Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis together with the financial statements and the related notes to those statements included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth in the section of this Annual Report on Form 10-K captioned “Risk Factors” and elsewhere in this report, our actual results may differ materially from those 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 course content. Schools standardize on Instructure’s solutions as the core of their learning platform because we bring together all of the tools that students, teachers, parents, and administrators need to create an accessible, engaging and modern learning environment. Our learning platform is cloud-native, built on open technologies, and scalable across thousands of institutions and tens of millions of users worldwide. We are the LMS market share leader in both Higher Education and paid K-12, with 8,085 global customers, representing Higher Education institutions and K-12 districts and schools in more than 100 countries. We are maniacally focused on our customers and enhancing the teaching and learning experience. As such, we continuously innovate to grow the functionality and capabilities of our learning platform, including through acquisitions to add online skills portfolio capabilities for Higher Education students and assessment and analytics capabilities. Our learning platform becomes the invaluable digital infrastructure behind our customers’ instructional workflows.
Since our founding in 2008, we have expanded our learning platform from the core LMS to include a broad set of offerings targeting all aspects of teaching and learning. As our learning 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.
Our Business Model
We generate revenue primarily from two main sources: (1) subscription and support revenue, which is comprised of software-as-a-service (“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. On July 26, 2021, we completed our initial public offering.
Subscription revenue is derived from customers using our learning platform and is driven by the number of customers, the number of users at each customer, and the price of our applications. Support revenue is derived from customers purchasing additional support beyond the standard support that is included in the basic SaaS fee. We sell annual and multi-year contracts, which typically vary in length between one and five years. Subscriptions and support are non-cancelable and are billed in advance on an annual basis. Subscription and support revenue represented 92% of total revenue for 2023.
Due to the nature of our multi-year subscription contracts, it is common that at any point in a contract term there can be amounts that we have not yet been contractually able to invoice, which along with our billed amounts are considered part of our remaining performance obligations ( “ RPO ” ).
We sell our applications and services through a direct sales force. Our sales organization includes technical sales engineers who serve as experts in the technical aspects of our applications and customer implementations. Many of our sales efforts require us to respond to request for proposals, particularly in the Higher Education space and to a lesser extent in K-12. Our sales force targets statewide systems for Higher Education and K-12, as well individual colleges and universities and K-12 schools. As we continue to grow internationally, we continue to enhance our indirect sales motion in order to penetrate certain international markets.
As of December 31, 2023, we had 8,085 customers representing Higher Education institutions and K-12 districts and schools in more than 100 countries, compared to 7,436 customers in more than 100 countries as of December 31, 2022. Our customers include State Universities of California, Florida, and Utah, all of the Ivy League universities, the entire Higher Education systems for Sweden and Norway, many of the largest K-12 systems in the U.S., and international K-12 systems. We continue to see growth opportunities in the K-12 market and have made incremental investments in the assessments space, which we expect to represent a meaningful portion of our business moving forward. We also continue to expand our international business, evidenced by our acquisition of Impact, which we believe will be an important factor in our continued growth. In 2023, revenue derived from outside of the U.S. increased 9% on a year-on-year basis, driven primarily by increases in demand across Western European, Asia-Pacific, and Latin American markets.
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The majority of our academic customers implement Canvas widely within their institutions and across school districts, where applicable. We define a customer as an entity with an active subscription contract. In situations where there is a single contract that applies to an entity with multiple subsidiaries or divisions, universities, or schools, only the entity that has contracted for our platform is counted as a customer. For example, a contracting school district is counted as a single customer even though the school district encompasses multiple schools. In 2023, no single customer represented more than 10% of our revenue.
We have a history of attracting new customers and generally increasing their annual spend with us over time. In Higher Education, the depth of our solution and demonstrated scalability allow us to sell to a single institution or university and then deploy extensively across schools (i.e., medical, law, business, undergraduate), departments (i.e., economics, math, art), or entire state systems, and reach students beyond the walls of the classroom by extending into Continuing Education and online learning.
Impacts of Macroeconomic Conditions and Trends
Adverse macroeconomic conditions, including but not limited to high inflation, slower economic growth or recession, changes to fiscal and monetary policy, and high interest rates could impact our business and customer spending. Certain of our customers may be negatively impacted by these events.
We have continued to experience high usage on our learning platform as our customers continue to embrace remote learning platforms and demand for our products remains high. These factors have generated a positive impact to our gross margin.
As of December 31, 2023, our pipeline for new K-12 contracts and cross-sell opportunities remains robust, complemented by the strength of state budgets dedicated to digital transformation projects. Notably, the Elementary and Secondary School Emergency Relief (“ESSER”) funds, with the third and largest set of funds, carry an obligation deadline of September 30, 2024. In addition to this, Instructure has witnessed a noteworthy surge in the volume of Non-Traditional use case projects entering the market. The expanding Non-Traditional student segment presents a substantial growth opportunity, and Instructure is strategically positioned to seize this market share. Leveraging the awareness gained from Kindergarten through Higher Ed utilization and Instructure's product competencies in credentialing, further enhances our unique advantage in capturing this evolving market.
The U.S dollar may fluctuate relative to foreign currencies depending on whether the U.S. Federal Reserve maintains the federal funds interest rate or if they choose to lower the federal funds interest rate as some recent reports have indicated, which could further impact our reported expenses. Similarly, as a result of increased federal funds interest rates, the interest rate applicable to our Senior Term Loan increased from 6.12% as of December 31, 2022 to 8.68% as of December 31, 2023, impacting our cost of debt. These items have not had a material impact on our results of operations to date.
Acquisition of Parchment
On February 1, 2024, Instructure closed the previously announced acquisition of Parchment, the world’s largest academic credentialing platform and network, where 100% of the equity interests were acquired in the all cash transaction. The purpose of the transaction is to bolster the Instructure Learning Platform's scale and reach as learners are engaged throughout their lifelong learning journey, facilitating evidence of learning and streamlining the educational process for educators and learners during key transitions. The preliminary purchase price is $833.3 million. The purchase price was paid to the sellers net of unpaid indebtedness and transaction expenses, and is subject to certain post-closing adjustments as set forth in the Purchase Agreement. The purchase was financed through a combination of cash on hand and debt financing.
Key Factors Affecting Our Performance
Our historical financial performance has been, and we expect our financial performance in the future to be, driven by the following trends and our ability to:
Increase Adoption of Cloud-Based Software by Higher Education and K-12 Institutions
Our ability to increase market adoption of our platform is driven by the overall adoption of cloud applications and infrastructure by academic institutions. Higher Education and K-12 institutions accelerated the pace of cloud adoption to support near-term online educational needs, as a result of, and following the COVID-19 pandemic, and we believe that Higher Education and K-12 institutions are poised to continue to accelerate the pace of cloud adoption to support near-term online educational needs to withstand future challenges. Academic institutions that relied upon on-premises solutions to support remote operations faced significant delays at the height of the COVID-19 pandemic. To be prepared for any similar future health crisis, institutions must make a fundamental shift to adopt cloud-based collaboration solutions in order to continue providing a high-quality education and support in-person, remote, and hybrid learning. As the leader in the market for cloud-based learning technology, we believe the imperative for these institutions to adopt cloud infrastructure will increase demand for our learning platform and broaden our customer base.
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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 learning platform in North America and our continued expansion efforts internationally. The growth of our K-12 customer base is primarily dependent on our ability to surround currently implemented free solutions with our learning platform and, in connection therewith, monetize demand for our broad capabilities. We intend to expand our customer base by continuing to make targeted and prudent investments in sales and marketing and customer support.
Cross-sell into our Existing Customer Base
Most of our customers initially engage with us using our Canvas LMS solution, and then we are generally able to cross-sell our other solutions as these customers become aware of the benefits of our broad capabilities, including learning, assessments, analytics, student success, program management, digital courseware, and global online learning. Our future revenue growth is dependent upon our ability to expand our customers’ use of our learning platform. Our ability to increase sales to existing customers depends on a number of factors, including customer satisfaction, competition, pricing, economic conditions, and spending by customers.
Key Business Metrics
In addition to our GAAP financial information, we review a number of operating and financial metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions.
Number of Customers
We evaluate the number of customers who use our products to measure and monitor the growth of our business and the success of our sales and marketing activities. We believe that the growth of our customer base is indicative of our revenue growth potential. We define a customer as an entity with an active subscription contract. In situations where there is a single contract that applies to an entity with multiple subsidiaries or divisions, universities or schools, only the entity that has contracted for our platform is counted as a customer. For example, a contracting school district is counted as a single customer even though the school district encompasses multiple schools. We had 6,908, 7,436, and 8,085 customers contracted to use our platform as of December 31, 2021, 2022, and 2023, respectively. The increase in customers from December 31, 2021 to December 31, 2022 and to December 31, 2023 was driven by the continued digital transformation in education and targeted sales and marketing efforts in new and existing markets.
Net Revenue Retention Rate; Gross Revenue Retention Rate
Our net revenue retention rate calculation begins with a customer cohort base as of a given month in the immediately preceding year and compares the ARR for that same cohort group in that given month for the current year. We calculate our net revenue retention rate by dividing the ARR obtained from a particular customer cohort in a given month by the ARR from that same customer cohort from the same month in the immediately preceding year. If a customer has any ARR in a given month, such customer is included in a “customer cohort.” This calculation contemplates all changes to ARR for the designated customer cohort, which includes customer terminations and non-renewals, customer consolidations, changes in quantities of users, changes in pricing, additional applications purchased or applications no longer used. We calculate the net revenue retention for our entire customer base at a given point in time. We believe our net revenue retention rate is an important metric to measure the long-term value of customer agreements and our ability to retain our customers. Our net revenue retention rate was 109%, 106%, and 103% as of December 31, 2021, 2022 and 2023, respectively.
We calculate gross revenue retention rate by subtracting downgrades and cancellations over a 12-month period from ARR at the beginning of the corresponding 12-month period for a particular customer cohort and dividing the result by the ARR from the beginning of the same 12-month period. Our gross revenue retention rate was 95%, 94%, and 93% at December 31, 2021, 2022 and 2023, respectively.
The most significant positive drivers of changes in our net revenue retention rate each year have historically been our ability to up-sell or cross-sell new solutions or additional licenses to our existing customer base and secure multi-year contracts containing periodic pricing term increases.
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Remaining Performance Obligations (“RPO”)
We monitor RPO as a key metric to help us evaluate the health of our business. RPO represents the amount of our contracted future revenue that has not yet been recognized, including both deferred revenue and non-cancelable contracted amounts that will be invoiced and recognized as revenue in future periods. RPO is not necessarily indicative of future revenue growth because it does not account for the timing of customers’ consumption or their consumption of more than their contracted capacity. Moreover, RPO is influenced by several factors, including the timing of renewals, the timing of purchases of additional capacity, average contract terms, and seasonality. Due to these factors, it is important to review RPO in conjunction with revenue and other financial metrics disclosed elsewhere in this Annual Report on Form 10-K.
RPO was $698.0 million, $760.1 million and $833.5 million as of December 31, 2021, 2022 and 2023, respectively. We may experience variations in our RPO from period to period, but RPO has generally increased over the long-term as a result of contracts with new customers and increasing the value of contracts with existing customers. These increases are partially offset by revenue recognized on existing contracts during a particular period.
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 implementation, training, and other types of consulting 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, which generally take anywhere from 30 to 90 days to complete depending on customer-side complexity and timelines. These services include regularly scheduled and highly-structured activities to ensure customers progress toward better utilizing our applications. Most of these interactions take place over the phone and through the use of web meeting technology. Because we have determined the implementation services are distinct, they are recognized over time as the services are rendered, using an efforts-expended input method. Implementation services also include nonrefundable upfront setup fees, which are allocated to the remaining performance obligations.
Instructure offers customers training services for an incremental fee which focus on creating confidence among users so they can be successful with our applications. Most training is performed remotely using web meeting technology, while the remainder is delivered in person. Because we have determined that training offerings are distinct from other performance obligations, we record training revenue upon the delivery of the service which can vary based on the nature of the training purchased. For trainings that are delivered live, revenue is recognized upon delivery. The Company offers customers unlimited access to online training services for a defined period of time, whereby revenue is recognized ratably over the defined contract term.
In addition to our implementation and training offerings, we provide consulting services for custom application development, integrations, content services and change management consulting. These services are architected to boost customer adoption of our applications and to drive usage of features and capabilities that are unique to our company. We have determined that these services are distinct. Professional services revenue is typically recognized over time as the services are rendered, using an efforts-expended input method.
Cost of Revenue
Cost of subscription and support revenue consists primarily of the costs of our cloud hosting provider and other third-party service providers, employee-related costs including payroll, benefits and stock-based compensation expense for our operations and customer support teams, amortization of capitalized software development costs and acquired technology, and allocated overhead costs, which we define as rent, facilities and costs related to IT. Our acquired technology is amortized over the estimated 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.
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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 useful life of seven years. The trade names acquired are amortized over the estimated useful lives ranging from one 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 and comprehensive loss over the estimated life of the new application or incremental functionality, which is generally three years.
General and Administrative . General and administrative expenses consist of personnel costs and related expenses for executive, finance, legal, human resources, recruiting, employee-related information technology, administrative personnel, including payroll, benefits and stock-based compensation expense; professional fees for external legal, accounting and other consulting services; and allocated overhead costs.
Other Income (Expense), net
Other income (expense), net consists primarily of interest income, interest expense, and the impact of foreign currency transaction gains and losses. Interest expense is related to fees incurred to have access to our credit facilities. As we have expanded our international operations, our exposure to fluctuations in foreign currencies has increased.
Income Tax Benefit
We are subject to income taxes in the United States and foreign jurisdictions in which we do business. These foreign jurisdictions have statutory tax rates different from those in the United States. Accordingly, our effective tax rates will vary depending on the relative proportion of foreign to U.S. income and changes in tax laws. The income tax benefit at December 31, 2023 consists of decreases in U.S. Federal and state deferred tax liabilities due to current year pretax book loss, domestic valuation allowances recorded, and the current year credits generated.
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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.
Year ended
December 31,
Year ended
December 31,
Year ended
December 31,
(dollars in thousands)
Revenue:
Subscription and support
Professional services and other
Total revenue
Cost of revenue:
Subscription and support (1)(2)(3)
Professional services and other (1)(3)
Total cost of revenue
Gross profit
Operating expenses:
Sales and marketing (1)(2)(3)
Research and development (1)(2)(3)
General and administrative (1)(3)
Impairment on disposal group (3)
Total operating expenses
Loss from operations
Other income (expense):
Interest income
Interest expense
Other income (expense), net (3)
Loss on extinguishment of debt
Total other income (expense), net
Loss before income tax benefit
Income tax benefit
Net loss
(1) Includes stock-based compensation as follows:
Year ended
December 31,
Year ended
December 31,
Year ended
December 31,
(dollars in thousands)
Cost of revenue:
Subscription and support
Professional services and other
Sales and marketing
Research and development
General and administrative
Total stock-based compensation
(2) Includes amortization of acquisition-related intangibles as follows:
Year ended
December 31,
Year ended
December 31,
Year ended
December 31,
(dollars in thousands)
Cost of revenue:
Subscription and support
Sales and marketing
Research and Development
Total amortization of acquisition-related intangibles
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(3) Includes transaction costs, sponsor costs, impairment charges, other non-recurring costs, and effects of foreign currency transaction gains and losses costs as follows:
Year ended
December 31,
Year ended
December 31,
Year ended
December 31,
(dollars in thousands)
Cost of revenue:
Subscription and support
Professional services and other
Sales and marketing
Research and development
General and administrative
Impairment on disposal group
Other income (expense), net
Total costs for transaction, sponsor, impairment, other non-recurring, and foreign currency gains and losses
Year ended
December 31,
Year ended
December 31,
Year ended
December 31,
(as a percentage of total revenue)
Revenue:
Subscription and support
Professional services and other
Total revenue
Cost of revenue:
Subscription and support
Professional services and other
Total cost of revenue
Gross profit
Operating expenses:
Sales and marketing
Research and development
General and administrative
Total operating expenses
Loss from operations
Other income (expense):
Interest income
Interest expense
Other income (expense), net
Loss on extinguishment of debt
Total other income, net
Loss before income tax benefit
Income tax benefit
Net loss
Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022
Revenue
Year ended
December 31,
Change
Amount
(dollars in thousands)
Subscription and support
Professional services and other
Total revenue
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Subscription and support revenue increased $54.9 million for the year ended December 31, 2023. The increase in revenue is due to expanded use of our solutions, including among new and existing customers. For the year ended December 31, 2023, revenue from new customers increased by $33.4 million and revenue from existing customers increased by $21.5 million. International markets contributed 20% of the total revenue for the year ended December 31, 2023, an increase of $8.9 million. Use of our solutions expanded as a result of the need for continued digital transformation in education and targeted sales and marketing efforts in new and existing markets.
Professional services and other revenue increased $0.2 million for the year ended December 31, 2023. The increase is due to the expanded use of our solutions as discussed above, offset by timing and delivery of certain professional services when compared to historical delivery patterns.
Cost of Revenue and Gross Margin
Year ended
December 31,
Change
Amount
(dollars in thousands)
Cost of revenue:
Subscription and support
Professional services and other
Total cost of revenue
Gross margin percentage
Subscription and support revenue
Professional services and other
Total gross margin
Subscription and support cost of revenue increased $12.2 million for the year ended December 31, 2023 due to an increase in web hosting costs of $7.3 million to support increased revenue, an increase in amortization of acquisition-related intangibles of $2.5 million, an increase in salaries, wages, and payroll-related benefits of $1.3 million, an increase in third-party contractor and consulting costs of $1.0 million related to cloud hosting projects primarily as a result of the Company's merger and acquisition activity, inclusive of post-close integration activities, and an increase in stock-based compensation of $0.4 million. These increases were offset by a decrease in software expenses of $0.3 million, and a decrease in bonuses of $0.1 million .
Professional services and other cost of revenue increased $1.9 million for the year ended December 31, 2023 due to an increase in salaries, wages, and payroll-related benefits of $1.9 million, an increase in stock-based compensation of $0.5 million, an increase in commissions of $0.1 million, an increase in bonuses of $0.2 million, and an increase in travel expenses of $0.2 million, and other insignificant increases totaling $0.1 million. These increases were offset by a decrease in third-party contractor and consulting costs of $1.0 million and a decrease in acquisition related amortization expense of $0.1 million.
Operating Expenses
Sales and Marketing
Year ended
December 31,
Change
Amount
(dollars in thousands)
Sales and marketing
Sales and marketing expenses increased $15.9 million for the year ended December 31, 2023 due to an increase in salaries, wages, and payroll-related benefits of $5.0 million, an increase in amortization of acquisition-related intangibles of $4.4 million, an increase in commission expense of $1.9 million, an increase in travel expenses of $1.7 million, an increase in severance costs of $1.3, an increase in stock-based compensation of $0.9 million, an increase in software expenses of $0.9 million, an increase in third-party contracting and consulting costs of $0.7 million, and an increase in employee related incentives of $0.2 million. These increases were offset by a decrease in marketing expenses, including tradeshows, conferences, and public relations, of $0.9 million, and a decrease in office rent of $0.2 million.
Research and Development
Year ended
December 31,
Change
Amount
(dollars in thousands)
Research and development
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Research and development expenses increased $11.0 million for the year ended December 31, 2023 due to an increase in salaries, wages, and payroll-related benefits of $7.8 million, an increase in stock-based compensation of $2.9 million, an increase in severance costs of $1.0 million, offset by a decrease in bonuses of $1.1 million. There were additional increases in travel expenses of $0.3 million, an increase in third-party contractor and consulting costs of $0.2 million, an increase in property taxes of $0.2 million, and an increase in travel expenses of $0.2 million. These increases were offset by a decrease in acquisition-related amortization expense of $0.2 million, a decrease in office rent of $0.1 million, and other insignificant decreases of $0.1 million.
General and Administrative
Year ended
December 31,
Change
Amount
(dollars in thousands)
General and administrative
General and administrative expenses increased $0.8 million for the year ended December 31, 2023 due to an increase in third-party contractor and consulting costs of $3.0 million primarily as a result of the Company's merger and acquisition activities, inclusive of due diligence and post-close integration activities, an increase in bad debt expense of $0.6 million, an increase in travel of $0.2 million, and an increase in severance costs of $0.2 million. These increases were offset by a decrease in insurance expenses of $1.7 million, a decrease in in salaries, wages, and payroll-related benefits of $0.4 million, a decrease in stock-based compensation of $0.3 million, a decrease in bonuses of $0.3 million, a decrease in systems and hardware expenses of $0.2 million, a decrease in employee-related incentives of $0.2 million and a decrease in acquisition-related amortization expense of $0.1 million.
Other Expense, net
Year ended
December 31,
Change
Amount
(dollars in thousands)
Other expense, net
Other expense, net includes interest income and expense and the impact of foreign currency transaction gains and losses. Other expense, net increased $9.2 million for the year ended December 31, 2023 as a result of increased interest expense of $17.4 million due to interest rate increases on our Senior Term Loan (as defined below). This increase in expense was offset by $4.1 million related to realized and unrealized foreign currency gains and an increase in interest income of $4.1 million.
Income Tax Benefit
Year ended
December 31,
Change
Amount
(dollars in thousands)
Income tax benefit
Income tax benefit decreased $3.9 million for the year ended December 31, 2023. Income tax benefit consists of current and deferred taxes for U.S. and foreign income taxes. The decrease in the income tax benefit was due to the 2023 reduction in pretax book loss, domestic valuation allowance recorded, and changes in foreign tax rates.
Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021
A discussion regarding our financial condition and results of operations for the years ended December 31, 2022 and 2021 can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 17, 2023.
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Liquidity and Capital Resources
As of December 31, 2023 and December 31, 2022, our principal sources of liquidity were cash, cash equivalents and restricted cash totaling $344.2 million and $190.3 million, respectively, which was held for working capital purposes, as well as the available balance of our Senior Secured Credit Facilities and Credit Facilities, respectively (each as defined below). As of December 31, 2023 and December 31, 2022, 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 historically financed our operations through cash received from operations. We believe our existing cash and cash equivalents, our Senior Secured Credit Facilities and cash provided by sales of our solutions and services will be sufficient to meet our working capital, capital expenditure and cash needs for the next 12 months and beyond. Our future capital requirements will depend on many factors including our growth rate, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced products and services offerings, and the continuing market acceptance of our products. In the future, we may enter into arrangements to acquire or invest in complementary businesses, services and technologies.
Our material cash requirements from known contractual and other obligations primarily consists of our Senior Term Loan and operating facility lease obligations, including certain letters of credit. Expected timing of these payments as of December 31, 2023 is as follows:
Total
Next 12 months
Beyond 12 months
(in thousands)
Senior Term Loan - principal
Senior Term Loan – interest (1)
Operating facility lease obligations (2)
Total
Interest payments that relate to the Senior Term Loan are calculated and estimated for the periods presented based on the expected principal balance for each period and the effective interest rate at December 31, 2023 of 8.68%, given that our debt is at floating interest rates. Excluded from these payments is the amortization of debt issuance costs related to our indebtedness.
As of December 31, 2023 and December 31, 2022, we had a total of $3.2 million and $4.3 million, respectively, of letters of credit outstanding that were issued for purposes of securing certain of the Company’s obligations under facility leases and other contractual arrangements.
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 December 31, 2023, we had deferred revenue of $302.7 million, of which $291.8 million was recorded as a current liability and is expected to be recorded to revenue in the next 12 months, provided all revenue recognition criteria have been met. As of December 31, 2022, we had deferred revenue of $289.4 million, of which $275.6 million was recorded as a current liability.
The following table shows our cash flows for the years ended December 31, 2023, 2022, and 2021:
Year ended
December 31,
Year ended
December 31,
Year ended
December 31,
(in thousands)
Net cash provided by operating activities
Net cash provided by (used in) investing activities
Net cash used in financing activities
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 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.
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Credit Facility
On October 29, 2021, we entered into a credit agreement with JPMorgan Chase Bank, N.A., as administrative agent (the “2021 Credit Agreement”), governing our senior secured credit facilities (the “Senior Secured Credit Facilities”), consisting of a $500.0 million senior secured term loan facility (the “Senior Term Loan”) and a $125.0 million senior secured revolving credit facility (the “Senior Revolver”). The proceeds from the Senior Secured Credit Facilities were used, in addition to cash on hand, to (1) refinance, in full, all existing indebtedness under our prior credit agreement (the “Refinancing”), (2) pay certain fees and expenses incurred in connection with the entry into the 2021 Credit Agreement and the Refinancing, and (3) finance working capital needs of the Company and its subsidiaries for general corporate purposes.
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 a $10.0 million sublimit for the issuance of letters of credit. Any issuance of letters of credit will reduce the amount available under the Senior Revolver. As of December 31, 2023, we had no outstanding borrowings under our Senior Revolver.
The Senior Term Loan has a seven-year maturity and the Senior Revolver has a five-year maturity. Commencing June 30, 2022, we were required to repay the Senior Term Loan portion of the Senior Secured Credit Facilities in quarterly principal installments of 0.25% of the aggregate original principal amount of the Senior Term Loan at closing, with the balance payable at maturity. Borrowings under the Senior Secured Credit Facilities bore interest, at the Company’s option, at: (i) Base Rate equal to the greater of (a) the Federal Funds Rate plus 1/2 of 1.00%, (b) the rate of interest in effect for such day as publicly announced from time to time by the administrative agent as its “prime rate,” (c) a Eurocurrency Rate for such date plus 1.00% and (d) 1.00%; or (ii) the Eurocurrency Rate (provided that the Eurocurrency Rate applicable to the Senior Term Loan shall not be less than 0.50% per annum). The Applicable Rate for the Senior Term Loan with respect to Eurocurrency Rate Loans was 2.75% per annum and 1.75% per annum for Base Rate Loans. The Applicable Rate for the Senior Revolver with respect to Eurocurrency Rate Loans, SONIA Loans, and Alternative Currency Term Rate Loans ranged from 2.00% to 2.5% subject to the Company’s Consolidated First Lien Net Leverage Ratio, while the Applicable Rate for Base Rate Loans ranged from 1.00% to 1.50% subject to the Company’s Consolidated First Lien Net Leverage Ratio. We are also required to pay an unused commitment fee to the lenders under the Senior Revolver at the Applicable Commitment Fee of the average daily unutilized commitments. The Applicable Commitment Fee ranges from 0.40% to 0.50% subject to the Company’s Consolidated First Lien Net Leverage Ratio.
On June 21, 2023, we entered into the first amendment to the 2021 Credit Agreement (the “Amended 2021 Credit Agreement”) whereby all borrowings denominated in U.S. dollars and that incur interest or fees using the Eurocurrency Rate, which are determined by reference to the London Interbank Offered Rate (“LIBOR”), have been replaced with the Secured Overnight Financing Rate (“SOFR”). For SOFR loans, the loans denominated in dollars now bear interest at the Adjusted Term SOFR Rate, which is equal to the Term SOFR Reference Rate, as published by the CME Term SOFR Administrator, plus the Term SOFR Adjustment as dictated by the interest rate period elected by the Company. The Term SOFR Adjustment ranges from 0.11448% to 0.42826% per annum. The Applicable Rate (x) for the Initial Term Loans remains at 2.75% per annum for SOFR loans and (y) for the Revolving Credit Facility remains at 2.5% per annum with applicable step downs. The transition from LIBOR to SOFR became effective on July 5, 2023. All other terms and conditions in place under the 2021 Credit Agreement on the effective date of the Amended 2021 Credit Agreement remained unchanged and in full effect.
On February 1, 2024, we entered into a second amendment to the 2021 Credit Agreement to borrow incremental term loans (the “Incremental Term Loans”) in an aggregate principal amount equal to $685.0 million. We used the proceeds of the incremental term loans to finance the acquisition of Parchment and to pay for fees and costs incurred in connection with the acquisition and related transactions.
As of December 31, 2023, we had outstanding borrowings of $491.3 million on the Senior Term Loan, no outstanding borrowings under our Senior Revolver and $3.2 million outstanding under letters of credit.
Operating Activities
Net cash provided by operating activities consists primarily of net loss adjusted for certain non-cash items, including stock-based compensation, depreciation and amortization and other non-cash charges, net.
Net cash provided by operating activities during 2023 was $164.0 million, which primarily reflected our net loss of $34.1 million, offset by non-cash expenses that included $43.5 million of stock-based compensation, $143.0 million of depreciation and amortization, $1.2 million of amortization of deferred financing costs, and $0.7 million of other non-cash items. These amounts were offset by a decrease to deferred income taxes of $7.8 million. Working capital sources of cash included a net increase of $15.9 million in deferred revenue and accounts receivable primarily resulting from the seasonality of our business where a significant number of customer agreements occur in the second and third quarter of each year, a $4.7 million increase in deferred commissions, a $4.6 million in right-of-use assets, and a $3.2 million increase in other liabilities. These sources were partially offset by a decrease in prepaid expenses and other assets of $5.6 million, and a decrease in lease liabilities of $7.1 million.
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Net cash provided by operating activities during 2022 was $140.3 million, which primarily reflected our net loss of $34.2 million, offset by non-cash expenses that included $33.6 million of stock-based compensation, $141.2 million of depreciation and amortization, $1.2 million of amortization of deferred financing costs, and $3.7 million of other non-cash items. These amounts were offset by a decrease to deferred income taxes of $10.2 million. Working capital sources of cash included a net increase of $5.8 million in deferred revenue and accounts receivable primarily resulting from the seasonality of our business where a significant number of customer agreements occur in the second and third quarter of each year, a $5.9 million increase in prepaid expenses and other assets, and $4.9 million in right-of-use assets. These sources were partially offset by a decrease in accounts payable and accrued liabilities of $2.2 million, a decrease in deferred commissions of $0.6 million, a decrease in lease liabilities of $6.8 million, and a decrease in other liabilities of $1.8 million.
Investing Activities
Our investing activities have consisted primarily of business acquisitions, purchases and maturities of marketable securities, property and equipment purchases for computer-related equipment and capitalization of software development costs. Capitalized software development costs are related to new applications or improvements to our existing software platform that expand the functionality for our customers.
Net cash used in investing activities during 2023 was $5.9 million, consisting of purchases of property and equipment.
Net cash used in investing activities during 2022 was $115.3 million, consisting of our acquisitions of Canvas Credentials and LearnPlatform of $19.5 million and $89.5 million, respectively, and purchases of property and equipment of $6.3 million .
Financing Activities
Our historical financing activities have consisted of borrowings of long-term debt, capital contributions received from stockholders, repurchasing shares for tax withholdings on vesting of restricted stock, proceeds from issuance of our common stock, and selling our common stock from our IPO.
Net cash used in financing activities during 2023 was $5.7 million, which consisted of $6.6 million of shares repurchased for tax withholdings on vesting of restricted stock, $5.0 million of principal payments made on our Credit Facilities, and $0.1 million of payments for financing costs, offset by $6.0 million of proceeds from issuance of common stock from employee equity plans.
Net cash used in financing activities during 2022 was $1.7 million, which consisted of $5.3 million of shares repurchased for tax withholdings on vesting of restricted stock, $3.8 million of principal payments made on our Credit Facilities, offset by $7.3 million of proceeds from issuance of common stock from employee equity plans.
Year Ended December 31, 2021
A discussion regarding our net cash provided by and used in operating activities, investing activities and financing activities for the year ended December 31, 2021 can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 17, 2023.
Indemnification Agreements
In the ordinary course of business, we enter into agreements of varying scope and terms pursuant to which we agree to indemnify customers, including, but not limited to, losses arising out of the breach of such agreements, services to be provided by us or from intellectual property infringement claims made by third parties. In addition, we have entered into indemnification agreements with our directors and certain officers and employees that require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees. No demands have been made upon us to provide indemnification under such agreements and there are no claims that we are aware of that could have a material effect on our consolidated balance sheets, consolidated statements of operations and comprehensive loss, or consolidated statements of cash flows.
Critical Accounting Estimates
Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements which have been prepared in accordance with GAAP. In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our reported revenue, results of operations and net income or loss, as well as on the value of certain assets and liabilities on our balance sheet during and as of the reporting periods. These estimates, assumptions and judgments are necessary because future events and their effects on our results and the value of our assets cannot be determined with certainty and are made based on our historical experience and on other assumptions that we believe to be reasonable under the circumstances. These estimates may change as new events occur or additional information is obtained, and we may periodically be faced with uncertainties, the outcomes of which are not within our control and may not be known for a prolonged period of time. Because the use of estimates is inherent in the financial reporting process, actual results could differ from those estimates.
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While our significant accounting policies are more fully described in Note 1—Description of Business and Summary of Significant Accounting Policies, we believe the following critical accounting estimates, assumptions and judgments have the most significant impact on our consolidated financial statements are described below.
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, assessment and talent management systems 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. 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.
We determined revenue recognition through the following steps:
Identification of the contract, or contracts, with a customer
Identification of the performance obligations in the contract
Determination of the transaction price
Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when, or as, we satisfy a performance obligation
We recognize revenue for subscription contracts on a ratable basis over the contract term based on the number of calendar days in each period, beginning on the date that our service is made available to the customer. Unearned revenue results from revenue amounts billed to customers in advance or cash received from customers in advance of the satisfaction of performance obligations. Determining the transaction price often involves judgments and estimates that can have a significant impact on the timing and amount of revenue reported.
Subscription and support revenue is derived from fees from customers to access our learning, assessment and talent management systems and support beyond the standard support that is included with all subscriptions. Subscription and support revenue is generally recognized on a ratable basis over the contract term.
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 revenue is typically recognized over time as the services are rendered, using an efforts-expended (labor hours) input method.
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 standalone selling prices 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. Standalone selling price is analyzed on a periodic basis to identify if we have experienced significant changes in our selling prices.
Identifying the performance obligations, allocation of the transaction price, and the period over which revenue is recognized requires judgment and the use of estimates by management. Any changes to our estimates could materially impact our revenue recognition.
Deferred Commissions
Deferred commissions are deferred and then amortized on a straight-line basis over a period of benefit that we have determined to be generally four years. We determined the period of benefit by taking into consideration our customer contracts, our technology and other factors. Amortization of deferred commissions is included in sales and marketing expenses in the accompanying consolidated statements of operations and comprehensive loss.
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Business Combinations
We estimate the fair value of assets acquired and liabilities assumed in a business combination. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired customer bases, acquired technology and acquired trade names, useful lives, royalty rates, and discount rates.
The estimates are inherently uncertain and subject to refinement during the measurement period for an acquisition, which may last up to one year from the acquisition date. During the measurement period, we may record adjustments to the fair value of tangible and intangible assets acquired and liabilities assumed, with a corresponding offset to goodwill. After the conclusion of the measurement period or the final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to earnings. Historically, there have been no significant changes in our estimates or assumptions. There were no acquisitions during the year ended December 31, 2023.
Goodwill, Acquisition Intangibles and Other Long-Lived Assets - Impairment Assessment
Goodwill represents the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. We assess goodwill for impairment for our reporting unit on an annual basis during our fourth fiscal quarter using an October 1 measurement date unless circumstances require a more frequent measurement.
When evaluating goodwill for impairment, we may first perform an assessment qualitatively whether it is more likely than not that our reporting unit's carrying amount exceeds its fair value, referred to as a “step zero” approach. If, based on the review of the qualitative factors, we determine it is not more likely than not that the fair value of our reporting unit is less than its carrying value, we would bypass the two-step impairment test. Events and circumstances we consider in performing the “step zero” qualitative assessment include significant underperformance relative to historical or projected future operating results, significant changes in our use of acquired assets or the strategy for our overall business, significant negative industry or economic trends, and significant declines in our stock price for a sustained period. If we conclude that it is more likely than not that our reporting unit's fair value is less than its carrying amount, we would perform the first step (“step one”) of the two-step impairment test and calculate the estimated fair value of the reporting unit by using discounted cash flow valuation models and by comparing our reporting unit to guideline publicly traded companies. These methods require estimates of our future revenues, profits, capital expenditures, working capital, and other relevant factors, as well as selecting appropriate guideline publicly traded companies for our reporting unit. We would estimate these amounts by evaluating historical trends, current budgets, operating plans, industry data, and other relevant factors. Alternatively, we may bypass the qualitative assessment described above for our reporting unit in any period and proceed directly to performing step one of the goodwill test.
We performed a step zero qualitative analysis for our assessment of goodwill impairment for fiscal years 2023 and 2022. After evaluating and weighing all relevant events and circumstances, we concluded that it is not more likely than not that the fair value of our reporting unit was less than its carrying amount. Consequently, we did not perform a step one quantitative analysis and determined goodwill was not impaired for our reporting unit for fiscal years 2023 and 2022.
Our intangible assets that have finite useful lives and other long-lived assets are assessed for potential impairment when there is evidence that events and circumstances related to our financial performance and economic environment indicate the carrying amount of the assets may not be recoverable. When impairment indicators are identified, we test for impairment using undiscounted cash flows. If such tests indicate impairment, then we measure and record the impairment as the difference between the carrying value of the asset and the fair value of the asset. Significant management judgment is required in forecasting future operating results used in the preparation of the projected cash flows. Should different conditions prevail, material write downs of our intangible assets or other long-lived assets could occur. We review the estimated remaining useful lives of our acquired intangible assets at each reporting period. A reduction in our estimate of remaining useful lives, if any, could result in increased annual amortization expense in future periods. We did not recognize any impairment charges on intangible assets that have finite useful lives or other long-lived assets in fiscal years 2023 and 2022.
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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.
We account for uncertainty in tax positions by recognizing a tax benefit from uncertain tax positions when it is more likely than not that the position will be sustained upon examination. Evaluating our uncertain tax positions, and determining our provision for (benefit from) income taxes are inherently uncertain and require making judgments, assumptions, and estimates.
While we believe that we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for (benefit from) income taxes and the effective tax rate in the period in which such determination is made.
The (provision for) benefit from income taxes includes the impact of reserve provisions and changes to reserves as well as the related net interest and penalties. In addition, we are subject to the continuous examination of our income tax returns by the United States Internal Revenue Service and other tax authorities that may assert assessments against us. We regularly assess the likelihood of adverse outcomes resulting from these examinations and assessments to determine the adequacy of our (provision for) benefit from income taxes.
Recent Accounting Pronouncements
For information on recent accounting pronouncements, see Recent Accounting Pronouncements in Note 1—Description of Business and Summary of Significant Accounting Policies in the notes to the consolidated financial statements.
Non-GAAP Financial Measures
In addition to our results determined in accordance with U.S. GAAP, we believe the following non-GAAP measures are useful in evaluating our operating performance and liquidity. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance and assists in comparisons with other companies, some of which use similar non-GAAP financial information to supplement their U.S. GAAP results. The non-GAAP financial information is presented for supplemental informational purposes only and should not be considered a substitute for financial information presented in accordance with U.S. GAAP, and may be different from similarly-titled non-GAAP measures used by other companies. A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with U.S. GAAP. Investors are encouraged to review the related U.S. GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable U.S. GAAP financial measures.
Non-GAAP Operating Income
We define non-GAAP operating income as loss from operations excluding the impact of stock-based compensation, transaction costs, sponsor costs, other non-recurring costs, amortization of acquisition-related intangibles, and the impact of fair value adjustments to acquired unearned revenue relating to the Take-Private Transaction and Certica, Impact, Elevate Data Sync, and LearnPlatform 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.
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The following table provides a reconciliation of loss from operations to non-GAAP operating income for each of the periods indicated:
Year ended
December 31,
Year ended
December 31,
Year ended
December 31,
(dollars in thousands)
Loss from operations
Stock-based compensation
Transaction costs (1)
Sponsor costs (2)
Impairment charges (3)
Other non-recurring costs (4)
Amortization of acquisition related intangibles
Fair value adjustment in connection with purchase accounting
Non-GAAP operating income
Represents expenses incurred with third parties as part of the Company’s merger and acquisition activity, including due diligence, closing and post-close integration activities.
Represent expenses incurred for services provided by Thoma Bravo and their affiliates.
(3) Includes impairment charges as follows:
Year ended
December 31,
Year ended
December 31,
Year ended
December 31,
(dollars in thousands)
Impairment on Bridge disposal group
Impairment of leased properties
Total impairment charges
(4) Includes other non-recurring costs as follows:
Year ended
December 31,
Year ended
December 31,
Year ended
December 31,
(dollars in thousands)
Professional services related to sale of Bridge
Loss on exit of leased properties
Contract modification fees
Employee severance
Workforce realignment costs
Other insignificant non-recurring costs
Total other non-recurring costs
Free Cash Flow
We define free cash flow as net cash provided by operating activities less purchases of property and equipment and intangible assets, net of proceeds from disposals of property and equipment. We believe free cash flow facilitates period-to-period comparisons of liquidity. We consider free cash flow to be an important measure because it measures the amount of cash we generate and reflects changes in working capital. We use free cash flow in conjunction with traditional U.S. GAAP measures as part of our overall assessment of our liquidity, including the preparation of our annual operating budget and quarterly forecasts, to evaluate the effectiveness of our business strategies, and to communicate with our board of directors concerning our liquidity.
The following table provides a reconciliation of net cash provided by operating activities to free cash flow for each of the periods indicated:
Year ended
December 31,
Year ended
December 31,
Year ended
December 31,
(dollars in thousands)
Net cash provided by operating activities
Purchases of property and equipment and intangible assets
Proceeds from disposals of property and equipment
Free cash flow
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Adjusted EBITDA
EBITDA is defined as earnings before debt-related costs, including interest and loss on debt extinguishment, benefit for taxes, depreciation, and amortization. We further adjust EBITDA to exclude certain items of a significant or unusual nature, including stock-based compensation, transaction costs, sponsor costs, impairment charges, other non-recurring costs, effects of foreign currency transaction gains and losses, amortization of acquisition-related intangibles, interest income, and the impact of fair value adjustments to acquired unearned revenue relating to the Take-Private Transaction and Certica, Impact, Elevate Data Sync, and LearnPlatform 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 of directors. In addition, it provides a useful measure for period-to-period comparisons of our business, as it removes the effect of certain non-cash expenses and certain variable charges.
Adjusted EBITDA has limitations as a financial measure, should be considered as supplemental in nature, and is not meant as a substitute for the related financial information prepared in accordance with U.S. GAAP.
The following table presents a reconciliation of net loss to adjusted EBITDA for each of the periods indicated:
Year ended
December 31,
Year ended
December 31,
Year ended
December 31,
(dollars in thousands)
Net Loss
Interest on outstanding debt and loss on debt extinguishment
Benefit for taxes
Depreciation
Amortization
Stock-based compensation
Transaction costs (1)
Sponsor costs (2)
Impairment charges (3)
Other non-recurring costs (4)
Effects of foreign currency transaction (gains) and losses
Amortization of acquisition-related intangibles
Interest income
Fair value adjustments to deferred revenue in connection with purchase accounting
Adjusted EBITDA
Represents expenses incurred with third parties as part of the Company’s merger and acquisition activity, including due diligence, closing and post-close integration activities.
Represent expenses incurred for services provided by Thoma Bravo and their affiliates.
(3) Includes impairment charges as follows:
Year ended
December 31,
Year ended
December 31,
Year ended
December 31,
(dollars in thousands)
Impairment on Bridge disposal group
Impairment of leased properties
Total impairment charges
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(4) Includes other non-recurring costs as follows:
Year ended
December 31,
Year ended
December 31,
Year ended
December 31,
(dollars in thousands)
Professional services related to sale of Bridge
Loss on exit of leased properties
Contract modification fees
Employee severance
Workforce realignment costs
Other insignificant non-recurring costs
Total other non-recurring costs
Allocated Combined Receipts
We define Allocated Combined Receipts as the combined receipts of our Company and companies that we have acquired allocated to the period of service delivery. We calculate Allocated Combined Receipts as the sum of (i) revenue and (ii) the impact of fair value adjustments to acquired unearned revenue related to the Take-Private Transaction and Certica, Impact and Elevate Data Sync acquisitions that we do not believe are reflective of our ongoing operations. Management uses this measure to evaluate organic growth of the business period over period, as if the Company had operated as a single entity and excluding the impact of acquisitions or adjustments due to purchase accounting. Organic growth in current and future periods is driven by sales to new customers and the addition of additional subscriptions and functionality to existing customers, offset by customer cancellations or reduced subscriptions upon renewal.
We believe that it is important to evaluate growth on this organic basis, as it is an indication of the success of our services from the customer’s perspective that is not impacted by corporate events such as acquisitions or the fair value estimates of acquired unearned revenue. We believe this measure is useful to investors because it illustrates the trends in our organic revenue growth and allows investors to analyze the drivers of revenue on the same basis as management.
The following table presents a reconciliation of revenue to Allocated Combined Receipts for each of the periods indicated:
Year ended
December 31,
Year ended
December 31,
Year ended
December 31,
(dollars in thousands)
Revenue
Fair value adjustments to deferred revenue in connection with purchase accounting
Allocated Combined Receipts
Item 7A. Quantitative and Qualitat ive Disclosures About Market Risk.
We are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign currency exchange rates and interest rates and inflation. We do not hold or issue financial instruments for trading purposes.
Foreign Currency Exchange Risk
Our reporting currency is the U.S. dollar. Due to our international operations, we have foreign currency risks related to operating expense denominated in currencies other than the U.S. dollar, particularly the euro. Most of our sales are denominated in U.S. dollars, and therefore our revenue is not currently subject to significant foreign currency risk. Our operating expenses are denominated in the currencies of the countries in which our operations are located, which are primarily in the United States, Europe, Australia, and New Zealand. Our 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. During the year ended December 31, 2023, 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.
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Interest Rate Risk
We had cash, cash equivalents and restricted cash of $344.2 million as of December 31, 2023, 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 December 31, 2023, we had in place a $125.0 million Senior Revolver, with availability of $125.0 million, and approximately $491.3 million outstanding under the Senior Term Loan. The Senior Revolver bears interest at 2.5% whereas the Senior Term Loan bears interest at 2.75% plus a variable applicable rate. As a result of increased federal funds interest rates, the interest rate applicable to our Senior Term Loan increased from 6.12% as of December 31, 2022 to 8.68% as of December 31, 2023, impacting our cost of debt. A hypothetical 1% increase or decrease to the interest rate applicable to our Senior Term Loan during the year ended December 31, 2023 would not have had a material impact on our consolidated financial statements.
We have an agreement to maintain cash balances at a financial institution of no less than $3.2 million as collateral for several letters of credit for purposes of securing certain of the Company’s obligations under facility leases and other contractual cash collateral arrangements.
Inflation Risk
We do not believe that inflation has had a material effect on our business, financial condition or results of operations in our fiscal year ended December 31, 2023 because substantially all of our sales are denominated in U.S. dollars, which have not been subject to material currency inflation, and our operating expenses that are denominated in currencies other than U.S. dollars have not been subject to material currency inflation.
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Item 8. Financial Statemen ts and Supplementary Data.
INSTRUCTURE HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm (PCAOB ID: 42 )
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Loss
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Instructure Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Instructure Holdings, Inc. (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations and comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 21, 2024 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
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Identification of performance obligations
Description of the Matter
As described in Note 1 to the consolidated financial statements, many of the Company's contracts with customers contain multiple performance obligations, which are accounted for separately when recognizing revenue if they are distinct.
The Company enters into contracts with its customers that may include promises to transfer subscriptions, support services, training, and other types of professional services. Auditing the Company’s revenue recognition was challenging and complex due to the effort required to analyze the accounting treatment for the Company’s various product and service offerings. This involved assessing the impact of terms and conditions in contracts with customers to determine whether products and services are considered distinct performance obligations and the related timing of revenue recognition.
How We
Addressed the Matter in Our Audit
We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company's identification and evaluation of distinct performance obligations and the determination of the timing of revenue recognition.
Our audit procedures also included, among others, an evaluation of management’s contract assessment and identification of performance obligations. We inspected a sample of customer contracts and reviewed management’s contract assessment and identification of performance obligations and tested the related timing of revenue recognition.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2012.
Salt Lake City, Utah
February 21, 2024
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Instructure Holdings, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Instructure Holdings, Inc.’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Instructure Holdings, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the accompanying consolidated balance sheets of the Company as of December 31, 2023 and 2022, the related consolidated statements of operations and comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes and our report dated February 21, 2024 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, 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.
/s/ Ernst & Young LLP
Salt Lake City, Utah
February 21, 2024
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INSTRUCTURE HOLDINGS, INC.
Consolidated B alance Sheets
(in thousands, except per share data)
December 31,
Assets
Current assets:
Cash and cash equivalents
Accounts receivable—net
Prepaid expenses
Deferred commissions
Other current assets
Total current assets
Property and equipment, net
Right-of-use assets
Goodwill
Intangible assets, net
Noncurrent prepaid expenses
Deferred commissions, net of current portion
Deferred tax assets
Other assets
Total assets
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
Accrued liabilities
Lease liabilities
Long-term debt, current
Deferred revenue
Total current liabilities
Long-term debt, net of current portion
Deferred revenue, net of current portion
Lease liabilities, net of current portion
Deferred tax liabilities
Other long-term liabilities
Total liabilities
Stockholders’ equity:
Common stock, par value $ 0.01 per share; 500,000 shares authorized as of December 31, 2023 and 2022, 145,207 and 142,917 shares issued and outstanding as of December 31, 2023 and 2022, respectively.
Additional paid-in capital
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes.
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INSTRUCTURE HOLDINGS, INC.
Consolidated Statem ents of Operations and Comprehensive Loss
(in thousands, except per share amounts)
Year ended
December 31,
Year ended
December 31,
Year ended
December 31,
Revenue:
Subscription and support
Professional services and other
Total revenue
Cost of revenue:
Subscription and support
Professional services and other
Total cost of revenue
Gross profit
Operating expenses:
Sales and marketing
Research and development
General and administrative
Impairment on disposal group
Total operating expenses
Loss from operations
Other income (expense):
Interest income
Interest expense
Other income (expense), net
Loss on extinguishment of debt
Total other income (expense), net
Loss before income tax benefit
Income tax benefit
Net loss and comprehensive loss
Net loss per common share, basic and diluted
Weighted-average common shares used in computing basic and diluted
net loss per common share attributable to common stockholders
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.
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INSTRUCTURE HOLDINGS, INC.
Consolidated Statements of Stockholders’ Equity
(in thousands)
Common
Stock, $0.01
Additional
Total
Par Value
Paid-In
Accumulated
Stockholders’
Shares
Amount
Capital
Deficit
Equity
Balances at December 31, 2020
Repurchase of TopCo Units
Issuance of common stock in connection with initial public offering, net of underwriters' discounts and commissions and issuance costs
Vesting of restricted stock units
Shares withheld for tax withholding on vesting of restricted stock units
Stock-based compensation
Net loss
Balances at December 31, 2021
Vesting of restricted stock units
Purchase of ESPP shares
Restricted stock withheld for taxes
Stock-based compensation
Net loss
Balances at December 31, 2022
Vesting of restricted stock units
Purchase of ESPP shares
Restricted stock withheld for taxes
Stock-based compensation
Net loss
Balances at December 31, 2023
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.
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INSTRUCTURE HOLDINGS, INC.
Consolidated Statem ents of Cash Flows
(in thousands)
Year ended
December 31,
Year ended
December 31,
Year ended
December 31,
Operating Activities:
Net loss
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation of property and equipment
Amortization of intangible assets
Amortization of deferred financing costs
Impairment on disposal group
Loss on extinguishment of debt
Stock-based compensation
Deferred income taxes
Other
Changes in assets and liabilities:
Accounts receivable, net
Prepaid expenses and other assets
Deferred commissions
Right-of-use assets
Accounts payable and accrued liabilities
Deferred revenue
Lease liabilities
Other liabilities
Net cash provided by operating activities
Investing Activities:
Purchases of property and equipment
Proceeds from sale of property and equipment
Proceeds from sale of Bridge
Business acquisitions, net of cash acquired
Net cash provided by (used in) investing activities
Financing Activities:
IPO proceeds, net of offering costs paid of $ 6,068
Proceeds from issuance of common stock from employee equity plans
Shares repurchased for tax withholdings on vesting of restricted stock units
Proceeds from issuance of term debt, net of discount
Distributions to stockholders
Repayments of long-term debt
Term Loan prepayment premium
Payments of financing costs
Net cash used in financing activities
Foreign currency impacts on cash and cash equivalents
Net increase 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.
INSTRUCTURE HOLDINGS, INC.
Consolidated Statements of Cash Flows
(in thousands)
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:
December 31,
December 31,
December 31,
Cash and equivalents
Restricted cash
Total cash, cash equivalents and restricted cash
See accompanying notes.
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INSTRUCTURE HOLDINGS, INC.
Notes to Consolidated Financial Statements
1. Description of Business and Summary of Significant Accounting Policies
Organization
On March 24, 2020, Instructure Parent, L.P. (“TopCo”) acquired 100 percent of Instructure, Inc.’s equity. Instructure Intermediate Holdings I, Inc. was a wholly-owned subsidiary of TopCo and was formed on January 14, 2020 by Thoma Bravo for the purpose of purchasing Instructure, Inc. and had no operations prior to the Take-Private Transaction. On May 26, 2021, Instructure Intermediate Holdings I, Inc. changed its name to Instructure Holdings, Inc (the “Company,” “Instructure,” “we,” “our,” or “us”).
Instructure is an education technology company dedicated to elevating student access, amplifying the power of teaching, and inspiring everyone to learn together. Instructure’s learning platform delivers a next-generation learning management system (“LMS”), robust assessments for learning, actionable analytics, and engaging, dynamic content. Instructure offers its learning platform through a Software-as-a-Service, or SaaS, business model. 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 consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. The accompanying consolidated financial statements include our accounts and those of our wholly-owned subsidiaries. All intercompany transactions have been eliminated in consolidation.
On July 9, 2021, the Company effected a 126,239.815 -for-1 stock split of its issued and outstanding shares of common stock and made comparable and equitable adjustments to its equity awards in accordance with the terms of the awards. The par value of the common stock was not adjusted as a result of the stock split. Accordingly, all share and per share amounts for all periods presented in the accompanying consolidated financial statements and notes thereto have been adjusted retrospectively, where applicable, to reflect this stock split. In connection with the stock split, on July 9, 2021, the Company’s board of directors and stockholders approved the Certificate of Amendment to the Amended and Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 2,000 shares to 500,000,000 shares and to increase the number of authorized shares of preferred stock from zero shares to 50,000,000 shares. No preferred stock has been issued or outstanding.
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 $ 234.0 million after deducting underwriting discounts and commissions. On August 19, 2021, the underwriters partially exercised their over-allotment option and purchased an additional 1,675,000 shares of common stock at the offering price of $ 20.00 per share. The Company received additional net proceeds of $ 31.4 million after deducting underwriting discounts and commissions.
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, acquisition related estimates, our assessment for impairment of goodwill, intangible assets, and other long-lived assets, the standalone selling price of performance obligations, timing of professional services revenue recognition, and the determination of the period of benefit for deferred commissions. We base our estimates on historical experience and on various other assumptions which we believe to be reasonable.
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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 in the consolidated financial statements.
Net Loss Per Share Attributable to Common Stockholders
Basic net loss per share attributable to common stockholders for the year ended December 31, 2023, 2022, and 2021 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. Restricted stock units and shares purchased through the employee stock purchase plan are considered to be common stock equivalents in the year ended December 31, 2023, 2022, and 2021.
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):
Year ended
December 31,
Year ended
December 31,
Year ended
December 31,
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, basic and diluted
For the year ended December 31, 2023, 2022, and 2021, we incurred net losses and, therefore, the effect of our outstanding restricted stock units and rights to purchase common stock through the employee stock purchase plan were not included in the calculation of diluted net loss per share as the effect would be anti-dilutive. The following table contains share totals with a potentially dilutive impact (in thousands):
Year ended
December 31,
Year ended
December 31,
Year ended
December 31,
Restricted stock units
Employee stock purchase plan
Total
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, cash equivalents and accounts receivable. We deposit cash with high credit quality financial institutions, which typically 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 no customers with revenue as a percentage of total revenue exceeding 10% for the periods presented.
As of December 31, 2023, and 2022 there were no customers with outstanding net accounts receivable balances as a percentage of total outstanding net accounts receivable greater than 10 %.
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Cash and Cash Equivalents
We consider all short-term highly liquid investments purchased with original maturities of three months or less at the time of acquisition to be 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 and comprehensive loss.
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.
The following is a roll-forward of our provision for credit losses (in thousands):
Balance
Beginning
of Period
Charged to
Costs or
Expenses
Deductions (1)
Balance at
End of
Period
Provision for Credit Losses
Year ended December 31, 2023
Year ended December 31, 2022
Year ended December 31, 2021
Deductions include actual accounts written-off, net of recoveries.
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). The estimated useful life of each asset category is as follows:
Estimated
Useful Life
Computer and office equipment
2 - 3 years
Purchased software
2 - 3 years
Furniture and fixtures
2 - 5 years
Capitalized software development costs
3 years
Leasehold improvement and other
Lesser of lease term or useful life
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 consolidated 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.
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Acquired finite-lived intangible assets are amortized on a straight-line basis over the estimated useful life of the asset, which ranges from one to ten years .
When there are indicators of potential impairment, we evaluate recoverability of the carrying values of property and equipment and finite-lived 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.
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.
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.
Fair Value
Our short-term financial instruments include cash equivalents, accounts receivable, accounts payable and accrued liabilities and are carried on the consolidated financial statements as of December 31, 2023 and 2022 at amounts that approximate fair value due to their short-term maturity dates.
Goodwill
Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. Goodwill is not subject to amortization, but is tested annually for impairment within our fourth fiscal quarter using an October 1 measurement date or more frequently if there are indicators of impairment. We first perform a qualitative assessment to determine if it is more likely than not that our reporting unit's carrying amount exceeds its fair value, referred to as a “step zero” approach. If, based on the review of the qualitative factors, we determine it is not more likely than not that the fair value of our reporting unit is less than its carrying value, we would bypass the quantitative impairment test. Management considers the following potential indicators of impairment: (1) significant underperformance relative to historical or projected future operating results; (2) significant changes in our use of acquired assets or the strategy of our overall business; (3) significant negative industry or economic trends; and (4) a significant decline in our stock price for a sustained period. We operate under one reporting unit and, as a result, evaluate goodwill based on our fair value as a whole. Our current year test did not result in any of the goodwill balance as no indicators of were identified. Refer to Note 3—Acquisitions and Disposals for additional information regarding of goodwill recognized in the year ended December 31, 2021 related to the sale of . We did not recognize any additional charges in any of the periods presented. We have no other intangible assets with indefinite useful lives. There were no acquisitions during the year ended December 31, 2023.
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 December 31, 2023 and 2022 were $ 2.8 million and $ 0.6 million, respectively.
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We determined revenue recognition through the following steps:
Identification of the contract, or contracts, with a customer
Identification of the performance obligations in the contract
Determination of the transaction price
Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when, or as, we satisfy a performance obligation
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 and comprehensive loss.
Deferred Revenue
Deferred revenue consists of billings and payments received in advance of revenue recognition generated by our subscription and support services and professional services and other, as described above.
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.
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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.
Advertising Costs
Advertising costs are expensed as incurred and are included in sales and marketing expenses in the consolidated statements of operations and comprehensive loss. Advertising expenses totaled $ 8.4 million, $ 9.4 million, and $ 8.3 million, for the year ended December 31, 2023, 2022, and 2021 , respectively.
Stock-Based Compensation
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 price of our common stock 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:
Fair Value of Our Common Stock. We rely on the closing price of our common stock as reported by the New York Stock Exchange on the date of grant to determine the fair value of our common stock.
Risk-Free Interest Rate. We base the risk-free interest rate used in the Black-Scholes option pricing model on the implied yield available on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options.
Expected Term. For the 2021 ESPP, we used an expected term of 0.6 years for the first offering period and used an expected term of 0.5 years for subsequent offering periods.
Volatility. For the first offering period, we estimated the price volatility factor based on the historical volatilities of our comparable companies as we did not have a sufficient trading history for our common stock. To determine our comparable companies, we considered public enterprise cloud-based application providers and selected those that were similar to us in size, stage of life cycle, and financial leverage. Beginning with the second offering period we began using the trading history of our own common stock to determine expected volatility.
Expected Dividend Yield. We have not paid and do not expect to pay dividends for the foreseeable future.
Business Combinations
We estimate the fair value of assets acquired and liabilities assumed in a business combination. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable, and as a result, actual results may differ from estimates.
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Foreign Currency
The functional currency of our foreign subsidiaries is the U.S. dollar. Monetary assets and liabilities denominated in a foreign currency are remeasured into U.S. dollars at the exchange rates in effect at the balance sheet dates. Income and expense accounts are remeasured on the date of the transaction using the exchange rate in effect on the transaction date. Non-monetary assets, liabilities, and equity transactions are converted at historical exchange rates in effect at the time of the transaction. Foreign currency transaction gains and losses are recorded in other income (expense), net in the consolidated statements of operations and comprehensive loss.
Research and Development
With the exception of capitalized software development costs, research and development costs are expensed as incurred.
Risks and Uncertainties
We are subject to all of the risks inherent in an early stage business. These risks include, but are not limited to, a limited operating history, new and rapidly evolving markets, dependence on the development of new services, unfavorable economic and market conditions, changes in level of demand for our services, and the timing of new application introductions. If we fail to anticipate or to respond adequately to technological developments in our industry, changes in customer or supplier requirements, or changes in regulatory requirements or industry standards, or any significant delays in the development or introduction of services, our business could be harmed.
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.
In recognizing tax benefits from uncertain tax positions, we assess whether it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. As we expand internationally, we will face increased complexity in determining the appropriate tax jurisdictions for revenue and expense items, and as a result, we may record unrecognized tax benefits in the future. At that time, we would make adjustments to these potential future reserves when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. Our estimate of the potential outcome of any uncertain tax position is subject to management’s assessment of relevant risks, facts and circumstances existing at that time. To the extent that the final tax outcome of these matters would be different to the amounts we may potentially record in the future, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact on our financial condition and operating results.
Recent Accounting Pronouncements
Recent accounting pronouncements not yet adopted
In November 2023, the FASB issued ASU No. 2023-07, Improvements to Reportable Segment Disclosures (Topic 280), which updates reportable segment disclosure requirements by requiring disclosures of significant reportable segment expenses that are regularly provided to the Chief Operating Decision Maker (“CODM”) and included within each reported measure of a segment's profit or loss. The ASU is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements and related notes.
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In December 2023, the FASB issued ASU No. 2023-09, Improvements to Income Tax Disclosures (Topic 740), which requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as additional information on income taxes paid. The ASU is effective on a prospective basis for annual periods beginning after December 15, 2024. Early adoption is also permitted for annual financial statements that have not yet been issued or made available for issuance. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements and related notes.
2. Property and Equipment
Property and equipment consisted of the following (in thousands):
December 31,
Computer and office equipment
Capitalized software development costs
Furniture and fixtures
Leasehold improvements and other
Total property and equipment
Less accumulated depreciation and amortization
Total
Accumulated amortization for capitalized software development costs was $ 4.7 million and $ 2.4 million at December 31, 2023 and 2022, respectively. Amortization expense for capitalized software development costs for the year ended December 31, 2023, 2022, and 2021 was $ 2.6 million, $ 1.4 million, and $ 0.7 million, respectively, and is recorded within subscription and support cost of revenue in the consolidated statements of operations and comprehensive loss.
3. Acquisitions and Disposals
2022 Acquisitions
On April 13, 2022, we acquired all outstanding shares of Concentric Sky, Inc. (“Concentric Sky,” which was rebranded to “Canvas Credentials” subsequent to acquisition) for the purpose of our continued commitment to building the education industry’s most integrated teaching and learning platform to support lifelong learning. The acquisition did not have a material effect on our revenue or earnings in the consolidated statements of operations and comprehensive loss for the reporting periods presented. For tax purposes, a 338(h)(10) election was filed to step up the tax basis of assets acquired to fair market value.
The final allocation of the purchase price was as follows (in thousands):
Total purchase consideration
Identifiable assets acquired
Cash
Accounts receivable
Prepaid expenses and other assets
Intangible assets: developed technology
Intangible assets: customer relationships
Total assets acquired
Liabilities assumed
Accounts payable and accrued liabilities
Deferred revenue
Total liabilities assumed
Goodwill
Total purchase consideration
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On December 15, 2022, we acquired all outstanding shares of LearnPlatform, Inc. (“LearnPlatform”) to accelerate the impact of the Instructure learning platform for schools, universities, and shared partner providers by adding evidence-based insight into inventory, compliance, procurement, and usage. The acquisition did not have a material effect on our revenue or earnings in the consolidated statements of operations and comprehensive loss for the reporting periods presented. At the time of the acquisition, we recorded a provisional net deferred tax liability of $ 3.4 million in purchase accounting due to the step up in book basis of intangible assets as a result of the stock acquisition. We expect the net deferred tax liability to decrease as book amortization expense is recognized on the acquisition-related intangible assets. During the third quarter of 2023, an adjustment of $ 1.1 million was made to the provisional net deferred tax liability, with a corresponding decrease to goodwill, in connection with the completion of the LearnPlatform tax filings for the period ending December 15, 2022.
The final allocation of the purchase price was as follows (in thousands):
Total purchase consideration
Identifiable assets acquired
Cash
Accounts receivable
Prepaid expenses and other assets
Right-of-use asset
Deferred tax asset
Intangible assets: developed technology
Intangible assets: customer relationships
Intangible assets: trade names and trademarks
Intangible assets: non-compete agreements
Total assets acquired
Liabilities assumed
Accounts payable and accrued liabilities
Deferred revenue
Lease liabilities
Deferred tax liabilities
Total liabilities assumed
Goodwill
Total purchase consideration
For all periods presented, the excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill, of which $ 9.7 million is expected to be deductible for tax purposes from the Canvas Credentials acquisition. The goodwill generated from all 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 useful life of five years. Amortization of developed technology is included in subscription and support cost of revenue expenses in the accompanying consolidated statements of operations and comprehensive loss. Customer relationships represent the estimated fair value of the acquired customer bases and are amortized over the estimated useful life of seven years. The trade names acquired are amortized over the estimated useful life of one to ten years. Amortization of customer relationships and trade names is included in sales and marketing expenses in the accompanying consolidated statements of operations and comprehensive loss. Non-compete agreements are amortized over an estimated useful life of three years and amortization is included in research and development expenses in the accompanying consolidated statements of operations and comprehensive .
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Sale of getBridge LLC (“Bridge”)
On February 26, 2021, the Company sold Bridge, its corporate learning platform and wholly-owned subsidiary, for a total purchase price of $ 47.0 million. We received cash proceeds net of transaction costs of $ 46.0 million. The proceeds from this sale were used to pay down the balance of our then outstanding Term Loan (as defined in Note 5—Credit Facility). During the year ended December 31, 2021, we recognized a pretax loss on this divestiture of $ 1.2 million, which is included in operating expenses as impairment on disposal group in the accompanying consolidated statements of operations and comprehensive loss.
4. Goodwill and Intangible Assets
Goodwill activity was as follows (in thousands):
Total
Balance as of December 31, 2022
Adjustments (Note 3 - Acquisitions and Disposals)
Balance as of December 31, 2023
Intangible assets consisted of the following (in thousands):
Weighted-Average Remaining Useful Life
December 31, 2023
December 31, 2022
Gross
Accumulated Amortization
Net
Gross
Accumulated Amortization
Net
Software
0 Months
Trade names
74 Months
Developed technology
20 Months
Customer relationships
45 Months
Non-competition agreements
24 Months
Total
Amortization expense for intangible assets was $ 143.0 million, $ 136.7 million, and $ 134.0 million, for the year ended December 31, 2023, 2022, and 2021, respectively.
Based on the recorded intangible assets at December 31, 2023, estimated amortization expense is expected to be as follows (in thousands):
Amortization
Years Ending December 31,
Expense
Thereafter
Total
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5. Credit Facility
On March 24, 2020, we entered into a credit agreement with a syndicate of lenders and Golub Capital Markets LLC, as administrative agent and collateral agent, and Golub Capital Markets LLC and Owl Rock Capital Advisors LLC, as joint bookrunners and joint lead arrangers (the “Credit Agreement”). The Credit Agreement provided for a senior secured term loan facility (the “Initial Term Loan”) in an original aggregate principal amount of $ 775.0 million, which was supplemented by an incremental term loan pursuant to the First Incremental Amendment and Waiver to Credit Agreement, dated as of December 22, 2020, in a principal amount of $ 70.0 million (the “Incremental Term Loan” and, together with the Initial Term Loan, the “Term Loan”). The maturity date for the Term Loan was March 24, 2026 , with the remaining principal due in full on the maturity date. 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 aggregate original principal amount of the Term Loan, reduced as a result of the application of prepayments. 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 (a “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, provided 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 Loans (as defined in the Credit Agreement). The applicable margins set forth on the pricing grid would become mandatory beginning on the last day of the tenth full fiscal quarter ending after March 24, 2020. Interest payments were due quarterly, or more frequently, based on the terms of the Credit Agreement.
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 5.5 %. In connection with the Company's IPO, the Company made a principal prepayment in August 2021 of $ 224.3 million on its outstanding Term Loan. In connection with the underwriters' partial exercise of their over-allotment option in August 2021, the Company made an additional principal prepayment in August 2021 of $ 30.8 million on its outstanding Term Loan. The Company also incurred a 1.5 % prepayment premium in conjunction with each principal prepayment.
The Company incurred fees with respect to the Revolving Credit Facility, including a commitment fee of 0.50 % per annum of unused commitments under the Revolving Credit Facility.
On October 29, 2021, we entered into a credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, (the “2021 Credit Agreement”) governing our senior secured credit facilities (the “Senior Secured Credit Facilities”), consisting of a $ 500.0 million senior secured term loan facility (the “Senior Term Loan”) and a $ 125.0 million senior secured revolving credit facility (the “Senior Revolver”). The proceeds from the Senior Secured Credit Facilities were used, in addition to cash on hand, to (1) refinance, in full, all existing indebtedness under the Credit Agreement (the “Refinancing”), (2) pay certain fees and expenses incurred in connection with the entry into the 2021 Credit Agreement and the Refinancing, and (3) finance working capital needs of the Company and its subsidiaries for general corporate purposes.
All of the Company’s obligations under the Senior Secured Credit Facilities are guaranteed by the subsidiary guarantors named therein. The Senior Revolver includes a $ 10.0 million sublimit for the issuance of letters of credit. Any issuance of letters of credit will reduce the amount available under the Senior Revolver. As of December 31, 2023 , we had no outstanding borrowings under our Senior Revolver.
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The Senior Term Loan has a seven-year maturity and the Senior Revolver has a five-year maturity. Commencing June 30, 2022, we were required to repay the Senior Term Loan portion of the Senior Secured Credit Facilities in quarterly principal installments of 0.25 % of the aggregate original principal amount of the Senior Term Loan at closing, with the balance payable at maturity. Borrowings under the Senior Secured Credit Facilities bore interest, at the Company’s option, at: (i) Base Rate equal to the greater of (a) the Federal Funds Rate plus 1/2 of 1.00 %, (b) the rate of interest in effect for such day as publicly announced from time to time by the administrative agent as its “prime rate,” (c) a Eurocurrency Rate for such date plus 1.00 % and (d) 1.00 %; or (ii) the Eurocurrency Rate (provided that the Eurocurrency Rate applicable to the Senior Term Loan shall not be less than 0.50 % per annum). The Applicable Rate for the Senior Term Loan with respect to Eurocurrency Rate Loans was 2.75 % per annum and 1.75 % per annum for Base Rate Loans. The Applicable Rate for the Senior Revolver with respect to Eurocurrency Rate Loans, SONIA Loans, and Alternative Currency Term Rate Loans ranged from 2.00 % to 2.5 % subject to the Company’s Consolidated First Lien Net Leverage Ratio, while the Applicable Rate for Base Rate Loans ranged from 1.00 % to 1.50 % subject to the Company’s Consolidated First Lien Net Leverage Ratio. We are also required to pay an unused commitment fee to the lenders under the Senior Revolver at the Applicable Commitment Fee of the average daily unutilized commitments. The Applicable Commitment Fee ranges from 0.40 % to 0.50 % subject to the Company’s Consolidated First Lien Net Leverage Ratio.
On June 21, 2023, we entered into the first amendment to the 2021 Credit Agreement (the “Amended 2021 Credit Agreement”) whereby all borrowings denominated in U.S. dollars and that incur interest or fees using the Eurocurrency Rate, which are determined by reference to the London Interbank Offered Rate (“LIBOR”), have been replaced with the Secured Overnight Financing Rate (“SOFR”). For SOFR loans, the loans denominated in dollars now bear interest at the Adjusted Term SOFR Rate, which is equal to the Term SOFR Reference Rate, as published by the CME Term SOFR Administrator, plus the Term SOFR Adjustment as dictated by the interest rate period elected by the Company. The Term SOFR Adjustment ranges from 0.11448 % to 0.42826 % per annum. The Applicable Rate (x) for the Initial Term Loans remains at 2.75 % per annum for SOFR loans and (y) for the Revolving Credit Facility remains at 2.50 % per annum with applicable step downs. The transition from LIBOR to SOFR became effective on July 5, 2023. All other terms and conditions in place under the 2021 Credit Agreement on the effective date of the Amended 2021 Credit Agreement remained unchanged and in full effect.
The 2021 Credit Agreement contains a financial covenant solely with respect to the Senior Revolver. If the outstanding amounts under the Senior Revolver exceed 35 % of the aggregate amount of the Senior Revolver commitments, we are required to maintain at the end of each fiscal quarter, commencing with the quarter ending June 30, 2022, a Consolidated Net Leverage Ratio of not more than 7.75 to 1.00 . As of December 31, 2023 , there was no amount outstanding under the Senior Revolver. The Company had $ 125.0 million of availability under the Senior Revolver as of December 31, 2023.
Debt discount costs of $ 13.6 million were incurred in connection with the Term Loan. An additional $ 3.8 million of debt discount costs were incurred after the IPO in August 2021 in connection with the prepayment premium associated with the Term Loan as the prepayments were treated as modifications for accounting purposes. These debt discount costs were being amortized into interest expense, as set forth in the consolidated statements of operations and comprehensive loss, over the contractual term of the Term Loan. As a result of the Refinancing in the fourth quarter of 2021, the Company wrote off the remaining $ 13.8 million of debt discount costs related to the Credit Facilities to loss on debt extinguishment in the consolidated statements of operations and comprehensive loss. Additionally, as a result of the Refinancing, the Company capitalized $ 1.0 million and $ 5.9 million of debt discount costs incurred in connection with the Senior Term Loan in long-term debt, current and long-term debt, net of current portion, respectively, on the consolidated balance sheets. The Company recognized $ 1.0 million, $ 1.0 million, and $ 2.3 million of amortization of debt discount costs for the years ended December 31, 2023, 2022, and 2021, respectively, which is recorded as interest expense in the accompanying consolidated statements of operations and comprehensive loss. At December 31, 2023 and 2022, the Company had an aggregate principal amount outstanding of $ 491.3 million and $ 496.3 million, respectively, under the Senior Term Loan, bearing interest at 8.68 % and 6.12 % , respectively. The Company had $ 4.9 million and $ 5.8 million of unamortized debt discount costs at December 31, 2023 and 2022, respectively, which is recorded as a reduction of the debt balance on the Company’s consolidated balance sheets.
Debt issuance costs of $ 0.7 million were incurred in connection with the Revolving Credit Facility. These debt issuance costs were being amortized into interest expense, as set forth in the consolidated statements of operations and comprehensive loss, over the contractual term of the Revolving Credit Facility. As a result of the Refinancing, the Company wrote off the remaining $ 0.5 million of debt issuance costs related to the Credit Facilities to loss on debt extinguishment in the consolidated statements of operations and comprehensive loss. Additionally, As a result of the Refinancing, the Company capitalized $ 0.2 million and $ 0.8 million of deferred issuance costs incurred in connection with the Senior Revolver in other current assets and other assets, respectively, on the consolidated balance sheets. The Company recognized $ 0.2 million, $ 0.2 million, and $ 0.1 million of amortization of debt issuance costs for the year ended December 31, 2023, 2022, and 2021, respectively, which is included in the accompanying consolidated statements of operations and comprehensive loss. The Company had $ 0.5 million and $ 0.7 million of unamortized debt issuance costs at December 31, 2023 and 2022, respectively, which are included in other current assets and other assets on the Company’s condensed consolidated balance sheets.
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In connection with the Refinancing, the Company was also required to pay a 1.5 % prepayment premium under the Credit Facilities totaling $ 8.1 million. Due to the Refinancing being treated as an extinguishment for accounting purposes, the prepayment premium was recorded to loss on extinguishment of debt in the consolidated statements of operations and comprehensive loss during the year ended December 31, 2021.
The Senior Secured Credit Facilities contain customary negative covenants. At December 31, 2023, the Company was in compliance with all applicable covenants pertaining to the Senior Secured Credit Facilities. The Company also maintained compliance with all applicable covenants pertaining to the Credit Facilities prior to the Refinancing.
The maturities of outstanding debt, as of December 31, 2023, are as follows (in thousands):
Amount
Years Ending December 31,
Thereafter
Total
6. Revenue
We have one operating segment, which is our cloud-based learning, assessment, development and engagement systems. Historically, we had primarily generated revenues from two customer bases, Education and Corporate. Education customers consist of K-12 and Higher Education institutions that purchase our Canvas Learning Management System (“LMS”), which includes assessments, analytics and learning content. Corporate customers purchased our Bridge product, which was a corporate learning platform. Following the sale of Bridge in 2021, the Company no longer receives revenues from Corporate customers. The following tables present the Company’s disaggregated revenues based on its two customer bases and by geographic region, based on the physical location of the customer (in thousands):
Year ended
December 31,
Year ended
December 31,
Year ended
December 31,
Education
Corporate
Total revenue
Percentage of revenue generated by Education
Year ended
December 31,
Year ended
December 31,
Year ended
December 31,
United States
Foreign
Total revenue
Percentage of revenue generated outside of the United States
Deferred Revenue and Performance Obligations
During the year ended December 31, 2023, 51 % of revenue recognized was included in our deferred revenue balance at December 31, 2022.
Transaction Price Allocated to the Remaining Performance Obligations
As of December 31, 2023, approximately $ 833.5 million of revenue is expected to be recognized from remaining performance obligations. We expect to recognize revenue on approximately 75 % of th ese remaining performance obligations over the next 24 months, with the balance recognized thereafter.
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7. Deferred Commissions
Deferred commissions primarily consist of sales commissions that are capitalized as incremental contract origination costs and were $ 27.5 million and $ 32.2 million as of December 31, 2023 and 2022 respectively. For the year ended December 31, 2023, 2022, and 2021, amortization expense for deferred commissions was $ 19.1 million, $ 16.1 million, and $ 10.9 million, respectively, and there was no impairment of deferred commissions during these periods.
8 . Stock-Based Compensation
Employee Equity Plans
The Instructure Parent, LP Incentive Equity Plan (the “2020 Plan”) was terminated in July 2021 in connection with the initial public offering (the “IPO”). As of the IPO date 6,126,802 unvested incentive units were exchanged for 3,496,739 RSUs under the 2021 Plan. The RSUs will generally vest in 11 equal quarterly installments commencing September 1, 2021.
In July 2021, our board of directors adopted the 2021 Omnibus Incentive Plan (the “2021 Plan”) and no shares remain available for issuance under the 2020 Plan. A total of 18,000,000 shares of the Company's common stock were initially reserved for issuance under the 2021 Plan. Pursuant to the terms of the 2021 Plan, the share reserve increased by 5,629,623 shares in January 2022 and 5,716,683 shares in January 2023. As of December 31, 2023, there were 19,683,951 shares of common stock available for future grants under the 2021 Plan.
In July 2021, our board of directors adopted, and our stockholders approved, the 2021 Employee Stock Purchase Plan (the “2021 ESPP”), which allows eligible employees to purchase shares of our common stock at a discount through payroll deductions of up to 15 % of their eligible compensation, subject to any plan limitations. The initial offering consisted of one offering period, which ended on February 28, 2022. Each new offering begins on or about March 1 and September 1 and is approximately six months in duration. On each purchase date, eligible employees purchase our common stock at a price per share equal to 85 % of the lesser of (1) the fair market value of our common stock on the offering date or (2) the fair market value of our common stock on the purchase date. A total of 1,900,000 shares of the Company's common stock were initially reserved for issuance under the 2021 ESPP. Pursuant to the terms of the 2021 ESPP, the share reserve increased by 1,407,406 shares in January 2022 and 1,429,171 shares in January 2023. As of December 31, 2023 , 4,018,556 shares of common stock were available for future purchases under the 2021 ESPP.
During the year ended December 31, 2023, we granted 3,316,718 RSUs to employees under the 2021 Plan. Each RSU entitles the recipient to receive one share of the Company's common stock upon vesting. The RSUs are subject to time-based service requirements and generally vest over a four-year service period. The grant date fair values of the RSUs granted during the year ended December 31, 2023 ranged from $ 24.24 to $ 28.00 , which represent the closing stock price for the underlying common stock on the respective grant dates, with an aggregate fair value of $ 83.5 million.
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 and comprehensive loss (in thousands):
Year ended
December 31,
Year ended
December 31,
Year ended
December 31,
Options (1)
Restricted stock units
Employee stock purchase plan
Class A and Class B units
Total stock-based compensation
For the year ended December 31, 2022, approximately $ 0.7 million is due to the acceleration and settlement of options from the LearnPlatform 2014 Stock Incentive Plan that was not included in consideration transferred. The amounts were settled in cash and the LearnPlatform 2014 Stock Incentive Plan was terminated on the date of acquisition.
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Year ended
December 31,
Year ended
December 31,
Year ended
December 31,
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”, and together with the stock options, “equity awards”), whether vested or unvested, were canceled and replaced with the right to receive $ 49.00 per share in cash, less the applicable exercise price per share and applicable withholding taxes (the “per share price”), with respect of each share of common stock underlying such award (“Cash Replacement Awards”). The per share price attributed to the unvested equity awards will vest and be payable at the same time such equity awards would have vested pursuant to their original terms prior to the replacement . During the year ended December 31, 2023, 2022, and 2021, the Company recognized $ 0.7 million, $ 5.5 million, and $ 7.6 million of stock-based compensation expense associated with the Cash Replacement Awards, respectively.
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 for the year ended December 31, 2023, 2022, and 2021 (in thousands, except per share amounts):
RSUs Outstanding
Weighted-
Average
Grant Date Fair
RSUs
Value Per Share
Unvested and outstanding at January 1, 2021
Granted
Vested
Forfeited or canceled
Unvested and outstanding at December 31, 2021
Granted
Vested
Forfeited or canceled
Unvested and outstanding at December 31, 2022
Granted
Vested
Forfeited or canceled
Unvested and outstanding at December 31, 2023
As of December 31, 2023 , total unrecognized compensation cost related to unvested RSUs granted on or after the IPO date amounted to $ 95.1 million, which is expected to be recognized over a weighted average period of 2.9 years.
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The following table summarizes the activity under the 2020 Plan and their conversion into RSUs under the 2021 Plan for the years ended December 31, 2023, 2022, and 2021 (in thousands, except per unit amounts):
RSUs
Weighted Average Grant Date Fair Value Per Unit
Outstanding Incentive Units at December 31, 2020
Incentive Units granted
Incentive Units forfeited or canceled
Incentive Units vested at IPO
Incentive Units exchanged for RSUs
Incentive Units after IPO
RSUs exchanged from Incentive Units
RSUs forfeited or canceled
RSUs vested
Unvested and outstanding at December 31, 2021
Vested
Forfeited or canceled
Unvested and outstanding at December 31, 2022
Vested
Forfeited or canceled
Unvested and outstanding at December 31, 2023
There were no equity awards granted under the 2020 Plan subsequent to the IPO. As of December 31, 2023 we had $ 2.4 million of unrecognized stock-based compensation expense related to unvested exchanged RSUs that are expected to be recognized over a weighted-average period of 0.3 years.
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 years ended December 31, 2023 and 2022:
Year ended
December 31,
Dividend yield
None
None
Volatility
Risk-free interest rate
Expected life (years)
9 . Income Taxes
Income (loss) before provision (benefit) for income taxes was as follows (in thousands):
Year ended
December 31,
Year ended
December 31,
Year ended
December 31,
United States
Foreign
Total
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The components of the provision (benefit) for income taxes were as follows (in thousands):
Year ended
December 31,
Year ended
December 31,
Year ended
December 31,
Current:
Federal
State
Foreign
Total
Deferred:
Federal
State
Foreign
Total
Provision (benefit) for income taxes
The following reconciles the differences between income taxes computed at the federal statutory rate of 21 % and the provision for income taxes (in thousands):
Year ended
December 31,
Year ended
December 31,
Year ended
December 31,
Expected income tax benefit at the federal statutory rate
State tax net of federal benefit
Stock-based compensation
Withholding Tax
Difference in foreign tax rates
Tax credits
Change in valuation allowance
Other
Income tax provision (benefit)
Year Ended December 31,
Year Ended December 31,
Deferred tax assets:
Net operating loss carryforwards
Research and development credits
Business interest deduction limitation
Capitalized R&D expenses
Accruals and reserves
Depreciation and amortization
Lease liability
Stock-based compensation
Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Intangible assets
Deferred commissions
Right of use asset
Capitalized costs
Total deferred tax liabilities
Net deferred tax liabilities
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On a quarterly basis, we estimate our annual effective tax rate to be applied to ordinary pre-tax income and record the tax impact of any discrete items separately in the relevant period. In addition, any change in valuation allowance that results from a change in judgment of the realizability of deferred tax assets is recorded in the quarter in which the change in judgment occurs.
The income tax benefit of $ 4.3 million during the year ended December 31, 2023 primarily relates to the pre-tax GAAP loss, current year credits generated and valuation allowance recorded. During the year ended December 31, 2023 , we recognized a $ 33.4 million add-back to taxable income related to the Section 174 capitalization of research and development expense legislation, which was entirely offset by net operating loss carryforwards in the current year. Given our cumulative loss position, we cannot currently substantiate the realizability of $ 18.5 million of the deferred tax asset established, and have therefore recorded a partial valuation allowance against the balance.
At December 31, 2023 , we had $ 59.6 million in tax-effected federal, state and foreign net operating loss carryforwards. Additionally, at December 31, 2023 , we had $ 13.5 million in income tax credits, net of recorded uncertain tax positions ( “UTPs”) , consisting of federal and state research and development tax credits. These tax credits, if unused, begin expiring in 2024 .
We review all available evidence to evaluate our recovery of deferred tax assets, including our history of accumulated losses in all tax jurisdictions over the most recent three years as well as our ability to generate income in future periods. We have provided a valuation allowance against some of our U.S. state and federal net deferred tax assets as it is more likely than not that these assets will not be realized given the nature of the assets and the likelihood of future utilization.
The valuation allowanc e increased by $ 6.0 million in the year ended December 31, 2023, due to R&D Credit carryforwards and foreign capitalized Section 174 costs. The valuation allowanc e increased by $ 2.8 million in the year ended December 31, 2022, primarily due to the Section 174 capitalization for foreign research and development costs rolling off over a 15 year period, creating deferred tax assets in excess of deferred tax liabilities expected in years 2030 through 2037.
U.S. income taxes on the undistributed earnings of our non-U.S. subsidiaries have not been provided for as we currently plan to indefinitely reinvest these amounts and have the ability to do so. Cumulative undistributed foreign earnings were not material at December 31, 2023 and December 31, 2022.
We had federal net operating loss carryforwards of $ 173.8 million and $ 271.0 million at December 31, 2023 and 2022 , respectively, some of which if unused will begin to expire at various dates through 2041 .
We had federal research and development credit carryforwards of $ 15.7 million and $ 14.5 million at December 31, 2023 and 2022 , respectively, that if unused will expire at various dates through 2041 . We also had state research and investment credit carryforwards of $ 5.1 million and $ 4.5 million as of December 31, 2023 and 2022 , respectively, that if unused will expire at various dates through 2037 .
Uncertain Tax Positions
We account for uncertainty in income taxes using a two-step process. We first determine whether it is more likely than not that a tax position will be sustained upon examination by the tax authority, including resolutions of any related appeals or litigation processes, based on technical merit. If a tax position meets the more-likely-than-not recognition threshold it is then measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.
The following summarizes activity related to unrecognized tax benefits (in thousands):
Year ended
December 31,
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December 31,
Year ended
December 31,
Unrecognized benefit—beginning of the year
Gross increases (decreases)—prior period positions
Gross increases (decreases)—current period positions
Unrecognized benefit—end of period
The Company does not expect any significant change in our unrecognized tax benefits within the next 12 months. At December 31, 2023 , the Company had $ 8.1 million of total unrecognized tax benefits recorded against research and development tax credit carryforwards and federal net operating loss carryforwards, all of which would impact the effective tax rate if recognized. At December 31, 2022 , the Company had $ 7.0 million of unrecognized tax benefits decreasing deferred tax assets.
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We have elected to recognize interest and penalties related to UTPs as a component of income tax expense. No interest or penalties have been recorded through the year ended December 31, 2023.
We file tax returns in the United States, the United Kingdom, Australia, the Netherlands, Hong Kong, Sweden, Hungary, Mexico, Brazil, China, Singapore 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.
10. 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 no transfers between Level 1 and Level 2 of the fair value measurement hierarchy during 2023 and 2022.
Instruments Not Recorded at Fair Value on a Recurring Basis.
We estimate the fair value of our Senior Term Loan carried at face value, less unamortized discount costs, quarterly for disclosure purposes. The estimated fair value of our Senior Term Loan is determined by Level 2 inputs, observable market based inputs or unobservable inputs that are corroborated by market data. As of December 31, 2023, the fair value of our Senior Term Loan was $ 486.4 million. The carrying amounts of our cash, accounts receivable, prepaid expenses, other current assets, accounts payable, and accrued liabilities approximate their current fair value because of their nature and relatively short maturity dates or durations.
11. Leases
The Company leases office space under non-cancelable operating leases with lease terms ranging from one to six years . These leases require monthly lease payments that may be subject to annual increases throughout the lease term. The Company subleases four of its locations. The first sublease expired in the second quarter of 2023, and the second, third, and fourth s ublease terms had 60 months , 25 months , and 4 months remaining, a s of December 31, 2023, respectively. None of the above subleases have an option for renewal.
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.
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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):
Year ended
December 31,
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December 31,
Year ended
December 31,
Operating lease cost, gross
Variable lease cost, gross (1)
Sublease income
Total lease costs (2)
Variable rent expense was not included within the measurement of the Company's operating right-of-use assets and lease liabilities. Variable rent expense is comprised primarily of the Company's proportionate share of operating expenses, property taxes and insurance and is classified as lease expense due to the Company's election to not separate lease and non-lease components.
Short-term lease costs for the year ended December 31, 2023, 2022, and 2021 were not significant and are not included in the table above.
Cash paid for amounts included in the measurement of operating lease liabilities for the year ended December 31, 2023, 2022, and 2021 were $ 8.7 million, $ 8.4 million, and $ 8.6 million, respectively, and was included in net cash provided by operating activities in the consolidated statements of cash flows.
As of December 31, 2023, the maturities of the Company's operating lease liabilities were as follows (in thousands):
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 December 31, 2023 and 2022, the weighted average remaining lease term was 3.0 and 3.6 years, respectively and the weighted average discount rate used to determine operating lease liabilities was 8.22 % and 8.20 % , respectively.
12. Commitments and Contingencies
Non-cancelable purchase obligations
As of December 31, 2023 , our outstanding non-cancelable purchase obligations with a term of 12 months or longer related to cloud infrastructure and business analytic services in the ordinary course of business totaled $ 56.2 million for fiscal year 2024, $ 60.0 million per year for fiscal years 2025 through 2027, and $ 65.0 million for fiscal year 2028. For the year ended December 31, 2023, we recognized expenses o f $ 50.8 million in subscription and support cost of revenue , $ 1.8 million in research and development, $ 0.9 million in professional services and other cost of revenue, $ 0.1 million in sales and marketing, and $ 0.1 million in general and administrative in our consolidated statements of operations and comprehensive loss related to our non-cancelable purchase obligations. For the year ended December 31, 2022, we recognized expenses of $ 38.4 million in subscription and support cost of revenue, $ 2.2 million in research and development, $ 1.0 million in professional services and other cost of revenue, $ 0.1 million in sales and marketing, and $ 0.1 million in general and administrative in our consolidated statements of operations and comprehensive loss related to our non-cancelable purchase obligations.
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Letters of Credit
As of December 31, 2023 and 2022, we had a total of $ 3.2 million and $ 4.3 million, respectively, of letters of credit outstanding that were issued for purposes of securing certain of the Company’s obligations under facility leases and other contractual arrangements.
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 consolidated financial statements. If only a range of estimated losses can be determined, we accrue an amount within the range that, in our judgment, reflects the most likely outcome; if none of the estimates within that range is a better estimate than any other amount, we accrue the low end of the range. Although the results of litigation and claims are inherently unpredictable and uncertain, management does not believe that the outcome of our various legal proceedings, if determined adversely to us, singly or in the aggregate, would have a material impact on our financial position, results of operations, or liquidity.
13. Employee Benefit Plan
We sponsor a qualified 401(k) defined contribution plan (the “401(k) Plan”), available to all qualified employees. The 401(k) Plan allows employees to contribute gross salary though payroll deductions up to the legally mandated limit based on their jurisdiction. For the year ended December 31, 2023 , the 401(k) Plan provides for matching contributions equal to 50 % of each participant's elective contributions, not to exceed $ 2,500 per participant annually. For the year ended December 31, 2022 and 2021, the 401(k) Plan provided for matching contributions equal to 50 % of each participant's elective contributions, not to exceed $ 2,000 per participant annually. Participants vest in matching contributions over a three-year period after a one-year cliff vest. The cost recognized for our contributions to the 401(k) Plan for the year ended December 31, 2023, 2022, and 2021, was $ 1.8 million, $ 1.4 million, and $ 1.4 million, respectively.
14. 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 year ended December 31, 2023, 2022, and 2021, the Company incurred $ 0.6 million, $ 0.6 million, and $ 0.1 million, respectively, related to these services. The related expense is reflected in general and administrative expense in the consolidated statements of operations and comprehensive loss.
In connection with our entry into our Credit Facilities on March 24, 2020, affiliates of Thoma Bravo collectively acquired $ 129.2 million of our Term Loan. In connection with our principal prepayments made in August 2021, $ 42.5 million of the prepayments were applied to the Term Loan held by affiliates of Thoma Bravo. Additionally, in connection with our October 29, 2021 Refinancing, $ 88.6 million of our Term Loan held by affiliates of Thoma Bravo was paid off. Refer to Note 5—Credit Facility for additional information regarding the principal prepayments and Refinancing.
Interest paid to affiliates of Thoma Bravo during the year ended December 31, 2021 was $ 7.5 million.
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15. Subsequent Events
On January 1, 2024, the Company made the decision to vacate multiple floors of its leased office space at its headquarters in Salt Lake City, Utah, with the intention of subleasing the vacated office space. The Company is assessing the impact of this decision to the current net-book value of its long-lived tangible assets.
On February 1, 2024, Instructure entered into the Second Amendment to the Credit Agreement (the “Second Amendment”), which amends that certain Credit Agreement, dated as of October 29, 2021 (as amended by that certain First Amendment to Credit Agreement, dated as of June 21, 2023, and as further amended, restated, amended and restated, supplemented or otherwise modified, the “Credit Agreement”), by and among the Instructure and certain of its subsidiaries, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders named therein. Pursuant to the Second Amendment, among certain other amendments, the lenders named in the Second Amendment agreed, severally and not jointly, to extend additional 2023 Incremental Term Loans (as defined in the 2021 Credit Agreement) (the “2023 Incremental Term Loans”) to the Company under the 2021 Credit Agreement in an aggregate principal amount equal to $ 685.0 million. The Company used the proceeds of the 2023 Incremental Term Loans, borrowed under the 2021 Credit Agreement, to finance (i) the cash consideration for the acquisition of PCS Holdings, LLC (“Parchment”), a Delaware limited liability company, and (ii) fees and costs incurred in connection with the acquisition and related transactions.
On February 1, 2024, Instructure closed the previously announced acquisition of Parchment, the world’s largest academic credentialing platform and network, where 100 % of the equity interests were acquired in the all cash transaction. The purchase was financed through a combination of cash on hand and debt financing. The purpose of the transaction is to bolster the Instructure Learning Platform's scale and reach as learners are engaged throughout their lifelong learning journey, facilitating evidence of learning and streamlining the educational process for educators and learners during key transitions. The Company intends to integrate Parchment into its single operating segment. The preliminary purchase price is $ 833.3 million. The purchase price was paid to the sellers net of unpaid indebtedness and transaction expenses, and is subject to certain post-closing adjustments as set forth in the Purchase Agreement. The Company is currently evaluating the purchase price allocation following the close of the acquisition of Parchment and expects the primary assets acquired to be intangible assets and goodwill, and expects to assume liabilities. It is not practicable to disclose the preliminary purchase price allocation or unaudited pro forma combined financial information for this acquisition, given the short period of time between the acquisition date and the issuance of these consolidated financial statements.
