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, 2021 and the related notes thereto, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 23, 2022 (the "2021 10-K"). The following discussion contains forward-looking statements. See the “Forward-Looking Statements” section of this Quarterly Report on Form 10-Q.
Overview
From the inception of a teacher’s lesson through a student’s mastery of a concept, Instructure personalizes, simplifies, organizes, and automates the entire learning lifecycle through the power of technology. Our learning platform delivers the elements that leaders, teachers, and learners need – a next-generation LMS, robust assessments for learning, actionable analytics, and engaging, dynamic content. Schools standardize on Instructure’s solutions as their core learning platform because we bring together all of the tools that students, teachers, parents, and administrators need to create an accessible and modern learning environment. Our platform is cloud-native, built on open technologies, and scalable across thousands of institutions and tens of millions of users worldwide. We are the LMS market share leader in both Higher Education and paid K-12, with nearly 7,000 global customers, representing Higher Education institutions and K-12 districts and schools in more than 100 countries. We are maniacally focused on our customers and enhancing the teaching and learning experience. As such, we continuously innovate to grow the footprint of our platform, including through our acquisitions of Portfolium to add online skills portfolio capabilities for Higher Education students, MasteryConnect and Certica to add assessment and analytics capabilities, Impact to allow educators to evaluate the impact education technologies have on student engagement and outcome, Elevate Data Sync to secure syncing capabilities across applications within a school environment, and Canvas Credentials to give educators a robust, scalable and feature-rich platform for badging. Our platform becomes deeply ingrained into our customers’ instructional workflows.
Since our founding in 2008, we have expanded our platform from the core LMS to include a broad set of offerings targeting all aspects of teaching and learning. As our platform has grown, we have become more strategic to schools as they seek vendor consolidation, best of breed solutions, and integrated offerings to serve teachers and students.
This discussion and analysis reflects our financial condition and results of operations for the unaudited three and six months ended June 30, 2022 and 2021.
For the unaudited three months ended June 30, 2022 and 2021:
•Our revenue was $114.6 million and $93.6 million, respectively.
•Our net loss was $12.9 million and $21.7 million, respectively.
•Our adjusted EBITDA was $39.8 million and $31.2 million, respectively.
•Our operating cash flow was $8.6 million and $6.4 million, respectively.
•Our free cash flow was $6.6 million and $5.2 million, respectively.
For the unaudited six months ended June 30, 2022 and 2021:
•Our revenue was $228.0 million and $187.5 million, respectively.
•Our net loss was $18.5 million and $54.8 million, respectively.
•Our adjusted EBITDA was $83.4 million and $63.8 million, respectively.
•Our operating cash flow was $(57.5) million and $(52.4) million, respectively.
•Our free cash flow was $(60.9) million and $(54.0) million, respectively.
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 measure.
24
Recent Developments
Macroeconomic Conditions and COVID-19 Update
Adverse macroeconomic conditions, including but not limited to heightened inflation, slower growth or recession, changes to fiscal and monetary policy, higher interest rates, currency fluctuations and challenges in the supply chain could impact our business. In addition, the war in Ukraine has given rise to potential global security issues that may, in particular, adversely affect international business and technology companies, such as ours. Certain of our customers may be negatively impacted by these events.
We believe that the COVID-19 pandemic accelerated adoption of our learning platform, which we expect will continue to generate additional opportunities for us in the future. We continued to experience high usage on our learning platform, even as North American K-12 students started returning to the classroom during 2021. As more of our customers continue to transition back to the classroom on either a full-time or hybrid basis, the demand for our network and data storage capacity, inclusive of third-party cloud hosting, has come down from peak pandemic levels, but remains significantly higher than pre-pandemic levels. These factors have generated a positive impact to our gross margin.
There is no assurance that we will experience a continued increase in the adoption of our learning platform or that new or existing customers will continue to utilize our service as the COVID-19 pandemic continues to taper.
The full extent to which the tapering of the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition continues to be uncertain and cannot be accurately predicted.
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 are poised to accelerate the pace of cloud adoption to support near-term online educational needs, as a result of, and following the COVID-19 pandemic, and to withstand future challenges. Academic institutions that relied upon on-premises solutions to support remote operations faced significant delays at the height of the pandemic. In order to continue providing a high-quality education and support in-person, remote, and hybrid learning, institutions must make a fundamental shift to adopt cloud-based collaboration solutions. As the leader in the market for cloud-based learning technology, we believe the imperative for these institutions to adopt cloud infrastructure will increase demand for our platform and broaden our customer base.
Grow Our Customer Base
We believe there is significant opportunity to grow our customer base in Higher Education and K-12. The growth of our Higher Education customer base is primarily dependent on the replacement of legacy systems with our cloud-native platform in North America and our continued expansion efforts internationally. The growth of our K-12 customer base is primarily dependent on our ability to surround currently implemented free solutions with our learning platform and, in connection therewith, monetize demand for our broad capabilities. We intend to expand our customer base by continuing to make targeted and prudent investments in sales and marketing and customer support.
Cross-sell into our Existing Customer Base
Most of our customers initially engage with us using our Canvas LMS solution, and then we are generally able to cross-sell our other solutions as these customers become aware of the benefits of our broad capabilities, including learning, assessments, analytics, student success, program management, digital courseware, and global online learning. Our future revenue growth is dependent upon our ability to expand our customers’ use of our learning platform. Our ability to increase sales to existing customers depends on a number of factors, including customer satisfaction, competition, pricing, economic conditions, and spending by customers.
Key Components of Results of Operations
Revenue
We generate revenue primarily from two main sources: (1) subscription and support revenue, which is comprised of Software-as-a-Service, or SaaS, fees from customers accessing our learning platform and from customers purchasing additional support beyond the standard support that is included in the basic SaaS fees; and (2) related professional services revenue, which is comprised of training, implementation services and other types of professional services.
25
Subscription revenue is derived from customers using our learning platform and is driven primarily by the number of customers, the number of users at each customer, the price of our applications and renewals. Support revenue is derived from customers purchasing additional support beyond the standard support that is included in the basic SaaS fee. Our contracts typically vary in length between one and five years. Subscriptions and support are non-cancelable and are billed in advance on an annual basis. All subscription and support fees billed are initially recorded in deferred revenue and recognized ratably over the subscription term.
Professional services and other revenue are derived primarily from implementation, training, and other consulting fees. Implementation services includes training and consulting services that generally take anywhere from 30 to 90 days to complete depending on customer-side complexity and timelines. It includes regularly scheduled and highly-structured activities to ensure customers progress toward better utilizing our applications. Most of these interactions take place over the phone and through the use of web meeting technology. Because we have determined the implementation services are distinct, they are recognized over time as the services are rendered, using an efforts-expended input method. Implementation services also include nonrefundable upfront setup fees, which are allocated to the remaining performance obligations.
We include training with every implementation and offer additional training for a fee. The training offered is focused on creating confidence among users so they can be successful with our applications. Most training is performed remotely using web meeting technology. Because we have determined that trainings are distinct, we record training revenue upon the delivery of the training. Training is recognized ratably in the same manner as subscription and support revenue described above.
In addition to our implementation and training offerings, we provide consulting services for custom application development, integrations, content services and change management consulting. These services are architected to boost customer adoption of our applications and to drive usage of features and capabilities that are unique to our company. We have determined that these services are distinct. Professional services revenue is typically recognized over time as the services are rendered, using an efforts-expended input method.
Cost of Revenue
Cost of subscription and support revenue consists primarily of the costs of our cloud hosting provider and other third-party service providers, employee-related costs including payroll, benefits and stock-based compensation expense for our operations and customer support teams, amortization of capitalized software development costs and acquired technology, and allocated overhead costs, which we define as rent, facilities and costs related to IT. Our acquired technology is amortized over the estimated remaining useful life, which is five years.
Cost of professional services and other revenue consists primarily of personnel costs of our professional services organization, including salaries, benefits, travel, bonuses and stock-based compensation, as well as allocated overhead costs.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of personnel costs of our sales and marketing employees, including sales commissions and incentives, benefits and stock-based compensation expense, marketing programs, including lead generation, costs of our annual InstructureCon user conference, acquisition-related amortization expenses and allocated overhead costs. We defer and amortize on a straight-line basis sales commission costs related to acquiring new contracts over a period of benefit that we have determined to be generally four years. Customer relationships represent the estimated fair value of the acquired customer bases and are amortized over the estimated remaining useful life of seven years. The trade names acquired are amortized over the estimated remaining useful lives ranging from three to ten years.
Research and Development. Research and development expenses consist primarily of personnel costs of our development team, including payroll, benefits and stock-based compensation expense and allocated overhead costs. We capitalize certain software development costs that are attributable to developing new applications, features and adding incremental functionality to our platform. We amortize these costs to subscription and support cost of revenue in the condensed consolidated statements of operations and comprehensive loss over the estimated life of the new application or incremental functionality, which is generally three years.
General and Administrative. General and administrative expenses consist of personnel costs and related expenses for executive, finance, legal, human resources, recruiting, employee-related information technology, administrative personnel, including payroll, benefits and stock-based compensation expense; professional fees for external legal, accounting and other consulting services; and allocated overhead costs.
Other Income (Expense)
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.
26
Income Tax Benefit
We are subject to income taxes in the United States and foreign jurisdictions in which we do business. These foreign jurisdictions have statutory tax rates different from those in the United States. Accordingly, our effective tax rates will vary depending on the relative proportion of foreign to U.S. income and changes in tax laws. The tax benefit at June 30, 2022 (unaudited) consists of decreases in U.S. Federal deferred tax liabilities due to current year pretax book loss, minimal increases to state deferred tax liabilities due to increases in valuation allowance recorded against state net operating loss carryforwards, and increases to foreign deferred tax assets as a result of changes in foreign tax rates.
Results of Operations
The following tables set forth our results of operations for the periods presented and as a percentage of our total revenue for those periods. The data has been derived from the unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q which include, in our opinion, all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of the financial position and results of operations for the interim periods presented. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30, |
|
|
Six months ended
June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
|
(in thousands) |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Subscription and support |
|
$ |
102,905 |
|
|
$ |
84,257 |
|
|
$ |
206,397 |
|
|
$ |
170,611 |
|
Professional services and other |
|
|
11,672 |
|
|
|
9,310 |
|
|
|
21,642 |
|
|
|
16,936 |
|
Total revenue |
|
|
114,577 |
|
|
|
93,567 |
|
|
|
228,039 |
|
|
|
187,547 |
|
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Subscription and support(1) (2) (3) |
|
|
35,868 |
|
|
|
36,163 |
|
|
|
71,414 |
|
|
|
76,047 |
|
Professional services and other(1) (3) |
|
|
6,530 |
|
|
|
4,811 |
|
|
|
11,995 |
|
|
|
10,561 |
|
Total cost of revenue |
|
|
42,398 |
|
|
|
40,974 |
|
|
|
83,409 |
|
|
|
86,608 |
|
Gross profit |
|
|
72,179 |
|
|
|
52,593 |
|
|
|
144,630 |
|
|
|
100,939 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing(1) (2) (3) |
|
|
45,885 |
|
|
|
39,083 |
|
|
|
89,206 |
|
|
|
80,305 |
|
Research and development(1) (3) |
|
|
18,669 |
|
|
|
14,279 |
|
|
|
35,870 |
|
|
|
31,368 |
|
General and administrative(1) (3) |
|
|
14,253 |
|
|
|
11,196 |
|
|
|
29,869 |
|
|
|
24,547 |
|
Impairment on disposal group (3) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,218 |
|
Total operating expenses |
|
|
78,807 |
|
|
|
64,558 |
|
|
|
154,945 |
|
|
|
137,438 |
|
Loss from operations |
|
|
(6,628 |
) |
|
|
(11,965 |
) |
|
|
(10,315 |
) |
|
|
(36,499 |
) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
27 |
|
|
|
— |
|
|
|
63 |
|
|
|
16 |
|
Interest expense |
|
|
(4,611 |
) |
|
|
(15,670 |
) |
|
|
(9,164 |
) |
|
|
(32,930 |
) |
Other expense(3) |
|
|
(3,417 |
) |
|
|
(108 |
) |
|
|
(3,111 |
) |
|
|
(742 |
) |
Total other income (expense), net |
|
|
(8,001 |
) |
|
|
(15,778 |
) |
|
|
(12,212 |
) |
|
|
(33,656 |
) |
Loss before income taxes |
|
|
(14,629 |
) |
|
|
(27,743 |
) |
|
|
(22,527 |
) |
|
|
(70,155 |
) |
Income tax benefit |
|
|
1,710 |
|
|
|
6,050 |
|
|
|
4,063 |
|
|
|
15,391 |
|
Net loss |
|
$ |
(12,919 |
) |
|
$ |
(21,693 |
) |
|
$ |
(18,464 |
) |
|
$ |
(54,764 |
) |
(1)Includes stock-based compensation as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30, |
|
|
Six months ended
June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
|
(in thousands) |
|
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Subscription and support |
|
$ |
325 |
|
|
$ |
171 |
|
|
$ |
607 |
|
|
$ |
395 |
|
Professional services and other |
|
|
465 |
|
|
|
110 |
|
|
|
841 |
|
|
|
287 |
|
Sales and marketing |
|
|
2,772 |
|
|
|
1,093 |
|
|
|
5,349 |
|
|
|
2,675 |
|
Research and development |
|
|
2,686 |
|
|
|
934 |
|
|
|
5,226 |
|
|
|
2,604 |
|
General and administrative |
|
|
3,139 |
|
|
|
1,450 |
|
|
|
6,840 |
|
|
|
3,382 |
|
Total stock-based compensation |
|
$ |
9,387 |
|
|
$ |
3,758 |
|
|
$ |
18,863 |
|
|
$ |
9,343 |
|
27
(2)Includes amortization of acquisition-related intangibles as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30, |
|
|
Six months ended
June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
|
(in thousands) |
|
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Subscription and support |
|
$ |
15,859 |
|
|
$ |
15,415 |
|
|
$ |
31,549 |
|
|
$ |
30,830 |
|
Sales and marketing |
|
|
18,332 |
|
|
|
17,946 |
|
|
|
36,381 |
|
|
|
35,892 |
|
Total amortization of acquisition-related intangibles |
|
$ |
34,191 |
|
|
$ |
33,361 |
|
|
$ |
67,930 |
|
|
$ |
66,722 |
|
(3)Includes restructuring, transaction and sponsor related costs as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30, |
|
|
Six months ended
June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
|
(in thousands) |
|
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Subscription and support |
|
$ |
9 |
|
|
$ |
28 |
|
|
$ |
18 |
|
|
$ |
1,948 |
|
Professional services and other |
|
|
41 |
|
|
|
5 |
|
|
|
95 |
|
|
|
855 |
|
Sales and marketing |
|
|
110 |
|
|
|
201 |
|
|
|
390 |
|
|
|
2,452 |
|
Research and development |
|
|
502 |
|
|
|
128 |
|
|
|
792 |
|
|
|
2,679 |
|
General and administrative |
|
|
726 |
|
|
|
2,592 |
|
|
|
2,563 |
|
|
|
6,859 |
|
Impairment on disposal group |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,218 |
|
Other expense |
|
|
3,477 |
|
|
|
— |
|
|
|
3,185 |
|
|
|
— |
|
Total restructuring, transaction and sponsor related costs |
|
$ |
4,865 |
|
|
$ |
2,954 |
|
|
$ |
7,043 |
|
|
$ |
16,011 |
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30, |
|
Six months ended
June 30, |
|
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
|
(as a percentage of total revenue) |
Revenue: |
|
|
|
|
|
|
|
|
Subscription and support |
|
90% |
|
90% |
|
91% |
|
91% |
Professional services and other |
|
10 |
|
10 |
|
9 |
|
9 |
Total revenue |
|
100 |
|
100 |
|
100 |
|
100 |
Cost of revenue: |
|
|
|
|
|
|
|
|
Subscription and support |
|
31 |
|
39 |
|
31 |
|
41 |
Professional services and other |
|
6 |
|
6 |
|
5 |
|
6 |
Total cost of revenue |
|
37 |
|
45 |
|
36 |
|
47 |
Gross profit |
|
63 |
|
55 |
|
64 |
|
53 |
Operating expenses: |
|
|
|
|
|
|
|
|
Sales and marketing |
|
40 |
|
42 |
|
39 |
|
43 |
Research and development |
|
16 |
|
15 |
|
16 |
|
17 |
General and administrative |
|
12 |
|
12 |
|
13 |
|
13 |
Impairment on disposal group |
|
— |
|
— |
|
— |
|
1 |
Total operating expenses |
|
68 |
|
69 |
|
68 |
|
74 |
Loss from operations |
|
(5) |
|
(14) |
|
(4) |
|
(21) |
Other income (expense): |
|
|
|
|
|
|
|
|
Interest income |
|
— |
|
— |
|
— |
|
— |
Interest expense |
|
(4) |
|
(17) |
|
(4) |
|
(18) |
Other expense |
|
(3) |
|
— |
|
(1) |
|
— |
Total other income (expense), net |
|
(7) |
|
(17) |
|
(5) |
|
(18) |
Loss before income taxes |
|
(12) |
|
(31) |
|
(9) |
|
(39) |
Income tax benefit |
|
2 |
|
6 |
|
2 |
|
8 |
Net loss |
|
(10)% |
|
(25)% |
|
(7)% |
|
(31)% |
Comparison of the unaudited three and six months ended June 30, 2022 and unaudited three and six months ended June 30, 2021.
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30, |
|
|
Change |
|
|
Six months ended
June 30, |
|
|
Change |
|
|
|
2022 |
|
|
2021 |
|
|
Amount |
|
|
% |
|
|
2022 |
|
|
2021 |
|
|
Amount |
|
|
% |
|
|
|
(dollars in thousands) |
|
Subscription and support |
|
$ |
102,905 |
|
|
$ |
84,257 |
|
|
$ |
18,648 |
|
|
|
22 |
% |
|
$ |
206,397 |
|
|
$ |
170,611 |
|
|
$ |
35,786 |
|
|
|
21 |
% |
Professional services and other |
|
|
11,672 |
|
|
|
9,310 |
|
|
|
2,362 |
|
|
|
25 |
|
|
|
21,642 |
|
|
|
16,936 |
|
|
|
4,706 |
|
|
|
28 |
|
Total revenue |
|
$ |
114,577 |
|
|
$ |
93,567 |
|
|
$ |
21,010 |
|
|
|
22 |
% |
|
$ |
228,039 |
|
|
$ |
187,547 |
|
|
$ |
40,492 |
|
|
|
22 |
% |
29
Three month change
Subscription and support revenue increased $18.6 million for the unaudited three months ended June 30, 2022 due to an increase in new customers, growth from existing customers through upselling historical products and cross-selling new products, contributions from our recent acquisitions, and the effects of acquisition accounting from Accounting Standards Codification (“ASC”) Topic 805 (“ASC 805”).
Professional services and other revenue increased $2.4 million for the unaudited three months ended June 30, 2022 due to the same factors discussed above.
Six month change
Subscription and support revenue increased $35.8 million for the unaudited six months ended June 30, 2022 due to new and existing customers, through upselling historical products and cross-selling new products, and contributions from our recent acquisitions, as discussed above, as well as the effects of acquisition accounting from ASC 805.
Professional services and other revenue increased $4.7 million for the unaudited six months ended June 30, 2022 due to the same factors discussed above.
Cost of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30, |
|
|
Change |
|
|
Six months ended
June 30, |
|
|
Change |
|
|
|
2022 |
|
|
2021 |
|
|
Amount |
|
|
% |
|
|
2022 |
|
|
2021 |
|
|
Amount |
|
|
% |
|
|
|
(dollars in thousands) |
|
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription and support |
|
$ |
35,868 |
|
|
$ |
36,163 |
|
|
$ |
(295 |
) |
|
|
(1 |
)% |
|
$ |
71,414 |
|
|
$ |
76,047 |
|
|
$ |
(4,633 |
) |
|
|
(6 |
)% |
Professional services and other |
|
|
6,530 |
|
|
|
4,811 |
|
|
|
1,719 |
|
|
|
36 |
|
|
|
11,995 |
|
|
|
10,561 |
|
|
|
1,434 |
|
|
|
14 |
|
Total cost of revenue |
|
$ |
42,398 |
|
|
$ |
40,974 |
|
|
$ |
1,424 |
|
|
|
3 |
% |
|
$ |
83,409 |
|
|
$ |
86,608 |
|
|
$ |
(3,199 |
) |
|
|
(4 |
)% |
Gross margin percentage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription and support revenue |
|
|
65 |
% |
|
|
57 |
% |
|
|
|
|
|
|
|
|
65 |
% |
|
|
55 |
% |
|
|
|
|
|
|
Professional services and other |
|
|
44 |
|
|
|
48 |
|
|
|
|
|
|
|
|
|
45 |
|
|
|
38 |
|
|
|
|
|
|
|
Total gross margin |
|
|
63 |
|
|
|
56 |
|
|
|
|
|
|
|
|
|
63 |
|
|
|
54 |
|
|
|
|
|
|
|
Three month change
Subscription and support cost of revenue decreased $0.3 million for the unaudited three months ended June 30, 2022 due to a decrease of $1.8 million in web hosting costs and $0.3 million in systems and hardware costs. Office rent decreased by $0.1 million and third-party consultants and contractors decreased by $0.1 million. These decreases were offset by an increase in other hosting operations of $0.4 million, an increase in salaries, wages, and employee-related benefits of $0.9 million, and an increase in acquisition-related intangibles of $0.5 million, and other insignificant increases of $0.1 million.
Professional services and other cost of revenue increased $1.7 million for the unaudited three months ended June 30, 2022 due to an increase in salaries, wages, and employee-related benefits of $1.2 million, an increase in software expense of $0.2 million, an increase in travel expense of $0.1 million, an increase in third-party consultants and contractors of $0.1 million, and other insignificant increases of $0.1 million.
Six month change
Subscription and support cost of revenue decreased $4.6 million for the unaudited six months ended June 30, 2022 due to a decrease of $1.9 million related to exiting leased property, which occurred in the first quarter of 2021, and decreases in rent and related expenses of $0.5 million. Web hosting expenses and software license expenses decreased $3.6 million. These decreases were offset by an increase in amortization of acquisition-related intangibles of $0.9 million, an increase in salaries, wages, and related benefits of $0.4 million, and an increase in other employee-related expenses including travel of $0.2 million.
Professional services and other cost of revenue increased $1.4 million for the unaudited six months ended June 30, 2022 due to an increase in salaries, wages, and related benefits of $1.5 million, an increase in systems and hardware expenses of $0.3 million, an increase in other employee-related expenses including travel of $0.2 million, an increase in third-party consultants and contractors of $0.1 million, and other insignificant increases of $0.1 million. These increases were offset by a decrease of $0.8 million related to exiting leased property, which occurred in the first quarter of 2021.
30
Operating Expenses
Sales and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30, |
|
|
Change |
|
|
Six months ended
June 30, |
|
|
Change |
|
|
|
2022 |
|
|
2021 |
|
|
Amount |
|
|
% |
|
|
2022 |
|
|
2021 |
|
|
Amount |
|
|
% |
|
|
|
(dollars in thousands) |
|
Sales and marketing |
|
$ |
45,885 |
|
|
$ |
39,083 |
|
|
$ |
6,802 |
|
|
|
17 |
% |
|
$ |
89,206 |
|
|
$ |
80,305 |
|
|
$ |
8,901 |
|
|
|
11 |
% |
Three month change
Sales and marketing expenses increased $6.8 million for the unaudited three months ended June 30, 2022 due to an increase in salaries, wages, and related benefits of $2.7 million, commissions of $1.3 million, and stock-based compensation expense of $1.8 million. There were also additional increases related to amortization of acquisition-related intangibles of $0.3 million, increases in marketing expenses such as advertising and tradeshows of $0.1 million, and an increase in employee-related expenses including travel of $1.0 million. These increases were offset by a decrease in third-party consultants and contractors of $0.4 million.
Six month change
Sales and marketing expenses increased $8.9 million for the unaudited six months ended June 30, 2022 due to an increase in salaries, wages, and related benefits of $4.3 million, commissions of $2.0 million, and stock-based compensation expense of $2.7 million. Additional increases included an increase in marketing expenses such as tradeshows and partnerships of $0.5 million, other employee-related expenses including travel of $1.6 million, and an increase in acquisition-related intangibles of $0.4 million. These increases were offset by a decrease of $2.0 million related to exiting leased property, which occurred in the first quarter of 2021, and a decrease in third-party consultants and contractors of $0.6 million.
Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30, |
|
|
Change |
|
|
Six months ended
June 30, |
|
|
Change |
|
|
|
2022 |
|
|
2021 |
|
|
Amount |
|
|
% |
|
|
2022 |
|
|
2021 |
|
|
Amount |
|
|
% |
|
|
|
(dollars in thousands) |
|
Research and development |
|
$ |
18,669 |
|
|
$ |
14,279 |
|
|
$ |
4,390 |
|
|
|
31 |
% |
|
$ |
35,870 |
|
|
$ |
31,368 |
|
|
$ |
4,502 |
|
|
|
14 |
% |
Three month change
Research and development expenses increased $4.4 million for the unaudited three months ended June 30, 2022 due to an increase in salaries, wages, and stock-based compensation of $2.4 million, an increase in third-party consultants and contractors of $1.1 million, an increase in software expenses of $0.4 million, and an increase in other employee-related expenses including travel of $0.5 million. These increases were offset by a decrease in franchise and property taxes of $0.1 million.
Six month change
Research and development expenses increased $4.5 million for the unaudited six months ended June 30, 2022 due to an increase in salaries, wages, and stock-based compensation of $3.1 million, an increase in third-party consultants and contractors of $1.6 million, an increase in systems and hardware expenses of $0.5 million, and an increase in other employee-related expenses including travel of $0.6 million. These increases were offset by a decrease of $1.2 million related to exiting leased property, which occurred in the first quarter of 2021, and a decrease in franchise and property taxes of $0.1 million.
General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30, |
|
|
Change |
|
|
Six months ended
June 30, |
|
|
Change |
|
|
|
2022 |
|
|
2021 |
|
|
Amount |
|
|
% |
|
|
2022 |
|
|
2021 |
|
|
Amount |
|
|
% |
|
|
|
(dollars in thousands) |
|
General and administrative |
|
$ |
14,253 |
|
|
$ |
11,196 |
|
|
$ |
3,057 |
|
|
|
27 |
% |
|
$ |
29,869 |
|
|
$ |
24,547 |
|
|
$ |
5,322 |
|
|
|
22 |
% |
31
Three month change
General and administrative expenses increased by $3.1 million for the unaudited three months ended June 30, 2022 due to an increase in employee-related expenses such as salaries, wages, and stock-based compensation of $2.6 million, an increase in business insurance of $1.1 million, an increase in franchise and property taxes of $0.3 million, an increase in systems and hardware expenses of $0.2 million, an increase in bad debt expense of $0.2 million, and other insignificant increases of $0.2 million. These increases were offset by decreases in legal expenses of $0.5 million and a decrease in third-party consultants and contractors of $1.0 million.
Six month change
General and administrative expenses increased by $5.3 million for the unaudited six months ended June 30, 2022 due to an increase in salaries, wages, and stock-based compensation of $4.2 million, an increase in business insurance of $2.3 million, and an increase in franchise and property taxes of $0.5 million. Additionally, bad debt expense increased $0.4 million, systems and hardware expenses increased by $0.2 million, and other employee-related expenses including travel increased by $0.4 million. These increases were offset by a decrease of $0.7 million related to exiting leased property, which occurred in the first quarter of 2021, decreases in third-party consultants and contractors of $1.9 million, and other insignificant decreases of $0.1 million.
Impairment on Disposal Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30, |
|
|
Change |
|
|
Six months ended
June 30, |
|
|
Change |
|
|
|
2022 |
|
|
2021 |
|
|
Amount |
|
|
% |
|
|
2022 |
|
|
2021 |
|
|
Amount |
|
|
% |
|
|
|
(dollars in thousands) |
|
Impairment on disposal group |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
$ |
1,218 |
|
|
$ |
(1,218 |
) |
|
|
(100 |
)% |
Six month change
Impairment on disposal group decreased by $1.2 million for the unaudited six months ended June 30, 2022. The decrease is due to our decision to market and sell Bridge, the Company’s corporate learning platform and wholly-owned subsidiary.
Other Income (Expense), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30, |
|
|
Change |
|
|
Six months ended
June 30, |
|
|
Change |
|
|
|
2022 |
|
|
2021 |
|
|
Amount |
|
|
% |
|
|
2022 |
|
|
2021 |
|
|
Amount |
|
|
% |
|
|
|
(dollars in thousands) |
|
Other income (expense), net |
|
$ |
(8,001 |
) |
|
$ |
(15,778 |
) |
|
$ |
7,777 |
|
|
|
(49 |
)% |
|
$ |
(12,212 |
) |
|
$ |
(33,656 |
) |
|
$ |
21,444 |
|
|
|
(64 |
)% |
Three month change
Other income (expense), net includes interest income and expense and the impact of foreign currency transaction gains and losses. Other income (expense), net decreased $7.8 million for the unaudited three months ended June 30, 2022 due to decreased interest expense of $11.0 million as a result of reduced interest rates on our Term Loan and Senior Term Loan (as defined below), as well as the overall reduction in principal following our IPO and Refinancing, and other insignificant decreases of $0.2 million. These decreases were offset by an increase in expense of $3.4 million related to realized and unrealized foreign currency losses.
Six month change
Other income (expense), net includes interest income and expense and the impact of foreign currency transaction gains and losses. Other income (expense), net decreased $21.4 million for the unaudited six months ended June 30, 2022 as a result of decreased interest expense of $23.8 million due to reduced interest rates on our Term Loan and Senior Term Loan, as well as the overall reduction in principal following our IPO and Refinancing. These decreases were offset by an increase of $2.4 million related to realized and unrealized foreign currency losses.
Income Tax Benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30, |
|
|
Change |
|
|
Six months ended
June 30, |
|
|
Change |
|
|
|
2022 |
|
|
2021 |
|
|
Amount |
|
|
% |
|
|
2022 |
|
|
2021 |
|
|
Amount |
|
|
% |
|
|
|
(dollars in thousands) |
|
Income tax benefit |
|
$ |
1,710 |
|
|
$ |
6,050 |
|
|
$ |
(4,340 |
) |
|
|
(72 |
)% |
|
$ |
4,063 |
|
|
$ |
15,391 |
|
|
$ |
(11,328 |
) |
|
|
(74 |
)% |
32
Three month change
Income tax benefit decreased $4.3 million for the unaudited three months ended June 30, 2022. Income tax benefit consists of current and deferred taxes for U.S. and foreign income taxes.
Six month change
Income tax benefit decreased $11.3 million for the unaudited six months ended June 30, 2022. Income tax benefit consists of current and deferred taxes for U.S. and foreign income taxes. Due to the Company's NOL carryforward position, the decrease in the income tax benefit was driven mainly by a reduction in pretax book loss recognized in the unaudited six months ended June 30, 2022.
Liquidity and Capital Resources
As of June 30, 2022 (unaudited) and December 31, 2021, our principal sources of liquidity were cash, cash equivalents and restricted cash totaling $87.6 million and $169.2 million, respectively, which was held for working capital purposes, as well as the available balance of our Senior Term Loan, (as defined below). As of June 30, 2022 (unaudited) and December 31, 2021, 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, our IPO, and more recently, our Refinancing. We believe our existing cash and cash equivalents, our Senior Term Loan and cash provided by sales of our solutions and services will be sufficient to meet our working capital, capital expenditure and cash needs for at least the next 12 months and beyond. Our future capital requirements will depend on many factors including our growth rate, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced products and services offerings, and the continuing market acceptance of our products. In the future, we may enter into arrangements to acquire or invest in complementary businesses, services and technologies.
We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in new technologies, this could reduce our ability to compete successfully and harm our results of operations.
A portion of our customers pay in advance for subscriptions, a portion of which is recorded as deferred revenue. Deferred revenue consists of the unearned portion of billed fees for our subscriptions, which is later recognized as revenue in accordance with our revenue recognition policy. As of June 30, 2022 (unaudited), we had deferred revenue of $283.3 million, of which $269.7 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, 2021, we had deferred revenue of $255.7 million, of which $240.9 million was recorded as a current liability.
The following table shows our cash flows for the unaudited six months ended June 30, 2022 and 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
|
(in thousands) |
|
Net cash used in operating activities |
|
$ |
(57,540 |
) |
|
$ |
(52,367 |
) |
Net cash provided by (used in) investing activities |
|
|
(22,863 |
) |
|
|
28,405 |
|
Net cash provided by (used in) financing activities |
|
|
1,138 |
|
|
|
(52,457 |
) |
33
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 quarters of each year.
Credit Facility
On March 24, 2020, we entered into a credit agreement with a syndicate of lenders and Golub Capital Markets LLC, as administrative agent and collateral agent, and Golub Capital Markets LLC and Owl Rock Capital Advisors LLC, as joint bookrunners and joint lead arrangers (the “Credit Agreement”). The Credit Agreement provided for a senior secured term loan facility (the “Initial Term Loan”) in an original aggregate principal amount of $775.0 million, which was supplemented by an incremental term loan pursuant to the First Incremental Amendment and Waiver to Credit Agreement, dated as of December 22, 2020, in a principal amount of $70.0 million (the “Incremental Term Loan” and, together with the Initial Term Loan, the “Term Loan”). The Credit Agreement also provided for a senior secured revolving credit facility in an aggregate principal amount of $50.0 million (the “Revolving Credit Facility” and, together with the Term Loan, the “Credit Facilities”). The Revolving Credit Facility included a $10.0 million sublimit for the issuance of letters of credit.
The Credit Agreement required us to repay the principal of the Term Loan in equal quarterly repayments equal to 0.25% of the original principal amount of Term Loan.
In connection with the Company's IPO, the Company made a principal prepayment in August 2021 of $224.3 million on its outstanding Term Loan. In connection with the underwriters' exercise of their over-allotment option in August 2021, the Company made an additional principal prepayment in August 2021 of $30.8 million on its outstanding Term Loan. The Company also incurred a 1.5% prepayment premium in conjunction with each principal prepayment.
On October 29, 2021, we entered into a credit agreement with JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent (the “2021 Credit Agreement”), governing our senior secured credit facilities (the “Senior Secured Credit Facilities”), consisting of a $500.0 million senior secured term loan facility (the “Senior Term Loan”) and a $125.0 million senior secured revolving credit facility (the “Senior Revolver”). The proceeds from the new Senior Secured Credit Facilities were used, in addition to cash on hand, (1) to refinance, in full, all existing indebtedness under the Credit Agreement (the “Refinancing”), (2) to pay certain fees and expenses incurred in connection with the entry into the 2021 Credit Agreement and the Refinancing, and (3) to finance working capital needs of the Company and its subsidiaries for general corporate purposes.
All of the Company's obligations under the Senior Secured Credit Facilities are guaranteed by the subsidiary guarantors named therein (the “Subsidiary Guarantors”). 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. At and subsequent to closing, there have not been any borrowings incurred under the Senior Revolver.
The Senior Term Loan has a seven-year maturity and the Senior Revolver has a five-year maturity. Commencing June 30, 2022, we are required to repay the Senior Term Loan portion of the Senior Secured Credit Facilities in quarterly principal installments of 0.25% of the aggregate original principal amount of the Senior Term Loan at closing, with the balance payable at maturity. Borrowings under the Senior Secured Credit Facilities bear interest, at the Company's option, at: (i) Base Rate equal to the greater of (a) the Federal Funds Rate plus 1/2 of 1.00%, (b) the rate of interest in effect for such day as publicly announced from time to time by the administrative agent as its "prime rate," (c) a Eurocurrency Rate for such date plus 1.00% and (d) 1.00%; or (ii) the Eurocurrency Rate (provided that the Eurocurrency Rate applicable to the Senior Term Loan shall not be less than 0.50% per annum). The Applicable Rate for the Senior Term Loan with respect to Eurocurrency Rate Loans is 2.75% per annum and 1.75% per annum for Base Rate Loans. The Applicable Rate for the Senior Revolver with respect to Eurocurrency Rate Loans, SONIA Loans, and Alternative Currency Term Rate Loans ranges from 2.00% to 2.5% subject to the Company's Consolidated First Lien Net Leverage Ratio, while the Applicable Rate for Base Rate Loans ranges from 1.00% to 1.50% subject to the Company's Consolidated First Lien Net Leverage Ratio. We are also required to pay an unused commitment fee to the lenders under the Senior Revolver at the Applicable Commitment Fee of the average daily unutilized commitments. The Applicable Commitment Fee ranges from 0.40% to 0.50% subject to the Company's Consolidated First Lien Never Leverage Ratio.
As of June 30, 2022 (unaudited), we had outstanding borrowings of $498.8 million on the Senior Term Loan, no outstanding borrowings under our Senior Revolver and $4.4 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.
34
Net cash used in operating activities during the unaudited six months ended June 30, 2022 was $57.5 million, which was attributable to a net loss of $18.5 million adjusted for certain non-cash items, including $16.0 million of stock-based compensation expense, $70.0 million depreciation and amortization and $0.6 million in amortization of debt discount and issuance costs, and $2.6 million in other non-cash items. These amounts were offset by a decrease of $5.4 million to deferred income taxes. The net change in operating asset and liabilities included a net increase of $90.2 million in deferred revenue and accounts receivable resulting from the seasonality of our business where a significant number of our customer agreements occur in the second and third quarter each year. Prepaid expenses and other current assets increased by $21.2 million, lease liabilities decreased by $3.5 million, other liabilities decreased by $1.4 million, accounts payable and accrued liabilities decreased by $9.1 million deferred commissions decreased by $0.2 million, and right-of-use assets decreased by $2.4 million.
Net cash used in operating activities during the unaudited six months ended June 30, 2021 was $52.4 million, which was attributable to a net loss of $54.8 million adjusted for certain non-cash items, including $4.8 million of stock-based compensation expense, $68.5 million depreciation and amortization, $1.2 million in amortization of debt discount and issuance costs, $1.2 million of impairment on disposal group, and $1.4 million in other non-cash items. These amounts were offset by a decrease to deferred income taxes of $15.4 million. The net change in operating assets and liabilities included a net increase of $52.9 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 $7.0 million, accounts payable and accrued liabilities decreased by $0.2 million, deferred commissions increased by $2.4 million, lease liabilities decreased by $3.1 million, and other liabilities decreased by $0.3 million and a decrease of $6.4 million in right-of-use assets.
Investing Activities
Our investing activities have consisted of business acquisitions, property and equipment purchases for computer-related equipment and capitalization of software development costs. Capitalized software development costs are related to new applications or improvements to our existing software platform that expand the functionality for our customers.
Net cash used in investing activities during the unaudited six months ended June 30, 2022 was $22.9 million, consisting of the acquisition of Canvas Credentials of $19.5 million, net of cash received, and purchases of property and equipment of $3.4 million.
Net cash provided by investing activities during the unaudited six months ended June 30, 2021 was $28.4 million, consisting of $46.0 million due to the sale of our Bridge business, which was offset by the acquisition of Impact of $16.0 million, net of cash received, and purchases of property and equipment of $1.6 million.
Financing Activities
Our financing activities have consisted of proceeds from issuance of common stock from employee equity plans, shares withheld for tax withholdings on vesting of RSUs, repurchases of TopCo units and repayments of long-term debt.
Net cash provided by financing activities during the unaudited six months ended June 30, 2022 was $1.1 million, which consisted of $4.1 million in proceeds from the issuance of common stock from employee equity plans, offset by $1.7 million of shares repurchased for tax withholdings on vesting of restricted stock units and principal payments made on our long-term debt of $1.3 million.
Net cash used in financing activities during the unaudited six months ended June 30, 2021 was $52.5 million, which consisted of $51.5 million of principal payments made on our long-term debt and distributions to stockholders of $0.9 million.
Critical Accounting Estimates
Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.
There have been no material changes to our critical accounting estimates as compared to those described in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in our 2021 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.
35
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30, |
|
|
Six months ended
June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
|
(in thousands) |
|
Other Financial Data: |
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP operating income (1) |
|
|
38,669 |
|
|
|
30,442 |
|
|
|
81,166 |
|
|
|
62,669 |
|
Free cash flow (2) |
|
|
6,551 |
|
|
|
5,184 |
|
|
|
(60,919 |
) |
|
|
(53,950 |
) |
Adjusted EBITDA (3) |
|
|
39,808 |
|
|
|
31,198 |
|
|
|
83,362 |
|
|
|
63,758 |
|
Allocated Combined Receipts (4) |
|
|
114,908 |
|
|
|
95,901 |
|
|
|
228,869 |
|
|
|
194,639 |
|
(1)We define “non-GAAP operating income” as loss from operations excluding the impact of stock-based compensation, restructuring, transaction and sponsor related costs, amortization of acquisition-related intangibles, and the impact of fair value adjustments to acquired unearned revenue relating to the Take-Private Transaction and the Certica, Impact and Elevate Data Sync acquisitions that we do not believe are reflective of our ongoing operations.
(2)We define “free cash flow” as net cash provided by (used in) operating activities less purchases of property and equipment and intangible assets, net of proceeds from disposals of property and equipment.
(3)“EBITDA” is defined as earnings before debt-related costs, including interest and loss on debt extinguishment, provision (benefit) for taxes, depreciation, and amortization. We further adjust EBITDA to exclude certain items of a significant or unusual nature, including stock-based compensation, restructuring, transaction and sponsor related costs, amortization of acquisition-related intangibles, and the impact of fair value adjustments to acquired unearned revenue relating to the Take-Private Transaction and Certica, Impact and Elevate Data Sync acquisitions.
(4)“Allocated Combined Receipts” is defined as the combined receipts of our Company and companies that we have acquired allocated to the period of service delivery. We calculate Allocated Combined Receipts as the sum of (i) revenue and (ii) the impact of fair value adjustments to acquired unearned revenue related to the Take-Private Transaction and Certica, Impact and Elevate Data Sync acquisitions that we do not believe are reflective of our ongoing operations.
Non-GAAP Operating Income
We define non-GAAP operating income as loss from operations excluding the impact of stock-based compensation, restructuring, transaction and sponsor related costs, amortization of acquisition-related intangibles, and the impact of fair value adjustments to acquired unearned revenue relating to the Take-Private Transaction and Certica, Impact and Elevate Data Sync acquisitions that we do not believe are reflective of our ongoing operations. We believe non-GAAP operating income is useful in evaluating our operating performance compared to that of other companies in our industry, as this metric generally eliminates the effects of certain items that may vary for different companies for reasons unrelated to overall operating performance. Although we exclude the amortization of acquisition-related intangibles from this non-GAAP measure, management believes it is important for investors to understand that such intangible assets were recorded as part of purchase accounting and contribute to revenue generation.
36
The following table provides a reconciliation of loss from operations to non-GAAP operating income for each of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30, |
|
|
Six months ended
June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
|
(in thousands) |
|
Loss from operations |
|
|
(6,628 |
) |
|
|
(11,965 |
) |
|
|
(10,315 |
) |
|
|
(36,499 |
) |
Stock-based compensation |
|
|
9,387 |
|
|
|
3,758 |
|
|
|
18,863 |
|
|
|
9,343 |
|
Restructuring, transaction and sponsor related costs |
|
|
1,388 |
|
|
|
2,954 |
|
|
|
3,858 |
|
|
|
16,011 |
|
Amortization of acquisition-related intangibles |
|
|
34,191 |
|
|
|
33,361 |
|
|
|
67,930 |
|
|
|
66,722 |
|
Fair value adjustments to deferred revenue in connection with purchase accounting |
|
|
331 |
|
|
|
2,334 |
|
|
|
830 |
|
|
|
7,092 |
|
Non-GAAP operating income |
|
$ |
38,669 |
|
|
$ |
30,442 |
|
|
$ |
81,166 |
|
|
$ |
62,669 |
|
Free Cash Flow
We define free cash flow as net cash used in operating activities less purchases of property and equipment and intangible assets, net of proceeds from disposals of property and equipment. We believe free cash flow facilitates period-to-period comparisons of liquidity. We consider free cash flow to be an important measure because it measures the amount of cash we generate and reflects changes in working capital. We use free cash flow in conjunction with traditional U.S. GAAP measures as part of our overall assessment of our liquidity, including the preparation of our annual operating budget and quarterly forecasts, to evaluate the effectiveness of our business strategies, and to communicate with our Board concerning our liquidity.
The following table provides a reconciliation of net cash used in operating activities to free cash flow for each of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30, |
|
|
Six months ended
June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
|
(in thousands) |
|
Net cash used in operating activities |
|
$ |
8,619 |
|
|
$ |
6,365 |
|
|
$ |
(57,540 |
) |
|
$ |
(52,367 |
) |
Purchases of property and equipment and intangible assets |
|
|
(2,082 |
) |
|
|
(1,196 |
) |
|
|
(3,415 |
) |
|
|
(1,607 |
) |
Proceeds from disposals of property and equipment |
|
|
14 |
|
|
|
15 |
|
|
|
36 |
|
|
|
24 |
|
Free cash flow |
|
$ |
6,551 |
|
|
$ |
5,184 |
|
|
$ |
(60,919 |
) |
|
$ |
(53,950 |
) |
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, restructuring, transaction and sponsor related costs, amortization of acquisition-related intangibles, and the impact of fair value adjustments to acquired unearned revenue relating to the Take-Private Transaction and Certica, Impact, and Elevate Data Sync acquisitions. 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. 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.
37
The following table presents a reconciliation of net loss to adjusted EBITDA for each of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30, |
|
|
Six months ended
June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
|
(in thousands) |
|
Net Loss |
|
$ |
(12,919 |
) |
|
$ |
(21,693 |
) |
|
$ |
(18,464 |
) |
|
$ |
(54,764 |
) |
Interest on outstanding debt and loss on debt extinguishment |
|
|
4,608 |
|
|
|
15,653 |
|
|
|
9,161 |
|
|
|
32,923 |
|
Benefit for taxes |
|
|
(1,710 |
) |
|
|
(6,050 |
) |
|
|
(4,063 |
) |
|
|
(15,391 |
) |
Depreciation |
|
|
1,053 |
|
|
|
879 |
|
|
|
2,058 |
|
|
|
1,818 |
|
Amortization |
|
|
2 |
|
|
|
2 |
|
|
|
4 |
|
|
|
4 |
|
Stock-based compensation |
|
|
9,387 |
|
|
|
3,758 |
|
|
|
18,863 |
|
|
|
9,343 |
|
Restructuring, transaction and sponsor related costs |
|
|
4,865 |
|
|
|
2,954 |
|
|
|
7,043 |
|
|
|
16,011 |
|
Amortization of acquisition-related intangibles |
|
|
34,191 |
|
|
|
33,361 |
|
|
|
67,930 |
|
|
|
66,722 |
|
Fair value adjustments to deferred revenue in connection with purchase accounting |
|
|
331 |
|
|
|
2,334 |
|
|
|
830 |
|
|
|
7,092 |
|
Adjusted EBITDA |
|
$ |
39,808 |
|
|
$ |
31,198 |
|
|
$ |
83,362 |
|
|
$ |
63,758 |
|
Allocated Combined Receipts
We define Allocated Combined Receipts as the combined receipts of our Company and companies that we have acquired allocated to the period of service delivery. We calculate Allocated Combined Receipts as the sum of (i) revenue and (ii) the impact of fair value adjustments to acquired unearned revenue related to the Take-Private Transaction and Certica, Impact and Elevate Data Sync acquisitions that we do not believe are reflective of our ongoing operations. Management uses this measure to evaluate organic growth of the business period over period, as if the Company had operated as a single entity and excluding the impact of acquisitions or adjustments due to purchase accounting. Organic growth in current and future periods is driven by sales to new customers and the addition of additional subscriptions and functionality to existing customers, offset by customer cancellations or reduced subscriptions upon renewal.
We believe that it is important to evaluate growth on this organic basis, as it is an indication of the success of our services from the customer’s perspective that is not impacted by corporate events such as acquisitions or the fair value estimates of acquired unearned revenue. We believe this measure is useful to investors because it illustrates the trends in our organic revenue growth and allows investors to analyze the drivers of revenue on the same basis as management.
The following table presents a reconciliation of revenue to Allocated Combined Receipts for each of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30, |
|
|
Six months ended
June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
|
(in thousands) |
|
Revenue |
|
$ |
114,577 |
|
|
$ |
93,567 |
|
|
$ |
228,039 |
|
|
$ |
187,547 |
|
Fair value adjustments to deferred revenue in connection with purchase accounting |
|
|
331 |
|
|
|
2,334 |
|
|
|
830 |
|
|
|
7,092 |
|
Allocated Combined Receipts |
|
$ |
114,908 |
|
|
$ |
95,901 |
|
|
$ |
228,869 |
|
|
$ |
194,639 |
|
38
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. All statements other than statements of historical facts are “forward-looking statements” for purposes of these provisions, including those relating to future events or our future financial performance and financial guidance. In some cases, you can identify forward-looking statements by terminology such as “may,” “might,” “will,” “should,” “expect,” “plan,” “anticipate,” “project,” “believe,” “estimate,” “predict,” “potential,” “intend” or “continue,” the negative of terms like these or other comparable terminology, and other words or terms of similar meaning in connection with any discussion of future operating or financial performance. For example, all statements we make relating to our estimated and projected costs, expenditures, cash flows, growth rates and financial results or our plans and objectives for future operations, growth initiatives, or strategies 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:
•risks associated with general global political, macroeconomic, social, health and market conditions, including rising inflation, political instability, terrorist activities or military conflicts, including Russia's invasion of Ukraine;
•risks associated with future stimulus packages approved by the U.S. federal government;
•risks associated with failing to continue our recent growth rates;
•our ability to acquire new customers and successfully retain existing customers;
•the effects of the increased usage of, or interruptions or performance problems associated with, our learning platform;
•the impact on our business and prospects from the ongoing effects of the COVID-19 pandemic;
•our history of losses and expectation that we will not be profitable for the foreseeable future;
•the impact of adverse general and industry-specific economic and market conditions;
•risks to our revenue from changes in the spending policies or budget priorities for government funding of Higher Education and K-12 institutions;
•our ability to grow our business effectively, to scale our business and to manage our expenses;
•risks caused by delays in upturns or downturns being reflected in our operating results;
•risks and uncertainties associated with potential acquisitions;
•our ability to use net operating losses to offset future taxable income;
•our ability to change our pricing models, if necessary to compete successfully;
•the length and unpredictability of our sales cycles;
•risks associated with failure to develop our sales and marketing capabilities;
•the competitiveness of the market in which we operate;
•risks associated with joint ventures, platform partnerships and strategic alliances;
•our ability to offer high-quality professional services and support;
•the effectiveness of our expense reduction plan;
•risks associated with international operations;
•our reliance on our management team and other key employees, including the effects of recent significant changes to our executive leadership team and the resulting transitions;
•our ability to attract and retain qualified personnel;
•our ability to maintain our company culture as we grow;
•risks related our brand recognition and reputation;
•the complexity and time-consuming nature of our billing and collections processing;
39
•our ability to adapt and respond to rapidly changing technology, evolving industry standards and changing customer needs;
•the impact of potential information technology or data security breaches or other cyberattacks or other disruptions;
•risks associated with our use of open source software, including that we make a substantial portion of the source code for Canvas available under the terms of an open source license;
•risks relating to our reliance on third-party software and intellectual property licenses;
•the impact of real or perceived errors, failures or bugs in our solutions;
•risks associated with lawsuits by third parties for alleged infringement, misappropriation or other violation of their intellectual property and proprietary rights;
•our ability to obtain, maintain, protect and enforce our intellectual property and proprietary rights;
•risks related to incorrect or improper use of our solutions or our failure to properly train customers on how to utilize our solutions;
•privacy laws and regulations, including changes thereto, applicable to our business;
•risks relating to non-compliance with FERPA, COPPA and other regulatory regimes applicable to our business;
•risks related to changes in tax laws;
•the impact of export and import control laws and regulations;
•risk relating to non-compliance with anti-corruption, anti-bribery and similar laws;
•our ability to comply with complex procurement rules and regulations;
•risks related to future litigation;
•risks related to our existing and future indebtedness;
•our ability to develop and maintain proper and effective internal control over financial reporting;
•our management team’s limited experience managing a public company
•our ability to correctly estimate market opportunity and forecast market growth;
•the impact of any catastrophic events;
•our ability to raise additional capital or generate cash flows necessary to expand operations and invest in new technologies; and
•other factors disclosed in the section entitled “Risk Factors” in the 2021 10-K and elsewhere in this Quarterly Report.
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 prospectus 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.