Instructure(INST) - 2023 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION (Unaudited) This section presents Instructure's unaudited condensed consolidated financial statements and management's discussion for Q1 2023 Item 1. Condensed Consolidated Financial Statements (Unaudited) This section presents Instructure's unaudited condensed consolidated financial statements and detailed notes for Q1 2023 Condensed Consolidated Balance Sheets This section provides a snapshot of Instructure's financial position at March 31, 2023, and December 31, 2022 | Metric (in thousands) | March 31, 2023 | December 31, 2022 | | :-------------------- | :------------- | :---------------- | | Cash and cash equivalents | $104,758 | $185,954 | | Total current assets | $229,954 | $285,036 | | Total assets | $2,065,870 | $2,153,489 | | Total current liabilities | $254,321 | $334,057 | | Total liabilities | $789,891 | $877,362 | | Total stockholders' equity | $1,275,979 | $1,276,127 | - Cash and cash equivalents decreased by $81.2 million from December 31, 2022, to March 31, 2023[10] - Total assets decreased by $87.6 million, while total liabilities decreased by $87.5 million over the quarter[10] Condensed Consolidated Statements of Operations and Comprehensive Loss This section details Instructure's financial performance, including revenue, gross profit, and net loss for Q1 2023 and Q1 2022 | Metric (in thousands) | Three months ended March 31, 2023 | Three months ended March 31, 2022 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Total revenue | $128,843 | $113,462 | | Gross profit | $83,011 | $72,451 | | Loss from operations | $(5,914) | $(3,687) | | Net loss | $(11,857) | $(5,545) | | Net loss per common share, basic and diluted | $(0.08) | $(0.04) | - Total revenue increased by 13.6% year-over-year, from $113.5 million in Q1 2022 to $128.8 million in Q1 2023[12] - Net loss more than doubled, increasing from $5.5 million in Q1 2022 to $11.9 million in Q1 2023, resulting in a higher net loss per common share[12] Condensed Consolidated Statements of Stockholders' Equity This section outlines changes in Instructure's stockholders' equity for the three months ended March 31, 2023 | Metric (in thousands) | December 31, 2022 | March 31, 2023 | | :-------------------- | :---------------- | :------------- | | Common Stock, $0.01 Par Value (Amount) | $1,429 | $1,435 | | Additional Paid-In Capital | $1,575,600 | $1,587,303 | | Accumulated Deficit | $(300,902) | $(312,759) | | Total Stockholders' Equity | $1,276,127 | $1,275,979 | - Total stockholders' equity remained relatively stable, decreasing slightly from $1,276.1 million at December 31, 2022, to $1,276.0 million at March 31, 2023[15] - The accumulated deficit increased by $11.8 million, primarily due to the net loss incurred during the quarter[15] Condensed Consolidated Statements of Cash Flows This section presents Instructure's cash flows from operating, investing, and financing activities for Q1 2023 and Q1 2022 | Cash Flow Activity (in thousands) | Three months ended March 31, 2023 | Three months ended March 31, 2022 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(80,918) | $(65,945) | | Net cash used in investing activities | $(1,321) | $(1,311) | | Net cash provided by financing activities | $766 | $2,813 | | Net decrease in cash, cash equivalents, and restricted cash | $(81,172) | $(63,853) | - Net cash used in operating activities increased by $14.9 million, from $65.9 million in Q1 2022 to $80.9 million in Q1 2023[18] - Net cash provided by financing activities decreased significantly from $2.8 million in Q1 2022 to $0.8 million in Q1 2023[18] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations of Instructure's accounting policies and specific financial statement line items 1. Description of Business and Basis of Presentation This note describes Instructure's business as an education technology company and its financial statement presentation basis - Instructure is an education technology company providing a cloud-based learning platform (SaaS model) focused on elevating student access, amplifying teaching, and inspiring learning[24] - The company operates in a single operating segment: cloud-based learning management, assessment, and performance systems[28] 2. Summary of Significant Accounting Policies This note outlines Instructure's key accounting policies and recent accounting pronouncement adoptions - No significant changes to accounting policies occurred during the three months ended March 31, 2023[29] - Recent accounting pronouncements adopted in January 2022 (ASU 2021-05, 2021-01, 2021-08) did not have a material impact on the financial statements[30][31][32] 3. Net Loss Per Share This note details the calculation of Instructure's basic and diluted net loss per common share | Metric (in thousands, except per share) | Three months ended March 31, 2023 | Three months ended March 31, 2022 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | | Net loss | $(11,857) | $(5,545) | | Weighted-average common shares outstanding—basic and diluted | 143,112 | 140,952 | | Net loss per common share, basic and diluted | $(0.08) | $(0.04) | - Potentially dilutive shares (RSUs and ESPP shares) were excluded from diluted EPS calculation for both periods as the company incurred net losses, making their effect anti-dilutive[35] 4. Property and Equipment This note provides a breakdown of Instructure's property and equipment, including capitalized software development costs | Category (in thousands) | March 31, 2023 | December 31, 2022 | | :---------------------- | :------------- | :---------------- | | Computer and office equipment | $5,581 | $5,528 | | Capitalized software development costs | $9,344 | $8,585 | | Total property and equipment, net | $12,249 | $12,380 | - Amortization expense for capitalized software development costs increased from $0.3 million in Q1 2022 to $0.6 million in Q1 2023[36] 5. Acquisitions This note details Instructure's strategic acquisitions of Concentric Sky and LearnPlatform to expand its offerings - In April 2022, Instructure acquired Concentric Sky (rebranded to Canvas Credentials) for $21.3 million to enhance its integrated teaching and learning platform[38][39] - In December 2022, Instructure acquired LearnPlatform for $94.0 million to add evidence-based insights into inventory, compliance, procurement, and usage for educational organizations[40][41] - Goodwill generated from these acquisitions is primarily attributable to expected synergies and assembled workforce values[41] 6. Goodwill and Intangible Assets This note presents the carrying values of Instructure's goodwill and various intangible assets | Intangible Asset (in thousands) | March 31, 2023 (Net) | December 31, 2022 (Net) | | :------------------------------ | :------------------- | :---------------------- | | Trade names | $86,811 | $90,164 | | Developed technology | $141,433 | $157,700 | | Customer relationships | $278,641 | $294,765 | | Non-compete agreements | $45 | $49 | | Total Intangible Assets, Net | $506,930 | $542,679 | - Goodwill remained constant at $1,266.4 million from December 31, 2022, to March 31, 2023[43] - Amortization expense for intangible assets was $35.7 million for Q1 2023, up from $33.7 million in Q1 2022[44] 7. Credit Facility This note describes Instructure's Senior Term Loan and Revolver, including outstanding balances and compliance - The company refinanced its credit facilities in October 2021, establishing a $500.0 million Senior Term Loan and a $125.0 million Senior Revolver[47] - As of March 31, 2023, $495.0 million was outstanding on the Senior Term Loan, bearing interest at 7.85%, and there were no outstanding borrowings under the Senior Revolver[51] - The company was in compliance with all applicable covenants pertaining to the Senior Secured Credit Facilities as of March 31, 2023[53] 8. Revenue This note provides a breakdown of Instructure's revenue by geographic region and remaining performance obligations | Geographic Region (in thousands) | Three months ended March 31, 2023 | Three months ended March 31, 2022 | | :------------------------------- | :-------------------------------- | :-------------------------------- | | United States | $102,596 | $90,107 | | Foreign | $26,247 | $23,355 | | Total revenue | $128,843 | $113,462 | - Approximately $703.7 million of revenue is expected to be recognized from remaining performance obligations, with 76% expected within the next 24 months[57] - Deferred revenue was $215.7 million as of March 31, 2023, with $203.2 million classified as current[140] 9. Deferred Commissions This note details Instructure's deferred commission balances and related amortization expenses | Metric (in thousands) | March 31, 2023 | December 31, 2022 | | :-------------------- | :------------- | :---------------- | | Deferred commissions | $31,200 | $32,200 | - Amortization expense for deferred commissions increased to $4.8 million in Q1 2023 from $3.4 million in Q1 2022[60] 10. Stockholders' Equity and Stock-Based Compensation This note outlines Instructure's stock-based compensation expenses and equity activity, including RSU grants - Total stock-based compensation expense was $10.0 million in Q1 2023, up from $9.5 million in Q1 2022[68] - The company granted 2,539,452 RSUs to employees in Q1 2023, with an aggregate fair value of $63.7 million[67] - Unrecognized compensation cost related to unvested RSUs amounted to $120.0 million as of March 31, 2023, expected to be recognized over a weighted average period of 3.4 years[70] 11. Income Taxes This note explains Instructure's income tax benefit and potential limitations on net operating loss carryforwards - The company's income tax benefit decreased by $0.2 million in Q1 2023, mainly due to an increase in pretax book loss, net of valuation allowance[135] - Utilization of net operating loss carryforwards and credits may be subject to annual limitations due to ownership changes[74] 12. Fair Value of Financial Instruments This note presents the fair value measurements of Instructure's financial assets and liabilities | Asset (in thousands) | March 31, 2023 (Level 1) | December 31, 2022 (Level 1) | | :------------------- | :----------------------- | :-------------------------- | | Money market funds | $3,417 | $3,383 | - The fair value of the Senior Term Loan was estimated at $489.5 million as of March 31, 2023, determined by Level 2 inputs[80] 13. Leases This note details Instructure's lease costs, cash payments, and weighted average lease terms and discount rates | Lease Cost (in thousands) | Three months ended March 31, 2023 | Three months ended March 31, 2022 | | :------------------------ | :-------------------------------- | :-------------------------------- | | Operating lease cost, gross | $1,786 | $1,796 | | Variable lease cost, gross | $710 | $536 | | Sublease income | $(287) | $(254) | | Total lease costs | $2,209 | $2,078 | - Cash paid for operating lease liabilities was $2.3 million in Q1 2023, slightly up from $2.2 million in Q1 2022[84] - The weighted average remaining lease term was 3.5 years as of March 31, 2023, with a weighted average discount rate of 8.21%[87] 14. Commitments and Contingencies This note outlines Instructure's non-cancelable purchase obligations, letters of credit, and legal proceedings - Non-cancelable purchase obligations for cloud infrastructure and business analytic services total $2.2 million for the remainder of 2023, $48.4 million for 2024, and $48.0 million for 2025[88] - The company had $4.3 million in outstanding letters of credit as of March 31, 2023[89] - A class action lawsuit related to the Take-Private Transaction was dismissed in full on January 6, 2023, with the appeal time expired[91] 15. Related-Party Transactions This note discloses Instructure's transactions with related parties, including advisory services and board memberships - The company incurred $0.2 million in Q1 2023 for financial and management advisory services from Thoma Bravo, LLC[92] - Payments to Internet2 and 1EdTech for services in the ordinary course of business totaled $26.0 thousand and $0.1 million, respectively, in Q1 2023, with a company officer serving on their boards[94][95] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Instructure's financial condition and results for Q1 2023, covering business, macroeconomic factors, and liquidity Overview This section provides a high-level summary of Instructure's business, platform, and key financial highlights for Q1 2023 - Instructure is a leading education technology company, providing a cloud-native learning platform (LMS, assessments, analytics, content) to over 7,000 global customers in Higher Education and K-12 across more than 100 countries[97] - The company has expanded its platform through strategic acquisitions like Impact, Elevate Data Sync, Canvas Credentials, and LearnPlatform to enhance functionality and integrate solutions[97] | Metric (in millions) | Three months ended March 31, 2023 | Three months ended March 31, 2022 | | :------------------- | :-------------------------------- | :-------------------------------- | | Revenue | $128.8 | $113.5 | | Net loss | $(11.9) | $(5.5) | | Adjusted EBITDA | $48.3 | $43.6 | | Operating cash flow | $(80.9) | $(65.9) | | Free cash flow | $(82.2) | $(67.3) | Recent Developments This section discusses recent macroeconomic conditions and their potential impact on Instructure's business and financial position - Adverse macroeconomic conditions, including high inflation, slower economic growth, and high interest rates, could impact business and customer spending[102] - The interest rate on the Senior Term Loan increased from 6.12% as of December 31, 2022, to 7.85% as of March 31, 2023, impacting the cost of debt[104] - The company transferred most cash deposits from Silicon Valley Bank following its closure, with remaining amounts fully accessible, but market uncertainty regarding banking system stability persists[103] Key Factors Affecting Our Performance This section outlines the primary drivers of Instructure's performance, including market adoption and growth strategies - Growth is driven by increasing adoption of cloud-based software by Higher Education and K-12 institutions, accelerated by post-pandemic needs for remote and hybrid learning solutions[105] - The company aims to grow its customer base by replacing legacy systems in North America and expanding internationally, particularly in K-12 by monetizing demand for its broad capabilities[106] - Future revenue growth relies on cross-selling additional solutions (assessments, analytics, student success, etc) to existing Canvas LMS customers[107] Key Components of Results of Operations This section explains the main components of Instructure's revenue, cost of revenue, and operating expenses - Revenue is primarily generated from subscription and support (SaaS fees) and professional services (training, implementation, consulting)[108] - Cost of subscription and support revenue includes cloud hosting, employee costs, and amortization of capitalized software and acquired technology[113] - Operating expenses are categorized into Sales and Marketing (including deferred commissions and acquisition-related amortization), Research and Development (including capitalized software development), and General and Administrative[115][116][117] Results of Operations This section provides a detailed comparative analysis of Instructure's revenue, expenses, and net loss for Q1 2023 versus Q1 2022 | Metric (in thousands) | March 31, 2023 | March 31, 2022 | Change Amount | Change % | | :-------------------- | :------------- | :------------- | :------------ | :------- | | Total revenue | $128,843 | $113,462 | $15,381 | 14% | | Total cost of revenue | $45,832 | $41,011 | $4,821 | 12% | | Gross profit | $83,011 | $72,451 | $10,560 | 15% | | Total operating expenses | $88,925 | $76,138 | $12,787 | 17% | | Loss from operations | $(5,914) | $(3,687) | $(2,227) | 60% | | Net loss | $(11,857) | $(5,545) | $(6,312) | 114% | - Subscription and support revenue increased by $15.0 million (14%) due to expanded use by new ($9.0 million) and existing ($6.0 million) customers, with international markets contributing 20% of total revenue[125] - Sales and marketing expenses increased by $7.5 million (17%), driven by higher salaries, acquisition-related amortization, travel, bonuses, and severance[130] - Research and development expenses increased by $6.5 million (38%), primarily due to increased personnel costs, severance, stock-based compensation, and contractor costs[131] - Other income (expense), net, increased by $3.9 million (92%) in expense, mainly due to a $4.9 million increase in interest expense on the Senior Term Loan[133] Liquidity and Capital Resources This section assesses Instructure's ability to meet its short-term and long-term obligations using available cash and credit - As of March 31, 2023, liquidity sources included $109.1 million in cash, cash equivalents, and restricted cash, and available capacity on the Senior Term Loan[136] - The company expects existing liquidity and cash from operations to be sufficient for at least the next 12 months[137] - Cash flows are subject to seasonal fluctuations, with higher cash flow, accounts receivable, and deferred revenue typically in the second and third quarters due to customer fiscal year-ends[142] | Cash Flow Activity (in thousands) | Three months ended March 31, 2023 | Three months ended March 31, 2022 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(80,918) | $(65,945) | | Net cash used in investing activities | $(1,321) | $(1,311) | | Net cash provided by financing activities | $766 | $2,813 | Non-GAAP Financial Measures This section presents Instructure's non-GAAP financial metrics, including operating income, free cash flow, and Adjusted EBITDA | Non-GAAP Metric (in thousands) | Three months ended March 31, 2023 | Three months ended March 31, 2022 | | :----------------------------- | :-------------------------------- | :-------------------------------- | | Non-GAAP operating income | $47,187 | $42,497 | | Free cash flow | $(82,239) | $(67,256) | | Adjusted EBITDA | $48,258 | $43,553 | - Non-GAAP operating income increased by $4.7 million, reflecting adjustments for stock-based compensation, transaction costs, sponsor costs, other non-recurring costs, and amortization of acquisition-related intangibles[160][161] - Adjusted EBITDA increased by $4.7 million, providing a measure of operating results that excludes certain non-cash and variable charges[166][168] Forward-Looking Statements This section highlights Instructure's forward-looking statements and the inherent risks and uncertainties associated with them - The report contains forward-looking statements regarding future events, financial performance, costs, expenditures, cash flows, and growth, which are subject to risks and uncertainties[172] - Key risks include continued economic uncertainty (inflation, interest rates, recession), ability to acquire and retain customers, impact of increased platform usage, and the company's history of losses[174] - Other risks involve potential acquisitions, market competitiveness, sales cycle unpredictability, international operations, reliance on management, and compliance with various laws and regulations[174] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details Instructure's exposure to market risks from foreign currency and interest rate fluctuations - The company is exposed to foreign currency exchange risk due to operating expenses denominated in currencies other than the U.S. dollar, particularly the euro, though most sales are in USD[179] - Interest rate risk arises from interest-earning instruments and variable-rate debt (Senior Term Loan), with the applicable interest rate on the Senior Term Loan increasing to 5.10% as of March 31, 2023[180][181] - A hypothetical 10% change in foreign currency exchange rates would not have had a material impact on financial statements for the periods presented[179] Item 4. Controls and Procedures Management confirms effective disclosure controls and procedures as of March 31, 2023, with no material changes to internal controls - Disclosure controls and procedures were evaluated and deemed effective as of March 31, 2023, ensuring timely and accurate reporting of information[184] - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2023[185] - The effectiveness of any internal control system is subject to inherent limitations, providing reasonable, not absolute, assurances[186] PART II. OTHER INFORMATION This section provides additional information not covered in the financial statements, including legal, risk, and exhibit details Item 1. Legal Proceedings Instructure is involved in various legal proceedings, with no material adverse effects expected; a class action lawsuit was dismissed - Management does not believe current legal proceedings would have a material adverse effect on the company's financial position, results of operations, or liquidity[188] - A class action lawsuit filed in February 2021 concerning the Take-Private Transaction was dismissed in full on January 26, 2023, with the time to appeal having expired[189] Item 1A. Risk Factors No material changes to the company's previously disclosed risk factors were reported - No material changes to the risk factors were reported compared to those in the 2022 Form 10-K[190] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds were reported for the period - No unregistered sales of equity securities or use of proceeds were reported[191] Item 3. Default Upon Senior Securities No defaults upon senior securities were reported for the period - Not applicable, indicating no defaults upon senior securities[191] Item 4. Mine Safety Disclosures Mine safety disclosures are not applicable to the company's operations - Not applicable, indicating no mine safety disclosures[192] Item 5. Other Information No other material information was reported for the period - No other information was reported[193] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including organizational documents and certifications - Exhibits include the Second Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws, Employment Agreement with Chris Ball, Consulting Agreement with Frank Maylett, and various certifications (Sarbanes-Oxley Act)[197] - The filing also includes Inline XBRL Instance Document and Taxonomy Extension files for financial data[197] SIGNATURES This section contains the required signatures for the Form 10-Q, confirming its submission by Instructure Holdings, Inc - The report was duly signed on May 3, 2023, by Dale Bowen, Chief Financial Officer of Instructure Holdings, Inc[202]