S-1 1 d932934ds1.htm FORM S-1 Form S-1
Table of Contents
Index to Financial Statements

As filed with the U.S. Securities and Exchange Commission on October 9, 2015

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

INSTRUCTURE, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   7372   26-3505687

(State or other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

6330 South 3000 East, Suite 700

Salt Lake City, UT 84121

(800) 203-6755

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

Joshua L. Coates

Chief Executive Officer

6330 South 3000 East, Suite 700

Salt Lake City, UT 84121

(800) 203-6755

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

 

Copies to:

 

John T. McKenna

Alan Hambelton

Cooley LLP

3175 Hanover Street

Palo Alto, CA 94304

(650) 843-5000

 

Matthew A. Kaminer

Senior Vice President, General Counsel and Secretary

Instructure, Inc.

6330 South 3000 East, Suite 700

Salt Lake City, UT 84121

(800) 203-6755

 

Tony Jeffries

Michael Nordtvedt

Wilson Sonsini Goodrich & Rosati,

Professional Corporation

650 Page Mill Road

Palo Alto, CA 94304

(650) 493-9300

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨   Accelerated filer ¨    Non-accelerated filer þ   Smaller reporting company ¨
  (Do not check if a smaller reporting company)

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of Securities
to be Registered
   Proposed Maximum Aggregate
Offering Price(1)
  Amount of
Registration Fee

Common Stock, $0.0001 par value per share

   $75,000,000   $7,553

 

 

(1) Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) under the Securities Act. Includes the offering price of shares that the underwriters have the option to purchase to cover over-allotments, if any.

 

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment that specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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Index to Financial Statements

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PROSPECTUS (Subject to Completion)

Issued October 9, 2015

            Shares

 

LOGO

COMMON STOCK

 

 

Instructure, Inc. is offering             shares of its common stock. This is our initial public offering and no public market currently exists for our shares. We anticipate that the initial public offering price of our common stock will be between $         and $         per share.

 

 

We intend to list our common stock on the New York Stock Exchange under the symbol “INST.”

 

 

We are an “emerging growth company” as defined under the federal securities laws. Investing in our common stock involves risks. See “Risk Factors” beginning on page 11.

 

 

PRICE $         A SHARE

 

 

 

      

Price to
Public

      

Underwriting
Discounts and
Commissions(1)

      

Proceeds to
Instructure

 

Per Share

       $                    $                    $            

Total

       $                               $                               $                       

 

(1) See “Underwriters” for a description of the compensation payable to the underwriters.

We have granted the underwriters the right to purchase up to an additional              shares of common stock to cover over-allotments.

The Securities and Exchange Commission and state securities regulators have not approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock to purchasers on                     , 2015.

 

 

 

MORGAN STANLEY   GOLDMAN, SACHS & CO.
JEFFERIES
NEEDHAM & COMPANY   OPPENHEIMER & CO.   RAYMOND JAMES

                    , 2015


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Index to Financial Statements

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     11   

Special Note Regarding Forward-Looking Statements

     36   

Industry and Market Data

     38   

Use of Proceeds

     39   

Dividend Policy

     39   

Capitalization

     40   

Dilution

     42   

Selected Consolidated Financial Data

     44   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     47   

Letter from Chief Executive Officer

     70   

Business

     71   

Management

     87   
 

 

We are responsible for the information contained in this prospectus and in any free writing prospectus we prepare and authorize. Neither we nor any of the underwriters have authorized anyone to provide you with different information, and we take no responsibility for any other information others may give you. Neither we nor the underwriters are making an offer to sell these securities in any jurisdictions where the offer and sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the cover of this prospectus. Our business, financial condition, results of operations and future growth prospects may have changed since that date.

Persons who come into possession of this prospectus and any applicable free writing prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus and any such free writing prospectus applicable to that jurisdiction.

Until                     , 2015 (the 25th day after the date of this prospectus), all dealers that buy, sell or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to their unsold allotments or subscriptions.


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PROSPECTUS SUMMARY

This summary highlights information contained in other parts of this prospectus. Because it is only a summary, it does not contain all of the information that you should consider before investing in shares of our common stock and it is qualified in its entirety by, and should be read in conjunction with, the more detailed information appearing elsewhere in this prospectus. You should read the entire prospectus carefully, especially “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes, before deciding to buy shares of our common stock. Unless the context requires otherwise, references in this prospectus to “Instructure,” the “company,” “we,” “us” and “our” refer to Instructure, Inc. and its wholly-owned subsidiaries.

INSTRUCTURE, INC.

Mission and Vision

Instructure’s mission is to make software that makes people smarter. Our vision is to help organizations everywhere leverage technology to maximize the potential of their people.

Overview

We provide an innovative, cloud-based learning management platform for academic institutions and companies worldwide. We built our learning management applications, Canvas, for the education market, and Bridge, for the corporate market, to enable our customers to easily develop, deliver and manage engaging face-to-face and online learning experiences. Our platform combines powerful, elegant and easy-to-use functionality with the reliability, security, scalability and support required by our customers.

In today’s dynamic, knowledge-driven economy, quality education and constant learning are critical to compete and succeed. Academic institutions recognize that for students to reach their maximum potential, they require a learning environment that is interactive and accessible. Similarly, companies need to deliver seamless and easy learning experiences to better attract, develop and retain talent and compete more effectively.

We develop software that millions of students, teachers and employees use to help achieve their education and learning goals. Our applications enhance academic and corporate learning by providing an engaging, easy-to-use platform for instructors and learners, enabling frequent and open interactions, streamlining workflow, and allowing the creation and sharing of content with anytime, anywhere access to information. Our open standards allow for integration with third-party publishers and software providers to deliver additional learning content and applications. Our platform also provides data analytics capabilities enabling real-time reaction to information and benchmarking in order to personalize curricula and increase the efficacy of the learning process.

We offer our platform through a Software-as-a-Service, or SaaS, business model. Customers can rapidly deploy our applications with minimal upfront implementation. Customers also benefit from automatic software updates with virtually no downtime.

We launched Canvas in February 2011 and have experienced rapid customer adoption in the education market. In addition, more than 100 corporate customers have implemented Canvas in order to deliver a more effective, simple way for their employees to learn. To better meet the needs of the corporate market, we leveraged our platform to develop Bridge, which launched in February 2015. As of June 30, 2015, we had more than 1,400 customers, representing colleges, universities, K-12 school districts, and companies in more than 25 countries.

 



 

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For 2012, 2013 and 2014, revenue was $8.8 million, $26.1 million and $44.4 million, respectively, representing year-over-year growth of 197% and 70%. We have experienced net revenue retention rates of over 100% at each of December 31, 2012, 2013 and 2014. For 2012, 2013 and 2014, our net losses were $18.5 million, $22.5 million and $41.4 million, respectively, as we focused on growing our business. For the six months ended June 30, 2015, revenue was $30.5 million and we incurred a net loss of $30.6 million.

Industry Background

The Markets for Learning are Large, Growing and Highly Strategic

The market for academic and corporate learning management software is estimated to be $4.1 billion in 2015, and projected to grow to $7.8 billion in 2018, according to MarketsandMarkets. We attribute the rapid growth of this market, in part, to the migration of instructor-led training to online learning, which we believe will increase the adoption of learning management systems.

Corporate learning management software is part of the broader human capital management market, which also includes the recruiting, workforce management, performance management and compensation management software markets. IDC estimates that these additional markets will be $5.1 billion in 2015, and projected to grow to $6.4 billion in 2018. We believe these additional markets may present opportunities for us to develop additional applications on our platform over time.

Consumerization of Technology is Changing How People Interact, Learn, Train and Work

Recent innovations in consumer-oriented technology are changing how people expect to interact, learn, train and work. In particular, the ubiquity of social media and highly intuitive consumer and mobile applications have led instructors, students and employees to expect the same rich functionality, availability and usability from a learning platform.

Strong User Engagement Leads to Robust Data Analytics

A learning management system has the potential to provide significant insight to educators and administrators on their students’ and employees’ progress toward meeting learning objectives and the factors impacting performance. High utilization enables the learning management system to capture more data and leads to more insightful analyses on user behavior, quality of individual courses and effectiveness of digital content. Better analytics enables instructors and administrators to make more informed decisions about instruction and materials that in turn drive improved learning outcomes and performance for individuals and companies.

Legacy Learning Management Systems Do Not Meet the Needs of Today’s Instructors, Students and Employees

Many traditional learning management systems are based on legacy technology architectures that do not meet the expectations of today’s users. We believe legacy learning management systems face the following key challenges:

 

    Poor User Experience. Learning management systems were first introduced over a decade ago. These systems often lack the features and interfaces to deliver a personalized, collaborative, engaging, mobile and always-on experience that users expect today.

 

    Not Mobile. Legacy learning management systems were not built for mobility and efforts to retrofit for use with mobile devices have often resulted in a poor user experience.

 

    Unreliable with Poor Uptime. Legacy learning management systems were not designed for cloud-based deployment. Traditional on-premise systems require downtime for maintenance, upgrades and unforeseen bug fixes, which can adversely impact instructors and students during critical times.

 



 

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    Low UtilizationLegacy learning management systems have historically been plagued by user dissatisfaction resulting in low utilization rates. Lack of utilization adversely affects the investments these institutions have made in their learning management systems. 48% of users are looking to leave their current learning management system and move to a new provider, according to the Brandon Hall Group.

 

    Expensive. Legacy learning management systems require substantial upfront and ongoing investments in IT infrastructure to implement and maintain an on-premise solution. Organizations often choose not to deploy software or to delay upgrades to newer versions due to concerns regarding costs, lengthy implementation and customization cycles, and potential business disruptions.

 

    Limited Reach and Complexity of Data Analytics. While legacy learning management systems have historically enabled the capture of data, access has been generally limited to administrators and teachers and not to students. Further, analytics tools currently offered in existing on-premise solutions can be limited in capabilities making it difficult to translate the data into useful actionable information.

 

    Closed Ecosystem. Legacy learning management solutions are often closed systems, which can limit the number of third-party integrations into a platform. Customers are forced to spend time and often money to obtain separate integration contracts with third-party publishers and software providers.

Our Platform

We designed our platform to enable users to teach, learn and collaborate anytime, anywhere, across a wide variety of application environments, operating systems, devices and locations. We believe our platform offers the following key benefits:

 

    Intuitive User Experience. We provide elegant and intuitive user interfaces that leverage familiar, consumer web navigation techniques, such as drag and drop, to make it easy to use our platform. We designed our system from the ground up, with modern, web-based design features, to create a differentiated user experience. We enable seamless collaboration among instructors and learners to share feedback and encourage online discussion forums.

 

    Optimized for Mobile. Our mobile-optimized platform allows users to access their applications anytime and anywhere. We offer a “mobile first” responsive design to ensure an optimal experience on most devices and, for Canvas, we also have iOS and Android native mobile applications available for free download on both phones and tablets.

 

    High Availability and Uptime. Our software is mission-critical for our users and customers and we focus on maintaining enterprise-grade reliability at all times. Our standard contracts provide for guaranteed 99.9% annual uptime. We achieved 99.9% uptime during 2014 while our customer base grew over 75%.

 

    High Utilization. Over eight million instructors, students and employees have used our software over the 12 months ended June 30, 2015. According to self-reported data in an ECAR 2014 survey, 58% of faculty in higher education use a learning management system to share content with students, while our internal analysis of higher education institutions using Canvas shows that 71% of faculty use Canvas to share content with students.

 

    Native Cloud-based Software. Our cloud-based delivery model enables customers to rapidly deploy our applications to experience immediate benefit. Software updates are implemented regularly and transparently. Our single-instance, multi-tenant architecture is designed to scale to support our rapid growth.

 



 

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    Open Access to Data Analytics. Our platform provides users with open API access to data analytics. We deliver the analytics in an easy to understand and consumable way, that is optimized for independent analysis. This open visibility allows learners to view their own progress in real-time, educators to adjust programs and personalize curricula for maximum effectiveness and organizations to benchmark user data internally and respond to patterns observed.

 

    Open Platform. We are committed to collaboration and openness. Our open standards allow organizations to easily deliver additional learning content and applications from third-party publishers and software providers through our EduAppCenter.com’s growing catalog of approximately 200 integrations or through open APIs.

Our Growth Strategy

We are pursuing the following strategies to grow our business:

 

    Grow our U.S. Customer Base. We believe there is opportunity to substantially expand our base of U.S. academic and corporate customers. K-12 academic institutions have yet to widely adopt learning management systems, while most higher education institutions have adopted legacy systems with which they are often unsatisfied. In the corporate market, there are both greenfield opportunities and opportunities to displace legacy solutions that do not meet customer needs.

 

    Further Maximize our Existing Customer Base. The majority of our academic customers implement Canvas widely within their institutions and across school districts. We plan to increase revenue from this customer base by selling additional applications and services. We plan to further penetrate our existing corporate customer base by growing the number of users on our platform and expanding enterprise wide. We believe our user-based pricing model and innovative applications provide us with a substantial opportunity to increase the value of our existing customer base.

 

    Continue to Expand Internationally. We intend to expand our direct and indirect sales force to further penetrate international markets. We opened our international headquarters in London in June 2014, and for the six months ended June 30, 2015, international customers accounted for 6% of our revenue.

 

    Continue to Innovate and Offer New Applications. We will continue to make significant investments to further enhance the functionality of our existing applications, expand the number of applications on our extensible learning platform and develop into adjacent markets that will benefit our customers.

Risks Associated with Our Business

Our business is subject to numerous risks and uncertainties including those highlighted in the section titled “Risk Factors” immediately following this prospectus summary. These risks include, among others, the following:

 

    We have a history of losses and anticipate that we will continue to incur losses for the foreseeable future and may not achieve or maintain profitability in the future.

 

    We have a limited operating history, which makes it difficult to evaluate our prospects and future operating results.

 

    We depend on new customer acquisition and expansion and customer renewals and given our limited operating history, we do not have a long history on which to base forecasts of customer renewal rates or future operating results.

 

    If our efforts to further increase the use and adoption of Canvas do not succeed, or if Bridge does not gain widespread market acceptance, our revenue will be harmed.

 

    We may experience quarterly fluctuations in our operating results due to a number of factors, which makes our future results difficult to predict and could cause our operating results to fall below expectations or our guidance.

 



 

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    If we fail to manage our growth effectively or our business does not grow as we expect, our operating results may suffer.

 

    We face significant competition from both established and new companies offering learning management systems.

 

    The success of our business depends in part on our ability to protect and enforce our intellectual property rights.

 

    Our executive officers, directors and holders of more than 5% of our outstanding common stock will beneficially own approximately     % of our common stock upon the closing of this offering and will continue to have substantial control over us.

If we are unable to adequately address these and other risks we face, our business, financial condition, operating results and prospects may be adversely affected.

Emerging Growth Company Status

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, enacted in April 2012, and therefore we intend to take advantage of certain exemptions from various public company reporting requirements, including not being required to have our internal control over financial reporting audited by our independent registered public accounting firm pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute payments not previously approved. We may take advantage of these exemptions for up to five years or until we are no longer an “emerging growth company,” whichever is earlier.

Corporate Information

We were incorporated in Delaware in September 2008. Our principal executive offices are located at 6330 South 3000 East, Suite 700, Salt Lake City, UT 84121 and our telephone number is (800) 203-6755. Our corporate website address is www.instructure.com. Information contained on or accessible through our website is not a part of this prospectus, and the inclusion of our website address in this prospectus is an inactive textual reference only.

Instructure, Canvas, the Instructure logo, Canvas logo and Bridge logo are trademarks of Instructure, Inc. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

 



 

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THE OFFERING

 

Common stock offered

  

                         shares

Common stock to be outstanding after this offering

  

                         shares

Over-allotment option

  

                         shares

Use of proceeds

  

We estimate that the net proceeds from this offering will be approximately $         million (or approximately $         million if the underwriters exercise their over-allotment option in full), based on an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

We intend to use the net proceeds to us from this offering primarily for general corporate purposes, including working capital, sales and marketing activities, research and development activities, general and administrative matters and capital expenditures. We may also use a portion of the net proceeds from this offering for acquisitions of, or investments in, technologies, solutions or businesses that complement our business, although we have no present commitments or agreements to enter into any such acquisitions or investments. See “Use of Proceeds” for additional information.

Proposed New York Stock Exchange symbol

  

“INST”

The number of shares of common stock to be outstanding after this offering is based on 32,173,354 shares of common stock outstanding as of June 30, 2015, and excludes:

 

    5,467,958 shares of common stock issuable upon the exercise of outstanding stock options as of June 30, 2015, with a weighted-average exercise price of $3.51 per share;

 

    155,000 shares of common stock issuable upon the exercise of outstanding warrants as of June 30, 2015, with a weighted-average exercise price of $1.41 per share;

 

    974,896 shares of common stock reserved for future issuance under our 2010 Equity Incentive Plan, which shares will cease to be available for issuance at the time our 2015 Equity Incentive Plan becomes effective in connection with this offering;

 

    3,000,000 shares of common stock reserved for future issuance under our 2015 Equity Incentive Plan, as well as any automatic increases in the number of shares of common stock reserved for future issuance under this plan, which will become effective upon the execution of the underwriting agreement for this offering; and

 

    500,000 shares of common stock reserved for future issuance under our 2015 Employee Stock Purchase Plan, as well as any automatic increases in the number of shares of common stock reserved for future issuance under this plan, which will become effective upon the execution of the underwriting agreement for this offering.

 



 

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In addition, unless we specifically state otherwise, all information in this prospectus assumes:

 

    the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws in connection with the closing of this offering;

 

    the conversion of all outstanding shares of our preferred stock into an aggregate of 22,465,711 shares of common stock upon the closing of this offering;

 

    no exercise of outstanding stock options or warrants; and

 

    no exercise by the underwriters of their option to purchase up to an additional              shares of common stock to cover over-allotments.

 



 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following tables summarize our consolidated financial data. We have derived the summary consolidated statements of operations data for the years ended December 31, 2013 and 2014 from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statement of operations data for the year ended December 31, 2012 has been derived from our audited financial statements not included in this prospectus. The consolidated statements of operations data for the six months ended June 30, 2014 and 2015 and the consolidated balance sheet data as of June 30, 2015 are derived from our unaudited interim consolidated financial statements included elsewhere in this prospectus. Our unaudited interim consolidated financial statements were prepared on a basis consistent with our audited consolidated financial statements and include, in our opinion, all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of the financial information set forth in those statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future.

You should read this data together with our consolidated financial statements and related notes appearing elsewhere in this prospectus and the sections titled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     Year Ended December 31,     Six Months Ended
June 30,
 
     2012     2013     2014         2014             2015      
                       (unaudited)  
     (in thousands, except per share data)  

Consolidated Statements of Operations Data:

  

Revenue:

      

Subscription and support

   $ 7,403      $ 22,456      $ 38,093      $ 15,724      $ 25,948   

Professional services and other

     1,371        3,599        6,259        2,452        4,554   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     8,774        26,055        44,352        18,176        30,502   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

          

Subscription and support(1)

     4,346        8,581        12,131        5,086        7,613   

Professional services and other(1)

     2,748        2,039        2,982        1,118        2,830   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue(1)

     7,094        10,620        15,113        6,204        10,443   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     1,680        15,435        29,239        11,972        20,059   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Sales and marketing(1)

     11,912        20,702        35,390        14,191        25,131   

Research and development(1)

     4,698        11,242        21,290        7,812        10,916   

General and administrative(1)

     3,411        5,321        11,268        4,183        13,969   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     20,021        37,265        67,948        26,186        50,016   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (18,341     (21,830     (38,709     (14,214     (29,957
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

          

Interest income

     8        22        32        28        7   

Interest expense

     (7     (150     (136     (57     (44

Change in fair value of warrant liability

     (199     (545     (2,518     (1,391     (527

Other income (expense) net

     3        4        (39     14        (109
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     (195     (669     (2,661     (1,406     (673
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (18,536     (22,499     (41,370     (15,620     (30,630

Income tax expense

                   (57            (14
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (18,536   $ (22,499   $ (41,427   $ (15,620   $ (30,644
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deemed dividends to investors

   $      $ (353   $      $      $ (632
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (18,536   $ (22,852   $ (41,427   $ (15,620   $ (31,276
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share attributable to common stockholders, basic and diluted(2)

   $ (3.57   $ (4.05   $ (4.98   $ (2.04   $ (3.33
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares used in computing basic and diluted net loss per common share attributable to common stockholders(2)

     5,185        5,642        8,312        7,656        9,392   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per common share attributable to common stockholders, basic and diluted (unaudited)(2)

       $ (1.37     $ (0.98
      

 

 

     

 

 

 

Pro forma weighted average common shares used in computing basic and diluted net loss per common share attributable to common stockholders (unaudited)(2)

         30,218          31,858   
      

 

 

     

 

 

 

 



 

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(1) Includes stock-based compensation as follows:

 

     Year Ended
December 31,
     Six Months Ended
June 30,
 
     2012      2013      2014      2014      2015  
                          (unaudited)  
     (in thousands)  

Cost of revenue:

           

Subscription and support

   $ 7       $ 28       $ 258       $ 10       $ 57   

Professional services and other

     5         8         39         13         58   

Sales and marketing

     473         1,597         2,877         103         422   

Research and development

     442         1,585         3,971         160         527   

General and administrative

     910         374         1,053         205         5,623   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $   1,837       $   3,592       $   8,198       $   491       $   6,687   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) See Note 1 to our consolidated financial statements for an explanation of the method used to calculate basic and diluted and pro forma net loss per common share attributable to common stockholders.

 

     As of June 30, 2015  
     Actual     Pro
Forma(1)
     Pro Forma
As
Adjusted(2)(3)
 
     (unaudited)  
     (in thousands)  

Consolidated Balance Sheet Data:

  

Cash and cash equivalents

   $ 13,608      $                    $                

Working capital, excluding current deferred revenue

     35,733        

Total assets

     61,708        

Deferred revenue

     45,793        

Total liabilities

     67,916        

Redeemable convertible preferred stock

     93,770        

Total stockholders’ (deficit) equity

     (99,978     

 

(1) The pro forma column reflects the conversion of all outstanding shares of redeemable convertible preferred stock into 22,465,711 shares of common stock upon the closing of this offering.
(2) The pro forma as adjusted column further reflects the sale of              shares of our common stock in this offering at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
(3) Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) each of cash and cash equivalents, working capital, excluding current deferred revenue, total assets and total stockholders’ (deficit) equity on a pro forma as adjusted basis by $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus remains the same, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) by 1,000,000 shares in the number of shares offered by us would increase (decrease) each of cash and cash equivalents, working capital, excluding current deferred revenue, total assets and total stockholders’ (deficit) equity on a pro forma as adjusted basis by $         million, assuming that the assumed initial public offering price remains the same, after deducting underwriting discounts and commissions. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.

 



 

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     Year Ended
December 31,
    Six Months Ended
June 30,
 
     2012     2013     2014     2014     2015  
     (unaudited)  
     (in thousands)  

Other Financial Data:

    

Non-GAAP operating loss(1)

   $ (16,286   $ (17,704   $ (29,280   $ (13,721   $ (21,939

 

(1) We define non-GAAP operating loss as operating loss before stock-based compensation, payroll tax expense on secondary stock purchase transactions and amortization of acquisition-related intangibles. For more information about non-GAAP operating loss and a reconciliation of non-GAAP operating loss to loss from operations, the most directly comparable financial measure calculated and presented in accordance with U.S. generally accepted accounting principles, or GAAP, see the section titled “Selected Consolidated Financial Data—Non-GAAP Financial Measure.”

 



 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including our consolidated financial statements and related notes, before deciding whether to purchase shares of our common stock. If any of the following risks actually occur, it could harm our business, prospects, operating results and financial condition. In such event, the market price of our common stock could decline and you could lose part or all of your investment.

Risks Related to Our Business and Industry

We have a history of losses and anticipate that we will continue to incur losses for the foreseeable future and may not achieve or maintain profitability in the future.

We have incurred net losses of $18.5 million, $22.5 million and $41.4 million in 2012, 2013 and 2014, respectively, and $15.6 million and $30.6 million in the six months ended June 30, 2014 and 2015, respectively. We had an accumulated deficit of $120.6 million at June 30, 2015. We must generate and sustain higher revenue levels in future periods to become profitable, and, even if we do, we may not be able to maintain or increase our profitability. We expect to continue to incur losses for the foreseeable future as we expend substantial financial and other resources on, among other things:

 

    sales and marketing, including expanding our direct sales organization and marketing programs, particularly for larger customers;

 

    investments in our research and development team, and the development of new applications and new features for, and enhancements of, our existing applications;

 

    expansion of our operations and infrastructure, both domestically and internationally; and

 

    general administration, including legal, accounting, and other expenses related to being a public company.

These expenditures may not result in additional revenue or the growth of our business. We also expect that our revenue growth rate will decline over time. Accordingly, we may not be able to generate sufficient revenue to offset our expected cost increases and achieve and sustain profitability. If we fail to achieve and sustain profitability, the market price of our common stock could decline.

We have a limited operating history, which makes it difficult to evaluate our prospects and future operating results.

We launched Canvas in February 2011 and launched Bridge in February 2015. Our limited operating history makes our ability to forecast future operating results difficult and subjects us to a number of uncertainties, including our ability to plan and model future growth. Our revenue grew 197% and 70% in 2013 and 2014, respectively, compared to the prior year; however, our historical revenue growth is not necessarily indicative of our future performance. We expect our revenue growth rates to slow in future periods due to a number of reasons, which may include the maturation of our business, slowing demand for our platform and applications, increasing competition, a decrease in the growth of our overall markets, or if we fail, for any reason, to continue to capitalize on growth opportunities, our relative lack of experience with renewals or a decline in available opportunities as a result of our increased market penetration in one or more of our markets.

We have encountered and will encounter risks and uncertainties frequently experienced by growing companies in rapidly changing industries, such as determining appropriate investments of our limited resources, market adoption of our current and future applications, competition from other companies, acquiring and retaining customers, hiring, integrating, training and retaining skilled personnel, developing new applications,

 

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determining prices and contract terms for our applications, unforeseen expenses and challenges in forecasting accuracy. If our assumptions regarding these risks and uncertainties, which we use to plan our business, are incorrect or change, or if we do not address these risks successfully, our prospects, operating results and business could be harmed.

We depend on new customer acquisition and expansion and customer renewals to grow our business.

We derive, and expect to continue to derive, a substantial majority of our revenue from the sale of new subscriptions or renewals of subscriptions to our learning management platform and applications. Our growth today is primarily driven by new subscriptions. Our contracts typically vary in length between one and five years and our customers have no obligation to renew their subscriptions after the expiration of their initial subscription periods. Our customers may elect not to renew or may seek to renew for lower subscription amounts or for shorter contract lengths. Our renewal rates may decline or fluctuate as a result of a number of factors, including limited customer resources, pricing changes, adoption and utilization of our applications and services by our customers, customer satisfaction with our learning management platform and applications, the acquisition of our customers by other companies, procurement or budgetary decisions from legislative or other regulatory bodies, and deteriorating general economic conditions. As our customer base continues to grow, renewals will become an increasingly important part of our results. If our customers do not renew their subscriptions for our learning management platform and applications, or decrease the amount they spend with us, our revenue will decline and our business will be harmed.

Because our recent growth has resulted in the rapid expansion of our business, we do not have a long history upon which to base forecasts of customer renewal rates or future revenue. As a result, our future operating results may be significantly below the expectations of investors, which could harm the market price of our common stock.

We have a limited history with our subscription and pricing models and changes in our models could adversely affect our revenue, gross profit and financial position.

We have limited experience with respect to determining the optimal prices and contract length for our learning management platform and applications, in particular with Bridge, and as a result, we have in the past and expect in the future that we will need to change our pricing model or contract length from time to time. For example, in May 2015, we raised our subscription prices for Canvas for higher education institutions. As the market for our learning management platform and applications grows, as new competitors introduce new competitive applications or services, or as we enter into new international markets, we may be unable to attract new customers at the same price or based on the same pricing models we have historically used, or for contract lengths consistent with our historical averages. Pricing and contract length decisions may also impact the mix of adoption among our applications and negatively impact our overall revenue. Moreover, larger organizations may demand substantial price concessions or shorter contract duration. As a result, in the future we may be required to reduce our prices or offer shorter contract durations, which could adversely affect our revenue, gross profit and financial position.

We may experience quarterly fluctuations in our operating results due to a number of factors, which makes our future results difficult to predict and could cause our operating results to fall below expectations.

Our quarterly operating results have fluctuated in the past and we expect them to fluctuate in the future due to a variety of factors, many of which are outside of our control. As a result, our past results may not be indicative of our future performance, and comparing our operating results on a period-to-period basis may not be meaningful. In addition to the other risks described in this prospectus, factors that may affect our quarterly operating results include:

 

    changes in spending on learning management systems by our current or prospective customers;

 

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    pricing our applications effectively so that we are able to attract and retain customers without compromising our operating results;

 

    attracting new customers and increasing our existing customers’ use of our applications;

 

    customer renewal rates and the amounts for which agreements are renewed;

 

    awareness of our brands;

 

    changes in the competitive dynamics of our market, including consolidation among competitors or customers and the introduction of new applications or application enhancements;

 

    changes to the commission plans, quotas and other compensation-related metrics for our sales representatives;

 

    the amount and timing of payment for operating expenses, particularly research and development, sales and marketing expenses and employee benefit expenses;

 

    our ability to manage our existing business and future growth, including increases in the number of customers on our platform and the introduction and adoption of our platform in new markets outside of the United States;

 

    unforeseen costs and expenses related to the expansion of our business, operations and infrastructure, including disruptions in our hosting network infrastructure and privacy and data security;

 

    foreign currency exchange rate fluctuations; and

 

    general economic and political conditions in our domestic and international markets.

We may not be able to accurately forecast the amount and mix of future subscriptions, size or duration of contracts, revenue and expenses and, as a result, our operating results may fall below our estimates or the expectations of public market analysts and investors. If our revenue or operating results fall below the expectations of investors, or below any estimates we may provide, the market price of our common stock could decline.

Our business is subject to seasonal sales and customer growth fluctuations which could result in volatility in our operating results.

We have historically experienced a pattern of higher sales and new academic customers in the second and third quarters, as a result of school procurement periods, which are typically based on a fiscal year ending June 30. This has resulted in lower sequential sales and customer growth in the other quarters of the year. As we attempt to expand the number of our corporate customers, we may see changes to this pattern of seasonality. Seasonality may cause our sales and customer growth to vary from quarter-to-quarter depending on the variability in the volume and timing of sales and renewals. These factors, among other things, make forecasting more difficult and may adversely affect our ability to predict financial results accurately, which could result in volatility or adversely affect the market price of our common stock.

We could lose revenue if there are changes in the spending policies or budget priorities for government funding of colleges, universities, schools and other education providers.

Our Canvas customers include colleges, universities, K-12 schools and other education providers, many of which depend substantially on government funding. Accordingly, any general decrease, delay or change in federal, state or local funding for colleges, universities, schools and other education providers could cause our current and potential customers to reduce their purchases of Canvas and related services, or decide not to renew their subscriptions, any of which could cause us to lose customers and revenue. In addition, a specific reduction in governmental funding support for learning management systems could also cause us to lose customers and revenue.

 

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Because we generally recognize revenue from subscriptions ratably over the term of the agreement, near term changes in sales may not be reflected immediately in our operating results.

We offer our learning management platform and applications primarily through multi-year subscription agreements and generally recognize revenue ratably over the related subscription period. As a result, much of the revenue we report in each quarter is derived from agreements entered into during prior quarters or years. A decline in new or renewed subscriptions in any one quarter is not likely to be reflected immediately in our revenue results for that quarter. However, declines would negatively affect our revenue and deferred revenue balances in future periods, and the effect of significant downturns in sales and market acceptance of our platform and applications, and potential changes in our rate of renewals, may not be fully reflected in our results of operations until future periods. Our subscription model also makes it difficult for us to rapidly increase our total revenue and deferred revenue balance through additional sales in any period, as revenue from new customers is recognized over the applicable subscription term.

Because we expense commissions associated with sales of our applications immediately upon the execution of a subscription agreement with a customer, our operating income in any period may not be indicative of our financial health and future performance.

We expense commissions paid to our sales personnel in the period in which we enter into an agreement for the sale of our applications. In contrast, we generally recognize the revenue associated with a sale of our applications ratably over the related subscription period. Although we believe higher sales is a positive indicator of the long-term health of our business, higher sales increases our operating expenses and could decrease earnings in any particular period. Thus, we may report poor operating results due to higher sales commissions in a period in which we experience strong sales of our applications. Alternatively, we may report better operating results due to the reduction of sales commissions in a period in which we experience a slowdown in sales. Therefore, you should not necessarily rely on our operating income during any one quarter as an indication of our financial health and potential future performance.

If the market for our applications develops more slowly than we expect, our growth may slow or stall, and our operating results would be harmed.

The market for learning management systems is still evolving, and we depend on continued growth of this market. We do not know whether the trend of adoption of cloud-based learning management systems we have experienced with our academic customers in the past will continue in the future. To date, we have derived a substantial majority of our revenue from Canvas. A critical factor for our continued growth is our ability to sell Canvas to new customers in K-12 and higher education. The adoption trend for our academic customers is subject to influence from federal, state and local policymakers. Historically, our corporate customers have licensed our Canvas application. To better meet the needs of the corporate market, we launched Bridge in February 2015. Given our limited history with corporate customers, we do not know whether companies will adopt cloud-based learning management systems, or what prices or contract terms to which they will agree. We will incur substantial operating costs, particularly in sales and marketing and research and development, in attempting to develop these markets. If the market for Canvas does not continue to grow, or grows more slowly than we expect, or if the market for Bridge does not develop as we anticipate, our operating results would be harmed.

If we fail to effectively develop and expand our sales and marketing capabilities, our ability to increase our customer base and increase the market share of our learning management platform and applications could be harmed.

To increase the number of customers and increase the market share of our learning management platform and applications, we will need to expand our sales and marketing operations, including our domestic and international sales force and international resellers. We will continue to dedicate significant resources to sales and marketing programs. The effectiveness of our inbound sales and marketing has varied over time and, together with the effectiveness of any international resellers we may engage, may vary in the future. Our business

 

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will be harmed if our efforts do not generate a correspondingly significant increase in revenue. We may not achieve anticipated revenue growth from expanding our sales force if we are unable to hire, develop and retain talented sales personnel, if our new sales personnel are unable to achieve desired productivity levels in a reasonable period of time or if our sales and marketing programs are not effective.

We face significant competition from both established and new companies offering learning management systems, which may harm our ability to gain new customers, retain existing customers and grow our business.

The learning management systems market is evolving, highly competitive and significantly fragmented, particularly in the K-12 and corporate markets. With the introduction of new technologies and the potential entry of new competitors into the market, we expect competition to persist and intensify in the future, which could harm our ability to increase sales, maintain or increase renewals and maintain our prices.

We face intense competition from other software companies that develop learning management systems. Canvas primarily competes with systems offered by Blackboard, Desire2Learn and Moodle in the education market. Bridge primarily competes with systems offered by Cornerstone OnDemand, Saba Software and SumTotal Systems (owned by Skillsoft) along with dozens of small, specialized systems for specific industries to large, generalized systems provided as part of a larger human resources management suite. Competition could significantly impede our ability to sell or renew subscriptions to our learning management platform and applications on terms favorable to us. Our current and potential competitors may develop and market new technologies that render our existing or future applications less competitive, unmarketable or obsolete. In addition, if these competitors develop applications with similar or superior functionality to our software, we may need to decrease the prices or accept less favorable terms for our subscriptions in order to remain competitive. If we are unable to maintain our pricing due to competitive pressures, margins will be reduced and operating results will be negatively affected.

Current competitors have, and potential competitors may have, significantly more financial, technical, marketing and other resources than us, and may be able to devote greater resources to the development, promotion, sale and support of their applications and services, have more extensive customer bases and broader customer relationships, and longer operating histories and greater name recognition than us. As a result, these competitors may be better able to respond quickly to new technologies and to undertake more extensive marketing campaigns. In a few cases, these vendors may also be able to offer additional software at little or no additional cost by bundling them with their existing suite of applications. To the extent any competitor has existing relationships with potential customers for other applications, those customers may be unwilling to purchase our software because of their existing relationships with the competitor. If we are unable to compete with such companies, the demand for our platform and applications could be adversely affected.

In addition, if one or more competitors were to merge or partner with another competitor, our ability to compete effectively could be adversely affected. Competitors may also establish or strengthen cooperative relationships with current or future distribution or technology partners or other parties with whom we have relationships, thereby limiting our ability to sell our applications. We may not be able to compete successfully against current or future competitors, and competitive pressures may harm our business, operating results and financial condition.

If we fail to adapt and respond effectively to rapidly changing technology, evolving industry standards and changing customer needs or requirements, our learning management platform and applications may become less competitive.

Our future success depends on our ability to adapt and enhance our learning management platform and applications. To attract new customers and increase revenue from existing customers, we need to continue to enhance and improve our application offerings, features and enhancements to meet customer needs at prices that our customers are willing to pay. Such efforts will require adding new functionality and responding to technological advancements, which will increase our research and development costs. If we are unable to develop

 

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applications that address customers’ needs, or enhance and improve our platform in a timely manner, we may not be able to maintain or increase market acceptance of our platform and applications. Further, many of our competitors expend a considerably greater amount of funds on their research and development programs, and those that do not may be acquired by larger companies that would allocate greater resources to our competitors’ research and development programs. If we fail to maintain adequate research and development resources or compete effectively with the research and development programs of our competitors our business could be harmed. Our ability to grow is also subject to the risk of future disruptive technologies. Access and use of our learning management platform and applications is provided via the internet, which, itself, was disruptive to the previous enterprise software model. If new technologies emerge that are able to deliver learning management software and related applications at lower prices, more efficiently, more conveniently or more securely, such technologies could adversely affect our ability to compete.

The length and unpredictability of the sales cycle for our platform and applications could delay new sales and cause our revenue for any given quarter to fail to meet our estimates or market expectations.

The sales cycle between our initial contact with a potential customer and the signing of a license varies. As a result of the variability and length of the sales cycle, we have only a limited ability to forecast the timing of sales. A delay in or failure to complete sales could harm our business and financial results, and could cause our financial results to vary significantly from period to period. Our sales cycle varies widely, reflecting differences in potential customers’ decision-making processes, procurement requirements and budget cycles, and is subject to significant risks over which we have little or no control, including:

 

    customers’ budgetary constraints and priorities;

 

    the timing of customers’ budget cycles;

 

    the need by some customers for lengthy evaluations that often include both their administrators and faculties; and

 

    the length and timing of customers’ approval processes.

Potential customers typically conduct extensive and lengthy evaluations before committing to our applications and services and generally require us to expend substantial time, effort and money educating them as to the value of our offerings.

Our planned further expansion of our business outside the United States exposes us to risks associated with international operations.

Our growth strategy involves the further expansion of our operations and customer base internationally. For the six months ended June 30, 2015, 6% of our revenue was derived from outside the United States. We opened our international headquarters in London, England in June 2014 and have offices in Sydney, Australia and Hong Kong. Our current international operations and future initiatives will involve a variety of risks, including:

 

    more stringent regulations relating to data security and the unauthorized use of, or access to, commercial and personal information, particularly in the European Union;

 

    technical or latency issues in delivering our platform and applications;

 

    dependence on certain third parties, including resellers with whom we do not have extensive experience;

 

    unexpected changes in regulatory requirements, taxes or trade laws;

 

    differing labor regulations, especially in the European Union, where labor laws are generally more advantageous to employees as compared to the United States, including deemed hourly wage and overtime regulations in these locations;

 

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    challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs;

 

    difficulties in maintaining our company culture with a dispersed and distant workforce;

 

    difficulties in managing a business in new markets with diverse cultures, languages, customs, legal systems, alternative dispute systems and regulatory systems;

 

    currency exchange rate fluctuations and the resulting effect on our revenue and expenses, and the cost and risk of entering into hedging transactions if we choose to do so in the future;

 

    limitations on our ability to reinvest earnings from operations in one country to fund the capital needs of our operations in other countries;

 

    limited or insufficient intellectual property protection;

 

    political instability or terrorist activities;

 

    requirements to comply with foreign privacy and information security laws and regulations and the risks and costs of non-compliance;

 

    likelihood of potential or actual violations of domestic and international anticorruption laws, such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act, or of U.S. and international export control and sanctions regulations, which likelihood may increase with an increase of sales or operations in foreign jurisdictions and operations in certain industries; and

 

    adverse tax burdens and foreign exchange controls that could make it difficult to repatriate earnings and cash.

Our limited experience in operating our business internationally increases the risk that any potential future expansion efforts that we may undertake will not be successful. If we invest substantial time and resources to expand our international operations and are unable to do so successfully and in a timely manner, our business and operating results will be harmed.

If we fail to offer high-quality professional services and support, our business and reputation may suffer.

High-quality professional services and support, including training, implementation and consulting services, are important for the successful marketing, sale and use of our learning management platform and applications and for the renewal of existing customers. The importance of high-quality professional services and support will increase as we expand our business and pursue new customers. If we do not provide effective ongoing support, our ability to sell additional functionality and services to, or to retain, existing customers may suffer and our reputation with existing or potential customers may be harmed.

If we fail to manage our growth effectively or our business does not grow as we expect, our operating results may suffer.

Our employee base and operations have grown substantially in a relatively short period of time. Our full-time employee base grew from 401 employees as of June 30, 2014 to 651 employees as of June 30, 2015. Our growth has placed, and will continue to place, a significant strain on our operational, financial and management infrastructure. We anticipate further increases in headcount will be required to support increases in our application offerings and continued expansion. To manage this growth effectively, we must continue to improve our operational, financial and management systems and controls by, among other things:

 

    effectively attracting, training and integrating a large number of new employees, particularly technical personnel and members of our management and sales teams;

 

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    further improving our key business systems, processes and information technology infrastructure to support our business needs;

 

    enhancing our information and communication systems to ensure that our employees are well-coordinated and can effectively communicate with each other and our customers; and

 

    improving our internal control over financial reporting and disclosure controls and procedures to ensure timely and accurate reporting of our operational and financial results.

If we fail to manage our expansion or implement new systems, or if we fail to implement improvements or maintain effective internal controls and procedures, costs and expenses may increase more than expected and we may not expand our customer base, increase renewal rates, enhance existing applications, develop new applications, satisfy customers, respond to competitive pressures, or otherwise execute our business plan. If we are unable to effectively manage our growth, our operating results will be harmed.

We rely on our management team and other key employees, and the loss of one or more key employees could harm our business.

Our success and future growth depend upon the continued services of our management team, including Joshua Coates, our Chief Executive Officer, and other key employees in the areas of engineering, marketing, sales, services and general and administrative functions. From time to time, there may be changes in our management team resulting from the hiring or departure of executives, which could disrupt our business. We also are dependent on the continued service of our existing software engineers and information technology personnel because of the complexity of our software, technologies and infrastructure. We may terminate any employee’s employment at any time, with or without cause, and any employee may resign at any time, with or without cause. We do not maintain any “key man” insurance for any employee. The loss of one or more of our key employees could harm our business.

If we fail to attract and retain additional qualified personnel we may be unable to execute our business strategy.

To execute our business strategy, we must attract and retain highly qualified personnel. In particular, we compete with many other companies for software developers with high levels of experience in designing, developing and managing cloud-based software, as well as for skilled information technology, marketing, sales and operations professionals, and we may not be successful in attracting and retaining the professionals we need, in particular in Utah, where we are headquartered. We have from time to time experienced, and we expect to continue to experience, difficulty in hiring and retaining highly skilled employees with appropriate qualifications which may, among other things, impede our ability to execute our software development and sales strategies. Many of the companies with which we compete for experienced personnel have greater resources than we do. In addition, in making employment decisions, particularly in the software industry, job candidates often consider the value of the stock options or other equity incentives they are to receive in connection with their employment. If the price of our stock declines, or experiences significant volatility, our ability to attract or retain qualified employees will be adversely affected. If we fail to attract new personnel or fail to retain and motivate our current personnel, our growth prospects could be harmed.

If we cannot maintain our company culture as we grow, we could lose the innovation, teamwork, passion and focus on execution that we believe contribute to our success and our business may be harmed.

We believe that a critical component to our success has been our company culture, which is based on dedication to customer experience, openness, ownership, trust, integrity, excellence and simplicity. We have invested substantial time and resources in building our team within this company culture. If we fail to preserve our culture our ability to retain and recruit personnel and to effectively focus on and pursue our corporate objectives could be harmed. As we grow and develop the infrastructure of a public company, we may find it

 

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difficult to maintain these important aspects of our company culture. If we fail to maintain our company culture, our business may be harmed.

If we do not maintain the compatibility of our learning management platform with third-party applications that our customers use in their businesses or schools, our revenue will decline.

A significant percentage of our customers choose to integrate our learning management platform with certain capabilities of third-party publishers and software providers using application programming interfaces, or APIs. The functionality and popularity of our platform depends, in part, on our ability to integrate our platform with third-party applications and software. Third-party providers of applications may change the features of their applications and software, restrict our access to their applications and software or alter the terms governing use of their applications and access to those applications and software in an adverse manner. Such changes could functionally limit or terminate our ability to use these third-party applications and software in conjunction with our learning management platform, which could negatively impact our offerings and harm our business. If we fail to integrate our platform with new third-party applications and software that our customers utilize, we may not be able to offer the functionality that our customers need, which would negatively impact our ability to generate revenue and adversely impact our business.

If our network or computer systems are breached or unauthorized access to customer data is otherwise obtained, our learning management platform and applications may be perceived as insecure and we may lose existing customers or fail to attract new customers, our reputation may be damaged and we may incur significant liabilities.

Use of our learning management platform and applications involve the storage, transmission and processing of our customers’ data, including personal or identifying information regarding their students or employees. Cyber attacks and other malicious internet-based activity continue to increase generally, and cloud-based platform providers of software and services have been targeted. If any unauthorized access to or security breaches of our platform, or those of our service providers, occurs, or is believed to have occurred, such an event or perceived event could result in the loss of data, loss of intellectual property or trade secrets, loss of business, severe reputational or brand damage adversely affecting customer or investor confidence, regulatory investigations and orders, litigation, indemnity obligations, damages for contract breach, penalties for violation of applicable laws, regulations, or contractual obligations, and significant costs for remediation that may include liability for stolen assets or information and repair of system damage that may have been caused, incentives offered to customers or other business partners in an effort to maintain business relationships after a breach, and other liabilities. Additionally, any such event or perceived event could impact our reputation, harm customer confidence, hurt our sales and expansion into existing and new markets, or cause us to lose existing customers. We could be required to expend significant capital and other resources to alleviate problems caused by such actual or perceived breaches and to remediate our systems, we could be exposed to a risk of loss, litigation or regulatory action and possible liability, and our ability to operate our business may be impaired. Additionally, actual, potential or anticipated attacks may cause us to incur increasing costs, including costs to deploy additional personnel and protection technologies, train employees and engage third-party experts and consultants.

In addition, if the security measures of our customers are compromised, even without any actual compromise of our own systems, we may face negative publicity or reputational harm if our customers or anyone else incorrectly attributes the blame for such security breaches to us or our systems. If customers believe that our platform and applications do not provide adequate security for the storage of personal or other sensitive information or its transmission over the internet, our business will be harmed. Customers’ concerns about security or privacy may deter them from using our platform for activities that involve personal or other sensitive information.

Our errors and omissions insurance covering certain security and privacy damages and claim expenses may not be sufficient to compensate for all liability. Although we maintain liability insurance for liabilities incurred as

 

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a result of some security and privacy damages, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all. Because the techniques used and vulnerabilities exploited to obtain unauthorized access or to sabotage systems change frequently and generally are not identified until they are launched against a target, we may be unable to anticipate these techniques or vulnerabilities or implement adequate preventative measures. We may also experience security breaches that may remain undetected for an extended period.

Because data security is a critical competitive factor in our industry, we make public statements in our privacy policies describing the security of our platform. Should any of these statements be untrue, become untrue, or be perceived to be untrue, even if through circumstances beyond our reasonable control, we may face claims, including claims of unfair or deceptive trade practices, brought by the U.S. Federal Trade Commission, state, local, or foreign regulators, and private litigants.

Interruptions or performance problems associated with our technology and infrastructure may adversely affect our business and operating results.

Our continued growth depends in part on the ability of our existing and potential customers to access our applications at any time. We have experienced, and may in the future experience, disruptions, outages, and other performance problems due to a variety of factors, including infrastructure changes, introductions of new functionality, human or software errors, distributed denial of service attacks, or other security related incidents. In some instances, we may not be able to identify the cause or causes of these performance problems within an acceptable period of time. It may become increasingly difficult to maintain and improve our performance, especially during peak usage times and as our platform becomes more complex and our user traffic increases. If our learning management platform and applications are unavailable or if our users are unable to access our applications within a reasonable amount of time or at all, our business will be harmed.

Moreover, our standard customer agreements include performance guarantees and service level standards that obligate us to provide credits or termination rights in the event of a significant disruption in our platform. To the extent that our third-party service providers experience outages, or to the extent we do not effectively address capacity constraints, upgrade our systems as needed, and continually develop our technology and network architecture to accommodate actual and anticipated changes in technology, our business and operating results may be adversely affected.

Our use of “open source” software could negatively affect our ability to offer our learning management platform and applications and subject us to possible litigation.

Our applications, in particular a substantial portion of Canvas, use “open source” software that we, in some cases, have obtained from third parties. Open source software is generally freely accessible, usable and modifiable, and is made available to the general public on an “as-is” basis under the terms of a non-negotiable license. Use and distribution of open source software may entail greater risks than use of third-party commercial software. Open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. In addition, certain open source licenses, like the GNU Affero General Public License, or AGPL, may require us to offer for no cost the components of our software that incorporate the open source software, to make available source code for modifications or derivative works we create based upon incorporating or using the open source software, or to license our modifications or derivative works under the terms of the particular open source license. If we are required, under the terms of an open source license, to release the source code of our proprietary software to the public, our competitors could create similar applications with lower development effort and time, which ultimately could result in a loss of sales for us.

We may also face claims alleging noncompliance with open source license terms or infringement or misappropriation of proprietary software. These claims could result in litigation, require us to purchase a costly license or require us to devote additional research and development resources to change our software, any of

 

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which would have a negative effect on our business and operating results, including being enjoined from the offering of the components of our software that contained the open source software. In addition, if the license terms for open source software that we use change, and we cannot continue to use the version of such software that we had been using, we may be forced to re-engineer our applications, incur additional costs, or discontinue the sale of applications or services if re-engineering could not be accomplished on a timely basis.

We could also be subject to suits by parties claiming ownership of what we believe to be open source software. Litigation could be costly for us to defend, have a negative effect on our operating results and financial condition and require us to devote additional research and development resources to change our applications. Although we monitor our use of open source software to avoid subjecting our applications to unintended conditions, few courts have interpreted open source licenses, and there is a risk that these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize our applications. We cannot guarantee that we have incorporated open source software in our software in a manner that will not subject us to liability, or in a manner that is consistent with our current policies and procedures.

We make a substantial portion of the source code for Canvas available under the terms of an open source license, and accept contributions of modifications to that source code, each of which could negatively affect our ability to offer our learning management platform and applications and subject us to possible litigation.

To promote our open platform philosophy, we make available a substantial portion of the source code for Canvas available to the public on the “GitHub” platform for no charge, under the terms of the AGPL. An individual or entity with the appropriate technical and human resources may choose to use this open source version of Canvas to try to self-host the platform to avoid paying any fees to us. In addition, some individuals or entities may try to use the open source version of Canvas for commercial purposes and directly compete with us for customers. We are aware of a few entities that currently self-host the platform and are aware of some entities that are currently selling hosting and support services. If more customers decide to self-host or other entities use the base code to compete with us, we may experience lower revenue and our business may be harmed.

We accept modifications of the source code for Canvas from contributors who agree to the terms of our contributor agreement. Our contributor agreement provides for assignment of joint ownership in the copyright to the contribution, and a license to any patent rights of the contributor. Contributors must also represent that it is an original work and that the contribution does not violate any third-party intellectual property right. However, we cannot ensure that any of these contributions is free of all third-party rights and claims of intellectual property infringement or misappropriation. By incorporating any contribution into our code base, we may be subject to intellectual property infringement or misappropriation claims, which as discussed elsewhere, are costly to defend and could require costly re-writing of our code base or licensing of replacement third-party solutions. Third party alternatives may not be available to us on commercially reasonable terms.

Our business is dependent upon our brand recognition and reputation, and if we fail to maintain or enhance our brand recognition or reputation, our business could be harmed.

We believe that maintaining and enhancing our brands and our reputation are critical to our relationships with our customers and to our ability to attract new customers. We also believe that our brands and reputation will be increasingly important as competition in our market continues to develop. Our success in this area will depend on a wide range of factors, some of which are beyond our control, including the following:

 

    the efficacy of our marketing efforts;

 

    our ability to continue to offer high-quality, innovative and error- and bug-free applications;

 

    our ability to retain existing customers and obtain new customers;

 

    our ability to maintain high customer satisfaction;

 

    the quality and perceived value of our applications;

 

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    our ability to successfully differentiate our applications from those of our competitors;

 

    actions of competitors and other third parties;

 

    our ability to provide customer support and professional services;

 

    any misuse or perceived misuse of our applications;

 

    positive or negative publicity;

 

    interruptions, delays or attacks on our platform or applications; and

 

    litigation, legislative or regulatory-related developments.

If our brand promotion activities are not successful, our operating results and growth may be harmed.

Furthermore, negative publicity, whether or not justified, relating to events or activities attributed to us, our employees, our partners or others associated with any of these parties, may tarnish our reputation and reduce the value of our brand. Damage to our reputation and loss of brand equity may reduce demand for our applications and have an adverse effect on our business, operating results and financial condition. Moreover, any attempts to rebuild our reputation and restore the value of our brands may be costly and time consuming, and such efforts may not ultimately be successful.

We rely upon Amazon Web Services to operate certain aspects of our service and any disruption of or interference with our use of Amazon Web Services could impair our ability to deliver our learning management platform and applications to our customers, resulting in customer dissatisfaction, damage to our reputation, loss of customers and harm to our business.

Amazon Web Services, or AWS, provides a distributed computing infrastructure platform for business operations, or what is commonly referred to as a cloud computing service. We have architected our software and computer systems to use data processing, storage capabilities and other services provided by AWS. Currently, our cloud service infrastructure is run on AWS. Given this, we cannot easily switch our AWS operations to another cloud provider, so any disruption of or interference with our use of AWS would impact our operations and our business would be adversely impacted. AWS provides us with computing and storage capacity pursuant to an agreement that continues until terminated by either party. AWS may terminate the agreement without cause by providing 90 days prior written notice, and may terminate the agreement with 30 days prior written notice for cause, including any material default or breach of the agreement by us that we do not cure within the 30 day period. The agreement requires AWS to provide us their standard computing and storage capacity and related support in exchange for timely payment by us. If any of our arrangements with AWS is terminated, we could experience interruptions in our software as well as delays and additional expenses in arranging new facilities and services.

We utilize third-party data center hosting facilities operated by AWS, located in various sites within the states of Virginia and Oregon. For international customers, we utilize third-party data center hosting facilities operated by AWS located in Dublin, Ireland, Sydney, Australia and Singapore.

Our operations depend, in part, on AWS’s abilities to protect these facilities against damage or interruption from natural disasters, power or telecommunications failures, criminal acts and similar events. Despite precautions taken at our data centers, the occurrence of spikes in usage volume, a natural disaster, an act of terrorism, vandalism or sabotage, a decision to close a facility without adequate notice, or other unanticipated problems at a facility could result in lengthy interruptions in the availability of our platform. Even with current and planned disaster recovery arrangements, our business could be harmed. Also, in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur. These factors in turn could further reduce our revenue, subject us to liability and cause us to issue credits or cause customers to fail to renew their subscriptions, any of which could harm our business.

 

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We are dependent on the continued availability of the internet and third-party computer and communications systems.

Our ability to provide our platform and applications to our customers depends on our ability to communicate with our customers through the public internet and third-party computer and communications systems. A severe disruption of one or more of these systems could impair our ability to process information, which could impede our ability to provide services to our customers, harm our reputation, result in a loss of customers harm our business and operating results.

Real or perceived errors, failures, or bugs in our learning management platform or applications could adversely affect our operating results and growth prospects.

We push updates to our platform on a frequent basis. Despite testing by us, errors, failures or bugs may not be found in our learning management platform or applications until after they are deployed to our customers. We have discovered and expect we will continue to discover software errors, failures and bugs in our learning management platform or applications and anticipate that certain of these errors, failures and bugs will only be discovered and remediated after deployment to customers. Real or perceived errors, failures or bugs in our platform and applications could result in negative publicity, loss of or delay in market acceptance of our platform and applications, loss of competitive position, or claims by customers for losses sustained by them. In such an event, we may be required, or may choose, for customer relations or other reasons, to expend additional resources in order to help correct the problem.

We implement bug fixes and upgrades as part of our regular system maintenance, which may lead to system downtime. Even if we are able to implement the bug fixes and upgrades in a timely manner, any history of defects or inaccuracies in the data we collect for our customers, or the loss, damage or inadvertent release of confidential data could cause our reputation to be harmed, and customers may elect not to purchase or renew their agreements with us or we may incur increased insurance costs. The costs associated with any material defects or errors in our software or other performance problems may be substantial and could harm our operating results.

Because many of our customers use our applications to store and retrieve critical information, we may be subject to liability claims if our applications do not work properly. We cannot be certain that the limitations of liability set forth in our licenses and agreements would be enforceable or would otherwise protect us from liability for damages. A material liability claim against us, regardless of its merit or its outcome, could result in substantial costs, significantly harm our business reputation and divert management’s attention from our operations.

We are subject to governmental laws, regulation and other legal obligations, particularly related to privacy, data protection and information security, and any actual or perceived failure to comply with such obligations could harm our business.

Personal privacy and information security are significant issues in the United States and the other jurisdictions where we offer our applications. The legislative and regulatory framework for privacy and security issues worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future. Our handling of data is subject to a variety of laws and regulations, including regulation by various government agencies, including the U.S. Federal Trade Commission, or FTC, and various state, local and foreign agencies. We collect personally identifiable information, or PII, and other data from our customers and users. We use this information to provide services to our customers and users and to support, expand and improve our business. We may also share customers’ or users’ PII with third parties as allowed by applicable law and agreements and authorized by the customer or as described in our privacy policy.

The U.S. federal and various state and foreign governments have adopted or proposed limitations on the collection, distribution, use and storage of PII. In the United States, the FTC and many state attorneys general are applying federal and state consumer protection laws as imposing standards for the online collection, use and

 

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dissemination of data. Furthermore, many states have recently enacted laws that apply directly to the operators of online services that are intended for K-12 school purposes that limit the collection, distribution, use and storage of student information that go beyond what may be applicable to other individuals. Many foreign countries and governmental bodies, including the European Union, Canada, Australia and other relevant jurisdictions, have laws and regulations concerning the collection and use of PII obtained from their residents or by businesses operating within their jurisdiction. These laws and regulations often are more restrictive than those in the United States. Laws and regulations in these jurisdictions apply broadly to the collection, use, storage, disclosure and security of data that identifies or may be used to identify or locate an individual, such as names, email addresses and, in some jurisdictions, Internet Protocol, or IP, addresses. In the European Union, where companies must meet specified privacy and security standards, Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data, commonly referenced as the Data Protection Directive, and EU member state implementations of the Data Protection Directive, require comprehensive information privacy and security protections for consumers with respect to PII, collected about them.

We have in the past relied on adherence to the U.S. Department of Commerce’s Safe Harbor Privacy Principles and compliance with the U.S.-EU and U.S.-Swiss Safe Harbor Frameworks as agreed to and set forth by the U.S. Department of Commerce, and the European Union and Switzerland, which established a means for legitimating the transfer of PII by U.S. companies doing business in Europe from the European Economic Area to the U.S. As a result of the October 6, 2015 European Union Court of Justice, or ECJ, opinion in Case C-362/14 (Schrems v. Data Protection Commissioner) regarding the adequacy of the U.S.-EU Safe Harbor Framework, the U.S. – EU Safe Harbor Framework is no longer deemed to be a valid method of compliance with restrictions set forth in the Data Protection Directive (and member states’ implementations thereof) regarding the transfer of data outside of the European Economic Area. In light of the ECJ opinion in Case C-362/14, we anticipate engaging in efforts to legitimize data transfers from the European Economic Area. We may be unsuccessful in establishing legitimate means of transferring data from the European Economic Area, we may experience hesitancy, reluctance, or refusal by European or multi-national customers to continue to use our services due to the potential risk exposure to such customers as a result of the ECJ ruling, and we and our customers are at risk of enforcement actions taken by an EU data protection authority until such point in time that we ensure that all data transfers to us from the European Economic Area are legitimized. We may find it necessary to establish systems to maintain EU-origin data in the European Economic Area, which may involve substantial expense and distraction from other aspects of our business. We publicly post our privacy policies and practices concerning our processing, use and disclosure of PII. Our publication of our privacy policy and other statements we publish that provide promises and assurances about privacy and security can subject us to potential state and federal action if they are found to be deceptive or misrepresentative of our practices.

Although we are working to comply with those federal, state, and foreign laws and regulations, industry standards, contractual obligations and other legal obligations that apply to us, those laws, regulations, standards and obligations are evolving and may be modified, interpreted and applied in an inconsistent manner from one jurisdiction to another, and may conflict with one another, other requirements or legal obligations, our practices or the features of our applications or platform. Any failure or perceived failure by us to comply with federal, state or foreign laws or regulations, industry standards, contractual obligations or other legal obligations, or any actual or suspected security incident, whether or not resulting in unauthorized access to, or acquisition, release or transfer of PII or other data, may result in governmental enforcement actions and prosecutions, private litigation, fines and penalties or adverse publicity and could cause our customers to lose trust in us, which could have an adverse effect on our reputation and business. Any inability to adequately address privacy and security concerns, even if unfounded, or comply with applicable laws, regulations, policies, industry standards, contractual obligations, or other legal obligations could result in additional cost and liability to us, damage our reputation, inhibit sales, and adversely affect our business.

We also expect that there will continue to be new proposed laws, regulations and industry standards concerning privacy, data protection and information security in the United States, the European Union and other

 

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jurisdictions, and we cannot yet determine the impact such future laws, regulations and standards may have on our business. Future laws, regulations, standards and other obligations, and changes in the interpretation of existing laws, regulations, standards and other obligations could impair our or our customers’ ability to collect, use or disclose information relating to consumers, which could decrease demand for our applications, increase our costs and impair our ability to maintain and grow our customer base and increase our revenue. New laws, amendments to or re-interpretations of existing laws and regulations, industry standards, contractual obligations and other obligations may require us to incur additional costs and restrict our business operations. Such laws and regulations may require companies to implement privacy and security policies, permit users to access, correct and delete personal information stored or maintained by such companies, inform individuals of security breaches that affect their personal information, and, in some cases, obtain individuals’ consent to use PII for certain purposes. In addition, a foreign government could require that any PII collected in a country not be disseminated outside of that country, and we are not currently equipped to comply with such a requirement. Other proposed legislation could, if enacted, impose additional requirements and prohibit the use of certain technologies that track individuals’ activities on web pages or that record when individuals click through to an internet address contained in an email message. Such laws and regulations could require us to change features of our software or restrict our customers’ ability to collect and use email addresses, page viewing data and personal information, which may reduce demand for our software. If we fail to comply with federal, state and international data privacy laws and regulations our ability to successfully operate our business and pursue our business goals could be harmed.

We also may find it necessary or desirable to join industry or other self-regulatory bodies or other privacy- or data protection-related organizations that require compliance with their rules pertaining to privacy and data protection. We also may be bound by additional, more stringent contractual obligations relating to our collection, use and disclosure of personal, financial and other data.

We are subject to contractual clauses that require us to comply with certain provisions of the Family Educational Rights and Privacy Act and we are subject to the Children’s Online Privacy Protection Act, and if we fail to comply with these laws, our reputation and business could be harmed.

The Family Educational Rights and Privacy Act, or FERPA, generally prohibits educational institutions that receive federal funding from disclosing PII from a student’s education records without the student’s consent. Through Canvas, our academic learning management application, our customers and users disclose to us certain information that may originate from or comprise a student education record, as the term is defined under FERPA. As an entity that provides services to institutions, we are often subject to contractual clauses that impose restrictions derived from FERPA on our ability to collect, process, transfer, disclose, and store student data, under which we may not transfer or otherwise disclose any PII from a student record to another party other than in a manner permitted under the statute. If we violate our obligations to any of our educational institution customers relating to the privacy of student records subject to FERPA, such a violation could constitute material breach of contract with one or more of our customers and could harm our reputation. Further, in the event that we disclose student information in a manner that results in a violation of FERPA by one of our educational customers, the U.S. Department of Education could require that customer to suspend our access to the customer’s student information that is covered under FERPA for a period of at least five years.

We are subject to the Children’s Online Privacy Protection Act, or COPPA, which applies to operators of commercial websites and online services directed to U.S. children under the age of 13 that collect personal information from children, and to operators of general audience websites with actual knowledge that they are collecting information from U.S. children under the age of 13. Canvas is directed, in part, at children under the age of 13. Through Canvas and other means, we collect certain personal information, including names and email addresses from children. COPPA is subject to interpretation by courts and other governmental authorities, including the FTC, and the FTC is authorized to promulgate, and has promulgated, revisions to regulations implementing provisions of COPPA, and provides non-binding interpretive guidance regarding COPPA that changes periodically with little or no public notice. Although we strive to ensure that our platform and applications are compliant with applicable COPPA provisions, these provisions may be modified, interpreted, or

 

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applied in new manners that we may be unable to anticipate or prepare for appropriately, and we may incur substantial costs or expenses in attempting to modify our systems, platform, applications, or other technology to address changes in COPPA or interpretations thereof. If we fail to accurately anticipate the application, interpretation or legislative expansion of COPPA we could be subject to governmental enforcement actions, litigation, fines and penalties or adverse publicity and we could be in breach of our customer contracts and our customers could lose trust in us, which could harm our reputation and business.

Third-party claims that we are infringing the intellectual property rights of others, whether successful or not, could subject us to costly and time-consuming litigation or require us to expensive licenses, and our business could be harmed.

The software industry is characterized by the existence of a large number of patents, copyrights, trademarks, trade secrets and other intellectual property rights. Companies in the software industry must often defend against litigation claims based on allegations of infringement or other violations of intellectual property rights. Third parties, including our competitors, may own patents or other intellectual property rights that cover aspects of our technology or business methods and may assert patent or other intellectual property rights within the industry. Moreover, in recent years, individuals and groups that are non-practicing entities, commonly referred to as “patent trolls,” have purchased patents and other intellectual property assets for the purpose of making claims of infringement in order to extract settlements. From time to time, we may receive threatening letters, notices or “invitations to license,” or may be the subject of claims that our services or software and underlying technology infringe or violate the intellectual property rights of others. Responding to such claims, regardless of their merit, can be time consuming, costly to defend in litigation, divert management’s attention and resources, damage our reputation and brand and cause us to incur significant expenses. Our technologies may not be able to withstand any third-party claims against their use. Claims of intellectual property infringement might require us to stop using technology found to be in violation of a third party’s rights, redesign our application, which could require significant effort and expense, and cause delays of releases, enter into costly settlement or license agreements or pay costly damage awards, or face a temporary or permanent injunction prohibiting us from marketing or selling our software. If we cannot or do not license the infringed technology on reasonable terms or at all, or substitute similar technology from another source, we could be forced to limit or stop selling our software, we may not be able to meet our obligations to customers under our customer contracts, our revenue and operating results could be adversely impacted, and we may be unable to compete effectively. Additionally, our customers may not purchase our learning management applications if they are concerned that they may infringe third-party intellectual property rights. The occurrence of any of these events may harm our business.

In our subscription agreements with our customers, we generally agree to indemnify our customers against any losses or costs incurred in connection with claims by a third party alleging that the customer’s use of our services or software infringes the intellectual property rights of the third party. Our customers who are accused of intellectual property infringement may seek indemnification from us. If any claim is successful, or if we are required to indemnify or defend our customers from any of these or other claims, these matters could be disruptive to our business and management and result in additional legal expenses.

The success of our business depends in part on our ability to protect and enforce our intellectual property rights.

Our success is dependent, in part, upon protecting our proprietary technology. We do not own any patents and we rely on a combination of copyrights, trademarks, service marks, trade secret laws and contractual restrictions to establish and protect our proprietary rights in our applications and services. However, the steps we take to protect our intellectual property may be inadequate. We will not be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property. Any of our trademarks or other intellectual property rights may be challenged by others or invalidated through administrative process or litigation. Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain. Despite our precautions, it may be possible for unauthorized third parties to copy our technology and use information that we regard as proprietary to create

 

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applications and services that compete with ours. Some license provisions protecting against unauthorized use, copying, transfer and disclosure of our offerings may be unenforceable under the laws of certain jurisdictions and foreign countries. Our corporate name and the name of our platform and applications have not been trademarked in each market where we operate and plan to operate. If we do not secure registrations for our trademarks, we may encounter more difficulty in enforcing them against third parties. Effective copyright, trademark and trade secret protection may not be available in every country in which our platform and applications are available. The laws of some foreign countries may not be as protective of intellectual property rights as those in the United States, and mechanisms for enforcement of intellectual property rights may be inadequate. To the extent we expand our international operations, our exposure to unauthorized copying and use of our technology and proprietary information may increase. Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our technology and intellectual property.

Although we enter into confidentiality and invention assignment agreements with our employees and consultants and enter into confidentiality agreements with the parties with whom we have strategic relationships and business alliances, no assurance can be given that these agreements will be effective in controlling access to and distribution of our applications and proprietary information or prevent reverse engineering. Further, these agreements may not prevent our competitors from independently developing technologies that are substantially equivalent or superior to our software and offerings, and we may be unable to prevent this competition.

We may be required to spend significant resources to monitor and protect our intellectual property rights. Litigation may be necessary in the future to enforce our intellectual property rights and to protect our trade secrets. Such litigation could be costly, time consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights. We may not prevail in any lawsuits that we initiate. Any litigation, whether or not resolved in our favor, could subject us to substantial costs, divert resources and the attention of management and technical personnel from our business and adversely affect our business. Our inability to protect our proprietary technology against unauthorized copying or use, as well as any costly litigation, could delay further sales or the implementation of our software and offerings, impair the functionality of our software and offerings, delay introductions of new features or enhancements, result in our substituting inferior or more costly technologies into our software and offerings, or injure our reputation.

We could face liability, or our reputation might be harmed, as a result of the activities of our customers or users, the content in our platform or the data they store on our servers.

As a provider of cloud-based learning management software, we may be subject to potential liability for the activities of our customers or users on or in connection with the data they store on our servers. Although our customer terms of use prohibit illegal use of our services by our customers and permit us to take down content or take other appropriate actions for illegal use, customers may nonetheless engage in prohibited activities or upload or store content with us in violation of applicable law or the customer’s own policies, which could subject us to liability or harm our reputation.

Various U.S. federal statutes may apply to us with respect to various customer activities. The Digital Millennium Copyright Act of 1998, or DMCA, provides recourse for owners of copyrighted material who believe that their rights under U.S. copyright law have been infringed on the internet. Under the DMCA, based on our current business activity as an internet service provider that does not own or control website content posted by our customers, we generally are not liable for infringing content posted by our customers or other third parties, provided that we follow the procedures for handling copyright infringement claims set forth in the DMCA. Generally, if we receive a proper notice from, or on behalf, of a copyright owner alleging infringement of copyrighted material located on websites we host, and we fail to expeditiously remove or disable access to the allegedly infringing material or otherwise fail to meet the requirements of the safe harbor provided by the DMCA, the copyright owner may seek to impose liability on us. Technical mistakes in complying with the

 

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detailed DMCA take-down procedures, or if we fail to otherwise comply with the other requirements of the safe harbor, could subject us to liability for copyright infringement.

Although statutes and case law in the United States have generally shielded us from liability for customer activities to date, court rulings in pending or future litigation may narrow the scope of protection afforded us under these laws. In addition, laws governing these activities are unsettled in many international jurisdictions, or may prove difficult or impossible for us to comply with in some international jurisdictions. Also, notwithstanding the exculpatory language of these bodies of law, we may become involved in complaints and lawsuits which, even if ultimately resolved in our favor, add cost to our doing business and may divert management’s time and attention. Finally, other existing bodies of law, including the criminal laws of various states, may be deemed to apply or new statutes or regulations may be adopted in the future, any of which could expose us to further liability and increase our costs of doing business.

Additionally, our customers could use our platform or applications to store or process PII, including sensitive PII, without our knowledge of such storage or processing. In the event that our systems experience a data security incident, or an individual or entity accesses information without, or in excess of, proper authorization, we could be subject to data security incident notification laws, as described elsewhere, which may require prompt remediation and notification to individuals. If we are unaware of the data and information stored on our systems, we may be unable to appropriately comply with all legal obligations, and we may be exposed to governmental enforcement or prosecution actions, private litigation, fines and penalties or adverse publicity and these incidents could cause our customers to lose trust in us, which could harm our reputation and business.

Future acquisitions could disrupt our business and may divert management’s attention and if unsuccessful, harm our business.

We may choose to expand by making acquisitions that could be material to our business. To date, we have only completed one acquisition and our ability as an organization to successfully acquire and integrate technologies or businesses is unproven and limited. Acquisitions involve many risks, including the following:

 

    an acquisition may negatively affect our results of operations and financial condition because it may require us to incur charges or assume substantial debt or other liabilities, may cause adverse tax consequences or unfavorable accounting treatment, may expose us to claims and disputes by third parties, including intellectual property claims and disputes, or may not generate sufficient financial return to offset additional costs and expenses related to the acquisition;

 

    we may encounter difficulties or unforeseen expenditures in integrating the business, technologies, products, personnel or operations of any company that we acquire, particularly if key personnel of the acquired company decide not to work for us;

 

    an acquisition may disrupt our ongoing business, divert resources, increase our expenses and distract our management;

 

    an acquisition may result in a delay or reduction of customer purchases for both us and the company we acquired due to customer uncertainty about continuity and effectiveness of service from either company;

 

    we may encounter difficulties in, or may be unable to, successfully sell any acquired products;

 

    an acquisition may involve the entry into geographic or business markets in which we have little or no prior experience or where competitors have stronger market positions;

 

    challenges inherent in effectively managing an increased number of employees in diverse locations;

 

    the potential strain on our financial and managerial controls and reporting systems and procedures;

 

    potential known and unknown liabilities associated with an acquired company;

 

    our use of cash to pay for acquisitions would limit other potential uses for our cash;

 

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    if we incur debt to fund such acquisitions, such debt may subject us to material restrictions on our ability to conduct our business as well as financial maintenance covenants;

 

    the risk of impairment charges related to potential write-downs of acquired assets or goodwill in future acquisitions;

 

    to the extent that we issue a significant amount of equity or equity-linked securities in connection with future acquisitions, existing stockholders may be diluted and earnings per share may decrease; and

 

    managing the varying intellectual property protection strategies and other activities of an acquired company.

We may not succeed in addressing these or other risks or any other problems encountered in connection with the integration of any acquired business. The inability to integrate successfully the business, technologies, products, personnel or operations of any acquired business, or any significant delay in achieving integration, could harm our business and operating results.

Our ability to raise capital in the future may be limited, and if we fail to raise capital when needed, we could be prevented from growing.

Our business and operations may consume resources faster than we anticipate. While we believe our cash and cash equivalents, cash flows from operations and available borrowings under our credit facility will be sufficient to support our planned operations for at least the next 12 months, in the future, we may need to raise additional funds to invest in future growth opportunities. Additional financing may not be available on favorable terms, if at all. If adequate funds are not available on acceptable terms, we may be unable to invest in future growth opportunities, which could harm our business and operating results. If we incur debt, the debt holders would have rights senior to common stockholders to make claims on our assets. In addition, our credit facility imposes, and future debt instruments may impose, restrictions on our ability to dispose property, make changes in our business, engage in mergers or acquisitions, incur additional indebtedness, and make investments and distributions. Furthermore, if we issue additional equity securities, stockholders will experience dilution, and the new equity securities could have rights senior to those of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. As a result, stockholders bear the risk that future securities offerings reduce the market price of our common stock and dilute their interest.

We may be subject to additional obligations to collect and remit sales tax and other taxes, and we may be subject to tax liability for past sales, which could harm our business.

State, local and foreign jurisdictions have differing rules and regulations governing sales, use, value added and other taxes, and these rules and regulations are subject to varying interpretations that may change over time. In particular, the applicability of such taxes to our learning management software in various jurisdictions is unclear. Further, these jurisdictions’ rules regarding tax nexus are complex and vary significantly. As a result, we could face the possibility of tax assessments and audits, and our liability for these taxes and associated penalties could exceed our original estimates. A successful assertion that we should be collecting additional sales, use, value added or other taxes in those jurisdictions where we have not historically done so and do not accrue for such taxes could result in substantial tax liabilities and related penalties for past sales, discourage customers from purchasing our application or otherwise harm our business and operating results.

Changes in tax laws or regulations that are applied adversely to us or our customers could increase the costs of learning management software and adversely impact our business.

New income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time. Any new taxes could adversely affect our domestic and international business operations, and our business and financial performance. Further, existing tax laws, statutes, rules, regulations or ordinances could be

 

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interpreted, changed, modified or applied adversely to us. These events could require us or our customers to pay additional tax amounts on a prospective or retroactive basis, as well as require us or our customers to pay fines or penalties and interest for past amounts deemed to be due. If we raise our prices to offset the costs of these changes, existing and potential future customers may elect not to continue or purchase our learning management platform or applications in the future. Additionally, new, changed, modified or newly interpreted or applied tax laws could increase our customers’ and our compliance, operating and other costs, as well as the costs of our software. Any or all of these events could harm our business and operating results.

We are a multinational organization faced with increasingly complex tax issues in many jurisdictions, and we could be obligated to pay additional taxes in various jurisdictions.

As a multinational organization, we may be subject to taxation in several jurisdictions around the world with increasingly complex tax laws, the application of which can be uncertain. The amount of taxes we pay in these jurisdictions could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents, which could harm our liquidity and operating results. In addition, the authorities in these jurisdictions could review our tax returns and impose additional tax, interest and penalties, and the authorities could claim that various withholding requirements apply to us or our subsidiaries or assert that benefits of tax treaties are not available to us or our subsidiaries, any of which could adversely affect our operating results.

Risks Related to Our Common Stock

There has been no prior market for our common stock and an active market may not develop or be sustained, and you may not be able to resell your shares at or above the initial public offering price, if at all.

Prior to this offering, there has been no public market for our common stock. The initial public offering price for our common stock will be determined through negotiations between the underwriters and us and may vary from the market price of our common stock following this offering. If you purchase shares of our common stock in this offering, you may not be able to resell those shares at or above the initial public offering price. An active or liquid market in our common stock may not develop upon closing of this offering or, if it does develop, it may not be sustainable, which could adversely affect your ability to sell your shares and could depress the market price of our common stock.

Our stock price may be volatile and may decline regardless of our operating performance.

Our stock price is likely to be volatile. The trading prices of the securities of technology companies, including providers of cloud-based software, have been highly volatile. As a result of this volatility, investors may not be able to sell their common stock at or above the initial public offering price. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

    actual or anticipated fluctuations in our revenue and other operating results, including as a result of the addition or loss of any number of customers;

 

    announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures or capital commitments;

 

    the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;

 

    failure of securities analysts to initiate or maintain coverage of us, changes in ratings and financial estimates and the publication of other news by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;

 

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    changes in operating performance and stock market valuations of cloud-based software or other technology companies, or those in our industry in particular;

 

    the size of our public float;

 

    price and volume fluctuations in the trading of our common stock and in the overall stock market, including as a result of trends in the economy as a whole;

 

    new laws or regulations or new interpretations of existing laws or regulations applicable to our business or industry, including data privacy and data security;

 

    lawsuits threatened or filed against us for claims relating to intellectual property, employment issues or otherwise;

 

    changes in our board of directors or management;

 

    short sales, hedging and other derivative transactions involving our common stock;

 

    sales of large blocks of our common stock including sales by our executive officers, directors and significant stockholders; and

 

    other events or factors, including changes in general economic, industry and market conditions and trends, as well as any natural disasters that may affect our operations.

In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies.

In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management and harm our business.

Future sales of shares by existing stockholders could cause our stock price to decline.

Sales of a substantial number of shares of our common stock in the public market could occur at any time. If our stockholders sell, or the market perceives that our stockholders intend to sell, substantial amounts of our common stock in the public market following this offering, the market price of our common stock could decline.

Immediately after this offering, based on the number of shares outstanding as of June 30, 2015, we will have          outstanding shares of common stock, assuming no exercise of outstanding options or warrants. Of these shares, the              shares sold in this offering will be immediately freely tradable, unless held by an affiliate, and all of the remaining shares of common stock will be restricted as a result of securities laws or lock-up agreements but will be able to be sold after the offering as described in the section of this prospectus titled “Shares Eligible for Future Sale.”

In addition, in connection with this offering, we intend to file one or more registration statements on Form S-8 registering the issuance of approximately             shares of common stock subject to options or other equity awards issued or reserved for future issuance under our equity incentive plans. Shares registered under these registration statements on Form S-8 will be available for sale in the public market subject to vesting arrangements and exercise of options, the lock-up agreements described above and the restrictions of Rule 144 under the Securities Act in the case of our affiliates.

Moreover, after this offering, the holders of 27,246,852 shares of common stock will have rights, subject to some conditions, to require us to file one or more registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. If we were to register these

 

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shares for resale, they could be freely sold in the public market. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the market price of our common stock could decline.

The concentration of our stock ownership will likely limit your ability to influence corporate matters, including the ability to influence the outcome of director elections and other matters requiring stockholder approval.

Based upon shares outstanding as of June 30, 2015 prior to this offering, our executive officers, directors and the holders of more than 5% of our outstanding common stock, in the aggregate, beneficially owned approximately 87.5% of our common stock, and upon the closing of this offering, that same group, in the aggregate, will beneficially own approximately     % of our common stock, assuming no exercise by the underwriters of their over-allotment option and no exercise of outstanding options or warrants, and after giving effect to the issuance of shares in this offering. As a result, these stockholders, acting together, will have significant influence over all matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions. Corporate actions might be taken even if other stockholders, including those who purchase shares in this offering, oppose them. This concentration of ownership might also have the effect of delaying or preventing a change of control of our company that other stockholders may view as beneficial.

If securities or industry analysts do not publish research or reports about our business, or if they downgrade our common stock, the price of our common stock could decline.

The trading market for our common stock depends, in part, on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. In addition, if our operating results fail to meet the forecast of analysts, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our common stock could decrease, which might cause our stock price and trading volume to decline.

Our management will have broad discretion over the use of the proceeds we receive in this offering and might not apply the proceeds in ways that increase the value of your investment.

Our management will have broad discretion to use the net proceeds from this offering and you will be relying on the judgment of our management regarding the application of these proceeds. Our management might not apply the net proceeds in ways that increase the value of your investment. We intend to use the net proceeds for general corporate purposes, including working capital, sales and marketing activities, research and development activities, general and administrative matters and capital expenditures. We may also use a portion of the net proceeds from this offering for acquisitions of, or investments in, technologies, solutions or businesses that complement our business, although we have no present commitments or agreements to enter into any such acquisitions or investments. Until we use the net proceeds from this offering, we plan to invest them, and these investments may not yield a favorable rate of return. If we do not invest or apply the net proceeds from this offering in ways that enhance stockholder value, we may fail to achieve expected financial results, which could cause our stock price to decline.

We are an “emerging growth company” and the reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced financial disclosure obligations,

 

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reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute payments not previously approved. As an “emerging growth company” under the JOBS Act, we are permitted to delay the adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. However, we are electing not to take advantage of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to not take advantage of the extended transition period for complying with new or revised accounting standards is irrevocable.

We may take advantage of these provisions until we are no longer an “emerging growth company.” We would cease to be an “emerging growth company” upon the earliest to occur of: the last day of the fiscal year in which we have more than $1.0 billion in annual revenue; the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; the issuance, in any three-year period, by us of more than $1.0 billion in non-convertible debt securities; and the last day of the fiscal year ending after the fifth anniversary of this offering. If we take advantage of any of these reduced reporting burdens in future filings, the information that we provide our security holders may be different than you might get from other public companies in which you hold equity interests. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

We will incur increased costs and demands upon management as a result of complying with the laws and regulations affecting public companies, particularly after we are no longer an “emerging growth company,” which could adversely affect our business, operating results and financial condition.

As a public company, and particularly after we cease to be an “emerging growth company,” we will incur greater legal, accounting and other expenses than we incurred as a private company. We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, and the rules and regulations of the New York Stock Exchange, or NYSE. These requirements have increased and will continue to increase our legal, accounting and financial compliance costs and have made and will continue to make some activities more time consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to maintain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as our executive officers. After we are no longer an emerging growth company, or sooner if we choose not to take advantage of certain exemptions set forth in the JOBS Act, we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. In that regard, we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge.

If we do not continue to develop effective internal controls, we may not be able to accurately report our financial results and our business could be harmed.

We and our independent registered public accounting firm identified a material weakness in our internal control over financial reporting as of and for the years ended December 31, 2012 and 2013. A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected on a timely basis. Specifically, it was determined that we did not have adequate processes and resources to evaluate significant or unusual transactions. As a result, we were required to make post-closing adjustments to record stock-based compensation and deemed dividends, resulting from the sale of

 

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stock by current and former employees and an investor to other holders of preferred stock for a price that exceeded the fair value. Furthermore, we were required to make post-closing adjustments to record leasehold improvements and lease incentives that were improperly netted on the balance sheets.

We subsequently took steps to remediate this material weakness, including increasing the depth and experience within our accounting and finance organization, designing and implementing improved processes and internal controls, and retaining outside consultants with deep technical expertise. While we believe that we have remediated the material weakness as of December 31, 2014, and did not identify any material weaknesses in the course of preparing our consolidated financial statements as of and for the year ended December 31, 2014, our efforts to remediate may not be effective or prevent any future material weakness or significant deficiency in our internal control over financial reporting.

The Sarbanes-Oxley Act requires, among other things, that we assess the effectiveness of our internal control over financial reporting annually and the effectiveness of our disclosure controls and procedures quarterly. In particular, beginning in 2016, Section 404 of the Sarbanes-Oxley Act, or Section 404, will require us to perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on, and our independent registered public accounting firm potentially to attest to, the effectiveness of our internal control over financial reporting. As an emerging growth company, we expect to avail ourselves of the exemption from the requirement that our independent registered public accounting firm attest to the effectiveness of our internal control over financial reporting under Section 404. However, we may no longer avail ourselves of this exemption when we cease to be an emerging growth company. When our independent registered public accounting firm is required to undertake an assessment of our internal control over financial reporting, the cost of our compliance with Section 404 will correspondingly increase. Our compliance with applicable provisions of Section 404 will require that we incur substantial accounting expense and expend significant management time on compliance-related issues as we implement additional corporate governance practices and comply with reporting requirements. Moreover, if we are not able to comply with the requirements of Section 404 applicable to us in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources.

Investor perceptions of our company may suffer if material weaknesses are found, and this could cause a decline in the market price of our common stock. Irrespective of compliance with Section 404, any failure of our internal control over financial reporting could harm our operating results and reputation. If we are unable to implement these requirements effectively or efficiently, it could harm our operations, financial reporting, or financial results and could result in an adverse opinion on our internal controls from our independent registered public accounting firm.

Provisions in our amended and restated certificate of incorporation and amended and restated bylaws and under Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.

Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could depress the trading price of our common stock by acting to discourage, delay or prevent a change of control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions:

 

    authorize the issuance of “blank check” preferred stock that our board of directors could issue to increase the number of outstanding shares to discourage a takeover attempt;

 

    prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;

 

    prohibit stockholders from calling a special meeting of our stockholders;

 

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    provide that the board of directors is expressly authorized to make, alter or repeal our bylaws; and

 

    establish advance notice requirements for nominations for elections to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

Additionally, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder and which may discourage, delay or prevent a change of control of our company.

Any provision of our amended and restated certificate of incorporation, bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

Our amended and restated certificate of incorporation will provide that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for: any derivative action or proceeding brought on our behalf; any action asserting a breach of fiduciary duty; any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our amended and restated certificate of incorporation or our bylaws; or any action asserting a claim against us that is governed by the internal affairs doctrine. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officer and other employees. If a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business and financial condition.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future financial condition, business strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “believe,” “continue,” “could,” “design,” “estimate,” “expect,” “intend,” “may,” “plan,” “potentially,” “predict,” “project,” “should,” “will” or the negative of these terms or other similar expressions.

We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions described in the section titled “Risk Factors.” These risks are not exhaustive. Other sections of this prospectus include additional factors that could adversely impact our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for our management to predict all risk factors nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in, or implied by, any forward-looking statements.

These forward-looking statements include, but are not limited to, statements concerning the following:

 

    our ability to grow and retain our customer base, both domestically and internationally;

 

    our ability to provide effective customer support and induce our customers to renew and upgrade their subscriptions;

 

    our ability to expand our sales organization to address effectively the new industries, geographies and types of organizations we intend to target;

 

    our ability to forecast and maintain an adequate rate of revenue growth and appropriately plan our expenses;

 

    our ability to displace existing products addressing learning management applications, along with continued acceptance of SaaS as an effective method for delivering our applications;

 

    the effects of seasonal and cyclical trends on our results of operations;

 

    the attraction and retention of qualified employees and key personnel;

 

    our ability to protect and enhance our brands and intellectual property;

 

    costs related to defending intellectual property infringement and other claims;

 

    the effects of increased competition and alternatives to our platform and applications and our ability to successfully differentiate our platform and applications;

 

    our expectations concerning our relationships and actions with third parties;

 

    future regulatory, judicial and legislative changes in our industry; and

 

    future arrangements with, or investments in, other entities or associations, products, services or technologies.

You should not rely upon forward-looking statements as predictions of future events. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus or to conform these statements to actual results or to changes in our expectations.

 

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In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this prospectus, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement of which this prospectus forms a part with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

 

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INDUSTRY AND MARKET DATA

Unless otherwise indicated, information contained in this prospectus concerning our industry and the market in which we operate, including our general expectations and market position, market opportunity and market size, is based on information from various sources including the independent industry publications set forth below, and is subject to a number of assumptions and limitations. Although we are responsible for all of the disclosure contained in this prospectus and we believe the information from the industry publication and other third-party sources included in this prospectus is reliable, such information is inherently imprecise. The content of the below sources, except to the extent specifically set forth in this prospectus, does not constitute a portion of this prospectus and are not incorporated herein.

 

    ECAR The Current Ecosystem of Learning Management Systems in Higher Education: Student, Faculty, and IT Perspectives (September 2014)

 

    IDC Worldwide and U.S. Human Capital Management Applications 2015-2019 Forecast (June 2015)

 

    MarketsandMarkets Learning Management Systems (LMS) Market: Worldwide Market Forecasts and Analysis (2013-2018) (October 2013)

 

    Brandon Hall Group LMS Trends 2014: Satisfaction and Spending (February 2014)

The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section titled “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

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USE OF PROCEEDS

We estimate that the net proceeds from the sale of              shares of common stock in this offering will be approximately $         million, based on an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise in full their over-allotment option to purchase additional shares, we estimate that the net proceeds will be approximately $         million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) our net proceeds by $         million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Each increase (decrease) by 1,000,000 shares in the number of shares offered by us would increase (decrease) the net proceeds from this offering by $         million, assuming the assumed initial public offering price remains the same, after deducting underwriting discounts and commissions.

The principal purposes of this offering are to increase our capitalization and financial flexibility, increase our visibility in the marketplace and create a public market for our common stock. As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to us from this offering. However, we currently intend to use the net proceeds to us from this offering primarily for general corporate purposes, including working capital, sales and marketing activities, research and development activities, general and administrative matters and capital expenditures. We expect to use a significant portion of the net proceeds from this offering to fund the expansion of our business, including expanding our direct sales organization and marketing programs, particularly for corporate customers, and making investments in our research and development teams to support the development of new applications and new features for, and enhancements of, our existing applications. We may also use a portion of the net proceeds from this offering for the acquisition of, or investment in, technologies, solutions or businesses that complement our business, although we have no present commitments or agreements to enter into any such acquisitions or investments. We will have broad discretion over the uses of the net proceeds from this offering and investors will be relying on the judgment of our management regarding the application of the net proceeds from this offering. Pending these uses, we plan to invest the net proceeds that we receive in this offering in short-term and intermediate-term interest-bearing obligations, investment-grade investments, certificates of deposit, or direct or guaranteed obligations of the U.S. government.

DIVIDEND POLICY

We have never declared or paid cash dividends on our capital stock. We intend to retain all available funds and future earnings, if any, to fund the development and expansion of our business and we do not anticipate paying any cash dividends in the foreseeable future. The terms of our credit facility also restrict our ability to pay dividends, and we may also enter into debt instruments in the future that will restrict our ability to declare or pay cash dividends on our common stock. Any future determination related to dividend policy will be made at the discretion of our board of directors and will be dependent on a number of factors, including our earnings, capital requirements and overall financial condition.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of June 30, 2015:

 

    on an actual basis;

 

    on a pro forma basis, to reflect (i) the conversion of all outstanding shares of our preferred stock into an aggregate of 22,465,711 shares of common stock upon the closing of this offering and (ii) the filing and effectiveness of our amended and restated certificate of incorporation; and

 

    on a pro forma as adjusted basis, to further reflect the sale by us of             shares of common stock in this offering at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

You should read the information in this table together with our consolidated financial statements and related notes included elsewhere in this prospectus and the sections titled “Selected Consolidated Financial Data,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     As of June 30, 2015  
     Actual     Pro
Forma
     Pro Forma
As Adjusted(1)
 
     (unaudited)  
     (in thousands, except share and per
share data)
 

Cash and cash equivalents

   $ 13,608      $                    $                
  

 

 

   

 

 

    

 

 

 

Redeemable convertible preferred stock, $0.0001 par value: 22,629,937 shares authorized and 22,465,711 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

   $ 93,770      $         $     

Stockholders’ (deficit) equity:

       

Preferred stock, $0.0001 par value: no shares authorized, issued or outstanding, actual; and              shares authorized and no shares issued or outstanding, pro forma and pro forma as adjusted

            

Common stock, $0.0001 par value: 39,900,000 shares authorized, 11,400,351 shares issued and 9,707,643 shares outstanding, actual;              shares authorized and              shares issued and outstanding, pro forma; and              shares authorized and              shares issued and outstanding, pro forma as adjusted

     1        

Treasury stock, 1,692,708 common shares, at cost

     (1     

Additional paid-in capital

     20,590        

Accumulated other comprehensive income

     (1     

Accumulated deficit

     (120,567     
  

 

 

   

 

 

    

 

 

 

Total stockholders’ (deficit) equity

     (99,978     
  

 

 

   

 

 

    

 

 

 

Total capitalization

   $ (6,208   $         $     
  

 

 

   

 

 

    

 

 

 

 

(1) Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) each of cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each increase (decrease) of 1,000,000 shares in the number of shares offered by us would increase (decrease) cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by $         million, assuming the assumed initial public offering price remains the same, after deducting underwriting discounts and commissions. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.

 

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The number of shares of common stock to be outstanding after this offering is based on 32,173,354 shares of common stock outstanding as of June 30, 2015, and excludes:

 

    5,467,958 shares of common stock issuable upon the exercise of outstanding stock options as of June 30, 2015, with a weighted-average exercise price of $3.51 per share;

 

    155,000 shares of common stock issuable upon the exercise of outstanding warrants as of June 30, 2015, with a weighted-average exercise price of $1.41 per share;

 

    974,896 shares of common stock reserved for future issuance under our 2010 Equity Incentive Plan, which shares will cease to be available for issuance at the time our 2015 Equity Incentive Plan becomes effective in connection with this offering;

 

    3,000,000 shares of common stock reserved for future issuance under our 2015 Equity Incentive Plan, as well as any automatic increases in the number of shares of common stock reserved for future issuance under this plan, which will become effective upon the execution of the underwriting agreement for this offering; and

 

    500,000 shares of common stock reserved for future issuance under our 2015 Employee Stock Purchase Plan, as well as any automatic increases in the number of shares of common stock reserved for future issuance under this benefit plan, which will become effective upon the execution of the underwriting agreement for this offering.

 

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DILUTION

If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the initial public offering price per share of common stock and the pro forma as adjusted net tangible book value per share of our common stock after the closing of the offering.

Our pro forma net tangible book value as of June 30, 2015 was $         million, or $         per share, which gives effect to the conversion of all outstanding shares of our preferred stock into an aggregate of 22,465,711 shares of common stock upon the closing of this offering. Pro forma net tangible book value per share is determined by subtracting our total liabilities from the total book value of our tangible assets and dividing the difference by the number of shares of common stock deemed to be outstanding at that date.

After giving effect to the sale of              shares of common stock in this offering at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of June 30, 2015, would have been $         million, or $         per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $         per share to our existing stockholders and immediate dilution of $         per share to new investors purchasing common stock in this offering.

The following table illustrates this dilution on a per share basis to new investors:

 

Assumed initial public offering price per share

      $                

Pro forma net tangible book value per share as of June 30, 2015

   $                   

Increase in pro forma net tangible book value per share attributable to new investors in this offering

     
  

 

 

    

Pro forma as adjusted net tangible book value per share after this offering

     
     

 

 

 

Dilution in net tangible book value per share to new investors in this offering

      $     
     

 

 

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) our pro forma as adjusted net tangible book value per share after this offering by $         per share and the dilution to new investors by $         per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase of 1,000,000 shares in the number of shares of common stock offered by us would increase the pro forma as adjusted net tangible book value by $         per share and decrease the dilution to new investors by $         per share, assuming the assumed initial public offering price remains the same and after deducting underwriting discounts and commissions. Similarly, each decrease of 1,000,000 shares in the number of shares of common stock offered by us would decrease the pro forma as adjusted net tangible book value by $         per share and increase the dilution to new investors by $         per share, assuming the assumed initial public offering price remains the same and after deducting underwriting discounts and commissions.

If the underwriters’ option to purchase              additional shares to cover over-allotments is exercised in full, the pro forma as adjusted net tangible book value per share after giving effect to this offering would be $         per share, representing an immediate increase to existing stockholders of $         per share, and immediate dilution to new investors in this offering of $         per share.

The following table summarizes, as of June 30, 2015, on the pro forma as adjusted basis described above:

 

    the total number of shares of common stock purchased from us by our existing stockholders and by new investors purchasing shares in this offering;

 

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    the total consideration paid to us by our existing stockholders and by new investors purchasing common stock in this offering, assuming an initial public offering price of $         per share, the midpoint of the range set forth on the cover page of this prospectus, before deducting underwriting discounts and commissions and estimated offering expenses payable by us in connection with this offering; and

 

    the average price per share paid by existing stockholders and by new investors purchasing shares in this offering.

 

     Shares Purchased     Total Consideration     Average
Price
Per Share
 
     Number      Percent     Amount      Percent    

Existing stockholders

     32,173,354                $                  $            

New investors

            
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

        100   $                          100  
  

 

 

    

 

 

   

 

 

    

 

 

   

The tables and calculations above are based on 32,173,354 shares of common stock outstanding as of June 30, 2015, and exclude:

 

    5,467,958 shares of common stock issuable upon the exercise of outstanding stock options as of June 30, 2015, with a weighted-average exercise price of $3.51 per share;

 

    155,000 shares of common stock issuable upon the exercise of outstanding warrants as of June 30, 2015, with a weighted-average exercise price of $1.41 per share;

 

    974,896 shares of common stock reserved for future issuance under our 2010 Equity Incentive Plan, which shares will cease to be available for issuance at the time our 2015 Equity Incentive Plan becomes effective in connection with this offering;

 

    3,000,000 shares of common stock reserved for future issuance under our 2015 Equity Incentive Plan, as well as any automatic increases in the number of shares of common stock reserved for future issuance under this plan, which will become effective upon the execution of the underwriting agreement for this offering; and

 

    500,000 shares of common stock reserved for future issuance under our 2015 Employee Stock Purchase Plan, as well as any automatic increases in the number of shares of common stock reserved for future issuance under this plan, which will become effective upon the execution of the underwriting agreement for this offering.

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) the total consideration paid to us by new investors by $         million assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and before deducting underwriting discounts and commissions and estimated expenses payable by us.

To the extent any outstanding options or warrants are exercised, new options are issued under our equity incentive plans, or we issue additional shares of common stock in the future, there will be further dilution to investors participating in this offering. If all outstanding options and warrants as of June 30, 2015 were exercised, then our existing stockholders, including the holders of these options and warrants, would own     % and new investors would own     % of the total number of shares of common stock outstanding upon the closing of this offering.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

You should read the selected consolidated financial data below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements, related notes and other financial information included elsewhere in this prospectus. The selected consolidated financial data in this section are not intended to replace the consolidated financial statements and are qualified in their entirety by the consolidated financial statements and related notes included elsewhere in this prospectus.

The following selected consolidated statements of operations data for the years ended December 31, 2013 and 2014 and the consolidated balance sheet data as of December 31, 2013 and 2014 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statement of operations data for the year ended December 31, 2012 has been derived from our audited financial statements not included in this prospectus. The consolidated statements of operations data for the six months ended June 30, 2014 and 2015 and the consolidated balance sheet data as of June 30, 2015 are derived from our unaudited interim consolidated financial statements included elsewhere in this prospectus. Our unaudited interim consolidated financial statements were prepared on a basis consistent with our audited consolidated financial statements and include, in our opinion, all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of the financial information set forth in those statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future.

 

    Year Ended December 31,     Six Months
Ended June 30,
 
    2012     2013     2014     2014     2015  
          (unaudited)  
    (in thousands, except per share data)  

Consolidated Statements of Operations Data:

 

Revenue:

       

Subscription and support

  $ 7,403      $ 22,456      $ 38,093      $ 15,724      $ 25,948   

Professional services and other

    1,371        3,599        6,259        2,452        4,554   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    8,774        26,055        44,352        18,176        30,502   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

       

Subscription and support(1)

    4,346        8,581        12,131        5,086        7,613   

Professional services and other(1)

    2,748        2,039        2,982        1,118        2,830   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue(1)

    7,094        10,620        15,113        6,204        10,443   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    1,680        15,435        29,239        11,972        20,059   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

       

Sales and marketing(1)

    11,912        20,702        35,390        14,191        25,131   

Research and development(1)

    4,698        11,242        21,290        7,812        10,916   

General and administrative(1)

    3,411        5,321        11,268        4,183        13,969   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    20,021        37,265        67,948        26,186        50,016   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (18,341     (21,830     (38,709     (14,214     (29,957
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

       

Interest income

    8        22        32        28        7   

Interest expense

    (7     (150     (136     (57     (44

Change in fair value of warrant liability

    (199     (545     (2,518     (1,391     (527

Other income (expense), net

    3        4        (39     14        (109
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

    (195     (669     (2,661     (1,406     (673
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (18,536     (22,499     (41,370     (15,620     (30,630

Income tax expense

                  (57            (14
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (18,536   $ (22,499   $ (41,427   $ (15,620   $ (30,644
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    Year Ended December 31,     Six Months
Ended June 30,
 
    2012     2013     2014     2014     2015  
          (unaudited)  
    (in thousands, except per share data)  

Deemed dividends to investors

  $      $ (353   $      $      $ (632
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

  $ (18,536   $ (22,852   $ (41,427   $ (15,620   $ (31,276
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share attributable to common stockholders, basic and diluted(2)

  $ (3.57   $ (4.05   $ (4.98   $ (2.04   $ (3.33
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares used in computing basic and diluted net loss per common share attributable to common stockholders(2)

    5,185        5,642        8,312        7,656        9,392   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per common share attributable to common stockholders, basic and diluted (unaudited)(2)

      $ (1.37     $ (0.98
     

 

 

     

 

 

 

Pro forma weighted average common shares used in computing basic and diluted net loss per common share attributable to common stockholders (unaudited)(2)

        30,218          31,858   
     

 

 

     

 

 

 

 

(1) Includes stock-based compensation as follows:

 

     Year Ended
December 31,
     Six Months Ended
June 30,
 
     2012      2013      2014          2014              2015      
                          (unaudited)  
     (in thousands)  

Cost of revenue:

              

Subscription and support

   $ 7       $ 28       $ 258       $ 10       $ 57   

Professional services and other

     5         8         39         13         58   

Sales and marketing

     473         1,597         2,877         103         422   

Research and development

     442         1,585         3,971         160         527   

General and administrative

     910         374         1,053         205         5,623   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 1,837       $ 3,592       $ 8,198       $ 491       $ 6,687   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) See Note 1 to our consolidated financial statements for an explanation of the method used to calculate basic, diluted and pro forma net loss per common share attributable to common stockholders.

 

     As of December 31,     As of
June 30,
2015
 
     2013     2014    
                 (unaudited)  
     (in thousands)  

Consolidated Balance Sheet Data:

      

Cash and cash equivalents

   $ 13,138      $ 43,915      $ 13,608   

Working capital, excluding deferred revenue

     22,023        47,440        35,733   

Total assets

     41,169        67,026        61,708   

Deferred revenue

     19,466        31,954        45,793   

Total liabilities

     35,155        53,568        67,916   

Redeemable convertible preferred stock

     49,092        88,989        93,770   

Total stockholders’ deficit

     (43,078     (75,531     (99,978

 

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Non-GAAP Financial Measure

In addition to our results determined in accordance with U.S. generally accepted accounting principles, or GAAP, we believe the following non-GAAP measure is useful in evaluating our operating performance. We regularly review the measure set forth below as we evaluate our business.

 

     Year Ended December 31,     Six Months Ended
June 30,
 
     2012     2013     2014     2014     2015  
     (unaudited)  
     (in thousands)  

Other Financial Data:

          

Non-GAAP operating loss (1)

   $ (16,286   $ (17,704   $ (29,280   $ (13,721   $ (21,939

 

(1) We define non-GAAP operating loss as operating loss before stock-based compensation, payroll tax expense on secondary stock purchase transactions and amortization of acquisition-related intangibles.

We believe non-GAAP operating loss provides investors and other users of our financial information consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations. We believe non-GAAP operating loss 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. We use non-GAAP operating loss in conjunction with traditional GAAP measures as part of our overall assessment of our performance, 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 financial performance.

Our definition may differ from the definitions used by other companies and therefore comparability may be limited. In addition, other companies may not publish this or similar metrics. Thus, our non-GAAP operating loss should be considered in addition to, not as a substitute for, or in isolation from, measures prepared in accordance with GAAP.

We compensate for these limitations by providing investors and other users of our financial information, reconciliations of non-GAAP operating loss to the related GAAP financial measure, loss from operations. We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure and to view non-GAAP operating loss in conjunction with the related GAAP financial measure.

The following table provides a reconciliation of loss from operations to non-GAAP operating loss:

 

     Year Ended December 31,     Six Months Ended
June 30,
 
     2012     2013     2014     2014     2015  
    

(unaudited)

(in thousands)

 

Loss from operations

   $ (18,341   $ (21,830   $ (38,709   $ (14,214   $ (29,957

Stock-based compensation

     1,837        3,592        8,198        491        6,687   

Payroll tax expense on secondary stock purchase transactions

     218        534        1,225               1,327   

Amortization of acquisition-related intangibles

                   6        2        4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP operating loss

   $ (16,286   $ (17,704   $ (29,280   $ (13,721   $ (21,939
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this prospectus. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere particularly in the section titled “Risk Factors” and elsewhere in this prospectus.

Overview

We provide an innovative, cloud-based learning management platform for academic institutions and companies worldwide. We built our learning management applications, Canvas, for the education market, and Bridge, for the corporate market, to enable our customers to easily develop, deliver and manage engaging face-to-face and online learning experiences. Our platform combines powerful, elegant and easy-to-use functionality with the reliability, security, scalability and support required by our customers.

We offer our platform through a Software-as-a-Service, or SaaS, business model. Customers can rapidly deploy our applications with minimal upfront implementation. Customers also benefit from automatic software updates with virtually no downtime. Our SaaS business model substantially reduces the need for our customers to buy and support a broad range of IT infrastructure, and significantly reduces the cost, complexity and disruptions associated with implementations and upgrades of on-premise software.

We were founded in 2008, and in 2011, we launched Canvas, with the goal to make teaching and learning easier. Initially, we focused on the U.S. education market, targeting colleges and universities. In 2012, we expanded our focus to include the K-12 market in the United States. We opened our international headquarters in London, England in June 2014 and have offices in Sydney, Australia and Hong Kong. To date, a substantial majority of our revenue has been derived from our sales of Canvas to the U.S. education market. While our initial efforts were focused on the education market, we discovered that companies also needed a cloud-based learning management platform to enable them to better train their employees. Our initial corporate customers licensed Canvas for this purpose. In February 2015, we launched Bridge to enable companies to further realize the benefits of our cloud-based platform with an application specifically designed to address their needs. As a result of its recent launch, we have not yet generated significant sales of Bridge.

We sell our applications and services primarily through a direct sales force and we engage in a variety of traditional and online marketing activities designed to provide sales lead generation, sales support and market awareness. A majority of our academic customers implement Canvas widely within their institutions and across school districts. This approach to wide initial deployments allows us to efficiently and broadly promote adoption and utilization of Canvas by students and faculty. Our corporate customers generally implement Canvas, and now Bridge, by way of initial deployments across a functional area, before purchasing additional seats and expanding within the organization. We believe there is a significant opportunity to continue to penetrate our existing corporate customers and expand the use of Bridge within these customers.

As of June 30, 2015, we have grown to serve more than 1,400 customers, representing colleges, universities, K-12 school districts, and companies in more than 25 countries. Our customers range from a single school to large corporations and academic institutions and accordingly our total contract values range from thousands of dollars to several million dollars. We generally define a customer as an entity with a subscription contract as of the measurement date. In situations where there is a single contract that applies to entities with multiple subsidiaries or divisions, universities, or governmental organizations, 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

 

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though the school district encompasses multiple schools. In 2014, no single customer represented more than 10% of our revenue.

Our subscription fee includes the use of our platform and our technical support and is based on the number of users. We also generate revenue from training, implementation services and other types of professional services. We have experienced net revenue retention rates of over 100% at each of December 31, 2012, 2013 and 2014. For 2012, 2013 and 2014, our revenue was $8.8 million, $26.1 million and $44.4 million, respectively, representing year-over-year growth of 197% and 70%. For 2012, 2013 and 2014, our net losses were $18.5 million, $22.5 million and $41.4 million, respectively. For the six months ended June 30, 2015, our revenue was $30.5 million and we incurred a net loss of $30.6 million.

Our Business Model

Since we introduced Canvas in February 2011, we have grown to over 1,400 customers as of June 30, 2015. Our business model focuses on maximizing the lifetime value of a customer relationship and we continue to make significant investments in order to grow our customer base. These investments include significant upfront costs, including direct sales and marketing expenses, such as sales commissions, and costs related to initial training, implementation and consulting services, which are generally expensed in the period incurred. The majority of our sales and marketing costs are related to the acquisition of new customers. However, due to our subscription model, we recognize revenue ratably over the term of the subscription period. As a result, the profitability of a customer to our business in any particular period, depends in part upon how long a customer has been a subscriber. In general, the associated upfront costs with respect to new customers is higher in the first year than the aggregate revenue we recognize from those new customers in the first year, even after the recognition of professional services revenue. We believe that, over time, as our customer base grows and a relatively higher percentage of our revenue is attributable to renewals versus new customers or upsells to existing customers, associated sales and marketing and other allocated upfront costs as a percentage of revenue will decrease.

To provide a better understanding of our business model, we are providing our calculation of contribution margin percentage for the six months ended June 30, 2015 for a set of customer cohorts. Each cohort is comprised of the customers who commenced their application subscriptions in a particular year. As we introduced Canvas in February 2011, 2011 comprises the earliest customer cohort. We believe this cohort analysis will help investors understand the potential long-term value of our customers.

We define contribution margin for a period as the revenue recognized from the customer cohort in such period less the estimated, allocated variable costs for the period associated with such revenue. The costs allocated to customers include personnel costs associated with the sales and marketing teams that support the customer, such as salaries, commissions and allocated management overhead expenses. As the majority of our sales and marketing costs are related to the acquisition of new customers, these costs are mainly allocated to the newest cohort in a given period. Costs allocated to customers also include the costs associated with use of our technology infrastructure and web hosting, and personnel costs associated with operations, professional services and customer success teams that support the customer. These costs are allocated based on usage, number of support tickets and overall support provided. Personnel costs exclude stock-based compensation expense. In addition, we exclude all research and development and general and administrative expenses from this analysis because these expenses support the growth of our business generally. We define contribution margin percentage as contribution margin divided by revenue associated with such cohort in a given period.

The following table shows contribution margin percentage of each customer cohort during the six months ended June 30, 2015:

 

     Customer Cohort  
     2011     2012     2013     2014     2015  

Contribution margin

     54     61     63     49     (363 )% 

 

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The contribution margin of our customer cohorts will fluctuate from one period to another depending upon the number of customers remaining in each cohort, upsells of additional features and applications, and changes in customer subscription fees, as well as changes in our variable costs. We may not experience similar financial outcomes from new future customers who subscribe to our applications. We do not yet have enough operating history to measure the lifetime of our customer relationships. Therefore, we cannot predict the average duration of a customer relationship in any of the above cohorts.

The allocated expenses or relationship of revenue to variable costs is not necessarily indicative of future performance and we cannot predict whether future contribution margin analyses will be similar to the above analysis. Other companies may calculate contribution margin differently than our chosen method and, therefore, may not be directly comparable. We have not yet achieved profitability, and even if our revenue exceeds these variable costs over time, we may not be able to achieve and maintain profitability.

Key Factors Affecting Our Performance

Investment in Sales and Marketing Organization

We continue to invest in our sales and marketing organization to drive additional revenue and support the growth of our customer base. Any investments we make in our sales and marketing organization will occur in advance of experiencing any benefits from such investments, so it may be difficult for us to determine if we are efficiently allocating our resources in these areas. We plan to continue to expand sales and marketing to grow our customer base and increase sales to existing customers. This expansion is expected to include adding sales personnel and expanding our marketing activities to continue to generate additional leads and build brand awareness.

We intend to expand and continue to invest in our international sales and marketing organization, which we believe will be an important factor in our continued growth. As we grow internationally, we may use reseller partnerships as needed to penetrate new markets. In 2014 and the six months ended June 30, 2015, 4% and 6%, respectively, of our revenue was derived from outside the United States. Our international operations are relatively new and we have limited experience operating in international markets, which increases the risk that our international expansion efforts may not be successful.

Investment in Technology

We have aggressively invested, and intend to continue to invest, in developing technology to support our growth. We expect our research and development expenses to increase as we expand headcount. While we invest heavily in research and development, we have also built a foundation for innovation through our approach to the learning management system as a learning platform. However, our investments in research and development may result in enhancements or new applications that may not achieve market adoption, are more expensive to develop than anticipated, may take longer to generate revenue or may generate less revenue than we anticipate.

Net Revenue Retention Rate

We calculate our net revenue retention rate by dividing the total revenue obtained from a particular customer in a given month by the total revenue from that customer from the same month in the immediately preceding year. This calculation contemplates all changes to revenue for the designated customer, which includes customer terminations, 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 over 100% at each of December 31, 2013 and 2014 and at each of June 30, 2014 and 2015.

 

 

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Financial Operations Overview

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 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.

Subscription revenue is derived from customers using our cloud-based learning platform and is driven primarily by the number of customers, the number of users at each customer, the price of our applications, and to a lesser extent historically, renewal rates. 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. Amounts that have not been billed are not reflected in our consolidated financial statements.

Professional services and other revenue are derived primarily from implementation, training, and other consulting fees. Our standard implementation takes anywhere from 30 to 90 days depending on customer-side complexity and timelines. It includes regularly scheduled and highly-structured activities to ensure customers progress toward actually using our applications. Most of these interactions take place over the phone and through the use of web meeting technology. Implementation revenue is recorded over the longer of the contract term or the estimated customer life.

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 an established standalone value, we record training revenue upon the delivery of the training.

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 an established standalone value for these services. In situations where we are unable to utilize the proportional performance method, for example due to either the lack of adequate documentation of time incurred or to be incurred, we recognize revenue based on the milestone method if individual milestones with substantive value to the customer exist. If neither of these two methods is able to be utilized, revenue recognition is deferred until the contract is completed.

Cost of Revenue

Cost of subscription and support revenue consists primarily of the costs 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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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 and allocated overhead costs. We immediately expense sales commissions related to acquiring new customers and upsells from existing customers. We expect sales and marketing expenses will increase as a result of hiring net new quota-carrying sales representatives inside and outside the United States, adding to the marketing staff and expanding our annual InstructureCon user conference and potentially adding other annual conferences. Over time, we expect sales and marketing expenses will decline as a percentage of total revenue.

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 and amortize such costs as costs of subscription revenue over the estimated life of the new application or incremental functionality, which is generally three years. We expect research and development expenses to increase in absolute dollars as we continue to increase the functionality of our software platform.

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. We expect that general and administrative expenses will increase on an absolute dollar basis but decrease as a percentage of total revenue as we focus on processes, systems and controls to enable our internal support functions to scale with the growth of our business. We also anticipate increases to general and administrative expenses as we incur the costs of compliance associated with being a publicly-traded company, including legal, audit and consulting fees.

Other Income (Expense)

Other income (expense) consists primarily of interest expense and the change in fair value of warrant liability which is subject to mark-to-market adjustments as of each reporting period. In February 2015, preferred stock warrants were exercised which resulted in the reclassification of the warrant liability of $3.9 million to additional paid-in capital. We have historically had a minimal amount of debt outstanding on which we pay interest. As we have expanded our international operations our exposure to fluctuations in foreign currencies has increased.

Income Tax Expense

We are subject to income taxes in the United States and foreign jurisdictions in which we do business. These foreign jurisdictions have statutory tax rates different from those in the United States. Accordingly, our effective tax rates will vary depending on the relative proportion of foreign to U.S. income and changes in tax laws.

 

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Results of Operations

The following tables set forth certain consolidated financial data in dollar amounts and as a percentage of total revenue.

 

     Year Ended
December 31,
    Six Months
Ended June 30,
 
     2013     2014     2014     2015  
                 (unaudited)  
     (in thousands)  

Revenue:

        

Subscription and support

   $ 22,456      $ 38,093      $ 15,724      $ 25,948   

Professional services and other

     3,599        6,259        2,452        4,554   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     26,055        44,352        18,176        30,502   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

        

Subscription and support

     8,581        12,131        5,086        7,613   

Professional services and other

     2,039        2,982        1,118        2,830   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     10,620        15,113        6,204        10,443   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     15,435        29,239        11,972        20,059   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Sales and marketing

     20,702        35,390        14,191        25,131   

Research and development

     11,242        21,290        7,812        10,916   

General and administrative

     5,321        11,268        4,183        13,969   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     37,265        67,948        26,186        50,016   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (21,830     (38,709     (14,214     (29,957
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

        

Interest income

     22        32        28        7   

Interest expense

     (150     (136     (57     (44

Change in fair value of warrant liability

     (545     (2,518     (1,391     (527

Other income (expense), net

     4        (39     14        (109
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     (669     (2,661     (1,406     (673
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (22,499     (41,370     (15,620     (30,630

Income tax expense

            (57            (14
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (22,499   $ (41,427   $ (15,620   $ (30,644
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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     Year Ended December 31,     Six Months Ended
June 30,
 
     2013     2014     2014     2015  
     (as a percentage of total revenue)  

Revenue:

        

Subscription and support

     86     86     87     85

Professional services and other

     14        14        13        15   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     100        100        100        100   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

        

Subscription and support

     33        27        28        25   

Professional services and other

     8        7        6        9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     41        34        34        34   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     59        66        66        66   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Sales and marketing

     79        80        78        82   

Research and development

     43        48        43        36   

General and administrative

     20        25        23        46   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     142        153        144        164   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (83     (87     (78     (98
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

        

Interest income

     0        0        0        0   

Interest expense

     (1     0        (0     (0

Change in fair value of warrant liability

     (2     (6     (8     (2

Other income (expense), net

     0        0        0        (0
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     (3     (6     (8     (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (86     (93     (86     (100

Income tax expense

            0               (0
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (86 )%      (93 )%      (86 )%      (100 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2014 Compared to the Six Months Ended June 30, 2015

Revenue

 

     Six Months Ended
June 30,
     Change  
     2014      2015      Amount      %  
     (dollars in thousands)  

Subscription and support

   $ 15,724       $ 25,948       $ 10,224         65

Professional services and other

     2,452         4,554         2,102         86   
  

 

 

    

 

 

    

 

 

    

Total revenue

   $ 18,176       $ 30,502       $ 12,326         68   
  

 

 

    

 

 

    

 

 

    

Subscription and support revenue increased $10.2 million for the six months ended June 30, 2015 primarily due to an increase in the total number of customers, which grew from approximately 750 as of June 30, 2014 to over 1,400 as of June 30, 2015.

Professional services and other revenue increased $2.1 million for the six months ended June 30, 2015 primarily due to an increase in new customers and the sale of premium implementations, which include additional professional services and onsite training.

 

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Cost of Revenue and Gross Margin

 

     Six Months Ended
June 30,
    Change  
         2014             2015         Amount      %  
     (dollars in thousands)  

Cost of revenue:

         

Subscription and support

   $ 5,086      $ 7,613      $ 2,527         50

Professional services and other

     1,118        2,830        1,712         153  
  

 

 

   

 

 

   

 

 

    

Total cost of revenue

   $ 6,204      $ 10,443      $ 4,239         68  
  

 

 

   

 

 

   

 

 

    

Gross margin percentage:

         

Subscription and support revenue

     68     71     

Professional services and other

     54        38        

Total gross margin

     66        66        

Total cost of revenue increased $4.2 million for the six months ended June 30, 2015 primarily due to an increase in employee-related costs, web hosting costs and amortization of developed technology. Total gross margin remained constant as the impact of improved leverage of our web hosting costs relative to the growth in subscription and support revenue was offset by higher costs of professional services and other revenue.

Subscription and support cost of revenue increased $2.5 million for the six months ended June 30, 2015 primarily due to an increase in employee-related costs, web hosting and third-party software license costs, amortization of developed technology and overhead allocations. Employee-related costs increased $1.2 million as we continued to grow our customer support organization to support our customer growth and improve service levels and offerings. Web hosting and third-party software license costs increased $1.0 million due to the increase in total customers. Amortization of capitalized software development costs increased $0.2 million due to the continued development of our software platform. Allocated overhead expenses increased $0.1 million primarily due to higher rent expense and the depreciation of capital equipment.

Professional services and other costs of revenue increased $1.7 million for the six months ended June 30, 2015 primarily due to an increase in employee-related costs, travel costs, outside contractors and overhead allocations. Employee-related costs increased $1.3 million as we continued to grow our professional services organization to support our customer growth and improve service levels and offerings. Travel costs increased $0.2 million as our premium implementations provided for onsite training. Outside contractor costs increased $0.1 due to an increase in seasonal demand for training and professional services. Allocated overhead expenses increased $0.1 million primarily due to higher rent expense and the depreciation of capital equipment.

Operating Expenses

Sales and Marketing

 

     Six Months Ended
June 30,
     Change  
     2014      2015      Amount      %  
     (dollars in thousands)  

Sales and marketing

   $ 14,191       $ 25,131       $ 10,940         77

Sales and marketing expenses increased $10.9 million for the six months ended June 30, 2015 primarily due to an increase in employee-related costs and sales commissions, expansion of marketing programs to new international and corporate markets, travel, overhead allocations and third-party services. Employee-related costs and sales commissions increased $7.9 million as a result of the hiring of additional employees and growth in our customer base. Marketing program costs increased $2.1 million as we launched Bridge in February 2015, expanded into international markets, and increased attendance at InstructureCon, our annual user conference.

 

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Travel and other costs increased $0.9 million as we continued to expand our sales and marketing organization to grow our customer base.

Research and Development

 

     Six Months Ended
June 30,
     Change  
         2014              2015          Amount      %  
     (dollars in thousands)  

Research and development

   $ 7,812       $ 10,916       $ 3,104         40

Research and development expenses increased $3.1 million for the six months ended June 30, 2015 primarily due to an increase in employee-related costs as we continue to grow our engineering organization to develop new applications and continue to develop additional features for Canvas and Bridge.

General and Administrative

 

     Six Months Ended
June 30,
     Change  
         2014              2015          Amount      %  
     (dollars in thousands)  

General and administrative

   $ 4,183       $ 13,969       $ 9,786         234

General and administrative expenses increased $9.8 million for the six months ended June 30, 2015 primarily due to an increase in employee-related costs, including stock-based compensation, information technology, third-party services, travel and other expenses and overhead allocations. Stock-based compensation increased $6.7 million as a result of a non-cash expense associated with the purchase by an investor of common stock from current and former employees at a premium over fair value. Employee-related costs increased $2.4 million as a result of the recruiting and hiring of additional employees. Our information technology expenses increased $0.2 million as we continued to automate our internal systems. Third-party services increased $0.2 million due to tax and legal costs relating to our international expansion. Travel and other expenses increased $0.2 million primarily due to our continued growth and international expansion. Allocated overhead expenses increased $0.1 million primarily due to higher rent expense and the depreciation of capital equipment.

Other Income (Expense)

 

     Six Months Ended
June 30,
    Change  
         2014             2015         Amount      %  
     (dollars in thousands)  

Other expense, net

   $ (1,406   $ (673   $ 733         (52 )% 

Other income (expense) includes interest income and expense and the impact of foreign currency transaction gains and losses. Other expense decreased $0.7 million for the six months ended June 30, 2015 as the change in fair value of warrant liability decreased due to the exercise of the redeemable convertible preferred stock warrants in February 2015.

 

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Year Ended December 31, 2013 Compared to the Year Ended December 31, 2014

Revenue

 

     Year Ended
December 31,
     Change  
     2013      2014      Amount      %  
     (dollars in thousands)  

Subscription and support

   $ 22,456       $ 38,093       $ 15,637         70

Professional services and other

     3,599         6,259         2,660         74  
  

 

 

    

 

 

    

 

 

    

Total revenue

   $ 26,055       $ 44,352       $ 18,297         70  
  

 

 

    

 

 

    

 

 

    

Subscription and support revenue increased $15.6 million during 2014 due to an increase throughout the year in total customers, which grew from over 490 as of December 31, 2013 to over 1,000 as of December 31, 2014.

Professional services and other revenue increased $2.7 million primarily due to the increase in customers and from new customers purchasing premium implementations, which included additional professional services and onsite training.

Cost of Revenue and Gross Margin

 

     Year Ended
December 31,
    Change  
     2013     2014     Amount      %  
     (dollars in thousands)  

Cost of revenue:

         

Subscription and support

   $ 8,581      $ 12,131      $ 3,550         41

Professional services and other

     2,039        2,982        943         46   
  

 

 

   

 

 

   

 

 

    

Total cost of revenue

   $ 10,620      $ 15,113      $ 4,493         42   
  

 

 

   

 

 

   

 

 

    

Gross margin percentage:

         

Subscription and support

     62     68     

Professional services and other

     43        52        

Total gross margin

     59        66        

Total cost of revenue increased $4.5 million from 2013 to 2014 primarily due to an increase in web hosting costs, employee-related costs, amortization of developed and acquired technology, allocated overhead expenses, third-party services and travel. The increase in gross margin was primarily driven by additional efficiencies in our web hosting as we added additional customers during the period, as well as improved efficiencies within our professional services organization.

Subscription and support cost of revenue increased $3.6 million from 2013 to 2014 due to an increase in web hosting costs as a result of customer growth and corresponding headcount increases to service additional customers. Web hosting costs increased $2.1 million due to growth in our customer base. Employee-related costs increased $1.2 million as a result of the hiring of additional employees. Allocated overhead expenses increased $0.2 million primarily due to higher rent expense and the depreciation of capital equipment. Amortization of capitalized software development costs increased $0.1 million due to continued development of our software platform.

Professional services and other costs of revenue increased $0.9 million from 2013 to 2014 primarily due to higher employee-related costs of $0.7 million as a result of the hiring of additional employees. Third-party services increased $0.1 million and travel costs increased $0.1 million.

 

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Operating Expenses

Sales and Marketing

 

     Year Ended
December 31,
     Change  
     2013      2014      Amount      %  
     (dollars in thousands)  

Sales and marketing

   $ 20,702       $ 35,390       $ 14,688         71

Sales and marketing expenses increased $14.7 million from 2013 to 2014 primarily due to higher employee-related costs and sales commissions of $10.2 million. Marketing and advertising costs increased $1.6 million as a result of efforts to gain more market presence through increased exposure and an increase in attendees at our InstructureCon annual user conference. Travel costs increased $1.3 million as a result of our higher customer base, along with sales and marketing activities expanding into the international markets. Allocated overhead costs increased by $0.7 million related to higher rent expense and the depreciation of capital equipment. Third-party services increased $0.5 million due to our international expansion and information technology expenses increased $0.4 million as we continued to automate our internal systems.

Research and Development

 

     Year Ended
December 31,
     Change  
     2013      2014      Amount      %  
     (dollars in thousands)  

Research and development

   $ 11,242       $ 21,290       $ 10,048         89

Research and development expenses increased $10.0 million from 2013 to 2014 primarily due to higher employee-related costs of $8.4 million as a result of the hiring of additional employees as we continued to grow our engineering organization to develop new applications and continue to develop our existing software platform. Third-party services increased $0.6 million related to additional software platform enhancement costs. Allocated overhead costs increased $0.5 million primarily due to higher rent expense and the depreciation of capital equipment. Travel costs increased $0.3 million primarily related to the opening of our Chicago office for developers and the 12 Spokes acquisition that included workforce throughout the United States. Information technology expenses increased $0.2 million as we continued to automate our internal systems.

General and Administrative

 

     Year Ended
December 31,
     Change  
     2013      2014      Amount      %  
     (dollars in thousands)  

General and administrative

   $ 5,321       $ 11,268       $ 5,947         112

General and administrative expenses increased $5.9 million primarily due to higher employee-related costs of $4.1 million as a result of hiring additional employees as we continued to grow our business and required additional personnel to support our expanded operations. Professional fees increased $1.2 million a result of our international expansion, and legal and accounting services. Third-party enterprise software fees increased $0.4 million as we required additional financial and other operating systems to support our expanded operations. Allocated overhead costs increased by $0.2 million related to higher rent expense and the depreciation of capital equipment.

 

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Other Income (Expense)

 

     Year Ended
December 31,
    Change  
     2013     2014     Amount     %  
     (dollars in thousands)  

Other expense, net

   $ (669   $ (2,661   $ (1,992     298

Other expense, net increased $2.0 million from 2013 to 2014 due to the expense recorded for the change in the fair value of warrant liability.

 

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Quarterly Results of Operations

The following tables set forth our quarterly consolidated statements of operations for each of the four quarters in the year ended December 31, 2014 and the quarters ended March 31 and June 30, 2015, as well as the percentage of revenue that each line item represents for each quarter. We have prepared the quarterly consolidated statements of operations data on a basis consistent with the audited consolidated financial statements included elsewhere in this prospectus. In the opinion of management, the financial information reflects all adjustments, consisting only of normal recurring adjustments, which we consider necessary for a fair presentation of this data. This information should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this prospectus. The results of historical periods are not necessarily indicative of the results for any future period.

 

    Three Months Ended  
    March 31,
2014
    June 30,
2014
    Sept. 30,
2014
    Dec. 31,
2014
    March 31,
2015
    June 30,
2015
 
    (unaudited)  
    (in thousands)  

Revenue:

           

Subscription and support

  $ 7,558      $ 8,166      $ 10,604      $ 11,765      $ 12,601      $ 13,347   

Professional services and other

    1,052        1,400        1,836        1,971        2,024        2,530   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    8,610        9,566        12,440        13,736        14,625        15,877   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

           

Subscription and support(1)

    2,478        2,608        3,245        3,800        3,676        3,937   

Professional services and other(1)

    463        655        861        1,003        1,235        1,595   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    2,941        3,263        4,106        4,803        4,911        5,532   

Gross profit

    5,669        6,303        8,334        8,933        9,714        10,345   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

           

Sales and marketing(1)

    6,231        7,960        8,144        13,055        11,081        14,050   

Research and development(1)

    3,506        4,306        4,372        9,106        5,271        5,645   

General and administrative(1)

    1,823        2,360        2,707        4,378        10,046        3,923   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    11,560        14,626        15,223        26,539        26,398        23,618   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (5,891     (8,323     (6,889     (17,606     (16,684     (13,273
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

           

Interest income

    18        10        2        2        3        4   

Interest expense

    (28     (29     (39     (40     (22     (22

Change in fair value of warrant liability

    (670     (721     (828     (299     (488     (39

Other income (expense), net

    4        10        (2     (51     (119     10   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

    (676     (730     (867     (388     (626     (47

Loss before for income taxes

    (6,567     (9,053     (7,756     (17,994     (17,310     (13,320

Income tax expense

                  (7     (50            (14
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (6,567   $ (9,053   $ (7,763   $ (18,044   $ (17,310   $ (13,334
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes stock-based compensation as follows:

 

     Three Months Ended  
     March 31,
2014
     June 30,
2014
     Sept. 30,
2014
     Dec. 31,
2014
     March 31,
2015
     June 30,
2015
 
     (unaudited)  
     (in thousands)  

Cost of revenue:

                 

Subscription

   $ 4       $ 6       $ 14       $ 234       $ 24       $ 33   

Professional services and other

     4         9         11         15         24         34   

Sales and marketing

     42         60         72         2,703         181         241   

Research and development

     45         116         146         3,664         240         287   

General and administrative

     84         121         122         726         5,460         163   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 179       $ 312       $ 365       $ 7,342       $ 5,929       $ 758   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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     Three Months Ended  
     March 31,
2014
    June 30,
2014
    Sept. 30,
2014
    Dec. 31,
2014
    March 31,
2015
    June 30,
2015
 
     (as a percentage of total revenue)  

Revenue:

            

Subscription and support

     88     85     85     86     86     84

Professional services and other

     12        15        15        14        14        16   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     100        100        100        100        100        100   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of Revenue:

            

Subscription and support

     29        27        26        28        25        25   

Professional services and other

     5        7        7        7        8        10   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     34        34        33        35        33        35   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     66        66        67        65        67        65   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

            

Sales and marketing

     72        83        65        95        76        88   

Research and development

     41        45        35        66        36        36   

General and administrative

     21        25        22        32        69        25   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     134        153        122        193        181        149   

Loss from operations

     (68     (87     (55     (128     (114     (84
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

            

Interest income

     0        0        0        0        0        0   

Interest expense

     0        0        0        0        0        (0

Change in fair value of warrant liability

     (8     (8     (7     (2     (3     (0

Other income (expense), net

     0        0        0        0        (1     0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     (8     (8     (7     (3     (4     (0

Loss before income taxes

     (76     (95     (62     (131     (118     (84

Income tax expense

                   0        0               (0

Net loss

     (76 )%      (95 )%      (62 )%      (131 )%      (118 )%      (84 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

We have historically experienced some seasonality in terms of when we enter into customer agreements for our platform and applications, mostly around our academic customer’s typical fiscal year end of June 30. This seasonality is reflected to a much lesser extent, and sometimes is not immediately apparent, in our revenue, because we recognize subscription revenue ratably over the term of the subscription. In addition, we may experience variances in total customers over a particular quarter for a variety of business reasons, and the extent to which we gain or lose customers over a particular quarter will not necessarily correlate to the changes in revenue in that quarter or in future periods. As a result, a slowdown in our ability to enter into customer agreements may not be apparent in our revenue for the quarter, as the revenue recognized in any quarter is primarily from customer agreements entered into in prior quarters. Historical patterns should not be considered a reliable indicator of our future sales activity or performance.

Our revenue has increased over the periods presented above due to the significant increase in our customer base. Our operating expenses generally have increased sequentially in every quarter primarily due to increases in headcount and other related expenses to support our growth. The increase in stock-based compensation for the three months ended December 31, 2014 and March 31, 2015 included an investor purchase of common stock from current and former employees at a premium over the fair value, which resulted in additional stock-based compensation. For further details, see Note 1 to our consolidated financial statements. We anticipate our operating expenses will continue to increase in absolute dollars in future periods as we invest in the long-term growth of our business.

 

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Our gross margin has continually improved as a result of higher revenue, lower hosting costs as a percentage of revenue and the efficient delivery of professional services.

Backlog

Backlog represents future non-cancellable amounts to be invoiced under our agreements. We have generally signed multiple year subscription contracts for our applications. For these agreements, it is common to invoice an initial amount at contract signing followed by subsequent periodic invoices, generally annually. At any point in the contract term, there can be amounts that we have not yet been contractually able to invoice. Until such time as these amounts are invoiced, they are not recorded in revenue, deferred revenue, accounts receivable or elsewhere in our consolidated financial statements, and are considered by us to be backlog. Multiple-year payments are recorded as deferred revenue until recognized as revenue according to our revenue recognition policies and are not considered a component of backlog. As of December 31, 2013 and 2014 and June 30, 2015, we had backlog of approximately $72.8 million, $113.2 million and $134.5 million, respectively. We expect backlog to fluctuate up or down from period to period for several reasons, including the timing and duration of customer contracts, varying billing cycles and the timing of customer renewals. Accordingly, we believe due to the potential fluctuations in backlog, that it is not a reliable indicator of future revenue and we do not utilize backlog as a key management metric internally.

Liquidity and Capital Resources

As of June 30, 2015, we had $13.6 million of cash and cash equivalents. We believe our cash and cash equivalents, cash flows from operations and available borrowings under our credit facility will be sufficient to support our planned operations for at least the next 12 months. Our future capital requirements will depend on many factors including our growth rate, net revenue retention rates, the timing and extent of spending to support the expansion of sales and marketing and research and development activities, the introduction of new and enhanced offerings, and the continuing market acceptance of our platform. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies, and intellectual property rights. We may be required to seek additional equity or debt financing. If 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 when desired, our business, operating results and financial condition may be adversely affected.

In June 2015, we entered into an amended and restated loan and security agreement, or credit facility, with Silicon Valley Bank. The agreement provides for up to $15.0 million in revolving borrowings (subject to increase to $25.0 million in the lender’s sole discretion). Availability is subject to a formula based on our monthly recurring revenue. Advances under the credit facility accrue interest at a floating per year rate equal to the prime rate plus 0.5%. The credit facility terminates in June 2017, at which time the principal amount of all outstanding advances becomes due and payable. We are obligated to pay a fee equal to 0.25% per year, payable quarterly in respect of any unused borrowing capacity under the credit facility. As of June 30, 2015 we did not have any outstanding borrowing under the credit facility.

To secure our obligations under the credit facility, we granted Silicon Valley Bank a security interest in substantially all of our tangible and intangible assets, excluding intellectual property. The credit facility contains customary events of default, conditions to borrowing, and covenants, including restrictions on our ability to dispose of assets, make acquisitions, incur debt, incur liens and make distributions and dividends to stockholders. The agreement also includes a financial covenant requiring the achievement of minimum bookings on a trailing three month basis, tested monthly. During the continuance of an event of default, SVB may accelerate amounts outstanding, terminate the credit facility and foreclose on the collateral. As of the date of this prospectus, we were in compliance with all covenants under the terms of the credit facility.

 

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The following table shows our cash flows for 2013, 2014 and the six months ended June 30, 2014 and 2015:

 

     Year Ended
December 31,
    Six Months Ended
June 30,
 
     2013     2014     2014     2015  
                 (unaudited)  
     (in thousands)  

Net cash used in operating activities

   $ (8,634   $ (20,395   $ (14,552   $ (26,712

Net cash (used in) provided by investing activities

     (14,405     10,003        10,343        (3,774

Net cash provided by financing activities

     29,741        41,169        396        179   

Our cash flows are subject to seasonal fluctuations. A significant portion of our contracts have terms that coincide with our academic customers’ typical fiscal year-end of June 30. Historical experience has shown an increase in new and renewed contracts as well as anniversary billings, all of which immediately precede the beginning of our academic customers’ typical fiscal year-end. We typically invoice SaaS fees annually upfront with credit terms of net 30 or 60 days. In turn, our cash flows from operations are affected by this seasonality and are typically reflected in higher cash flow, accounts receivable and deferred revenue balances for the second and third quarter of each year.

Operating Activities

Net cash used in operating activities consists primarily of net loss adjusted for certain non-cash items, including stock-based compensation, change in fair value of warrant liability, depreciation and amortization and other non-cash charges, net. We expect that we will continue to use cash from operating activities in 2015 as we continue to invest in and grow our business.

Net cash used in operating activities during the six months ended June 30, 2015 primarily reflected our net loss of $30.6 million, offset by non-cash expenses that included $6.7 million of stock-based compensation, $1.3 million of depreciation and amortization, and $0.5 million in change in fair value of warrant liability. Working capital uses of cash included a net decrease of $6.3 million in deferred revenue and accounts receivable primarily resulting from the previously discussed seasonal increases in new, renewed and anniversary contracts and our practice of invoicing our customers upfront annually. Also contributing to the use of cash was a $2.5 million increase in prepaid expenses. These uses of cash were offset by a $3.9 million increase in accounts payable and a $0.4 million adjustment to straight-line deferred rent expense.

Net cash used in operating activities during the six months ended June 30, 2014 primarily reflected our net loss of $15.6 million, offset by non-cash expenses that included $1.4 million for the change in fair value of warrant liability, $1.0 million of depreciation and amortization, and $0.5 million in stock-based compensation. Working capital uses of cash included a net decrease of $3.5 million in deferred revenue and accounts receivable primarily resulting from the growth in the number of customers invoiced during prior periods. These uses of cash were offset by a $0.9 million increase in accounts payable and a $0.7 million adjustment to straight-line deferred rent expense.

Net cash used in operating activities during 2014 primarily reflected our net loss of $41.4 million, offset by non-cash expenses that included $8.2 million in stock-based compensation, $2.6 million for the change in warrant liability, and $2.1 million of depreciation and amortization. Working capital sources of cash included a $12.5 million increase in deferred revenue primarily resulting from the growth in the number of customers invoiced during the period and a $2.5 million increase in accounts payable and accrued expenses as a result of a higher level of expenses consistent with the overall growth of the business. These sources of cash were offset by a $4.3 million increase in accounts receivable as a result of increased billings to customers consistent with the overall growth of the business, a $2.3 million increase in prepaid expenses and other assets resulting from a prepayment to one of our third-party hosting service providers and $0.3 million related for all other insignificant items. The change in net cash used in operating activities from 2013 to 2014 is primarily due to increases in employee-related costs as we continued to invest in and grow our business.

 

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Net cash used in operating activities during 2013 primarily reflected our net loss of $22.5 million, offset by non-cash expenses that included $3.6 million of stock-based compensation, $1.5 million of depreciation and amortization, and $0.5 million for the change in warrant liability and $0.3 million related to other insignificant items. Working capital sources of cash included a $7.4 million increase in deferred revenue due to the growth in the number of customers invoiced during the period, a $2.7 million increase in deferred rent related to the move to our new corporate headquarters, and a $1.4 million increase in accounts payable and accrued expenses resulting from a higher level of expenses consistent with the overall growth of the business. These sources of cash were partially offset by a $2.1 million increase in accounts receivable as a result of increased billings to customers consistent with the overall growth of the business. A $1.4 million increase in prepaid expenses and other assets resulting from a prepayment to one of our third-party hosting service providers. The change in net cash used in operating activities during 2013 is primarily due to increases in employee-related costs as we continued to invest in and grow our business.

Investing Activities

Our investing activities have consisted primarily of 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. As our business grows, we expect that we will continue to invest in the expansion of, and improvements to, our leased spaces, both domestically and internationally.

Net cash used in investing activities during the six months ended June 30, 2015 was $3.8 million, consisting primarily of $3.1 million of purchased property and equipment and capitalized software development costs and $1.2 million purchase of marketable securities, offset by $0.5 million of cash maturities from our marketable securities.

Net cash provided by investing activities during the six months ended June 30, 2014 was $10.3 million, consisting primarily of $12.5 million for the maturity and sale of marketable securities. These sources of cash were partially offset by $1.2 million of purchased property and equipment, $0.7 million purchase of marketable securities and $0.3 million acquisition of 12 Spokes.

Net cash provided by investing activities during 2014 was $10.0 million, consisting primarily of $13.8 million for the maturity and sale of marketable securities. These sources of cash were partially offset by a $2.4 million of purchased property and equipment and a $1.2 million purchase of marketable securities.

Net cash used in investing activities during 2013 was $14.4 million, consisting primarily of $13.4 million to purchase marketable securities and a $1.0 million purchase of property and equipment.

Financing Activities

Our financing activities have consisted primarily of issuances of preferred stock to fund our operations and, to a lesser extent, proceeds from the exercises of warrants and options. Cash flows used in financing activities consisted primarily of the repayment of capital leases.

Net cash provided by financing activities for the six months ended June 30, 2015, consisted primarily of $0.3 million of proceeds received from warrant exercises and $0.1 million proceeds received from option exercises, offset by a $0.2 million repayment of capital lease obligations.

Net cash provided by financing activities for the six months ended June 30, 2014, consisted primarily of $0.5 million of proceeds received from option exercises, offset by a $0.1 million repayment of capital lease obligations.

 

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Net cash provided by financing activities for 2014, was $41.2 million, consisting primarily of $39.9 million of net proceeds received from the issuance of Series E preferred stock and $0.8 million of proceeds received from option exercises and $0.5 million for other insignificant items.

Net cash provided by financing activities for 2013, consisted primarily of net proceeds of $29.9 million received from the issuance of Series D preferred stock.

Contractual Obligations and Commitments

Contractual obligations are cash that we are obligated to pay as part of certain contracts that we have entered during the course of business. Below is a table that shows the projected outlays as of December 31, 2014:

 

            Payments due by Period:  
     Total      Less
than
1 Year
     1-3
Years
     3-5
Years
     More
than
5 Years
 
     (in thousands)  

Capital lease obligation

   $ 236       $ 236       $       $       $   

Operating leases obligations

     50,135         4,570         13,941         9,988         21,636   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 50,371       $ 4,806       $ 13,941       $ 9,988       $ 21,636   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

We lease our office facilities under non-cancelable operating leases. As of December 31, 2014, we had leases that expire at various dates through 2025.

Off-Balance Sheet Arrangements

During 2013, 2014 and the six months ended June 30, 2015 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.

Qualitative and Quantitative Disclosures about Market Risk

We have operations both within the United States and internationally, and we are exposed to market risk in the ordinary course of business.

Foreign Currency Risk

Due to our international operations, we have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. dollar, primarily the British Pound Sterling, Euro and Australian dollar. Our sales contracts are primarily denominated in U.S. dollars with a small number denominated in foreign currencies. In addition, a portion of our operating expenses are incurred outside the United States and are denominated in foreign currencies. Decreases in the relative value of the U.S. dollar to other currencies may negatively affect our revenue and other operating results as expressed in U.S. dollars. We do not believe an immediate 10% increase or decrease in the relative value of the U.S. dollar to other currencies would have a material effect on our operating results.

We have experienced and will continue to experience fluctuations in our net loss as a result of transaction gains or losses related to revaluing certain current asset and current liability balances that are denominated in currencies other than the functional currency of the entities in which they are recorded. We have recognized immaterial amounts of foreign currency gains and losses in 2013, 2014 and the six months ended June 30, 2015. We have not engaged in the hedging of our foreign currency transactions to date, we are evaluating the costs and benefits of initiating such a program and may in the future hedge selected significant transactions denominated in currencies other than the U.S. dollar as we expand our international operation and our risk grows.

 

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Interest Rate Risk

We hold cash and cash equivalents for working capital purposes. We do not buy and hold securities principally for the purpose of selling them in the near future nor do we intend to hold securities to maturity. Rather, our policy is focused on the preservation of capital, liquidity and return. From time to time, we may sell certain securities but the objectives are generally not to generate profits on short-term differences in price. We do not have material exposure to market risk with respect to investments, as any investments we enter into are primarily highly liquid investments. We had a $15 million credit facility with Silicon Valley Bank which was undrawn as of June 30, 2015. The interest accrued under the credit facility at a floating rate equal to the prime rate plus 0.5%. A 10% increase or decrease in interest rates would not result in a material change in either our obligations under the credit facility, even at the borrowing limit, or in the returns on our cash.

Income Taxes

As of December 31, 2014, we had approximately $59.1 million of federal and state net operating loss carryforwards available to reduce future taxable income that will begin to expire in 2028 for federal purposes and 2017 for state tax purposes. As of December 31, 2014, we also had federal research and development tax credit carryforwards of approximately $1.1 million and state research and investment credit carryforwards of $0.4 million. If not utilized, the federal and state carryforwards will expire at various dates through 2034.

Utilization of the net operating loss carryforwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization. An analysis to determine the limitation of the net operating loss carryforwards has not been performed.

Due to our cumulative losses, we maintain a full valuation allowance against our deferred tax assets as of December 31, 2014. We consider all available evidence, both positive and negative, in assessing the extent to which a valuation allowance should be applied against our deferred tax assets.

Emerging Growth Company Status

Section 107 of the Jumpstart Our Small Business Startups Act, or JOBS Act, provides that an “emerging growth company” can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. However, we have chosen to irrevocably “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to not take advantage of the extended transition period for complying with new or revised accounting standards is irrevocable.

Critical Accounting Policies and 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 accounting principles generally accepted in the United States of America. 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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The critical accounting estimates, assumptions and judgments that we believe have the most significant impact on our consolidated financial statements are described below.

Revenue Recognition

We primarily generate revenue from multiple element arrangements, which typically include subscriptions to our online software and support, implementation, training and consulting services. Our customers do not have the right to take possession of the online software solution. Revenue from subscriptions is recognized ratably over the subscription period beginning on the date the subscription is made available to customers. We recognize revenue from implementation over the customer life. We recognize revenue from training and consulting services as the services are provided. Amounts billed that have not yet met the applicable revenue recognition criteria are recorded as deferred revenue.

As part of accounting for multiple element arrangements, we must assess if each component has value on a standalone basis and should be treated as a separate unit of accounting. There is an in-depth process that we undergo to determine the standalone value for each component where we determine if an individual component could be sold by itself or if the component is sold by other third parties. If the component has standalone value upon delivery, we account for each component separately. Subscription services have standalone value as they are often sold separate from all other services. Implementation services do not have standalone value as they are not sold separately by us or by third parties. Training and consulting services also have standalone value as they are sold separately by us and by third parties.

We allocate total arrangement fees to each element in a multiple element arrangement based on the relative selling price hierarchy of each element. We are not able to establish vendor-specific objective evidence, or VSOE, the most reliable level of allocating standalone value, for our subscription implementation, training and consulting services because of our pricing practices. We note that third party evidence, or TPE, the second most reliable level of allocating standalone value, is not appropriate for determining the standalone value for any of our services because the pricing for any similar third party subscription or training or consulting services is inconsistent. Therefore, we rely on best estimate of selling price, or BESP, to allocate value to the various components of our arrangements.

We determine BESP by considering our overall pricing objectives and market conditions. Significant pricing practices taken into consideration for our subscription services, which may also include support, training, and professional services, include discounting practices, the size and volume of our transactions, the customer type, price lists, our pricing strategy, and historical stand-alone sales. The determination of BESP is made through consultation with and approval by our pricing committee. As our pricing strategies evolve, we may modify our pricing in the future which could result in changes in relative selling prices.

If our judgments change we would not expect to see a material effect on our consolidated financial statements.

We are evaluating the new revenue recognition guidance of ASC 606, effective January 1, 2018 and the adoption of this new guidance may have a material effect on the presentation of our consolidated financial statements.

Stock-Based Compensation

We measure and recognize compensation expense for all stock-based awards granted to our employees and other service providers, based on the estimated fair value of the award on the date of grant and on a straight-line basis over the vesting period of the award based on the estimated portion of the award that is expected to vest. We use the Black-Scholes option pricing model to measure the fair value of our stock-based awards when they

 

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are granted. We make several estimates in determining our stock-based compensation. These assumptions and estimates are as follows:

 

    Fair Value of Common Stock. As our stock is not publicly traded, we must estimate the fair value of common stock, as discussed in “Valuation of Common Stock” below.

 

    Expected Term. The expected term represents the period that our stock-based awards are expected to be outstanding. The expected term assumptions were determined based on the vesting terms, exercise terms and contractual lives of the options. The expected term of employee option awards is determined using the average midpoint between vesting and the contractual term for outstanding awards, or the simplified method, because we do not yet have a sufficient history of option exercises. We consider this appropriate as we plan to see significant changes to our equity structure in the future and there is no other method that would be more indicative of exercise activity.

 

    Expected Volatility. Since we do not have a trading history of our common stock, the expected volatility is determined based on the historical stock volatilities of our comparable companies. To determine our peer companies, we used the following criteria: software or software-as-a-service companies; similar histories and relatively comparable financial leverage; sufficient public company trading history; and in similar businesses and geographical markets. We used the peers’ stock price volatility over the expected life of our granted options to calculate the expected volatility. We intend to continue to apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own share price becomes available, or unless circumstances change such that the identified companies are no longer similar to us, in which case, more suitable companies whose share prices are publicly available would be used in the calculation.

 

    Risk-Free Interest Rate. The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options.

 

    Expected Dividend Yield. We have never declared or paid any cash dividends and do not plan to pay cash dividends in the foreseeable future, and, therefore, use an expected dividend yield of zero.

We will continue to use judgment in evaluating the assumptions related to our stock-based compensation expense calculations on a prospective basis.

In addition to the assumptions used in the Black-Scholes option-pricing model, we must also estimate a forfeiture rate to calculate the stock-based compensation expense for our awards. Our forfeiture rate is based on an analysis of our actual forfeitures, although we do not have sufficient history, over the expected term. We will continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover and other factors. Changes in the estimated forfeiture rate can have a significant impact on our stock-based compensation expense as the cumulative effect of adjusting the rate is recognized in the period the forfeiture estimate is changed. If a revised forfeiture rate is higher than the previously estimated forfeiture rate, an adjustment is made that will result in a decrease to the stock-based compensation expense recognized in our financial statements. If a revised forfeiture rate is lower than the previously estimated forfeiture rate, an adjustment is made that will result in an increase to the share-based compensation expense recognized in our financial statements.

We have also recorded stock-based compensation for investor purchases of common stock and preferred stock from current and former employees to the extent the purchase price per share exceeded the fair value of such shares.

Valuation of Common Stock

Given the absence of an active market for our common stock, our board of directors was required to estimate the fair value of our common stock at the time of each option grant based upon several factors, including its consideration of input from management and contemporaneous third-party valuations.

 

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The exercise price for all stock options granted was at the estimated fair value of the underlying common stock, as estimated on the date of grant by our board of directors in accordance with the guidelines outlined in the American Institute of Certified Public Accountants, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Each fair value estimate was based on a variety of factors, which included the following:

 

    contemporaneous valuations performed by unrelated third-party valuation firms;

 

    the prices, rights, preferences and privileges of our preferred stock relative to those of our common stock;

 

    the lack of marketability of our common stock;

 

    our actual operating and financial performance;

 

    current business conditions and projections;

 

    our hiring key personnel and the experience of our management;

 

    our history and the timing of the introduction of new applications and features;

 

    our stage of development;

 

    the likelihood of achieving a liquidity event, such as an initial public offering or a merger or acquisition of our business given prevailing market conditions;

 

    the illiquidity of stock-based awards involving securities in a private company;

 

    the market performance of comparable publicly traded companies; and

 

    U.S. and global capital market conditions.

To allocate value to our common stock, we utilized either an option pricing method, or OPM, a probability weighted expected return method, or PWERM, approach or a hybrid method consisting of OPM and PWERM. The OPM treats common stock and preferred stock as call options on a business, with exercise prices based on the liquidation preference of the preferred stock. Therefore, the common stock only has value if the funds available for distribution to the holders of common stock exceeds the value of the liquidation preference of the preferred stock at the time of a liquidity event, such as a merger, sale, or initial public offering, assuming the business has funds available to make a liquidation preference meaningful and collectible by stockholders. The common stock is modeled as a call option with a claim on the business at an exercise price equal to the remaining value immediately after the preferred stock is liquidated. The OPM uses the Black-Scholes option-pricing model to price the call option.

The PWERM approach employs various market approach calculations depending upon the likelihood of various liquidation scenarios. For each of the various scenarios, an equity value is estimated and the rights and preferences for each shareholder class are considered to allocate the equity value to common shares. The common share value is then multiplied by a discount factor reflecting the calculated discount rate and the timing of the event. Lastly, the common share value is multiplied by an estimated probability for each scenario. The probability and timing of each scenario are based upon discussions between our board of directors and our management team. Under the PWERM, the value of our common stock is based upon four possible future events for our company: (1) an initial public offering, (2) an acquisition of our company, (3) remaining a private concern and (4) a liquidation scenario.

The market approach uses similar companies or transactions in the marketplace. We utilized the guideline company method of the market approach for determining the fair value of our common stock under the initial public offering scenarios. We identified companies similar to our business and used these guideline companies to develop relevant market multiples and ratios. We then applied these market multiples and ratios to our financial forecasts to create an indication of total equity value. Under the acquisition scenario, we utilized the guideline

 

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company method and the guideline transaction method of the market approach to determine the fair value of the common stock. The guideline transaction method compares the operating results and market value of the equity or invested capital of acquired companies similar to our business. Under the liquidation scenario, we assumed no value remained to be allocated to our common stockholders.

Following this offering, we will 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.

Based on the assumed initial public offering price per share of $            , the midpoint of the price range set forth on the cover page of this prospectus, the aggregate intrinsic value of our outstanding stock awards as of June 30, 2015 was $         million, of which $         million related to vested awards and $         million related to unvested awards.

Recent Accounting Pronouncement

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), or ASU 2014-09, which amended the existing FASB Accounting Standards Codification. This standard establishes a principle for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. The standard also provides guidance on the recognition of costs related to obtaining and fulfilling customer contracts. In July 2015, the FASB decided to defer by one year the effective dates of its new revenue recognition standard for public and nonpublic entities. As a result, this guidance will be effective for public companies for interim and annual periods beginning on or after December 15, 2017. Public entities would be permitted to adopt the standard as early as the original public entity effective date; early adoption prior to that date would not be permitted. Once effective, entities can choose to apply the standard using either a full retrospective approach or a modified retrospective approach. We have not yet selected a transition method and are currently assessing the potential impact that this standard will have on our consolidated financial statements.

 

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LETTER FROM CHIEF EXECUTIVE OFFICER

Dear Instructure Investors,

When we went to market in 2011 with Canvas, our cloud-based learning management system for higher ed, we disrupted the stagnant LMS market with our simple strategy: Build a company focused on customer satisfaction and provide an open cloud platform that emphasizes user experience and continuous innovation.

In the last four years, we’ve created a successful sales, marketing and innovation machine that continues to roll forward globally. We’ve opened offices on four continents, hired more than 650 employees, expanded our reach to millions of individual users, and secured contracts with more than 1,400 customers, representing colleges, universities, K-12 school districts, and companies in 25 countries. Responding to demand from corporate users who liked what they saw with Canvas, we launched Bridge for corporate learning and training in 2015.

The hallmarks of success—high customer satisfaction and retention rates are the key factors, which we believe set us apart from other software companies. Customers love our software and our company’s open culture, which permeates every aspect of our technology, support and business operations.

We’ve built a team of smart, creative, passionate people who work hard to provide an awesome experience for our customers. Through Canvas and Bridge, we enable educational institutions and corporations to streamline workflows, provide anytime, anywhere access to information, and connect people, tools, and ideas seamlessly through an engaging, easy-to-use platform. We help millions of students, teachers and employees to achieve their education and learning goals. We make software that makes people smarter.

-josh

Josh Coates, CEO

Instructure

 

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BUSINESS

Mission and Vision

Instructure’s mission is to make software that makes people smarter. Our vision is to help organizations everywhere leverage technology to maximize the potential of their people.

Overview

We provide an innovative, cloud-based learning management platform for academic institutions and companies worldwide. We built our learning management applications, Canvas, for the education market, and Bridge, for the corporate market, to enable our customers to easily develop, deliver and manage engaging face-to-face and online learning experiences. Our platform combines powerful, elegant and easy-to-use functionality with the reliability, security, scalability and support required by our customers.

In today’s dynamic, knowledge-driven economy, quality education and constant learning are critical to compete and succeed. Academic institutions recognize that for students to reach their maximum potential, they require a learning environment that is interactive and accessible. Similarly, companies need to deliver seamless and easy learning experiences to better attract, develop and retain talent and compete more effectively.

We develop software that millions of students, teachers and employees use to help achieve their education and learning goals. Our applications enhance academic and corporate learning by providing an engaging, easy-to-use platform for instructors and learners, enabling frequent and open interactions, streamlining workflow, and allowing the creation and sharing of content with anytime, anywhere access to information. Our platform runs on a modern, cloud-based architecture that enables users to teach, learn and engage across a wide variety of application environments, operating systems, devices and locations at any time. Our open standards allow for integration with third-party publishers and software providers to deliver additional learning content and applications. Our platform also provides data analytics capabilities enabling real-time reaction to information and benchmarking in order to personalize curricula and increase the efficacy of the learning process.

We offer our platform through a Software-as-a-Service, or SaaS, business model. Customers can rapidly deploy our applications with minimal upfront implementation. Customers also benefit from automatic software updates with virtually no downtime. Our SaaS business model substantially reduces the need for our customers to buy and support a broad range of IT infrastructure, and significantly reduces the cost, complexity and disruptions associated with implementations and upgrades of on-premise software.

We launched Canvas in February 2011 and have experienced rapid customer adoption in the education market. In addition, more than 100 corporate customers have implemented Canvas in order to deliver a more effective, simple way for their employees to learn. To better meet the needs of the corporate market, we leveraged our platform to develop Bridge, which launched in February 2015. As of June 30, 2015, we had more than 1,400 customers, representing colleges, universities, K-12 school districts, and companies in more than 25 countries.

For 2012, 2013 and 2014, revenue was $8.8 million, $26.1 million and $44.4 million, respectively, representing year-over-year growth of 197% and 70%. We have experienced net revenue retention rates of over 100% at each of December 31, 2012, 2013 and 2014. For 2012, 2013 and 2014, our net losses were $18.5 million, $22.5 million and $41.4 million, respectively, as we focused on growing our business. For the six months ended June 30, 2015, revenue was $30.5 million and we incurred a net loss of $30.6 million.

 

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Industry Background

The Markets for Learning are Large, Growing and Highly Strategic

In today’s dynamic, knowledge-driven economy, students and employees must continuously develop knowledge and skills to compete and succeed. The pivotal role of learning, not only in academic settings but also in the corporate environment, has driven many organizations to seek out technologies and applications to help improve the creation and delivery of more effective learning experiences.

The market for academic and corporate learning management software is estimated to be $4.1 billion in 2015, and projected to grow to $7.8 billion in 2018, according to MarketsandMarkets. We attribute the rapid growth of this market, in part, to the migration of instructor-led training to online learning, which we believe will increase the adoption of learning management systems.

Corporate learning management software is part of the broader human capital management market, which also includes the recruiting, workforce management, performance management and compensation management software markets. IDC estimates that these additional markets will be $5.1 billion in 2015, and projected to grow to $6.4 billion in 2018. We believe these additional markets may present opportunities for us to develop additional applications on our platform over time.

Consumerization of Technology is Changing How People Interact, Learn, Train and Work

Recent innovations in consumer-oriented technology are changing how people expect to interact, learn, train and work. In particular, the ubiquity of social media and highly intuitive consumer and mobile applications have led instructors, students and employees to expect the same rich functionality, availability and usability from a learning platform. Users also expect learning management systems to provide a forum for discussion and collaboration to create a truly interactive user experience in addition to being a content delivery system.

Strong User Engagement Leads to Robust Data Analytics

Given today’s focus on accountability and performance, both academic institutions and companies are striving to improve learning outcomes. To do so, an organization must first understand the variables that impact results, such as attendance metrics, user engagement, and the efficacy of various learning content and technologies for individual learners. A learning management system has the potential to provide significant insight to educators and administrators on their students’ and employees’ progress toward meeting learning objectives and the factors impacting performance. In addition, such learning management systems can facilitate insightful benchmarking to allow organizations to explore other drivers of learning outcomes.

Strong user engagement with learning management systems is critical to maximize the potential of data analytics. High utilization enables the learning management system to capture more data, and leads to more insightful analyses on user behavior, quality of individual courses and effectiveness of digital content. Better analytics enables instructors and administrators to make more informed decisions about instruction and materials that in turn drive improved learning outcomes and performance for individuals and companies. This virtuous cycle among user engagement, data analytics and learning outcomes represents the evolution of learning technology. We believe that the market increasingly is demanding learning management software that delivers both robust analytics and strong user engagement.

Legacy Learning Management Systems Do Not Meet the Needs of Today’s Instructors, Students and Employees

Many traditional learning management systems are based on legacy technology architectures that do not meet the expectations of today’s users. We believe legacy learning management systems face the following key challenges:

 

   

Poor User Experience. Learning management systems were first introduced over a decade ago. These systems often lack the features and interfaces to deliver a personalized, collaborative, engaging, mobile

 

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and always-on experience that users expect today. According to the Brandon Hall Group, 61% of companies are not highly satisfied with the feature set of their learning management systems. Users demand improved features, such as alerts, text, audio and video communication, collaboration tools, mobile access and personalization to help them achieve learning goals.

 

    Not Mobile. Legacy learning management systems were not built for mobility and efforts to retrofit for use with mobile devices have often resulted in a poor user experience. This adversely impacts the usage of learning management systems as instructors, students and employees spend an increasing amount of time on their mobile devices.

 

    Unreliable with Poor Uptime. Legacy learning management systems were not designed for cloud-based deployment. Traditional on-premise systems require downtime for maintenance, upgrades and unforeseen bug fixes, which can adversely impact instructors and students during critical times.

 

    Low Utilization. Legacy learning management systems have historically been plagued by user dissatisfaction resulting in low utilization rates. In 2014, ECAR found that only 47% of faculty members use their learning management systems daily and only 41% of faculty members use a learning management system to interact with students outside the classroom. We believe lack of utilization adversely affects the investments these institutions have made in their learning management systems. According to the Brandon Hall Group, 48% of users are looking to leave their current learning management system and move to a new provider.

 

    Expensive. Legacy learning management systems require substantial upfront and ongoing investments in IT infrastructure to implement and maintain an on-premise solution. Organizations often choose not to deploy software or to delay upgrades to newer versions due to concerns regarding costs, lengthy implementation and customization cycles, and potential business disruptions. This makes it difficult for organizations to respond quickly to changing needs and often results in outdated or different versions of applications running across various departments or geographies within organizations.

 

    Limited Reach and Complexity of Data Analytics. While legacy learning management systems have historically enabled the capture of data, access has been generally limited to administrators and teachers and not to students. Further, analytics tools currently offered in existing on-premise solutions can be limited in capabilities making it difficult to translate the data into useful, actionable information.

 

    Closed Ecosystem. Legacy learning management solutions are often closed systems, which can limit the number of third-party integrations into a platform. Customers are forced to spend time and often money to obtain separate integration contracts with third-party publishers and software providers. Consequently, it is more difficult for them to take advantage of the growing and robust set of learning, human resource and other applications available in open ecosystems.

Our Platform

We designed our platform to enable users to teach, learn and collaborate anytime, anywhere, across a wide variety of application environments, operating systems, devices and locations. We believe our platform offers the following key benefits:

 

    Intuitive User Experience. We provide elegant and intuitive user interfaces that leverage familiar, consumer web navigation techniques, such as drag and drop, to make it easy to use our platform. We designed our system from the ground up, with modern, web-based design features, to create a differentiated user experience. We enable seamless collaboration among instructors and learners to share feedback and encourage online discussion forums. These interactive features extend learning beyond the physical classroom and facilitate a more engaging learning experience. Users can easily add audio, wikis, online workspaces, social media options and other collaboration tools to their online courses. Furthermore, our video-integrated functionality strengthens instructor-to-student and peer-to-peer online relationships and improves overall retention and usage rates.

 

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    Optimized for Mobile. Our mobile-optimized platform allows users to access their applications anytime and anywhere. We offer a “mobile first” responsive design to ensure an optimal experience on most devices and, for Canvas, we also have iOS and Android native mobile applications available for free download on both phones and tablets.

 

    High Availability and Uptime. Our software is mission-critical for our users and customers and we focus on maintaining enterprise-grade reliability at all times. Our standard contracts provide for guaranteed 99.9% annual uptime. We achieved 99.9% uptime during 2014 while our customer base grew over 75%.

 

    High Utilization. Over eight million instructors, students and employees have used our software over the 12 months ended June 30, 2015. According to self-reported data in an ECAR 2014 survey, 58% of faculty in higher education use a learning management system to share content with students, while our internal analysis of higher education institutions using Canvas shows that 71% of faculty use Canvas to share content with students.

 

    Native Cloud-based Software. Our cloud-based delivery model enables customers to rapidly deploy our applications to experience immediate benefit. Software updates are implemented regularly and transparently. Our single-instance, multi-tenant architecture is designed to scale to support our rapid growth. We increased our number of customers by over 670 during the 12 months ended June 30, 2015. Our cloud-based platform provides upfront cost savings over on-premise solutions by reducing the need for expensive IT resources and hardware infrastructure.

 

    Open Access to Data Analytics. Our platform provides users with open API access to data analytics. We deliver the analytics in an easy to understand and consumable way, that is optimized for independent analysis. This open visibility allows learners to view their own progress in real-time, educators to adjust programs and personalize curricula for maximum effectiveness and organizations to benchmark user data internally and respond to patterns observed.

 

    Open Platform. We are committed to collaboration and openness. Our open standards allow organizations to easily deliver additional learning content and applications from third-party publishers and software providers. This extends the content, tools and services necessary to satisfy the diverse needs of our customers without sacrificing the innate simplicity of our platform. Canvas users can deploy third-party content and software applications within the application interface or browse our EduAppCenter.com’s growing catalog of approximately 200 integrations. Bridge was specifically designed to integrate easily via open APIs with a variety of enterprise resource planning and human resources information systems.

Our Growth Strategy

We are pursuing the following strategies to grow our business:

 

    Grow our U.S. Customer Base. We believe that the market for learning management systems remains significantly underserved. K-12 academic institutions have yet to widely adopt learning management systems, while most higher education institutions have adopted legacy systems with which they are often unsatisfied. In the corporate market, there are both greenfield opportunities and opportunities to displace legacy solutions that do not meet customer needs. As a result, we believe there is opportunity to substantially expand our base of U.S. academic and corporate customers. Toward that end, we are making significant investments in growing our direct sales team, particularly focused on the corporate market.

 

    Further Maximize our Existing Customer Base. The majority of our academic customers implement Canvas widely within their institutions and across school districts. This approach to wide initial deployments allows us to efficiently and broadly promote adoption and utilization of Canvas by students and faculty. We plan to increase revenue from this customer base by selling additional applications and services. We plan to further penetrate our existing corporate customer base by growing the number of users on our platform and expanding enterprise wide. We believe our user-based pricing model and innovative applications provide us with a substantial opportunity to increase the value of our existing customer base.

 

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    Continue to Expand Internationally. We believe there is a significant opportunity for our cloud-based learning management platform outside of the United States and we intend to expand our direct and indirect sales force to further penetrate international markets. We opened our international headquarters in London in June 2014, and for the six months ended June 30, 2015, international customers accounted for 6% of our revenue.

 

    Continue to Innovate and Offer New Applications. We will continue to make significant investments to further enhance the functionality of our existing applications, expand the number of applications on our extensible learning platform and develop into adjacent markets that will benefit our customers. We take a strategic approach to research and development investment. For example, in 2015, we launched Bridge to better serve our corporate customers because we saw corporate customers adopt Canvas, due to a lack of suitable alternatives.

Our Applications

Our applications enhance academic and corporate learning by providing a system of engagement for teachers and learners, enabling frequent and open interactions, streamlining workflow, and allowing the creation and sharing of content with anytime, anywhere access to information. Our applications also provide users with powerful, easy-to-use functionality, to intuitively interact with course content and activities. All of our applications run on our extensible platform, which allows us to easily deploy new applications and features to support the needs of our customers. We use modern mobile technology to provide anytime, anywhere access to our applications from a wide array of devices, including personal computers, tablets and smartphones. We also have iOS and Android native mobile applications for Canvas available for free download.

 

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Canvas

Canvas is designed for our K-12 and higher education customers. Our customers use Canvas’s extensive set of flexible content creation, management and delivery tools to support and enhance face-to-face and online instruction.

Canvas enables instructors and learners to:

 

    post and discuss content such as assignments, quizzes, announcements and class notes;

 

    choose, manage and change courses;

 

    automate classroom activities, including the syllabus, attendance and calendar of course events;

 

    perform outcomes-based assessments;

 

    facilitate text, audio and video communications for enhanced teacher and student engagement;

 

    grade assignments, using SpeedGrader, and post grades online;

 

    access an integrated learning object repository;

 

    analyze course and student data to improve learning outcomes and teaching methods;

 

    set personalized academic goals and track performance; and

 

    provide parental access to assignments and grades.

Canvas supports standards-based integration with hundreds of third-party publishers and software providers. The extensibility of the Canvas application enables our customers to build the learning and teaching environment that meets their unique organizational needs.

Canvas Network

Canvas Network allows anyone around the world access to open online courses for personal and professional development. Through Canvas Network, academic institutions have the flexibility to offer and deliver courses over the internet to a much broader audience than just their own employees or on-campus students. Some institutions choose to pursue a massive open online course, or MOOC, format, and some choose to pursue a smaller online course format with more interaction. Institutions already using Canvas can easily move courses onto Canvas Network, extending their reach and enhancing their brand.

Canvas Data

Canvas Data provides access to a complete data set of user activity. This includes course activity information, assessment and evaluations, discreet page views, attendance metrics, user engagement, individual curricula, and demographic data, including user and device characteristics. Data is delivered in a format optimized to perform queries and reporting, making it easier for administrators to benchmark, customize teaching and improve learning outcomes.

Canvas Catalog

Canvas Catalog is a white-label, web-based course catalog and registration system that enables organizations to build and maintain a branded marketplace for their online course offerings. Catalog provides a searchable course index, custom course landing pages, collections of courses in specialized programs, automatically distributed certificates and other recognitions of completion, and online payment gateways for student registration and enrollment.

 

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Bridge

Bridge is designed to enable corporate customers to deliver impactful learning to accelerate employee progression and address the unique development needs of their workforce. Through Bridge, we have streamlined employee learning by offering a consumerized, mobile experience that is easy to use for both administrators and learners.

Bridge enables organizations to:

 

    create courses and training content;

 

    deliver and track compliance and regulatory requirements;

 

    create surveys to assess employees’ knowledge, ability and sentiment;

 

    personalize courses based on feedback, need or job;

 

    align employees to support organizational goals;

 

    assign required training;

 

    organize and group courses by various categories;

 

    track employee learning progress;

 

    provide a mobile experience to allow course access and management anywhere, from any device; and

 

    extend training to reseller channels and other distribution networks.

Bridge incorporates real-time feedback between managers and employees so that organizations can quickly respond to changing needs. Bridge offers integrated survey capabilities that enable organizations to diagnose organizational misalignment, as well as knowledge gaps, which can then be remediated through targeted and engaging learning experiences.

Technology and Standards

The technologies used to build our platform and applications are native cloud, multi-tenant and designed to scale to millions of users. We utilize a modern technology stack to take advantage of advancements in web-design, open source technologies, scalability, and security. We have implemented industry-standard best security practices to help us protect our servers and our customers’ critical information.

Our platform and applications are hosted on cloud infrastructure provided by Amazon Web Services, or AWS. Our hosting services provide full support, rolling release upgrades/updates, backup, and disaster recovery services. We primarily use Elastic Compute Cloud, or EC2, along with load balancing, auto scaling and storage, or S3, provided by Amazon. Our infrastructure enables us to scale horizontally and rapidly adjust to variances in usage, at the server, database and file store level. Our applications run on virtualized instances in Tier III and Tier IV AWS data center facilities, which provide industry-standard best security practices. As of June 30, 2015, we used AWS data center facilities located in Virginia, Oregon, Dublin, Ireland, Sydney, Australia and Singapore and intend to expand operations to other regions based on market conditions. These facilities have earned multiple certifications including, but not limited to, SOC 2 Type II, ISO9001 and ISO27001.

We designed our platform to be resilient to failure and capable of rapid recovery from component failure. We apply a wide variety of strategies to achieve 99.9% uptime, excluding scheduled maintenance. During 2014, we achieved 99.9% uptime. We have automated procedures in place to handle coordinated changes across our various instances and store backups of key databases in multiple redundant and geographically isolated locations.

Our technology stack is a dynamic web application built with our own automated scaling and provisioning technologies. We use Web 2.0 technologies like Ruby on Rails and Node.js, which provide users a familiar web

 

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experience. Our platform is built on underlying open source technologies, taking full advantage of advancements in scalability and flexibility. We utilize Linux and React operating systems, Postgres and Cassandra databases, and Redis value store. Our platform also provides an API that third-parties can use to add new features and functionality.

Keeping the platform secure is a primary focus of our operations team due to the sensitive nature of the data contained within the platform. We maintain a high level of diligence around data security and have chosen to adopt the AICPA SOC2 set of security controls and demonstrate compliance with these controls through annual audits and web application vulnerability assessments.

 

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Customers

As of June 30, 2015, we had more than 1,400 customers representing colleges, universities, school districts, and companies in more than 25 countries. We have K-12 customers in 48 of 50 states. The majority of our academic customers implement Canvas widely within their institutions and across school districts. Canvas is used by seven Ivy League schools. We define a customer as an entity with an active subscription contract. In situations where there is a single contract that applies to entities 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 2014, no single customer represented more than 10% of our revenue. The following sets forth a list of representative customers:

 

Higher Education

Richland Community College, Illinois

University of Colorado | Anschutz Medical Campus

University of Michigan

University of Texas at Austin

Utah Education Network

K-12

Granite School District, Utah

Hall County Schools, Georgia

Knox County Schools, Tennessee

North Carolina Department of Public Instruction

Pasco County Schools, Florida

 

 

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International

Best Practice Network, United Kingdom

City University of Hong Kong

London Business School

Trinity Grammar School, Australia

University of Birmingham, United Kingdom

Corporations

Center for Professional Leadership Studies at UNLV

Dawnbreaker

Foundation Center

InMoment

Salud Family Health Centers

 

 

Customer Case Studies

By using our applications to deliver an online learning experience, many customers benefit from an easy to use environment that gives access to insightful analytics, which can lead to significant cost savings. The case studies below illustrate the results that certain of our customers have achieved by using our platform.

Pasco County Schools

Situation: Beginning in 2008, Pasco County (along with every school district in Florida) was required by state law to offer a full-time virtual program for K-12 students. In response, the Pasco eSchool was launched in 2009. Its first four years were spent juggling numerous learning management systems to comply with rigid vendor requirements that course content be delivered using proprietary systems. And just as the eSchool began using Moodle, district schools were moving independently toward other learning management systems.

Solutions and Benefits: In 2012, Pasco County assembled an internal team to begin investigating a new learning management system that could simplify the district’s technology landscape. After narrowing the choice to four finalists, Pasco County chose Canvas because of its robust feature set, ease of use, customer-responsiveness, and open API, which allowed the district to customize the learning management system to meet current and future needs for both its virtual and in-school programs. To ensure the success of its implementation goals, the district purchased Premium Canvas Training and Support Packages. Pasco reported the following benefits from using Canvas:

 

    expanded reach with full time virtual program;

 

    offered more courses to more students (both virtual and in-school);

 

    offered and tracked professional development;

 

    created a culture of teachers comfortable with teaching with technology;

 

    easily integrated with other education applications; and

 

    increased communication between teachers, students, and parents.

University of Central Florida

Situation: The University of Central Florida, or UCF, is the second-largest university in the United States. Its 12 colleges offer 210 degree programs and serves approximately 61,000 students. UCF delivers 38% of its total credit hours online. It needed a learning management system that was flexible and that could be customized to meet UCF’s unique needs.

Solutions and Benefits: In 2012, UCF selected Canvas. UCF particularly valued Canvas’ extensibility and began implementing the platform with teachers and students as part of its distributed learning initiative. UCF’s Canvas usage has since grown and the university often participates in beta environments for new product and feature releases. Most recently, UCF began using Canvas Data to identify patterns and trends in its data. UCF reports the following benefits from using Canvas:

 

    a customized platform to fit its unique needs;

 

    expanded capacity within the platform by building a suite of custom integrations;

 

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    continual updates incorporate technical and pedagogical improvements, allowing instructors and designers to achieve a balanced approach in their online courses; and

 

    high usage and user adoption.

Richland Community College

Situation: Richland Community College was in need of a new learning management system to replace what they were currently using, which had been bought by another company and was now being shut down. They wanted a learning management system that was intuitive and agile, not slow and cumbersome like what they had been using.

Solution and Benefits: In May 2012, after evaluating several learning management systems, Richland Community College chose Canvas because of its student and teacher-friendly, easy-to-use interface. In May 2012, it began a soft, one-year roll out with select teachers and students. Then in summer 2013, they rolled out Canvas to the entire institution. To the faculty’s surprise, even though it was a new system for much of the faculty and students, the number of support tickets decreased dramatically from day one. In addition to this, Richland reported the following benefits from using Canvas:

 

    improved faculty/student communication;

 

    experienced lower system and integration frustration;

 

    reduced grading controversy due to easy-to-use gradebook with straight-forward insight into performance and grades;

 

    less time spent uploading and locating content;

 

    comfort in knowing Canvas support person is there anytime to answer any question they can’t figure out on their own; and

 

    teachers and students report feeling comfortable with the learning management system and that it helps them to be successful.

University of Birmingham

Situation: In 2013, the University of Birmingham’s legacy virtual learning environment was ready for review. It was time for the University’s digital learning team to seek a teaching and learning environment that was a better fit for their five-year digital strategy for growth and excellence in teaching and learning. The University sought a solution that would not only deliver a fully-integrated, connected University, but also provide a teaching and learning environment that was scalable, modern and appealing to both academic staff and digitally-native learners. The University was looking for a state-of-the-art solution that came with guaranteed reliability, accessibility and scalability, which could also set them apart from the competition.

Solution and Benefits: Canvas offered a collaborative solution for the University’s teaching and learning environment. Canvas is a cloud-based platform, which meant it could cope with increased usage at key times throughout the academic year in line with the University’s requirements. Canvas’ user-interface was designed to be easy-to-use, modern and accessible on multiple web browsers and devices in line with the University’s requirements.

The University of Birmingham implemented the system and set an 18-month window for all content to be transitioned to Canvas. However, in practice, this period has proven to be much shorter, with staff actively choosing to use the new platform. Within three months more courses were on Canvas than had been available in the penultimate year of the previous platform.

 

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Clearlink

Situation: In early 2014, Clearlink, a provider of content and conversion services, saw the increasing need to have an empowered centralized platform for training their growing sales teams efficiently and effectively. Understanding their need for a robust and easy-to-use learning management system, they went out into the market looking for a solution. They were impressed by the growth of Instructure and started exploring our corporate product, Bridge. Clearlink wanted a simple, cost effective solution that could deliver vendor information to the sales floor quickly and consistently, without pulling the inbound sales teams away from their phones. In choosing a new learning management system, an easy-to-use interface and reporting were both critical components of Clearlink’s decision making process. By late 2014, Clearlink picked Bridge as their learning management system.

Solutions and Benefits: After evaluating Bridge extensively, Clearlink chose Bridge for multiple reasons, including:

 

    an easy to navigate user interface;

 

    an intuitive user experience for better adoptability;

 

    Bridge easily creates programs and quizzes for content contributors;

 

    quick and efficient response and interaction with the Instructure team; and

 

    instructure cares about Clearlink’s success.

Since implementation in January 2015, Clearlink has developed over 43 courses and enrolled close to 1,600 employees. Each course has provided significant savings to Clearlink by allowing agents to consume trainings at their workstations and on their mobile devices. The ability to deliver training “virtually” has deepened learner engagement with information critical to creating quality sales. Additionally, key partners who rely on Clearlink’s unique customer acquisition capabilities are benefiting from Bridge’s capabilities. Instead of relying on a costly and time-consuming effort to send trainers, training materials and support to conduct on-site training events, brand-partners can now share their content directly with Clearlink to be consumed through Bridge. This has saved each organization significant time and expense and deepened the already strong relationship of trust. Additionally, the “real-time” access to training has allowed Clearlink to drive performance in important metrics such as answer rate percentage, sales conversion and unavailable time.

Sales and Marketing

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, and to a minimal extent in the corporate market. As of June 30, 2015, our sales function consisted of 125 employees, the majority of whom were direct quota-based sales representatives. As we grow internationally, we may use reseller partnerships as needed to penetrate certain new markets.

We engage in a variety of traditional and online marketing activities designed to provide sales lead generation and sales support and promote brand awareness. Our specific marketing activities for lead generation include advertising in trade publications, digital advertising, including search engine optimization and search engine marketing, display search and referral marketing. Brand awareness activities include press relations in business, human resources, education publications and blogs, market specific advertising campaigns and speaking engagements, and industry trade-shows and seminars. We also host InstructureCon, our annual user conference for current customers and prospects. Nearly 1,700 people attended InstructureCon 2015 in Park City, Utah.

 

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Customer Success

We view strong customer support and services as essential for customer retention even though our applications are easy to adopt and use. The majority of our services and support is offered by phone and online audio and video conferencing rather than in person, resulting in a more efficient and cost effective business model for us and our customers. As of June 30, 2015, our Customer Success department, responsible for all customer post-sale interaction, consisted of 200 employees located in the United States, the United Kingdom and Australia. Our services and support efforts include the following:

 

    Customer Success Management. We have created a strong Customer Success Management team to assist customers throughout the deployment and production lifecycle. They provide coverage available to all customers as part of their standard subscription as well as other service offerings.

 

    Implementation Services. We believe that a positive onboarding experience leads to more satisfied customers, longer customer relationships and greater lifetime value. Our standard implementation takes anywhere from 30 to 90 days depending on customer-side complexity and timelines. It includes regularly scheduled and highly-structured activities to ensure customers progress toward actually and effectively using our applications. Most of these interactions take place over the phone and through online audio and video conferencing.

 

    Training Services. Also critical to customer success is our customers’ comfort level with the features and functionality of our applications. We include training with every implementation and offer additional training for a fee. The training offered is intended to engender confidence among users so they can be successful with our platform. Most training is performed remotely by online audio and video conferencing.

 

    Consulting Services. In addition to our implementation and training offerings, we provide 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 Instructure, which we believe increases brand loyalty and lifetime value.

 

    Support. We provide standard support services, which can be upgraded to our premium support services to include 24/7 coverage and an improved service level agreement. Our Tier 1 offering includes our premium support services as well as direct support to users by our agents. We also provide extensive user guides and online videos for the ongoing education and assistance of our users. During the 12 months ended June 30, 2015, more than 95% of our support users that responded to our survey reported they were satisfied with their experience when surveyed about their interactions with Instructure.

Partner Ecosystem and Integration

We are committed to enabling our customers to build an ecosystem for successful learning. Our open platform is central to both our technology and our strategy.

From a technological perspective, we remain focused on implementing industry standards like IMS Global Learning Consortium’s Learning Tools Interoperability and Learning Information Services, allowing for robust integrations between Canvas and a large spectrum of third-party solutions to be offered to our customers.

Our partnership program invites third-party software, service and content providers, through an extensive library of APIs, to easily integrate with our applications and at no or minimal charge to the partner. This allows us to broaden and efficiently extend the functionality of our applications. We have over 100 partners, including Pearson, Cengage, Gooru, Ex Libris, Panopto, AspirEdu, Boundless Learning, iParadigms, Verificient Technologies, Zaption and Harvard Business Publishing.

 

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Research and Development

Our product, customer success, and sales and marketing teams operate cross-functionally and regularly engage with customers, partners and industry analysts to understand customer needs and general industry trends to enhance our existing applications. Additionally, our research and education team analyzes user data and current online learning trends and collaborates with customers to inform application development and growth into adjacent markets. Once application improvements are identified, the entire development organization works closely together to design, develop, test and launch new functionality and application updates. We have made, and will continue to make, significant investments to strengthen our existing applications, and expand the number of applications on our extensible learning platform that will benefit our customers and allow us to expand into new markets.

Culture and Employees

We are passionate about making learning and working more engaging and accessible for people everywhere and we apply that same vision at Instructure every day. We maintain seven values that we believe set us apart, define our company culture and serve as a strategic advantage as they are directly aligned with the experience we strive to provide to our customers.

 

    Customer Experience. We aspire to create an awesome customer experience in every interaction with our applications and people.

 

    Openness. Instructure is built on openness—it’s part of who we are. Open doors. Open office. Open source. We have created an open work environment without offices to increase collaboration and transparency—and to reflect the open learning platform environment we provide to our customers.

 

    Ownership. Everyone’s an owner because each of us can have a significant impact on our ability to succeed. Full-time Instructure employees receive equity grants and can participate in the success and growth of the company.

 

    Trust. We have a clear “tell us if we’re doing something stupid” policy. Everyone is encouraged to offer input and feedback regardless of level of experience or position. Questioning the status quo is part of our DNA and supports us in continuing to disrupt and transform our markets.

 

    Integrity. Simply put, we say what we’re going to do and then we do it. We hold people accountable for results and commitments. Our objectives and commitments are openly shared throughout the company.

 

    Excellence. Achieving excellence isn’t easy. But we believe it can be simple. Instructure pursues the leading edge of innovation in our technology, support, and business operations. We do this by hiring smart, creative, passionate people and giving them opportunities to create awesome.

 

    Simplicity. Our platform is designed to make teaching, learning, and engaging easier. Everything we do—from designing software to how we communicate—should reflect that. Keep it simple and easy to understand.

Since our founding, we have worked hard to retain our open and engaging culture with people who are passionate about improving learning. We have received multiple “best places to work” awards and have maintained high ratings on recruiting websites. As of June 30, 2015, we had 651 full-time employees.

Competition

We operate in highly competitive markets. Canvas primarily competes with systems offered by Blackboard, Desire2Learn and Moodle in the education market. Bridge primarily competes with systems offered by Cornerstone OnDemand, Saba Software and SumTotal Systems (owned by Skillsoft) along with dozens of small,

 

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specialized systems for specific industries to large, generalized systems provided as part of a larger human resources management suite.

We may face future competition in our markets from other large, established companies, as well as from smaller specialized companies.

The principal competitive factors in our markets include the following:

 

    usability and features;

 

    reliability and uptime;

 

    service and support for users and staff;

 

    software integration and third-party publisher partnerships;

 

    mobile capabilities;

 

    data analytics; and

 

    collaboration and engagement.

We believe that we compete favorably on the basis of these factors. Our ability to remain competitive will depend to a great extent upon our ongoing performance in the areas of product development, partner ecosystem development and customer support. In addition, many of our competitors, particularly the large software companies named above, may have greater name recognition, longer operating histories and significantly greater resources. Some competitors may be able to devote greater resources to the development, promotion and sale of their products than we can to ours, which could allow them to respond more quickly than we can to changes in customer needs. We cannot assure you that our competitors will not offer or develop products or services that are superior to ours or achieve greater market acceptance.

Intellectual Property

We rely on a combination of trade secret, copyright, and trademark laws, a variety of contractual arrangements, such as license agreements, assignment agreements, confidentiality and non-disclosure agreements, and confidentiality procedures and technical measures to gain rights to and protect the intellectual property used in our business. We actively pursue registration of our trademarks, logos, service marks, and domain names in the United States and in other key jurisdictions, but we have not, to date, applied for patent protection for any of our inventions. We are the registered holder of a variety of U.S. and international domain names that include the term Instructure, Canvas and Bridge.

A substantial portion of our Canvas application, including the base code, uses “open source” software we license from third parties. Open source software is made available to the general public on an “as-is” basis under the terms of a non-negotiable license. Open source software is generally freely accessible, usable and modifiable. Certain open source licenses, like the GNU Affero General Public License may require us to offer the components of our software that incorporate the open source software for no cost, make available source code for modifications or derivative works we create based upon incorporating or using the open source software, and license such modifications or derivative works under the terms of the particular open source license. We also rely on certain intellectual property rights that we license from third parties under proprietary licenses. Though such third-party technologies may not continue to be available to us on commercially reasonable terms, we believe that alternative technologies would be available to us.

To promote our open platform philosophy, we make available a substantial portion of the source code for Canvas available to the public on the “GitHub” platform for no charge, under the terms of the GNU Affero General Public License. We accept modifications of the source code for Canvas from contributors who agree to

 

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the terms of our contributor agreement. Our contributor agreement provides for assignment of joint ownership in the copyright to the contribution, and a license to any patent rights of the contributor. Contributors must also represent that it is an original work and that the contribution does not violate any third party intellectual property right.

We control access to and use of our proprietary technology and other confidential information through the use of internal and external controls, including contractual protections with employees, contractors, customers, and partners, and our software is protected by U.S. and international copyright laws. Our policy is to require employees and independent contractors to sign agreements assigning to us any inventions, trade secrets, works of authorship, developments and other processes generated by them on our behalf and agreeing to protect our confidential information, and all of our key employees and contractors have done so. In addition, we generally enter into confidentiality agreements with our vendors and customers. We also control and monitor access to, and distribution of our software, documentation and other proprietary information. In addition, we intend to expand our international operations, and effective copyright, trademark, and trade secret protection may not be available to us in every country in which our software is available.

Regulatory

The legal environment of internet-based businesses is evolving rapidly in the United States and elsewhere. The manner in which existing laws and regulations are applied in this environment, and how they will relate to our business in particular, both in the United States and internationally, is often unclear. For example, we sometimes cannot be certain which laws will be deemed applicable to us given the global nature of our business, including with respect to such topics as data privacy and security, pricing, credit card fraud, advertising, taxation, content regulation, and intellectual property ownership and infringement. Moreover, our academic customers are regulated at the state and federal levels by legislatures, administrative agencies and other policymaking bodies that can directly impact their ability to procure and deploy technology products.

Our customers, and those with whom they communicate using our applications, upload and store customer data onto our platform. This presents legal challenges to our business and operations, such as rights of privacy or intellectual property rights related to the content loaded onto our platform. Both in the United States and internationally, we must monitor and comply with a wide variety of laws and regulations regarding the data stored and processed on our platform as well as the operation of our business.

Data Privacy and Security Laws

Data privacy and security with respect to the collection of personally identifiable information, or PII, continues to be the focus of worldwide legislation and regulation. We are subject to data privacy and security regulation by data protection authorities in the U.S. (including the states in which we conduct our business) and potentially in other countries.

In recent years, there have been a number of well-publicized data breaches involving the unauthorized use and disclosure of individuals’ PII. Many states have responded to these incidents by enacting laws requiring holders of personal information to maintain safeguards and to take certain actions in response to a data breach, such as providing prompt notification of the breach to affected individuals and state officials or amending existing laws to expand compliance obligations. Federal laws are also under consideration that may create additional compliance obligations and penalties. In the European Union, where companies must meet specified privacy and security standards, the Data Protection Directive and data protection laws of each of the European Member countries require comprehensive information privacy and security protections for consumers with respect to PII collected about them. We have in the past relied on compliance with adherence to the U.S. Department of Commerce’s Safe Harbor Privacy Principles and compliance with the U.S.-EU and U.S.-Swiss Safe Harbor Frameworks as agreed to and set forth by the U.S. Department of Commerce, and the European Union and Switzerland, concerning U.S. companies doing business in Europe, collecting PII from European

 

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citizens, and transferring such PII to the United States under the Safe Harbor Framework. As a result of the October 6, 2015 European Union Court of Justice, or ECJ, opinion in Case C-362/14 (Schrems v. Data Protection Commissioner) regarding the adequacy of the U.S.-EU Safe Harbor Framework, the U.S.-EU Safe Harbor Framework is now considered, within the EU, to be an invalid means of legitimizing data transfers to the United States under the Data Protection Directive and its implementations into EU member state national law. In light of the ECJ opinion in Case C-362/14, we are engaged in efforts to legitimize data transfers from the European Economic Area, such as the use of so-called ‘model contract clauses’ developed by the European Commission. We post on our website our privacy policies and practices concerning the processing, use and disclosure of PII. Our publication of our Safe Harbor certifications, our privacy policy, and other statements we publish that provide promises and assurances about privacy and security can subject us to potential state and federal action if they are found to deceptive or misrepresentative of our practices.

Through contractual obligations with our customers we sometimes agree to certain obligations related to The Family Educational Rights and Privacy Act, or FERPA, which generally prohibits educational institutions that receive federal funding from disclosing PII from a student’s education records without the student’s consent. We are also subject to the Children’s Online Privacy Protection Act, or COPPA, which applies to operators of commercial websites and online services directed to U.S. children under the age of 13 that collect personal information from children, and to operators of general audience websites with actual knowledge that they are collecting information from U.S. children under the age of 13. Also, certain laws and regulations that protect the collection, use and disclosure of particular types of data may hinder our ability to provide services to customers and potential customers subjected to such laws.

Copyrights

U.S. and international copyright and trademark laws protect the rights of third parties from infringement of their works of authorship. Our customers and users can generally use our platform to upload and present a wide variety of content. We maintain an active copyright infringement policy and respond to takedown requests by third-party intellectual property right owners that might result from content uploaded to our platform. As our business expands to other countries, we must also respond to regional and country-specific intellectual property considerations, including takedown and cease-and-desist notices in foreign languages, and we must build infrastructure to support these processes. The Digital Millennium Copyright Act, or DMCA, also applies to our business. This statute includes a safe harbor that is intended to reduce the liability of online service providers for hosting content provided by users that infringes copyrights of others. The copyright infringement policies that we have implemented for our platform are intended to satisfy the DMCA safe harbor.

Facilities

We lease space for our corporate headquarters in Salt Lake City, Utah pursuant to a lease that expires in February 2025. We also lease space in Chicago, Illinois for certain research and development functions pursuant to a lease that expires in July 2022. We maintain our international headquarters in London, England and sales offices in Sydney, Australia and Hong Kong. We believe our facilities are adequate for our current needs.

Legal Proceedings

We may, from time to time, be party to litigation and subject to claims incident to the ordinary course of business. As our growth continues, we may become party to an increasing number of litigation matters and claims. The outcome of litigation and claims cannot be predicted with certainty, and the resolution of these matters could materially affect our future results of operations, cash flows or financial position. We are not presently party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, financial condition or cash flows.

 

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MANAGEMENT

Executive Officers and Directors

The following table sets forth certain information regarding our current executive officers, key employees and directors as of August 31, 2015:

 

Name

   Age     

Position(s)

Executive Officers

     

Joshua L. Coates

     41       Chief Executive Officer and Director

Steven B. Kaminsky

     56       Chief Financial Officer

Marc T. Maloy

     41       Executive Vice President Worldwide Sales

Matthew A. Kaminer

     41       Senior Vice President, General Counsel and Secretary

Key Employees

     

S. David Burggraaf

     48       Senior Vice President Engineering

Misty D. Frost

     44       Senior Vice President Marketing

Mitchell E. Macfarlane

     39       Senior Vice President Customer Experience

Jeff E. Weber

     48       Senior Vice President People and Places

Zachary S. Wily

     39       Chief Architect

Non-Employee Directors

     

Steven A. Collins

     50       Director

William M. Conroy

     56       Director

Byron B. Deeter

     41       Director

E. Nicholaus Efstratis

     44       Director

Ellen Levy

     46       Director

Adam D. Marcus

     39       Director

Lloyd G. Waterhouse

     63       Director

Brian C. Whitmer

     32       Director

 

(1) Member of the compensation committee.
(2) Member of the audit committee.
(3) Member of the nominating and corporate governance committee.

Executive Officers

Joshua L. Coates has served as our Chief Executive Officer since October 2010 and as a member of our board of directors since January 2010. From 2007 to 2009, Mr. Coates served as Chief Technology Officer of the advanced development group at EMC Corporation, a provider of online information backup and recovery services. In 2005, Mr. Coates founded Berkeley Data Systems, which operated mozy.com, an online storage company, where he served as Founder and Chief Executive Officer until it was acquired by EMC in 2007. In 1999, Mr. Coates founded Scale Eight, a software company, where he served as Founder, Chief Technology Officer and member of the board of directors. Mr. Coates holds a B.S. in computer science from University of California, Berkeley. We believe Mr. Coates is qualified to serve on our board of directors due to his extensive knowledge of our company and his extensive background in the software industry.

Steven B. Kaminsky has served as our Chief Financial Officer since May 2012. From March 2008 to May 2012, Mr. Kaminsky served as Chief Financial Officer at Radisphere National Radiology Group, Inc., a provider

 

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of standards-based radiology delivery solutions for health systems. Beginning in 2005, he served as Chief Financial Officer at Plan Data Management, a healthcare technology company, which was acquired by TriZetto Group, Inc., a healthcare technology company, in 2006, after which Mr. Kaminsky served as Vice President of Finance and Internal Audit until 2008. From 2002 to 2005, Mr. Kaminsky served as Chief Financial Officer at ReefEdge, Inc., a software company. Prior to 2002, he held positions at McDonalds Corporation and Ernst & Young LLP. Mr. Kaminsky holds a B.S. in accounting from University of Illinois at Urbana-Champagne, an M.B.A. from University of California, Los Angeles and is a Certified Public Accountant (inactive).

Marc T. Maloy has served as our Executive Vice President Worldwide Sales since September 2014 and previously served as our Senior Vice President Sales since April 2013. From 2001 to 2013, Mr. Maloy served in various roles at HireRight, Inc., a background checking company, most recently as Senior Vice President of Worldwide Sales from 2009 to April 2013. From 1998 to 2001, he served as Director of Operations at Certico Verification Services, LLC, a pre-employment background screening company. Mr. Maloy holds a B.S. in human resources and operations management from the Kelley School at Indiana University.

Matthew A. Kaminer has served as our Senior Vice President, General Counsel and Secretary since May 2015. From July 2013 to May 2015, Mr. Kaminer served as General Counsel and Secretary of Collective Inc., a video and mobile advertising company. From June 2011 to July 2013, he served as General Counsel and Secretary of Epocrates, Inc., a healthcare information company. From March 2010 to June 2011, Mr. Kaminer served as General Counsel for MediMedia USA, Inc., a provider of specialty healthcare communications, publishing and medical education. From 2004 to 2009, Mr. Kaminer served as Assistant General Counsel and Chief Privacy Officer at WebMD Health Corp., a medical information company. Mr. Kaminer holds a B.S. in computer science from Pennsylvania State University and a J.D. from George Washington University.

Key Employees

S. David Burggraaf has served as our Senior Vice President Engineering since March 2014. From 2010 to 2014, Mr. Burggraaf served as Senior Vice President Product Engineering at FamilySearch Organization, a nonprofit family history organization. From 2006 to 2010, he served as Vice President Engineering at The Church of Jesus Christ of Latter-day Saints. From 1994 to 2006, Mr. Burggraaf served in various roles at Microsoft Corporation.

Misty D. Frost has served as our Senior Vice President Marketing since April 2012. From 2004 to 2012, Ms. Frost served in various roles at Datamark, Inc., a provider of enrollment marketing services to the higher education market, including Director of Product Development, Director of Interactive Operations and serving most recently as Vice President Delivery Services. Prior to 2004, she served in various marketing roles at Critical Mass Inc., a design agency, Sumus Interactive, Inc., a communications firm, and Dahlin Smith White, Inc., an advertising firm. Ms. Frost holds a B.S. in anthropology from the University of Utah.

Mitchell E. Macfarlane has served as our Senior Vice President Customer Experience since February 2015 and has served in various other leadership positions since joining us in May 2011. From May 2010 to May 2011, Mr. Macfarlane served as Principal Program Manager at VMware, Inc., a provider of virtualization and cloud infrastructure solutions. From 2006 to 2010, he served as Senior Enterprise Project Manager at InfoTrax Systems, LLC, a provider of backend operations systems. Prior to 2006, Mr. Macfarlane served in various roles at General Electric Company, Nu Skin Enterprises, Inc., a direct selling company, and Big Planet Inc., a multi-level marketing company selling internet services. Mr. Macfarlane holds a B.S. in sociology and an M.B.A. from Brigham Young University.

Jeff E. Weber has served as our Senior Vice President People and Places since May 2013. From August 1999 to April 2013, Mr. Weber served in various roles at ancestry.com, an online family history company, most recently as Senior Vice President People and Places from March 2012 to April 2013. From 1996 to 1999, he served as Director Human Resource Outsourcing at The Russell Group, LLC, a human resources outsourcing

 

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firm. From 1993 to 1996, Mr. Weber served as a Human Resource Generalist at Shell Oil Company. Mr. Weber holds a B.S. in business and an M.B.A. with an emphasis in organizational behavior from Brigham Young University.

Zachary S. Wily has served as our Chief Architect since March 2014 and served as our Vice President Engineering from May 2011 to March 2014 and our Director, Engineering from February 2010 to May 2011. From 2005 to 2010, Mr. Wily served in various roles at Mozy and EMC.

Non-Employee Directors

Steven A. Collins has served as a member of our board of directors since May 2014. From 2011 to February 2014, Mr. Collins served as the Executive Vice President and Chief Financial Officer of ExactTarget Inc., a cross-channel digital marketing company. From 2003 to 2011, Mr. Collins was with NAVTEQ Corporation, a digital mapping company, and served as the Vice President of Finance and the Senior Vice President of Finance & Accounting prior to being named Chief Financial Officer. Mr. Collins currently serves on the board of directors of Shopify, Inc. Mr. Collins holds a B.S. in industrial engineering from Iowa State University and an M.B.A. from the Wharton School of the University of Pennsylvania. Mr. Collins is a Certified Public Accountant. We believe Mr. Collins is qualified to serve on our board of directors due to his software industry experience, including his experience in finance.

William M. Conroy has served as a member of our board of directors since May 2013. Since March 2011, Mr. Conroy has served as President of Conroy Advisors, LLC, a consulting company. From March 2010 to March 2011, he served as Solutions Executive in the information management organization of IBM. From 2002 to 2010, Mr. Conroy served as President, Chief Executive Officer and a member of the board of directors of Initiate Systems, Inc., a software company, until it was acquired by IBM in 2010. From 2001 to 2002, he served as President and Chief Operating Officer of Click Commerce, Inc., a research solutions company. From 2000 to 2001, he served as a Partner with Insight Capital Group, a global private equity firm. From 1997 to 2000, Mr. Conroy served as Executive Vice President and Chief Operating Officer of TenFold Corporation, a software company. Prior to joining TenFold, he served in various capacities at Oracle Corporation, most recently as group vice president. Mr. Conroy holds a B.S. in business administration from Bowling Green State University. We believe Mr. Conroy is qualified to serve on our board of directors due to consulting and investment experience and his service on the boards of directors of other companies in the information technology industry.

Byron B. Deeter has served as a member of our board of directors since May 2013. Mr. Deeter is a Partner of Bessemer Venture Partners, a venture capital firm, where he has held various positions since he joined the firm in 2005, and is presently a member of the firm’s management company. From 2004 to 2005, he was a director at IBM. Mr. Deeter held various positions in Trigo Technologies, Inc., a product information management software company, including President and Chief Executive Officer from January 2000 to November 2000 and Vice President Business Development from November 2000 to April 2004. From 1998 to 2000, Mr. Deeter worked as an Associate with TA Associates, a private equity firm, and from 1996 to 1998, as an Analyst at McKinsey & Company. Mr. Deeter served on the board of directors of Eloqua, Inc. from 2007 to 2013, until Eloqua was acquired by Oracle, on the board of directors of Cornerstone OnDemand, Inc. from 2007 to July 2014 and on the board of directors of Criteo S.A. from April 2010 to January 2014. Mr. Deeter holds a B.A. in political economies of industrial societies from the University of California, Berkeley. We believe Mr. Deeter is qualified to serve on our board of directors due to his experience with SaaS and marketing companies.

E. Nicholaus Efstratis has served as a member of our board of directors since January 2010. Since 2007, Mr. Efstratis has served as a Managing Director at Epic Ventures, a venture capital firm. He has been a venture capitalist investing in early stage technology companies since 1999. Prior to focusing on the technology sector, Mr. Efstratis and his family founded and operated Ranchlife Adventures, a working cattle and guest ranch located in Montana. Mr. Efstratis holds a B.S. in entrepreneurship and an M.B.A. from Brigham Young University. We believe Mr. Efstratis is qualified to serve on our board of directors due to his investment experience in the information technology industry.

 

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Ellen Levy has served as a member of our board of directors since August 2015. Since April 2012, Dr. Levy has served as Managing Director of Silicon Valley Connect, LLC, a management consulting company. From 2008 to April 2012, Dr. Levy served in various roles at LinkedIn Corporation, a professional social networking internet service, serving most recently as Vice President Strategic Initiatives since March 2010. Dr. Levy holds a B.A. from the University of Michigan and an M.A. and Ph.D. in cognitive psychology from Stanford University. We believe Dr. Levy is qualified to serve on our board of directors due to her experience working with software and other technology companies.

Adam D. Marcus has served as a member of our board of directors since January 2014. Mr. Marcus is a Managing Partner at OpenView Venture Partners, a venture capital firm, where he has held various positions since he joined the firm in 2009. From 2005 to 2009, he served as an Associate and Senior Associate at Battery Ventures, a venture capital firm. From 2003 to 2005, Mr. Marcus led corporate development for the Boston Celtics. Mr. Marcus holds a B.S. in psychology and Spanish from Franklin and Marshall College and an M.B.A. from the Tuck School of Business at Dartmouth College. We believe Mr. Marcus is qualified to serve on our board of directors due to his investment experience in the information technology industry and his experience with SaaS and marketing companies.

Lloyd G. Waterhouse has served as a member of our board of directors since August 2015. From June 2012 to April 2014, Mr. Waterhouse served as the Chief Executive Officer of McGraw-Hill Education, a division of The McGraw-Hill Companies, Inc., a content and analytics provider. From 2006 to December 2007, Mr. Waterhouse served as Chief Executive Officer and President of Harcourt Education Group, a global education company, and served as an independent director and consultant from August 2004 to September 2006. From 2001 to 2004, he served as Chief Executive Officer and Chairman of Reynolds and Reynolds Co., a leading provider of integrated solutions to automotive retailers. Since May 2010, Mr. Waterhouse has served on the board of directors of SolarWinds, Inc., and from April 2009 to June 2012, served on the board of directors of ITT Educational Services, Inc. Mr. Waterhouse holds a B.S. in finance from Pennsylvania State University and an M.B.A. from Youngstown State University. We believe Mr. Waterhouse is qualified to serve on our board of directors due to his experience as a senior executive, particularly within the education industry, and as a director of publicly-traded companies.

Brian C. Whitmer, one of our co-founders, has served as a member of our board of directors since January 2011 and between September 2008 and January 2010. Since July 2014, Mr. Whitmer has served as Founder of CoughDrop, Inc., an alternative and augmentative communication company. From September 2012 to December 2013, Mr. Whitmer served as our Chief Product Officer. From 2008 to September 2012, Mr. Whitmer served as our Vice President of Product. From 2007 to 2008, Mr. Whitmer served as a research lab assistant at Brigham Young University. From 2004 to 2006, he held various software development positions at the Missionary Training Center of The Church of Jesus Christ of Latter-day Saints. Mr. Whitmer holds a B.S. and M.S. in computer science from Brigham Young University. We believe Mr. Whitmer is qualified to serve on our board of directors due to his extensive knowledge of our company and his software industry experience.

Family Relationships

There are no family relationships among any of the directors or executive officers.

Board Composition

Our business and affairs are managed under the direction of our board of directors, which currently consists of seven members. Certain members of our board of directors were elected pursuant to the provisions of a voting agreement among certain of our major stockholders. Under the terms of this voting agreement, the stockholders who are party to the voting agreement have agreed to vote their respective shares so as to elect as directors: (1) one director designated by EPIC Venture Fund IV (Mr. Efstratis); (2) one director designated by OpenView Venture Partners, L.P. (Mr. Marcus); (3) one director designated by Bessemer Venture Partners VIII L.P.

 

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(Mr. Deeter); (4) the person serving as Chief Executive Officer (Mr. Coates); (5) one director designated by certain holders of our common stock (Mr. Whitmer); and (6) two directors designated by the holders of our common stock and preferred stock, voting together as a single class (Mr. Collins and Mr. Conroy). The voting agreement will terminate upon the closing of this offering and none of our stockholders will have any special rights regarding the election or designation of members of our board of directors. There is no contractual arrangement by which Dr. Levy and Mr. Waterhouse were appointed to our board of directors.

Our board of directors will consist of              members upon the closing of this offering. In accordance with our amended and restated certificate of incorporation to be filed in connection with this offering, immediately after this offering, our board of directors will be elected annually to serve until the next annual general meeting of stockholders.

Director Independence

Generally, under the listing requirements and rules of the New York Stock Exchange, or the NYSE, independent directors must comprise a majority of our board of directors within one year of the completion of this offering.

Our board of directors has undertaken a review of its composition, the composition of its committees and the independence of each director. Our board of directors has determined that, other than Mr. Coates, by virtue of his positions as President and Chief Executive Officer and Mr. Whitmer, by virtue of his prior employment with us, none of our directors has a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each is “independent” as that term is defined under the applicable rules and regulations of the SEC and the listing requirements and rules of the NYSE. Accordingly, a majority of our directors are independent, as required under applicable NYSE rules. In making this determination, our board of directors considered the current and prior relationships that each non-employee director has with our company and all other facts and circumstances our board of directors deemed relevant in determining their independence, including the beneficial ownership of our capital stock by each non-employee director.

Board Committees

Our board of directors has the authority to appoint committees to perform certain management and administration functions. Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee. The composition and responsibilities of each committee are described below. Members will serve on these committees until their resignation or until otherwise determined by the board of directors. Following the closing of this offering, the charters for each of these committees will be available on our website at www.instructure.com. Information contained on or accessible through our website is not a part of this prospectus, and the inclusion of our website address in this prospectus is an inactive textual reference only

Audit Committee

Our audit committee consists of                     ,                      and                     , each of whom satisfies the independence requirements under the NYSE listing standards and Rule 10A-3(b)(1) of the Exchange Act. The chairman of our audit committee is                                 . Our board of directors has determined that each of                     ,                      and                      is an “audit committee financial expert” within the meaning of SEC regulations. Our board of directors has also determined that each member of our audit committee has the requisite financial expertise required under the applicable requirements of the NYSE. In arriving at this determination, the board of directors has examined each audit committee member’s scope of experience and the nature of their employment in the corporate finance sector.

 

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The primary purpose of the audit committee is to discharge the responsibilities of our board of directors with respect to our accounting, financial and other reporting and internal control practices and to oversee our independent registered accounting firm. Specific responsibilities of our audit committee include:

 

    selecting a qualified firm to serve as the independent registered public accounting firm to audit our financial statements;

 

    helping to ensure the independence and performance of the independent registered public accounting firm;

 

    discussing the scope and results of the audit with the independent registered public accounting firm, and reviewing, with management and the independent accountants, our interim and year-end operating results;

 

    developing procedures for employees to submit concerns anonymously about questionable accounting or audit matters;

 

    reviewing our policies on risk assessment and risk management;

 

    reviewing related party transactions;

 

    obtaining and reviewing a report by the independent registered public accounting firm at least annually, that describes our internal quality-control procedures, any material issues with such procedures, and any steps taken to deal with such issues when required by applicable law; and

 

    approving (or, as permitted, pre-approving) all audit and all permissible non-audit service to be performed by the independent registered public accounting firm.

Compensation Committee

Our compensation committee consists of                     ,                      and                     , each of whom our board of directors has determined to be independent under the NYSE listing standards and the rules and regulations of the SEC, a “non-employee director” as defined in Rule 16b-3 promulgated under the Exchange Act and an “outside director” as that term is defined in Section 162(m) of the Internal Revenue Code of 1986, as amended, or the Code. The chairman of our compensation committee is                     .

The primary purpose of our compensation committee is to discharge the responsibilities of our board of directors to oversee our compensation policies, plans and programs and to review and determine the compensation to be paid to our executive officers, directors and other senior management, as appropriate. Specific responsibilities of our compensation committee include:

 

    reviewing and approving, or recommending that our board of directors approve, the compensation of our executive officers;

 

    reviewing and recommending to our board of directors the compensation of our directors;

 

    reviewing and approving, or recommending that our board of directors approve, the terms of compensatory arrangements with our executive officers;

 

    administering our stock and equity incentive plans;

 

    selecting independent compensation consultants and assessing whether there are any conflicts of interest with any of the committee’s compensation advisors;

 

    reviewing and approving, or recommending that our board of directors approve, incentive compensation and equity plans, severance agreements, change-of-control protections and any other compensatory arrangements for our executive officers and other senior management, as appropriate;

 

    reviewing and establishing general policies relating to compensation and benefits of our employees; and

 

    reviewing our overall compensation philosophy.

 

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Nominating and Corporate Governance Committee

Our nominating and corporate governance committee consists of                      and                     , each of whom our board of directors has determined to be independent under the NYSE listing standards. The chairman of our nominating and corporate governance committee is                     .

Specific responsibilities of our nominating and corporate governance committee include:

 

    identifying, evaluating and selecting, or recommending that our board of directors approve, nominees for election to our board of directors;

 

    evaluating the performance of our board of directors and of individual directors;

 

    reviewing developments in corporate governance practices;

 

    evaluating the adequacy of our corporate governance practices and reporting;

 

    reviewing management succession plans; and

 

    developing and making recommendations to our board of directors regarding corporate governance guidelines and matters.

Code of Business Conduct and Ethics

We have adopted a Code of Business Conduct and Ethics that applies to all of our employees, officers and directors, including those officers responsible for financial reporting. Following the closing of this offering, the Code of Business Conduct and Ethics will be available on our website at www.instructure.com. Information contained on or accessible through our website is not a part of this prospectus, and the inclusion of our website address in this prospectus is an inactive textual reference only. We intend to disclose any amendments to the Code of Business Conduct and Ethics, or any waivers of its requirements, on our website to the extent required by the applicable rules and exchange requirements. The inclusion of our website address in this prospectus does not incorporate by reference the information on or accessible through our website into this prospectus.

Compensation Committee Interlocks and Insider Participation

None of the members of our compensation committee has ever been an officer or employee of our company. None of our executive officers serve, or have served during the last fiscal year, as a member of the board of directors, compensation committee or other board committee performing equivalent functions of any entity that has one or more executive officers serving as one of our directors or on our compensation committee.

2014 Non-Employee Director Compensation

The following table sets forth information regarding compensation earned by or paid to our non-employee directors during 2014. Mr. Coates did not receive any additional compensation for his service on our board of directors.

 

Name

   Fees Earned
or Paid in Cash
     Option
Awards(1)
    Other
Compensation
    Total  

Steven A. Collins

   $       $ 168,976 (2)    $      $ 168,976   

William M. Conroy

                    40,000 (3)      40,000   

Byron B. Deeter

                             

E. Nicholaus Efstratis

                             

Ellen Levy(4)

                             

Adam D. Marcus

                             

Lloyd G. Waterhouse(4)

                             

Brian C. Whitmer

                    63,337 (5)      63,337   

 

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(1) The amounts reported do not reflect the amounts actually received by our non-employee directors. Instead, these amounts reflect the aggregate grant date fair value of each stock option granted to our non-employee directors during 2014, as computed in accordance with Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, 718. Assumptions used in the calculation of these amounts are included in Note 9 to our audited financial statements included in this prospectus. As required by SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. Our non-employee directors who have received options will only realize compensation with regard to these options to the extent the trading price of our common stock is greater than the exercise price of such options. The table below lists the aggregate number of shares subject to outstanding option awards held by each of our non-employee directors.

 

Name

   Number of Shares
Subject to
Outstanding
Options as of
December 31, 2014
 

Steven A. Collins

     85,535   

William M. Conroy.

       

Byron B. Deeter

       

E. Nicholaus Efstratis

       

Ellen Levy

       

Adam D. Marcus

       

Lloyd G. Waterhouse

       

Brian C. Whitmer

       

 

(2) In May 2014, in connection with the appointment of Mr. Collins to the board of directors and in consideration for his service as a director, we granted Mr. Collins an option to purchase 85,535 shares of our common stock at an exercise price of $3.25 per share. All shares subject to the option are early exercisable, which are subject to our right to repurchase any unvested shares if Mr. Collins ceases to provide continued services with us through the relevant vesting date. The shares are scheduled to vest over a two-year period as follows: 1/24th of the shares vest each month, subject to continued service with us through each relevant vesting date. The vesting of Mr. Collin’s option award will accelerate in full upon a change of control.
(3) Reflects compensation for advisory services paid to Mr. Conroy pursuant to a consulting agreement we entered into with Mr. Conroy in February 2013.
(4) Dr. Levy and Mr. Waterhouse joined our board of directors in August 2015.
(5) Includes (a) $30,004 earned in 2013, which were paid during 2014, pursuant to Mr. Whitmer’s employment and severance arrangements and (b) $33,333 for consulting services paid to Mr. Whitmer pursuant to a consulting agreement we entered into with Mr. Whitmer in December 2013.

Non-Employee Director Compensation Policy

We have adopted a non-employee director compensation policy, pursuant to which our non-employee directors will be eligible to receive compensation for service on our board of directors and committees of our board of directors.

Cash Compensation

Commencing upon the execution of the underwriting agreement for this offering, each non-employee director will receive an annual cash retainer of $30,000 for serving on our board of directors. The chairperson and members of the three standing committees of our board of directors will be entitled to the following additional annual cash retainers:

 

Committee

   Chairperson Fee      Member Fee  

Audit Committee

   $ 20,000       $ 7,500   

Compensation Committee

     10,000         5,000   

Nominating and Corporate Governance Committee

     7,500         3,500   

All annual cash compensation amounts will be payable in equal quarterly installments in arrears, on the last day of each fiscal quarter for which the service occurred, pro-rated based on the days served in the applicable fiscal quarter.

 

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Each director may elect to receive their annual cash compensation in the form of restricted stock units, or RSUs. Such RSUs will be granted on the date of our annual stockholder meeting and will vest in full on the last market trading day immediately prior to the next annual stockholder meeting, subject to the director’s continued service through such vesting date.

Equity Compensation

IPO Grant. On the date of this offering, each of Ellen Levy and Lloyd G. Waterhouse, will be granted an RSU with a value of $350,000. The value of this award will be determined based on the price per share set forth on the cover page of this prospectus. This award will vest as to 50% on the last market trading day immediately prior to the first annual stockholder meeting after the date of this offering and 50% of this award will vest on the last market trading day immediately prior to the second annual stockholder meeting after the date of this offering, subject, in each case, to the director’s continued service through such vesting date. On the date of this offering, each of William M. Conroy and Byron B. Deeter will be granted an RSU with a value of $262,500. The value of this award will be determined based on the price per share set forth on the cover page of this prospectus. This award will vest as to one-third on the last market trading day immediately prior to the first annual stockholder meeting after the date of this offering and two-thirds of this award will vest on the last market trading day immediately prior to the second annual stockholder meeting after the date of this offering, subject, in each case, to the director’s continued service through such vesting date.

Initial Grant. On the date of a non-employee director’s initial appointment to our board of directors, or if such date is not a market trading day, the first market trading day thereafter, such director will receive (1) a RSU with a value of $175,000, pro-rated based on the number of days that have elapsed as of the date of appointment since our last annual meeting of stockholders (or if an annual meeting has not yet been held, the date of this offering), or the Pro-rated Portion, plus (2) a RSU with a value of $175,000, or the Annual Portion. The value of the awards granted will be determined based on the fair market value per share of common stock on the applicable grant date. The Pro-rated Portion will vest in full on the last market trading day immediately prior to the next annual stockholder meeting following such director’s appointment, subject to the director’s continued service through such vesting date. The Annual Portion will vest on the last market trading day immediately prior to the second annual stockholder meeting following such director’s appointment. If a non-employee director is initially elected at an annual stockholder meeting, such director will receive a RSU with a value of $350,000. The award will vest as to 50% on the last market trading day immediately prior to our next annual stockholder meeting and 50% will vest on the last market trading day immediately prior to the second annual stockholder meeting following such election, subject, in each case, to the director’s continued service through such vesting date.

Biennial Grant. On the date of each annual stockholder meeting, each non-employee director who is continuing in office after the date of such meeting, and whose IPO Grant, Initial Grant or most recent Biennial Grant, as applicable, has fully vested on the last market trading day immediately prior to the date of such annual stockholder meeting, will receive an RSU with a value of $350,000. The value of the awards granted will be determined based on the fair market value per share of common stock on the applicable grant date. The award will vest as to 50% on the last market trading day immediately prior to the next annual stockholder meeting and 50% will vest on the last market trading day immediately prior to the date of the following annual stockholder meeting, subject, in each case, to the director’s continued service through such vesting date.

Change in Control. All RSUs issued pursuant to the non-employee director compensation policy will vest in full upon a change in control or corporate transaction, each as defined in the 2015 Equity Incentive Plan, subject to the director’s continued service through the effective date of such transaction.

 

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EXECUTIVE COMPENSATION

Our named executive officers, consisting of our principal executive officer and the next two most highly compensated executive officers, as of December 31, 2014, were:

 

    Joshua L. Coates, our Chief Executive Officer;

 

    Steven B. Kaminsky, our Chief Financial Officer; and

 

    Marc T. Maloy, our Executive Vice President Worldwide Sales.

2014 Summary Compensation Table

The following table presents all of the compensation awarded to or earned by our named executive officers during 2014:

 

Name and Principal Position

   Year      Salary      Non-Equity
Incentive Plan
Compensation
    All Other
Compensation
    Total  

Joshua L. Coates

     2014       $ 1       $      $      $ 1   

Chief Executive Officer

            

Steven B. Kaminsky

     2014         214,346         49,950 (1)      1,059 (2)      265,355   

Chief Financial Officer

            

Marc T. Maloy

     2014         256,944         141,786 (3)      2,859 (4)      401,589   

Executive Vice President Worldwide Sales

            

 

(1) Represent amounts earned in 2014, which were paid during 2015, under our executive bonus plan based on the achievement of company and individual performance goals. Our 2014 company goals related to business and corporate development objective and financial management objectives. The 2014 annual performance bonuses for each eligible named executive officers based on company performance (80%) and individual performance (20%), which we determined was appropriate in order to reinforce the importance of integrated and collaborative leadership. For 2014, Mr. Coates waived his right to receive any payments under the executive bonus plan, our board of directors determined that Mr. Kaminsky was entitled to 106% of his target bonus and Mr. Maloy was not eligible to participate in our executive bonus plan.
(2) Includes (a) the value of company paid premiums of $59 for life insurance and (b) $1,000 of saf