UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
OR
For the transition period from to
Commission file number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
(Address of principal executive offices, including zip code)
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
As of October 29, 2021, there were
Instructure Holdings, Inc.
Quarterly Report on Form 10-Q
For the Quarter Ended September 30, 2021
INDEX
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Page |
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Item 1. |
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3 |
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3 |
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4 |
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5 |
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7 |
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9 |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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35 |
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Item 3. |
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53 |
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Item 4. |
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54 |
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Item 1. |
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55 |
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Item 1A. |
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55 |
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Item 2. |
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55 |
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Item 3. |
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55 |
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Item 4. |
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55 |
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Item 5. |
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55 |
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Item 6. |
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55 |
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57 |
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In this Quarterly Report on Form 10-Q, “we,” “our,” “us,” “Instructure,” and the “Company” refer to Instructure Holdings, Inc. and its wholly-owned subsidiaries.
2
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
INSTRUCTURE HOLDINGS, INC.
Consolidated Balance Sheets
(in thousands, except per share amounts)
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September 30, |
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December 31, |
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2021 |
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2020 |
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(unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable—net |
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Prepaid expenses |
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Deferred commissions |
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Assets held for sale |
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Other current assets |
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Total current assets |
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Property and equipment, net |
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Right-of-use assets |
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Goodwill |
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Intangible assets, net |
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Noncurrent prepaid expenses |
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Deferred commissions, net of current portion |
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Other assets |
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Total assets |
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$ |
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$ |
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Liabilities and stockholders’ equity |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Accrued liabilities |
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Lease liabilities |
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Long-term debt, current |
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Liabilities held for sale |
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Deferred revenue |
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Total current liabilities |
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Long-term debt, net of current portion |
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Deferred revenue, net of current portion |
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Lease liabilities, net of current portion |
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Deferred tax liabilities |
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Other long-term liabilities |
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Total liabilities |
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Stockholders’ equity: |
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Common stock, par value $ |
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Additional paid-in capital |
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Accumulated deficit |
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( |
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( |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
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$ |
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$ |
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Share amounts and per share data give retroactive effect to the forward stock split described in the Description of Business and Basis of Presentation footnote effective July 9, 2021.
See accompanying notes.
3
INSTRUCTURE HOLDINGS, INC.
Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
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Successor |
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Predecessor |
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Three months |
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Three months |
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Nine months |
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Six months |
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Three months |
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2021 |
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2020 |
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2021 |
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2020 |
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2020 |
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Revenue: |
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Subscription and support |
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$ |
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$ |
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$ |
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$ |
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$ |
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Professional services and other |
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Total revenue |
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Cost of revenue: |
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Subscription and support |
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Professional services and other |
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Total cost of revenue |
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Gross profit |
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Operating expenses: |
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Sales and marketing |
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Research and development |
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General and administrative |
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Impairment on held-for-sale goodwill |
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Impairment on held-for-sale assets |
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Total operating expenses |
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Loss from operations |
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( |
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( |
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( |
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Other income (expense): |
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Interest income |
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Interest expense |
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( |
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Other income (expense) |
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Total other income (expense), net |
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( |
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( |
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( |
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Loss before income taxes |
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( |
) |
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( |
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( |
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( |
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( |
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Income tax benefit (expense) |
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( |
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Net loss and comprehensive loss |
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$ |
( |
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$ |
( |
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$ |
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$ |
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$ |
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Net loss per common share, basic and diluted |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
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$ |
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Weighted average common shares used in computing basic and diluted net loss per common share |
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Share amounts and per share data give retroactive effect to the forward stock split described in the Description of Business and Basis of Presentation footnote effective July 9, 2021.
See accompanying notes.
4
INSTRUCTURE HOLDINGS, INC.
Consolidated Statements of Stockholders’ Equity
(in thousands, except per share amounts)
(unaudited)
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Common |
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Common |
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Stock, $0.0001 |
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Stock, $0.01 |
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Additional |
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Total |
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Par Value |
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Par Value |
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Paid-In |
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Accumulated |
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Stockholders’ |
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Shares |
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Amount |
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Shares |
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Amount |
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Capital |
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Deficit |
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Equity |
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Successor Balances at June 30, 2021 |
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— |
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$ |
— |
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$ |
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$ |
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$ |
( |
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$ |
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Repurchase of TopCo Units |
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— |
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— |
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( |
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— |
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( |
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Issuance of common stock in connection with initial public offering, net of underwriters' discounts and commissions and issuance costs |
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— |
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— |
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Vesting of restricted stock units |
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— |
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— |
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( |
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— |
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— |
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Shares withheld for tax withholding on vesting of restricted stock units |
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— |
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— |
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( |
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( |
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( |
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( |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Successor Balances at September 30, 2021 |
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— |
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$ |
— |
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$ |
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$ |
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$ |
( |
) |
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$ |
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Successor Balances at June 30, 2020 |
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— |
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$ |
— |
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$ |
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$ |
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$ |
( |
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$ |
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Additional capital contribution |
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— |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Successor Balances at September 30, 2020 |
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— |
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$ |
— |
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$ |
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$ |
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$ |
( |
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$ |
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5
INSTRUCTURE HOLDINGS, INC.
Consolidated Statements of Stockholders’ Equity
(in thousands, except per share amounts)
(unaudited)
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Common |
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Common |
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Stock, $0.0001 |
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Stock, $0.01 |
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Additional |
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Total |
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Par Value |
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Par Value |
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Paid-In |
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Accumulated |
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Stockholders’ |
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Shares |
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Amount |
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Shares |
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Amount |
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Capital |
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Deficit |
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Equity |
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Successor Balances at December 31, 2020 |
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— |
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$ |
— |
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$ |
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$ |
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$ |
( |
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$ |
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Repurchase of TopCo Units |
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— |
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— |
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( |
) |
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( |
) |
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( |
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— |
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( |
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Issuance of common stock in connection with initial public offering, net of underwriters' discounts and commissions and issuance costs |
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— |
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— |
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— |
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Vesting of restricted stock units |
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— |
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— |
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( |
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— |
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— |
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Shares withheld for tax withholding on vesting of restricted stock units |
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— |
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— |
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( |
) |
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( |
) |
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( |
) |
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— |
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( |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
) |
Successor Balances at September 30, 2021 |
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— |
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$ |
— |
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$ |
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$ |
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$ |
( |
) |
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$ |
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Predecessor Balances at December 31, 2019 |
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$ |
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— |
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$ |
— |
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$ |
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$ |
( |
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$ |
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Exercise of common stock options |
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— |
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— |
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— |
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— |
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Vesting of restricted stock units |
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— |
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— |
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— |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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— |
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Shares withheld for tax withholding on vesting of restricted stock units |
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(29 |
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— |
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— |
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— |
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( |
) |
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— |
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( |
) |
Net loss |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
) |
Predecessor Balances at March 31, 2020 |
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— |
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— |
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( |
) |
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Cancellation of Predecessor equity |
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( |
) |
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( |
) |
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— |
|
|
|
— |
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Take-Private Transaction |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
||||
Additional capital contribution |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Successor Balances at September 30, 2020 |
|
|
— |
|
|
$ |
— |
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||
Share amounts and per share data give retroactive effect to the forward stock split described in the Description of Business and Basis of Presentation footnote effective July 9, 2021.
See accompanying notes.
6
INSTRUCTURE HOLDINGS, INC.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
|
|
Successor |
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Predecessor |
|
||||||
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Nine months |
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Six months |
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Three months |
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2021 |
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2020 |
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2020 |
|
|||
Operating activities: |
|
|
|
|
|
|
|
|
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|
|||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
$ |
( |
) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
|
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|
|||
Depreciation of property and equipment |
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Amortization of intangible assets |
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|||
Amortization of deferred financing costs |
|
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Impairment on disposal group |
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Impairment on held-for-sale goodwill |
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|
|||
Stock-based compensation |
|
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|
|||
Deferred income taxes |
|
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( |
) |
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( |
) |
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Other |
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|
|||
Changes in assets and liabilities: |
|
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|
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|
|||
Accounts receivable, net |
|
|
( |
) |
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|
( |
) |
|
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|
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|
Prepaid expenses and other assets |
|
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( |
) |
||
Deferred commissions |
|
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( |
) |
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|
( |
) |
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Right-of-use assets |
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|
|||
Accounts payable and accrued liabilities |
|
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( |
) |
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|
||
Deferred revenue |
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( |
) |
||
Lease liabilities |
|
|
( |
) |
|
|
( |
) |
|
|
|
( |
) |
Other liabilities |
|
|
( |
) |
|
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|
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|
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|
||
Net cash provided by (used in) operating activities |
|
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|
|
|
|
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( |
) |
||
Investing activities: |
|
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|
|
|
|
|
|
|||
Purchases of property and equipment |
|
|
( |
) |
|
|
( |
) |
|
|
|
( |
) |
Proceeds from sale of property and equipment |
|
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|
|||
Proceeds from sale of Bridge |
|
|
|
|
|
|
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|
|||
Business acquisitions, net of cash received |
|
|
( |
) |
|
|
( |
) |
|
|
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|
|
Maturities of marketable securities |
|
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|
|||
Net cash provided by (used in) investing activities |
|
|
|
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( |
) |
|
|
|
|
||
Financing activities: |
|
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|
|||
IPO proceeds, net of offering costs paid of $ |
|
|
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|
|
|
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|
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|
|||
Proceeds from issuance of common stock from employee equity plans |
|
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|
|||
Shares repurchased for tax withholdings on vesting of restricted stock units |
|
|
( |
) |
|
|
|
|
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|
( |
) |
|
Proceeds from issuance of term debt, net of discount |
|
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|
|||
Proceeds from contributions from stockholders |
|
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|||
Distributions to stockholders |
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( |
) |
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||
Repayments of long-term debt |
|
|
( |
) |
|
|
( |
) |
|
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|
|
Term Loan prepayment premium |
|
|
( |
) |
|
|
|
|
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|
||
Net cash provided by (used in) financing activities |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Net increase (decrease) in cash, cash equivalents, and restricted cash |
|
|
|
|
|
|
|
|
|
( |
) |
||
Cash, cash equivalents, and restricted cash, beginning of period |
|
|
|
|
|
|
|
|
|
|
|||
Cash, cash equivalents, and restricted cash, end of period |
|
$ |
|
|
$ |
|
|
|
$ |
|
|||
Supplemental cash flow disclosure: |
|
|
|
|
|
|
|
|
|
|
|||
Cash paid for taxes |
|
$ |
|
|
$ |
|
|
|
$ |
|
|||
Interest paid |
|
$ |
|
|
$ |
|
|
|
|
|
|||
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|||
Capital expenditures incurred but not yet paid |
|
$ |
|
|
$ |
|
|
|
$ |
|
|||
See accompanying notes.
7
INSTRUCTURE HOLDINGS, INC.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
The following provides a reconciliation of Cash, Cash Equivalents and Restricted Cash to the amounts reported on the consolidated balance sheets. Restricted cash has been disclosed in Other assets as it is associated with letters of credit obtained to secure office space from our various lease agreements and other contractual arrangements (in thousands):
|
|
Successor |
|
|
|
Predecessor |
|
||||||
|
|
Nine months |
|
|
Six months |
|
|
|
Three months |
|
|||
|
|
2021 |
|
|
2020 |
|
|
|
2020 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|||
Cash and equivalents |
|
$ |
|
|
$ |
|
|
|
$ |
|
|||
Restricted cash |
|
|
|
|
|
|
|
|
|
|
|||
Total cash, cash equivalents, and restricted cash |
|
$ |
|
|
$ |
|
|
|
$ |
|
|||
See accompanying notes.
8
INSTRUCTURE HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
1. Description of Business and Basis of Presentation
Organization
On March 24, 2020, Instructure Parent, L.P. (“TopCo”) acquired
Instructure, Inc. was incorporated in the state of Delaware in September 2008. We are headquartered in Salt Lake City, Utah, and have wholly-owned subsidiaries in the United Kingdom, Australia, the Netherlands, Hong Kong, Sweden, Brazil, Mexico, Hungary, and Singapore.
Basis of Presentation
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) applicable to interim periods, under the rules and regulations of the United States Securities and Exchange Commission (“SEC”). In the opinion of management, we have prepared the accompanying unaudited financial statements on a basis substantially consistent with the audited consolidated financial statements of the Company as of and for the fiscal year ended December 31, 2020, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. All intercompany balances and transactions have been eliminated in consolidation. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire year ending December 31, 2021. The year-end balance sheet data was derived from audited financial statements, but this Form 10-Q does not include all disclosures required under U.S. GAAP. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been omitted under the rules and regulations of the SEC.
On July 9, 2021, the Company effected a
On July 26, 2021, the Company completed its initial public offering (“IPO”) of
9
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Such estimates, which we evaluate on an on-going basis, include provisions for credit losses, useful lives for property and equipment and intangible assets, valuation allowances for net deferred income tax assets, valuation of stock-based compensation and common stock, the standalone selling price of performance obligations, the fair value of identified assets and liabilities acquired in business combinations and the determination of the period of benefit for deferred commissions. We base our estimates on historical experience and on various other assumptions which we believe to be reasonable.
Operating Segments
We operate in a single operating segment, cloud-based learning management, assessment and performance systems. Operating segments are defined as components of an enterprise for which separate financial information is regularly evaluated by the chief operating decision makers (“CODMs”), which are our chief executive officer and chief financial officer, in deciding how to allocate resources and assess performance. Our CODMs evaluate our financial information and resources and assess the performance of these resources on a consolidated basis. Since we operate in one operating segment, all required financial segment information can be found on the consolidated financial statements.
Net Loss Per Share Attributable to Common Stockholders
Basic net loss per share attributable to common stockholders in both the Successor Period and the Predecessor Period is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted net loss per share attributable to common stockholders is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period. For purposes of this calculation, options to purchase common stock and restricted stock units are considered to be common stock equivalents in the Predecessor Period, and restricted stock units are considered to be common stock equivalents in the Successor Period.
Concentration of Credit Risk, Significant Customers and International Operations
Financial instruments that potentially subject us to a concentration of credit risk consist principally of cash and accounts receivable. We deposit cash with high credit quality financial institutions, which at times, may exceed federally insured amounts. We have not experienced any losses on our deposits. We perform ongoing credit evaluations of our customers’ financial condition and generally require no collateral from our customers. We review the expected collectability of accounts receivable and record a provision for credit losses for amounts that we determine are not collectible.
There were
As of September 30, 2021 (unaudited) and December 31, 2020, our largest customer's outstanding net accounts receivable balance as a percentage of the total outstanding net accounts receivable balance represented
Cash and Cash Equivalents
Provision for Credit Losses
Provision for credit losses consist of bad debt expense associated with our accounts receivable balance. These losses are recorded in general and administrative in our consolidated statements of operations.
10
We are exposed to credit losses primarily through our receivables from customers. We develop estimates to reflect the risk of credit loss which are based on historical loss trends adjusted for asset specific attributes, current conditions and reasonable and supportable forecasts of the economic conditions that will exist through the contractual life of the financial asset. We monitor our ongoing credit exposure through an active review of collection trends. Our activities include monitoring the timeliness of payment collection, managing dispute resolution and performing timely account reconciliations. Our provisions for credit loss balances at September 30, 2021 (unaudited) and December 31, 2020 were $
Property and Equipment and Intangible Assets
Property and equipment are stated at cost less accumulated depreciation. Expenditures that materially increase values or capacities or extend useful lives of property and equipment are capitalized.
Repairs and maintenance costs that do not extend the useful life or improve the related assets are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets or over the related lease terms (if shorter).
|
|
Estimated |
Computer and office equipment |
|
|
Purchased software |
|
|
Furniture and fixtures |
|
|
Capitalized software development costs |
|
|
Leasehold improvement and other |
|
|
Certain costs incurred to develop software applications used in the cloud-based learning, assessment, development and engagement system are capitalized and included in property and equipment, net on the balance sheets. Capitalizable costs consist of (1) certain external direct costs of materials and services incurred in developing or obtaining internal-use software; and (2) payroll and payroll-related costs for employees who are directly associated with and who devote time to the project. These costs generally consist of internal labor during configuration, coding and testing activities. Research and development costs incurred during the preliminary project stage, or costs incurred for data conversion activities, training, maintenance and general and administrative or overhead costs, are expensed as incurred. Costs that cannot be separated between the maintenance of, and relatively minor upgrades and enhancements to, internal-use software are also expensed as incurred. Costs incurred during the application development stage that significantly enhance and add new functionality to the cloud-based learning, assessment, development and engagement system are capitalized as capitalized software development costs. Capitalization begins when: (1) the preliminary project stage is complete; (2) management with the relevant authority authorizes and commits to the funding of the software project; (3) it is probable the project will be completed; (4) the software will be used to perform the functions intended; and (5) certain functional and quality standards have been met.
Acquired finite-lived intangibles are amortized on a straight-line basis over the estimated useful life of the asset, which ranges from to
When there are indicators of potential impairment, we evaluate recoverability of the carrying values of property and equipment and intangible assets by comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds our estimated undiscounted future net cash flows, an impairment charge is recognized based on the amount by which the carrying value of the asset exceeds the fair value of the asset. We did not incur any impairment charges during the periods presented.
Leases
We enter into operating lease arrangements for real estate assets related to office space. Consistent with the Financial Accounting Standards Board's (“FASB”) Accounting Standards Codification (“ASC”) 842, Leases (“Topic 842”), the Company determines if an arrangement conveys the right to control the use of the identified asset in exchange for consideration. Operating leases are included as right-of-use assets and lease liabilities in the consolidated balance sheets. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term.
11
Lease payments consist of the fixed payments under the arrangements. Variable costs, such as maintenance and utilities based on actual usage, are not included in the measurement of right-of-use assets and lease liabilities but are expensed when the event determining the amount of variable consideration to be paid occurs. As the implicit rate of the Company’s leases is not determinable, the Company uses an incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. Lease expense is recognized on a straight-line basis over the lease term.
The Company generally uses the non-cancellable lease term when recognizing the right-of-use assets and lease liabilities unless it is reasonably certain that a renewal option or termination option will be exercised. The Company accounts for lease components and non-lease components as a single component.
Fair Value
Goodwill
Revenue Recognition
We generate revenue primarily from two main sources: (1) subscription and support revenue, which is comprised of SaaS fees from customers accessing our learning platform and from customers purchasing additional support beyond the standard support that is included in the basic SaaS fees; and (2) related professional services revenue, which is comprised of training, implementation services and other types of professional services. Consistent with ASC 606, Revenue from Contracts with Customers, revenue is recognized when control of these services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services. The timing of revenue recognition may differ from the timing of invoicing our customers. We record an unbilled receivable, which is included within accounts receivable—net on our consolidated balance sheets, when revenue is recognized prior to invoicing. Unbilled receivable balances as of September 30, 2021 (unaudited) and December 31, 2020 were $
We determined revenue recognition through the following steps:
12
The following describes the nature of our primary types of revenue and the revenue recognition policies and significant payment terms as they pertain to the types of transactions we enter into with our customers.
Subscription and Support
Subscription and support revenue is derived from fees from customers to access our learning platform and support beyond the standard support that is included with all subscriptions. The terms of our subscriptions do not provide customers the right to take possession of the software. Subscription and support revenue is generally recognized on a ratable basis over the contract term. Payments from customers are primarily due annually in advance.
Professional Services and Other
Professional services revenue is derived from implementation, training, and consulting services. Our professional services are typically considered distinct from the related subscription services as the promise to transfer the subscription can be fulfilled independently from the promise to deliver the professional services (i.e., customer receives standalone functionality from the subscription and the customer obtains the intended benefit of the subscription without the professional services). Professional services arrangements are billed in advance, and revenue from these arrangements is typically recognized over time as the services are rendered, using an efforts-expended input method. Implementation services also include nonrefundable upfront setup fees, which are allocated to the remaining performance obligations.
Contracts with Multiple Performance Obligations
Many of our contracts with customers contain multiple performance obligations. We account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price (“SSP”) basis. We determine the SSP based on our overall pricing objectives by reviewing our significant pricing practices, including discounting practices, geographical locations, the size and volume of our transactions, the customer type, price lists, our pricing strategy, and historical standalone sales. SSP is analyzed on a periodic basis to identify if we have experienced significant changes in our selling prices.
Deferred Commissions
Sales commissions earned by our sales force, as well as related payroll taxes, are considered incremental and recoverable costs of obtaining a contract with a customer. These costs are deferred and then amortized on a straight-line basis over a period of benefit that we have determined to be generally four years. We determined the period of benefit by taking into consideration our customer contracts, our technology and other factors. Amortization of deferred commissions is included in sales and marketing expenses in the accompanying consolidated statements of operations.
Deferred Revenue
Deferred revenue consists of billings and payments received in advance of revenue recognition generated by our subscription and support services and professional services and other, as described above.
Cost of Revenue
Cost of subscription revenue consists primarily of our managed hosting provider and other third-party service providers, employee-related costs including payroll, benefits and stock-based compensation expense for our operations and customer support teams, amortization of capitalized software development costs and acquired technology, and allocated overhead costs, which we define as rent, facilities and costs related to information technology, or IT.
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.
Service Availability Warranty
We warrant to our customers: (1) that commercially reasonable efforts will be made to maintain the online availability of the platform for a minimum availability in a trailing 365-day period (excluding scheduled outages, standard maintenance windows, force majeure, and outages that result from any technology issue originating from any customer or user); (2) the functionality or features of the platform may change but will not materially degrade during any paid term; and (3) that support may change but will not materially degrade during any paid term. To date, we have not experienced any significant losses under these warranties.
13
Stock-Based Compensation
Successor
Before our IPO, we determined the grant date fair value for all unit-based awards granted to employees and nonemployees by using an option-pricing model. As of June 30, 2021, our equity was not publicly traded and there was no history of market prices for our units. Thus, estimating grant date fair value required us to make assumptions, including the value of our equity, expected time to liquidity, and expected volatility. Stock-based compensation costs for granted units were recognized as expense over the requisite service period, which was generally the vesting period for awards, on a straight-line basis for awards with only a service condition. For granted units subject to performance conditions, the Company recorded expense when the performance condition became probable. Forfeitures were accounted for as they occurred.
Subsequent to our IPO in July 2021, we account for all awards granted to employees and nonemployees using a fair value method. Stock-based compensation is recognized as an expense and is measured at the fair value of the award. The measurement date for employee awards is generally the date of the grant. Stock-based compensation costs are recognized as expense over the requisite service period, which is generally the vesting period for awards, on a straight-line basis for awards with only a service condition. Forfeitures are accounted for as they occur.
We use the closing price of our common stock as reported on the New York Stock Exchange for the fair value of restricted stock units (“RSUs”) granted.
We use the Black-Scholes option pricing model to determine the fair value of purchase rights issued to employees under our 2021 Employee Stock Purchase Plan (“2021 ESPP”). The Black-Scholes option pricing model is affected by the unit price and a number of assumptions, including the award’s expected life, risk-free interest rate, the expected volatility of the underlying stock and expected dividends.
These assumptions are estimated as follows:
Predecessor
For the Predecessor Periods, we accounted for all stock options and awards granted to employees and nonemployees using a fair value method. Stock-based compensation was recognized as an expense and measured at the fair value of the award. The measurement date for employee awards was generally the date of the grant. Stock-based compensation costs were recognized as expense over the requisite service period, which was generally the vesting period for awards, on a straight-line basis for awards with only a service condition. Forfeitures were accounted for as they occurred.
During the Predecessor Periods, we used the then closing price of our common stock as reported on the New York Stock Exchange for the fair value of RSUs granted as at that time our common stock was publicly traded.
During the Predecessor Periods, we used the Black-Scholes option pricing model to determine the fair value of stock options issued to our employees, as well as purchase rights issued to employees under our 2015 Employee Stock Purchase Plan (“2015 ESPP”). The Black-Scholes option pricing model is affected by the unit price and a number of assumptions, including the award’s expected life, risk-free interest rate, the expected volatility of the underlying stock and expected dividends.
14
These assumptions are estimated as follows:
In connection with the Take-Private Transaction on March 31, 2020, and except for certain executives, outstanding equity awards (including under the 2015 Plan, the Portfolium 2014 Plan and the 2015 ESPP) (each as defined herein), whether vested or unvested, were cancelled and replaced with the right to receive the Cash Replacement Awards (as defined herein).
Business Combinations
Foreign Currency
Research and Development
15
Risks and Uncertainties
Income Taxes
We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, and for operating losses and tax credit carryforwards. Management must make assumptions, judgments and estimates to determine our current provision for income taxes and our deferred tax assets and liabilities.
We record a valuation allowance to reduce our deferred tax assets to the net amount that we believe is more likely than not to be realized. Accordingly, the need to establish such allowance is assessed periodically by considering matters such as future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and results of recent operations. The evaluation of recoverability of the deferred tax assets requires that we weigh all positive and negative evidence to reach a conclusion that it is more likely than not that all or some portion of the deferred tax assets will not be realized. The weight given to the evidence is commensurate with the extent to which it can be objectively verified.
16
Assets and Liabilities Held for Sale
Adopted accounting pronouncements
Effective January 1, 2020, the Company adopted ASU No. 2016-13, Financial Instruments—Credit Losses, which requires the use of a forward-looking expected credit loss model for accounts receivables, loans and other financial instruments. Credit losses relating to available-for-sale debt securities will also be recorded through a provision for credit losses rather than as a reduction in the amortized cost basis of the securities. The adoption of this guidance did not have a material impact on our consolidated financial statements and related notes.
Issued accounting pronouncements
In January of 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848), which refined the scope of Topic 848 and clarified some of its provisions. The amendments permit entities to elect certain optional expedients and exceptions when accounting for derivative contracts and certain hedging relationships affected by the discounting transition. The Company is evaluating the impact of the ASU as it relates to arrangements that reference London Inter-Bank Offered Rate (“LIBOR”).
3. Net Loss Per Share
A reconciliation of the denominator used in the calculation of basic and diluted net loss per share is as follows (in thousands, except per share amounts):
|
|
Successor |
|
|
|
Predecessor |
|
||||||||||||||
|
|
Three months |
|
|
Three months |
|
|
Nine months |
|
|
Six months |
|
|
|
Three months |
|
|||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
|
|
2020 |
|
|||||
|
|
|
|
|
|
|
|
(unaudited) |
|
|
|
|
|
|
|
|
|||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
$ |
( |
) |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Weighted-average common shares outstanding—basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Dilutive effect of share equivalents resulting from stock options and unvested restricted stock units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Weighted-average common shares outstanding—diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net loss per common share |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
$ |
( |
) |
17
For the unaudited three months ended March 31, 2020 (Predecessor), we incurred net losses and, therefore, the effect of our outstanding options to purchase common stock and restricted stock units were not included in the calculation of diluted net loss per share as the effect would be anti-dilutive. We also incurred losses in the unaudited nine and three months ended September 30, 2021 (Successor) and unaudited six and three months ended September 30, 2020 (Successor). The following table contains share totals with a potentially dilutive impact (in thousands):
|
|
Successor |
|
|
|
Predecessor |
|
||||||||||||||
|
|
Three months |
|
|
Three months |
|
|
Nine months |
|
|
Six months |
|
|
|
Three months |
|
|||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
|
|
2020 |
|
|||||
|
|
|
|
|
(unaudited) |
|
|
|
|
|
|||||||||||
Options to purchase common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Restricted stock units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Employee stock purchase plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
4. Acquisitions
2021 Acquisitions
On June 28, 2021, we acquired all outstanding shares of Eesysoft Software International B.V. (“Eesysoft”) for the purpose of enhancing our ability to help our customers more effectively use our core products. $
During the unaudited three months ended September 30, 2021 (Successor), we recognized a measurement period adjustment of $
Consideration transferred |
|
(unaudited) |
|
|
Cash paid |
|
$ |
|
|
Deferred consideration |
|
|
|
|
Total purchase consideration |
|
$ |
|
|
|
|
|
|
|
Identifiable assets acquired |
|
|
|
|
Cash |
|
$ |
|
|
Accounts receivable |
|
|
|
|
Deposits |
|
|
|
|
Intangible assets: developed technology |
|
|
|
|
Intangible assets: customer relationships |
|
|
|
|
Total assets acquired |
|
$ |
|
|
|
|
|
|
|
Liabilities assumed |
|
|
|
|
Accounts payable and accrued liabilities |
|
$ |
|
|
Deferred revenue |
|
|
|
|
Payroll tax liability |
|
|
|
|
Deferred tax liability |
|
|
|
|
Lease liability |
|
|
|
|
Total liabilities assumed |
|
$ |
|
|
Goodwill |
|
|
|
|
Total purchase consideration |
|
$ |
|
|
18
2020 Acquisitions
Our consolidated financial statements reflect the Take-Private Transaction that occurred on March 24, 2020, which was accounted for as a business combination. The Take-Private Transaction was accounted for in accordance with the acquisition method of accounting for business combinations with TopCo as the acquirer. The acquisition-related costs were expensed in the Predecessor Period, with the exception of $
Consideration transferred |
|
|
|
|
Cash paid |
|
$ |
|
|
Total purchase consideration |
|
$ |
|
|
Identifiable assets acquired |
|
|
|
|
Cash and cash equivalents |
|
$ |
|
|
Accounts receivable |
|
|
|
|
Prepaid expenses |
|
|
|
|
Other assets |
|
|
|
|
Intangible assets: developed technology |
|
|
|
|
Intangible assets: customer relationships |
|
|
|
|
Intangible assets: trade name |
|
|
|
|
Property and equipment |
|
|
|
|
Right-of-use assets |
|
|
|
|
Total assets acquired |
|
$ |
|
|
Liabilities assumed |
|
|
|
|
Accounts payable and accrued liabilities |
|
$ |
|
|
Deferred revenue |
|
|
|
|
Lease liabilities |
|
|
|
|
Deferred tax liability |
|
|
|
|
Other liabilities |
|
|
|
|
Total liabilities assumed |
|
$ |
|
|
Goodwill |
|
|
|
|
Total purchase consideration |
|
$ |
|
|
On December 22, 2020, we acquired all outstanding shares of Certica Holdings, LLC (“Certica”) for the purpose of enhancing our analytic, assessment, and data management solutions for Kindergarten through 12th grade (“K-12”) students. The acquisition did not have a material effect on our revenue or earnings in the consolidated statements of operations for the reporting periods presented. As a result of the acquisition, a provisional deferred tax liability of $
19
The following table summarizes the estimated fair values of the consideration transferred, assets acquired and liabilities assumed as of the date of the Certica acquisition (in thousands):
Consideration transferred |
|
|
|
|
Cash paid |
|
$ |
|
|
Total purchase consideration |
|
$ |
|
|
Identifiable assets acquired |
|
|
|
|
Cash |
|
$ |
|
|
Accounts receivable |
|
|
|
|
Prepaid expenses |
|
|
|
|
Other assets |
|
|
|
|
Intangible assets: developed technology |
|
|
|
|
Intangible assets: customer relationships |
|
|
|
|
Intangible assets: trade name |
|
|
|
|
Total assets acquired |
|
$ |
|
|
Liabilities assumed |
|
|
|
|
Accounts payable and accrued liabilities |
|
$ |
|
|
Deferred revenue |
|
|
|
|
Contingent consideration liability |
|
|
|
|
Other liability |
|
|
|
|
Deferred tax liability |
|
|
|
|
Total liabilities assumed |
|
$ |
|
|
Goodwill |
|
|
|
|
Total purchase consideration |
|
$ |
|
|
For all acquisitions disclosed above, the excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill, none of which is expected to be deductible for tax purposes. The goodwill generated from these transactions is attributable to the expected synergies to be achieved upon consummation of the business combinations and the assembled workforce values. The fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions. Developed technology represents the estimated fair value of the acquired existing technology and is being amortized over its estimated remaining useful life of
Due to the step up in book basis of the intangible assets as a result of the Take-Private Transaction, the Company moved from a deferred tax asset position, offset by a full valuation allowance, to an overall net deferred tax liability position of $
20
5. Property and Equipment
Property and equipment, net of amounts held for sale, consisted of the following (in thousands):
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2021 |
|
|
2020 |
|
||
|
|
(unaudited) |
|
|
|
|
||
Computer and office equipment |
|
$ |
|
|
$ |
|
||
Capitalized software development costs |
|
|
|
|
|
|
||
Furniture and fixtures |
|
|
|
|
|
|
||
Leasehold improvements and other |
|
|
|
|
|
|
||
Total property and equipment |
|
|
|
|
|
|
||
Less accumulated depreciation and amortization |
|
|
( |
) |
|
|
( |
) |
Total |
|
$ |
|
|
$ |
|
||
6. Goodwill and Intangible Assets
Goodwill activity was as follows (in thousands):
|
|
Total |
|
|
Balance as of December 31, 2020 |
|
$ |
|
|
Additions (Note 4 - Acquisitions) |
|
|
|
|
Balance as of September 30, 2021 (unaudited) |
|
$ |
|
|
Intangible assets, net of amounts held for sale, consisted of the following (in thousands):
|
|
Weighted Average Remaining Useful Life (Years) |
|
September 30, |
|
|
December 31, |
|
||
|
|
|
|
(unaudited) |
|
|
|
|
||
Software |
|
|
$ |
|
|
$ |
|
|||
Trade names |
|
|
|
|
|
|
|
|||
Developed technology |
|
|
|
|
|
|
|
|||
Customer relationships |
|
|
|
|
|
|
|
|||
Accumulated Amortization |
|
|
|
|
( |
) |
|
|
( |
) |
Total |
|
|
|
$ |
|
|
$ |
|
||
Amortization expense for intangible assets was $
21
Based on the recorded intangible assets at September 30, 2021 (unaudited), estimated amortization expense is expected to be as follows (in thousands):
|
|
Amortization |
|
|
|
|
Expense |
|
|
Years Ending December 31, |
|
(unaudited) |
|
|
Remainder of 2021 |
|
$ |
|
|
2022 |
|
|
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 and thereafter |
|
|
|
|
Total |
|
$ |
|
|
7. Revenue
We have
|
|
Successor |
|
|
|
Predecessor |
|
||||||||||||||
|
|
Three months |
|
|
Three months |
|
|
Nine months |
|
|
Six months |
|
|
|
Three months |
|
|||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
|
|
2020 |
|
|||||
|
|
|
|
|
|
|
|
(unaudited) |
|
|
|
|
|
|
|
|
|||||
Education |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
$ |
|
|||||
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
$ |
|
|||||
Percentage of revenue generated by Education |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
|
|
|
% |
|||||
|
|
Successor |
|
|
|
Predecessor |
|
||||||||||||||
|
|
Three months |
|
|
Three months |
|
|
Nine months |
|
|
Six months |
|
|
|
Three months |
|
|||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
|
|
2020 |
|
|||||
|
|
|
|
|
|
|
|
(unaudited) |
|
|
|
|
|
|
|
|
|||||
United States |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
$ |
|
|||||
Foreign |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
$ |
|
|||||
Percentage of revenue generated outside of the United States |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
|
|
|
% |
|||||
Deferred Revenue and Performance Obligations
During the unaudited nine and three months ended September 30, 2021,
22
Transaction Price Allocated to the Remaining Performance Obligations
As of September 30, 2021 (unaudited), approximately $
As of December 31, 2020, approximately $
8. Deferred Commissions
Deferred commissions primarily consist of sales commissions that are capitalized as incremental contract origination costs and were $
9. Assets and Liabilities Held for Sale
We decided to sell Bridge, the Company’s corporate learning platform and wholly-owned subsidiary, during the third quarter of 2020. Historically, Bridge was part of the Company’s single operating segment. The decision to sell Bridge reflects our strategy to focus on our Higher Education and K–12 customers. As of December 31, 2020, the gross proceeds expected from the divestiture were approximately $
As of December 31, 2020, we measured the assets and liabilities held for sale associated with Bridge at the lower of its carrying value or fair value less costs to sell. The Company allocated $
23
The following table presents information related to the assets and liabilities that were classified as held for sale at December 31, 2020 (amounts in thousands):
|
|
December 31, 2020 |
|
|
Assets |
|
|
|
|
Net receivables |
|
$ |
|
|
Deferred commissions, current |
|
|
|
|
Other current assets |
|
|
|
|
Property and equipment, net |
|
|
|
|
Deferred commissions, net of current portion |
|
|
|
|
Goodwill |
|
|
|
|
Net intangible assets |
|
|
|
|
Total assets held for sale |
|
$ |
|
|
Liabilities |
|
|
|
|
Accrued Liabilities |
|
$ |
|
|
Deferred revenue |
|
|
|
|
Total liabilities held for sale |
|
|
|
|
Total net assets held for sale |
|
$ |
|
|
Total net assets held for sale |
|
$ |
|
|
Estimated fair value less costs to sell |
|
|
( |
) |
Impairment of held-for-sale assets |
|
$ |
|
|
Total assets held for sale |
|
$ |
|
|
Impairment of held-for-sale goodwill and assets |
|
|
( |
) |
Adjusted assets held for sale |
|
$ |
|
|
On February 26, 2021, the Company sold Bridge for a total purchase price of $
During the unaudited three months ended March 31, 2021 (Successor), we recognized a pretax loss on this divestiture of $
10. 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 $
The Credit Facilities contained customary negative covenants. At September 30, 2021 (unaudited) and December 31, 2020, the Company was in compliance with all applicable covenants pertaining to the Credit Facilities.
24
The Credit Agreement required us to repay the principal of the Term Loan in equal quarterly repayments equal to
On May 27, 2021, the Company exercised its option to make a Pricing Grid Election. As a result, the Company’s applicable margin for Eurodollar loans under the Credit Facilities from May 27, 2021 onward was
The Company incurred fees with respect to the Revolving Credit Facility, including a commitment fee of
Debt discount costs of $
Debt issuance costs of $
The maturities of outstanding debt, as of September 30, 2021, are as follows (in thousands):
|
|
Amount |
|
|
Years Ending December 31, |
|
(unaudited) |
|
|
Remainder of 2021 |
|
$ |
|
|
2022 |
|
|
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
$ |
|
|
25
On October 29, 2021, we entered into a credit agreement with JPMorgan Chase Bank, N.A. ("JPMorgan"), as administrative agent, (the "JPMorgan Credit Agreement") governing our senior secured credit facilities (the "Senior Secured Credit Facilities"), consisting of a $
All of the Company's obligations under the Senior Secured Credit Facilities are guaranteed by the subsidiary guarantors named therein (the "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
The JPMorgan Credit Agreement contains a financial covenant solely with respect to the Senior Revolver. If the outstanding amounts under the Senior Revolver exceed
11. Stockholders’ Equity
The TopCo Amended and Restated Partnership Agreement (“Partnership Agreement”) set forth the terms, rights, powers, qualifications, limitations and restrictions of the partnership. In accordance with the Partnership Agreement, there was an unlimited number of authorized Class A Units and Class B Units (collectively, the “Units”) and issuance of such Units was determined by the board of managers.
In connection with the Take-Private Transaction, TopCo issued
26
12. Stock-Based Compensation
Employee Equity Plans
The following two tables show stock-based compensation by award type and where the stock-based compensation expense was recorded in our consolidated statements of operations (in thousands):
|
|
Successor |
|
|
|
Predecessor |
|
||||||||||||||
|
|
Three months |
|
|
Three months |
|
|
Nine months |
|
|
Six months |
|
|
|
Three months |
|
|||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
|
|
2020 |
|
|||||
|
|
|
|
|
(unaudited) |
|
|
|
|
|
|||||||||||
Options |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
$ |
|
|||||
Restricted stock units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Employee stock purchase plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Class A and Class B Units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total stock-based compensation |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
$ |
|
|||||
|
|
Successor |
|
|
|
Predecessor |
|
||||||||||||||
|
|
Three months |
|
|
Three months |
|
|
Nine months |
|
|
Six months |
|
|
|
Three months |
|
|||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
|
|
2020 |
|
|||||
|
|
|
|
|
(unaudited) |
|
|
|
|
|
|||||||||||
Subscription and support cost of revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
$ |
|
|||||
Professional services and other cost of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Sales and marketing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Research and development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total stock-based compensation |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
$ |
|
|||||
In connection with the Take-Private Transaction on March 31, 2020, and except for certain executives, outstanding stock options and restricted stock units (“RSUs”, together with the stock options “equity awards”), whether vested or unvested, were cancelled and replaced with the right to receive $
Successor
In July 2021, our board of directors adopted the 2021 Omnibus Incentive Plan (the “2021 Plan”) in order to promote the success of the Company’s business for the benefit of its stockholders by enabling the Company to offer eligible individuals cash and stock-based incentives in order to attract, retain, and reward such individuals and strengthen the mutuality of interests between such individuals and the Company’s stockholders. The 2021 Plan provides for potential grants of the following awards with respect to shares of the Company’s common stock: (i) incentive stock options qualified as such under U.S. federal income tax laws; (ii) non-qualified stock options or any other form of stock options; (iii) restricted stock units; (iv) performance awards; (v) Other equity-based and cash-based incentive awards as determined by the Committee (meaning any committee of the board of directors duly authorized by the board of directors to administer the 2021 Plan). The maximum aggregate number of shares of the Company’s common stock that may be issued pursuant to awards under the 2021 Plan is
27
On July 21, 2021, the board of directors granted
Restricted Stock Units
Restricted Stock Unit activity on or after the IPO date was as follows during the periods indicated, presented for awards granted to employees and members of the board of directors (unaudited, in thousands, except per unit amounts):
|
|
RSUs |
|
|
Weighted Average Grant Date Fair Value Per Unit |
|
||
Outstanding as June 30, 2021 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
|
|
||
Vested |
|
|
|
|
|
|
||
Forfeited or cancelled |
|
|
( |
) |
|
|
|
|
Outstanding at September 30, 2021 |
|
|
|
|
$ |
|
||
As of September 30, 2021, total unrecognized compensation cost related to unvested RSUs granted on or after the IPO date amounted to $
Incentive Units
In April 2020, as part of the Take-Private Transaction, the board of managers approved the Instructure Parent, LP Incentive Equity Plan (the “2020 Plan”) and the Instructure Co-Invest Agreement (the “Co-Invest Agreement”) to incentivize employees and to align the employees and management with the owners of the business.
The 2020 Plan provides for the grant of incentive stock options, profits interest, equity appreciation rights and other forms of awards to employees and non-employees granted or denominated in shares of the TopCo’s Units. Under the 2020 Plan,
The Co-Invest Agreement offered employees the one-time opportunity to co-invest in TopCo by purchasing Units directly from the Company for cash. Under the Co-Invest agreement, the purchase price for
Additionally, TopCo granted
In connection with the stock-split and IPO,
28
The following table summarizes the activity under the 2020 Plan, inclusive of the Incentive Carry and Board Carry, and their conversion into RSUs under the 2021 Plan (unaudited, in thousands, except per unit amounts):
|
|
RSUs - Pre IPO |
|
|
Weighted Average Grant Date Fair Value Per Unit |
|
||
Outstanding Incentive Units at December 31, 2020 |
|
|
|
|
$ |
|
||
Incentive Units granted |
|
|
|
|
|
|
||
Incentive Units forfeited or cancelled |
|
|
( |
) |
|
|
|
|
Incentive Units vested at IPO |
|
|
( |
) |
|
|
|
|
Incentive Units exchanged for RSUs |
|
|
( |
) |
|
|
|
|
Incentive Units after IPO |
|
|
|
|
|
|
||
RSUs exchanged from Incentive Units |
|
|
|
|
|
|
||
RSUs forfeited or cancelled |
|
|
( |
) |
|
|
|
|
RSUs vested |
|
|
( |
) |
|
|
|
|
Outstanding RSUs at September 30, 2021 |
|
|
|
|
$ |
|
||
The following table summarizes the assumptions relating to our Incentive Units used in the option pricing model to establish the grant date fair value for the Successor Period from April 1, 2020 to December 31, 2020:
|
|
Period from April 1 to December 31, |
|
|
2020 |
Dividend yield |
|
|
Volatility |
|
|
Risk-free interest rate |
|
|
Expected life (years) |
|
There were no Incentive Units granted subsequent to December 31, 2020. As of September 30, 2021 (unaudited) and December 31, 2020, we had $
2021 Employee Stock Purchase Plan
The following table summarizes the assumptions relating to 2021 ESPP purchase rights used in a Black-Scholes option pricing model for the three months ended September 30, 2021:
|
|
Three months |
|
|
2021 |
Dividend yield |
|
|
Volatility |
|
|
Risk-free interest rate |
|
|
Expected life (years) |
|
29
Predecessor
Additionally, as part of our acquisition of Portfolium, we assumed the Portfolium 2014 Plan.
The board of directors determined the terms of each grant. Generally, options have a vesting period ranging from one to four years. Stock options have a ten-year contractual life. Certain stock options had provisions to accelerate vesting upon the occurrence of certain events such as a change in control. Certain stock options provided for early exercise of unvested shares. All options were granted with an exercise price equal to or greater than the estimated fair value of our common stock at the date of grant. The fair value of the common stock that underlies the stock options has historically been determined by the board of directors based, in part, upon periodic valuation studies obtained from a third-party valuation firm. After the initial IPO and prior to the Take-Private Transaction, the fair value was determined by the then closing price of our common stock as reported on the New York Stock Exchange on the date of grant. There were no grants between the Take-Private Transaction and the date we were de-listed from the New York Stock Exchange.
On each purchase date, eligible employees could purchase our stock at a price per share equal to
In Connection with the Take-Private Transaction on March 31, 2020, and except for certain executives, outstanding equity awards (including under the 2015 Plan, the Portfolium 2014 Plan and the 2015 ESPP), whether vested or unvested, were cancelled and replaced with the right to receive the Cash Replacement Awards.
The following table summarizes the assumptions relating to the 2015 ESPP purchase rights used in a Black Scholes option pricing model for the unaudited three months ended March 31, 2020:
|
|
Three Months Ended March 31, |
|
|
2020 |
2015 Employee Stock Purchase Plan |
|
|
Dividend yield |
|
|
Volatility |
|
|
Risk-free interest rate |
|
|
Expected life (years) |
|
|
Fair value of common stock |
|
$ |
30
The Company did
The following table summarizes the stock option activity for the unaudited three months ended March 31, 2020 (in thousands, except per share amounts):
|
|
Shares Underlying Options |
|
|
Weighted Average Exercise Price |
|
|
Weighted Average Remaining Life (in years) |
|
|
Aggregate Fair Value |
|
||||
Outstanding at January 1, 2020 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Exercised |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|||
Forfeited or cancelled |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Outstanding at March 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Vested and expected to vest - March 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Exercisable at March 31, 2020 (1) |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
The following table summarizes the activity of our unvested stock options for the unaudited three months ended March 31, 2020 (in thousands, except per share amounts):
|
|
Shares Underlying Options |
|
|
Weighted Average Grant Date Fair Value Per Share |
|
||
Unvested at January 1, 2020 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
|
|
||
Vested |
|
|
( |
) |
|
|
|
|
Forfeited |
|
|
|
|
|
|
||
Unvested at March 31, 2020 (1) |
|
|
|
|
$ |
|
||
The total intrinsic value of options exercised was $
|
|
RSUs Outstanding |
|
|||||
|
|
Shares |
|
|
Weighted Average Grant Date Fair Value Per Share |
|
||
Unvested and outstanding at January 1, 2020 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
|
|
||
Vested |
|
|
( |
) |
|
|
|
|
Cancelled |
|
|
( |
) |
|
|
|
|
Unvested and outstanding at March 31, 2020 (1) |
|
|
|
|
|
|
||
13. Income Taxes
Utilization of the net operating loss carryforwards and credits may be subject to substantial annual limitation due to the ownership change limitations provided by Section 382 of the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.
31
We file tax returns in the United States, the United Kingdom, Australia, the Netherlands, Hong Kong, Sweden, Brazil, Mexico, Hungary, China and various state jurisdictions. All of our tax years remain open to examination by major taxing jurisdictions to which we are subject, as carryforward attributes generated in past years may still be adjusted upon examination by the Internal Revenue Service or state and foreign tax authorities if they have or will be used in future periods.
We believe that we have provided adequate reserves for our income tax uncertainties in all open tax years. We do not expect our gross unrecognized tax benefits to change significantly in the next 12 months.
14. Fair Value of Financial Instruments
The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. The fair value hierarchy prioritizes the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
There were
|
|
September 30, 2021 |
|
|||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Money market funds |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Total assets |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Assets measured at fair value on a recurring basis as of December 31, 2020 were as follows (in thousands):
|
|
December 31, 2020 |
|
|||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Money market funds |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Total assets |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
15. Leases
The Company leases office space under non-cancelable operating leases with lease terms ranging from to
Operating lease right-of-use assets and operating lease liabilities are recognized at the lease commencement date based on the present value of the lease payments over the lease term. Right-of-use assets also include adjustments related to prepaid or deferred lease payments and lease incentives. As most of our leases do not provide an implicit interest rate, we use our incremental borrowing rate based on information available at the lease commencement date to determine the present value of lease payments.
32
The Company performed evaluations of its contracts and determined that each of its identified leases are operating leases. The components of operating lease expense were as follows (in thousands):
|
|
Successor |
|
|
|
Predecessor |
|
||||||||||||||
|
|
Three months |
|
|
Three months |
|
|
Nine months |
|
|
Six months |
|
|
|
Three months |
|
|||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
|
|
2020 |
|
|||||
|
|
|
|
|
|
|
|
(unaudited) |
|
|
|
|
|
|
|
|
|||||
Operating lease cost, gross |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
$ |
|
|||||
Variable lease cost, gross(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Sublease income |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
( |
) |
Total lease costs(2) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
$ |
|
|||||
Cash paid for amounts included in the measurement of operating lease liabilities for the unaudited nine and three months ended September 30, 2021 (Successor), unaudited six and three months ended September 30, 2020 (Successor), and unaudited three months ended March 31, 2020 (Predecessor) were $
As of September 30, 2021 (unaudited), the maturities of the Company’s operating lease liabilities were as follows (in thousands):
Remainder of 2021 |
$ |
|
|||
2022 |
|
|
|||
2023 |
|
|
|||
2024 |
|
|
|||
2025 |
|
|
|||
2026 and thereafter |
|
|
|||
Total lease payments |
|
|
|||
Less: |
|
|
|||
Imputed interest |
|
( |
) |
||
Lease liabilities |
|
|
|||
Tenant improvement reimbursements included in the measurement of lease liabilities but not yet received |
|
( |
) |
||
Lease liabilities, net |
|
|
|||
As of September 30, 2021 (unaudited) and December 31, 2020, the weighted average remaining lease term is
16. Commitments and Contingencies
Letters of Credit
As of September 30, 2021 (unaudited) and December 31, 2020, we had a total of $
33
Litigation
We are involved in various legal proceedings and claims, including challenges to trademarks, from time to time arising in the normal course of business. If we determine that it is probable that a loss has been incurred and the amount is reasonably estimable, we will record a liability in our financial statements. If only a range of estimated losses can be determined, we accrue an amount within the range that, in our judgment, reflects the most likely outcome; if none of the estimates within that range is a better estimate than any other amount, we accrue the low end of the range. Management believes that the outcome of our various legal proceedings, singly or in the aggregate, will not have a material impact on our financial position, results of operations, or liquidity.
17. Related-Party Transactions
The Company has agreements in place with Thoma Bravo, LLC for financial and management advisory services, along with compensation arrangements and reimbursements to directors and officers. During the unaudited nine and three months ended September 30, 2021 (Successor), unaudited six months ended September 30, 2020 (Successor), and unaudited three months ended March 31, 2020 (Predecessor), the Company incurred $
The spouse of Mitch Benson, our Chief Product Officer, is an employee of the Company. Mr. Benson has been an employee of the Company since 2014 and our Chief Product Officer since August 2019. His spouse, Ms. Tara Gunther, has been an employee of the Company since 2014. Her 2020 base salary and short-term incentive award was approximately $
In connection with our entry into our Credit Facilities on March 24, 2020, affiliates of Thoma Bravo collectively acquired $
18. Subsequent Events
On November 5, 2021, Instructure, Inc. entered into a Stock Purchase Agreement with all of the securityholders of Kimono LLC (“Kimono”) and paid $
34
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
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, 2020 and the related notes thereto, which are included in the Company’s Prospectus dated July 21, 2021 filed with the SEC in connection with the Company’s initial public offering (the “IPO”). The following discussion contains forward-looking statements that are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in the section entitled “Risk Factors” of the Company’s Prospectus dated July 21, 2021 filed with the SEC in connection with our IPO and in the “Forward Looking Statements” section of this Quarterly Report on Form 10-Q. As a result, our actual results may differ materially from those contained or anticipated in these forward-looking statements.
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. 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 MasteryConnect, Certica and Eesysoft to add assessment and analytics capabilities. 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 nine and three months ended September 30, 2021 (Successor), unaudited six and three months ended September 30, 2020 (Successor) and unaudited three months ended March 31, 2020 (Predecessor).
For the unaudited nine and three months ended September 30, 2021 (Successor), unaudited six and three months ended September 30, 2020 (Successor), and three months ended March 31, 2020 (Predecessor):
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.
Recent Developments
On July 26, 2021, the Company completed its IPO of 12,500,000 shares of common stock at an offering price of $20.00 per share. The Company received net proceeds of $233.1 million after deducting underwriting discounts and commissions. On August 19, 2021, the underwriters partially exercised their over-allotment option of 1,675,000 shares of common stock at an offering price of $20.00 per share. The Company received net proceeds of $31.3 million after deducting underwriting discounts and commissions. The Company used the proceeds from the IPO and the overallotment option to repay approximately $255.1 million of borrowings outstanding under its Term Loan.
35
Impact of COVID-19
Although the COVID-19 pandemic caused general business disruption worldwide beginning in January 2020, it also created a set of conditions in which students of all ages began learning from home, causing schools to rapidly adopt or upgrade online platforms for students and teachers to conduct lessons remotely. In response to the pandemic, the U.S. government also passed stimulus legislation that directed over $280 billion of funding to education initiatives. These circumstances resulted in an increase in our operational performance, cash flows, and financial condition. 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.
While we have experienced a significant increase in customers due to the pandemic, the aforementioned factors have also driven increased usage of our services and have required us to expand our network and data storage and processing capacity, particularly third-party cloud hosting. During the six months ended September 30, 2020 (Successor) and three months ended March 31, 2020 (Predecessor), this resulted in an increase in our operating costs. We continue to experience high usage on our learning platform, even as North American K-12 students have returned to the classroom during the nine months ended September 30, 2021. As more of our customers have begun transitioning 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 after the COVID-19 pandemic has tapered. Moreover, the tapering of the COVID-19 pandemic, particularly as vaccinations are widely available, may result in a decline in customers once students are no longer attending school from home.
As part of our response to the COVID-19 pandemic, we implemented an internal initiative to ensure the support and retention of our customers. This initiative is a collaboration between multiple organizations and teams at Instructure to help ensure renewal and growth in statewide deals. The initiative includes monitoring usage, developing a statewide communication plan, establishing user groups, creating marketing and advocacy materials, and keeping leadership informed of status, risks, and wins.
The full extent to which the COVID-19 pandemic will directly or indirectly impact the global economy, the lasting social effects, and impact on our business, results of operations and financial condition will depend on future developments that are highly 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 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.
36
Cross-sell into our Existing Customer Base
Most of our customers initially engage with us using our Canvas LMS solution, and then we are generally able to cross-sell our other solutions as these customers become aware of the benefits of our broad capabilities, including learning, assessments, analytics, student success, program management, digital courseware, and global online learning. Our future revenue growth is dependent upon our ability to expand our customers’ use of our learning platform. Our ability to increase sales to existing customers depends on a number of factors, including customer satisfaction, competition, pricing, economic conditions, and spending by customers.
Key Components of Results of Operations
Revenue
We generate revenue primarily from two main sources: (1) subscription and support revenue, which is comprised of SaaS fees from customers accessing our learning platform and from customers purchasing additional support beyond the standard support that is included in the basic SaaS fees; and (2) related professional services revenue, which is comprised of training, implementation services and other types of professional services.
Subscription revenue is derived from customers using our learning platform and is driven primarily by the number of customers, the number of users at each customer, the price of our applications and renewals. Support revenue is derived from customers purchasing additional support beyond the standard support that is included in the basic SaaS fee. Our contracts typically vary in length between one and five years. Subscriptions and support are non-cancelable and are billed in advance on an annual basis. All subscription and support fees billed are initially recorded in deferred revenue and recognized ratably over the subscription term.
Professional services and other revenue are derived primarily from implementation, training, and other consulting fees. Implementation services includes training and consulting services that generally take anywhere from 30 to 90 days to complete depending on customer-side complexity and timelines. It includes regularly scheduled and highly-structured activities to ensure customers progress toward better utilizing our applications. Most of these interactions take place over the phone and through the use of web meeting technology. Because we have determined the implementation services are distinct, they are recognized over time as the services are rendered, using an efforts-expended input method. Implementation services also include nonrefundable upfront setup fees, which are allocated to the remaining performance obligations.
We include training with every implementation and offer additional training for a fee. The training offered is focused on creating confidence among users so they can be successful with our applications. Most training is performed remotely using web meeting technology. Because we have determined that trainings are distinct, we record training revenue upon the delivery of the training. Training is recognized ratably in the same manner as subscription and support revenue described above.
In addition to our implementation and training offerings, we provide consulting services for custom application development, integrations, content services and change management consulting. These services are architected to boost customer adoption of our applications and to drive usage of features and capabilities that are unique to our company. We have determined that these services are distinct. Professional services revenue is typically recognized over time as the services are rendered, using an efforts-expended input method.
Cost of Revenue
Cost of subscription and support revenue consists primarily of the costs of our cloud hosting provider and other third-party service providers, employee-related costs including payroll, benefits and stock-based compensation expense for our operations and customer support teams, amortization of capitalized software development costs and acquired technology, and allocated overhead costs, which we define as rent, facilities and costs related to IT. Our acquired technology is amortized over the estimated 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.
37
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 five 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 consolidated statements of operations 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.
Income Tax Benefit (Expense)
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 December 31, 2020 consists of decreases in U.S. Federal and state deferred tax liabilities, due to book amortization, and of the step up in basis of intangible assets from the Take-Private Transaction.
38
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 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.
|
|
Successor |
|
|
|
Predecessor |
|
||||||||||||||
|
|
Three months |
|
|
Three months |
|
|
Nine months |
|
|
Six months |
|
|
|
Three months |
|
|||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
|
|
2020 |
|
|||||
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|||||||||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Subscription and support |
|
$ |
96,163 |
|
|
$ |
73,313 |
|
|
$ |
266,774 |
|
|
$ |
129,460 |
|
|
|
$ |
65,968 |
|
Professional services and other |
|
|
11,058 |
|
|
|
8,459 |
|
|
|
27,994 |
|
|
|
13,682 |
|
|
|
|
5,421 |
|
Total revenue |
|
|
107,221 |
|
|
|
81,772 |
|
|
|
294,768 |
|
|
|
143,142 |
|
|
|
|
71,389 |
|
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Subscription and support(1) (2) (3) |
|
|
36,528 |
|
|
|
35,996 |
|
|
|
112,575 |
|
|
|
69,975 |
|
|
|
|
19,699 |
|
Professional services and other(1) (3) |
|
|
4,939 |
|
|
|
5,034 |
|
|
|
15,500 |
|
|
|
10,592 |
|
|
|
|
4,699 |
|
Total cost of revenue |
|
|
41,467 |
|
|
|
41,030 |
|
|
|
128,075 |
|
|
|
80,567 |
|
|
|
|
24,398 |
|
Gross profit |
|
|
65,754 |
|
|
|
40,742 |
|
|
|
166,693 |
|
|
|
62,575 |
|
|
|
|
46,991 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Sales and marketing(1) (2) (3) |
|
|
40,553 |
|
|
|
40,100 |
|
|
|
120,858 |
|
|
|
84,034 |
|
|
|
|
27,010 |
|
Research and development(1) (3) |
|
|
15,823 |
|
|
|
14,619 |
|
|
|
47,191 |
|
|
|
36,736 |
|
|
|
|
19,273 |
|
General and administrative(1) (3) |
|
|
14,396 |
|
|
|
13,092 |
|
|
|
38,943 |
|
|
|
47,533 |
|
|
|
|
17,295 |
|
Impairment on held-for-sale goodwill (3) |
|
|
— |
|
|
|
29,612 |
|
|
|
— |
|
|
|
29,612 |
|
|
|
|
— |
|
Impairment on disposal group (3) |
|
|
— |
|
|
|
3,389 |
|
|
|
1,218 |
|
|
|
3,389 |
|
|
|
|
— |
|
Total operating expenses |
|
|
70,772 |
|
|
|
100,812 |
|
|
|
208,210 |
|
|
|
201,304 |
|
|
|
|
63,578 |
|
Loss from operations |
|
|
(5,018 |
) |
|
|
(60,070 |
) |
|
|
(41,517 |
) |
|
|
(138,729 |
) |
|
|
|
(16,587 |
) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Interest income |
|
|
— |
|
|
|
5 |
|
|
|
13 |
|
|
|
40 |
|
|
|
|
313 |
|
Interest expense |
|
|
(11,251 |
) |
|
|
(16,357 |
) |
|
|
(44,178 |
) |
|
|
(34,449 |
) |
|
|
|
(8 |
) |
Other income (expense), net(3) |
|
|
(1,623 |
) |
|
|
187 |
|
|
|
(2,365 |
) |
|
|
603 |
|
|
|
|
(5,738 |
) |
Total other income (expense), net |
|
|
(12,874 |
) |
|
|
(16,165 |
) |
|
|
(46,530 |
) |
|
|
(33,806 |
) |
|
|
|
(5,433 |
) |
Loss before income taxes |
|
|
(17,892 |
) |
|
|
(76,235 |
) |
|
|
(88,047 |
) |
|
|
(172,535 |
) |
|
|
|
(22,020 |
) |
Income tax benefit (expense) |
|
|
4,631 |
|
|
|
16,062 |
|
|
|
20,022 |
|
|
|
35,788 |
|
|
|
|
(183 |
) |
Net loss |
|
$ |
(13,261 |
) |
|
$ |
(60,173 |
) |
|
$ |
(68,025 |
) |
|
$ |
(136,747 |
) |
|
|
$ |
(22,203 |
) |
|
|
Successor |
|
|
|
Predecessor |
|
||||||||||||||
|
|
Three months |
|
|
Three months |
|
|
Nine months |
|
|
Six months |
|
|
|
Three months |
|
|||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
|
|
2020 |
|
|||||
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|||||||||||
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Subscription and support |
|
$ |
257 |
|
|
$ |
333 |
|
|
$ |
652 |
|
|
$ |
653 |
|
|
|
$ |
301 |
|
Professional services and other |
|
|
323 |
|
|
|
222 |
|
|
|
610 |
|
|
|
463 |
|
|
|
|
285 |
|
Sales and marketing |
|
|
2,139 |
|
|
|
1,843 |
|
|
|
4,814 |
|
|
|
5,435 |
|
|
|
|
1,977 |
|
Research and development |
|
|
2,292 |
|
|
|
2,149 |
|
|
|
4,896 |
|
|
|
7,193 |
|
|
|
|
1,874 |
|
General and administrative |
|
|
3,368 |
|
|
|
2,175 |
|
|
|
6,750 |
|
|
|
26,806 |
|
|
|
|
2,672 |
|
Total stock-based compensation |
|
$ |
8,379 |
|
|
$ |
6,722 |
|
|
$ |
17,722 |
|
|
$ |
40,550 |
|
|
|
$ |
7,109 |
|
39
|
|
Successor |
|
|
|
Predecessor |
|
||||||||||||||
|
|
Three months |
|
|
Three months |
|
|
Nine months |
|
|
Six months |
|
|
|
Three months |
|
|||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
|
|
2020 |
|
|||||
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|||||||||||
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Subscription and support |
|
$ |
15,582 |
|
|
$ |
15,000 |
|
|
$ |
46,412 |
|
|
$ |
30,167 |
|
|
|
$ |
1,293 |
|
Sales and marketing |
|
|
18,008 |
|
|
|
17,617 |
|
|
|
53,900 |
|
|
|
35,430 |
|
|
|
|
1,293 |
|
Total amortization of acquisition-related intangibles |
|
$ |
33,590 |
|
|
$ |
32,617 |
|
|
$ |
100,312 |
|
|
$ |
65,597 |
|
|
|
$ |
2,586 |
|
|
|
Successor |
|
|
|
Predecessor |
|
||||||||||||||
|
|
Three months |
|
|
Three months |
|
|
Nine months |
|
|
Six months |
|
|
|
Three months |
|
|||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
|
|
2020 |
|
|||||
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|||||||||||
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Subscription and support |
|
$ |
159 |
|
|
$ |
— |
|
|
$ |
2,108 |
|
|
$ |
2,056 |
|
|
|
$ |
— |
|
Professional services and other |
|
|
28 |
|
|
|
70 |
|
|
|
883 |
|
|
|
856 |
|
|
|
|
66 |
|
Sales and marketing |
|
|
99 |
|
|
|
1,420 |
|
|
|
2,551 |
|
|
|
3,706 |
|
|
|
|
556 |
|
Research and development |
|
|
226 |
|
|
|
1,017 |
|
|
|
2,904 |
|
|
|
3,581 |
|
|
|
|
1,273 |
|
General and administrative |
|
|
1,519 |
|
|
|
4,556 |
|
|
|
8,378 |
|
|
|
7,117 |
|
|
|
|
6,465 |
|
Impairment on disposal group |
|
|
— |
|
|
|
3,389 |
|
|
|
1,218 |
|
|
|
3,389 |
|
|
|
|
— |
|
Impairment on held-for-sale goodwill |
|
|
— |
|
|
|
29,612 |
|
|
|
— |
|
|
|
29,612 |
|
|
|
|
— |
|
Other income (expense), net |
|
|
(1,610 |
) |
|
|
618 |
|
|
|
(1,610 |
) |
|
|
618 |
|
|
|
|
(5,757 |
) |
Total restructuring, transaction and sponsor related costs |
|
$ |
3,641 |
|
|
$ |
39,446 |
|
|
$ |
19,652 |
|
|
$ |
49,699 |
|
|
|
$ |
14,117 |
|
40
|
|
Successor |
|
|
Predecessor |
||||||||||
|
|
Three months |
|
Three months |
|
Nine months |
|
Six months |
|
|
Three months |
||||
|
|
2021 |
|
2020 |
|
2021 |
|
2020 |
|
|
2020 |
||||
|
|
|
|
(as a percentage of total revenue) |
|
|
|
||||||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
||||
Subscription and support |
|
90% |
|
90% |
|
91% |
|
90% |
|
|
92% |
||||
Professional services and other |
|
10 |
|
10 |
|
9 |
|
10 |
|
|
8% |
||||
Total revenue |
|
100 |
|
100 |
|
100 |
|
100 |
|
|
100 |
||||
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
||||
Subscription and support |
|
34 |
|
44 |
|
38 |
|
49 |
|
|
28 |
||||
Professional services and other |
|
5 |
|
6 |
|
5 |
|
7 |
|
|
7 |
||||
Total cost of revenue |
|
39 |
|
50 |
|
43 |
|
56 |
|
|
35 |
||||
Gross profit |
|
61 |
|
50 |
|
57 |
|
44 |
|
|
65 |
||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
||||
Sales and marketing |
|
38 |
|
49 |
|
41 |
|
59 |
|
|
38 |
||||
Research and development |
|
15 |
|
18 |
|
16 |
|
26 |
|
|
27 |
||||
General and administrative |
|
13 |
|
16 |
|
13 |
|
33 |
|
|
24 |
||||
Impairment on held-for-sale goodwill |
|
— |
|
36 |
|
— |
|
21 |
|
|
— |
||||
Impairment on disposal group |
|
— |
|
4 |
|
— |
|
2 |
|
|
— |
||||
Total operating expenses |
|
66 |
|
123 |
|
70 |
|
141 |
|
|
89 |
||||
Loss from operations |
|
(5) |
|
(73) |
|
(13) |
|
(97) |
|
|
(24) |
||||
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
||||
Interest income |
|
— |
|
— |
|
— |
|
— |
|
|
— |
||||
Interest expense |
|
(10) |
|
(20) |
|
(15) |
|
(24) |
|
|
— |
||||
Other expense |
|
(2) |
|
— |
|
(1) |
|
— |
|
|
(8) |
||||
Total other income (expense), net |
|
(12) |
|
(20) |
|
(16) |
|
(24) |
|
|
(8) |
||||
Loss before income taxes |
|
(17) |
|
(93) |
|
(29) |
|
(121) |
|
|
(32) |
||||
Income tax benefit (expense) |
|
4 |
|
20 |
|
7 |
|
25 |
|
|
(1) |
||||
Net loss |
|
(13)% |
|
(73)% |
|
(22)% |
|
(96)% |
|
|
(33)% |
||||
Comparison of the unaudited Three Months Ended September 30, 2021 (Successor) and unaudited Three Months Ended September 30, 2020 (Successor) and comparison of the unaudited Nine Months Ended September 30, 2021 (Successor), the unaudited period from April 1, 2020 to September 30, 2020 (Successor), and the unaudited period from January 1, 2020 to March 31, 2020 (Predecessor).
Revenue
|
|
Successor |
|
|
|
|
|
|
|
|
Successor |
|
|
|
Predecessor |
|
|||||||||||||
|
|
Three months |
|
|
Three months |
|
|
Change |
|
|
Nine months |
|
|
Six months |
|
|
|
Three months |
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
Amount |
|
|
% |
|
|
2021 |
|
|
2020 |
|
|
|
2020 |
|
|||||||
|
|
(dollars in thousands) |
|
|
|
|
|
||||||||||||||||||||||
Subscription and support |
|
$ |
96,163 |
|
|
$ |
73,313 |
|
|
$ |
22,850 |
|
|
|
31 |
% |
|
$ |
266,774 |
|
|
$ |
129,460 |
|
|
|
$ |
65,968 |
|
Professional services and other |
|
|
11,058 |
|
|
|
8,459 |
|
|
|
2,599 |
|
|
|
31 |
|
|
|
27,994 |
|
|
|
13,682 |
|
|
|
|
5,421 |
|
Total revenue |
|
$ |
107,221 |
|
|
$ |
81,772 |
|
|
$ |
25,449 |
|
|
|
31 |
% |
|
$ |
294,768 |
|
|
$ |
143,142 |
|
|
|
$ |
71,389 |
|
41
Three month change
Subscription and support revenue increased $22.9 million for the unaudited three months ended September 30, 2021 (Successor) 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 $2.6 million for the unaudited three months ended September 30, 2021 (Successor) due to the same factors discussed above.
Nine month change
Subscription and support revenue was $266.8 million for the unaudited nine months ended September 30, 2021 (Successor), $129.5 million for the unaudited six months ended September 30, 2020 (Successor), and $66.0 million for the unaudited three months ended March 31, 2020 (Predecessor). This increase was due to the increase in new and existing customers, as discussed above, partly as a result of COVID-19, as well as the effects of acquisition accounting from ASC 805.
Professional services and other revenue was $28.0 million for the unaudited nine months ended September 30, 2021 (Successor), $13.7 million for the unaudited six months ended September 30, 2020 (Successor), and $5.4 million for the unaudited three months ended March 31, 2020 (Predecessor). This increase was due to the increase in new and existing customers, as discussed above, partly as a result of COVID-19, as well as the effects of acquisition accounting from ASC 805.
Cost of Revenue
|
|
Successor |
|
|
|
|
|
|
|
|
Successor |
|
|
|
Predecessor |
|
|||||||||||||
|
|
Three months |
|
|
Three months |
|
|
Change |
|
|
Nine months |
|
|
Six months |
|
|
|
Three months |
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
Amount |
|
|
% |
|
|
2021 |
|
|
2020 |
|
|
|
2020 |
|
|||||||
|
|
(dollars in thousands) |
|
|
|
|
|
||||||||||||||||||||||
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Subscription and support |
|
$ |
36,528 |
|
|
$ |
35,996 |
|
|
$ |
532 |
|
|
|
1 |
% |
|
$ |
112,575 |
|
|
$ |
69,975 |
|
|
|
$ |
19,699 |
|
Professional services and other |
|
|
4,939 |
|
|
|
5,034 |
|
|
|
(95 |
) |
|
|
(2 |
) |
|
|
15,500 |
|
|
|
10,592 |
|
|
|
|
4,699 |
|
Total cost of revenue |
|
$ |
41,467 |
|
|
$ |
41,030 |
|
|
$ |
437 |
|
|
|
1 |
% |
|
$ |
128,075 |
|
|
$ |
80,567 |
|
|
|
$ |
24,398 |
|
Gross margin percentage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Subscription and support revenue |
|
|
62 |
% |
|
|
51 |
% |
|
|
|
|
|
|
|
|
58 |
% |
|
|
46 |
% |
|
|
|
70 |
% |
||
Professional services and other |
|
|
55 |
|
|
|
40 |
|
|
|
|
|
|
|
|
|
45 |
|
|
|
23 |
|
|
|
|
13 |
|
||
Total gross margin |
|
|
61 |
|
|
|
50 |
|
|
|
|
|
|
|
|
|
57 |
|
|
|
44 |
|
|
|
|
66 |
|
||
Three month change
Total cost of revenue increased $0.4 million for the unaudited three months ended September 30, 2021 (Successor) due to an increase in software expense, amortization of acquisition-related intangible assets, and third-party contractor costs.
Subscription and support cost of revenue increased $0.5 million for the unaudited three months ended September 30, 2021 (Successor) due to an increase in software costs, amortization of acquisition-related technology and third-party contractors. Web hosting and third-party software license costs increased $0.4 million due to the increase in total customers. Amortization costs increased $0.4 million due to an increase in acquisition-related technology related to the acquisition of Eesysoft. Third-party consultants and contractors increased $1.4 million due to outsourcing customer support during our peak busy season. The increases were offset by a decrease of $1.1 million related to the salaries, wages, and employee-related benefits due to lower headcount. Additional offsets are due to a decrease in office rent and related expenses of $0.5 million.
Professional services and other cost of revenue decreased $0.1 million for the unaudited three months ended September 30, 2021 (Successor) due to a decrease of $0.3 million related to systems and hardware, office rent and communication expenses, and depreciation. This was offset by an increase in stock-based compensation expense and other employee-related expenses of $0.2 million.
42
Nine month change
Subscription and support cost of revenue was $112.6 million for the unaudited nine months ended September 30, 2021 (Successor), $70.0 million for the unaudited six months ended September 30, 2020 (Successor), and $19.7 million for the unaudited three months ended March 31, 2020 (Predecessor). This increase was due to the increase in amortization of acquisition-related intangibles of $13.2 million, an increase in web hosting expenses of $7.7 million and other software expenses of $1.5 million. Additionally, expenses related to third-party consultants and contractors increased by $1.6 million, and employee-related and marketing expenses increased by $0.3 million. These increases were offset by decreases of $1.3 million in salaries and wages due to decreased headcount, and decreases in rent expense, communication expense, and other allocated costs of $0.03 million due to moving our support organization to remote workers.
Professional services and other cost of revenue was $15.5 million for the unaudited nine months ended September 30, 2021 (Successor), $10.6 million for the unaudited six months ended September 30, 2020 (Successor), and $4.7 million for the unaudited three months ended March 31, 2020 (Predecessor). This increase was due to an increase in payroll expense of $0.5 million, offset by a decrease in systems and hardware expense of $0.2 million and depreciation expense of $0.1 million.
Operating Expenses
Sales and Marketing
|
|
Successor |
|
|
|
|
|
|
|
|
Successor |
|
|
|
Predecessor |
|
|||||||||||||
|
|
Three months |
|
|
Three months |
|
|
Change |
|
|
Nine months |
|
|
Six months |
|
|
|
Three months |
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
Amount |
|
|
% |
|
|
2021 |
|
|
2020 |
|
|
|
2020 |
|
|||||||
|
|
(dollars in thousands) |
|
|
|
|
|
||||||||||||||||||||||
Sales and marketing |
|
$ |
40,553 |
|
|
$ |
40,100 |
|
|
$ |
453 |
|
|
|
1 |
% |
|
$ |
120,858 |
|
|
$ |
84,034 |
|
|
|
$ |
27,010 |
|
Percentage of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41 |
% |
|
|
59 |
% |
|
|
|
38 |
% |
||||
Three month change
Sales and marketing expenses increased $0.5 million for the unaudited three months ended September 30, 2021 (Successor) due to an increase in payroll, travel and other employee-related costs of $0.9 million, as select offices began to reopen from the COVID-19 closures. Additionally, amortization of acquisition-related intangibles increased $0.3 million, and marketing expenses increased $0.2 million. These increases were offset by decreases in consultants and contractors of $0.7 million, and a decrease in office rent of $0.2 million.
Nine month change
Sales and marketing expense was $120.9 million for the unaudited nine months ended September 30, 2021 (Successor), $84.0 million for the unaudited six months ended September 30, 2020 (Successor), and $27.0 million for the unaudited three months ended March 31, 2020 (Predecessor). This increase was due to increases in amortization of acquisition-related intangibles of $16.8 million, increases in marketing expenses related to lead generation of $0.8 million, increases in software expenses of $0.3 million, and increases in other employee-related expenses of $0.6 million. These increases were offset by decreases in payroll and stock-based compensation expenses of $8.0 million, and decreases in office rent and communication expenses of $0.7 million.
Research and Development
|
|
Successor |
|
|
|
|
|
|
|
|
Successor |
|
|
|
Predecessor |
|
|||||||||||||
|
|
Three months |
|
|
Three months |
|
|
Change |
|
|
Nine months |
|
|
Six months |
|
|
|
Three months |
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
Amount |
|
|
% |
|
|
2021 |
|
|
2020 |
|
|
|
2020 |
|
|||||||
|
|
(dollars in thousands) |
|
|
|
|
|
||||||||||||||||||||||
Research and development |
|
$ |
15,823 |
|
|
$ |
14,619 |
|
|
$ |
1,204 |
|
|
|
8 |
% |
|
$ |
47,191 |
|
|
$ |
36,736 |
|
|
|
$ |
19,273 |
|
Percentage of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16 |
% |
|
|
26 |
% |
|
|
|
27 |
% |
||||
43
Three month change
Research and development expenses increased $1.2 million for the unaudited three months ended September 30, 2021 (Successor) due to an increase in employee-related costs and third party consultants and contractors. Employee-related costs, including payroll and travel, increased $0.7 million and third party consultants and contractors increased by $1.1 million. These increases were offset by an decrease of $0.6 million in allocated office rent.
Nine month change
Research and development expense was $47.2 million for the unaudited nine months ended September 30, 2021 (Successor), $36.7 million for the unaudited six months ended September 30, 2020 (Successor), and $19.3 million for the unaudited three months ended March 31, 2020 (Predecessor). This decrease was due to a decrease in employee-related costs, including severance and stock-based compensation, of $10.2 million. Additionally, we saw decreases in systems and hardware expense of $1.4 million and decreases in allocated office rent of $0.9 million. These decreases were offset by an increase of $3.6 million in third-part consultants and contracts, and other employee related expenses of $0.1 million.
General and Administrative
|
|
Successor |
|
|
|
|
|
|
|
|
Successor |
|
|
|
Predecessor |
|
|||||||||||||
|
|
Three months |
|
|
Three months |
|
|
Change |
|
|
Nine months |
|
|
Six months |
|
|
|
Three months |
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
Amount |
|
|
% |
|
|
2021 |
|
|
2020 |
|
|
|
2020 |
|
|||||||
|
|
(dollars in thousands) |
|
|
|
|
|
||||||||||||||||||||||
General and administrative |
|
$ |
14,396 |
|
|
$ |
13,092 |
|
|
$ |
1,304 |
|
|
|
10 |
% |
|
$ |
38,943 |
|
|
$ |
47,533 |
|
|
|
$ |
17,295 |
|
Percentage of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 |
% |
|
|
33 |
% |
|
|
|
24 |
% |
||||
Three month change
General and administrative expenses increased by $1.3 million for the unaudited three months ended September 30, 2021 (Successor) due to an increase in employee-related and insurance costs. Employee-related costs, including payroll, stock-based compensation, and travel, increased by $2.4 million. Expenses related to D&O insurance increased by $0.9 million, and recruiting expenses increased by $0.2 million. These increases were offset by a decrease in legal fees of $1.9 million and other insignificant decreases in taxes and fees, and bad debt expense of $0.3 million.
Nine month change
General and administrative expense was $38.9 million for the unaudited nine months ended September 30, 2021 (Successor), $47.5 million for the unaudited six months ended September 30, 2020 (Successor), and $17.3 million for the unaudited three months ended March 31, 2020 (Predecessor). This decrease was due to a decrease in payroll and stock-based compensation expense of $22.6 million, legal fees and expenses of $3.7 million, as well as a decrease in other taxes and fees, and bad debt expense of $0.9 million. These decreases were offset by an increase in insurance expenses of $1.0 million and other employee related and travel expenses of $0.3 million.
Other Income (Expense), Net
|
|
Successor |
|
|
|
|
|
|
|
|
Successor |
|
|
|
Predecessor |
|
|||||||||||||
|
|
Three months |
|
|
Three months |
|
|
Change |
|
|
Nine months |
|
|
Six months |
|
|
|
Three months |
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
Amount |
|
|
% |
|
|
2021 |
|
|
2020 |
|
|
|
2020 |
|
|||||||
|
|
(dollars in thousands) |
|
|
|
|
|
||||||||||||||||||||||
Other income (expense), net |
|
$ |
(12,874 |
) |
|
$ |
(16,165 |
) |
|
$ |
3,291 |
|
|
|
(20 |
)% |
|
$ |
(46,530 |
) |
|
$ |
(33,806 |
) |
|
|
$ |
(5,433 |
) |
Percentage of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16 |
)% |
|
|
(24 |
)% |
|
|
|
(8 |
)% |
||||
44
Three month change
Other income (expense), net includes interest income and expense and the impact of foreign currency transaction gains and losses. Other income (expense), net increased $3.3 million for the unaudited three months ended September 30, 2021 (Successor) as a result of a decreased interest expense of $5.1 million due to reduced interest rate on our Term Loan (as defined below), and prepayments made on the principal with proceeds from the IPO and the exercise of the underwriters' overallotment option. Additional decreases of $0.5 million was due to the disposal of assets in the prior period. These decreases were offset by increases in realized and unrealized foreign currency losses of $2.3 million.
Nine month change
Other income (expense), net was $(46.5) million for the unaudited nine months ended September 30, 2021 (Successor), $(33.8) million for the unaudited six months ended September 30, 2020 (Successor), and $(5.4) million for the unaudited three months ended March 31, 2020 (Predecessor). This increase in expense was due to an increase in interest expense related to our Term Loan of $9.7 million resulting from additional debt acquired in December 2020. Additional increases were due to an increase in realized and unrealized foreign currency losses of $2.2 million, and decrease in interest income from marketable securities of $0.3 million. These increases were offset by a decrease in expense related to the disposal of leased property and other assets, which occurred in the prior period.
Liquidity and Capital Resources
As of September 30, 2021 (unaudited) and December 31, 2020, our principal sources of liquidity were cash, cash equivalents and restricted cash totaling $231.8 million and $151.0 million, respectively, which was held for working capital purposes, as well as the available balance of our Credit Facilities, (as defined below). As of September 30, 2021 (unaudited) and December 31, 2020, 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, debt financing and equity contributions from Thoma Bravo, and more recently, our IPO. We believe our existing cash and cash equivalents, our Credit Facilities and cash provided by sales of our solutions and services will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. 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 September 30, 2021 (unaudited), we had deferred revenue of $287.1 million, of which $270.4 million was recorded as a current liability and is expected to be recorded to revenue in the next 12 months, provided all other revenue recognition criteria have been met. As of December 31, 2020, we had deferred revenue of $204.9 million, of which $192.9 million was recorded as a current liability.
The following table shows our cash flows for the unaudited nine months ended September 30, 2021 (Successor), the unaudited six months ended September 30, 2020 (Successor), and unaudited three months ended March 31, 2020 (Predecessor):
|
|
Successor |
|
|
|
Predecessor |
|
||||||
|
|
Nine months |
|
|
Six months |
|
|
|
Three months |
|
|||
|
|
2021 |
|
|
2020 |
|
|
|
2020 |
|
|||
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|||
Net cash provided by (used in) operating activities |
|
$ |
108,816 |
|
|
$ |
41,960 |
|
|
|
$ |
(57,058 |
) |
Net cash provided by (used in) investing activities |
|
|
26,372 |
|
|
|
(1,904,855 |
) |
|
|
|
14,871 |
|
Net cash provided by (used in) financing activities |
|
|
(54,353 |
) |
|
|
2,016,728 |
|
|
|
|
(346 |
) |
45
Our cash flows are subject to seasonal fluctuations. A significant portion of our contracts have terms that coincide with our academic customers’ typical fiscal year-end of June 30. Historical experience has shown an increase in new and renewed contracts as well as anniversary billings, all of which immediately precede the beginning of our academic customers’ typical fiscal year-end. We typically invoice SaaS fees annually upfront with credit terms of net 30 or 60 days. In turn, our cash flows from operations are affected by this seasonality and are typically reflected in higher cash flow, accounts receivable and deferred revenue balances for the second and third quarter of each year.
Credit Facilities
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. Further, until the last day of the quarter ending June 30, 2021, the Credit Facilities bore interest at a rate equal to (i) 6.00% plus the highest of (x) the prime rate (as determined by reference to the Wall Street Journal), (y) the Federal funds open rate plus 0.50% per annum, and (z) a daily Eurodollar rate based on an interest period of one month plus 1.00% per annum or (ii) the Eurodollar rate plus 7.00% per annum, subject to a 1.00% Eurodollar floor. Thereafter, on the last day of each of the five full fiscal quarters, we had the option (“Pricing Grid Election”) to (i) retain the aforementioned applicable margins or (ii) switch to the applicable margins set forth on a pricing grid which, subject to certain pro forma total net leverage ratio limits, provides for applicable margins ranging from 5.50% to 7.00%, in the case of Eurodollar loans, and 4.50% to 6.00% in the case of ABR Loan. The applicable margins set forth on the pricing grid became mandatory beginning on the tenth full fiscal quarter ending after March 24, 2020.
On May 27, 2021, the Company exercised its option to make a Pricing Grid Election. As a result, the Company’s applicable margin for Eurodollar loans under the Credit Facilities was 5.5% as of September 30, 2021.
We were also required to pay a commitment fee of up to 0.50% per annum of unused commitments under the Revolving Credit Facility, letter of credit fees on a per annum basis, and customary fronting, issuance, and administrative fees for the issuance of letters of credit.
As of September 30, 2021 (unaudited), we had outstanding borrowings of $531.3 million of the Term Loan, no outstanding borrowings under our Revolving Credit Facility and $4.3 million outstanding under letters of credit, respectively. With proceeds from our IPO, we made a principal payment in August 2021 of $224.3 million on our outstanding Term Loan. Subsequently, following the exercise of the underwriter's overallotment of shares, we made a principal payment of $30.8 million on its outstanding Term Loan. In connection with the payments, we also incurred a 1.5% prepayment premium.
On October 29, 2021, we entered into the Refinancing, providing for Senior Secured Credit Facilities consisting of a $500.0 million Senior Term Loan and a $125.0 million Senior Revolver. The proceeds from the new Senior Term Loan were used, in addition to cash on hand, to refinance, in full, all existing indebtedness under the Credit Agreement, and to pay certain fees and expenses incurred in connection with the entry into the JPMorgan Credit Agreement and Refinancing.
Operating Activities
Net cash provided by (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.
46
Net cash provided by operating activities during the unaudited nine months ended September 30, 2021 (Successor) was $108.8 million, which was attributable to a net loss of $68.0 million adjusted for certain non-cash items, including $11.5 million of stock-based compensation expense, $103.0 million depreciation and amortization, $2.0 million in amortization of debt discount and issuance costs, $1.2 million of impairment on disposal group, and $1.6 million in other non-cash items. These amounts were offset by a decrease to deferred income taxes of $20.3 million. Working capital sources of cash included a net increase of $72.8 million in deferred revenue and accounts receivable resulting from the seasonality of our business where a significant number of our customer agreements occur in the second and third quarter each year. Prepaid expenses and other current assets decreased by $0.1 million, accounts payable and accrued liabilities increased by $8.6 million, deferred commissions increased by $5.6 million, lease liabilities decreased by $4.7 million, other liabilities decreased by $0.9 million, and right-of-use assets decreased by $7.6 million.
Net cash provided by operating activities during the unaudited six months ended September 30, 2020 (Successor) was $42.0 million, which was attributable to our net loss of $136.7 million adjusted for certain non-cash items, including $3.1 million of stock-based compensation expense, $68.0 million of depreciation and amortization, $1.0 million in amortization of debt discount and issuance costs, $33.0 million of impairment on disposal group and held-for-sale goodwill, and $1.4 million in other non-cash items. These amounts were offset by a decrease to deferred income taxes of $36.1 million. These amounts were offset by a decrease to deferred income taxes of $36.1 million. Working capital sources of cash included a net increase of $108.7 million in deferred revenue and accounts receivable resulting from the seasonality of our business where a significant number of customer agreements occur in the second and third quarter of each year. Prepaid expenses and other current assets decreased by $21.4 million, right-of-use assets decreased by $5.3 million, and deferred commissions decreased by $19.0 million. These were offset by increases of $4.0 million in other liabilities and $11.8 million in accounts payable and accrued liabilities.
Net cash used in operating activities during the unaudited three months ended March 31, 2020 (Predecessor) was $57.1 million, which was attributable to our net loss of $22.2 million adjusted for certain non-cash items, including $7.1 million of stock-based compensation expense, $5.6 million of depreciation and amortization, and $2.0 million in other non-cash items. Working capital sources of cash included a net decrease of $25.1 million in deferred revenue and accounts receivable resulting from the seasonality of our business where a significant number of customer agreements occur in the second and third quarter of each year. As a result of our leasing activity, our right-of-use assets and lease liabilities resulted in a net decrease of $3.0 million. Accounts payable and accrued liabilities increased by $2.2 million, while deferred commissions increased by $1.5 million. These were offset by a decrease of $25.1 million in prepaid expenses and other current assets due to renewal of annual contracts to begin fiscal year 2020.
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 provided by investing activities during the unaudited nine months ended September 30, 2021 (Successor) was $26.4 million, consisting of $46.0 million due to the sale of our Bridge business, which was offset by our acquisition of Eesysoft of $16.9 million, and purchases of property and equipment of $2.8 million.
Net cash used in investing activities during the unaudited six months ended September 30, 2020 (Successor) was $1,904.9 million, consisting of business acquisitions of $1,904.1 million, and purchases of property and equipment of $0.9 million.
Net cash provided by investing activities during the unaudited three months ended March 31, 2020 (Predecessor) was $14.9 million, consisting of cash maturities of our marketable securities of $15.6 million. These were offset by purchases of property and equipment of $0.7 million.
Financing Activities
Our financing activities have consisted of borrowings of long-term debt, capital contributions received from stockholders, and selling our common stock from our IPO.
Net cash used in financing activities during the unaudited nine months ended September 30, 2021 (Successor) was $54.4 million, which consisted of $307.9 million of principal payments made on our long-term debt, $3.8 million of prepayment premium paid in connection with our principal debt payments, $1.3 million of shares repurchased for tax withholdings on vesting of restricted stock, and distributions to stockholders of $0.9 million. These cash outflows were offset by $259.6 million of IPO proceeds, net of offering costs paid of $5.7 million.
Net cash provided by financing activities during the unaudited six months ended September 30, 2020 (Successor) was $2,016.7 million, which consisted of $763.3 of borrowings, net of debt discount and issuance costs totaled, which was offset by $3.9 million of principal payments made during the period. Total proceeds from contributions from stockholders was $1,257.3 million.
47
Net cash used in financing activities during the unaudited three months ended March 31, 2020 (Predecessor) was $0.3 million, which consisted of $1.1 million in proceeds received from the issuance of common stock under employee equity plans, including the exercise of stock options, offset by $1.4 million in shares repurchased for tax withholdings on vesting of restricted stock.
Contractual Obligations and Commitments
As of September 30, 2021, there had been no material changes, outside of the ordinary course of business, in the Company's outstanding contractual obligations disclosed in the Company’s Prospectus dated July 21, 2021 filed with the SEC in connection with the IPO.
Off-Balance Sheet Arrangements
During the nine months ended September 30, 2021 and 2020, we did not have any relationships with any entities or financial partnerships, such as structured finance or special purpose entities established for the purpose of facilitating off-balance sheet arrangements or other purposes.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these 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.
Certain accounting policies involve significant judgments and assumptions by management, which have a material impact on the carrying value of assets and liabilities and the recognition of income and expenses. Management considers these accounting policies to be critical accounting policies. The estimates and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results are described in Note 2—Summary of Significant Accounting Policies included in this Form 10-Q.
Recent Accounting Pronouncement
For information on recent accounting pronouncements, see Recent Accounting Pronouncements in the notes to the consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.
Non-GAAP Financial Measures
In addition to our results determined in accordance with U.S. GAAP, we believe the following non-GAAP measures are useful in evaluating our operating performance and liquidity. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance and assists in comparisons with other companies, some of which use similar non-GAAP financial information to supplement their U.S. GAAP results. The non-GAAP financial information is presented for supplemental informational purposes only and should not be considered a substitute for financial information presented in accordance with U.S. GAAP, and may be different from similarly-titled non-GAAP measures used by other companies. A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with U.S. GAAP. Investors are encouraged to review the related U.S. GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable U.S. GAAP financial measures.
|
|
Successor |
|
|
|
Predecessor |
|
||||||||||||||
|
|
Three months |
|
|
Three months |
|
|
Nine months |
|
|
Six months |
|
|
|
Three months |
|
|||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
|
|
2020 |
|
|||||
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|||||||||||
Other Financial Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Non-GAAP operating income (1) |
|
|
40,361 |
|
|
|
25,483 |
|
|
|
103,030 |
|
|
|
37,324 |
|
|
|
|
1,468 |
|
Free cash flow (2) |
|
|
160,006 |
|
|
|
99,516 |
|
|
|
106,056 |
|
|
|
41,169 |
|
|
|
|
(57,771 |
) |
Adjusted EBITDA (3) |
|
|
41,257 |
|
|
|
26,388 |
|
|
|
105,013 |
|
|
|
39,780 |
|
|
|
|
4,809 |
|
Allocated Combined Receipts (4) |
|
|
108,600 |
|
|
|
87,922 |
|
|
|
303,239 |
|
|
|
162,731 |
|
|
|
|
71,389 |
|
48
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 and Eesysoft acquisitions that we do not believe are reflective of our ongoing operations. We believe non-GAAP operating income is useful in evaluating our operating performance compared to that of other companies in our industry, as this metric generally eliminates the effects of certain items that may vary for different companies for reasons unrelated to overall operating performance. Although we exclude the amortization of acquisition-related intangibles from this non-GAAP measure, management believes it is important for investors to understand that such intangible assets were recorded as part of purchase accounting and contribute to revenue generation.
The following table provides a reconciliation of loss from operations to non-GAAP operating income for each of the periods indicated:
|
|
Successor |
|
|
|
Predecessor |
|
||||||||||||||
|
|
Three months |
|
|
Three months |
|
|
Nine months |
|
|
Six months |
|
|
|
Three months |
|
|||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
|
|
2020 |
|
|||||
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|||||||||||
Loss from operations |
|
|
(5,018 |
) |
|
|
(60,070 |
) |
|
|
(41,517 |
) |
|
|
(138,729 |
) |
|
|
|
(16,587 |
) |
Stock-based compensation |
|
|
8,379 |
|
|
|
6,722 |
|
|
|
17,722 |
|
|
|
40,550 |
|
|
|
|
7,109 |
|
Restructuring, transaction and sponsor related costs |
|
|
2,031 |
|
|
|
40,064 |
|
|
|
18,042 |
|
|
|
50,317 |
|
|
|
|
8,360 |
|
Amortization of acquisition-related intangibles |
|
|
33,590 |
|
|
|
32,617 |
|
|
|
100,312 |
|
|
|
65,597 |
|
|
|
|
2,586 |
|
Fair value adjustments to deferred revenue in connections with purchase accounting |
|
|
1,379 |
|
|
|
6,150 |
|
|
|
8,471 |
|
|
|
19,589 |
|
|
|
|
— |
|
Non-GAAP operating income |
|
$ |
40,361 |
|
|
$ |
25,483 |
|
|
$ |
103,030 |
|
|
$ |
37,324 |
|
|
|
$ |
1,468 |
|
49
Free Cash Flow
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. 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 provided by (used in) operating activities to free cash flow for each of the periods indicated:
|
|
Successor |
|
|
|
Predecessor |
|
||||||||||||||
|
|
Three months |
|
|
Three months |
|
|
Nine months |
|
|
Six months |
|
|
|
Three months |
|
|||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
|
|
2020 |
|
|||||
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|||||||||||
Net cash provided by (used in) operating activities |
|
$ |
161,183 |
|
|
$ |
100,285 |
|
|
$ |
108,816 |
|
|
$ |
41,960 |
|
|
|
$ |
(57,058 |
) |
Purchases of property and equipment and intangible assets |
|
|
(1,193 |
) |
|
|
(807 |
) |
|
|
(2,800 |
) |
|
|
(858 |
) |
|
|
|
(732 |
) |
Proceeds from disposals of property and equipment |
|
|
16 |
|
|
|
38 |
|
|
|
40 |
|
|
|
67 |
|
|
|
|
19 |
|
Free cash flow |
|
$ |
160,006 |
|
|
$ |
99,516 |
|
|
$ |
106,056 |
|
|
$ |
41,169 |
|
|
|
$ |
(57,771 |
) |
Adjusted EBITDA
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 and Eesysoft 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.
50
The following table presents a reconciliation of net loss to adjusted EBITDA for each of the periods indicated:
|
|
Successor |
|
|
|
Predecessor |
|
||||||||||||||
|
|
Three months |
|
|
Three months |
|
|
Nine months |
|
|
Six months |
|
|
|
Three months |
|
|||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
|
|
2020 |
|
|||||
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|||||||||||
Net Loss |
|
$ |
(13,261 |
) |
|
$ |
(60,173 |
) |
|
$ |
(68,025 |
) |
|
$ |
(136,747 |
) |
|
|
$ |
(22,203 |
) |
Interest on outstanding debt and loss on debt extinguishment |
|
|
11,247 |
|
|
|
16,357 |
|
|
|
44,170 |
|
|
|
34,449 |
|
|
|
|
— |
|
Provision (benefit) for taxes |
|
|
(4,631 |
) |
|
|
(16,062 |
) |
|
|
(20,022 |
) |
|
|
(35,788 |
) |
|
|
|
183 |
|
Depreciation |
|
|
911 |
|
|
|
1,329 |
|
|
|
2,728 |
|
|
|
2,426 |
|
|
|
|
2,982 |
|
Amortization |
|
|
2 |
|
|
|
2 |
|
|
|
5 |
|
|
|
5 |
|
|
|
|
35 |
|
Stock-based compensation |
|
|
8,379 |
|
|
|
6,722 |
|
|
|
17,722 |
|
|
|
40,550 |
|
|
|
|
7,109 |
|
Restructuring, transaction and sponsor related costs |
|
|
3,641 |
|
|
|
39,446 |
|
|
|
19,652 |
|
|
|
49,699 |
|
|
|
|
14,117 |
|
Amortization of acquisition-related intangibles |
|
|
33,590 |
|
|
|
32,617 |
|
|
|
100,312 |
|
|
|
65,597 |
|
|
|
|
2,586 |
|
Fair value adjustments to deferred revenue in connection with purchase accounting |
|
|
1,379 |
|
|
|
6,150 |
|
|
|
8,471 |
|
|
|
19,589 |
|
|
|
|
— |
|
Adjusted EBITDA |
|
$ |
41,257 |
|
|
$ |
26,388 |
|
|
$ |
105,013 |
|
|
$ |
39,780 |
|
|
|
$ |
4,809 |
|
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 and Eesysoft 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:
|
|
Successor |
|
|
|
Predecessor |
|
||||||||||||||
|
|
Three months |
|
|
Three months |
|
|
Nine months |
|
|
Six months |
|
|
|
Three months |
|
|||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
|
|
2020 |
|
|||||
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
||||||||
Revenue |
|
$ |
107,221 |
|
|
$ |
81,772 |
|
|
$ |
294,768 |
|
|
$ |
143,142 |
|
|
|
$ |
71,389 |
|
Fair value adjustments to deferred revenue in connection with purchase accounting |
|
|
1,379 |
|
|
|
6,150 |
|
|
|
8,471 |
|
|
|
19,589 |
|
|
|
|
— |
|
Allocated Combined Receipts |
|
$ |
108,600 |
|
|
$ |
87,922 |
|
|
$ |
303,239 |
|
|
$ |
162,731 |
|
|
|
$ |
71,389 |
|
51
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this prospectus are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “will,” “should,” “can have,” “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. 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. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including:
52
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. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q and “Risk Factors” in the Prospectus dated July 21, 2021 filed with the SEC in connection with our IPO. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements 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 prospectus are made only as of the date hereof. We undertake no obligation to update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign currency exchange rates and interest rates and inflation. We do not hold or issue financial instruments for trading purposes.
53
Foreign Currency Exchange Risk
Our reporting currency is the U.S. dollar. Due to our international operations, we have foreign currency risks related to operating expense denominated in currencies other than the U.S. dollar, particularly the euro. Most of our sales are denominated in U.S. dollars, and therefore our revenue is not currently subject to significant foreign currency risk. Our operating expenses are denominated in the currencies of the countries in which our operations are located, which are primarily in the United States, Europe, Australia, and New Zealand. Our consolidated results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates. To date, we have not entered into any hedging arrangements with respect to foreign currency risk or other derivative financial instruments. For the unaudited nine and three months ended September 30, 2021 (Successor), the unaudited six and three months ended September 30, 2020 (Successor), and unaudited three months ended March 31, 2020 (Predecessor), a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have had a material impact on our consolidated financial statements.
Interest Rate Risk
We had cash, cash equivalents and restricted cash of $231.8 million and $151.0 million as of September 30, 2021 (unaudited) and December 31, 2020, respectively, consisting of cash and money market accounts in highly rated financial institutions. With the exception of cash, these interest-earning instruments carry a degree of interest rate risk. To date, fluctuations in our interest income have not been significant. We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. Due to the short-term nature of these investments, we have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in interest rates.
At September 30, 2021 (unaudited) and December 31, 2020, we also had in place a $50.0 million Revolving Credit Facility, with availability of $50.0 million, and approximately $531.3 million and $839.2 million in Term Loans, respectively, both of which bear interest at 5.50%, plus a variable applicable margin. At September 30, 2021 (unaudited) and December 31, 2020, the applicable margin was 1.0% for the Revolving Credit Facility and 1.0% for the Term Loans.
We have an agreement to maintain cash balances at a financial institution of no less than $4.3 million as collateral for several letters of credit for purposes of securing certain of the Company’s obligations under facility leases and other contractual arrangements.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures. Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, have evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) prior to the filing of this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were, in design and operation, effective at a reasonable assurance level.
Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent limitation on the effectiveness of internal control. The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.
54
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are, and from time to time may be, party to litigation and subject to claims incident to the ordinary course of business. As our growth continues, we may become party to an increasing number of litigation matters and claims. The outcome of litigation and claims cannot be predicted with certainty, and the resolution of these matters could materially affect our future results of operations, cash flows or financial position. With the potential exception of the below matter (which we believe is without merit and which we are defending vigorously against), we are not presently party to any legal proceedings that in the opinion of management, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, financial condition or cash flows.
In February 2021, Oklahoma Law Enforcement Retirement System and Q. Wade Billings filed a class action lawsuit against Instructure Holdings, LLC, certain Thoma Bravo entities and certain directors and officers of Predecessor, relating to the Take Private Transaction. The complaint alleges that such directors and officers breached their fiduciary duties in connection with the Take Private Transaction, and that Instructure Holdings, LLC and Thoma Bravo aided and abetted such breaches. Plaintiffs seek damages of an unidentified amount, interest, and attorneys’ and experts’ fees and expenses.
The defendants moved to dismiss the complaint on May 3, 2021. We do not believe these claims have merit and are defending vigorously against them.
Item 1A. Risk Factors
There have been no material changes in the risk factors included in section entitled “Risk Factors” included in our Prospectus dated July 21, 2021 filed with the SEC in connection with our IPO.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None
Item 3. Defaults upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits
55
EXHIBIT INDEX
Exhibit Number |
|
Description |
3.1 |
|
|
3.2 |
|
Amended and Restated Bylaws of Instructure Holdings, Inc., effective July 21, 2021(2) |
10.1 |
|
|
10.2 |
|
|
10.3 |
|
|
10.4 |
|
|
31.1 |
|
|
31.2 |
|
|
32.1* |
|
|
32.2* |
|
|
101.INS |
|
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
101.SCH |
|
Inline XBRL Taxonomy Extension Schema |
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation |
101.DEF |
|
Inline XBRL Extension Definition |
101.LAB |
|
Inline XBRL Taxonomy Extension Label |
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation |
104 |
|
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* Document has been furnished, is not deemed filed and is not to be incorporated by reference into any of the Company’s filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, irrespective of any general incorporation language contained in any such filing.
(1) Incorporated by reference to Exhibit 3.1 on Form 8-K filed on July 21, 2021
(2) Incorporated by reference to Exhibit 3.2 on Form 8-K filed on July 21, 2021
(3) Incorporated by reference to Exhibit 10.1 on Form 8-K filed on July 21, 2021
(4) Incorporated by reference to Exhibit 10.2 on Form 8-K filed on July 21, 2021
(5) Incorporated by reference to Exhibit 10.3 on Form 8-K filed on July 21, 2021
(6) Incorporated by reference to Exhibit 10.4 on Form 8-K filed on July 21, 2021
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
Instructure Holdings, Inc. |
|
|
|
|
|
Date: November 10, 2021 |
|
By: |
/s/Dale Bowen |
|
|
|
Dale Bowen |
|
|
|
Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) |
57