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INSTRUCTURE HOLDINGS, INC. - Quarter Report: 2023 June (Form 10-Q)

10-Q
Table of Contents

 

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 June 30, 2023

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: 001-40647

 

Instructure Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

84-4325548

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

6330 South 3000 East, Suite 700

Salt Lake City, UT 84121

(Address of principal executive offices, including zip code)

(800) 203-6755

(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

Common Stock, par value $0.01 per share

INST

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 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definition 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 No

As of July 31, 2023, there were 143,990,731 shares of the registrant’s common stock outstanding.

 


Table of Contents

 

Instructure Holdings, Inc.

Quarterly Report on Form 10-Q

For the Quarter Ended June 30, 2023

INDEX

 

 

 

Page

 

 

PART I. FINANCIAL INFORMATION (Unaudited)

 

 

 

Item 1.

 

Condensed Consolidated Financial Statements (unaudited)

 

3

 

 

 

 

 

 

Condensed Consolidated Balance Sheets

 

3

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss

 

4

 

 

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity

 

5

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows

 

7

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

9

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

22

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

38

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

39

 

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

40

 

 

 

 

 

Item 1A.

 

Risk Factors

 

40

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

40

 

 

 

 

Item 3.

 

Default Upon Senior Securities

 

40

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

40

 

 

 

 

Item 5.

 

Other Information

 

40

 

 

 

 

Item 6.

 

Exhibits

 

40

 

 

 

 

SIGNATURES

 

42

 

In this Quarterly Report on Form 10-Q, “we,” “our,” “us,” “Instructure,” and the “Company” refer to Instructure Holdings, Inc. and its wholly-owned subsidiaries.

2


Table of Contents

 

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

INSTRUCTURE HOLDINGS, INC.

Condensed Consolidated Balance Sheets

(in thousands, except per share amounts)

 

 

 

June 30,

 

 

December 31,

 

 

 

2023

 

 

2022

 

 

 

(unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

126,003

 

 

$

185,954

 

Accounts receivable—net

 

 

208,366

 

 

 

71,428

 

Prepaid expenses

 

 

31,781

 

 

 

11,120

 

Deferred commissions

 

 

14,590

 

 

 

13,390

 

Other current assets

 

 

3,502

 

 

 

3,144

 

Total current assets

 

 

384,242

 

 

 

285,036

 

Property and equipment, net

 

 

12,836

 

 

 

12,380

 

Right-of-use assets

 

 

11,272

 

 

 

13,575

 

Goodwill

 

 

1,266,402

 

 

 

1,266,402

 

Intangible assets, net

 

 

471,186

 

 

 

542,679

 

Noncurrent prepaid expenses

 

 

6,413

 

 

 

871

 

Deferred commissions, net of current portion

 

 

15,759

 

 

 

18,781

 

Deferred tax assets

 

 

8,126

 

 

 

8,143

 

Other assets

 

 

5,152

 

 

 

5,622

 

Total assets

 

$

2,181,388

 

 

$

2,153,489

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

13,465

 

 

$

18,792

 

Accrued liabilities

 

 

32,020

 

 

 

28,483

 

Lease liabilities

 

 

7,167

 

 

 

7,205

 

Long-term debt, current

 

 

4,013

 

 

 

4,013

 

Deferred revenue

 

 

317,439

 

 

 

275,564

 

Total current liabilities

 

 

374,104

 

 

 

334,057

 

Long-term debt, net of current portion

 

 

484,382

 

 

 

486,471

 

Deferred revenue, net of current portion

 

 

13,299

 

 

 

13,816

 

Lease liabilities, net of current portion

 

 

12,897

 

 

 

16,610

 

Deferred tax liabilities

 

 

20,279

 

 

 

24,702

 

Other long-term liabilities

 

 

1,310

 

 

 

1,706

 

Total liabilities

 

 

906,271

 

 

 

877,362

 

Stockholders’ equity:

 

 

 

 

 

 

Common stock, par value $0.01 per share; 500,000 shares authorized as of June 30, 2023 (unaudited) and December 31, 2022; 143,991 and 142,917 shares issued and outstanding as of June 30, 2023 (unaudited) and December 31, 2022, respectively.

 

 

1,440

 

 

 

1,429

 

Additional paid-in capital

 

 

1,597,409

 

 

 

1,575,600

 

Accumulated deficit

 

 

(323,732

)

 

 

(300,902

)

Total stockholders’ equity

 

 

1,275,117

 

 

 

1,276,127

 

Total liabilities and stockholders’ equity

 

$

2,181,388

 

 

$

2,153,489

 

 

See accompanying notes.

3


Table of Contents

 

INSTRUCTURE HOLDINGS, INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except per share amounts)

(unaudited)

 

 

Three months ended
June 30,

 

 

Six months ended
June 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and support

 

$

118,569

 

 

$

102,905

 

 

$

237,049

 

 

$

206,397

 

Professional services and other

 

 

12,501

 

 

 

11,672

 

 

 

22,864

 

 

 

21,642

 

Total revenue

 

 

131,070

 

 

 

114,577

 

 

 

259,913

 

 

 

228,039

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and support

 

 

38,377

 

 

 

35,868

 

 

 

77,187

 

 

 

71,414

 

Professional services and other

 

 

6,912

 

 

 

6,530

 

 

 

13,934

 

 

 

11,995

 

Total cost of revenue

 

 

45,289

 

 

 

42,398

 

 

 

91,121

 

 

 

83,409

 

Gross profit

 

 

85,781

 

 

 

72,179

 

 

 

168,792

 

 

 

144,630

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

52,159

 

 

 

45,885

 

 

 

103,009

 

 

 

89,206

 

Research and development

 

 

21,482

 

 

 

18,669

 

 

 

45,184

 

 

 

35,870

 

General and administrative

 

 

14,218

 

 

 

14,253

 

 

 

28,591

 

 

 

29,869

 

Total operating expenses

 

 

87,859

 

 

 

78,807

 

 

 

176,784

 

 

 

154,945

 

Loss from operations

 

 

(2,078

)

 

 

(6,628

)

 

 

(7,992

)

 

 

(10,315

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

320

 

 

 

27

 

 

 

1,661

 

 

 

63

 

Interest expense

 

 

(10,289

)

 

 

(4,611

)

 

 

(19,774

)

 

 

(9,164

)

Other income (expense)

 

 

402

 

 

 

(3,417

)

 

 

478

 

 

 

(3,111

)

Total other income (expense), net

 

 

(9,567

)

 

 

(8,001

)

 

 

(17,635

)

 

 

(12,212

)

Loss before income taxes

 

 

(11,645

)

 

 

(14,629

)

 

 

(25,627

)

 

 

(22,527

)

Income tax benefit

 

 

672

 

 

 

1,710

 

 

 

2,797

 

 

 

4,063

 

Net loss and comprehensive loss

 

$

(10,973

)

 

$

(12,919

)

 

$

(22,830

)

 

$

(18,464

)

Net loss per common share, basic and diluted

 

$

(0.08

)

 

$

(0.09

)

 

$

(0.16

)

 

$

(0.13

)

Weighted average common shares used in computing basic and diluted net loss per common share

 

 

143,647

 

 

 

141,534

 

 

 

143,381

 

 

 

141,244

 

 

See accompanying notes.

 

4


Table of Contents

 

INSTRUCTURE HOLDINGS, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except per share amounts)

(unaudited)

 

 

Common

 

 

 

 

 

 

 

 

 

 

 

 

Stock, $0.01

 

 

Additional

 

 

 

 

 

Total

 

 

 

Par Value

 

 

Paid-In

 

 

Accumulated

 

 

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balances at March 31, 2023

 

 

143,479

 

 

$

1,435

 

 

$

1,587,303

 

 

$

(312,759

)

 

$

1,275,979

 

Vesting of restricted stock units

 

 

581

 

 

 

6

 

 

 

(6

)

 

 

 

 

 

 

Shares withheld for tax withholding on vesting of restricted stock units

 

 

(69

)

 

 

(1

)

 

 

(1,706

)

 

 

 

 

 

(1,707

)

Stock-based compensation

 

 

 

 

 

 

 

 

11,818

 

 

 

 

 

 

11,818

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(10,973

)

 

 

(10,973

)

Balances at June 30, 2023

 

 

143,991

 

 

$

1,440

 

 

$

1,597,409

 

 

$

(323,732

)

 

$

1,275,117

 

 

 

 

Common

 

 

 

 

 

 

 

 

 

 

 

 

Stock, $0.01

 

 

Additional

 

 

 

 

 

Total

 

 

 

Par Value

 

 

Paid-In

 

 

Accumulated

 

 

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balances at March 31, 2022

 

 

141,347

 

 

$

1,413

 

 

$

1,550,318

 

 

$

(272,205

)

 

$

1,279,526

 

Vesting of restricted stock units

 

 

589

 

 

 

6

 

 

 

(6

)

 

 

 

 

 

 

Shares withheld for tax withholding on vesting of restricted stock units

 

 

(22

)

 

 

 

 

 

(425

)

 

 

 

 

 

(425

)

Stock-based compensation

 

 

 

 

 

 

 

 

8,306

 

 

 

 

 

 

8,306

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(12,919

)

 

 

(12,919

)

Balances at June 30, 2022

 

 

141,914

 

 

$

1,419

 

 

$

1,558,193

 

 

$

(285,124

)

 

$

1,274,488

 

 

 

5


Table of Contents

 

INSTRUCTURE HOLDINGS, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except per share amounts)

(unaudited)

 

 

Common

 

 

 

 

 

 

 

 

 

 

 

 

Stock, $0.01

 

 

Additional

 

 

 

 

 

Total

 

 

 

Par Value

 

 

Paid-In

 

 

Accumulated

 

 

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balances at December 31, 2022

 

 

142,917

 

 

$

1,429

 

 

$

1,575,600

 

 

$

(300,902

)

 

$

1,276,127

 

Vesting of restricted stock units

 

 

1,021

 

 

 

11

 

 

 

(11

)

 

 

 

 

 

 

Purchase of ESPP shares

 

 

173

 

 

 

2

 

 

 

3,293

 

 

 

 

 

 

3,295

 

Shares withheld for tax withholding on vesting of restricted stock units

 

 

(120

)

 

 

(2

)

 

 

(2,984

)

 

 

 

 

 

(2,986

)

Stock-based compensation

 

 

 

 

 

 

 

 

21,511

 

 

 

 

 

 

21,511

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(22,830

)

 

 

(22,830

)

Balances at June 30, 2023

 

 

143,991

 

 

$

1,440

 

 

$

1,597,409

 

 

$

(323,732

)

 

$

1,275,117

 

 

 

 

Common

 

 

 

 

 

 

 

 

 

 

 

 

Stock, $0.01

 

 

Additional

 

 

 

 

 

Total

 

 

 

Par Value

 

 

Paid-In

 

 

Accumulated

 

 

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balances at December 31, 2021

 

 

140,741

 

 

$

1,407

 

 

$

1,539,638

 

 

$

(266,660

)

 

$

1,274,385

 

Vesting of restricted stock units

 

 

1,014

 

 

 

10

 

 

 

(10

)

 

 

 

 

 

 

Purchase of ESPP shares

 

 

240

 

 

 

3

 

 

 

4,073

 

 

 

 

 

 

4,076

 

Shares withheld for tax withholding on vesting of restricted stock units

 

 

(81

)

 

 

(1

)

 

 

(1,687

)

 

 

 

 

 

(1,688

)

Stock-based compensation

 

 

 

 

 

 

 

 

16,179

 

 

 

 

 

 

16,179

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(18,464

)

 

 

(18,464

)

Balances at June 30, 2022

 

 

141,914

 

 

$

1,419

 

 

$

1,558,193

 

 

$

(285,124

)

 

$

1,274,488

 

 

See accompanying notes.

6


Table of Contents

 

INSTRUCTURE HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

Six months ended
June 30,

 

 

 

2023

 

 

2022

 

Operating activities:

 

 

 

 

 

 

Net loss

 

$

(22,830

)

 

$

(18,464

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

 

Depreciation of property and equipment

 

 

2,295

 

 

 

2,057

 

Amortization of intangible assets

 

 

71,493

 

 

 

67,934

 

Amortization of deferred financing costs

 

 

589

 

 

 

587

 

Stock-based compensation

 

 

21,311

 

 

 

15,971

 

Deferred income taxes

 

 

(4,406

)

 

 

(5,422

)

Other

 

 

184

 

 

 

2,599

 

Changes in assets and liabilities:

 

 

 

 

 

 

Accounts receivable, net

 

 

(137,334

)

 

 

(115,316

)

Prepaid expenses and other assets

 

 

(26,680

)

 

 

(21,176

)

Deferred commissions

 

 

1,822

 

 

 

196

 

Right-of-use assets

 

 

2,303

 

 

 

2,410

 

Accounts payable and accrued liabilities

 

 

(1,718

)

 

 

(9,131

)

Deferred revenue

 

 

41,358

 

 

 

25,080

 

Lease liabilities

 

 

(3,751

)

 

 

(3,487

)

Other liabilities

 

 

(396

)

 

 

(1,378

)

Net cash used in operating activities

 

 

(55,760

)

 

 

(57,540

)

Investing activities:

 

 

 

 

 

 

Purchases of property and equipment

 

 

(2,900

)

 

 

(3,415

)

Proceeds from sale of property and equipment

 

 

35

 

 

 

36

 

Business acquisitions, net of cash received

 

 

 

 

 

(19,484

)

Net cash used in investing activities

 

 

(2,865

)

 

 

(22,863

)

Financing activities:

 

 

 

 

 

 

Proceeds from issuance of common stock from employee equity plans

 

 

3,295

 

 

 

4,076

 

Shares repurchased for tax withholdings on vesting of restricted stock units

 

 

(2,988

)

 

 

(1,688

)

Payments for financing costs

 

 

(84

)

 

 

 

Repayments on long-term debt

 

 

(2,500

)

 

 

(1,250

)

Net cash provided by (used in) financing activities

 

 

(2,277

)

 

 

1,138

 

Foreign currency impacts on cash, cash equivalents, and restricted cash

 

 

457

 

 

 

(2,291

)

Net decrease in cash, cash equivalents, and restricted cash

 

 

(60,445

)

 

 

(81,556

)

Cash, cash equivalents, and restricted cash, beginning of period

 

 

190,266

 

 

 

169,152

 

Cash, cash equivalents, and restricted cash, end of period

 

$

129,821

 

 

$

87,596

 

Supplemental cash flow disclosure:

 

 

 

 

 

 

Cash paid for taxes

 

$

1,819

 

 

$

2,775

 

Interest paid

 

$

17,674

 

 

$

5,766

 

Non-cash investing and financing activities:

 

 

 

 

 

 

Capital expenditures incurred but not yet paid

 

$

138

 

 

$

189

 

 

See accompanying notes.

 

7


Table of Contents

 

INSTRUCTURE HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

The following provides a reconciliation of cash, cash equivalents and restricted cash to the amounts reported on the condensed consolidated balance sheets. Restricted cash has been disclosed in Other assets as it is associated with letters of credit obtained to secure office space from our various lease agreements and other contractual arrangements (in thousands):

 

 

 

 

 

 

 

 

 

 

Six months ended
June 30,

 

 

 

2023

 

 

2022

 

 

 

 

 

 

 

 

Cash and equivalents

 

$

126,003

 

 

$

83,234

 

Restricted cash

 

 

3,818

 

 

 

4,362

 

Total cash, cash equivalents, and restricted cash

 

$

129,821

 

 

$

87,596

 

 

See accompanying notes.

8


Table of Contents

 

INSTRUCTURE HOLDINGS, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

1. Description of Business and Basis of Presentation

Organization

On March 24, 2020, Instructure Parent, L.P. (“TopCo”) acquired 100 percent of Instructure, Inc.’s equity. Instructure Intermediate Holdings I, Inc. was a wholly-owned subsidiary of TopCo and was formed on January 14, 2020 by Thoma Bravo Fund XIII, L.P. (“Thoma Bravo”) for the purpose of purchasing (the “Take-Private Transaction”) Instructure, Inc. and had no operations prior to the Take-Private Transaction. On May 26, 2021, Instructure Intermediate Holdings I, Inc. changed its name to Instructure Holdings, Inc. (the “Company,” “Instructure,” “we,” “our,” or “us”).

Instructure is an education technology company dedicated to elevating student access, amplifying the power of teaching, and inspiring everyone to learn together. Instructure's learning platform delivers a next-generation learning management system (“LMS”), robust assessments for learning, actionable analytics, and engaging, dynamic content. Instructure offers its learning platform through a Software-as-a-Service, or SaaS, business model. Instructure, Inc. was incorporated in the state of Delaware in September 2008. We are headquartered in Salt Lake City, Utah, and have wholly-owned subsidiaries in the United Kingdom, Australia, the Netherlands, Hong Kong, Sweden, Brazil, Mexico, Hungary, and Singapore.

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) applicable to interim periods, under the rules and regulations of the United States Securities and Exchange Commission (“SEC”). In the opinion of management, we have prepared the accompanying unaudited condensed consolidated financial statements on a basis substantially consistent with the audited consolidated financial statements of the Company as of and for the fiscal year ended December 31, 2022, and these condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. All intercompany balances and transactions have been eliminated in consolidation. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire year ending December 31, 2023. The year-end balance sheet data was derived from audited financial statements, but the interim condensed consolidated balance sheet included in this Form 10-Q does not include all disclosures required under U.S. GAAP. Certain information and note disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP have been omitted under the rules and regulations of the SEC.

These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 17, 2023 (the "2022 10-K").

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Such estimates, which we evaluate on an on-going basis, include provisions for credit losses, useful lives for property and equipment and intangible assets, valuation allowances for net deferred income tax assets, valuation of stock-based compensation, acquisition related estimates, our assessment for impairment of goodwill, intangible assets, and other long-lived assets, the standalone selling price of performance obligations, timing of professional services revenue recognition, and the determination of the period of benefit for deferred commissions. We base our estimates on historical experience and on various other assumptions which we believe to be reasonable.

Operating Segments

We operate in a single operating segment, cloud-based learning management, assessment and performance systems. Operating segments are defined as components of an enterprise for which separate financial information is regularly evaluated by the chief operating decision makers (“CODMs”), which are our chief executive officer and chief financial officer, in deciding how to allocate resources and assess performance. Our CODMs evaluate our financial information and resources and assess the performance of these resources on a consolidated basis. Since we operate in one operating segment, all required financial segment information can be found in the condensed consolidated financial statements.

 

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2. Summary of Significant Accounting Policies

A summary of the Company’s significant accounting policies is discussed in “Note 1 – Description of Business and Summary of Significant Accounting Policies” of the 2022 10-K. There have been no significant changes to these policies during the unaudited six months ended June 30, 2023.

Recent Accounting Pronouncements

Adopted accounting pronouncements

Effective January 1, 2022, the Company adopted Accounting Standards Update (“ASU”) No. 2021-05, Leases (Topic 842): Lessors—Certain Leases with Variable Lease Payments to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing transactions. Upon adoption a lessor is required to classify a lease with variable lease payments (that do not depend on a rate or index) as an operating lease on commencement date if classifying the lease as a sales-type or direct financing lease would result in a selling loss. The adoption of this ASU did not have a material impact on our condensed consolidated financial statements and related notes.

Effective January 1, 2022, the Company adopted ASU No. 2021-01, Reference Rate Reform (Topic 848), which refined the scope of Topic 848 and clarified some of its provisions. The amendments permit entities to elect certain optional expedients and exceptions when accounting for derivative contracts and certain hedging relationships affected by the discounting transition. The adoption of this ASU did not have a material impact on our condensed consolidated financial statements and related notes. For additional information related to this ASU, see Note 7. “Credit Facility” in the notes to these condensed consolidated financial statements.

Effective January 1, 2022, the Company adopted ASU No. 2021-08, Business Combinations (Topic 805), which requires that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Revenue from Contracts with Customers (Topic 606). The adoption of this ASU did not have a material impact on our condensed consolidated financial statements and related notes.

Issued accounting pronouncements

There have been no recent accounting pronouncements issued which are expected to have a material effect on the Company’s condensed consolidated financial statements. Management continues to monitor and review recently issued accounting guidance upon issuance.

 

3. Net Loss Per Share

 

A reconciliation of the denominator used in the calculation of basic and diluted net loss per share is as follows (in thousands, except per share amounts):

 

 

 

Three months ended
June 30,

 

 

Six months ended
June 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(unaudited)

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(10,973

)

 

$

(12,919

)

 

$

(22,830

)

 

$

(18,464

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding—basic

 

 

143,647

 

 

 

141,534

 

 

 

143,381

 

 

 

141,244

 

Dilutive effect of share equivalents resulting from unvested restricted stock units and shares for issuance under employee stock purchase plan

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding—diluted

 

 

143,647

 

 

 

141,534

 

 

 

143,381

 

 

 

141,244

 

Net loss per common share, basic and diluted

 

$

(0.08

)

 

$

(0.09

)

 

$

(0.16

)

 

$

(0.13

)

 

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For the unaudited three and six months ended June 30, 2023, we incurred net losses and, therefore, the effect of our restricted stock units (“RSUs”) and of shares issuable under the employee stock purchase plan were not included in the calculation of diluted net loss per share as the effect would be anti-dilutive. We also incurred losses in the unaudited three and six months ended June 30, 2022. The following table contains share totals with a potentially dilutive impact (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended
June 30,

 

 

Six months ended
June 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(unaudited)

 

Restricted stock units

 

 

5,788

 

 

 

5,722

 

 

 

5,788

 

 

 

5,722

 

Shares issuable under employee stock purchase plan

 

 

98

 

 

 

126

 

 

 

98

 

 

 

126

 

Total

 

 

5,886

 

 

 

5,848

 

 

 

5,886

 

 

 

5,848

 

 

 

4. Property and Equipment

Property and equipment consisted of the following (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2023

 

 

2022

 

 

 

(unaudited)

 

 

 

 

Computer and office equipment

 

$

5,760

 

 

$

5,528

 

Capitalized software development costs

 

 

10,804

 

 

 

8,585

 

Furniture and fixtures

 

 

1,420

 

 

 

1,589

 

Leasehold improvements and other

 

 

6,283

 

 

 

6,970

 

Total property and equipment

 

 

24,267

 

 

 

22,672

 

Less accumulated depreciation and amortization

 

 

(11,431

)

 

 

(10,292

)

Total

 

$

12,836

 

 

$

12,380

 

Accumulated amortization for capitalized software development costs was $3.5 million and $2.4 million at June 30, 2023 (unaudited) and December 31, 2022, respectively. Amortization expense for capitalized software development costs for the unaudited three and six months ended June 30, 2023 was $0.6 million and $1.1 million, respectively, and $0.3 million and $0.6 million for the unaudited three and six months ended June 30, 2022, respectively, and is recorded within subscription and support cost of revenue on the condensed consolidated statements of operations and comprehensive loss.

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5. Acquisitions

2022 Acquisitions

On April 13, 2022, we acquired all outstanding shares of Concentric Sky, Inc. (“Concentric Sky” which was rebranded to “Canvas Credentials” subsequent to acquisition) for the purpose of our continued commitment to building the education industry’s most integrated teaching and learning platform to support lifelong learning. $0.5 million of the purchase price was held back for a period of 90 days following the acquisition for working capital adjustments. The amount held back had been paid in full as of December 31, 2022. The acquisition did not have a material effect on our revenue or earnings in the condensed consolidated statements of operations and comprehensive loss for the reporting periods presented. For tax purposes, a 338(h)(10) election was filed to step up the tax basis of assets acquired to fair market value.
 

The final allocation of the purchase price was as follows (in thousands):

 

Consideration transferred

 

 

 

Cash paid

 

$

20,814

 

Holdback amount

 

 

500

 

Total purchase consideration

 

$

21,314

 

Identifiable assets acquired

 

 

 

Cash

 

$

1,330

 

Accounts receivable

 

 

1,018

 

Prepaid expenses and other assets

 

 

109

 

Intangible assets: developed technology

 

 

3,900

 

Intangible assets: customer relationships

 

 

9,100

 

Total assets acquired

 

$

15,457

 

Liabilities assumed

 

 

 

Accounts payable and accrued liabilities

 

$

1,335

 

Deferred revenue

 

 

2,566

 

Total liabilities assumed

 

$

3,901

 

Goodwill

 

 

9,758

 

Total purchase consideration

 

$

21,314

 

 

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On December 15, 2022, we acquired all outstanding shares of LearnPlatform, Inc. ("LearnPlatform") to accelerate the impact of the Instructure learning platform for schools, universities, and shared partner providers by adding evidence-based insight into inventory, compliance, procurement, and usage. $0.2 million of the purchase price was held back for a period of 90 days following the acquisition for working capital adjustments. The amount held back had been paid in full as of March 31, 2023. The acquisition did not have a material effect on our revenue or earnings in the condensed consolidated statements of operations and comprehensive loss for the reporting periods presented. We recorded a provisional net deferred tax liability of $3.4 million in purchase accounting due to the step up in book basis of intangible assets as a result of the stock acquisition. We expect the net deferred tax liability to decrease as book amortization expense is recognized on the acquisition-related intangible assets. The net deferred tax liability will remain provisional until the tax returns have been reconciled against existing evidence used to support the net deferred tax liability at the time purchase accounting was recorded.

The following table summarizes the preliminary estimated fair values of the consideration transferred, assets acquired and liabilities assumed as of the date of the LearnPlatform acquisition (in thousands):

Consideration transferred

 

 

 

Cash paid

 

$

93,825

 

Holdback amount

 

 

150

 

Total purchase consideration

 

$

93,975

 

 

 

 

 

Identifiable assets acquired

 

 

 

Cash

 

$

4,297

 

Accounts receivable

 

 

1,306

 

Prepaid expenses and other assets

 

 

373

 

Right-of-use asset

 

 

288

 

Intangible assets: developed technology

 

 

7,600

 

Intangible assets: customer relationships

 

 

28,700

 

Intangible assets: trade names and trademarks

 

 

300

 

Intangible assets: non-compete agreements

 

 

50

 

Total assets acquired

 

$

42,914

 

 

 

 

 

Liabilities assumed

 

 

 

Accounts payable and accrued liabilities

 

$

767

 

Deferred revenue

 

 

6,900

 

Lease liabilities

 

 

288

 

Deferred tax liabilities

 

 

3,407

 

Total liabilities assumed

 

$

11,362

 

Goodwill

 

 

62,423

 

Total purchase consideration

 

$

93,975

 

 

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For all periods presented, the excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill, of which $16.7 million is expected to be deductible for tax purposes, comprised of $9.7 million from the Canvas Credentials acquisition and $7.0 million from the Elevate Data Sync acquisition, which was completed in the fourth quarter of the year ended December 31, 2021. The goodwill generated from all transactions is attributable to the expected synergies to be achieved upon consummation of the business combinations and the assembled workforce values. The fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions. Developed technology represents the estimated fair value of the acquired existing technology and is being amortized over its estimated useful life of five years. Amortization of developed technology is included in subscription and support cost of revenue expenses in the accompanying condensed consolidated statements of operations and comprehensive loss. Customer relationships represent the estimated fair value of the acquired customer bases and are amortized over the estimated useful life of seven years. The trade names acquired are amortized over the estimated useful life of one to ten years. Amortization of customer relationships and trade names is included in sales and marketing expenses in the accompanying condensed consolidated statements of operations and comprehensive loss. Non-compete agreements are amortized over an estimated useful life of three years and amortization is included in research and development expenses in the accompanying condensed consolidated statements of operations and comprehensive loss.

6. Goodwill and Intangible Assets

Goodwill activity was as follows (in thousands):

 

 

Total

 

Balance as of December 31, 2022

 

$

1,266,402

 

Additions

 

 

 

Balance as of June 30, 2023 (unaudited)

 

$

1,266,402

 

 

Intangible assets consisted of the following (in thousands):

 

 

Weighted-Average
Remaining
Useful Life

 

June 30, 2023

 

 

December 31, 2022

 

 

 

 

 

Gross

 

 

Accumulated Amortization

 

 

Net

 

 

Gross

 

 

Accumulated Amortization

 

 

Net

 

 

 

 

 

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Software

 

0 Months

 

$

21

 

 

$

(21

)

 

$

 

 

$

21

 

 

$

(20

)

 

$

1

 

Trade names

 

80 Months

 

 

126,100

 

 

 

(42,642

)

 

 

83,458

 

 

 

126,100

 

 

 

(35,936

)

 

 

90,164

 

Developed technology

 

25 Months

 

 

325,300

 

 

 

(200,133

)

 

 

125,167

 

 

 

325,300

 

 

 

(167,600

)

 

 

157,700

 

Customer relationships

 

51 Months

 

 

451,400

 

 

 

(188,880

)

 

 

262,520

 

 

 

451,400

 

 

 

(156,635

)

 

 

294,765

 

Non-compete agreements

 

30 Months

 

 

50

 

 

 

(9

)

 

 

41

 

 

 

50

 

 

 

(1

)

 

 

49

 

Total

 

 

$

902,871

 

 

$

(431,685

)

 

$

471,186

 

 

$

902,871

 

 

$

(360,192

)

 

$

542,679

 

Amortization expense for intangible assets was $35.7 million and $71.5 million for the unaudited three and six months ended June 30, 2023, respectively, and $34.2 million and $67.9 million for the unaudited three and six months ended June 30, 2022, respectively.

Based on the recorded intangible assets at June 30, 2023 (unaudited), estimated amortization expense is expected to be as follows (in thousands):

 

 

 

Amortization

 

 

 

Expense

 

Years Ending December 31,

 

(unaudited)

 

Remainder of 2023

 

$

71,475

 

2024

 

 

142,442

 

2025

 

 

99,729

 

2026

 

 

79,625

 

2027

 

 

40,682

 

2028 and thereafter

 

 

37,233

 

Total

 

$

471,186

 

 

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7. Credit Facility

On March 24, 2020, we entered into a credit agreement with a syndicate of lenders and Golub Capital Markets LLC, as administrative agent and collateral agent, and Golub Capital Markets LLC and Owl Rock Capital Advisors LLC, as joint bookrunners and joint lead arrangers (the “Credit Agreement”). The Credit Agreement provided for a senior secured term loan facility (the “Initial Term Loan”) in an original aggregate principal amount of $775.0 million, which was supplemented by an incremental term loan pursuant to the First Incremental Amendment and Waiver to Credit Agreement, dated as of December 22, 2020, in a principal amount of $70.0 million (the “Incremental Term Loan” and, together with the Initial Term Loan, the “Term Loan”). The maturity date for the Term Loan was March 24, 2026, with the remaining principal due in full on the maturity date. The Credit Agreement also provided for a senior secured revolving credit facility in an aggregate principal amount of $50.0 million (the “Revolving Credit Facility” and, together with the Term Loan, the “Credit Facilities”). The Revolving Credit Facility included a $10.0 million sublimit for the issuance of letters of credit.

On October 29, 2021, we entered into a credit agreement with JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent, (the “2021 Credit Agreement”) governing our senior secured credit facilities (the “Senior Secured Credit Facilities”), consisting of a $500.0 million senior secured term loan facility (the “Senior Term Loan”) and a $125.0 million senior secured revolving credit facility (the “Senior Revolver”). The proceeds from the Senior Secured Credit Facilities were used, in addition to cash on hand, to (1) refinance, in full, all existing indebtedness under the Credit Agreement (the “Refinancing”), (2) pay certain fees and expenses incurred in connection with the entry into the 2021 Credit Agreement and the Refinancing, and (3) finance working capital needs of the Company and its subsidiaries for general corporate purposes.

All of the Company’s obligations under the Senior Secured Credit Facilities are guaranteed by the subsidiary guarantors named therein. The Senior Revolver includes a $10.0 million sublimit for the issuance of letters of credit. Any issuance of letters of credit will reduce the amount available under the Senior Revolver. As of June 30, 2023 (unaudited), we had no outstanding borrowings under our Senior Revolver.

The Senior Term Loan has a seven-year maturity and the Senior Revolver has a five-year maturity. Commencing June 30, 2022, we were required to repay the Senior Term Loan portion of the Senior Secured Credit Facilities in quarterly principal installments of 0.25% of the aggregate original principal amount of the Senior Term Loan at closing, with the balance payable at maturity. Borrowings under the Senior Secured Credit Facilities bear interest, at the Companys option, at: (i) Base Rate equal to the greater of (a) the Federal Funds Rate plus 1/2 of 1.00%, (b) the rate of interest in effect for such day as publicly announced from time to time by the administrative agent as its “prime rate,” (c) a Eurocurrency Rate for such date plus 1.00% and (d) 1.00%; or (ii) the Eurocurrency Rate (provided that the Eurocurrency Rate applicable to the Senior Term Loan shall not be less than 0.50% per annum). The Applicable Rate for the Senior Term Loan with respect to Eurocurrency Rate Loans is 2.75% per annum and 1.75% per annum for Base Rate Loans. The Applicable Rate for the Senior Revolver with respect to Eurocurrency Rate Loans, SONIA Loans, and Alternative Currency Term Rate Loans ranges from 2.00% to 2.5% subject to the Companys Consolidated First Lien Net Leverage Ratio, while the Applicable Rate for Base Rate Loans ranges from 1.00% to 1.50% subject to the Companys Consolidated First Lien Net Leverage Ratio. We are also required to pay an unused commitment fee to the lenders under the Senior Revolver at the Applicable Commitment Fee of the average daily unutilized commitments. The Applicable Commitment Fee ranges from 0.40% to 0.50% subject to the Company’s Consolidated First Lien Never Leverage Ratio.

On June 21, 2023, we entered into the first amendment to the 2021 Credit Agreement (the “Amended 2021 Credit Agreement”) whereby all borrowings denominated in U.S. Dollars and that incur interest or fees using the Eurocurrency Rate, which are determined by reference to the London Interbank Offered Rate (“LIBOR”), have been replaced with the Secured Overnight Financing Rate (“SOFR”). For SOFR loans, the loans denominated in Dollars now bear interest at the Adjusted Term SOFR Rate, which is equal to the Term SOFR Reference Rate, as published by the CME Term SOFR Administrator, plus the Term SOFR Adjustment as dictated by the interest rate period elected by the Company. The Term SOFR Adjustment ranges from 0.11448% to 0.42826% per annum. The Applicable Rate (x) for the Initial Term Loans remains at 2.75% per annum for SOFR loans and (y) for the Revolving Credit Facility remains at 2.50% per annum with applicable step downs. The transition from LIBOR to SOFR became effective on July 5, 2023. All other terms and conditions in place under the 2021 Credit Agreement on the effective date of the Amended 2021 Credit Agreement remained unchanged and in full effect.

The Amended 2021 Credit Agreement contains a financial covenant solely with respect to the Senior Revolver. If the outstanding amounts under the Senior Revolver exceed 35% of the aggregate amount of the Senior Revolver commitments, we are required to maintain at the end of each fiscal quarter a Consolidated Net Leverage Ratio of not more than 7.75 to 1.00. As of June 30, 2023 (unaudited), there was no amount outstanding under the Senior Revolver. The Company had $125.0 million of availability under the Senior Revolver as of June 30, 2023 (unaudited).

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As a result of the Refinancing, the Company capitalized $1.0 million and $5.9 million of debt discount costs incurred in connection with the Senior Term Loan in long-term debt, current and long-term debt, net of current portion, respectively, on the condensed consolidated balance sheets. The Company recognized $0.3 million and $0.5 million of amortization of debt discount costs for the unaudited three and six months ended June 30, 2023, respectively, and $0.3 million and $0.5 million for the unaudited three and six months ended June 30, 2022, respectively, which is recorded as interest expense in the accompanying condensed consolidated statements of operations and comprehensive loss. At June 30, 2023 (unaudited) and December 31, 2022 the Company had an aggregate principal amount outstanding of $493.8 million and $496.3 million, respectively, under the Senior Term Loan, bearing interest at 7.85% and 6.12%, respectively. The Company had $5.4 million and $5.8 million of unamortized debt discount costs at June 30, 2023 (unaudited) and December 31, 2022, respectively, which is recorded as a reduction of the debt balance on the Company’s condensed consolidated balance sheets.

As a result of the Refinancing, the Company capitalized $0.2 million and $0.8 million of deferred issuance costs incurred in connection with the Senior Revolver in other current assets and other assets, respectively, on the condensed consolidated balance sheets. The Company recognized $47.0 thousand and $0.1 million of amortization of debt issuance costs for the unaudited three and six months ended June 30, 2023, respectively, and $47.0 thousand and $0.1 million for the unaudited three and six months ended June 30, 2022, respectively, which is recorded as interest expense in the accompanying condensed consolidated statements of operations and comprehensive loss. The Company had $0.6 million and $0.7 million of unamortized debt issuance costs at June 30, 2023 (unaudited) and December 31, 2022, respectively, which are included in other current assets and other assets on the Company’s condensed consolidated balance sheets.

The Senior Secured Credit Facilities contain customary negative covenants. At June 30, 2023 (unaudited), the Company was in compliance with all applicable covenants pertaining to the Senior Secured Credit Facilities.

The maturities of outstanding debt, as of June 30, 2023 (unaudited), are as follows (in thousands):

 

 

Amount

 

Years Ending December 31,

 

(unaudited)

 

Remainder of 2023

 

$

2,500

 

2024

 

 

5,000

 

2025

 

 

5,000

 

2026

 

 

5,000

 

2027

 

 

5,000

 

Thereafter

 

 

471,250

 

Total

 

$

493,750

 

 

8. Revenue

We have one operating segment, which is our cloud-based learning, assessment, development and engagement systems. Historically, we have generated revenues from our Education customer base. Education customers consist of K-12 and Higher Education institutions that purchase our Canvas Learning Management System (“LMS”), which includes assessments, analytics and learning content. The following table presents the Company’s disaggregated revenues by geographic region, based on the physical location of the customer (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended
June 30,

 

 

Six months ended
June 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(unaudited)

 

United States

 

$

104,350

 

 

$

90,957

 

 

$

206,944

 

 

$

181,064

 

Foreign

 

 

26,720

 

 

 

23,620

 

 

 

52,969

 

 

 

46,975

 

Total revenue

 

$

131,070

 

 

$

114,577

 

 

$

259,913

 

 

$

228,039

 

Percentage of revenue generated outside of the United States

 

 

20

%

 

 

21

%

 

 

20

%

 

 

21

%

Deferred Revenue and Performance Obligations

During the unaudited three and six months ended June 30, 2023, 88% and 85% of revenue recognized was included in our deferred revenue balance at March 31, 2023 (unaudited), and December 31, 2022, respectively. During the unaudited three and six months ended June 30, 2022, 89% and 84%, respectively, of revenue recognized was included in our deferred revenue balance at March 31, 2022 (unaudited), and December 31, 2021, respectively.

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Transaction Price Allocated to the Remaining Performance Obligations

As of June 30, 2023 (unaudited), approximately $853.6 million of revenue is expected to be recognized from remaining performance obligations. We expect to recognize revenue on approximately 73% of our remaining performance obligations over the next 24 months, with the balance recognized thereafter.

Concentration of Credit Risk, Significant Customers and Provision for Credit Losses

There were no customers with revenue as a percentage of total revenue exceeding 10% for the periods presented.

As of June 30, 2023 (unaudited) and December 31, 2022 there were no customers with outstanding net accounts receivable balances as a percentage of total outstanding net accounts receivable greater than 10%.

Our provisions for credit loss balances at June 30, 2023 (unaudited) and December 31, 2022 were $1.7 million and $1.5 million, respectively.

 

9. Deferred Commissions

Deferred commissions primarily consist of sales commissions that are capitalized as incremental contract origination costs and were $30.3 million and $32.2 million as of June 30, 2023 (unaudited) and December 31, 2022, respectively. Amortization expense for deferred commissions was $5.3 million and $10.1 million for the unaudited three and six months ended June 30, 2023, respectively, and $3.8 million and $7.2 million for the unaudited three and six months ended June 30, 2022, respectively. There was no impairment of deferred commissions during these periods.

 

10. Stock-Based Compensation

As of June 30, 2023 (unaudited) and December 31, 2022, there were 500,000,000 shares of common stock authorized. As of June 30, 2023 (unaudited) and December 31, 2022, there were 143,990,731 and 142,917,080 shares of common stock issued and outstanding, respectively.

Employee Equity Plans

In April 2020, as part of the Take-Private Transaction, the board of managers of TopCo approved the Instructure Parent, LP Incentive Equity Plan (the “2020 Plan”) and the Instructure Co-Invest Agreement (the “Co-Invest Agreement”) to incentivize employees and to align the employees and management with the owners of the business.

The 2020 Plan was terminated in July 2021 in connection with the IPO. No further equity awards were granted under the 2020 Plan subsequent to the IPO. As of the IPO date, 2,271,698 vested incentive units under the 2020 Plan converted to 1,305,738 shares of the Companys common stock and were released to the unit holders, and 6,126,802 unvested incentive units under the 2020 Plan were exchanged for 3,496,739 RSUs under the 2021 Plan. The RSUs will generally vest in 11 equal quarterly installments which commenced on September 1, 2021.

In July 2021, our board of directors adopted the 2021 Omnibus Incentive Plan (the “2021 Plan”), which serves as the successor to 2020 Plan. Accordingly, no shares remain available for issuance under the 2020 Plan. A total of 18,000,000 shares of the Company's common stock were initially reserved for issuance under the 2021 Plan. Pursuant to the terms of the 2021 Plan, the share reserve increased by 5,629,623 shares in January 2022 and 5,716,683 shares in January 2023. As of June 30, 2023, we had 19,915,235 shares of common stock available for future grants under the 2021 Plan.

In July 2021, our board of directors adopted, and our stockholders approved the 2021 Employee Stock Purchase Plan (the “2021 ESPP”), which allows eligible employees to purchase shares of our common stock at a discount through payroll deductions of up to 15% of their eligible compensation, subject to any plan limitations. The initial offering period ended on February 28, 2022. Each new offering period begins on or about March 1 and September 1 and is approximately six months in duration. On each purchase date, eligible employees will purchase our common stock at a price per share equal to 85% of the lesser of (1) the fair market value of our common stock on the offering date or (2) the fair market value of our common stock on the purchase date. A total of 1,900,000 shares of the Company’s common stock were initially reserved for issuance under the 2021 ESPP. Pursuant to the terms of the 2021 ESPP, the share reserve increased by 1,407,406 shares in January 2022 and 1,429,171 shares in January 2023. As of June 30, 2023 (unaudited), 4,145,940 shares of common stock were available for purchase under the 2021 ESPP.

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During the unaudited three months ended June 30, 2023, we granted 20,718 RSUs to employees under the 2021 Plan. Each RSU entitles the recipient to receive one share of the Company's common stock upon vesting. The RSUs are subject to time-based service requirements and generally vest over a four-year service period. The grant date fair value of the RSUs granted during the unaudited three months ended June 30, 2023 was $26.24, which represents the closing stock price for the underlying common stock on the grant date, with an aggregate fair value of $0.5 million.

The following two tables present stock-based compensation by award type and where the stock-based compensation expense was recorded in our condensed consolidated statements of operations and comprehensive loss (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended
June 30,

 

 

Six months ended
June 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(unaudited)

 

Options

 

$

 

 

$

2

 

 

$

 

 

$

21

 

Restricted stock units

 

 

11,478

 

 

 

8,848

 

 

 

21,077

 

 

 

17,711

 

Shares issuable under employee stock purchase plan

 

 

378

 

 

 

537

 

 

 

789

 

 

 

1,131

 

Total stock-based compensation

 

$

11,856

 

 

$

9,387

 

 

$

21,866

 

 

$

18,863

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended
June 30,

 

 

Six months ended
June 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(unaudited)

 

Subscription and support cost of revenue

 

$

474

 

 

$

325

 

 

$

853

 

 

$

607

 

Professional services and other cost of revenue

 

 

622

 

 

 

465

 

 

 

1,036

 

 

 

841

 

Sales and marketing

 

 

3,469

 

 

 

2,772

 

 

 

5,997

 

 

 

5,349

 

Research and development

 

 

3,480

 

 

 

2,686

 

 

 

6,654

 

 

 

5,226

 

General and administrative

 

 

3,811

 

 

 

3,139

 

 

 

7,326

 

 

 

6,840

 

Total stock-based compensation

 

$

11,856

 

 

$

9,387

 

 

$

21,866

 

 

$

18,863

 

In connection with the Take-Private Transaction on March 24, 2020, and except for certain executives, outstanding stock options and restricted stock units, and together with the stock options, “equity awards,” whether vested or unvested, were canceled and replaced with the right to receive $49.00 per share in cash, less the applicable exercise price per share and applicable withholding taxes (the “per share price”), with respect of each share of common stock underlying such award (“Cash Replacement Awards”). The per share price attributed to the unvested equity awards vests and is payable at the same time such equity awards would have vested pursuant to their original terms prior to the replacement. During the unaudited three and six months ended June 30, 2023 the Company recognized $0.2 million and $0.6 million of stock-based compensation expense associated with Cash Replacement Awards, respectively, and $1.2 million and $2.9 million for the unaudited three and six months ended June 30, 2022, respectively.

Restricted Stock Units

The following table summarizes the activity of RSUs for the unaudited six months ended June 30, 2023 (in thousands, except per unit amounts):

 

 

 

RSUs

 

 

Weighted Average Grant Date Fair Value Per Unit

 

Unvested and outstanding at December 31, 2022

 

 

3,437

 

 

$

21.60

 

Granted

 

 

2,560

 

 

 

25.11

 

Vested

 

 

(508

)

 

 

22.16

 

Forfeited or canceled

 

 

(509

)

 

 

21.11

 

Unvested and outstanding at June 30, 2023

 

 

4,980

 

 

$

23.30

 

 

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As of June 30, 2023 (unaudited) and December 31, 2022, total unrecognized compensation cost related to unvested RSUs amounted to $106.2 million and $68.3 million, respectively, which is expected to be recognized over a weighted average period of 3.2 years and 3.1 years, respectively.

The following table summarizes the activity of the incentive units granted under the 2020 Plan, subsequent to their conversion into RSUs under the 2021 Plan, for the unaudited six months ended June 30, 2023 (in thousands, except per unit amounts):

 

 

RSUs

 

 

Weighted Average Grant Date Fair Value Per Unit

 

Unvested and outstanding at December 31, 2022

 

 

1,409

 

 

$

10.72

 

Vested

 

 

(512

)

 

 

11.58

 

Forfeited or canceled

 

 

(89

)

 

 

11.08

 

Unvested and outstanding at June 30, 2023

 

 

808

 

 

$

10.74

 

There were no incentive units granted subsequent to December 31, 2021. As of June 30, 2023 (unaudited) and December 31, 2022, we had $7.8 million and $14.2 million, respectively, of unrecognized stock-based compensation expense related to unvested incentive units exchanged for RSUs that are expected to be recognized over a weighted-average period of 0.8 and 1.3 years, respectively.

2021 ESPP

The following table summarizes the assumptions relating to 2021 ESPP purchase rights used in a Black-Scholes option pricing model for the three months ended June 30, 2023 and 2022 (unaudited):

 

 

 

Three months ended
June 30,

 

 

2023

 

2022

Dividend yield

 

None

 

None

Volatility

 

25%

 

41%

Risk-free interest rate

 

5.2

 

0.06

Expected life (years)

 

0.5

 

0.5

 

11. Income Taxes

Utilization of the net operating loss carryforwards and credits may be subject to substantial annual limitation due to the ownership change limitations provided by Section 382 of the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.

We file tax returns in the United States, the United Kingdom, Australia, the Netherlands, Hong Kong, Sweden, Brazil, Mexico, Hungary, China, Singapore and various state jurisdictions. All of our tax years remain open to examination by major taxing jurisdictions to which we are subject, as carryforward attributes generated in past years may still be adjusted upon examination by the Internal Revenue Service or state and foreign tax authorities if they have or will be used in future periods.

We believe that we have provided adequate reserves for our income tax uncertainties in all open tax years. We do not expect our gross unrecognized tax benefits to change significantly in the next 12 months.

 

12. Fair Value of Financial Instruments

The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. The fair value hierarchy prioritizes the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

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There were no transfers between Level 1 and Level 2 of the fair value measurement hierarchy during the period ended June 30, 2023 (unaudited) and December 31, 2022. Assets measured at fair value on a recurring basis as of June 30, 2023 (unaudited) were as follows (in thousands):

 

 

June 30, 2023

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Money market funds

 

$

3,308

 

 

$

 

 

$

 

 

$

3,308

 

Total assets

 

$

3,308

 

 

$

 

 

$

 

 

$

3,308

 

 

Assets measured at fair value on a recurring basis as of December 31, 2022 were as follows (in thousands):

 

 

December 31, 2022

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Money market funds

 

$

3,383

 

 

$

 

 

$

 

 

$

3,383

 

Total assets

 

$

3,383

 

 

$

 

 

$

 

 

$

3,383

 

 

Instruments Not Recorded at Fair Value on a Recurring Basis.

We estimate the fair value of our Senior Term Loan carried at face value, less unamortized discount costs, quarterly for disclosure purposes. The estimated fair value of our Senior Term Loan is determined by Level 2 inputs, observable market-based inputs or unobservable inputs that are corroborated by market data. As of June 30, 2023 (unaudited), the fair value of our Senior Term Loan was $488.4 million. The carrying amounts of our cash, prepaid expenses, other current assets, and accrued liabilities approximate their current fair value because of their nature and relatively short maturity dates or durations.

13. Leases

The Company leases office space under non-cancelable operating leases with lease terms ranging from one to six years. These leases require monthly lease payments that may be subject to annual increases throughout the lease term. Certain of these leases also include early termination options. The Company has elected to exercise its early termination rights. All related operating leases have been impaired to reflect this early termination option. The Company subleases four of its locations. As of June 30, 2023, the first sublease had expired, and the second, third, and fourth sublease terms had 66 months, 31 months, and 10 months remaining, respectively. None of the above subleases have an option for renewal.
 

Operating lease right-of-use assets and operating lease liabilities are recognized at the lease commencement date based on the present value of the lease payments over the lease term. Right-of-use assets also include adjustments related to prepaid or deferred lease payments and lease incentives. As most of our leases do not provide an implicit interest rate, we use our incremental borrowing rate based on information available at the lease commencement date to determine the present value of lease payments.

The Company performed evaluations of its contracts and determined that each of its identified leases are operating leases. The components of operating lease expense were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended
June 30,

 

 

Six months ended
June 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(unaudited)

 

Operating lease cost, gross

 

$

1,511

 

 

$

1,588

 

 

$

3,297

 

 

$

3,384

 

Variable lease cost, gross(1)

 

 

656

 

 

 

591

 

 

 

1,366

 

 

 

1,127

 

Sublease income

 

 

(287

)

 

 

(287

)

 

 

(574

)

 

 

(541

)

Total lease costs(2)

 

$

1,880

 

 

$

1,892

 

 

$

4,089

 

 

$

3,970

 

(1)
Variable rent expense was not included within the measurement of the Company's operating right-of-use assets and lease liabilities. Variable rent expense is comprised primarily of the Company's proportionate share of operating expenses, property taxes and insurance and is classified as lease expense due to the Company's election to not separate lease and non-lease components.
(2)
Short-term lease costs for the unaudited three and six months ended June 30, 2023 and 2022 were not significant and are not included in the table above.

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Cash paid for amounts included in the measurement of operating lease liabilities for the unaudited three and six months ended June 30, 2023 were $2.2 million and $4.4 million, respectively, and $2.0 million and $4.2 million for the unaudited three and six months ended June 30, 2022, respectively, and were included in net cash used in operating activities in the condensed consolidated statements of cash flows.

As of June 30, 2023 (unaudited), the maturities of the Company’s operating lease liabilities were as follows (in thousands):

Remainder of 2023

$

4,222

 

2024

 

8,478

 

2025

 

4,346

 

2026

 

2,772

 

2027

 

1,996

 

2028 and thereafter

 

1,097

 

Total lease payments

 

22,911

 

Less:

 

 

Imputed interest

 

(2,847

)

Lease liabilities

 

20,064

 

Tenant improvement reimbursements included in the measurement of lease liabilities but not yet received

 

(414

)

Lease liabilities, net

$

19,650

 

As of June 30, 2023 (unaudited) and December 31, 2022, the weighted average remaining lease term was 3.3 and 3.6 years, respectively, and the weighted average discount rate used to determine operating lease liabilities was 8.21% and 8.20% as of June 30, 2023 (unaudited) and December 31, 2022, respectively.

 

14. Commitments and Contingencies

Non-cancelable purchase obligations

As of June 30, 2023 (unaudited), our outstanding non-cancelable purchase obligations with a term of 12 months or longer related to cloud infrastructure and business analytic services in the ordinary course of business totaled $2.2 million for fiscal year 2023, $48.4 million for fiscal year 2024, and $48.0 million for fiscal year 2025. During the unaudited three months ended June 30, 2023, we recognized $10.8 million in subscription and support cost of revenue, $0.4 million in research and development, and $0.1 million in professional services and other cost of revenue in our condensed consolidated statements of operations and comprehensive loss related to our non-cancelable purchase obligations, and during the unaudited six months ended June 30, 2023 we recognized $23.0 million in subscription and support cost of revenue, $1.0 million in research and development, and $0.4 million in professional services and other cost of revenue in our condensed consolidated statements of operations and comprehensive loss related to our non-cancelable purchase obligations.

Letters of Credit

As of June 30, 2023 (unaudited) and December 31, 2022, we had a total of $3.8 million and $4.3 million, respectively, of letters of credit outstanding that were issued for purposes of securing certain of the Company’s obligations under facility leases and other contractual arrangements.

Litigation

We are involved in various legal proceedings and claims, including challenges to trademarks, from time to time arising in the normal course of business. If we determine that it is probable that a loss has been incurred and the amount is reasonably estimable, we will record a liability in our condensed consolidated financial statements. If only a range of estimated losses can be determined, we accrue an amount within the range that, in our judgment, reflects the most likely outcome; if none of the estimates within that range is a better estimate than any other amount, we accrue the low end of the range. Although the results of litigation and claims are inherently unpredictable and uncertain, management does not believe that the outcome of our various legal proceedings, if determined adversely to us, singly or in the aggregate, would have a material impact on our financial position, results of operations, or liquidity.

 

15. Related-Party Transactions

The Company has agreements in place with Thoma Bravo, LLC for financial and management advisory services, along with compensation arrangements and reimbursements to directors and officers. During the unaudited three and six months ended June 30, 2023 the Company incurred $0.2 million and $0.4 million of costs related to these services, respectively, and $0.1 million and $0.3 million for the unaudited three and six months ended June 30, 2022, respectively. The related expense is reflected in general and administrative expense in the condensed consolidated statements of operations and comprehensive loss.

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The spouse of Mitch Benson, our Chief Strategy Officer, was an employee of the Company prior to June, 30, 2023. Mr. Benson has served as an Officer of the Company since August 2019. His spouse, Ms. Tara Gunther, had been an employee of the Company since 2014. Her 2022 base salary and short-term incentive award was approximately $0.2 million in the aggregate. She also received benefits generally available to all employees. The compensation for Ms. Gunther was determined in accordance with our standard employment and compensation practices applicable to employees with similar responsibilities and positions. For the six months ended June 30, 2023 (unaudited), Ms. Gunther's base salary was $0.2 million.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis together with the financial statements and the related notes to those statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and our audited Consolidated Financial Data for the year ended December 31, 2022 and the related notes thereto, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 17, 2023 (the "2022 10-K"). The following discussion contains forward-looking statements. See the “Forward-Looking Statements” section of this Quarterly Report on Form 10-Q.

Overview

From the inception of a teacher’s lesson through a student’s mastery of a concept, Instructure personalizes, simplifies, organizes, and automates the entire learning lifecycle through the power of technology. Our learning platform delivers the elements that leaders, teachers, and learners need – a next-generation LMS, robust assessments for learning, actionable analytics, and engaging, dynamic course content. Schools standardize on Instructure’s solutions as the core of their learning platform because we bring together all of the tools that students, teachers, parents, and administrators need to create an accessible, engaging and modern learning environment. Our platform is cloud-native, built on open technologies, and scalable across thousands of institutions and tens of millions of users worldwide. We are the LMS market share leader in both Higher Education and paid K-12, with over 7,000 global customers, representing Higher Education institutions and K-12 districts and schools in more than 100 countries. We are maniacally focused on our customers and enhancing the teaching and learning experience. As such, we continuously innovate to grow the functionality and capabilities of our platform, including through our earlier acquisitions to add online skills portfolio capabilities for Higher Education students and assessment and analytics capabilities. Most recently, we acquired Eesysoft (rebranded to “Impact by Instructure” subsequent to acquisition, or “Impact”) to allow educators to evaluate the impact education technologies have on student engagement and outcome, Kimono LLC (rebranded to “Elevate Data Sync” subsequent to acquisition) to secure data syncing capabilities across applications within a school environment, Concentric Sky, the maker of Badgr, (rebranded to “Canvas Credentials” subsequent to acquisition) to empower institutions to help learners navigate their personal learning journeys through stackable digital credentialing technology that allows them to carry proof of their academic achievements and skills development, and LearnPlatform to empower educational organizations to evaluate and manage ongoing usage and effectiveness of digital learning products. Our platform becomes the invaluable digital infrastructure behind our customers’ instructional workflows.

Since our founding in 2008, we have expanded our platform from the core LMS to include a broad set of offerings targeting all aspects of teaching and learning. As our platform has grown, we have become more strategic to schools as they seek vendor consolidation, best of breed solutions, and integrated offerings to serve teachers and students.

This discussion and analysis reflects our financial condition and results of operations for the unaudited three and six months ended June 30, 2023 and 2022.

For the unaudited three months ended June 30, 2023 and 2022:

Our revenue was $131.1 million and $114.6 million, respectively.
Our net loss was $11.0 million and $12.9 million, respectively.
Our adjusted EBITDA was $51.3 million and $39.8 million, respectively.
Our operating cash flow was $25.1 million and $8.6 million, respectively.
Our free cash flow was $23.5 million and $6.6 million, respectively.

For the unaudited six months ended June 30, 2023 and 2022:

Our revenue was $259.9 million and $228.0 million, respectively.
Our net loss was $22.8 million and $18.5 million, respectively.
Our adjusted EBITDA was $99.5 million and $83.4 million, respectively.
Our operating cash flow was $(55.8) million and $(57.5) million, respectively.
Our free cash flow was $(58.6) million and $(60.9) million, respectively.

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Adjusted EBITDA and free cash flow are non-GAAP measures, see “Non-GAAP Financial Measures” for definitions and reconciliations to the most closely comparable GAAP measures.

Recent Developments

Macroeconomic Conditions and Trends

Adverse macroeconomic conditions, including but not limited to high inflation, slower economic growth or recession, changes to fiscal and monetary policy, high interest rates, currency fluctuations, market-wide liquidity issues and challenges in the supply chain could impact our business and customer spending. Certain of our customers may also be negatively impacted by these events.

In March 2023, Silicon Valley Bank (“SVB”) was closed and placed in receivership with the Federal Deposit Insurance Corporation (“FDIC”) as receiver. The majority of our cash deposits are held by financial institutions other than SVB. Any amounts deposited with SVB are fully accessible. However, there is continued uncertainty in the markets regarding the stability of the banking system and especially of regional banks and the safety of deposits in excess of FDIC insured deposit limits. If the various banks and financial institutions at which we hold our cash enter receivership or become insolvent, our ability to access our cash may be threatened.

During 2022, the U.S. dollar strengthened against foreign currencies. The U.S dollar may continue to strengthen against foreign currencies if the U.S. Federal Reserve further raises the federal funds interest rate, which could further impact our reported expenses. Similarly, as a result of increased federal funds interest rates, the interest rate applicable to our Senior Term Loan increased from 6.12% as of December 31, 2022 to 7.85% as of June 30, 2023 (unaudited), impacting our cost of debt. These items have not had a material impact on our results of operations to date.

Key Factors Affecting Our Performance

Our historical financial performance has been, and we expect our financial performance in the future to be, driven by the following trends and our ability to:

Increase Adoption of Cloud-Based Software by Higher Education and K-12 Institutions

Our ability to increase market adoption of our platform is driven by the overall adoption of cloud applications and infrastructure by academic institutions. We believe that Higher Education and K-12 institutions continue to be poised to accelerate the pace of cloud adoption to support near-term online educational needs as a result of continued adoption of remote education and continued digital transformation in education, to withstand future challenges. Academic institutions that relied upon on-premises solutions to support remote operations faced significant delays at the height of the pandemic. In order to continue providing a high-quality education and support in-person, remote, and hybrid learning, institutions must make a fundamental shift to adopt cloud-based collaboration solutions. As the leader in the market for cloud-based learning technology, we believe the imperative for these institutions to adopt cloud infrastructure will increase demand for our platform and broaden our customer base.

Grow Our Customer Base

We believe there is significant opportunity to grow our customer base in Higher Education and K-12. The growth of our Higher Education customer base is primarily dependent on the replacement of legacy systems with our cloud-native platform in North America and our continued expansion efforts internationally. The growth of our K-12 customer base is primarily dependent on our ability to surround currently implemented free solutions with our learning platform and, in connection therewith, monetize demand for our broad capabilities. We intend to expand our customer base by continuing to make targeted and prudent investments in sales and marketing and customer support.

Cross-sell into our Existing Customer Base

Most of our customers initially engage with us using our Canvas LMS solution, and then we are generally able to cross-sell our other solutions as these customers become aware of the benefits of our broad capabilities, including learning, assessments, analytics, student success, program management, digital courseware, and global online learning. Our future revenue growth is dependent upon our ability to expand our customers’ use of our learning platform. Our ability to increase sales to existing customers depends on a number of factors, including customer satisfaction, competition, pricing, economic conditions, and spending by customers.

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Key Components of Results of Operations

Revenue

We generate revenue primarily from two main sources: (1) subscription and support revenue, which is comprised of SaaS fees from customers accessing our learning platform and from customers purchasing additional support beyond the standard support that is included in the basic SaaS fees; and (2) related professional services revenue, which is comprised of training, implementation services and other types of professional services.

Subscription revenue is derived from customers using our learning platform and is driven primarily by the number of customers, the number of users at each customer, the price of our applications, and renewals. Support revenue is derived from customers purchasing additional support beyond the standard support that is included in the basic SaaS fee. Our contracts typically vary in length between one and five years. Subscriptions and support are non-cancelable and are billed in advance on an annual basis. All subscription and support fees billed are initially recorded in deferred revenue and recognized ratably over the subscription term.

Professional services and other revenue are derived primarily from implementation, training, and other consulting fees. Implementation services includes training and consulting services that generally take anywhere from 30 to 90 days to complete depending on customer-side complexity and timelines. It includes regularly scheduled and highly-structured activities to ensure customers progress toward better utilizing our applications. Most of these interactions take place over the phone and through the use of web meeting technology. Because we have determined the implementation services are distinct, they are recognized over time as the services are rendered, using an efforts-expended input method. Implementation services also include nonrefundable upfront setup fees, which are allocated to the remaining performance obligations.

We include training with every implementation and offer additional training for a fee. The training offered is focused on creating confidence among users so they can be successful with our applications. Most training is performed remotely using web meeting technology. Because we have determined that trainings are distinct, we record training revenue upon the delivery of the training. Training is recognized ratably in the same manner as subscription and support revenue described above.

In addition to our implementation and training offerings, we provide consulting services for custom application development, integrations, content services and change management consulting. These services are architected to boost customer adoption of our applications and to drive usage of features and capabilities that are unique to our company. We have determined that these services are distinct. Professional services revenue is typically recognized over time as the services are rendered, using an efforts-expended input method.

Cost of Revenue

Cost of subscription and support revenue consists primarily of the costs of our cloud hosting provider and other third-party service providers, employee-related costs including payroll, benefits and stock-based compensation expense for our operations and customer support teams, amortization of capitalized software development costs and acquired technology, and allocated overhead costs, which we define as rent, facilities and costs related to IT. Our acquired technology is amortized over the estimated useful life, which is five years.

Cost of professional services and other revenue consists primarily of personnel costs of our professional services organization, including salaries, benefits, travel, bonuses and stock-based compensation, as well as allocated overhead costs.

Operating Expenses

Sales and Marketing. Sales and marketing expenses consist primarily of personnel costs of our sales and marketing employees, including sales commissions and incentives, benefits and stock-based compensation expense, marketing programs, including lead generation, costs of our annual InstructureCon user conference, acquisition-related amortization expenses and allocated overhead costs. We defer and amortize on a straight-line basis sales commission costs related to acquiring new contracts over a period of benefit that we have determined to be generally four years. Customer relationships represent the estimated fair value of the acquired customer bases and are amortized over the estimated useful life of seven years. The trade names acquired are amortized over the estimated useful lives ranging from one to ten years.

Research and Development. Research and development expenses consist primarily of personnel costs of our development team, including payroll, benefits and stock-based compensation expense and allocated overhead costs. We capitalize certain software development costs that are attributable to developing new applications, features and adding incremental functionality to our platform. We amortize these costs to subscription and support cost of revenue in the condensed consolidated statements of operations and comprehensive loss over the estimated life of the new application or incremental functionality, which is generally three years.

General and Administrative. General and administrative expenses consist of personnel costs and related expenses for executive, finance, legal, human resources, recruiting, employee-related information technology, administrative personnel, including payroll, benefits and stock-based compensation expense; professional fees for external legal, accounting and other consulting services; and allocated overhead costs.

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Other Income (Expense), net

Other income (expense), net consists primarily of interest income, interest expense, and the impact of foreign currency transaction gains and losses. Interest expense is related to fees incurred to have access to our credit facilities. As we have expanded our international operations, our exposure to fluctuations in foreign currencies has increased.

Income Tax Benefit

We are subject to income taxes in the United States and foreign jurisdictions in which we do business. These foreign jurisdictions have statutory tax rates different from those in the United States. Accordingly, our effective tax rates will vary depending on the relative proportion of foreign to U.S. income and changes in tax laws. The tax benefit at June 30, 2023 consists of decreases in U.S. Federal and state deferred tax liabilities due to current year pretax book loss, net of valuation allowance recorded.

Results of Operations

The following tables set forth our results of operations for the periods presented and as a percentage of our total revenue for those periods. The data has been derived from the unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q which include, in our opinion, all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of the financial position and results of operations for the interim periods presented. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods.

 

 

 

 

 

 

 

Three months ended
June 30,

 

 

Six months ended
June 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and support

 

$

118,569

 

 

$

102,905

 

 

$

237,049

 

 

$

206,397

 

Professional services and other

 

 

12,501

 

 

 

11,672

 

 

 

22,864

 

 

 

21,642

 

Total revenue

 

 

131,070

 

 

 

114,577

 

 

 

259,913

 

 

 

228,039

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and support(1) (2) (3)

 

 

38,377

 

 

 

35,868

 

 

 

77,187

 

 

 

71,414

 

Professional services and other(1) (3)

 

 

6,912

 

 

 

6,530

 

 

 

13,934

 

 

 

11,995

 

Total cost of revenue

 

 

45,289

 

 

 

42,398

 

 

 

91,121

 

 

 

83,409

 

Gross profit

 

 

85,781

 

 

 

72,179

 

 

 

168,792

 

 

 

144,630

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing(1) (2) (3)

 

 

52,159

 

 

 

45,885

 

 

 

103,009

 

 

 

89,206

 

Research and development(1) (2) (3)

 

 

21,482

 

 

 

18,669

 

 

 

45,184

 

 

 

35,870

 

General and administrative(1) (3)

 

 

14,218

 

 

 

14,253

 

 

 

28,591

 

 

 

29,869

 

Total operating expenses

 

 

87,859

 

 

 

78,807

 

 

 

176,784

 

 

 

154,945

 

Loss from operations

 

 

(2,078

)

 

 

(6,628

)

 

 

(7,992

)

 

 

(10,315

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

320

 

 

 

27

 

 

 

1,661

 

 

 

63

 

Interest expense

 

 

(10,289

)

 

 

(4,611

)

 

 

(19,774

)

 

 

(9,164

)

Other income (expense)(3)

 

 

402

 

 

 

(3,417

)

 

 

478

 

 

 

(3,111

)

Total other income (expense), net

 

 

(9,567

)

 

 

(8,001

)

 

 

(17,635

)

 

 

(12,212

)

Loss before income taxes

 

 

(11,645

)

 

 

(14,629

)

 

 

(25,627

)

 

 

(22,527

)

Income tax benefit

 

 

672

 

 

 

1,710

 

 

 

2,797

 

 

 

4,063

 

Net loss

 

$

(10,973

)

 

$

(12,919

)

 

$

(22,830

)

 

$

(18,464

)

 

25


Table of Contents

 

 

(1)
Includes stock-based compensation as follows:

 

 

Three months ended
June 30,

 

 

Six months ended
June 30,

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

(in thousands)

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

Subscription and support

 

$

474

 

 

$

325

 

 

$

853

 

 

$

607

 

Professional services and other

 

 

622

 

 

 

465

 

 

 

1,036

 

 

 

841

 

Sales and marketing

 

 

3,469

 

 

 

2,772

 

 

 

5,997

 

 

 

5,349

 

Research and development

 

 

3,480

 

 

 

2,686

 

 

 

6,654

 

 

 

5,226

 

General and administrative

 

 

3,811

 

 

 

3,139

 

 

 

7,326

 

 

 

6,840

 

Total stock-based compensation

 

$

11,856

 

 

$

9,387

 

 

$

21,866

 

 

$

18,863

 

 

(2)
Includes amortization of acquisition-related intangibles as follows:

 

 

Three months ended
June 30,

 

 

Six months ended
June 30,

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

(in thousands)

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

Subscription and support

 

$

16,265

 

 

$

15,859

 

 

$

32,338

 

 

$

31,549

 

Sales and marketing

 

 

19,475

 

 

 

18,332

 

 

 

39,145

 

 

 

36,381

 

Research and development

 

 

4

 

 

 

 

 

 

9

 

 

 

 

Total amortization of acquisition-related intangibles

 

$

35,744

 

 

$

34,191

 

 

$

71,492

 

 

$

67,930

 

 

(3)
Includes transaction, sponsor, other non-recurring costs, and foreign currency gains and losses as follows:

 

 

 

Three months ended
June 30,

 

 

Six months ended
June 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

Subscription and support

 

$

989

 

 

$

9

 

 

$

1,283

 

 

$

18

 

Professional services and other

 

 

14

 

 

 

41

 

 

 

239

 

 

 

95

 

Sales and marketing

 

 

1,610

 

 

 

110

 

 

 

3,369

 

 

 

390

 

Research and development

 

 

1,414

 

 

 

502

 

 

 

4,982

 

 

 

792

 

General and administrative

 

 

606

 

 

 

726

 

 

 

2,103

 

 

 

2,563

 

Other income (expense)

 

 

391

 

 

 

(3,477

)

 

 

641

 

 

 

(3,185

)

Total costs for transaction, sponsor, other non-recurring costs, and foreign currency gains and losses

 

$

4,242

 

 

$

4,865

 

 

$

11,335

 

 

$

7,043

 

 

26


Table of Contents

 

 

 


 

 

 

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

2023

 

2022

 

2023

 

2022

 

 

(as a percentage of total revenue)

Revenue:

 

 

 

 

 

 

 

 

Subscription and support

 

90%

 

90%

 

91%

 

91%

Professional services and other

 

10

 

10

 

9

 

9

Total revenue

 

100

 

100

 

100

 

100

Cost of revenue:

 

 

 

 

 

 

 

 

Subscription and support

 

29

 

31

 

30

 

31

Professional services and other

 

5

 

6

 

5

 

5

Total cost of revenue

 

34

 

37

 

35

 

36

Gross profit

 

66

 

63

 

65

 

64

Operating expenses:

 

 

 

 

 

 

 

 

Sales and marketing

 

40

 

40

 

40

 

39

Research and development

 

16

 

16

 

17

 

16

General and administrative

 

11

 

12

 

11

 

13

Total operating expenses

 

67

 

68

 

68

 

68

Loss from operations

 

(1)

 

(5)

 

(3)

 

(4)

Other income (expense):

 

 

 

 

 

 

 

 

Interest income

 

 

 

1

 

Interest expense

 

(8)

 

(4)

 

(8)

 

(4)

Other income (expense)

 

 

(3)

 

 

(1)

Total other income (expense), net

 

(8)

 

(7)

 

(7)

 

(5)

Loss before income taxes

 

(9)

 

(12)

 

(10)

 

(9)

Income tax benefit

 

1

 

2

 

1

 

2

Net loss

 

(8)%

 

(10)%

 

(9)%

 

(7)%

 

Comparison of the unaudited three and six months ended June 30, 2023 and unaudited three and six months ended June 30, 2022.

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended
June 30,

 

 

Change

 

 

Six months ended
June 30,

 

 

Change

 

 

 

2023

 

 

2022

 

 

Amount

 

 

%

 

 

2023

 

 

2022

 

 

Amount

 

 

%

 

 

 

(dollars in thousands)

 

Subscription and support

 

$

118,569

 

 

$

102,905

 

 

$

15,664

 

 

 

15

%

 

$

237,049

 

 

$

206,397

 

 

$

30,652

 

 

 

15

%

Professional services and other

 

 

12,501

 

 

 

11,672

 

 

 

829

 

 

 

7

 

 

 

22,864

 

 

 

21,642

 

 

 

1,222

 

 

 

6

 

Total revenue

 

$

131,070

 

 

$

114,577

 

 

$

16,493

 

 

 

14

%

 

$

259,913

 

 

$

228,039

 

 

$

31,874

 

 

 

14

%

 

27


Table of Contents

 

Three month change

Subscription and support revenue increased $15.7 million for the unaudited three months ended June 30, 2023. The increase is due to expanded use of our solutions, including among new and existing customers. For the unaudited three months ended June 30, 2023, revenue from new customers increased by $8.4 million and revenue from existing customers increased by $7.3 million. International markets contributed 20% of the total revenue for the unaudited three months ended June 30, 2023, an increase of $3.1 million. Use of our solutions expanded as a result of the need for continued digital transformation in education and targeted sales and marketing efforts in new and existing markets.

Professional services and other revenue increased $0.8 million for the unaudited three months ended June 30, 2023. The increase is due to the expanded use of our solutions as discussed above.

 

Six month change

Subscription and support revenue increased $30.7 million for the unaudited six months ended June 30, 2023. The increase is due to expanded use of our solutions, including among new and existing customers. For the unaudited six months ended June 30, 2023, revenue from new customers increased by $17.4 million and revenue from existing customers increased by $13.3 million. International markets contributed 20% of the total revenue for the unaudited six months ended June 30, 2023, an increase of $6.0 million. Use of our solutions expanded as a result of the need for continued digital transformation in education and targeted sales and marketing efforts in new and existing markets.

Professional services and other revenue increased $1.2 million for the unaudited six months ended June 30, 2023. The increase is due to the expanded use of our solutions as discussed above.

Cost of Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended
June 30,

 

 

Change

 

 

Six months ended
June 30,

 

 

Change

 

 

 

2023

 

 

2022

 

 

Amount

 

 

%

 

 

2023

 

 

2022

 

 

Amount

 

 

%

 

 

 

(dollars in thousands)

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and support

 

$

38,377

 

 

$

35,868

 

 

$

2,509

 

 

 

7

%

 

$

77,187

 

 

$

71,414

 

 

$

5,773

 

 

 

8

%

Professional services and other

 

 

6,912

 

 

 

6,530

 

 

 

382

 

 

 

6

 

 

 

13,934

 

 

 

11,995

 

 

 

1,939

 

 

 

16

 

Total cost of revenue

 

$

45,289

 

 

$

42,398

 

 

$

2,891

 

 

 

7

%

 

$

91,121

 

 

$

83,409

 

 

$

7,712

 

 

 

9

%

Gross margin percentage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and support revenue

 

 

68

%

 

 

65

%

 

 

 

 

 

 

 

 

67

%

 

 

65

%

 

 

 

 

 

 

Professional services and other

 

 

45

 

 

 

44

 

 

 

 

 

 

 

 

 

39

 

 

 

45

 

 

 

 

 

 

 

Total gross margin

 

 

65

 

 

 

63

 

 

 

 

 

 

 

 

 

65

 

 

 

63

 

 

 

 

 

 

 

 

Three month change

Subscription and support cost of revenue increased $2.5 million for the unaudited three months ended June 30, 2023 due to an increase in web hosting costs of $1.5 million, an increase in amortization of acquisition-related intangibles of $0.6 million, an increase in third-party contractor and consulting costs of $0.5 million, an increase in salaries, wages, and payroll-related benefits of $0.1 million, and other insignificant increases totaling $0.1 million. These increases were offset by a decrease in software expenses of $0.3 million.

Professional services and other cost of revenue increased $0.4 million for the unaudited three months ended June 30, 2023 due to an increase in salaries, wages, and payroll-related benefits of $0.6 million. This increase was offset by a decrease in software expenses of $0.2 million.

 

28


Table of Contents

 

Six month change

Subscription and support cost of revenue increased $5.8 million for the unaudited six months ended June 30, 2023 due to an increase in web hosting costs of $3.3 million, an increase in amortization of acquisition-related intangibles of $1.2 million, an increase in third-party contractor and consulting costs of $0.7 million, an increase in salaries, wages, and payroll-related benefits of $0.6 million, an increase in stock-based compensation of $0.2 million, and other insignificant increases totaling $0.1 million. These increases were offset by a decrease in software expenses of $0.3 million.

Professional services and other cost of revenue increased $1.9 million for the unaudited six months ended June 30, 2023 due to an increase in salaries, wages, and payroll-related benefits of $1.5 million, an increase in stock-based compensation of $0.2 million, an increase in bonuses of $0.1 million, and an increase in travel expenses of $0.1 million.

Operating Expenses

Sales and Marketing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended
June 30,

 

 

Change

 

 

Six months ended
June 30,

 

 

Change

 

 

 

2023

 

 

2022

 

 

Amount

 

 

%

 

 

2023

 

 

2022

 

 

Amount

 

 

%

 

 

 

(dollars in thousands)

 

Sales and marketing

 

$

52,159

 

 

$

45,885

 

 

$

6,274

 

 

 

14

%

 

$

103,009

 

 

$

89,206

 

 

$

13,803

 

 

 

15

%

 

Three month change

Sales and marketing expenses increased $6.3 million for the unaudited three months ended June 30, 2023 due to an increase in salaries, wages, and payroll-related benefits of $1.4 million, an increase in third-party contracting and consulting costs of $1.4 million, an increase in amortization of acquisition-related intangibles of $1.1 million, an increase in commissions of $0.9 million, an increase in marketing expenses, including tradeshows, conferences, and public relations, of $0.8 million, an increase in stock-based compensation of $0.7 million, and an increase in bonuses of $0.1 million. These increases were offset by other insignificant decreases totaling $0.1 million.

 

Six month change

Sales and marketing expenses increased $13.8 million for the unaudited six months ended June 30, 2023 due to an increase in salaries, wages, and payroll-related benefits of $4.2 million, an increase in amortization of acquisition-related intangibles of $2.6 million, an increase in commissions of $1.9 million, an increase in third-party contracting and consulting costs of $1.7 million, an increase in travel expenses of $1.1 million, an increase in marketing expenses, including tradeshows, conferences, and public relations, of $0.7 million, an increase in stock-based compensation of $0.6 million, an increase in software expenses of $0.4 million, an increase in bonuses of $0.3 million, an increase in employee-related incentives of $0.2 million, and other insignificant increases totaling $0.1 million.

Research and Development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended
June 30,

 

 

Change

 

 

Six months ended
June 30,

 

 

Change

 

 

 

2023

 

 

2022

 

 

Amount

 

 

%

 

 

2023

 

 

2022

 

 

Amount

 

 

%

 

 

 

(dollars in thousands)

 

Research and development

 

$

21,482

 

 

$

18,669

 

 

$

2,813

 

 

 

15

%

 

$

45,184

 

 

$

35,870

 

 

$

9,314

 

 

 

26

%

 

29


Table of Contents

 

 

Three month change

Research and development expenses increased $2.8 million for the unaudited three months ended June 30, 2023 due to an increase in salaries, wages, and payroll-related benefits of $2.6 million and an increase in stock-based compensation of $0.8 million. These increases were offset by decreases in software expenses and related maintenance of $0.2 million, a decrease in third-party contractor and consulting costs of $0.2 million, and a decrease in employee-related incentives of $0.2 million.

 

Six month change

Research and development expenses increased $9.3 million for the unaudited six months ended June 30, 2023 due to an increase in salaries, wages, and payroll-related benefits of $6.0 million, an increase in stock-based compensation of $1.4 million, offset by a decrease in bonuses of $0.2 million. There were additional increases related to third-party contractor and consulting costs of $1.8 million, an increase in software expenses and related maintenance of $0.3 million, and an increase in travel expenses of $0.2 million. These increases were offset by a decrease in employee-related incentives of $0.2 million.

General and Administrative

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended
June 30,

 

 

Change

 

 

Six months ended
June 30,

 

 

Change

 

 

 

2023

 

 

2022

 

 

Amount

 

 

%

 

 

2023

 

 

2022

 

 

Amount

 

 

%

 

 

 

(dollars in thousands)

 

General and administrative

 

$

14,218

 

 

$

14,253

 

 

$

(35

)

 

 

(0

)%

 

$

28,591

 

 

$

29,869

 

 

$

(1,278

)

 

 

(4

)%

 

Three month change

General and administrative expenses did not significantly change for the unaudited three months ended June 30, 2023 due to increases in salaries, wages, and payroll-related benefits of $0.6 million and increases in third-party contractor and consulting costs of $1.0 million, which were offset by a decrease in insurance expenses of $0.5 million, a decrease in software expenses of $0.1 million, and other insignificant decreases totaling $0.1 million.

 

Six month change

General and administrative expenses decreased by $1.3 million for the unaudited six months ended June 30, 2023 due to a decrease in insurance expenses of $1.0 million, a decrease in third-party contractor and consulting costs of $0.8 million, and a decrease in employee-related incentives of $0.1 million. These decreases were offset by an increase in stock-based compensation of $0.5 million and an increase in salaries, wages, and payroll-related benefits of $0.1 million.

Other Income (Expense), Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended
June 30,

 

 

Change

 

 

Six months ended
June 30,

 

 

Change

 

 

 

2023

 

 

2022

 

 

Amount

 

 

%

 

 

2023

 

 

2022

 

 

Amount

 

 

%

 

 

 

(dollars in thousands)

 

Other income (expense), net

 

$

(9,567

)

 

$

(8,001

)

 

$

(1,566

)

 

 

20

%

 

$

(17,635

)

 

$

(12,212

)

 

$

(5,423

)

 

 

44

%

 

Three month change

Other income (expense), net includes interest income and expense and the impact of foreign currency transaction gains and losses. Other income (expense), net increased $1.6 million for the unaudited three months ended June 30, 2023 as a result of increased interest expense of $5.7 million due to interest rate increases on our Senior Term Loan (as defined below). This increase in expense was offset by $3.8 million related to realized and unrealized foreign currency gains, and an increase in interest income of $0.3 million.

 

Six month change

Other income (expense), net includes interest income and expense and the impact of foreign currency transaction gains and losses. Other income (expense), net increased $5.4 million for the unaudited six months ended June 30, 2023 as a result of increased interest expense of $10.6 million due to interest rate increases on our Senior Term Loan (as defined below) and an increase in expense from disposal of fixed assets of $0.2 million. These increases in expense were offset by $3.8 million related to realized and unrealized foreign currency gains, and an increase in interest income of $1.6 million.

30


Table of Contents

 

Income Tax Benefit

 

 

 

Three months ended
June 30,

 

 

Change

 

 

Six months ended
June 30,

 

 

Change

 

 

 

2023

 

 

2022

 

 

Amount

 

 

%

 

 

2023

 

 

2022

 

 

Amount

 

 

%

 

 

 

(dollars in thousands)

 

Income tax benefit

 

$

672

 

 

$

1,710

 

 

$

(1,038

)

 

 

(61

)%

 

$

2,797

 

 

$

4,063

 

 

$

(1,266

)

 

 

(31

)%

Three month change

Income tax benefit decreased $1.0 million for the unaudited three months ended June 30, 2023. Income tax benefit consists of current and deferred taxes for U.S. and foreign income taxes.

Six month change

Income tax benefit decreased $1.3 million for the unaudited six months ended June 30, 2023. Income tax benefit consists of current and deferred taxes for U.S. and foreign income taxes. Due to the Company's net operating loss (“NOL”) carryforward position, the decrease in the income tax benefit was driven mainly by foreign tax rate changes.

Liquidity and Capital Resources

As of June 30, 2023 (unaudited) and December 31, 2022, our principal sources of liquidity were cash, cash equivalents and restricted cash totaling $129.8 million and $190.3 million, respectively, which was held for working capital purposes, as well as the available balance of our Senior Term Loan, (as defined below). As of June 30, 2023 (unaudited) and December 31, 2022, our cash equivalents were comprised of money market funds. We expect our operating cash flows to improve as we increase our operational efficiency and experience economies of scale.

We have financed our operations through cash received from operations and debt financing. We believe our existing cash and cash equivalents, our Senior Term Loan and cash provided by sales of our solutions and services will be sufficient to meet our working capital, capital expenditure and cash needs for at least the next 12 months and beyond. Our future capital requirements will depend on many factors including our growth rate, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced products and services offerings, and the continuing market acceptance of our products. In the future, we may enter into arrangements to acquire or invest in complementary businesses, services and technologies.

Our material cash requirements from known contractual and other obligations primarily consist of our Senior Term Loan and operating facility lease obligations, including certain letters of credit. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in our 2022 10-K for more details.

We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in new technologies, this could reduce our ability to compete successfully and harm our results of operations.

A portion of our customers pay in advance for subscriptions, a portion of which is recorded as deferred revenue. Deferred revenue consists of the unearned portion of billed fees for our subscriptions, which is later recognized as revenue in accordance with our revenue recognition policy. As of June 30, 2023 (unaudited), we had deferred revenue of $330.7 million, of which $317.4 million was recorded as a current liability and is expected to be recorded to revenue in the next 12 months, provided all other revenue recognition criteria have been met. As of December 31, 2022, we had deferred revenue of $289.4 million, of which $275.6 million was recorded as a current liability.

The following table shows our cash flows for the unaudited six months ended June 30, 2023 and 2022:

 

 

 

 

 

 

 

 

 

Six months ended
June 30,

 

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Net cash used in operating activities

 

$

(55,760

)

 

$

(57,540

)

Net cash used in investing activities

 

 

(2,865

)

 

 

(22,863

)

Net cash provided by (used in) financing activities

 

 

(2,277

)

 

 

1,138

 

 

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Our cash flows are subject to seasonal fluctuations. A significant portion of our contracts have terms that coincide with our customers’ typical fiscal year-end of June 30. Historical experience has shown an increase in new and renewed contracts as well as anniversary billings, all of which immediately precede the beginning of our academic customers’ typical fiscal year-end. We typically invoice SaaS fees annually upfront with credit terms of net 30 or 60 days. In turn, our cash flows from operations are affected by this seasonality and are typically reflected in higher cash flow, accounts receivable and deferred revenue balances for the second and third quarter of each year.

Credit Facility

On March 24, 2020, we entered into a credit agreement with a syndicate of lenders and Golub Capital Markets LLC, as administrative agent and collateral agent, and Golub Capital Markets LLC and Owl Rock Capital Advisors LLC, as joint bookrunners and joint lead arrangers (the “Credit Agreement”). The Credit Agreement provided for a senior secured term loan facility (the “Initial Term Loan”) in an original aggregate principal amount of $775.0 million, which was supplemented by an incremental term loan pursuant to the First Incremental Amendment and Waiver to Credit Agreement, dated as of December 22, 2020, in a principal amount of $70.0 million (the “Incremental Term Loan” and, together with the Initial Term Loan, the “Term Loan”). The Credit Agreement also provided for a senior secured revolving credit facility in an aggregate principal amount of $50.0 million (the “Revolving Credit Facility” and, together with the Term Loan, the “Credit Facilities”). The Revolving Credit Facility included a $10.0 million sublimit for the issuance of letters of credit.

On October 29, 2021, we entered into a credit agreement with JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent (the “2021 Credit Agreement”), governing our senior secured credit facilities (the “Senior Secured Credit Facilities”), consisting of a $500.0 million senior secured term loan facility (the “Senior Term Loan”) and a $125.0 million senior secured revolving credit facility (the “Senior Revolver”). The proceeds from the Senior Secured Credit Facilities were used, in addition to cash on hand, to (1) refinance, in full, all existing indebtedness under the Credit Agreement (the “Refinancing”), (2) pay certain fees and expenses incurred in connection with the entry into the 2021 Credit Agreement and the Refinancing, and (3) finance working capital needs of the Company and its subsidiaries for general corporate purposes.

All of the Company’s obligations under the Senior Secured Credit Facilities are guaranteed by the subsidiary guarantors named therein. The Senior Revolver includes borrowing capacity available for letters of credit. Any issuance of letters of credit will reduce the amount available under the Senior Revolver. As of June 30, 2023 there have not been any borrowings incurred under the Senior Revolver.

The Senior Term Loan has a seven-year maturity and the Senior Revolver has a five-year maturity. Commencing June 30, 2022, we are required to repay the Senior Term Loan portion of the Senior Secured Credit Facilities in quarterly principal installments of 0.25% of the aggregate original principal amount of the Senior Term Loan at closing, with the balance payable at maturity. Borrowings under the Senior Secured Credit Facilities bear interest, at the Company’s option, at: (i) Base Rate equal to the greater of (a) the Federal Funds Rate plus 1/2 of 1.00%, (b) the rate of interest in effect for such day as publicly announced from time to time by the administrative agent as its “prime rate,” (c) a Eurocurrency Rate for such date plus 1.00% and (d) 1.00%; or (ii) the Eurocurrency Rate (provided that the Eurocurrency Rate applicable to the Senior Term Loan shall not be less than 0.50% per annum). The Applicable Rate for the Senior Term Loan with respect to Eurocurrency Rate Loans is 2.75% per annum and 1.75% per annum for Base Rate Loans. The Applicable Rate for the Senior Revolver with respect to Eurocurrency Rate Loans, SONIA Loans, and Alternative Currency Term Rate Loans ranges from 2.00% to 2.5% subject to the Company’s Consolidated First Lien Net Leverage Ratio, while the Applicable Rate for Base Rate Loans ranges from 1.00% to 1.50% subject to the Company’s Consolidated First Lien Net Leverage Ratio. We are also required to pay an unused commitment fee to the lenders under the Senior Revolver at the Applicable Commitment Fee of the average daily unutilized commitments. The Applicable Commitment Fee ranges from 0.40% to 0.50% subject to the Company’s Consolidated First Lien Never Leverage Ratio.

On June 21, 2023, we entered into the first amendment to the 2021 Credit Agreement (the “Amended 2021 Credit Agreement”) whereby all borrowings denominated in U.S. Dollars and that incur interest or fees using the Eurocurrency Rate, which are determined by reference to the London Interbank Offered Rate (“LIBOR”), have been replaced with the Secured Overnight Financing Rate (“SOFR”). For SOFR loans, the loans denominated in Dollars now bear interest at the Adjusted Term SOFR Rate, which is equal to the Term SOFR Reference Rate, as published by the CME Term SOFR Administrator, plus the Term SOFR Adjustment as dictated by the interest rate period elected by the Company. The Term SOFR Adjustment ranges from 0.11448% to 0.42826% per annum. The Applicable Rate (x) for the Initial Term Loans remains at 2.75% per annum for SOFR loans and (y) for the Revolving Credit Facility remains at 2.5% per annum with applicable step downs. The transition from LIBOR to SOFR became effective on July 5, 2023. All other terms and conditions in place under the 2021 Credit Agreement on the effective date of the Amended 2021 Credit Agreement remained unchanged and in full effect.

As of June 30, 2023 (unaudited), we had outstanding borrowings of $493.8 million on the Senior Term Loan, no outstanding borrowings under our Senior Revolver and $3.8 million outstanding under letters of credit.

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Operating Activities

Net cash used in operating activities consists of net loss adjusted for certain non-cash items, including stock-based compensation, depreciation and amortization and other non-cash charges, net.

Net cash used in operating activities during the unaudited six months ended June 30, 2023 was $55.8 million, which was attributable to a net loss of $22.8 million adjusted for certain non-cash items, including $21.3 million of stock-based compensation expense, $73.8 million of depreciation and amortization, $0.6 million of amortization of debt discount and issuance costs and $0.2 million in other non-cash items. These amounts were offset by a decrease of $4.4 million to deferred income taxes. Working capital sources of cash included a net decrease of $96.0 million in deferred revenue and accounts receivable resulting from the seasonality of our business where a significant number of our customer agreements occur in the second and third quarter each year. Prepaid expenses and other current assets increased by $26.8 million, while accounts payable and accrued liabilities decreased by $1.7 million, lease liabilities decreased by $3.8 million, other liabilities decreased by $0.4 million, deferred commissions decreased by $1.8 million, and right-of-use assets decreased by $2.3 million.

Net cash used in operating activities during the unaudited six months ended June 30, 2022 was $57.5 million, which was attributable to a net loss of $18.5 million adjusted for certain non-cash items, including $16.0 million of stock-based compensation expense, $70.0 million depreciation and amortization and $0.6 million in amortization of debt discount and issuance costs, and $2.6 million in other non-cash items. These amounts were offset by a decrease of $5.4 million to deferred income taxes. Working capital sources of cash included a net decrease of $90.2 million in deferred revenue and accounts receivable resulting from the seasonality of our business where a significant number of our customer agreements occur in the second and third quarter each year. Prepaid expenses and other current assets increased by $21.2 million, lease liabilities decreased by $3.5 million, other liabilities decreased by $1.4 million, accounts payable and accrued liabilities decreased by $9.1 million deferred commissions decreased by $0.2 million, and right-of-use assets decreased by $2.4 million.

Investing Activities

Our investing activities have consisted of business acquisitions, property and equipment purchases for computer-related equipment and capitalization of software development costs. Capitalized software development costs are related to new applications or improvements to our existing software platform that expand the functionality for our customers.

Net cash used in investing activities during the unaudited six months ended June 30, 2023 was $2.9 million, consisting of purchases of property and equipment of $2.9 million.

Net cash used in investing activities during the unaudited six months ended June 30, 2022 was $22.9 million, consisting of the acquisition of Canvas Credentials of $19.5 million, net of cash received, and purchases of property and equipment of $3.4 million.

Financing Activities

Our financing activities have consisted of proceeds from issuance of common stock from employee equity plans, shares withheld for tax withholdings on vesting of RSUs, and repayments of long-term debt.

Net cash used in financing activities during the unaudited six months ended June 30, 2023 was $2.3 million, which consisted of $3.3 million in proceeds from the issuance of common stock from employee equity plans, offset by $3.0 million of shares repurchased for tax withholdings on vesting of RSUs, $0.1 million of financing costs, and $2.5 million in payments on long-term debt.

Net cash provided by financing activities during the unaudited six months ended June 30, 2022 was $1.1 million, which consisted of $4.1 million in proceeds from the issuance of common stock from employee equity plans, offset by $1.7 million of shares repurchased for tax withholdings on vesting of RSUs and principal payments made on our long-term debt of $1.3 million.

Critical Accounting Estimates

Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.

There have been no material changes to our critical accounting estimates as compared to those described in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in our 2022 10-K.

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Recent Accounting Pronouncement

For information on recent accounting pronouncements, see Note 2. “Summary of Significant Accounting Policies—Recent Accounting Pronouncements” in the notes to the condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.

Non-GAAP Financial Measures

In addition to our results determined in accordance with U.S. GAAP, we believe the following non-GAAP measures are useful in evaluating our operating performance and liquidity. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance and assists in comparisons with other companies, some of which use similar non-GAAP financial information to supplement their U.S. GAAP results. The non-GAAP financial information is presented for supplemental informational purposes only and should not be considered a substitute for financial information presented in accordance with U.S. GAAP, and may be different from similarly-titled non-GAAP measures used by other companies. A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with U.S. GAAP. Investors are encouraged to review the related U.S. GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable U.S. GAAP financial measures.

 

Non-GAAP Operating Income

We define non-GAAP operating income as loss from operations excluding the impact of stock-based compensation, transaction costs, sponsor costs, other non-recurring costs, amortization of acquisition-related intangibles, and the impact of fair value adjustments to acquired unearned revenue relating to the Take-Private Transaction and Certica, Impact and Elevate Data Sync acquisitions that we do not believe are reflective of our ongoing operations. We believe non-GAAP operating income is useful in evaluating our operating performance compared to that of other companies in our industry, as this metric generally eliminates the effects of certain items that may vary for different companies for reasons unrelated to overall operating performance. Although we exclude the amortization of acquisition-related intangibles from this non-GAAP measure, management believes it is important for investors to understand that such intangible assets were recorded as part of purchase accounting and contribute to revenue generation.

The following table provides a reconciliation of loss from operations to non-GAAP operating income for each of the periods indicated:

 

 

Three months ended
June 30,

 

 

Six months ended
June 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Loss from operations

 

 

(2,078

)

 

 

(6,628

)

 

 

(7,992

)

 

 

(10,315

)

Stock-based compensation

 

 

11,856

 

 

 

9,387

 

 

 

21,866

 

 

 

18,863

 

Transaction costs (1)

 

 

2,317

 

 

 

927

 

 

 

6,153

 

 

 

2,351

 

Sponsor costs (2)

 

 

24

 

 

 

169

 

 

 

82

 

 

 

303

 

Other non-recurring costs (3)

 

 

2,292

 

 

 

292

 

 

 

5,741

 

 

 

1,204

 

Amortization of acquisition-related intangibles

 

 

35,744

 

 

 

34,191

 

 

 

71,492

 

 

 

67,930

 

Fair value adjustments to deferred revenue in connection with purchase accounting

 

 

 

 

 

331

 

 

 

 

 

 

830

 

Non-GAAP operating income

 

$

50,155

 

 

$

38,669

 

 

$

97,342

 

 

$

81,166

 

 

(1)
Represents expenses incurred with third parties as part of the Company’s merger and acquisition activity, including due diligence, closing and post-close integration activities.
(2)
Represents expenses incurred for services provided by Thoma Bravo and their affiliates.

 

(3) Includes other non-recurring costs as follows:

 

Three months ended
June 30,

 

 

Six months ended
June 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Contract modification fees

 

 

491

 

 

 

 

 

 

606

 

 

 

230

 

Employee severance

 

 

526

 

 

 

265

 

 

 

2,385

 

 

 

330

 

Workforce realignment costs

 

 

725

 

 

 

 

 

 

1,785

 

 

 

354

 

Other insignificant non-recurring costs

 

 

550

 

 

 

27

 

 

 

965

 

 

 

290

 

Total other non-recurring costs

 

$

2,292

 

 

$

292

 

 

$

5,741

 

 

$

1,204

 

 

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Free Cash Flow

We define free cash flow as net cash used in operating activities less purchases of property and equipment and intangible assets, net of proceeds from disposals of property and equipment. We believe free cash flow facilitates period-to-period comparisons of liquidity. We consider free cash flow to be an important measure because it measures the amount of cash we generate and reflects changes in working capital. We use free cash flow in conjunction with traditional U.S. GAAP measures as part of our overall assessment of our liquidity, including the preparation of our annual operating budget and quarterly forecasts, to evaluate the effectiveness of our business strategies, and to communicate with our board of directors concerning our liquidity.

The following table provides a reconciliation of net cash used in operating activities to free cash flow for each of the periods indicated:

 

 

 

Three months ended
June 30,

 

 

Six months ended
June 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Net cash provided by (used in) operating activities

 

$

25,073

 

 

$

8,619

 

 

$

(55,760

)

 

$

(57,540

)

Purchases of property and equipment and intangible assets

 

 

(1,573

)

 

 

(2,082

)

 

 

(2,900

)

 

 

(3,415

)

Proceeds from disposals of property and equipment

 

 

29

 

 

 

14

 

 

 

35

 

 

 

36

 

Free cash flow

 

$

23,529

 

 

$

6,551

 

 

$

(58,625

)

 

$

(60,919

)

 

Adjusted EBITDA

EBITDA is defined as earnings before debt-related costs, including interest and loss on debt extinguishment, benefit for taxes, depreciation, and amortization. We further adjust EBITDA to exclude certain items of a significant or unusual nature, including stock-based compensation, transaction costs, sponsor costs, other non-recurring costs, effects of foreign currency transaction (gains) and losses, amortization of acquisition-related intangibles, interest income, and the impact of fair value adjustments to acquired unearned revenue relating to the Take-Private Transaction and Certica, Impact and Elevate Data Sync acquisitions. Although we exclude the amortization of acquisition-related intangibles from this non-GAAP measure, management believes that it is important for investors to understand that such intangible assets were recorded as part of purchase accounting and contribute to revenue generation.

We believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management team and board of directors. In addition, it provides a useful measure for period-to-period comparisons of our business, as it removes the effect of certain non-cash expenses and certain variable charges.

Adjusted EBITDA has limitations as a financial measure, should be considered as supplemental in nature, and is not meant as a substitute for the related financial information prepared in accordance with U.S. GAAP.

The following table presents a reconciliation of net loss to adjusted EBITDA for each of the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended
June 30,

 

 

Six months ended
June 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Net loss

 

$

(10,973

)

 

$

(12,919

)

 

$

(22,830

)

 

$

(18,464

)

Interest on outstanding debt and loss on debt extinguishment

 

 

10,287

 

 

 

4,608

 

 

 

19,772

 

 

 

9,161

 

Benefit for taxes

 

 

(672

)

 

 

(1,710

)

 

 

(2,797

)

 

 

(4,063

)

Depreciation

 

 

1,092

 

 

 

1,053

 

 

 

2,295

 

 

 

2,058

 

Amortization

 

 

 

 

 

2

 

 

 

2

 

 

 

4

 

Stock-based compensation

 

 

11,856

 

 

 

9,387

 

 

 

21,866

 

 

 

18,863

 

Transaction costs (1)

 

 

2,317

 

 

 

927

 

 

 

6,153

 

 

 

2,351

 

Sponsor costs (2)

 

 

24

 

 

 

169

 

 

 

82

 

 

 

303

 

Other non-recurring costs (3)

 

 

2,298

 

 

 

292

 

 

 

5,848

 

 

 

1,204

 

Effects of foreign currency transaction (gains) and losses

 

 

(397

)

 

 

3,477

 

 

 

(748

)

 

 

3,185

 

Amortization of acquisition-related intangibles

 

 

35,744

 

 

 

34,191

 

 

 

71,492

 

 

 

67,930

 

Interest income

 

 

(316

)

 

 

 

 

 

(1,617

)

 

 

 

Fair value adjustments to deferred revenue in connection with purchase accounting

 

 

 

 

 

331

 

 

 

 

 

 

830

 

Adjusted EBITDA

 

$

51,260

 

 

$

39,808

 

 

$

99,518

 

 

$

83,362

 

(1)
Represents expenses incurred with third parties as part of the Company’s merger and acquisition activity, including due diligence, closing and post-close integration activities.

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(2)
Represents expenses incurred for services provided by Thoma Bravo and their affiliates.

(3) Includes other non-recurring costs as follows:

 

Three months ended
June 30,

 

 

Six months ended
June 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Loss on exit of leased properties

 

 

6

 

 

 

 

 

 

107

 

 

 

 

Contract modification fees

 

 

491

 

 

 

 

 

 

606

 

 

 

230

 

Employee severance

 

 

526

 

 

 

265

 

 

 

2,385

 

 

 

330

 

Workforce realignment costs

 

 

725

 

 

 

 

 

 

1,785

 

 

 

354

 

Other insignificant non-recurring costs

 

 

550

 

 

 

27

 

 

 

965

 

 

 

290

 

Total other non-recurring costs

 

$

2,298

 

 

$

292

 

 

$

5,848

 

 

$

1,204

 

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. All statements other than statements of historical facts are “forward-looking statements” for purposes of these provisions, including those relating to future events or our future financial performance and financial guidance. In some cases, you can identify forward-looking statements by terminology such as “may,” “might,” “will,” “should,” “expect,” “plan,” “anticipate,” “project,” “believe,” “estimate,” “predict,” “potential,” “intend” or “continue,” the negative of terms like these or other comparable terminology, and other words or terms of similar meaning in connection with any discussion of future operating or financial performance. For example, all statements we make relating to our estimated and projected costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth initiatives, or strategies, industry, market and macroeconomic expectations, or future business and product capabilities are forward-looking statements. These statements are only predictions. You should not place undue reliance on our forward-looking statements. These statements are not guarantees of future performance and are subject to future events, risks and uncertainties, many of which are beyond our control, or currently unknown to us. Our assumptions may turn out to be inaccurate and cause actual events or results to differ materially from our expectation or projections. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including:

the continued economic uncertainty, including record-high inflation, supply chain challenges, labor shortages, high interest rates, foreign currency exchange volatility, concerns of economic slowdown or recession and reduced spending or suspension of investment in new or enhanced projects;
risks associated with failing to continue our recent growth rates, including our ability to acquire new customers and successfully retain existing customers;
the effects of the increased usage of, or interruptions or performance problems associated with, our learning platform;
the impact on our business by health pandemics or epidemics;
our history of losses and expectation that we will not be profitable for the foreseeable future;
the risk that the markets for our applications develop more slowly than expected;
risks associated with future stimulus packages approved by the U.S. federal government;
risks to our revenue from changes in the spending policies or budget priorities for government funding of Higher Education and K-12 institutions;
risks and uncertainties associated with potential acquisitions;
our ability to grow our business effectively, to scale our business and to manage our expenses;
the competitiveness of the market in which we operate;
risks caused by delays in upturns or downturns being reflected in our operating results;
our ability to use net operating losses to offset future taxable income;
our ability to change our pricing models, if necessary to compete successfully;
the length and unpredictability of our sales cycles;
risks associated with failure to develop our sales and marketing capabilities;

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risks associated with joint ventures, platform partnerships and strategic alliances;
our ability to offer high-quality professional services and support;
the effectiveness of our expense reduction plan;
risks associated with international operations;
our reliance on our management team and other key employees, including the effects of recent significant changes to our executive leadership team and the resulting transitions;
our ability to attract and retain qualified personnel;
our ability to maintain our company culture as we grow;
risks related our brand recognition and reputation;
the complexity and time-consuming nature of our billing and collections processing;
our ability to adapt and respond to rapidly changing technology, evolving industry standards and changing customer needs;
the impact of potential information technology or data security breaches or other cyberattacks or other disruptions;
risks associated with our use of open source software, including that we make a substantial portion of the source code for Canvas available under the terms of an open source license;
risks relating to our reliance on third-party software and intellectual property licenses;
the impact of real or perceived errors, failures or bugs in our solutions;
risks associated with lawsuits by third parties for alleged infringement, misappropriation or other violation of their intellectual property and proprietary rights;
our ability to obtain, maintain, protect and enforce our intellectual property and proprietary rights;
risks related to incorrect or improper use of our solutions or our failure to properly train customers on how to utilize our solutions;
privacy laws and regulations, including changes thereto, applicable to our business;
risks relating to non-compliance with FERPA, COPPA and other regulatory regimes applicable to our business;
risks related to changes in tax laws;
the impact of export and import control laws and regulations;
risk relating to non-compliance with anti-corruption, anti-bribery and similar laws;
our ability to comply with complex procurement rules and regulations;
risks related to future litigation;
risks related to our existing and future indebtedness;
our ability to develop and maintain proper and effective internal control over financial reporting;
our management team’s limited experience managing a public company
our ability to correctly estimate market opportunity and forecast market growth;
the impact of any catastrophic events;
our ability to raise additional capital or generate cash flows necessary to expand operations and invest in new technologies; and
other factors disclosed in the section entitled “Risk Factors” in the 2022 Form 10-K.

 

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We derive many of our forward-looking statements from our operating budgets and forecasts, which are based on many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by this cautionary statement as well as other cautionary statements that are made from time to time in our other SEC filings and public communications. You should evaluate all forward-looking statements made in this report in the context of these risks and uncertainties.

We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this report are made only as of the date hereof. We undertake no obligation to update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign currency exchange rates and interest rates and inflation. We do not hold or issue financial instruments for trading purposes.

Foreign Currency Exchange Risk

Our reporting currency is the U.S. dollar. Due to our international operations, we have foreign currency risks related to operating expense denominated in currencies other than the U.S. dollar, particularly the euro. Most of our sales are denominated in U.S. dollars, and therefore our revenue is not currently subject to significant foreign currency risk. Our operating expenses are denominated in the currencies of the countries in which our operations are located, which are primarily in the United States, Europe, Australia, and New Zealand. Our condensed consolidated results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates. To date, we have not entered into any hedging arrangements with respect to foreign currency risk or other derivative financial instruments. For the unaudited three and six months ended June 30, 2023 (unaudited), a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have had a material impact on our condensed consolidated financial statements.

Interest Rate Risk

We had cash, cash equivalents and restricted cash of $129.8 million and $190.3 million as of June 30, 2023 (unaudited) and December 31, 2022, respectively, consisting of cash and money market accounts in highly rated financial institutions. With the exception of cash, these interest-earning instruments carry a degree of interest rate risk. To date, fluctuations in our interest income have not been significant. We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. Due to the short-term nature of these investments, we have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in interest rates.

At June 30, 2023 (unaudited) and December 31, 2022, we also had in place a $125.0 million Senior Revolver and approximately $493.8 million outstanding on our Senior Term Loan. As of June 30, 2023 (unaudited) and December 31, 2022, we had no outstanding borrowings under our Senior Revolver. The Senior Revolver bears interest at 2.5% whereas the Senior Term Loan bears interest at 2.75% plus a variable applicable rate. At June 30, 2023 (unaudited) and December 31, 2022, the applicable rate was 7.85% and 6.12%, respectively.

We have an agreement to maintain cash balances at a financial institution of no less than $3.8 million as collateral for several letters of credit for purposes of securing certain of the Company’s obligations under facility leases and other contractual arrangements.

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Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures. Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, have evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were designed to, and were effective to, provide assurance at a reasonable level that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting during the quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent limitation on the effectiveness of internal control. The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.

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PART II. OTHER INFORMATION

We are, and from time to time may be, party to litigation and subject to claims incident to the ordinary course of business. As our growth continues, we may become party to an increasing number of litigation matters and claims. The outcome of litigation and claims cannot be predicted with certainty, and the resolution of these matters could materially affect our future results of operations, cash flows or financial position. We are not presently party to any legal proceedings that in the opinion of management, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, financial condition or cash flows.

Item 1A. Risk Factors

There have been no material changes in the risk factors included in the section entitled “Risk Factors” included in our 2022 Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None

Item 3. Defaults upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Insider Trading Arrangements

During the quarter ended June 30, 2023, none of our directors or officers (as defined in Section 16 of the Securities Exchange Act of 1934, as amended), adopted or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement” (each as defined in Item 408(a) and (c) of Regulation S-K).

Item 6. Exhibits

 

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EXHIBIT INDEX

 

Exhibit Number

 

Description

3.1

 

Second Amended and Restated Certificate of Incorporation of Instructure Holdings, Inc., filed July 23, 2021(1)

3.2

 

Amended and Restated Bylaws of Instructure Holdings, Inc., effective July 21, 2021(2)

3.3

 

Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation of Instructure Holdings, Inc., filed May 30, 2023

10.1

 

First Amendment to Credit Agreement, dated as of June 21, 2023, 2023, between JPMorgan Chase Bank, N.A., as administrative agent, Instructure Holdings, Inc. and the lenders and L/C issuers from time to time party thereto, including Exhibit A, which is a conformed copy off the Credit Agreement

31.1

 

Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

 

Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*

 

Certification of the Principal Executive Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS

 

Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH

 

Inline XBRL Taxonomy Extension Schema

101.CAL

 

Inline XBRL Taxonomy Extension Calculation

101.DEF

 

Inline XBRL Extension Definition

101.LAB

 

Inline XBRL Taxonomy Extension Label

101.PRE

 

Inline XBRL Taxonomy Extension Presentation

104

 

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

* Document has been furnished, is not deemed filed and is not to be incorporated by reference into any of the Company’s filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, irrespective of any general incorporation language contained in any such filing.

 

(1) Incorporated by reference to Exhibit 3.1 on Form 8-K filed on July 21, 2021

(2) Incorporated by reference to Exhibit 3.2 on Form 8-K filed on July 21, 2021

(3) Incorporated by reference to Exhibit 10.1 on Form 8-K filed on January 10, 2023
(4) Incorporated by reference to Exhibit 99.2 on Form 8-K filed on February 13, 2023

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

Instructure Holdings, Inc.

Date: August 2, 2023

By:

/s/Dale Bowen

Dale Bowen

 

Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)

 

 

 

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