SEC Form 10-Q filed by Instructure Holdings Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
OR
For the transition period from to
Commission file number:
(Exact name of registrant as specified in its charter)
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(I.R.S. Employer Identification No.) |
(Address of principal executive offices, including zip code)
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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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.
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).
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.
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Emerging growth company |
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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 May 7, 2024, there were
Instructure Holdings, Inc.
Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 2024
INDEX
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Item 1. |
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3 |
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3 |
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Condensed Consolidated Statements of Operations and Comprehensive Loss |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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20 |
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Item 3. |
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34 |
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Item 4. |
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35 |
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Item 1. |
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36 |
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Item 1A. |
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36 |
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Item 2. |
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36 |
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Item 3. |
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36 |
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Item 4. |
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36 |
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Item 5. |
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36 |
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Item 6. |
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36 |
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38 |
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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
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
INSTRUCTURE HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(in thousands, except per share amounts)
(unaudited)
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March 31, |
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December 31, |
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2024 |
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2023 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Funds held on behalf of customers |
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Accounts receivable—net |
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Prepaid expenses |
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Deferred commissions |
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Other current assets |
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Total current assets |
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Property and equipment, net |
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Right-of-use assets |
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Goodwill |
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Intangible assets, net |
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Noncurrent prepaid expenses |
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Deferred commissions, net of current portion |
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Deferred tax assets |
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Other assets |
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Total assets |
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$ |
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$ |
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Liabilities and stockholders’ equity |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Customer fund deposits |
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Accrued liabilities |
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Lease liabilities |
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Long-term debt, current |
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Deferred revenue |
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Total current liabilities |
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Long-term debt, net of current portion |
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Deferred revenue, net of current portion |
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Lease liabilities, net of current portion |
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Deferred tax liabilities |
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Other long-term liabilities |
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Total liabilities |
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Stockholders’ equity: |
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Common stock, par value $ |
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Additional paid-in capital |
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Accumulated deficit |
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( |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
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$ |
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$ |
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See accompanying notes.
3
INSTRUCTURE HOLDINGS, INC.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except per share amounts)
(unaudited)
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Three months ended |
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2024 |
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2023 |
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Revenue: |
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Subscription and support |
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$ |
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$ |
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Professional services and other |
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Total revenue |
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Cost of revenue: |
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Subscription and support |
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Professional services and other |
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Total cost of revenue |
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Gross profit |
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Operating expenses: |
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Sales and marketing |
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Research and development |
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General and administrative |
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Total operating expenses |
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Loss from operations |
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Other income (expense): |
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Interest income |
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Interest expense |
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Other income (expense) |
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( |
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Loss on extinguishment of debt |
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( |
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Total other income (expense), net |
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( |
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Loss before income taxes |
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Income tax benefit |
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Net loss and comprehensive loss |
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$ |
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$ |
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Net loss per common share, basic and diluted |
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$ |
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$ |
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Weighted average common shares used in computing basic and diluted net loss per common share |
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See accompanying notes.
4
INSTRUCTURE HOLDINGS, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands, except per share amounts)
(unaudited)
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Common |
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Stock, $0.01 |
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Additional |
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Total |
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Par Value |
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Paid-In |
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Accumulated |
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Stockholders’ |
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Shares |
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Amount |
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Capital |
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Deficit |
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Equity |
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Balances at December 31, 2023 |
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$ |
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$ |
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$ |
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$ |
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Vesting of restricted stock units |
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( |
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— |
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— |
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Purchase of ESPP shares |
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— |
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Shares withheld for tax withholding on vesting of restricted stock units |
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( |
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( |
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( |
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— |
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( |
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Stock-based compensation |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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( |
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Balances at March 31, 2024 |
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$ |
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$ |
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$ |
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$ |
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Common |
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Stock, $0.01 |
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Additional |
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Total |
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Par Value |
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Paid-In |
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Accumulated |
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Stockholders’ |
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Shares |
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Amount |
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Capital |
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Deficit |
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Equity |
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Balances at December 31, 2022 |
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$ |
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$ |
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$ |
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$ |
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Vesting of restricted stock units |
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( |
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— |
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— |
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Purchase of ESPP shares |
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— |
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Shares withheld for tax withholding on vesting of restricted stock units |
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( |
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( |
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( |
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— |
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( |
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Stock-based compensation |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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( |
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Balances at March 31, 2023 |
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$ |
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$ |
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$ |
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$ |
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5
INSTRUCTURE HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
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Three months ended |
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2024 |
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2023 |
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Operating activities: |
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Net loss |
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$ |
( |
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$ |
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Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
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Depreciation of property and equipment |
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Amortization of intangible assets |
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Amortization of deferred financing costs |
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Stock-based compensation |
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Deferred income taxes |
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Right-of-use assets |
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Other |
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Changes in assets and liabilities: |
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Accounts receivable, net |
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Prepaid expenses and other assets |
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( |
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( |
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Deferred commissions |
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Accounts payable and accrued liabilities |
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( |
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( |
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Deferred revenue |
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( |
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( |
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Lease liabilities |
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( |
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Other liabilities |
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( |
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( |
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Net cash used in operating activities |
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( |
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( |
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Investing activities: |
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Purchases of property and equipment |
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( |
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Proceeds from sale of property and equipment |
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Business acquisitions, net of cash received |
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Net cash used in investing activities |
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( |
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Financing activities: |
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Proceeds from issuance of common stock from employee equity plans |
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Shares repurchased for tax withholdings on vesting of restricted stock units |
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Proceeds from issuance of term debt, net of discount |
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Change in customer fund deposits |
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Repayments on long-term debt |
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( |
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Net cash provided by financing activities |
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Foreign currency impacts on cash, cash equivalents, restricted cash, and funds held on behalf of customers |
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Net decrease in cash, cash equivalents, restricted cash, and funds held on behalf of customers |
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Cash, cash equivalents, restricted cash, and funds held on behalf of customers, beginning of period |
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Cash, cash equivalents, restricted cash, and funds held on behalf of customers, end of period |
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$ |
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$ |
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Supplemental cash flow disclosure: |
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Cash paid for taxes |
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$ |
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$ |
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Interest paid |
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$ |
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$ |
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Non-cash investing and financing activities: |
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Capital expenditures incurred but not yet paid |
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$ |
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$ |
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See accompanying notes.
6
INSTRUCTURE HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
The following provides a reconciliation of cash, cash equivalents, restricted cash, and funds held on behalf of customers 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 (in thousands):
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As of March 31, |
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2024 |
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2023 |
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Cash and cash equivalents |
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$ |
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$ |
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Restricted cash |
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Funds held on behalf of customers |
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Total cash, cash equivalents, restricted cash, and funds held on behalf of customers |
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$ |
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$ |
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See accompanying notes.
7
INSTRUCTURE HOLDINGS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
1. Description of Business and Basis of Presentation
Company and Background
Instructure Holdings, Inc. (the “Company,” “Instructure,” “we,” “our,” or “us”) is an education technology company dedicated to elevating student access, amplifying the power of teaching, and inspiring everyone to learn together. Instructure’s platform delivers a next-generation learning management system (“LMS”), robust assessments for learning, actionable analytics, and engaging, dynamic content. Instructure offers its platform through a Software-as-a-Service, or SaaS, business model. The Company was founded 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, Ireland, Canada, 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, 2023, 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, 2024. 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, 2023, filed with the SEC on February 21, 2024 (the “2023 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, 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 (“CODM”), which are our chief executive officer and chief financial officer, in deciding how to allocate resources and assess performance. Our CODM 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.
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 2023 10-K. There have been no significant changes to these policies during the three months ended March 31, 2024, except as noted below.
8
Revenue Recognition
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 usage of our credential management 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. Consistent with ASC 606, Revenue from Contracts with Customers, revenue is recognized when control of these services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services. The timing of revenue recognition may differ from the timing of invoicing our customers. We record an unbilled receivable, which is included within accounts receivable—net on our consolidated balance sheets, when revenue is recognized prior to invoicing.
We determined revenue recognition through the following steps:
The following describes the nature of our primary types of revenue and the revenue recognition policies and significant payment terms as they pertain to the types of transactions we enter into with our customers.
Subscription and Support
Subscription and support revenue is derived from fees from customers to access and use our learning platform and our credential management platform, and support beyond the standard support that is included with all subscriptions. The terms of our subscriptions do not provide customers the right to take possession of the software. Subscription and support revenue from our learning platform is generally recognized on a ratable basis over the contract term. Payments from customers are primarily due annually in advance. Subscription and support revenue from our credential management platform is generally recognized based on the proportion of credentials transferred to the total estimated credentials to be transferred over the contract period. Customers choose to access and use the credential management platform through subscription contracts by committing to guaranteed minimum payments with excess volume billed in arrears, or through transactional contracts where payment generally occurs once an order is placed. The Company records pass through fees for transactional contracts on a net revenue basis, as the Company does not have control over the credential and is therefore acting as the agent.
Professional Services and Other
Professional services revenue is derived from implementation, training, and consulting services. Our professional services are typically considered distinct from the related subscription services as the promise to transfer the subscription can be fulfilled independently from the promise to deliver the professional services (i.e., customer receives standalone functionality from the subscription and the customer obtains the intended benefit of the subscription without the professional services). Professional services arrangements are billed in advance, and revenue from these arrangements is typically 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.
Contracts with Multiple Performance Obligations
Many of our contracts with customers contain multiple performance obligations. We account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price (“SSP”) basis. We determine the SSP based on our overall pricing objectives by reviewing our significant pricing practices, including discounting practices, geographical locations, the size and volume of our transactions, the customer type, price lists, our pricing strategy, and historical standalone sales. SSP is analyzed on a periodic basis to identify if we have experienced significant changes in our selling prices.
9
Deferred Commissions
Sales commissions earned by our sales force, as well as related payroll taxes, are considered incremental and recoverable costs of obtaining a contract with a customer. These costs are deferred and then amortized on a straight-line basis over a period of benefit that we have determined to be generally four years. We determined the period of benefit by taking into consideration our customer contracts, our technology and other factors. Amortization of deferred commissions is included in sales and marketing expenses in the accompanying consolidated statements of operations and comprehensive loss.
Deferred Revenue
Deferred revenue consists of billings and payments received in advance of revenue recognition generated by our subscription and support services and professional services and other, as described above.
Funds Held on Behalf of Customers and Customer Fund Deposits
Funds held on behalf of customers and customer fund deposits represent cash received or in-transit from credential requestors via third-party credit card processors and other payment methods. The Company generally remits payment to customers within 30 to 60 days following the purchase of a credential. Funds held on behalf of customers represent the total amount due to customers, and as such, a liability for the same amount is recorded to customer fund deposits. The funds held on behalf of customers are not available for general business use by the Company.
Recent Accounting Pronouncements
Issued accounting pronouncements
In November 2023, the FASB issued Accounting Standards Update (“ASU”) No. 2023-07, Improvements to Reportable Segment Disclosures (Topic 280), which updates reportable segment disclosure requirements by requiring disclosures of significant reportable segment expenses that are regularly provided to the CODM and included within each reported measure of a segment's profit or loss. The ASU is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. We do not expect the adoption of this guidance to have a material impact on our condensed consolidated financial statements and related notes.
In December 2023, the FASB issued ASU No. 2023-09, Improvements to Income Tax Disclosures (Topic 740), which requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as additional information on income taxes paid. The ASU is effective on a prospective basis for annual periods beginning after December 15, 2024. Early adoption is also permitted for annual financial statements that have not yet been issued or made available for issuance. We do not expect the adoption of this guidance to have a material impact on our condensed consolidated financial statements and related notes.
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 |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Numerator: |
|
|
|
|
|
|
||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
Denominator: |
|
|
|
|
|
|
||
Weighted-average common shares outstanding—basic |
|
|
|
|
|
|
||
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 |
|
|
|
|
|
|
||
Net loss per common share, basic and diluted |
|
$ |
( |
) |
|
$ |
( |
) |
10
For the three months ended March 31, 2024 and 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.
|
|
|
|
|
|
|
||
|
|
Three months ended |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Restricted stock units |
|
|
|
|
|
|
||
Shares issuable under employee stock purchase plan |
|
|
|
|
|
|
||
Total |
|
|
|
|
|
|
||
4. Property and Equipment
Property and equipment consisted of the following (in thousands):
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Computer and office equipment |
|
$ |
|
|
$ |
|
||
Capitalized software development costs |
|
|
|
|
|
|
||
Furniture and fixtures |
|
|
|
|
|
|
||
Leasehold improvements and other |
|
|
|
|
|
|
||
Total property and equipment |
|
|
|
|
|
|
||
Less accumulated depreciation and amortization |
|
|
( |
) |
|
|
( |
) |
Total |
|
$ |
|
|
$ |
|
||
Accumulated amortization for capitalized software development costs was $
11
5. Acquisitions
2024 Acquisitions
On February 1, 2024, we acquired all outstanding shares of PCS Holdings, LLC (“Parchment”), the world's largest academic credentialing platform and network. By adding Parchment to the Instructure Learning Platform, we provide a verifiable and comprehensive digital passport of achievement records and outcomes for learners.
At the time of the acquisition, we recorded a provisional net deferred tax liability of $
The following table summarizes the preliminary estimated fair values of the consideration transferred, assets acquired and liabilities assumed as of the date of the Parchment acquisition (in thousands):
Consideration transferred |
|
|
|
|
Cash paid |
|
$ |
|
|
Escrow |
|
|
|
|
Total purchase consideration |
|
$ |
|
|
|
|
|
|
|
Identifiable assets acquired |
|
|
|
|
Cash and cash equivalents |
|
$ |
|
|
Funds held on behalf of customers |
|
|
|
|
Accounts receivable |
|
|
|
|
Prepaid expenses and other assets |
|
|
|
|
Property and equipment |
|
|
|
|
Right-of-use assets |
|
|
|
|
Intangible assets: developed technology |
|
|
|
|
Intangible assets: trade name |
|
|
|
|
Intangible assets: customer relationships |
|
|
|
|
Total assets acquired |
|
$ |
|
|
|
|
|
|
|
Liabilities assumed |
|
|
|
|
Accounts payable and accrued liabilities |
|
$ |
|
|
Customer fund deposits |
|
|
|
|
Lease liabilities |
|
|
|
|
Deferred revenue |
|
|
|
|
Deferred tax liabilities |
|
|
|
|
Other liabilities |
|
|
|
|
Total liabilities assumed |
|
$ |
|
|
Goodwill |
|
|
|
|
Total purchase consideration |
|
$ |
|
|
For all periods presented, the excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired is recorded as goodwill, of which $
12
The following unaudited pro forma condensed combined financial information (in thousands) presents the results of operations of Instructure as if the Parchment acquisition occurred as of January 1, 2023. The unaudited pro forma results may not necessarily reflect actual results of operations that would have been achieved, nor are they necessarily indicative of future results of operations. The unaudited pro forma results reflect the elimination of historical intangible amortization expense incurred by Parchment and the step-up amortization adjustments for the fair value of intangible assets acquired, the elimination of historical interest expense incurred by Parchment on its debt and the incurrence of interest expense related to the issuance of debt in connection with the Parchment acquisition, and transaction expenses, nonrecurring post-combination compensation expense and the related adjustment to the income tax provision.
|
|
Three months ended |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Total revenue |
|
$ |
|
|
$ |
|
||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
Actual revenue and net loss recorded on Instructure's condensed combined statement of operations and comprehensive loss for Parchment during the three months ended March 31, 2024 was $
6. Goodwill and Intangible Assets
Goodwill activity was as follows (in thousands):
|
|
Total |
|
|
Balance as of December 31, 2023 |
|
$ |
|
|
Additions - see Note 5. “Acquisitions” |
|
|
|
|
Balance as of March 31, 2024 |
|
$ |
|
|
Intangible assets consisted of the following (in thousands):
|
|
Weighted-Average |
|
March 31, 2024 |
|
|
December 31, 2023 |
|
||||||||||||||||||
|
|
|
|
Gross |
|
|
Accumulated Amortization |
|
|
Net |
|
|
Gross |
|
|
Accumulated Amortization |
|
|
Net |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Software |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||||
Trade names |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||||
Developed technology |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||||
Customer relationships |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||||
Non-compete agreements |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||||
Total |
|
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||
Amortization expense for intangible assets was $
Based on the recorded intangible assets at March 31, 2024, estimated amortization expense is expected to be as follows (in thousands):
|
|
Amortization |
|
|
|
|
Expense |
|
|
Years Ending December 31, |
|
|
|
|
Remainder of 2024 |
|
$ |
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
2028 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
$ |
|
|
13
7. Credit Facility
On October 29, 2021, we entered into a credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, (the “2021 Credit Agreement”) governing our senior secured credit facilities (the “Senior Secured Credit Facilities”), consisting of a $
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 $
The Senior Term Loan has a
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
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
On February 1, 2024, we entered into the second amendment to the 2021 Credit Agreement as previously amended by the Amended 2021 Credit Agreement (the “Amended 2023 Credit Agreement”), by and among the Company and certain of its subsidiaries, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders named therein. Pursuant to the Amended 2023 Credit Agreement, among certain other amendments, the lenders agreed, severally and not jointly, to extend additional 2023 Incremental Term Loans (the “2023 Incremental Term Loans”) to Instructure under the 2021 Credit Agreement in an aggregate principal amount equal to $
As a result of the 2023 Incremental Term Loans, the Company capitalized $
14
As a result of the 2021 Refinancing, the Company capitalized $
The Amended Senior Secured Credit Facilities contain customary negative covenants. At March 31, 2024, the Company was in compliance with all applicable covenants pertaining to the Amended Senior Secured Credit Facilities.
The maturities of outstanding debt as of March 31, 2024 are as follows (in thousands):
|
|
Amount |
|
|
Years Ending December 31, |
|
|
|
|
Remainder of 2024 |
|
$ |
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
2028 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
$ |
|
|
8. Revenue
We have
|
|
|
|
|
|
|
||
|
|
Three months ended |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
|
|
|
|
|||||
United States |
|
$ |
|
|
$ |
|
||
Foreign |
|
|
|
|
|
|
||
Total revenue |
|
$ |
|
|
$ |
|
||
Percentage of revenue generated outside of the United States |
|
|
% |
|
|
% |
||
Deferred Revenue and Performance Obligations
During the three months ended March 31, 2024,
Transaction Price Allocated to the Remaining Performance Obligations
As of March 31, 2024, approximately $
Concentration of Credit Risk, Significant Customers and Provision for Credit Losses
There were
As of March 31, 2024 and December 31, 2023 there were
Our provisions for credit loss balances at March 31, 2024 and December 31, 2023 were $
15
9. Deferred Commissions
Deferred commissions primarily consist of sales commissions that are capitalized as incremental contract origination costs and were $
10. Stock-Based Compensation
As of March 31, 2024 and December 31, 2023, there were
Employee Equity Plans
The Instructure Parent, LP Incentive Equity Plan (the “2020 Plan”) was terminated in July 2021 in connection with the Company’s initial public offering (the “IPO”). As of the IPO date
In July 2021, our board of directors adopted the 2021 Omnibus Incentive Plan (the “2021 Plan”) and
During the three months ended March 31, 2024, we granted
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 |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
|
|
|
|
|||||
Restricted stock units |
|
|
|
|
|
|
||
Shares issuable under employee stock purchase plan |
|
|
|
|
|
|
||
Total stock-based compensation |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
|
|
Three months ended |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
|
|
|
|
|||||
Subscription and support cost of revenue |
|
$ |
|
|
$ |
|
||
Professional services and other cost of revenue |
|
|
|
|
|
|
||
Sales and marketing |
|
|
|
|
|
|
||
Research and development |
|
|
|
|
|
|
||
General and administrative |
|
|
|
|
|
|
||
Total stock-based compensation |
|
$ |
|
|
$ |
|
||
16
Restricted Stock Units
The following table summarizes the activity of RSUs for the three months ended March 31, 2024 (in thousands, except per unit amounts):
|
|
RSUs |
|
|
Weighted Average Grant Date Fair Value Per Unit |
|
||
Unvested and outstanding at December 31, 2023 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
|
|
||
Vested |
|
|
( |
) |
|
|
|
|
Forfeited or canceled |
|
|
( |
) |
|
|
|
|
Unvested and outstanding at March 31, 2024 |
|
|
|
|
$ |
|
||
As of March 31, 2024 and December 31, 2023, total unrecognized compensation cost related to unvested RSUs amounted to $
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 three months ended March 31, 2024 (in thousands, except per unit amounts):
|
|
RSUs |
|
|
Weighted Average Grant Date Fair Value Per Unit |
|
||
Unvested and outstanding at December 31, 2023 |
|
|
|
|
$ |
|
||
Vested |
|
|
( |
) |
|
|
|
|
Unvested and outstanding at Mach 31, 2024 |
|
|
|
|
$ |
|
||
There were no incentive units granted subsequent to December 31, 2021. As of March 31, 2024 and December 31, 2023, we had $
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 March 31, 2024 and 2023:
|
|
Three months ended |
||
|
|
2024 |
|
2023 |
Dividend yield |
|
|
||
Volatility |
|
|
||
Risk-free interest rate |
|
|
||
Expected life (years) |
|
|
||
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, Ireland, Canada 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.
17
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.
There were
Instruments Not Recorded at Fair Value on a Recurring Basis
We estimate the fair value of our Senior Term Loan and 2023 Incremental Term Loans carried at face value, less unamortized discount costs, quarterly for disclosure purposes. The estimated fair value of our Senior Term Loan and 2023 Incremental Term Loans is determined by Level 2 inputs, observable market-based inputs or unobservable inputs that are corroborated by market data. As of March 31, 2024, the fair value of our Senior Term Loan and 2023 Incremental Term Loans was $
13. Leases
The Company leases office space under non-cancelable operating leases with lease terms ranging from to
During the three months ended March 31, 2024, the Company vacated multiple floors of its leased office space at its headquarters in Salt Lake City, Utah, with the intention of subleasing the vacated office space. As a result, the Company recognized a loss on exit of leased properties of $
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 total lease costs were as follows (in thousands):
|
|
|
|
|
|
|
||
|
|
Three months ended |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
|
|
|
|
|||||
Operating lease cost, gross |
|
$ |
|
|
$ |
|
||
Variable lease cost, gross(1) |
|
|
|
|
|
|
||
Sublease income |
|
|
( |
) |
|
|
( |
) |
Total lease costs(2) |
|
$ |
|
|
$ |
|
||
18
Cash paid for amounts included in the measurement of operating lease liabilities for the three months ended March 31, 2024 were $
As of March 31, 2024, the maturities of the Company’s operating lease liabilities were as follows (in thousands):
Remainder of 2024 |
$ |
|
|
2025 |
|
|
|
2026 |
|
|
|
2027 |
|
|
|
2028 |
|
|
|
2029 and thereafter |
|
|
|
Total lease payments |
|
|
|
Less: |
|
|
|
Imputed interest |
|
( |
) |
Lease liabilities |
|
|
|
Tenant improvement reimbursements included in the measurement of lease liabilities but not yet received |
|
( |
) |
Lease liabilities, net |
$ |
|
|
As of March 31, 2024 and December 31, 2023, the weighted average remaining lease term was
14. Commitments and Contingencies
Non-cancelable purchase obligations
As of March 31, 2024, 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 $
Letters of Credit and Collateral Arrangements
As of March 31, 2024 and December 31, 2023, we had a total of $
Litigation
We are involved in various legal proceedings and claims, including challenges to trademarks, from time to time. 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, individually or in the aggregate, would have a material impact on our financial statements.
19
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 three months ended March 31, 2024 and March 31, 2023 the Company incurred $
In conjunction with the Amended 2023 Credit Agreement and the 2023 Incremental Term Loans, during the three months ended March 31, 2024, the Company paid affiliates of Thoma Bravo, LLC $
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, 2023 and the related notes thereto, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on February 21, 2024 (the “2023 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 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. Instructure is the LMS market share leader in both Higher Education and paid K-12, with over 8,000 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 acquisitions. Our platform becomes the invaluable digital infrastructure behind our customers’ instructional workflows. We recently acquired Parchment, the world's largest academic credentialing platform and network. By adding Parchment to the Instructure Learning Platform, we provide a verifiable and comprehensive digital passport of achievement records and outcomes for learners. Identification of Parchment's global customer count within Instructure's ecosystem is ongoing as part of our go-to-market alignment and integration efforts.
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, learning, and credentialing. 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 three months ended March 31, 2024 and 2023.
For the three months ended March 31, 2024 and 2023:
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.
20
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, and high interest rates could impact our business and customer spending. Certain of our customers may be negatively impacted by these events.
We have continued to experience high usage on our platform as our customers continue to embrace remote learning platforms and demand for our products remains high. These factors have generated a positive impact to our gross margin.
Instructure has witnessed a noteworthy surge in the volume of Non-Traditional use case projects entering the market. The expanding Non-Traditional student segment presents a substantial growth opportunity, and we believe Instructure is strategically positioned to seize this market share. Leveraging the awareness gained from Kindergarten through Higher Ed utilization and Instructure's product competencies in credentialing, further enhances our advantage in capturing this evolving market.
The U.S dollar may fluctuate relative to foreign currencies depending on whether the U.S. Federal Reserve maintains the federal funds interest rate or if they choose to lower the federal funds interest rate, which could further impact our reported expenses. The interest rate applicable to our Senior Term Loan decreased slightly from 8.68% as of December 31, 2023 to 8.35% as of March 31, 2024. 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. To be prepared for any similar future health crisis, institutions must make a fundamental shift to adopt cloud-based collaboration solutions. In order to continue providing a high-quality education and support in-person, remote, and hybrid learning. 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.
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 usage of our credential management 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.
21
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. Revenue derived from the use of our credential management platform is also subscription and support revenue, and is generally recognized based on the proportion of credentials transferred to the total estimated credentials to be transferred over the contract period. Customers choose to access and use the credential management platform through subscription contracts by committing to guaranteed minimum payments with excess volume billed in arrears, or through transactional contracts where payment generally occurs once an order is placed. The Company records pass through fees for transactional contracts on a net revenue basis, as the Company does not have control over the credential and is therefore acting as the agent.
Professional services and other revenue are derived primarily from training, implementation, and other professional fees, which generally take anywhere from 30 to 90 days to complete depending on customer-side complexity and timelines. These services include 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.
Instructure offers customers training services for an incremental fee which focus on creating confidence among users so they can be successful with our applications. Most training is performed remotely using web meeting technology, while the remainder is delivered in person. Because we have determined that training offerings are distinct from other performance obligations, we record training revenue upon the delivery of the service which can vary based on the nature of the training purchased. For trainings that are delivered live, revenue is recognized upon delivery. The Company offers customers unlimited access to online training services for a defined period of time, whereby revenue is recognized ratably over the defined contract term.
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 information technology. Our technology acquired through mergers and acquisitions is measured at its estimated fair value and is amortized over its estimated useful life.
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. Customer relationships and trade names acquired are amortized over their respective estimated useful lives.
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.
22
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 income tax benefit at March 31, 2024 consists of decreases in U.S. Federal and state deferred tax liabilities due to current year pretax book loss, net of valuation allowance released.
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 |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
|
|
(in thousands) |
|
|||||
Revenue: |
|
|
|
|
|
|
||
Subscription and support |
|
$ |
144,657 |
|
|
$ |
118,480 |
|
Professional services and other |
|
|
10,798 |
|
|
|
10,363 |
|
Total revenue |
|
|
155,455 |
|
|
|
128,843 |
|
Cost of revenue: |
|
|
|
|
|
|
||
Subscription and support(1) (2) (3) |
|
|
46,312 |
|
|
|
38,810 |
|
Professional services and other(1) (3) |
|
|
8,041 |
|
|
|
7,022 |
|
Total cost of revenue |
|
|
54,353 |
|
|
|
45,832 |
|
Gross profit |
|
|
101,102 |
|
|
|
83,011 |
|
Operating expenses: |
|
|
|
|
|
|
||
Sales and marketing(1) (2) (3) |
|
|
59,256 |
|
|
|
50,850 |
|
Research and development(1) (2) (3) |
|
|
27,536 |
|
|
|
23,702 |
|
General and administrative(1) (3) |
|
|
20,390 |
|
|
|
14,373 |
|
Total operating expenses |
|
|
107,182 |
|
|
|
88,925 |
|
Income (loss) from operations |
|
|
(6,080 |
) |
|
|
(5,914 |
) |
Other income (expense): |
|
|
|
|
|
|
||
Interest income |
|
|
2,508 |
|
|
|
1,341 |
|
Interest expense |
|
|
(22,596 |
) |
|
|
(9,485 |
) |
Other income (expense)(3) |
|
|
(1,835 |
) |
|
|
76 |
|
Loss on extinguishment of debt(3) |
|
|
(189 |
) |
|
|
— |
|
Total other income (expense), net |
|
|
(22,112 |
) |
|
|
(8,068 |
) |
Loss before income taxes |
|
|
(28,192 |
) |
|
|
(13,982 |
) |
Income tax benefit |
|
|
7,067 |
|
|
|
2,125 |
|
Net loss |
|
$ |
(21,125 |
) |
|
$ |
(11,857 |
) |
23
|
|
Three months ended |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
|
|
(in thousands) |
|
|||||
Cost of revenue: |
|
|
|
|
|
|
||
Subscription and support |
|
$ |
565 |
|
|
$ |
379 |
|
Professional services and other |
|
|
644 |
|
|
|
414 |
|
Sales and marketing |
|
|
3,114 |
|
|
|
2,528 |
|
Research and development |
|
|
3,840 |
|
|
|
3,174 |
|
General and administrative |
|
|
4,282 |
|
|
|
3,515 |
|
Total stock-based compensation |
|
$ |
12,445 |
|
|
$ |
10,010 |
|
|
|
Three months ended |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
|
|
(in thousands) |
|
|||||
Cost of revenue: |
|
|
|
|
|
|
||
Subscription and support |
|
$ |
17,838 |
|
|
$ |
16,073 |
|
Sales and marketing |
|
|
25,483 |
|
|
|
19,670 |
|
Research and development |
|
|
4 |
|
|
|
5 |
|
Total amortization of acquisition-related intangibles |
|
$ |
43,325 |
|
|
$ |
35,748 |
|
|
|
Three months ended |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
|
|
(in thousands) |
|
|||||
Cost of revenue: |
|
|
|
|
|
|
||
Subscription and support |
|
$ |
1,840 |
|
|
$ |
294 |
|
Professional services and other |
|
|
743 |
|
|
|
225 |
|
Sales and marketing |
|
|
2,264 |
|
|
|
1,759 |
|
Research and development |
|
|
3,046 |
|
|
|
3,568 |
|
General and administrative |
|
|
5,911 |
|
|
|
1,497 |
|
Other income (expense) |
|
|
(1,832 |
) |
|
|
250 |
|
Loss on extinguishment of debt |
|
|
189 |
|
|
|
— |
|
Total costs for transaction, globalization, restructuring, technology modernization, other non-recurring costs, and foreign currency gains and losses |
|
$ |
15,825 |
|
|
$ |
7,093 |
|
24
|
|
|
||
|
|
Three months ended |
||
|
|
2024 |
|
2023 |
|
|
(as a percentage of total revenue) |
||
Revenue: |
|
|
|
|
Subscription and support |
|
93% |
|
92% |
Professional services and other |
|
7 |
|
8 |
Total revenue |
|
100 |
|
100 |
Cost of revenue: |
|
|
|
|
Subscription and support |
|
30 |
|
30 |
Professional services and other |
|
5 |
|
5 |
Total cost of revenue |
|
35 |
|
35 |
Gross profit |
|
65 |
|
65 |
Operating expenses: |
|
|
|
|
Sales and marketing |
|
38 |
|
39 |
Research and development |
|
18 |
|
18 |
General and administrative |
|
13 |
|
11 |
Total operating expenses |
|
69 |
|
68 |
Income (loss) from operations |
|
(4) |
|
(3) |
Other income (expense): |
|
|
|
|
Interest income |
|
2 |
|
1 |
Interest expense |
|
(15) |
|
(7) |
Other income (expense) |
|
(1) |
|
— |
Loss on extinguishment of debt |
|
— |
|
— |
Total other income (expense), net |
|
(14) |
|
(6) |
Loss before income taxes |
|
(18) |
|
(9) |
Income tax benefit |
|
5 |
|
2 |
Net loss |
|
(13)% |
|
(7)% |
Comparison of the three months ended March 31, 2024 and three months ended March 31, 2023.
Revenue
|
|
|
|
|
|
|
|
|
|
|||||||
|
|
Three months ended |
|
|
Change |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
Amount |
|
|
% |
|
||||
|
|
(dollars in thousands) |
|
|||||||||||||
Subscription and support |
|
$ |
144,657 |
|
|
$ |
118,480 |
|
|
$ |
26,177 |
|
|
|
22 |
% |
Professional services and other |
|
|
10,798 |
|
|
|
10,363 |
|
|
|
435 |
|
|
|
4 |
|
Total revenue |
|
$ |
155,455 |
|
|
$ |
128,843 |
|
|
$ |
26,612 |
|
|
|
21 |
% |
25
Subscription and support revenue increased $26.2 million for the three months ended March 31, 2024. The increase is due to expanded use of our solutions, including among new and existing customers. For the three months ended March 31, 2024, revenue from new customers increased by $6.7 million, revenue from existing customers increased by $2.2 million, and revenue from Parchment accounted for $17.3 million of the increase. Included in those figures, international markets contributed 19% of the total revenue for the three months ended March 31, 2024, an increase of $2.7 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 $0.4 million for the three months ended March 31, 2024. The increase is due to the expanded use of our solutions as discussed above, as well as contributions from the acquisition of Parchment.
Cost of Revenue and Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
Three months ended |
|
|
Change |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
Amount |
|
|
% |
|
||||
|
|
(dollars in thousands) |
|
|||||||||||||
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Subscription and support |
|
$ |
46,312 |
|
|
$ |
38,810 |
|
|
$ |
7,502 |
|
|
|
19 |
% |
Professional services and other |
|
|
8,041 |
|
|
|
7,022 |
|
|
|
1,019 |
|
|
|
15 |
|
Total cost of revenue |
|
$ |
54,353 |
|
|
$ |
45,832 |
|
|
$ |
8,521 |
|
|
|
19 |
% |
Gross margin percentage |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Subscription and support revenue |
|
|
68 |
% |
|
|
67 |
% |
|
|
|
|
|
|
||
Professional services and other |
|
|
26 |
|
|
|
32 |
|
|
|
|
|
|
|
||
Total gross margin |
|
|
65 |
|
|
|
64 |
|
|
|
|
|
|
|
||
Subscription and support cost of revenue increased $7.5 million for the three months ended March 31, 2024 due to an increase in web hosting costs of $1.4 million, an increase in amortization of acquisition-related intangibles of $1.8 million, an increase in salaries, wages, and payroll-related benefits of $1.3 million, an increase in stock-based compensation of $0.2 million, an increase of $0.4 million due to exit of leased properties, an increase in amortization of capitalized software costs of $0.2 million, an increase of $0.2 million in software expense, and other insignificant increases totaling $0.1 million. Additionally, subscription and support cost of revenue increased $1.9 million due to the addition of Parchment's printing operations and merchant fees.
Professional services and other cost of revenue did not significantly change for the three months ended March 31, 2024 due to an increase in salaries, wages, and payroll-related benefits of $0.7 million, an increase in stock-based compensation of $0.2 million, and an increase in bonuses of $0.1 million.
Operating Expenses
Sales and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
Three months ended |
|
|
Change |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
Amount |
|
|
% |
|
||||
|
|
(dollars in thousands) |
|
|||||||||||||
Sales and marketing |
|
$ |
59,256 |
|
|
$ |
50,850 |
|
|
$ |
8,406 |
|
|
|
17 |
% |
Sales and marketing expenses increased $8.4 million for the three months ended March 31, 2024 due to an increase in salaries, wages, and payroll-related benefits of $1.0 million, an increase in amortization of acquisition-related intangibles of $5.8 million, an increase in stock-based compensation of $0.6 million, an increase in commissions of $0.1 million, an increase in software expense of $0.3 million, an increase in employee-related expense of $0.7 million, and an increase in exit of leased properties of $0.3 million. These increases were offset by a decrease in marketing expenses, including tradeshows, conferences, and public relations, of $0.1 million and a decrease in travel-related expense of $0.3 million.
26
Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
Three months ended |
|
|
Change |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
Amount |
|
|
% |
|
||||
|
|
(dollars in thousands) |
|
|||||||||||||
Research and development |
|
$ |
27,536 |
|
|
$ |
23,702 |
|
|
$ |
3,834 |
|
|
|
16 |
% |
Research and development expenses increased $3.8 million for the three months ended March 31, 2024 due to an increase in salaries, wages, and payroll-related benefits of $2.9 million, an increase in stock-based compensation of $0.7 million, an increase in bonuses of $0.1 million, an increase in exit of leased properties of $0.4 million, and an increase in systems and hardware of $0.2 million. These increases were offset by a decrease in third-party contractor and consulting costs of $0.3 million.
General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
Three months ended |
|
|
Change |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
Amount |
|
|
% |
|
||||
|
|
(dollars in thousands) |
|
|||||||||||||
General and administrative |
|
$ |
20,390 |
|
|
$ |
14,373 |
|
|
$ |
6,017 |
|
|
|
42 |
% |
General and administrative expenses increased by $6.0 million for the three months ended March 31, 2024 due to increases in third-party contractor and consulting costs of $3.5 million, an increase in salaries, wages, and payroll-related benefits of $1.3 million, an increase in stock-based compensation of $0.8 million, an increase in bonuses of $0.3 million, and other insignificant increases totaling $0.1 million.
Other Income (Expense), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
Three months ended |
|
|
Change |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
Amount |
|
|
% |
|
||||
|
|
(dollars in thousands) |
|
|||||||||||||
Other income (expense), net |
|
$ |
(22,112 |
) |
|
$ |
(8,068 |
) |
|
$ |
(14,044 |
) |
|
|
174 |
% |
Other income (expense), net includes interest income and expense and the impact of foreign currency transaction gains and losses. Other income (expense), net increased $14.0 million for the three months ended March 31, 2024 as a result of increased interest expense of $13.1 million due to additional borrowings on our Senior Term Loan (as defined below), an increase of $0.2 million due to loss on extinguishment of debt, and an increase of $2.1 million related to realized and unrealized foreign currency gains. This increase in expense was offset by an increase in interest income of $1.2 million and a gain of $0.2 million related to disposal of fixed assets.
Income Tax Benefit
|
|
Three months ended |
|
|
Change |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
Amount |
|
|
% |
|
||||
|
|
(dollars in thousands) |
|
|||||||||||||
Income tax benefit |
|
$ |
7,067 |
|
|
$ |
2,125 |
|
|
$ |
4,942 |
|
|
|
233 |
% |
Income tax benefit increased $4.9 million for the three months ended March 31, 2024. Income tax benefit consists of current and deferred taxes for U.S. and foreign income taxes. The increase is due to forecasted net loss related to the Parchment acquisition.
27
Liquidity and Capital Resources
As of December 31, 2023 our principal sources of liquidity were cash, cash equivalents, and restricted cash, and, as of March 31, 2024 our principal sources of liquidity were cash, cash equivalents, restricted cash, and funds held on behalf of customers. For March 31, 2024 and December 31, 2023, these amounts totaled $89.3 million and $344.2 million, respectively, which were held for working capital purposes, as well as the available balance of our Senior Revolver (as defined below). As of March 31, 2024 and December 31, 2023, 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 Amended Senior Secured Credit Facilities (as defined below) 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 payments under our Amended Senior Secured Credit Facilities 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 2023 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 March 31, 2024, we had deferred revenue of $235.0 million, of which $223.2 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, 2023, we had deferred revenue of $302.7 million, of which $291.8 million was recorded as a current liability.
The following table shows our cash flows for the three months ended March 31, 2024 and 2023:
|
|
|
|
|
|
|
||
|
|
Three months ended |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
|
|
(in thousands) |
|
|||||
Net cash used in operating activities |
|
$ |
(92,553 |
) |
|
$ |
(80,918 |
) |
Net cash used in investing activities |
|
|
(823,612 |
) |
|
|
(1,321 |
) |
Net cash provided by financing activities |
|
|
662,191 |
|
|
|
766 |
|
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 October 29, 2021, we entered into a credit agreement with JPMorgan Chase Bank, N.A., 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 our initial credit agreement entered into in March 2020 with a syndicate of lenders and Golub Capital Markets LLC (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.
28
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 March 31, 2024 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 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. 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 Net 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.
On February 1, 2024, we entered into the second amendment to the 2021 Credit Agreement as previously amended by the Amended 2021 Credit Agreement (the “Amended 2023 Credit Agreement”), by and among the Company and certain of its subsidiaries, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders named therein. Pursuant to the Amended 2023 Credit Agreement, among certain other amendments, the lenders agreed, severally and not jointly, to extend additional 2023 Incremental Term Loans (as defined in the 2021 Credit Agreement) (the “2023 Incremental Term Loans”) to Instructure under the 2021 Credit Agreement in an aggregate principal amount equal to $685.0 million. The Company used the proceeds of the 2023 Incremental Term Loans, borrowed under the 2021 Credit Agreement, to finance (i) the cash consideration for the acquisition of Parchment, and (ii) fees and costs incurred in connection with the acquisition and related transactions. The Senior Secured Credit Facilities, together with the Amended 2023 Credit Agreement, comprise our amended senior secured credit facilities (the “Amended Senior Secured Credit Facilities”).
As of March 31, 2024, we had outstanding borrowings of $1,173.3 million on the Senior Term Loan and the 2023 Incremental Term Loans, no outstanding borrowings under our Senior Revolver and $1.0 million outstanding under letters of credit.
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 three months ended March 31, 2024 was $92.6 million, which was attributable to a net loss of $21.1 million adjusted for certain non-cash items, including $12.4 million of stock-based compensation expense, $44.7 million of depreciation and amortization, $1.0 million of amortization of debt discount and issuance costs, $0.6 million of right-of-use assets, and $1.3 million in other non-cash items. These amounts were offset by a decrease of $7.9 million to deferred income taxes. Working capital sources of cash included a net decrease of $60.8 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 $52.5 million, while accounts payable and accrued liabilities decreased by $10.4 million, lease liabilities increased by $1.4 million, other liabilities decreased by $2.0 million, and deferred commissions decreased by $1.9 million.
Net cash used operating activities during the three months ended March 31, 2023 was $80.9 million, which was attributable to a net loss of $11.9 million adjusted for certain non-cash items, including $9.6 million of stock-based compensation expense, $35.7 million of depreciation and amortization, $0.3 million of amortization of debt discount and issuance costs, $3.1 million of deferred income taxes and $0.2 million of other non-cash items. Working capital sources of cash included a net decrease of $66.0 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 $39.6 million, while accounts payable and accrued liabilities decreased by $7.2 million, lease liabilities decreased by $1.9 million, other liabilities decreased by $0.3 million, deferred commissions decreased by $0.9 million, and right-of-use assets decreased by $1.0 million.
29
Investing Activities
Our investing activities have consisted primarily 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 three months ended March 31, 2024 was $823.6 million, consisting of purchases of property and equipment of $1.9 million and business acquisitions, net of cash received, of $821.7 million related to the acquisition of Parchment.
Net cash used in investing activities during the three months ended March 31, 2023 was $1.3 million, consisting of purchases of property and equipment.
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, borrowings and repayments of long-term debt, and changes in customer fund deposits.
Net cash provided by financing activities during the three months ended March 31, 2024 was $662.2 million, which consisted of borrowings under the 2023 Incremental Term Loans, net of discount, of $664.3 million, $3.2 million in proceeds from the issuance of common stock from employee equity plans, offset by $1.6 million of shares repurchased for tax withholdings on vesting of RSUs, $3.0 million in repayments on long-term debt, and $0.8 million decrease in customer fund deposits.
Net cash provided by financing activities during the three months ended March 31, 2023 was $0.8 million, which consisted of $3.3 million in proceeds from the issuance of common stock from employee equity plans, offset by $1.3 million of shares repurchased for tax withholdings on vesting of restricted stock units, and a $1.3 million payment on long-term debt.
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.
For information on our critical accounting estimates, see the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in our 2023 10-K.
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.
30
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, globalization costs, restructuring costs, technology modernization costs, other non-recurring costs, and amortization of acquisition-related intangibles 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 |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
|
|
(in thousands) |
|
|||||
Income (loss) from operations |
|
|
(6,080 |
) |
|
|
(5,914 |
) |
Stock-based compensation |
|
|
12,445 |
|
|
|
10,010 |
|
Transaction costs(1) |
|
|
5,615 |
|
|
|
3,839 |
|
Globalization costs(2) |
|
|
890 |
|
|
|
9 |
|
Restructuring costs(3) |
|
|
4,930 |
|
|
|
3,224 |
|
Technology modernization costs(4) |
|
|
2,266 |
|
|
|
215 |
|
Other non-recurring costs (5) |
|
|
102 |
|
|
|
56 |
|
Amortization of acquisition-related intangibles |
|
|
43,326 |
|
|
|
35,748 |
|
Non-GAAP operating income |
|
$ |
63,494 |
|
|
$ |
47,187 |
|
31
Free Cash Flow
We define free cash flow as net cash provided by 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 provided by operating activities to free cash flow for each of the periods indicated:
|
|
Three months ended |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
|
|
(in thousands) |
|
|||||
Net cash used in operating activities |
|
$ |
(92,553 |
) |
|
$ |
(80,918 |
) |
Purchases of property and equipment and intangible assets |
|
|
(1,881 |
) |
|
|
(1,327 |
) |
Proceeds from disposals of property and equipment |
|
|
8 |
|
|
|
6 |
|
Free cash flow |
|
$ |
(94,426 |
) |
|
$ |
(82,239 |
) |
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, globalization costs, restructuring costs, technology modernization costs, other non-recurring costs, effects of foreign currency transaction losses, amortization of acquisition-related intangibles, and interest income. 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 |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
|
|
(in thousands) |
|
|||||
Net loss |
|
$ |
(21,125 |
) |
|
$ |
(11,857 |
) |
Interest on outstanding debt and loss on debt extinguishment |
|
|
22,785 |
|
|
|
9,485 |
|
Benefit for taxes |
|
|
(7,067 |
) |
|
|
(2,125 |
) |
Depreciation |
|
|
1,343 |
|
|
|
1,203 |
|
Amortization |
|
|
— |
|
|
|
2 |
|
Stock-based compensation |
|
|
12,445 |
|
|
|
10,010 |
|
Transaction costs(1) |
|
|
5,615 |
|
|
|
3,839 |
|
Globalization costs(2) |
|
|
890 |
|
|
|
9 |
|
Restructuring costs(3) |
|
|
4,930 |
|
|
|
3,325 |
|
Technology modernization costs(4) |
|
|
2,266 |
|
|
|
215 |
|
Other non-recurring costs(5) |
|
|
102 |
|
|
|
56 |
|
Effects of foreign currency transaction losses |
|
|
1,832 |
|
|
|
(351 |
) |
Amortization of acquisition-related intangibles |
|
|
43,326 |
|
|
|
35,748 |
|
Interest income |
|
|
(2,398 |
) |
|
|
(1,301 |
) |
Adjusted EBITDA |
|
$ |
64,944 |
|
|
$ |
48,258 |
|
32
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 (the “Exchange Act”). 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:
33
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 three months ended March 31, 2024, 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 $89.3 million and $344.2 million as of March 31, 2024 and December 31, 2023, 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 March 31, 2024 and December 31, 2023, we also had in place a $125.0 million Senior Revolver and approximately $491.3 million and $1,173.3 million outstanding on our Senior Term Loan and 2023 Incremental Term Loans, respectively. As of March 31, 2024 and December 31, 2023, we had no outstanding borrowings under our Senior Revolver. The Senior Revolver bears interest at 2.5% whereas the Senior Term Loan and 2023 Incremental Term Loans bear interest at 2.75% plus a variable applicable rate. At March 31, 2024 and December 31, 2023, the applicable rate was 8.35% and 8.68%, respectively.
We have an agreement to maintain cash balances at a financial institution of no less than $1.0 million as collateral for several letters of credit for the purpose of securing certain of the Company’s obligations under facility leases.
34
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 Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. 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 March 31, 2024 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.
35
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are, and from time to time may be, party to litigation and subject to claims. 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.
Item 1A. Risk Factors
A discussion of the material factors that make an investment in us risky is included in the section entitled “Risk Factors” included in our 2023 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 March 31, 2024, none of our directors or officers (as defined in Section 16 of the Exchange Act),
Item 6. Exhibits
36
EXHIBIT INDEX
Exhibit Number |
|
Description |
3.1 |
|
|
3.2 |
|
|
3.3 |
|
Amended and Restated Bylaws of Instructure Holdings, Inc., effective July 21, 2021(2) |
10.1 |
|
|
31.1 |
|
|
31.2 |
|
|
32.1* |
|
|
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 3.3 on Form 10-Q filed on August 2, 2023
(3) Incorporated by reference to Exhibit 3.2 on Form 8-K filed on July 21, 2021
(4) Incorporated by reference to Exhibit 10.1 on Form 8-K filed on February 1, 2024
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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.
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Instructure Holdings, Inc. |
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Date: May 9, 2024 |
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By: |
/s/Peter Walker |
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Peter Walker |
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Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) |
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