INSTRUCTURE HOLDINGS, INC. Forward-Looking Statements
You should read the following discussion and analysis together with the financial statements and the related notes to those statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and our audited Consolidated Financial Data for the year endedDecember 31, 2020 and the related notes thereto, which are included in the Company's Prospectus datedJuly 21, 2021 filed with theSEC in connection with the Company's initial public offering (the "IPO"). The following discussion contains forward-looking statements that are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in the section entitled "Risk Factors" of the Company's Prospectus datedJuly 21, 2021 filed with theSEC in connection with our IPO and in the "Forward Looking Statements" section of this Quarterly Report on Form 10-Q. As a result, our actual results may differ materially from those contained or anticipated in these forward-looking statements.
Overview
From the inception of a teacher's lesson through a student's mastery of a concept,Instructure personalizes, simplifies, organizes, and automates the entire learning lifecycle through the power of technology. Our learning platform delivers the elements that leaders, teachers, and learners need - a next-generation LMS, robust assessments for learning, actionable analytics, and engaging, dynamic content. Schools standardize onInstructure's solutions as their core learning platform because we bring together all of the tools that students, teachers, parents, and administrators need to create an accessible and modern learning environment. Our platform is cloud-native, built on open technologies, and scalable across thousands of institutions and tens of millions of users worldwide. We are the LMS market share leader in both Higher Education and paid K-12. We are maniacally focused on our customers and enhancing the teaching and learning experience. As such, we continuously innovate to grow the footprint of our platform, including through our acquisitions ofMasteryConnect , Certica and Eesysoft to add assessment and analytics capabilities. Our platform becomes deeply ingrained into our customers' instructional workflows. Since our founding in 2008, we have expanded our platform from the core LMS to include a broad set of offerings targeting all aspects of teaching and learning. As our platform has grown, we have become more strategic to schools as they seek vendor consolidation, best of breed solutions, and integrated offerings to serve teachers and students. This discussion and analysis reflects our financial condition and results of operations for the unaudited nine and three months endedSeptember 30, 2021 (Successor), unaudited six and three months endedSeptember 30, 2020 (Successor) and unaudited three months endedMarch 31, 2020 (Predecessor). For the unaudited nine and three months endedSeptember 30, 2021 (Successor), unaudited six and three months endedSeptember 30, 2020 (Successor), and three months endedMarch 31, 2020 (Predecessor): ? Our revenue was$294.8 million ,$107.2 million ,$143.1 million ,$81.8 million , and$71.4 million , respectively. ? Our net loss was$68.0 million ,$13.3 million ,$136.7 million ,$60.2 million , and$22.2 million , respectively. ? Our adjusted EBITDA was$105.0 million ,$41.3 million ,$39.8 million ,$26.4 million , and$4.8 million , respectively. ? Our operating cash flow was$108.8 million ,$161.2 million ,$42.0 million ,$100.3 million , and$(57.1) million , respectively. ? Our free cash flow was$106.1 million ,$160.0 million ,$41.2 million ,$99.5 million , and$(57.8) million , respectively.
Adjusted EBITDA and free cash flow are non-GAAP measures, see "Non-GAAP Financial Measures" for definitions and reconciliations to the most closely comparable GAAP measure.
Recent Developments
OnJuly 26, 2021 , the Company completed its IPO of 12,500,000 shares of common stock at an offering price of$20.00 per share. The Company received net proceeds of$233.1 million after deducting underwriting discounts and commissions. OnAugust 19, 2021 , the underwriters partially exercised their over-allotment option of 1,675,000 shares of common stock at an offering price of$20.00 per share. The Company received net proceeds of$31.3 million after deducting underwriting discounts and commissions. The Company used the proceeds from the IPO and the overallotment option to repay approximately$255.1 million of borrowings outstanding under its Term Loan. 35 --------------------------------------------------------------------------------
Impact of COVID-19
Although the COVID-19 pandemic caused general business disruption worldwide beginning inJanuary 2020 , it also created a set of conditions in which students of all ages began learning from home, causing schools to rapidly adopt or upgrade online platforms for students and teachers to conduct lessons remotely. In response to the pandemic, theU.S. government also passed stimulus legislation that directed over$280 billion of funding to education initiatives. These circumstances resulted in an increase in our operational performance, cash flows, and financial condition. We believe that the COVID-19 pandemic accelerated adoption of our learning platform, which we expect will continue to generate additional opportunities for us in the future. While we have experienced a significant increase in customers due to the pandemic, the aforementioned factors have also driven increased usage of our services and have required us to expand our network and data storage and processing capacity, particularly third-party cloud hosting. During the six months endedSeptember 30, 2020 (Successor) and three months endedMarch 31, 2020 (Predecessor), this resulted in an increase in our operating costs. We continue to experience high usage on our learning platform, even as North American K-12 students have returned to the classroom during the nine months endedSeptember 30, 2021 . As more of our customers have begun transitioning back to the classroom on either a full-time or hybrid basis, the demand for our network and data storage capacity, inclusive of third-party cloud hosting, has come down from peak pandemic levels, but remains significantly higher than pre-pandemic levels. These factors have generated a positive impact to our gross margin. There is no assurance that we will experience a continued increase in the adoption of our learning platform or that new or existing customers will continue to utilize our service after the COVID-19 pandemic has tapered. Moreover, the tapering of the COVID-19 pandemic, particularly as vaccinations are widely available, may result in a decline in customers once students are no longer attending school from home. As part of our response to the COVID-19 pandemic, we implemented an internal initiative to ensure the support and retention of our customers. This initiative is a collaboration between multiple organizations and teams atInstructure to help ensure renewal and growth in statewide deals. The initiative includes monitoring usage, developing a statewide communication plan, establishing user groups, creating marketing and advocacy materials, and keeping leadership informed of status, risks, and wins.
The full extent to which the COVID-19 pandemic will directly or indirectly impact the global economy, the lasting social effects, and impact on our business, results of operations and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted.
Key Factors Affecting Our Performance
Our historical financial performance has been, and we expect our financial performance in the future to be, driven by our ability to:
Increase Adoption of
Our ability to increase market adoption of our platform is driven by the overall adoption of cloud applications and infrastructure by academic institutions. We believe that Higher Education and K-12 institutions are poised to accelerate the pace of cloud adoption to support near-term online educational needs, as a result of, and following the COVID-19 pandemic, and to withstand future challenges. Academic institutions that relied upon on-premises solutions to support remote operations faced significant delays at the height of the pandemic. In order to continue providing a high-quality education and support in-person, remote, and hybrid learning, institutions must make a fundamental shift to adopt cloud-based collaboration solutions. As the leader in the market for cloud-based learning technology, we believe the imperative for these institutions to adopt cloud infrastructure will increase demand for our platform and broaden our customer base.
Grow Our Customer Base
We believe there is significant opportunity to grow our customer base in Higher Education and K-12. The growth of our Higher Education customer base is primarily dependent on the replacement of legacy systems with our cloud-native platform inNorth America and our continued expansion efforts internationally. The growth of our K-12 customer base is primarily dependent on our ability to surround currently implemented free solutions with our learning platform and, in connection therewith, monetize demand for our broad capabilities. We intend to expand our customer base by continuing to make targeted and prudent investments in sales and marketing and customer support. 36 --------------------------------------------------------------------------------
Cross-sell into our Existing Customer Base
Most of our customers initially engage with us using our Canvas LMS solution, and then we are generally able to cross-sell our other solutions as these customers become aware of the benefits of our broad capabilities, including learning, assessments, analytics, student success, program management, digital courseware, and global online learning. Our future revenue growth is dependent upon our ability to expand our customers' use of our learning platform. Our ability to increase sales to existing customers depends on a number of factors, including customer satisfaction, competition, pricing, economic conditions, and spending by customers.
Key Components of Results of Operations
Revenue
We generate revenue primarily from two main sources: (1) subscription and support revenue, which is comprised of SaaS fees from customers accessing our learning platform and from customers purchasing additional support beyond the standard support that is included in the basic SaaS fees; and (2) related professional services revenue, which is comprised of training, implementation services and other types of professional services. Subscription revenue is derived from customers using our learning platform and is driven primarily by the number of customers, the number of users at each customer, the price of our applications and renewals. Support revenue is derived from customers purchasing additional support beyond the standard support that is included in the basic SaaS fee. Our contracts typically vary in length between one and five years. Subscriptions and support are non-cancelable and are billed in advance on an annual basis. All subscription and support fees billed are initially recorded in deferred revenue and recognized ratably over the subscription term. Professional services and other revenue are derived primarily from implementation, training, and other consulting fees. Implementation services includes training and consulting services that generally take anywhere from 30 to 90 days to complete depending on customer-side complexity and timelines. It includes regularly scheduled and highly-structured activities to ensure customers progress toward better utilizing our applications. Most of these interactions take place over the phone and through the use of web meeting technology. Because we have determined the implementation services are distinct, they are recognized over time as the services are rendered, using an efforts-expended input method. Implementation services also include nonrefundable upfront setup fees, which are allocated to the remaining performance obligations. We include training with every implementation and offer additional training for a fee. The training offered is focused on creating confidence among users so they can be successful with our applications. Most training is performed remotely using web meeting technology. Because we have determined that trainings are distinct, we record training revenue upon the delivery of the training. Training is recognized ratably in the same manner as subscription and support revenue described above. In addition to our implementation and training offerings, we provide consulting services for custom application development, integrations, content services and change management consulting. These services are architected to boost customer adoption of our applications and to drive usage of features and capabilities that are unique to our company. We have determined that these services are distinct. Professional services revenue is typically recognized over time as the services are rendered, using an efforts-expended input method.
Cost of Revenue
Cost of subscription and support revenue consists primarily of the costs of our
cloud hosting provider and other third-party service providers, employee-related
costs including payroll, benefits and stock-based compensation expense for our
operations and customer support teams, amortization of capitalized software
development costs and acquired technology, and allocated overhead costs, which
we define as rent, facilities and costs related to IT. Our acquired technology
is amortized over the estimated remaining useful life, which is five years.
Cost of professional services and other revenue consists primarily of personnel
costs of our professional services organization, including salaries, benefits,
travel, bonuses and stock-based compensation, as well as allocated overhead
costs.
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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 remaining useful life of seven years. The trade names acquired are amortized over the estimated remaining useful lives ranging from five to ten years. Research and Development. Research and development expenses consist primarily of personnel costs of our development team, including payroll, benefits and stock-based compensation expense and allocated overhead costs. We capitalize certain software development costs that are attributable to developing new applications, features and adding incremental functionality to our platform. We amortize these costs to subscription and support cost of revenue in the consolidated statements of operations over the estimated life of the new application or incremental functionality, which is generally three years. General and Administrative. General and administrative expenses consist of personnel costs and related expenses for executive, finance, legal, human resources, recruiting, employee-related information technology, administrative personnel, including payroll, benefits and stock-based compensation expense; professional fees for external legal, accounting and other consulting services; and allocated overhead costs.
Other Income (Expense)
Other income (expense), net consists primarily of interest income, interest expense, and the impact of foreign currency transaction gains and losses. Interest expense is related to fees incurred to have access to our credit facilities. As we have expanded our international operations, our exposure to fluctuations in foreign currencies has increased.
Income Tax Benefit (Expense)
We are subject to income taxes inthe United States and foreign jurisdictions in which we do business. These foreign jurisdictions have statutory tax rates different from those inthe United States . Accordingly, our effective tax rates will vary depending on the relative proportion of foreign toU.S. income and changes in tax laws. The tax benefit atDecember 31, 2020 consists of decreases inU.S. Federal and state deferred tax liabilities, due to book amortization, and of the step up in basis of intangible assets from the Take-Private Transaction. 38 --------------------------------------------------------------------------------
Results of Operations
The following tables set forth our results of operations for the periods
presented and as a percentage of our total revenue for those periods. The data
has been derived from the unaudited consolidated financial statements contained
in this Quarterly Report on Form 10-Q which include, in our opinion, all
adjustments, consisting only of normal recurring adjustments, that we consider
necessary for a fair presentation of the financial position and results of
operations for the interim periods presented. The period-to-period comparison of
financial results is not necessarily indicative of financial results to be
achieved in future periods.
Successor Predecessor
Three months Three months Nine months Six months Three months
ended ended ended ended ended
September 30, September 30, September 30, September 30, March 31,
2021 2020 2021 2020 2020
(in thousands)
Revenue:
Subscription and support $ 96,163 $ 73,313
11,058 8,459 27,994 13,682 5,421
Total revenue 107,221 81,772 294,768 143,142 71,389
Cost of revenue:
Subscription and support(1) (2)
(3) 36,528 35,996 112,575 69,975 19,699
Professional services and other(1)
(3) 4,939 5,034 15,500 10,592 4,699
Total cost of revenue 41,467 41,030 128,075 80,567 24,398
Gross profit 65,754 40,742 166,693 62,575 46,991
Operating expenses:
Sales and marketing(1) (2) (3) 40,553 40,100 120,858 84,034 27,010
Research and development(1) (3) 15,823 14,619 47,191 36,736 19,273
General and administrative(1) (3) 14,396 13,092 38,943 47,533 17,295
Impairment on held-for-sale
goodwill (3) - 29,612 - 29,612 -
Impairment on disposal group (3) - 3,389 1,218 3,389 -
Total operating expenses 70,772 100,812 208,210 201,304 63,578
Loss from operations (5,018 ) (60,070 ) (41,517 ) (138,729 ) (16,587 )
Other income (expense):
Interest income - 5 13 40 313
Interest expense (11,251 ) (16,357 ) (44,178 ) (34,449 ) (8 )
Other income (expense), net(3) (1,623 ) 187 (2,365 ) 603 (5,738 )
Total other income (expense), net (12,874 ) (16,165 ) (46,530 ) (33,806 ) (5,433 )
Loss before income taxes (17,892 ) (76,235 ) (88,047 ) (172,535 ) (22,020 )
Income tax benefit (expense) 4,631 16,062 20,022 35,788 (183 )
Net loss $ (13,261 ) $ (60,173 ) $ (68,025 ) $ (136,747 ) $ (22,203 )
(1)Includes stock-based compensation as follows:
Successor Predecessor
Three months Three months Nine months Six months Three months
ended ended ended ended ended
September 30, September 30, September 30, September 30, March 31,
2021 2020 2021 2020 2020
(in thousands)
Cost of revenue:
Subscription and support $ 257 $ 333 $ 652 $ 653 $ 301
Professional services and other 323 222 610 463 285
Sales and marketing 2,139 1,843 4,814 5,435 1,977
Research and development 2,292 2,149 4,896 7,193 1,874
General and administrative 3,368 2,175 6,750 26,806 2,672Total stock-based compensation $ 8,379 $ 6,722
$ 17,722 $ 40,550 $ 7,109 39
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(2)
Includes amortization of acquisition-related intangibles as follows:
Successor Predecessor
Three months Three months Nine months Six months Three months
ended ended ended ended ended
September 30, September 30, September 30, September 30, March 31,
2021 2020 2021 2020 2020
(in thousands)
Cost of revenue:
Subscription and support $ 15,582 $ 15,000 $ 46,412 $ 30,167 $ 1,293
Sales and marketing 18,008 17,617 53,900 35,430 1,293
Total amortization of
acquisition-related intangibles $ 33,590 $ 32,617 $ 100,312 $ 65,597 $ 2,586
(3)Includes restructuring, transaction and sponsor related costs as follows:
Successor Predecessor
Three months Three months Nine months Six months Three months
ended ended ended ended ended
September 30, September 30, September 30, September 30, March 31,
2021 2020 2021 2020 2020
(in thousands)
Cost of revenue:
Subscription and support $ 159 $ - $ 2,108 $ 2,056 $ -
Professional services and other 28 70 883 856 66
Sales and marketing 99 1,420 2,551 3,706 556
Research and development 226 1,017 2,904 3,581 1,273
General and administrative 1,519 4,556 8,378 7,117 6,465
Impairment on disposal group - 3,389 1,218 3,389 -
Impairment on held-for-sale
goodwill - 29,612 - 29,612 -
Other income (expense), net (1,610 ) 618 (1,610 ) 618 (5,757 )
Total restructuring, transaction
and sponsor related costs $ 3,641 $ 39,446 $ 19,652 $ 49,699 $ 14,117
40
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Successor Predecessor
Three months Three months Nine months Six months Three months
ended ended ended ended ended
September 30, September 30, September 30, September 30, March 31,
2021 2020 2021 2020 2020
(as a percentage of total revenue)
Revenue:
Subscription and support 90% 90% 91% 90% 92%
Professional services and
other 10 10 9 10 8%
Total revenue 100 100 100 100 100
Cost of revenue:
Subscription and support 34 44 38 49 28
Professional services and
other 5 6 5 7 7
Total cost of revenue 39 50 43 56 35
Gross profit 61 50 57 44 65
Operating expenses:
Sales and marketing 38 49 41 59 38
Research and development 15 18 16 26 27
General and administrative 13 16 13 33 24
Impairment on held-for-sale
goodwill - 36 - 21 -
Impairment on disposal
group - 4 - 2 -
Total operating expenses 66 123 70 141 89
Loss from operations (5) (73) (13) (97) (24)
Other income (expense):
Interest income - - - - -
Interest expense (10) (20) (15) (24) -
Other expense (2) - (1) - (8)
Total other income
(expense), net (12) (20) (16) (24) (8)
Loss before income taxes (17) (93) (29) (121) (32)
Income tax benefit
(expense) 4 20 7 25 (1)
Net loss (13)% (73)% (22)% (96)% (33)%
Comparison of the unaudited Three Months Ended September 30, 2021 (Successor)
and unaudited Three Months Ended September 30, 2020 (Successor) and comparison
of the unaudited Nine Months Ended September 30, 2021 (Successor), the unaudited
period from April 1, 2020 to September 30, 2020 (Successor), and the unaudited
period from January 1, 2020 to March 31, 2020 (Predecessor).
Revenue
Successor Successor Predecessor
Three months Three months Nine months Six months Three months
ended ended ended ended ended
September 30, September 30, Change September 30, September 30, March 31,
2021 2020 Amount % 2021 2020 2020
(dollars in thousands)
Subscription
and support $ 96,163 $ 73,313 $ 22,850 31 % $ 266,774 $ 129,460 $ 65,968
Professional
services and
other 11,058 8,459 2,599 31 27,994 13,682 5,421
Total revenue $ 107,221 $ 81,772 $ 25,449 31 % $ 294,768 $ 143,142 $ 71,389
41
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Three month change
Subscription and support revenue increased$22.9 million for the unaudited three months endedSeptember 30, 2021 (Successor) due to an increase in new customers, growth from existing customers through upselling historical products and cross-selling new products, contributions from our recent acquisitions, and the effects of acquisition accounting from Accounting Standards Codification ("ASC") Topic 805 ("ASC 805").
Professional services and other revenue increased
Nine month change
Subscription and support revenue was$266.8 million for the unaudited nine months endedSeptember 30, 2021 (Successor),$129.5 million for the unaudited six months endedSeptember 30, 2020 (Successor), and$66.0 million for the unaudited three months endedMarch 31, 2020 (Predecessor). This increase was due to the increase in new and existing customers, as discussed above, partly as a result of COVID-19, as well as the effects of acquisition accounting from ASC 805. Professional services and other revenue was$28.0 million for the unaudited nine months endedSeptember 30, 2021 (Successor),$13.7 million for the unaudited six months endedSeptember 30, 2020 (Successor), and$5.4 million for the unaudited three months endedMarch 31, 2020 (Predecessor). This increase was due to the increase in new and existing customers, as discussed above, partly as a result of COVID-19, as well as the effects of acquisition accounting from ASC 805. Cost of Revenue Successor Successor Predecessor Three months Three months Nine months Six months Three months ended ended ended ended ended September 30, September 30, Change September 30, September 30, March 31, 2021 2020 Amount % 2021 2020 2020 (dollars in thousands) Cost of revenue: Subscription and support$ 36,528 $ 35,996 $ 532 1 %$ 112,575 $ 69,975 $ 19,699 Professional services and other 4,939 5,034 (95 ) (2 ) 15,500 10,592 4,699 Total cost of revenue$ 41,467 $ 41,030 $ 437 1 %$ 128,075 $ 80,567 $ 24,398 Gross margin percentage Subscription and support revenue 62 % 51 % 58 % 46 % 70 % Professional services and other 55 40 45 23 13 Total gross margin 61 50 57 44 66 Three month change
Total cost of revenue increased
Subscription and support cost of revenue increased$0.5 million for the unaudited three months endedSeptember 30, 2021 (Successor) due to an increase in software costs, amortization of acquisition-related technology and third-party contractors. Web hosting and third-party software license costs increased$0.4 million due to the increase in total customers. Amortization costs increased$0.4 million due to an increase in acquisition-related technology related to the acquisition of Eesysoft. Third-party consultants and contractors increased$1.4 million due to outsourcing customer support during our peak busy season. The increases were offset by a decrease of$1.1 million related to the salaries, wages, and employee-related benefits due to lower headcount. Additional offsets are due to a decrease in office rent and related expenses of$0.5 million . Professional services and other cost of revenue decreased$0.1 million for the unaudited three months endedSeptember 30, 2021 (Successor) due to a decrease of$0.3 million related to systems and hardware, office rent and communication expenses, and depreciation. This was offset by an increase in stock-based compensation expense and other employee-related expenses of$0.2 million . 42 --------------------------------------------------------------------------------
Nine month change
Subscription and support cost of revenue was$112.6 million for the unaudited nine months endedSeptember 30, 2021 (Successor),$70.0 million for the unaudited six months endedSeptember 30, 2020 (Successor), and$19.7 million for the unaudited three months endedMarch 31, 2020 (Predecessor). This increase was due to the increase in amortization of acquisition-related intangibles of$13.2 million , an increase in web hosting expenses of$7.7 million and other software expenses of$1.5 million . Additionally, expenses related to third-party consultants and contractors increased by$1.6 million , and employee-related and marketing expenses increased by$0.3 million . These increases were offset by decreases of$1.3 million in salaries and wages due to decreased headcount, and decreases in rent expense, communication expense, and other allocated costs of$0.03 million due to moving our support organization to remote workers. Professional services and other cost of revenue was$15.5 million for the unaudited nine months endedSeptember 30, 2021 (Successor),$10.6 million for the unaudited six months endedSeptember 30, 2020 (Successor), and$4.7 million for the unaudited three months endedMarch 31, 2020 (Predecessor). This increase was due to an increase in payroll expense of$0.5 million , offset by a decrease in systems and hardware expense of$0.2 million and depreciation expense of$0.1 million . Operating Expenses Sales and Marketing Successor Successor Predecessor Three months Three months Nine months Six months Three months ended ended ended ended ended September 30, September 30, Change September 30, September 30, March 31, 2021 2020 Amount % 2021 2020 2020 (dollars in thousands) Sales and marketing$ 40,553 $ 40,100 $ 453 1 %$ 120,858 $ 84,034 $ 27,010 Percentage of revenue 41 % 59 % 38 % Three month change Sales and marketing expenses increased$0.5 million for the unaudited three months endedSeptember 30, 2021 (Successor) due to an increase in payroll, travel and other employee-related costs of$0.9 million , as select offices began to reopen from the COVID-19 closures. Additionally, amortization of acquisition-related intangibles increased$0.3 million , and marketing expenses increased$0.2 million . These increases were offset by decreases in consultants and contractors of$0.7 million , and a decrease in office rent of$0.2 million .
Nine month change
Sales and marketing expense was$120.9 million for the unaudited nine months endedSeptember 30, 2021 (Successor),$84.0 million for the unaudited six months endedSeptember 30, 2020 (Successor), and$27.0 million for the unaudited three months endedMarch 31, 2020 (Predecessor). This increase was due to increases in amortization of acquisition-related intangibles of$16.8 million , increases in marketing expenses related to lead generation of$0.8 million , increases in software expenses of$0.3 million , and increases in other employee-related expenses of$0.6 million . These increases were offset by decreases in payroll and stock-based compensation expenses of$8.0 million , and decreases in office rent and communication expenses of$0.7 million . Research and Development Successor Successor Predecessor Three months Three months Nine months Six months Three months ended ended ended ended ended September 30, September 30, Change September 30, September 30, March 31, 2021 2020 Amount % 2021 2020 2020 (dollars in thousands) Research and development$ 15,823 $ 14,619 $ 1,204 8 %$ 47,191 $ 36,736 $ 19,273 Percentage of revenue 16 % 26 % 27 % 43
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Three month change Research and development expenses increased$1.2 million for the unaudited three months endedSeptember 30, 2021 (Successor) due to an increase in employee-related costs and third party consultants and contractors. Employee-related costs, including payroll and travel, increased$0.7 million and third party consultants and contractors increased by$1.1 million . These increases were offset by an decrease of$0.6 million in allocated office rent.
Nine month change
Research and development expense was$47.2 million for the unaudited nine months endedSeptember 30, 2021 (Successor),$36.7 million for the unaudited six months endedSeptember 30, 2020 (Successor), and$19.3 million for the unaudited three months endedMarch 31, 2020 (Predecessor). This decrease was due to a decrease in employee-related costs, including severance and stock-based compensation, of$10.2 million . Additionally, we saw decreases in systems and hardware expense of$1.4 million and decreases in allocated office rent of$0.9 million . These decreases were offset by an increase of$3.6 million in third-part consultants and contracts, and other employee related expenses of$0.1 million . General and Administrative Successor Successor Predecessor Three months Three months Nine months Six months Three months ended ended ended ended ended September 30, September 30, Change September 30, September 30, March 31, 2021 2020 Amount % 2021 2020 2020 (dollars in thousands) General and administrative$ 14,396 $ 13,092 $ 1,304 10 %$ 38,943 $ 47,533 $ 17,295 Percentage of revenue 13 % 33 % 24 % Three month change General and administrative expenses increased by$1.3 million for the unaudited three months endedSeptember 30, 2021 (Successor) due to an increase in employee-related and insurance costs. Employee-related costs, including payroll, stock-based compensation, and travel, increased by$2.4 million . Expenses related to D&O insurance increased by$0.9 million , and recruiting expenses increased by$0.2 million . These increases were offset by a decrease in legal fees of$1.9 million and other insignificant decreases in taxes and fees, and bad debt expense of$0.3 million .
Nine month change
General and administrative expense was$38.9 million for the unaudited nine months endedSeptember 30, 2021 (Successor),$47.5 million for the unaudited six months endedSeptember 30, 2020 (Successor), and$17.3 million for the unaudited three months endedMarch 31, 2020 (Predecessor). This decrease was due to a decrease in payroll and stock-based compensation expense of$22.6 million , legal fees and expenses of$3.7 million , as well as a decrease in other taxes and fees, and bad debt expense of$0.9 million . These decreases were offset by an increase in insurance expenses of$1.0 million and other employee related and travel expenses of$0.3 million . Other Income (Expense), Net Successor Successor Predecessor Three months Three months Nine months Six months Three months ended ended ended ended ended September 30, September 30, Change September 30, September 30, March 31, 2021 2020 Amount % 2021 2020 2020 (dollars in thousands) Other income (expense), net$ (12,874 ) $ (16,165 ) $ 3,291 (20 )%$ (46,530 ) $ (33,806 ) $ (5,433 ) Percentage of revenue (16 )% (24 )% (8 )% 44
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Three month change Other income (expense), net includes interest income and expense and the impact of foreign currency transaction gains and losses. Other income (expense), net increased$3.3 million for the unaudited three months endedSeptember 30, 2021 (Successor) as a result of a decreased interest expense of$5.1 million due to reduced interest rate on our Term Loan (as defined below), and prepayments made on the principal with proceeds from the IPO and the exercise of the underwriters' overallotment option. Additional decreases of$0.5 million was due to the disposal of assets in the prior period. These decreases were offset by increases in realized and unrealized foreign currency losses of$2.3 million .
Nine month change
Other income (expense), net was$(46.5) million for the unaudited nine months endedSeptember 30, 2021 (Successor),$(33.8) million for the unaudited six months endedSeptember 30, 2020 (Successor), and$(5.4) million for the unaudited three months endedMarch 31, 2020 (Predecessor). This increase in expense was due to an increase in interest expense related to our Term Loan of$9.7 million resulting from additional debt acquired inDecember 2020 . Additional increases were due to an increase in realized and unrealized foreign currency losses of$2.2 million , and decrease in interest income from marketable securities of$0.3 million . These increases were offset by a decrease in expense related to the disposal of leased property and other assets, which occurred in the prior period.
Liquidity and Capital Resources
As ofSeptember 30, 2021 (unaudited) andDecember 31, 2020 , our principal sources of liquidity were cash, cash equivalents and restricted cash totaling$231.8 million and$151.0 million , respectively, which was held for working capital purposes, as well as the available balance of our Credit Facilities, (as defined below). As ofSeptember 30, 2021 (unaudited) andDecember 31, 2020 , our cash equivalents were comprised of money market funds. We expect our operating cash flows to improve as we increase our operational efficiency and experience economies of scale. We have financed our operations through cash received from operations, debt financing and equity contributions fromThoma Bravo , and more recently, our IPO. We believe our existing cash and cash equivalents, our Credit Facilities and cash provided by sales of our solutions and services will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. Our future capital requirements will depend on many factors including our growth rate, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced products and services offerings, and the continuing market acceptance of our products. In the future, we may enter into arrangements to acquire or invest in complementary businesses, services and technologies. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in new technologies, this could reduce our ability to compete successfully and harm our results of operations. A portion of our customers pay in advance for subscriptions, a portion of which is recorded as deferred revenue. Deferred revenue consists of the unearned portion of billed fees for our subscriptions, which is later recognized as revenue in accordance with our revenue recognition policy. As ofSeptember 30, 2021 (unaudited), we had deferred revenue of$287.1 million , of which$270.4 million was recorded as a current liability and is expected to be recorded to revenue in the next 12 months, provided all other revenue recognition criteria have been met. As ofDecember 31, 2020 , we had deferred revenue of$204.9 million , of which$192.9 million was recorded as a current liability. The following table shows our cash flows for the unaudited nine months endedSeptember 30, 2021 (Successor), the unaudited six months endedSeptember 30, 2020 (Successor), and unaudited three months endedMarch 31, 2020 (Predecessor): Successor Predecessor Nine months Six months Three months ended ended ended September 30, September 30, March 31, 2021 2020 2020 (in thousands) Net cash provided by (used in) operating activities$ 108,816 $ 41,960 $ (57,058 ) Net cash provided by (used in) investing activities 26,372 (1,904,855 ) 14,871 Net cash provided by (used in) financing activities (54,353 ) 2,016,728 (346 ) 45
-------------------------------------------------------------------------------- Our cash flows are subject to seasonal fluctuations. A significant portion of our contracts have terms that coincide with our academic customers' typical fiscal year-end ofJune 30 . Historical experience has shown an increase in new and renewed contracts as well as anniversary billings, all of which immediately precede the beginning of our academic customers' typical fiscal year-end. We typically invoice SaaS fees annually upfront with credit terms of net 30 or 60 days. In turn, our cash flows from operations are affected by this seasonality and are typically reflected in higher cash flow, accounts receivable and deferred revenue balances for the second and third quarter of each year.
Credit Facilities
OnMarch 24, 2020 , we entered into a credit agreement with a syndicate of lenders andGolub Capital Markets LLC , as administrative agent and collateral agent, andGolub Capital Markets LLC andOwl 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 ofDecember 22, 2020 , in a principal amount of$70.0 million (the "Incremental Term Loan" and, together with the Initial Term Loan, the "Term Loan"). The Credit Agreement also provided for a senior secured revolving credit facility in an aggregate principal amount of$50.0 million (the "Revolving Credit Facility" and, together with the Term Loan, the "Credit Facilities"). The Revolving Credit Facility included a$10.0 million sublimit for the issuance of letters of credit. The Credit Agreement required us to repay the principal of the Term Loan in equal quarterly repayments equal to 0.25% of the original principal amount of Term Loan. Further, until the last day of the quarter endingJune 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 theWall Street Journal ), (y) the Federal funds open rate plus 0.50% per annum, and (z) a daily Eurodollar rate based on an interest period of one month plus 1.00% per annum or (ii) the Eurodollar rate plus 7.00% per annum, subject to a 1.00% Eurodollar floor. Thereafter, on the last day of each of the five full fiscal quarters, we had the option ("Pricing Grid Election") to (i) retain the aforementioned applicable margins or (ii) switch to the applicable margins set forth on a pricing grid which, subject to certain pro forma total net leverage ratio limits, provides for applicable margins ranging from 5.50% to 7.00%, in the case of Eurodollar loans, and 4.50% to 6.00% in the case of ABR Loan. The applicable margins set forth on the pricing grid became mandatory beginning on the tenth full fiscal quarter ending afterMarch 24, 2020 .
On
We were also required to pay a commitment fee of up to 0.50% per annum of unused commitments under the Revolving Credit Facility, letter of credit fees on a per annum basis, and customary fronting, issuance, and administrative fees for the issuance of letters of credit. As ofSeptember 30, 2021 (unaudited), we had outstanding borrowings of$531.3 million of the Term Loan, no outstanding borrowings under our Revolving Credit Facility and$4.3 million outstanding under letters of credit, respectively. With proceeds from our IPO, we made a principal payment inAugust 2021 of$224.3 million on our outstanding Term Loan. Subsequently, following the exercise of the underwriter's overallotment of shares, we made a principal payment of$30.8 million on its outstanding Term Loan. In connection with the payments, we also incurred a 1.5% prepayment premium. OnOctober 29, 2021 , we entered into the Refinancing, providing for Senior Secured Credit Facilities consisting of a$500.0 million Senior Term Loan and a$125.0 million Senior Revolver. The proceeds from the new Senior Term Loan were used, in addition to cash on hand, to refinance, in full, all existing indebtedness under the Credit Agreement, and to pay certain fees and expenses incurred in connection with the entry into the JPMorgan Credit Agreement and Refinancing. Operating Activities
Net cash provided by (used in) operating activities consists of net loss adjusted for certain non-cash items, including stock-based compensation, depreciation and amortization and other non-cash charges, net.
46
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Net cash provided by operating activities during the unaudited nine months ended
September 30, 2021 (Successor) was $108.8 million , which was attributable to a
net loss of $68.0 million adjusted for certain non-cash items, including $11.5
million of stock-based compensation expense, $103.0 million depreciation and
amortization, $2.0 million in amortization of debt discount and issuance costs,
$1.2 million of impairment on disposal group, and $1.6 million in other non-cash
items. These amounts were offset by a decrease to deferred income taxes of $20.3
million . Working capital sources of cash included a net increase of $72.8
million in deferred revenue and accounts receivable resulting from the
seasonality of our business where a significant number of our customer
agreements occur in the second and third quarter each year. Prepaid expenses and
other current assets decreased by $0.1 million , accounts payable and accrued
liabilities increased by $8.6 million , deferred commissions increased by $5.6
million , lease liabilities decreased by $4.7 million , other liabilities
decreased by $0.9 million , and right-of-use assets decreased by $7.6 million .
Net cash provided by operating activities during the unaudited six months ended
September 30, 2020 (Successor) was $42.0 million , which was attributable to our
net loss of $136.7 million adjusted for certain non-cash items, including $3.1
million of stock-based compensation expense, $68.0 million of depreciation and
amortization, $1.0 million in amortization of debt discount and issuance costs,
$33.0 million of impairment on disposal group and held-for-sale goodwill, and
$1.4 million in other non-cash items. These amounts were offset by a decrease to
deferred income taxes of $36.1 million . These amounts were offset by a decrease
to deferred income taxes of $36.1 million . Working capital sources of cash
included a net increase of $108.7 million in deferred revenue and accounts
receivable resulting from the seasonality of our business where a significant
number of customer agreements occur in the second and third quarter of each
year. Prepaid expenses and other current assets decreased by $21.4 million ,
right-of-use assets decreased by $5.3 million , and deferred commissions
decreased by $19.0 million . These were offset by increases of $4.0 million in
other liabilities and $11.8 million in accounts payable and accrued liabilities.
Net cash used in operating activities during the unaudited three months ended
March 31, 2020 (Predecessor) was $57.1 million , which was attributable to our
net loss of $22.2 million adjusted for certain non-cash items, including $7.1
million of stock-based compensation expense, $5.6 million of depreciation and
amortization, and $2.0 million in other non-cash items. Working capital sources
of cash included a net decrease of $25.1 million in deferred revenue and
accounts receivable resulting from the seasonality of our business where a
significant number of customer agreements occur in the second and third quarter
of each year. As a result of our leasing activity, our right-of-use assets and
lease liabilities resulted in a net decrease of $3.0 million . Accounts payable
and accrued liabilities increased by $2.2 million , while deferred commissions
increased by $1.5 million . These were offset by a decrease of $25.1 million in
prepaid expenses and other current assets due to renewal of annual contracts to
begin fiscal year 2020.
Investing Activities
Our investing activities have consisted of business acquisitions, property and
equipment purchases for computer-related equipment and capitalization of
software development costs. Capitalized software development costs are related
to new applications or improvements to our existing software platform that
expand the functionality for our customers.
Net cash provided by investing activities during the unaudited nine months ended
September 30, 2021 (Successor) was $26.4 million , consisting of $46.0 million
due to the sale of our Bridge business, which was offset by our acquisition of
Eesysoft of $16.9 million , and purchases of property and equipment of $2.8
million .
Net cash used in investing activities during the unaudited six months ended
Net cash provided by investing activities during the unaudited three months
ended
Financing Activities
Our financing activities have consisted of borrowings of long-term debt, capital contributions received from stockholders, and selling our common stock from our IPO. Net cash used in financing activities during the unaudited nine months endedSeptember 30, 2021 (Successor) was$54.4 million , which consisted of$307.9 million of principal payments made on our long-term debt,$3.8 million of prepayment premium paid in connection with our principal debt payments,$1.3 million of shares repurchased for tax withholdings on vesting of restricted stock, and distributions to stockholders of$0.9 million . These cash outflows were offset by$259.6 million of IPO proceeds, net of offering costs paid of$5.7 million . Net cash provided by financing activities during the unaudited six months endedSeptember 30, 2020 (Successor) was$2,016.7 million , which consisted of$763.3 of borrowings, net of debt discount and issuance costs totaled, which was offset by$3.9 million of principal payments made during the period. Total proceeds from contributions from stockholders was$1,257.3 million . 47 -------------------------------------------------------------------------------- Net cash used in financing activities during the unaudited three months endedMarch 31, 2020 (Predecessor) was$0.3 million , which consisted of$1.1 million in proceeds received from the issuance of common stock under employee equity plans, including the exercise of stock options, offset by$1.4 million in shares repurchased for tax withholdings on vesting of restricted stock.
Contractual Obligations and Commitments
As ofSeptember 30, 2021 , there had been no material changes, outside of the ordinary course of business, in the Company's outstanding contractual obligations disclosed in the Company's Prospectus datedJuly 21, 2021 filed with theSEC in connection with the IPO.
Off-Balance Sheet Arrangements
During the nine months endedSeptember 30, 2021 and 2020, we did not have any relationships with any entities or financial partnerships, such as structured finance or special purpose entities established for the purpose of facilitating off-balance sheet arrangements or other purposes.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted inthe United States . The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions. Certain accounting policies involve significant judgments and assumptions by management, which have a material impact on the carrying value of assets and liabilities and the recognition of income and expenses. Management considers these accounting policies to be critical accounting policies. The estimates and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results are described in Note 2-Summary of Significant Accounting Policies included in this Form 10-Q.
Recent Accounting Pronouncement
For information on recent accounting pronouncements, see Recent Accounting Pronouncements in the notes to the consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.
Non-GAAP Financial Measures
In addition to our results determined in accordance withU.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 theirU.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 withU.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 withU.S. GAAP. Investors are encouraged to review the relatedU.S. GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparableU.S. GAAP financial measures. Successor Predecessor Three months Three months Nine months Six months Three months ended ended ended ended ended September 30, September 30, September 30, September 30, March 31, 2021 2020 2021 2020 2020 (in thousands) Other Financial Data: Non-GAAP operating income (1) 40,361 25,483 103,030 37,324 1,468 Free cash flow (2) 160,006 99,516 106,056 41,169 (57,771 ) Adjusted EBITDA (3) 41,257 26,388 105,013 39,780 4,809 Allocated Combined Receipts (4) 108,600 87,922 303,239 162,731 71,389 48
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(1)
We define "non-GAAP operating income" as loss from operations excluding the impact of stock-based compensation, restructuring, transaction and sponsor related costs, amortization of acquisition-related intangibles, and the impact of fair value adjustments to acquired unearned revenue relating to the Take-Private Transaction and the Certica and Eesysoft acquisitions that we do not believe are reflective of our ongoing operations. (2) We define "free cash flow" as net cash provided by (used in) operating activities less purchases of property and equipment and intangible assets, net of proceeds from disposals of property and equipment. (3) "EBITDA" is defined as earnings before debt-related costs, including interest and loss on debt extinguishment, provision for taxes, depreciation, and amortization. We further adjust EBITDA to exclude certain items of a significant or unusual nature, including stock-based compensation, restructuring, transaction and sponsor related costs, amortization of acquisition-related intangibles, and the impact of fair value adjustments to acquired unearned revenue relating to the Take-Private Transaction and Certica and Eesysoft acquisitions. (4) "Allocated Combined Receipts" is defined as the combined receipts of our Company and companies that we have acquired allocated to the period of service delivery. We calculate Allocated Combined Receipts as the sum of (i) revenue and (ii) the impact of fair value adjustments to acquired unearned revenue related to the Take-Private Transaction and Certica and Eesysoft acquisitions that we do not believe are reflective of our ongoing operations.
Non-GAAP Operating Income
We define non-GAAP operating income as loss from operations excluding the impact of stock-based compensation, restructuring, transaction and sponsor related costs, amortization of acquisition-related intangibles, and the impact of fair value adjustments to acquired unearned revenue relating to the Take-Private Transaction and Certica and Eesysoft acquisitions that we do not believe are reflective of our ongoing operations. We believe non-GAAP operating income is useful in evaluating our operating performance compared to that of other companies in our industry, as this metric generally eliminates the effects of certain items that may vary for different companies for reasons unrelated to overall operating performance. Although we exclude the amortization of acquisition-related intangibles from this non-GAAP measure, management believes it is important for investors to understand that such intangible assets were recorded as part of purchase accounting and contribute to revenue generation.
The following table provides a reconciliation of loss from operations to non-GAAP operating income for each of the periods indicated:
Successor Predecessor
Three months Three months Nine months Six months Three months
ended ended ended ended ended
September 30, September 30, September 30, September 30, March 31,
2021 2020 2021 2020 2020
(in thousands)
Loss from operations (5,018 ) (60,070 ) (41,517 ) (138,729 ) (16,587 )
Stock-based compensation 8,379 6,722 17,722 40,550 7,109
Restructuring, transaction and
sponsor related costs 2,031 40,064 18,042 50,317 8,360
Amortization of
acquisition-related intangibles 33,590 32,617 100,312 65,597 2,586
Fair value adjustments to deferred
revenue in connections with
purchase accounting 1,379 6,150 8,471 19,589 -
Non-GAAP operating income $ 40,361 $ 25,483 $ 103,030 $ 37,324 $ 1,468
49
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Free Cash Flow We define free cash flow as net cash provided by (used in) operating activities less purchases of property and equipment and intangible assets, net of proceeds from disposals of property and equipment. We believe free cash flow facilitates period-to-period comparisons of liquidity. We consider free cash flow to be an important measure because it measures the amount of cash we generate and reflects changes in working capital. We use free cash flow in conjunction with traditionalU.S. GAAP measures as part of our overall assessment of our liquidity, including the preparation of our annual operating budget and quarterly forecasts, to evaluate the effectiveness of our business strategies, and to communicate with our Board concerning our liquidity.
The following table provides a reconciliation of net cash provided by (used in) operating activities to free cash flow for each of the periods indicated:
Successor Predecessor
Three months Three months Nine months Six months Three months
ended ended ended ended ended
September 30, September 30, September 30, September 30, March 31,
2021 2020 2021 2020 2020
(in thousands)
Net cash provided by (used in)
operating activities $ 161,183 $ 100,285
(1,193 ) (807 ) (2,800 ) (858 ) (732 )
Proceeds from disposals of
property and equipment 16 38 40 67 19
Free cash flow $ 160,006 $ 99,516 $ 106,056 $ 41,169 $ (57,771 )
Adjusted EBITDA
EBITDA is defined as earnings before debt-related costs, including interest and
loss on debt extinguishment, provision (benefit) for taxes, depreciation, and
amortization. We further adjust EBITDA to exclude certain items of a significant
or unusual nature, including stock-based compensation, restructuring,
transaction and sponsor related costs, amortization of acquisition-related
intangibles, and the impact of fair value adjustments to acquired unearned
revenue relating to the Take-Private Transaction and Certica and Eesysoft
acquisitions. Although we exclude the amortization of acquisition-related
intangibles from this non-GAAP measure, management believes that it is important
for investors to understand that such intangible assets were recorded as part of
purchase accounting and contribute to revenue generation.
We believe that adjusted EBITDA provides useful information to investors and
others in understanding and evaluating our operating results in the same manner
as our management team and Board. In addition, it provides a useful measure for
period-to-period comparisons of our business, as it removes the effect of
certain non-cash expenses and certain variable charges.
Adjusted EBITDA has limitations as a financial measure, should be considered as
supplemental in nature, and is not meant as a substitute for the related
financial information prepared in accordance with
50
--------------------------------------------------------------------------------The following table presents a reconciliation of net loss to adjusted EBITDA for each of the periods indicated:
Successor Predecessor
Three months Three months Nine months Six months Three months
ended ended ended ended ended
September 30, September 30, September 30, September 30, March 31,
2021 2020 2021 2020 2020
(in thousands)
Net Loss $ (13,261 ) $ (60,173 )
11,247 16,357 44,170 34,449 -
Provision (benefit) for taxes (4,631 ) (16,062 ) (20,022 ) (35,788 ) 183
Depreciation 911 1,329 2,728 2,426 2,982
Amortization 2 2 5 5 35
Stock-based compensation 8,379 6,722 17,722 40,550 7,109
Restructuring, transaction and
sponsor related costs 3,641 39,446 19,652 49,699 14,117
Amortization of
acquisition-related intangibles 33,590 32,617 100,312 65,597 2,586
Fair value adjustments to deferred
revenue in connection with
purchase accounting 1,379 6,150 8,471 19,589 -
Adjusted EBITDA $ 41,257 $ 26,388 $ 105,013 $ 39,780 $ 4,809 Allocated Combined Receipts
We define Allocated Combined Receipts as the combined receipts of our Company and companies that we have acquired allocated to the period of service delivery. We calculate Allocated Combined Receipts as the sum of (i) revenue and (ii) the impact of fair value adjustments to acquired unearned revenue related to the Take-Private Transaction and Certica and Eesysoft acquisitions that we do not believe are reflective of our ongoing operations. Management uses this measure to evaluate organic growth of the business period over period, as if the Company had operated as a single entity and excluding the impact of acquisitions or adjustments due to purchase accounting. Organic growth in current and future periods is driven by sales to new customers and the addition of additional subscriptions and functionality to existing customers, offset by customer cancellations or reduced subscriptions upon renewal. We believe that it is important to evaluate growth on this organic basis, as it is an indication of the success of our services from the customer's perspective that is not impacted by corporate events such as acquisitions or the fair value estimates of acquired unearned revenue. We believe this measure is useful to investors because it illustrates the trends in our organic revenue growth and allows investors to analyze the drivers of revenue on the same basis as management.
The following table presents a reconciliation of revenue to Allocated Combined Receipts for each of the periods indicated:
Successor Predecessor
Three months Three months Nine months Six months Three months
ended ended ended ended ended
September 30, September 30, September 30, September 30, March 31,
2021 2020 2021 2020 2020
(in thousands)
Revenue $ 107,221 $ 81,772 $ 294,768 $ 143,142 $ 71,389
Fair value adjustments to deferred
revenue in connection with
purchase accounting 1,379 6,150 8,471 19,589 -
Allocated Combined Receipts $ 108,600 $ 87,922 $ 303,239 $ 162,731 $ 71,389
51
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Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this prospectus are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as "anticipate," "estimate," "expect," "project," "plan," "intend," "believe," "may," "will," "should," "can have," "likely" and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected costs, expenditures, cash flows, growth rates and financial results or our plans and objectives for future operations, growth initiatives, or strategies are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including: ? risks associated with future stimulus packages approved by theU.S. federal government; ? risks associated with failing to continue our recent growth rates; ? our ability to acquire new customers and successfully retain existing customers; ? the effects of the increased usage of, or interruptions or performance problems associated with, our learning platform; ? the impact on our business and prospects from the effects of the current COVID-19 pandemic; ? our history of losses and expectation that we will not be profitable for the foreseeable future; ? the impact of adverse general and industry-specific economic and market conditions; ? risks to our revenue from changes in the spending policies or budget priorities for government funding of Higher Education and K-12 institutions; ? our ability to grow our business effectively, to scale our business and to manage our expenses; ? risks caused by delays in upturns or downturns being reflected in our operating results; ? risks and uncertainties associated with potential acquisitions; ? our ability to use net operating losses to offset future taxable income; ? our ability to change our pricing models, if necessary to compete successfully; ? the length and unpredictability of our sales cycles; ? risks associated with failure to develop our sales and marketing capabilities; ? the competitiveness of the market in which we operate; ? risks associated with joint ventures, platform partnerships and strategic alliances; ? our ability to offer high-quality professional services and support; ? the effectiveness of our expense reduction plan; ? risks associated with international operations; ? our reliance on our management team and other key employees, including the effects of recent significant changes to our executive leadership team and the resulting transitions; ? our ability to attract and retain qualified personnel; ? our ability to maintain our company culture as we grow; ? risks related our brand recognition and reputation; ? the complexity and time-consuming nature of our billing and collections processing; ? our ability to adapt and respond to rapidly changing technology, evolving industry standards and changing customer needs; ? the impact of potential information technology or data security breaches or other cyberattacks or other disruptions; ? risks associated with our use of open source software, including that we make a substantial portion of the source code for Canvas available under the terms of an open source license; 52
-------------------------------------------------------------------------------- ? risks relating to our reliance on third-party software and intellectual property licenses; ? the impact of real or perceived errors, failures or bugs in our solutions; ? risks associated with lawsuits by third parties for alleged infringement, misappropriation or other violation of their intellectual property and proprietary rights; ? our ability to obtain, maintain, protect and enforce our intellectual property and proprietary rights; ? risks related to incorrect or improper use of our solutions or our failure to properly train customers on how to utilize our solutions; ? privacy laws and regulations, including changes thereto, applicable to our business; ? risks relating to non-compliance with FERPA, COPPA and other regulatory regimes applicable to our business; ? risks related to changes in tax laws; ? the impact of export and import control laws and regulations; ? risk relating to non-compliance with anti-corruption, anti-bribery and similar laws; ? our ability to comply with complex procurement rules and regulations; ? risks related to future litigation; ? risks related to our existing and future indebtedness; ? our ability to develop and maintain proper and effective internal control over financial reporting; ? our management team's limited experience managing a public company ? our ability to correctly estimate market opportunity and forecast market growth; ? the impact of any catastrophic events; ? rising inflation and our ability to control costs, including our operating costs; ? our ability to raise additional capital or generate cash flows necessary to expand operations and invest in new technologies; and ? other factors disclosed in the section entitled "Risk Factors" and elsewhere in this prospectus. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based on many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Quarterly Report on Form 10-Q and "Risk Factors" in the Prospectus datedJuly 21, 2021 filed with theSEC in connection with our IPO. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements as well as other cautionary statements that are made from time to time in our otherSEC filings and public communications. You should evaluate all forward-looking statements made in this prospectus in the context of these risks and uncertainties. We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this prospectus are made only as of the date hereof. We undertake no obligation to update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.
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