618   

Capped Call Transactions
In connection with the offering of the Notes, the Company entered into privately negotiated capped call transactions with certain financial institution counterparties (the “Capped Calls”). The Capped Calls each have an initial strike price of approximately $31.00 per share, subject to certain adjustments, which corresponds to the initial conversion price of the Notes. The Capped Calls have initial cap prices of $48.62 per share, subject to certain adjustments. The Capped Calls cover, subject to anti-dilution adjustments, approximately 27.8 million shares of Class A common stock. The Capped Calls are generally intended to reduce or offset the potential dilution to the Class A common stock upon any conversion of the Notes with such reduction or offset, as the case may be, subject to a cap based on the cap price. The Capped Calls expire on the earlier of (i) the last day on which any convertible securities remain outstanding and (ii) April 15, 2025, subject to earlier exercise. The Capped Calls are subject to either adjustment or termination upon the occurrence of specified extraordinary events affecting the Company, including a merger event, a tender offer, and a nationalization, insolvency or delisting involving the Company. In addition, the Capped Calls are subject to certain specified additional disruption events that may give rise to a termination of the Capped Calls, including changes in law, insolvency filings, and hedging disruptions. The Capped Calls are recorded in stockholders’ equity and are not accounted for as derivatives. The net cost of $105.6 million incurred to purchase the capped call transactions was recorded as a reduction to additional paid-in capital in the accompanying condensed consolidated balance sheet.
 Revolving Credit Facility
On May 30, 2019, the Company entered into a $215.0 million revolving credit and guaranty agreement with a syndicate of financial institutions. The revolving credit facility has an accordion option, which, if exercised, would allow the Company to increase the aggregate commitments by up to the greater of $200.0 million and 100% of the consolidated adjusted EBITDA of the Company and its subsidiaries, plus an unlimited amount subject to satisfaction of certain leverage ratio based compliance tests after giving effect to the exercise, in each case subject to obtaining additional lender commitments and satisfying certain conditions. Pursuant to the terms of the revolving credit facility, the Company may issue letters of credit under the revolving credit facility, which reduce the total amount available for borrowing under such facility. The revolving credit facility terminates on May 30, 2024.
Interest on borrowings under the revolving credit facility accrues at a variable rate tied to the prime rate or the LIBOR, plus
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the applicable margin, at the Company’s election. The margin is 0.25% in the case of prime rate loans and 1.25% in the case of LIBOR loans. Interest is payable quarterly in arrears. Pursuant to the terms of the revolving credit facility, the Company is required to pay an annual commitment fee that accrues at a rate of 0.10% per annum on the unused portion of the borrowing commitments under the revolving credit facility. In addition, the Company is required to pay a fee in connection with letters of credit issued and outstanding under the revolving credit facility that accrues at a rate of 1.25% per annum on the amount to be drawn under such letters of credit outstanding. There is an additional fronting fee of 0.125% per annum multiplied by the aggregate face amount of issued and outstanding letters of credit.
The revolving credit facility contains customary conditions to borrowing, events of default, and covenants, including covenants that restrict the Company’s and its subsidiaries’ ability to, among other things, incur additional indebtedness, create or incur liens, merge or consolidate with other companies, sell substantially all of the Company’s assets, liquidate or dissolve, make distributions to the Company’s equity holders or its subsidiaries’ equity interests, pay dividends, make redemptions and repurchases of stock, or engage in transactions with affiliates. In addition, the revolving credit facility contains financial covenants, including a minimum liquidity balance and a minimum revenue amount. The Company has been in compliance with all covenants under the revolving credit facility since it entered into the revolving credit and guaranty agreement on May 30, 2019.
As of April 30, 2020, the Company had no amounts or letters of credit issued and outstanding under the revolving credit facility. The Company’s total available borrowing capacity under the revolving credit facility was $215.0 million as of April 30, 2020.
Note 7.    Commitments and Contingencies
Letters of Credit
As of April 30, 2020, the Company had $38.5 million in standby letters of credit outstanding related to facility lease obligations in San Francisco, California and Denver, Colorado, which is included in restricted cash in the accompanying condensed consolidated balance sheets.
Hosting Commitments
On April 30, 2020, the Company executed an amendment to its existing agreement with Amazon Web Services (“AWS”). The amended agreement was effective as of May 1, 2020 and continues through April 30, 2025. Pursuant to the amended agreement, the Company has minimum annual commitments of $75.0 million which will increase by $5.0 million annually, for a total minimum commitment of $425.0 million.
Legal Matters
The Company records a loss contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company also discloses material contingencies when it believes a loss is not probable but reasonably possible. Accounting for contingencies requires the Company to use judgment related to both the likelihood of a loss and the estimate of the amount or range of loss. The outcomes of the Company’s legal proceedings are inherently unpredictable and subject to significant uncertainties. For some matters for which a material loss is reasonably possible, an estimate of the amount of loss or range of losses is not possible, nor is the Company able to estimate the loss or range of losses that could potentially result from the application of non-monetary remedies. Many legal and tax contingencies can take years to be resolved. Until the final resolution of legal matters, all amounts of loss or range of losses are estimates only. The final losses the Company incurs may differ materially from these estimates.
Beginning in September 2019, seven purported class action lawsuits were filed against the Company, its directors, certain of its officers, and certain investment funds associated with certain of its directors, each alleging violations of securities laws in connection with the Company’s registration statement on Form S-1 filed with the SEC (the “Registration Statement”). Six of these lawsuits were filed in the Superior Court of California for the County of San Mateo and one of these lawsuits was filed in the U.S. District Court for the Northern District of California (the “Federal Action”). In the Federal Action, captioned Dennee v. Slack Technologies, Inc., Case No. 3:19-CV-05857-SI, a lead plaintiff has been appointed and the operative complaint was filed in January 2020. In January 2020, the Company and the other defendants filed a motion to dismiss the complaint. In April 2020, the U.S. District Court for the Northern District of California granted in part and denied in part the motion to dismiss. On May 5, 2020, the Company and the other defendants filed a motion to certify the court’s order for interlocutory appeal. A hearing for the motion is scheduled for June 12, 2020. The six state court actions were consolidated in November 2019, and the consolidated action is captioned In re Slack Technologies, Inc. Shareholder Litigation, Lead Case No. 19CIV05370 (the “State Court Action”). The operative complaint was filed in the State Court Action in December 2019. The Company and the other defendants filed demurrers to the complaint on February 20, 2020. The state court will schedule a hearing on the demurrers
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once certain restrictions on court proceedings related to the COVID-19 pandemic are lifted. The Federal Action and the State Court Action seek unspecified monetary damages and other relief on behalf of investors who purchased the Company’s Class A common stock issued pursuant and/or traceable to the Registration Statement.
In April 2020, three purported stockholder derivative lawsuits were filed against certain of the Company, its officers and certain of its current and former directors in the U.S. District Courts for the District of Delaware and the Northern District of California. The case filed in the Northern District of California was dismissed and re-filed in the United States District Court for the District of Delaware. The purported stockholder derivative lawsuits allege breaches of fiduciary duty in connection with the Registration Statement. The complaints seek declarations that the defendants breached their fiduciary duties to the Company, the award of unspecified damages to the Company, and certain reforms to the Company’s governance policies.
The Company believes these lawsuits are without merit and intends to vigorously defend them. Based on the preliminary nature of the proceedings in these cases, the outcomes of these matters remain uncertain.
In addition, the Company is involved from time to time in various claims and legal actions arising in the ordinary course of business. While it is not feasible to predict or determine the ultimate outcomes of these matters, the Company believes that none of these ordinary course legal proceedings will have a material adverse effect on its condensed consolidated financial statements.
Indemnification Agreements
In the ordinary course of business, the Company provides indemnifications of varying scope and terms to customers, business partners, vendors, lessors, investors, directors, officers, employees, and other parties with respect to certain matters. Indemnification may include losses from the Company’s breach of such agreements, intellectual property infringement claims made by third parties, and other liabilities relating to or arising from Slack, or the Company’s acts or omissions. These indemnifications may survive termination of the underlying agreement and the maximum potential amount of future indemnification payments may not be subject to a cap. It is not possible to determine the maximum potential loss under these indemnifications due to the Company’s limited history of prior indemnification claims and the unique facts and circumstances involved in each particular indemnification. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnifications as of April 30, 2020.
Note 8.    Stockholders' Equity
Common Stock
The Company’s amended and restated certificate of incorporation authorizes the issuance of Class A common stock and Class B common stock. As of April 30, 2020, the Company had authorized 5.0 billion shares of Class A common stock and 700.0 million shares of Class B common stock, each at par value of $0.0001. As of April 30, 2020, 430.9 million shares of Class A common stock and 131.1 million shares of Class B common stock were issued and outstanding.
Preferred Stock
The Company’s board of directors has the authority, without further action by the Company’s stockholders, to issue up to 100,000,000 shares of undesignated preferred stock with rights and preferences, including voting rights, designated from time to time by the board of directors.
Equity Incentive Plans
The Company maintains two equity incentive plans: the 2009 Stock Plan (the “2009 Plan”) and the 2019 Stock Option and Incentive Plan (the “2019 Plan”). All shares that remain available for future grants are under the 2019 Plan. In addition, the Company offers the 2019 Employee Stock Purchase Plan (the “2019 ESPP”) to eligible employees.
Stock Options
A summary of stock option activity under the 2009 Plan and 2019 Plan is as follows (in thousands, except years and per
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share data):
Number of shares Weighted-average exercise price per share Weighted-average remaining contractual term (In years) Aggregate intrinsic value
Outstanding at January 31, 2020 8,425    $ 4.68    6.27 $ 135,224   
Granted 1,678    24.31