Instructure(INST) - 2021 Q4 - Annual Report

Part I Business Instructure provides a cloud-native SaaS learning platform, serving nearly 7,000 global customers, with 2021 revenue of $405.4 million and a net loss of $88.7 million Financial Performance Summary (in millions) | Period | Revenue | Net Loss | | :--- | :--- | :--- | | 2021 (Successor) | $405.4 | $(88.7) | | Successor 2020 Period | $230.7 | $(178.0) | | Predecessor 2020 Period | $71.4 | $(22.2) | | 2019 (Predecessor) | $258.5 | $(80.8) | - The company operates a SaaS business model, providing a scalable, cloud-native learning platform with a guaranteed 99.9% uptime[15][20][26] - Instructure's platform includes a suite of solutions beyond the core Canvas LMS, such as Canvas Studio, MasteryConnect, Impact, and Elevate Data Sync[16][21] - As of December 31, 2021, the company served nearly 7,000 customers in over 100 countries, including all Ivy League universities, with no single customer accounting for more than 10% of 2021 revenue[45] - The company competes with established LMS providers like Blackboard, D2L, Moodle, and Schoology, differentiating itself through its comprehensive, integrated platform offering[56][57] - The company is subject to various data privacy and security regulations, including GDPR, CCPA, FERPA, and COPPA[66][67][69] Risk Factors The company faces risks including potential post-COVID customer decline, net losses, intense competition, security breaches, reliance on third-party infrastructure, substantial indebtedness, and regulatory complexities - COVID-19 Related Risks: The company benefited from U.S. federal stimulus packages and increased demand for remote learning due to the pandemic, but these trends may not be sustained, potentially affecting customer acquisition and renewals[78][80] - Business and Financial Risks: The company has a history of net losses, reporting $88.7 million in 2021, and anticipates continued losses as it invests in growth, facing significant competition and unpredictable sales cycles[89][108][111] - Technology and Security Risks: The business relies on AWS for its cloud infrastructure, making it vulnerable to service disruptions, and a security breach could lead to unauthorized data access, reputational damage, and significant liabilities; a substantial portion of the Canvas source code is open source, which could enable competition and create licensing risks[134][139][146] - Regulatory Risks: The company is subject to complex and evolving global data privacy laws, such as GDPR and CCPA, as well as U.S. education-specific regulations like FERPA and COPPA, with non-compliance potentially resulting in significant fines and business harm[159][162][168] - Indebtedness Risks: As of December 31, 2021, the company had approximately $500.0 million in outstanding term loans, requiring significant cash flow for service and including covenants that restrict operational and financial flexibility[192][193] - Ownership and Governance Risks: Thoma Bravo controls approximately 86.7% of the company's voting power, qualifying it as a "controlled company," which allows it to control board elections and exempts the company from certain NYSE corporate governance requirements[204][207] Unresolved Staff Comments The company reports that it has no unresolved comments from the staff of the Securities and Exchange Commission - None Properties Instructure's corporate headquarters are in Salt Lake City, Utah, with additional leased offices globally, including London, Sydney, Sao Paulo, and Budapest - The main corporate headquarters are in Salt Lake City, Utah, under leases expiring in 2025 and 2027[233] - International headquarters are in London, England, with other key offices in Australia, Brazil, and Hungary[233] Legal Proceedings The company is defending a class action lawsuit filed in February 2021 in Delaware, alleging breach of fiduciary duties related to the 2020 Take-Private Transaction - A class action lawsuit, Oklahoma Law Enforcement Retirement System v. Goldsmith et al., was filed concerning the Take-Private Transaction[235] - The complaint alleges breach of fiduciary duties by former directors/officers and that Instructure Holdings, LLC and Thoma Bravo entities aided and abetted these breaches[235] - The company filed a motion to dismiss the amended complaint in October 2021 and believes the claims are without merit[236] Mine Safety Disclosures This item is not applicable to the company's business operations - Not applicable Part II Market for Registrant's Common Equity, Related Stockholders Matters and Issuer Purchases of Equity Securities Instructure's common stock began trading on NYSE in July 2021, with no cash dividends paid or planned, and limited share repurchases for tax obligations - The company's common stock began trading on the NYSE on July 22, 2021, under the symbol "INST"[240] - The company has never declared or paid cash dividends and does not anticipate paying any in the foreseeable future, with its ability to do so also restricted by its credit facility[242] Issuer Purchases of Equity Securities (Q4 2021) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | Oct 2021 | — | $ — | | Nov 2021 | — | $ — | | Dec 2021 | 10,000 | $21.70 | | Total | 10,000 | $21.70 | Reserved This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's SaaS business model, 2021 financial performance with $405.4 million revenue, key growth metrics, liquidity, and non-GAAP measures - The company's business model is primarily based on subscription and support revenue from its SaaS learning platform, which accounted for 91% of total revenue in 2021[252][253] - The COVID-19 pandemic accelerated the adoption of the company's learning platform, resulting in increased operational performance and cash flows, though it also increased operating costs due to higher usage[262][263] Key Business Metrics | Metric | Dec 31, 2019 | Dec 31, 2020 | Dec 31, 2021 | | :--- | :--- | :--- | :--- | | Number of Customers | ~5,000 | ~6,000 | ~7,000 | | Net Revenue Retention Rate | 107% | 117% | 109% | | Gross Revenue Retention Rate | 95% | 96% | 95% | | Remaining Performance Obligations (RPO) | $599M | $569M | $698M | Results of Operations Summary (in thousands) | Line Item | 2021 (Successor) | Successor 2020 Period | Predecessor 2020 Period | | :--- | :--- | :--- | :--- | | Total revenue | $405,361 | $230,673 | $71,389 | | Gross profit | $235,496 | $106,523 | $46,991 | | Loss from operations | $(46,948) | $(172,543) | $(16,587) | | Net loss | $(88,679) | $(177,981) | $(22,203) | - As of December 31, 2021, principal sources of liquidity were cash and cash equivalents of $169.2 million and available credit facilities, with $500.0 million outstanding on its Senior Term Loan[308][322] Non-GAAP Financial Measures (in thousands) | Measure | 2021 (Successor) | Successor 2020 Period | Predecessor 2020 Period | | :--- | :--- | :--- | :--- | | Non-GAAP Operating Income | $143,717 | $62,639 | $1,468 | | Free Cash Flow | $100,937 | $35,331 | $(57,771) | | Adjusted EBITDA | $146,678 | $66,325 | $4,809 | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks include foreign currency fluctuations, significant interest rate exposure from variable-rate debt, and minimal impact from inflation in 2021 - The company is exposed to foreign currency risk as operating expenses are denominated in various currencies, primarily in Europe and Australia, while most sales are in U.S. dollars[380] - Significant interest rate risk exists due to approximately $500.0 million in outstanding variable-rate debt under the Senior Term Loan as of December 31, 2021[381][382] - Management does not believe that inflation had a material effect on the business, financial condition, or results of operations for the fiscal year ended December 31, 2021[384] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2021, including balance sheets, income statements, cash flows, and notes, with revenue allocation identified as a critical audit matter - The financial statements are presented for two distinct periods due to the Take-Private Transaction on March 24, 2020: the "Predecessor" period (before March 31, 2020) and the "Successor" period (after April 1, 2020)[420] Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Assets | $2,133,782 | $2,268,631 | | Cash and cash equivalents | $164,928 | $146,212 | | Goodwill | $1,194,221 | $1,172,395 | | Total Liabilities | $859,397 | $1,180,647 | | Long-term debt, net | $493,263 | $827,043 | | Deferred revenue | $255,676 | $204,879 | | Total Stockholders' Equity | $1,274,385 | $1,087,984 | - The independent auditor, Ernst & Young LLP, identified the allocation of revenue in contracts with multiple performance obligations as a critical audit matter due to the judgment required in identifying distinct performance obligations and estimating standalone selling prices[397][398] - In 2021, the company completed two acquisitions: Eesysoft (rebranded as Impact) for $19.0 million and Kimono (rebranded as Elevate Data Sync) for $11.4 million[482][485] - On February 26, 2021, the company sold its corporate learning platform subsidiary, Bridge, for a total purchase price of $47.0 million[516] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports that there have been no changes in or disagreements with its accountants regarding any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure - None Controls and Procedures Management concluded disclosure controls were effective as of December 31, 2021, with no material changes to internal controls, and no management assessment of internal controls over financial reporting due to exemption - Management concluded that disclosure controls and procedures were effective as of December 31, 2021[581] - The report does not include a management assessment of internal control over financial reporting, as permitted for newly public companies[582] - There were no material changes in internal control over financial reporting during the fourth quarter of 2021[583] Other Information This item is not applicable - Not applicable Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable - Not applicable Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the forthcoming 2022 Proxy Statement - Information is incorporated by reference from the forthcoming 2022 Proxy Statement[589] Executive Compensation The information required for this item regarding executive compensation is incorporated by reference from the company's 2022 Proxy Statement - Information is incorporated by reference from the forthcoming 2022 Proxy Statement[590] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required for this item concerning security ownership is incorporated by reference from the company's 2022 Proxy Statement - Information is incorporated by reference from the forthcoming 2022 Proxy Statement[591] Certain Relationships and Related Transactions, and Director Independence The information required for this item regarding related party transactions and director independence is incorporated by reference from the company's 2022 Proxy Statement - Information is incorporated by reference from the forthcoming 2022 Proxy Statement[592] Principal Accountant Fees and Services The information required for this item regarding principal accountant fees and services is incorporated by reference from the company's 2022 Proxy Statement - Information is incorporated by reference from the forthcoming 2022 Proxy Statement[593] Part IV Exhibits, Financial Statement Schedules This section lists all financial statements and exhibits filed with the Form 10-K, including corporate governance documents, material contracts, and certifications - This item lists all financial statements, schedules, and exhibits filed with the Annual Report on Form 10-K[596] Form 10-K Summary This item is not applicable - Not applicable