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As filed with the Securities and Exchange Commission on July 15, 2021

Registration No. 333-257473

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 2

TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Instructure Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware
(State or other jurisdiction of
incorporation or organization)
  7372
(Primary Standard Industrial
Classification Code Number)
  84-4325548
(I.R.S. Employer
Identification No.)

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)

 

 

Steve Daly

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 of all communications, including communications sent to agent for service, should be sent to:

Bradley C. Reed, P.C.

Michael P. Keeley
Kirkland & Ellis LLP
300 North LaSalle
Chicago, IL 60654
(312) 862-2000

 

Matthew A. Kaminer

Chief Legal Officer
Instructure Holdings, Inc.
6330 South 3000 East, Suite 700
Salt Lake City, UT 84121
(800) 203-6755

 

John T. McKenna

Alan D. Hambelton

Cooley LLP

3175 Hanover Street

Palo Alto, CA 94304

(650) 843-5000

Approximate date of commencement of proposed sale to the public:

As soon as practicable after this Registration Statement becomes effective.

 

 

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 registered additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated Filer                             
Non-accelerated filer      Smaller Reporting Company    
     Emerging Growth Company    

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

 

 

Title of Each Class of Securities to be Registered  

Amount to be

Registered(1)

  Proposed Maximum
Aggregate Offering
Price Per Share(2)
  Proposed Maximum
Aggregate Offering
Price(1)(2)
 

Amount of

Registration Fee

Common Stock, par value $0.01 per share

  14,375,000   $21.00   $301,875,000   $32,935(3)

 

 

(1)

Includes the aggregate offering price of shares of common stock subject to the underwriters’ over-allotment option.

(2)

Estimated solely for purposes of computing the amount of the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended.

(3)

Previously paid.

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 which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this 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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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 it is not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PROSPECTUS (Subject to Completion)

Issued July 15, 2021

12,500,000 Shares

 

 

LOGO

COMMON STOCK

 

 

Instructure Holdings, Inc. is offering 12,500,000 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 $19.00 and $21.00 per share.

 

 

We have been approved to list our common stock on the New York Stock Exchange (“NYSE”) under the symbol “INST.”

 

 

Investing in our common stock involves risks. See “Risk Factors” beginning on page 22.

 

 

PRICE $                 A SHARE

 

 

 

      

Price to
Public

      

Underwriting
Discounts

and
Commissions(1)

      

Proceeds to
Instructure, before expenses

 

Per Share

       $                              $                              $                      

Total

       $                              $                              $                      

 

(1)

See “Underwriting” for a description of the compensation payable to the underwriters.

 

 

We have granted the underwriters the right to purchase up to an additional 1,875,000 shares of common stock solely to cover over-allotments, if any.

Immediately after this offering, assuming an offering size as set forth above, funds controlled by our principal stockholder, Thoma Bravo, will own approximately 88.1% of our outstanding common stock (or 87.0% of our outstanding common stock if the underwriters’ over-allotment option is exercised in full). As a result, we expect to be a “controlled company” within the meaning of the corporate governance standards of NYSE. See “Management—Corporate Governance—Controlled Company Status.”

At our request, the underwriters have reserved up to 5% of the common stock to be issued by us and offered by this prospectus for sale, at the initial public offering price, to our senior leadership team, which includes our directors and officers, through a directed share program. For more information, see “Underwriting.”

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock against payment in New York, New York on                     , 2021.

 

 

 

MORGAN STANLEY    J.P. MORGAN    CITIGROUP
JEFFERIES    MACQUARIE CAPITAL
BAIRD   

BTIG

  

RAYMOND JAMES

  

TRUIST SECURITIES

  

WILLIAM BLAIR

ACADEMY SECURITIES

  

C.L. KING & ASSOCIATES

  

DREXEL HAMILTON

   RAMIREZ & CO., INC.

                    , 2021


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     Page  

Prospectus Summary

     1  

Risk Factors

     22  

Forward-Looking Statements

     61  

Market and Industry Data

     64  

Use of Proceeds

     65  

Dividend Policy

     66  

Capitalization

     67  

Dilution

     69  

Selected Consolidated Financial Data

     71  

Unaudited Pro Forma Combined Financial Data

     77  

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

     89  

Business

     129  

Management

     154  
 

 

 

We and the underwriters have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may provide you. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock.

For investors outside of the United States, neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about, and to observe any restrictions relating to, this offering and the distribution of this prospectus outside of the United States.

Through and including                     , 2021 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, 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 an unsold allotment or subscription.

 

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Basis of Presentation

Unless we state otherwise or the context otherwise requires, throughout this prospectus the following terms have the meanings set forth below:

 

   

“Instructure,” the “Company,” “our company,” “we,” “us” and “our” refer (i) for Predecessor periods, to Instructure, Inc., where appropriate, and its consolidated subsidiaries, and (ii) for Successor periods, to Instructure Holdings, Inc. and its consolidated subsidiaries;

 

   

“issuer” refers to Instructure Holdings, Inc.;

 

   

“Predecessor” refers to the periods prior to and including March 31, 2020, and “Predecessor 2020 Period” refers to the period from January 1, 2020 to and including March 31, 2020;

 

   

“Successor” refers to the periods from and after April 1, 2020, and “Successor 2020 Period” refers to the period from April 1, 2020 to December 31, 2020;

 

   

“Take-Private Transaction” refers to Thoma Bravo’s acquisition of Instructure, Inc. on March 24, 2020;

 

   

“Thoma Bravo Funds” refers to Thoma Bravo Executive Fund XIII, L.P., Thoma Bravo Fund XIII, L.P., Thoma Bravo Fund XIII-A, L.P., and the term “Thoma Bravo” refers to Thoma Bravo UGP, LLC, the ultimate general partner of the Thoma Bravo Funds, and, unless the context otherwise requires, its affiliated entities, including Thoma Bravo, L.P., the management company of the Thoma Bravo Funds; and

 

   

(i) “users” means students, teachers, administrators, observers (i.e., parents or guardians of students) and other individuals who use any of our solutions during a certain period of time and to whom we have assigned a systematically generated unique account identifier, and (ii) “contracted” means that a particular customer has entered into a written contract for a specified subscription period covering a specified number of users and is legally obligated to pay. The number of “contracted Canvas LMS users” refers to the number of contracted users or full time equivalent contracted users (where our customers have a portion of the student population that are part time) of our Canvas LMS solution that our customers have paid for during a specified period and that generate revenue for us pursuant to a written contract, and does not include (1) users of any other solution that we offer, or (2) other individuals (such as teachers, administrators and observers) affiliated with the customer or the contracted users who we permit to create accounts and use our solutions for free. As a result, the number of users of our solutions is greater than the number of contracted users. The amount of revenue we generate is impacted only by the number of contracted users and not the number of users who are using our solutions or have created accounts on our platform.

Instructure Holdings, Inc., the issuer of the shares of common stock in this offering, was incorporated on January 14, 2020 to serve as a holding company in connection with the Take-Private Transaction. The issuer had no operations prior to the Take-Private Transaction. As a result of the Take-Private Transaction, the consolidated financial statements included elsewhere in this prospectus are presented in two distinct periods—the Predecessor period and the Successor period—to indicate the application of two different bases of accounting between the periods presented and therefore are not comparable. For accounting purposes, management has designated the “acquisition date” with respect to the Take-Private Transaction as March 31, 2020, as the operating results and change in financial position for the intervening period between March 24 and March 31, 2020 is not material.

Prior to this offering, the issuer has been a wholly-owned subsidiary of Instructure Parent, L.P. (“TopCo”). Prior to the consummation of this offering, TopCo will effect a series of transactions that will result in TopCo’s equityholders holding shares of our common stock directly, and then TopCo will be liquidated and dissolved. For additional information, see “Prospectus Summary—Corporate Reorganization.”

 

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Following this offering, the issuer will continue to be a holding company and, after the application of the net proceeds from this offering, its sole asset will be the capital stock of its wholly-owned direct and indirect subsidiaries, including Instructure, Inc., our principal operating subsidiary.

 

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Prospectus Summary

This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before investing in our common stock. For a more complete understanding of us and this offering, you should read and carefully consider the entire prospectus, including the more detailed information set forth under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes. Some of the statements in this prospectus are forward-looking statements. See “Forward-Looking Statements.”

Instructure

Instructure’s mission is to elevate student success, amplify the power of teachers everywhere, and inspire everyone to learn together by applying the power of simple, purposeful, and transformative software to the important challenge of educating the world’s population.

From the inception of a teacher’s lesson through a student’s mastery of a concept, Instructure personalizes, simplifies, organizes, and automates the entire learning lifecycle through the power of technology. Our learning platform delivers the elements that leaders, teachers, and learners need – a next-generation Learning Management System (“LMS”), robust assessments for learning, actionable analytics, and engaging, dynamic content. Schools standardize on Instructure’s solutions as their core learning platform because we bring together all of the tools that students, teachers, parents, and administrators need to create an accessible and modern learning environment. Our platform is cloud-native, built on open technologies, and scalable across thousands of institutions and tens of millions of users worldwide. We are the LMS market share leader in both Higher Education and paid K-12, with over 6,000 global customers, representing Higher Education institutions and K-12 districts and schools in more than 90 countries. We are maniacally focused on our customers and enhancing the teaching and learning experience. As such, we continuously innovate to grow the footprint of our platform, including through our acquisitions of Portfolium to add online skills portfolio capabilities for Higher Education students and MasteryConnect and Certica to add K-12 assessment and analytics capabilities. Our platform becomes deeply ingrained into our customers’ instructional workflows.

Technology has fundamentally transformed the way education is delivered and consumed – putting the delivery of world-class experiences and the opportunities they engender within everyone’s reach. Despite technology’s potential to massively scale the impact of high quality instruction and elevate student outcomes, a variety of factors have historically led to slower adoption and implementation in academic institutions, including competing budget priorities, institutional resistance to change, low student-to-device ratios, and poor connectivity in school and at home.

The COVID-19 pandemic has created a set of conditions in which students of all ages have been learning remotely for a year, providing an opportunity to demonstrate the efficacy of distance learning at scale and opening up new possibilities for learners who previously could not access quality education. Almost overnight, schools and universities had to rapidly adopt or redeploy online platforms for students and teachers to conduct lessons remotely. As a result of government stimulus and realigned school and university budget priorities, hardware, software, and internet connectivity began to proliferate in regions and markets with historically low levels of access. The COVID-19 pandemic has been a massive tailwind to adoption over the past year, but the need for ongoing technology in education will persist well beyond the pandemic.

The opportunity for platform technologies in education is massive. According to the U.S. Census Bureau and the National Center for Education Statistics, in the U.S. alone, there are over 70 million students enrolled across over 137,000 schools. According to UNESCO, approximately 1.4 billion students worldwide were


 

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learning from home as of March 2020. According to HolonIQ, global spend on education technology was $163 billion in 2019 and will increase at a compound annual growth rate of 16% between 2019 and 2025. A new minimum threshold for the digital classroom experience has been reached and the LMS is now the de facto technology in any learning environment. Students and teachers have now fully embraced technology in education and the reputational and systemic risk from academic institutions of being unable to provide redundancy and contingency is too great to ignore. Further government stimulus in education is expected to drive technology funding and adoption, particularly in international regions which have seen comparatively less investment than in the U.S. The perfect storm of technology advancements, widespread access to devices, and increased classroom spending has created an extensive and long-lasting transformation of the education market.

Instructure has been a beneficiary of these tailwinds in education technology. We launched Canvas, our LMS application, in 2011 and quickly saw rapid adoption in the Higher Education market as we displaced legacy systems with our cloud-native and extendable platform and won greenfield opportunities where software solutions did not exist. We have grown our K-12 business over time and have experienced significant acceleration during the COVID-19 pandemic as device proliferation and technology acceptance within districts has advanced. Our extendable learning platform is comprised of the following solutions:

 

   

Canvas LMS. As the cornerstone of our platform, Canvas LMS is designed to give our Higher Education and K-12 customers an extensive set of flexible tools to support and enhance content creation, management, and delivery of face-to-face and online instruction.

 

   

Canvas Studio. An online video platform which enables customers to host, manage, and deliver impactful video learning experiences.

 

   

Canvas Catalog. A web-based course catalog and registration system that enables institutions to create and maintain a branded marketplace for their online course offerings.

 

   

Assessments. Solutions for K-12 assessment that include MasteryConnect, a robust student assessment management system, and Certica, which provides a variety of assessment content solutions and analytics to inform daily instruction in the classroom and data which measure student learning and preparedness for exams mandated by federal and state regulations.

 

   

Portfolium. Solutions for Higher Education that include Pathways and Program Assessment, which guide students along pathways that lead to skills and knowledge showcased in online portfolios.

 

   

Canvas Network. An invitation-only offering allowing institutions to offer and deliver courses over the internet to a much broader audience than just their own students.

Our broad capabilities have expanded our total addressable market, provide significant upsell and cross-sell opportunities, and collectively form the basis of an extendable platform which has become a standard among many U.S. Higher Education and K-12 institutions and a growing number of international institutions.

Our global customer base spans from K-12 through Higher Education and Continuing Education, giving us a prominent position to accompany learners throughout their learning lifecycle. We continue to deepen our relationships with Higher Education customers by facilitating their strategic growth – often through powering their emerging Continuing Education initiatives that open their doors to a new universe of non-traditional learners. We are increasingly able to sell to large districts and statewide systems due to the scalability, adaptability, and reliability of our platform. Our customers include State Universities of California, Florida, and Utah, all of the Ivy League universities, the entire Higher Education systems for Sweden and Norway, international K-12 systems such as Queensland, Australia, which administers to over 1,200 schools, and many of our nation’s largest K-12 systems, such as Broward County, Florida and Clark County, Nevada.


 

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Once implemented, Instructure serves as the connected hub for engagement between teachers, students, parents, content providers, and an always growing ecosystem of partners, including the largest commercial providers and the smallest education technology start-ups. As of December 31, 2020, our platform supported over 30 million contracted Canvas LMS users and a rich community of over 500 ecosystem partners. Our ecosystem partners are education technology organizations that provide adjacent services or complementary integrated solutions and have entered into a partnership agreement with us. This ecosystem contributes to our innovation and product development, and has resulted in students utilizing partner-integrated products over 2.7 billion times in the fourth quarter of 2020, an increase of 361% over the fourth quarter of 2019. We review certain metrics relating to partner-integrated products, which include learning tools that were integrated into our Canvas LMS platform, and allow users to access the learning tools directly from within our Canvas LMS platform. We count each “utilization” of a partner integrated product, or each instance where any user accesses those tools from within the Canvas LMS platform. The increase in utilizations resulted from increases in (1) online learning during the COVID-19 pandemic, (2) awareness of available tools by faculty and the resulting add-in of the tools for students, and (3) engagement of students with the Canvas LMS platform. Our best-in-class customer support organization supports our customers and ecosystem partners.

Our ecosystem has created a network effect of adoption where the embedded nature of our platform drives compounded usage of our applications and those that our partners deliver. The more our platform is used the more valuable it is to customers and users, increasing customer retention and positioning us to more rapidly expand both our customer base and the Instructure products each of those customers will use.

We went public in 2015 and were subsequently taken private by Thoma Bravo in 2020. Thoma Bravo saw the opportunity to combine our market leadership, tremendous customer loyalty, and superior technology with world class operations, to create a mission-driven company that could also be profitable and enduring. Over the past year, we have transformed our business into a more competitive and focused learning platform leader, well-positioned for long-term, durable growth. We have accomplished our strategic transformation through the following initiatives:

 

   

Aligned focus on core offerings. We have realigned our business to focus solely on education and our learning platform. We divested Bridge in February 2021, our corporate learning offering, and stopped spending on unprofitable activities, including legacy analytics initiatives and international products for non-core regions.

 

   

Optimized go-to-market strategy. We aligned all sales and marketing functions under a single sales leader. We were able to restructure our sales and marketing organization while improving productivity by eliminating sales coverage in non-core international regions and focusing our efforts solely on education.

 

   

Streamlined cost structure. We implemented a strategic expense reduction plan that enabled us to focus on delivering customer value sustained by recurring revenue, durable growth, and improved retention, with fewer resources than we had at the time of the Take-Private Transaction (as defined below). We simplified our organizational design, moved a portion of our development efforts to Budapest, closed and consolidated facilities internationally and within the U.S., and aligned the organization with our sole focus on serving education.

 

   

Enhanced management team. We appointed a new Chief Executive Officer, Steve Daly, and a new Chief Financial Officer, Dale Bowen, as well as several other senior executives who bring focus, operational discipline, execution expertise, deep industry knowledge, and innovation to the company.

We have emerged from this transformation a stronger and more resilient company, poised to continue to win in the market. For 2018, 2019, 2020 (Predecessor) and 2020 (Successor):

 

   

Our revenue was $209.5 million, $258.5 million, $71.4 million, and $230.7 million, respectively.

 

   

Our net loss was $43.5 million, $80.8 million, $22.2 million, and $178.0 million, respectively.


 

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Our adjusted EBITDA was $(11.2) million, $(9.3) million, $4.8 million, and $66.3 million, respectively.

 

   

Our operating cash flow was $0.1 million, $18.9 million, $(57.1) million, and $36.9 million, respectively.

 

   

Our free cash flow was $(10.9) million, $8.7 million, $(57.7) million, and $35.3 million, respectively.

For the unaudited three months ended March 31, 2021:

 

   

Our revenue was $94.0 million.

 

   

Our net loss was $33.1 million.

 

   

Our adjusted EBITDA was $32.6 million.

 

   

Our operating cash flow was $(58.7) million.

 

   

Our free cash flow was $(59.1) million.

For definitions of adjusted EBITDA and free cash flow and reconciliations to their most directly comparable measures calculated in accordance with the U.S. general accepted account principles (“GAAP”), see “Management’s Discussion and Analysis of Financial Condition and Result of Operation—Non-GAAP Financial Measures.”

Industry Background

The Education Industry is one of the Largest and Most Important Sectors of the Global Economy

Success in education is a primary driver of economic well-being, quality of life, geopolitical competitiveness, and societal advancement. As such, the education market is massive and commands high spending from governments and private institutions worldwide. According to the U.S. Census Bureau and the National Center for Education Statistics, in the U.S. alone, there are over 70 million students enrolled across over 137,000 schools. According to UNESCO, approximately 1.4 billion students worldwide were learning from home as of March 2020. According to CB Insights, the U.S. spends over $1.6 trillion annually on education, representing one of the highest government spending categories. According to HolonIQ, global spend on education stands at almost $6 trillion. The overwhelming majority of educational spend goes toward traditional instruction – teachers, classrooms and classroom tools, student and teacher support services, and administration. A key component of broader education spend is funding directed to education technology. According to HolonIQ, global spend on education technology was $163 billion in 2019 and will increase at a compound annual growth rate of 16% between 2019 and 2025.

Technology is Disrupting Every Aspect of Education

Technology has fundamentally transformed the way education is delivered and consumed – creating the ability to democratize education and improve the quality of instruction for everyone. From traditional classroom teaching to full online learning, technology has brought disruptive tools to improve teaching efficiency, elevate student performance, enhance peer collaboration, and enable greater personalization. With technology, schools are able to provide equitable access to learning for lifelong development, build communities around education – including students, teachers, parents, and content providers – and scale quality education to bring best-in-class experiences to students at any time or place. Technology also enables blended learning environments, enhancing both face-to-face and online experiences by using data and analytics to inform instruction and enriching learning experiences outside of school hours.

The backbone of education technology is the LMS, a critical software platform that enables teachers to create, deliver, and track the effectiveness of learning programs and students to organize study materials, centralize access to learning content, and increase collaboration. Beyond the LMS, several adjacent technology


 

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tools have emerged to improve the experience for teachers and students alike, including student assessments, data and analytics, and interactive content. Collectively, these solutions are integral to achieving significant improvements in education accessibility, scalability, productivity, collaboration, engagement, and skill-building.

Technology Spend has Historically been Underpenetrated Relative to Overall Spend

While on an absolute basis the education technology market is large, spending on education technology in 2019 represented only 2.7% of overall education spending, according to HolonIQ. Despite technology’s disruptive capabilities, a variety of factors have historically led to a slower level of adoption and implementation in academic institutions, including:

 

   

Competing budget priorities. School administrators and decision-makers have to manage a variety of constituents and budget priorities, leading to historical underfunding of technology.

 

   

Institutional resistance to change. General institutional resistance and inertia have contributed to underinvestment in technology.

 

   

Low student-to-device ratios and poor connectivity in school or at home. According to an analysis conducted by Future Ready Schools of the 2018 U.S. Census American Community Survey, 3.6 million households with children did not have a computer, which put 7.3 million children at an academic disadvantage. Similarly, 8.4 million households with children did not have high-speed home internet service. This imbalance of device access and connectivity has also slowed uniform technology adoption.

As a result of these historical trends, schools across the world have struggled to provide a robust online learning experience and ensure equitable access to education for all.

Global Distance Learning Mandates Have Accelerated Adoption of Education Technology at All Levels

The COVID-19 pandemic has created a set of conditions in which students of all ages have been learning from home for a year. While the pandemic created unique problems and complexities for everyone, the resulting changes in education have removed historical impediments to implementation of education technology, thereby accelerating adoption at all levels, proving that distance learning can be done at scale and that technology will be a critical element of teaching and learning moving forward.

Almost overnight, schools had to rapidly adopt online platforms for students and teachers to conduct lessons remotely, given mandated distance learning orders. According to the U.S. Census Bureau, since the onset of the COVID-19 pandemic, 93% of U.S. households with school-aged children reported using some form of distance learning and 80% of people living with children in distance learning programs reported children using online tools for schoolwork between May and June 2020. Distance learning mandates resulted in three events:

 

  (1)   Rapid adoption of an LMS and adjacent offerings among schools without existing technology solutions;

 

  (2)   A transition from free products used for point solutions to paid platform solutions that could scale across districts and states, with the paid LMS penetration rate of K-12 districts increasing from 30% to 41% between 2019 and August 2020; and

 

  (3)   Government stimulus provided increased grants and subsidies for Higher Education and a proliferation of hardware and software in K-12, which historically had lagged in device availability relative to Higher Education.

The ultimate result of these events within the education sector has been widespread access to devices, with approximately 86% of students in the U.S. now having access to a device, according to the Center on Reinventing Public Education. In turn, this has allowed schools and institutions to reach more students through online learning platforms while remote learning is required, while also providing a firm basis for these devices to augment and enhance the learning experience for students who have and will return to classrooms. An LMS


 

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allows effective use of those computers as key tools within the expanding view of a learning environment, rather than mere portals to the un-curated Internet. As access to computers and connections becomes more widespread, the LMS proliferates, becoming even more useful and allowing for the democratization of education.

COVID-induced Transformation in Education is Permanent

Institutional Transformation: while distance learning mandates required schools to implement learning platforms, the need for such tools will continue to persist in hybrid and in-person learning environments. Students and teachers have now fully embraced technology in education, and the reputational and systemic risk from academic institutions of being unable to provide redundancy and contingency is too great to ignore. Schools and students no longer have to decide between in-person or online – we expect there will be a combination of both options to support various needs and various times. Examples of capabilities that will still be needed in face-to-face and hybrid environments include: content delivery, student assessments, homework submission, grading, student analytics, parent/teacher collaboration, and scheduling. In hybrid learning environments, the need for quality, personalized assessments is in fact even greater, as it is paramount that teachers can understand how students are performing in remote environments and track their progress from a distance. The capabilities of learning platforms along with the institutional scars from the pandemic make technology implementation an investment priority even if budgets tighten in the future.

Financial Transformation: future funding toward education technology is expected. According to the Office of Elementary and Secondary Education, in the U.S., $30.7 billion of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) stimulus was used to fund education initiatives, including the purchasing of educational technology, planning and coordination of long-term closures, and training and professional development for staff. In December 2020, U.S. Congress passed an additional COVID-19 relief package that includes approximately $82 billion for education. In addition, the American Rescue Plan, signed into law in March 2021, includes nearly $170 billion in dedicated public education funds to assist in reopening efforts, such as distance learning programs, the implementation of safety protocols, and emergency financial assistance. Importantly, the American Rescue Plan allocates $7 billion of funds for the specific purpose of purchasing technology for students to aid in digital learning. International regions have seen education stimulus as well, and we expect to see an increase in spending over the coming years. As a demonstration of the education technology’s funding momentum, it is estimated by HolonIQ that the share of education technology spend as a percentage of global education spend is expected to nearly double from 2.7% in 2019 to 5.2%, or $404 billion, in 2025.

As Adoption Accelerates, Platform Leaders Will Win

As the education technology market continues to grow, platform leaders are best positioned to win. The market is populated with three groups: legacy on-premises providers, point solutions, and platform leaders. Legacy providers are typically siloed, on-premises solutions, or cloud-enabled adaptations of on-premises solutions, designed to address only a limited scope of teaching and learning needs. Point solutions typically provide single features rather than a full suite of products. The weaknesses of these two market archetypes has allowed platforms with broad, best-in-class offerings to emerge and establish significant market leadership. There is now a bifurcation of enduring platform leaders and sub-scale players, with leaders consolidating to add incremental capabilities and expand reach.

Platform leaders have an integrated suite of product offerings, a partner ecosystem connected to the platform, scalable product architecture, and the ability to expand reach into adjacent markets. Platforms in education technology span across K-12, Higher Education, and Continuing Education – the full lifecycle of learning – and have become the centers of gravity for innovation and engagement. Platform leaders benefit from growth in customer base, reduced customer acquisition costs, and high barriers to entry for other competitors. Academic institutions everywhere are now focused on building their student experience and learning protocols around platform leaders with the greatest depth of features and offerings.


 

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Industry Dynamics in U.S. Higher Education

Higher Education institutions were among the first adopters of LMS, and nearly every Higher Education institution in the U.S. has adopted an LMS of some kind to date. A major driver of this adoption has been high rates of access to devices among Higher Education student populations, with approximately 90% of individuals with at least high school degrees having a device, according to the U.S. Census Bureau. Additionally, Higher Education institutions utilize learning platforms to facilitate Continuing Education for alumni or non-matriculating students. However, as LMS adoption has taken place over the past 20 years, many schools are still reliant on legacy systems with limited features and functionality. The impact of the COVID-19 pandemic has driven Higher Education institutions to revisit their technology infrastructures and significantly increase investment in reliable, scalable, and feature-rich learning platforms.

Industry Dynamics in U.S. K-12

In contrast to Higher Education, K-12 adoption of LMS has not been as robust, with the paid LMS penetration rate of K-12 districts standing at approximately 41% as of August 2020. The lower penetration of LMS at the K-12 level represents a large greenfield opportunity for education technology to replace free solutions with paid learning platforms and monetize demand for broader product suites. The impact of the COVID-19 pandemic has driven K-12 schools to invest heavily in learning platforms to build resilience and redundancy and ensure equitable access to education for all students. Additionally, student access to devices now stands at approximately 86% according to the Center on Reinventing Public Education. We expect that the vast majority of K-12 schools will increase their technology investments going forward.

Industry Dynamics for Schools and Universities Internationally

The international market for LMS is highly fragmented and has historically been dependent on free, open source, and on-premises products that lack the functionality, scalability, and reliability of a leading learning platform. Since the onset of the COVID-19 pandemic, international academic institutions have experienced first-hand the scalability and capacity limitations associated with on-premises solutions, and the service and performance issues that can result. LMS penetration and device access vary by region, resulting in a patchwork of heterogeneous technology usage. The opportunity for leading learning platforms to expand internationally is significant, with Western Europe representing the most well-organized and well-funded region. As a result of the COVID-19 pandemic, international academic institutions are evaluating cloud-based platform solutions that can provide increased functionality, redundancy, and resilience in hybrid learning environments.

Requirements for an Effective, Modern Learning Platform

The changing education technology landscape has highlighted the necessity for a modern learning platform capable of meeting the evolving needs of students and teachers in diverse environments. Key elements of an effective, modern learning platform, include:

 

   

Cloud-first Architecture: schools require learning management solutions that can scale, adapt to changing environments, quickly disseminate information, and leverage data collected across many channels. Learning platforms that are cloud-native provide rapid time to value and are simple to maintain, modify and extend.

 

   

Reliability: learning platforms are mission-critical systems for education providers and students, and therefore must be reliable, available, and enterprise-grade. The ability to handle growing data and users, fluctuating demand, and changing workload patterns while maintaining high availability is a critical differentiator.

 

   

Open and Extendable: modern infrastructure that supports open standards, transparency, and integrations with other systems including content providers and point solutions.


 

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Multi-functional: ability to span across all areas of instruction, including: teaching and learning, assessments, analytics, and interactive content.

 

   

Extendable across the Education Lifecycle: addressing the needs of K-12, Higher Education, and Continuing Education.

 

   

Management across Schools, Districts, Institutions, and Systems: built with enterprise-grade functionality, configurability, consistency, and management flexibility that can scale to support any size or scope of institution.

 

   

Community of Technology Partners and Users: ecosystem of parents, teachers, and students for collaboration; community of content creators and users to share ideas and fuel product roadmaps; and third-party integration partners.

Market Opportunity

The education technology market that we address is large and rapidly growing. As the need for scalable, reliable, and adaptable solutions that can enable in-person, hybrid, and remote learning environments increases, we believe that investment in education technology will be an imperative for every school and academic institution in the world. According to HolonIQ, global expenditures on education technology are expected to grow from $163 billion in 2019 to $404 billion in 2025, reflecting a compound annual growth rate of 16%.

We estimate that our total market opportunity is approximately $30 billion, comprised of an LMS market opportunity of approximately $5 billion, a market opportunity for our non-LMS products of approximately $10 billion, and new market expansion opportunities of approximately $15 billion.

We believe that our products can address the needs of Higher Education and K-12 students in markets where student to device ratios and wireless connectivity are sufficiently high to allow for the effective deployment of education technology. The Higher Education market in the U.S. and Canada is comprised of approximately 22 million students, with approximately 89 million additional Higher Education students in international markets that we believe we can address. According to Agile Education Marketing, the K-12 market in the U.S. and Canada is comprised of approximately 57 million students, while, according to the UNESCO Institute for Statistics, there are approximately 709 million additional K-12 students in international markets that we believe we can address. The significant number of students worldwide supports our belief that our addressable market is large, and that we have significant greenfield opportunities among addressable customers.

Our Platform

Our learning platform is an extendable, configurable, and highly integrated set of solutions designed to meet the teaching and learning needs of every K-12 and Higher Education institution and includes the Canvas LMS, Canvas Studio, Canvas Catalog, Assessments, Portfolium, and Canvas Network. With its cloud-native offerings, open application programming interfaces (“APIs”), support of industry standards, and accessibility, our platform streamlines digital tools and content for teachers and students, creating a simpler and more connected learning experience.


 

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Benefits of Our Solution

Cloud-native Architecture

Our cloud-native architecture enables customers to enjoy all of the benefits of the cloud, including rapid time to value, no maintenance, frequent updates with no downtime, and horizontal scalability across millions of users. The cloud allows users to access our platform at any time, from any device, affording institutions and providers the ability to collaborate on the use of their data, to differentiate and personalize instruction, answer critical questions about the efficacy of content and tools, and put teachers and students in control of their own outcomes.

High Reliability and Uptime

We built our platform with enterprise scalability to span over 5.6 million concurrent users across districts and states. We guarantee 99.9% uptime through service level agreements (“SLAs”), and have generally delivered above this level over the past four years. Our uptime has remained excellent while growing our customer base and usage throughout 2020. Importantly, we are able to scale up and down dynamically when there are abrupt changes in usage, such as immediate moves to distance learning, or changes in school hours, class schedules, and academic calendars.

Open Source and Open Ethos

Our platform is built on open source technologies, providing customers full flexibility in how they use our platform, and giving them access to constant innovation with upgrades to the code base. Importantly, through open APIs, customers get access to massive amounts of their data, providing them the freedom and flexibility to use their own data for assessments, personalization, benchmarking, and engagement.

Extendable Across Partner Ecosystem

We are the connected hub for teaching and learning. A key feature of delivering a platform is building an ecosystem of partners connected to the platform. We enable third-party software providers to integrate with our platform through a library of open APIs, allowing us to provide a more comprehensive offering through product integration, and for third parties to rapidly scale solutions across our customer base. We have over 500 partners, from some of the world’s largest technology companies to niche point solution providers, across content providers, hardware providers, collaboration tools, publishers, and productivity tools. In the fourth quarter of 2020, students utilized partner-integrated products over 2.7 billion times, an increase of 361% from the fourth quarter of 2019.

Multi-Functional Product Suite

Our platform capabilities span multiple areas of instruction, including learning, assessments, analytics, and program management. By addressing multiple areas of instruction, we provide the most relevancy in the classroom to teachers and students. The breadth of our offerings facilitates improved student outcomes, allows us to address a large and growing market, and enables us to cross-sell numerous offerings within our existing customer base, where customers want to buy adjacent solutions.

Solutions Address All Market Segments

We serve all market segments within education, including K-12, Higher Education, and Continuing Education. By serving all segments in the market, we are able to engage with students throughout the education lifecycle and increase retention within our user base. This also provides us with a large market opportunity, with both greenfield and replacement options across U.S. and international markets.


 

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Continuous Innovation to Enable New Applications

Our continuous commitment to innovation leads to stronger retention and customer satisfaction, continued relevancy with our customer base, and the ability to respond quickly to market changes, such as providing increased scalability in response to the COVID-19 pandemic. In 2020, we released a large volume of new features, including 67 new capabilities over a span of three months in response to new demand from our customers as a result of the COVID-19 pandemic. On average, we have approximately 32 releases per year. We also seek to expand our platform by developing into adjacent markets through strategic acquisitions and partnerships.

Competitive Strengths

Leading Market Share Positions in the North America Higher Education and K-12 Markets

We are the paid LMS market share leader by student enrollment in both North America Higher Education and K-12, demonstrating our differentiated offering, successful execution, and ability to support the entire lifecycle of learning, and positioning us as the de facto learning platform. We believe that our reputation as a market leader creates a network effect in which standardization on our platform is increasingly attractive to ecosystem partners and in turn positions us to more rapidly expand our customer base.

Designed to Scale from Single School to State and Country-wide Deployments

The scalability enabled by our cloud-native architecture, robust set of capabilities, and management features allows us to win any opportunity, from a single school to a large-scale deployment, where point solutions cannot compete. At the institutional level, we provide solutions that can be deployed to manage entire learning environments of any size. At the individual user level, we provide solutions that allow teachers to access new populations of learners across the globe. Our expansive deployment model provides scalability in our go-to-market engine, as we can sell once and then deploy more broadly across systems.

Large and Highly Engaged User Base

We have built a large and growing ecosystem around our platform and company. As of December 31, 2020, we had 30 million contracted Canvas LMS users globally. In recent months, our website has been one of the top 20 most visited websites in the U.S., demonstrating the high level of engagement we experience from our customers. We have over 1.1 million members in our Canvas Community customer network, where administrators, designers, instructors, parents, and students share, collaborate, and shape the Canvas product through community forums and content repositories. Our vibrant community of users promotes adoption of our solutions by sharing best practices and broadly disseminating the value our solutions deliver.

End-to-end Lifecycle of Customer Success

Our company-wide focus on the customer results in successful implementations, high retention, and happy customers. We invest significantly in customer success, employing more individuals in customer-facing roles than any other group in our organization, and intend to continue investing in and scaling our customer success group moving forward. Our maniacal focus on the customer has led to a best-in-class customer satisfaction score (CSAT) of over 90%. Our platform becomes deeply ingrained into our customers’ instructional workflows.

Highly Efficient Go-To-Market Model

We continue to invest in and grow our sales force to go after the massive opportunities ahead of us. We have a highly tenured and effective sales team with quota carrying representatives driving the majority of our business. We utilize a single, outbound sales motion, which has reduced the complexity in sales and allows representatives


 

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to focus on replacement and greenfield opportunities from K-12 through Continuing Education. Our average bookings per representative increased over 100% in 2020 and our sales representatives had an average tenure with us of over 3.2 years as of December 31, 2020. We calculate average bookings per sales representative by dividing our total bookings in a given period by the number of quota bearing sales representatives that were employed by us during the respective period. Our average bookings per sales representative was $0.7 million, $0.6 million and $1.6 million for the years ended December 31, 2018, 2019 and 2020, respectively. The decrease in average bookings per sales representative from 2018 to 2019 was driven by an increase in the number of sales representatives without a corresponding increase in bookings. The subsequent increase in average bookings per sales representative from 2019 to 2020 was driven by increased demand for our solutions in 2020 bolstered by the accelerated adoption of hybrid and remote learning, while the number of sales representatives remained relatively stable.

Growth Strategies

Grow Our Customer Base

Higher Education. We expect to grow our customer base in Higher Education primarily through replacements of legacy systems in North America, where the LMS market is largely penetrated and our market share has grown from approximately 24% to 37% over the past four years, and through greenfield wins in targeted and strategic international regions. As international penetration of paid LMS and adjacent systems is still relatively low, we expect to target new opportunities in select regions utilizing our local sales teams, as well as channel partners.

K-12. We expect to grow our customer base in K-12 by surrounding free solutions currently in place with our scalable platform, monetizing demand for our breadth of capabilities, and focusing customers on the benefits of district or state-wide standardization, in addition to capturing the remaining 45% of U.S. students who are not currently using a paid LMS, based on an Instructure survey.

Cross-sell into our Existing Customer Base

Our broad capabilities spanning learning, assessments, analytics, student success, program management, digital courseware, and global online learning initiatives provide us a significant opportunity to cross-sell offerings into our existing customer base. We generally land with our LMS product and have the ability to cross-sell additional solutions into our LMS customer base.

Continue to Innovate and Expand Our Platform

We will continue to innovate on our platform, expand our features and monetize new offerings. Key to our ability to service our customer base will be the continued strengthening of our core focus areas in learning management, assessment management, student success, and online learning, where we see significant customer demand for broad offerings. We will also continue to innovate our platform and build strengths in adjacent areas of learning analytics, program management, and instructional content, where we see opportunities to expand our customer base.

Risk Factor Summary

There are a number of risks related to our business, this offering and our common stock that you should consider before you decide to participate in this offering. Some of the principal risks related to our business include the following:

 

   

We have benefitted from the U.S. federal government’s stimulus packages focused on educational initiatives approved as a result of the COVID-19 pandemic and there is no guarantee additional funding will be approved.


 

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We have experienced increased customer acquisitions and renewals as a result of the COVID-19 pandemic and such increases in customer acquisitions and renewals may not be sustained or may reverse at any time.

 

   

The increased adoption and use of our platform stemming from the COVID-19 pandemic may result in interruptions, delays, or outages, increased customer interactions and waiting times, and increased variable costs, all of which could harm our business, financial condition and results of operations.

 

   

We have a history of losses, and we do not expect to be profitable for the foreseeable future.

 

   

Our future revenues and operating results will be harmed if we are unable to acquire new customers, if our customers do not renew their contracts with us, or if we are unable to expand sales to our existing customers or develop new products that achieve market acceptance.

 

   

If the markets for our applications develop more slowly than expected or market conditions reduce IT spending, our growth may slow or stall.

 

   

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

 

   

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

 

   

We face significant competition from both established and new companies, and the risk of new entrants, including established entrants, offering learning platforms, which may adversely affect our ability to add new customers, retain existing customers and grow our business.

 

   

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

 

   

If we fail to maintain, enhance or protect our brand, our ability to expand our customer base will be impaired and our business, financial condition and results of operations may suffer.

 

   

A breach or compromise of our security measures or those we rely on could result in unauthorized access to customers’ data, which may materially and adversely impact our reputation, business and results of operations.

 

   

A substantial portion of the source code for Canvas is available under the terms of an open source license, and accepts contributions of modifications to that source code, each of which could negatively affect our ability to offer our learning platform or subject us to possible litigation.

 

   

Failure to protect and enforce our proprietary technology and intellectual property rights could substantially harm our business, operating results and financial condition.

 

   

Our customers, domestically and internationally, are highly regulated and subject to a number of challenges and risks. Our failure to comply with laws and regulations applicable to us as a technology provider for Higher Education and K-12 could adversely affect our business and results of operations, increase costs and impose constraints on the way we conduct our business.

 

   

We face risk if our estimates of market opportunity and forecasts of market growth prove to be inaccurate or if we need to change our pricing models to compete successfully.

After this offering, Thoma Bravo will own approximately 88.1% of our common stock (or 87.0% of our common stock if the underwriters’ over-allotment option is exercised in full) and we will be a “controlled company” within the meaning of the rules of the NYSE. As a result, we will qualify for, and intend to rely on, exemptions from certain corporate governance requirements and you will not have the same protections as those afforded to stockholders of companies that are subject to such governance requirements.


 

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These and other risks are more fully described in the section entitled “Risk Factors” in this prospectus. If any of these risks actually occurs, our business, financial condition, results of operations, cash flows and prospects could be materially and adversely affected. As a result, you could lose all or part of your investment in our common stock.

Our Principal Stockholder

Thoma Bravo is a leading investment firm building on a more than 40-year history of providing capital and strategic support to experienced management teams and growing companies. Thoma Bravo has invested in many fragmented, consolidating industry sectors in the past, but has become known particularly for its history of successful investments in the application, infrastructure and security software and technology-enabled services sectors, which have been its investment focus for more than 15 years. Thoma Bravo manages a series of investment funds representing more than $57.5 billion of capital commitments.

In connection with this offering, we will enter into a director nomination agreement (the “Director Nomination Agreement”) with Thoma Bravo that provides Thoma Bravo the right to designate nominees to our board of directors (our “Board”), subject to certain conditions. The Director Nomination Agreement will provide Thoma Bravo the right to designate: (i) all of the nominees for election to our Board for so long as Thoma Bravo controls, in the aggregate, 40% or more of the total number of shares of our common stock beneficially owned by Thoma Bravo upon completion of this offering, as adjusted for any reorganization, recapitalization, stock dividend, stock split, reverse stock split or similar changes in our capitalization, or such amount of shares, as adjusted (the “Original Amount”); (ii) a number of directors (rounded up to the nearest whole number) equal to 40% of the total directors for so long as Thoma Bravo beneficially owns at least 30% and less than 40% of the Original Amount; (iii) a number of directors (rounded up to the nearest whole number) equal to 30% of the total directors for so long as Thoma Bravo beneficially owns at least 20% and less than 30% of the Original Amount; (iv) a number of directors (rounded up to the nearest whole number) equal to 20% of the total directors for so long as Thoma Bravo beneficially owns at least 10% and less than 20% of the Original Amount; and (v) one director for so long as Thoma Bravo beneficially owns, at least 5% of the Original Amount. See “Certain Relationships and Related Party Transactions—Policies for Approval of Related Party Transactions—Director Nomination Agreement” for more details with respect to the Director Nomination Agreement.

In connection with our entry into our Credit Facilities (as defined below) on March 24, 2020, affiliates of Thoma Bravo collectively acquired $129.2 million of our term loans under our Term Loan (as defined below) and, as of March 31, 2021, affiliates of Thoma Bravo collectively owned $131.6 million of our Term Loan. As a result, Thoma Bravo will receive a portion of the net proceeds of this offering in connection with the repayment of our Term Loan. Based upon our estimated receipt of net proceeds from this offering of approximately $228.1 million (or $263.0 million if the underwriters exercise their option to purchase additional shares in full), we expect that Thoma Bravo will receive $38.0 million of the total $228.1 million (or $43.8 million of the total $263.0 million if the underwriters exercise their option to purchase additional shares in full) of such net proceeds used to repay outstanding borrowings under our Term Loan. See “Use of Proceeds” for additional information.

General Corporate Information

We were incorporated in January 2020 as Instructure Intermediate Holdings I, Inc. to serve as a holding company in connection with the Take-Private Transaction. In May 2021, we changed our name to Instructure Holdings, Inc. Our principal executive offices are located at 6330 South 3000 East, Suite 700, Salt Lake City, Utah 84121. Our telephone number is (800) 203-6755. Our website address is www.instructure.com. The information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus, and you should not consider any information contained on, or that can be accessed through, our website as part of this prospectus or in deciding whether to purchase our common stock. We are a holding company and all of our business operations are conducted through our subsidiaries.


 

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This prospectus includes our trademarks and service marks such as “Instructure,” “Canvas,” the Instructure logo, and the Canvas logo, which are protected under applicable intellectual property laws and are the property of us or our subsidiaries. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names.

Corporate Reorganization

The issuer is a holding company and all of our business operations are conducted through our subsidiaries. Prior to this offering, we are a wholly-owned subsidiary of TopCo. Topco has two outstanding classes of units: (i) Class A Units, held by the Thoma Bravo Funds and certain of our current and former employees, officers and directors, or their affiliates, who purchased such units in connection with the Take-Private Transaction or thereafter; and (ii) Class B Units, which are held by the same equityholders as the Class A Units plus certain of our employees, officers and directors who have been granted management incentive units, which management incentive units are or were at the time of issuance subject to certain vesting conditions. Each class of units is subject to the terms of the limited partnership agreement of Topco.

Pursuant to the limited partnership agreement of Topco, units share in distributions according to a “waterfall” which provides for distributions to be made in the following order and priority: (1) first, to the holders of Class A Units until they receive a 9% annual return on their remaining unreturned capital contributions, compounded quarterly; (2) second, to the holders of Class A Units until they receive an amount equal to their respective capital contributions on a pro rata basis; and (3) third, to the holders of the Class B Units based on their percentage of ownership, taking into account applicable vesting terms and “participation thresholds.” A participation threshold in respect of a Class B Unit is determined at the time of issuance or grant of each management incentive unit and is equal to or greater than the amount payable in respect of a Class B Unit having a participation threshold of zero pursuant to the waterfall in a hypothetical liquidation of TopCo at the value of TopCo as of immediately prior to such issuance or grant. Participation thresholds are reduced as Topco makes distributions pursuant to the waterfall.

On July 9, 2021, we effected a 126,239.815-for-1 stock split of our issued and outstanding common stock. Prior to the consummation of this offering, (i) TopCo will distribute all of our issued and outstanding shares of common stock to its equityholders, including the Thoma Bravo Funds and our directors, officers and other employees, in accordance with the distribution waterfall provisions of TopCo’s limited partnership agreement, (ii) our directors, officers and other employees who hold unvested management incentive units under the Second Amended and Restated Instructure Parent, LP Incentive Equity Plan and the applicable grant agreements will exchange those incentive units for new awards of restricted stock units under our 2021 Omnibus Incentive Plan (the “2021 Plan”) having equivalent value as of the date of exchange, and (iii) TopCo will wind up and dissolve, as a result of which all of the outstanding Class A Units and Class B Units will be cancelled in their entirety and TopCo (along with the Class A Units and Class B Units) will cease to exist. None of the shares of our common stock distributed to TopCo’s equityholders will be registered at that time and, as such, all such shares will be “restricted securities” for purposes of the Securities Act. Following these transactions, the equityholders will hold our shares of common stock (or restricted stock units) directly and they will cease to be equityholders of TopCo.

In this prospectus, our “Corporate Reorganization” refers to the transactions described above.


 

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The following chart summarizes our corporate structure following the Corporate Reorganization and this offering:

 

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The Offering

 

Common stock offered

12,500,000 shares.

 

Common stock to be outstanding after this offering


138,500,000 shares (or 140,375,000 shares if the over-allotment option is exercised in full).

 

Over-allotment option

1,875,000 shares.

 

Use of proceeds

We estimate that our net proceeds from this offering will be approximately $228.1 million, or approximately $263.0 million if the underwriters’ over-allotment option is exercised in full, assuming an initial public offering price of $20.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

  The principal purposes of this offering are to repay indebtedness, increase our capitalization and financial flexibility, create a public market for our common stock and enable access to the public equity markets for us and our stockholders. We expect to use approximately $228.1 million of the net proceeds of this offering to repay $224.7 million of outstanding borrowings under our Credit Facilities (or $263.0 million if the underwriters exercise their option to purchase additional shares in full to repay $259.1 million of outstanding borrowings under our Credit Facilities), net of fees.

 

  In connection with our entry into our Credit Facilities, affiliates of Thoma Bravo collectively acquired $129.2 million of our term loans under our Term Loan and, as of March 31, 2021, affiliates of Thoma Bravo collectively owned $131.6 million of our Term Loan. As a result, Thoma Bravo will receive a portion of the net proceeds of this offering in connection with the repayment of our Term Loan. Based upon our estimated receipt of net proceeds from this offering of approximately $228.1 million (or $263.0 million if the underwriters exercise their option to purchase additional shares in full) as described above, we expect that Thoma Bravo will receive $38.0 million of the total $228.1 million (or $43.8 million of the total $263.0 million if the underwriters exercise their option to purchase additional shares in full) of such net proceeds used to repay outstanding borrowings under our Term Loan. See “Use of Proceeds” for additional information.

 

Controlled company

After this offering, assuming an offering size as set forth in this section, Thoma Bravo will own approximately 88.1% of our common stock (or 87.0% of our common stock if the underwriters’ over-allotment option is exercised in full). As a result, we expect to be a controlled company within the meaning of the corporate governance standards of NYSE. See “Management—Corporate Governance—Controlled Company Status.”

 

Directed Share Program

At our request, the underwriters have reserved up to 5% of the shares of our common stock to be issued by us and offered by this prospectus for sale, at the initial public offering price, at our discretion, to our senior


 

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leadership team, which includes our directors and officers, through a directed share program. The number of shares of common stock available for sale to the general public will be reduced to the extent that such persons purchase such reserved shares. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same basis as the other shares of common stock offered by this prospectus. Shares purchased through the directed share program will not be subject to lock-up restrictions with the underwriters. See “Underwriting” for more information.

 

Risk factors

Investing in our common stock involves a high degree of risk. See “Risk Factors” elsewhere in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.

 

NYSE trading symbol

“INST”

The number of shares of common stock to be outstanding following this offering is based on 126,000,000 shares of common stock outstanding as of March 31, 2021, and excludes:

 

   

1,648,824 shares of common stock issuable upon vesting and settlement of restricted stock units (“RSUs”) to be issued upon the closing of this offering to certain of our employees (the “IPO Grants”);

 

   

4,010,648 shares of common stock issuable upon the vesting and settlement of RSU awards under our 2021 Plan that are issuable upon the exchange of management incentive unit awards of TopCo that were issued, outstanding and unvested as of March 31, 2021 (the “Exchange Grants”);

 

   

18,000,000 shares of common stock reserved for future issuance under our 2021 Plan, which will become effective in connection with this offering (inclusive of shares reserved for the IPO Grants and the Exchange Grants);

 

   

1,900,000 shares of our common stock that will become available for future issuance under our 2021 Employee Stock Purchase Plan (the “2021 ESPP”), which will become effective in connection with this offering; and

 

   

86,343 shares of common stock repurchased by us from former employees after March 31, 2021.

Unless otherwise indicated, all information in this prospectus, including the number of shares of common stock to be outstanding following this offering, assumes:

 

   

an initial public offering price of $20.00 per share, which is the midpoint of the estimated price range set forth on the cover of this prospectus;

 

   

no exercise by the underwriters of their over-allotment option to purchase up to 1,875,000 additional shares of common stock;

 

   

the 126,239.815-for-1 stock split of our common stock effected on July 9, 2021 and the effectiveness of other Corporate Reorganization transactions described in “Prospectus Summary—Corporate Reorganization” prior to the consummation of this offering; and

 

   

the filing of our second amended and restated certificate of incorporation and the adoption of our amended and restated bylaws, each in connection with the closing of this offering.


 

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Summary Consolidated Financial Data

The following table sets forth our summary historical consolidated financial and other data for the periods and as of the dates indicated. As a result of the Take-Private Transaction on March 24, 2020, our summary historical consolidated financial and other data are presented in two distinct periods to indicate the application of two different bases of accounting between the periods presented and are therefore not comparable. The period prior to and including March 31, 2020 includes all of the accounts of Instructure, Inc. and is identified as “Predecessor” and the period after March 31, 2020 includes all of the accounts of Instructure Holdings, Inc. and is identified as “Successor.” For accounting purposes, management has designated the “Acquisition Date” as March 31, 2020, as the operating results and change in financial position for the intervening period is not material.

To facilitate comparability of the year ended December 31, 2020 to the year ended December 31, 2019, we present combined results for the combination of consolidated results from January 1, 2020 to December 31, 2020, comprising the Predecessor consolidated results from January 1, 2020 to March 31, 2020, the Successor consolidated results for the period from April 1, 2020 to December 31, 2020 and certain pro forma adjustments that give effect to the Take-Private Transaction as if it had occurred on January 1, 2020 (the “Unaudited Pro Forma Combined 2020 Period”).

We derived the summary historical consolidated financial and other data for the years ended December 31, 2018 and 2019 from the Predecessor’s audited consolidated financial statements included elsewhere in this prospectus. We derived the summary historical consolidated financial and other data for the periods from January 1, 2020 to March 31, 2020, which relate to the Predecessor, April 1, 2020 to December 31, 2020, which relate to the Successor, and as of December 31, 2020 from the Successor’s audited consolidated financial statements included elsewhere in this prospectus. We derived the summary historical consolidated financial and other data for the three months ended March 31, 2020, which relates to the Predecessor, and the three months ended and as of March 31, 2021, which relates to the Successor, from the Successor’s unaudited consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited consolidated financial statements on the same basis as the audited consolidated financial statements of the Successor, and in the opinion of our management, reflect all adjustments, including normal recurring items, considered necessary for a fair presentation of this data.


 

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Our historical results are not necessarily indicative of the results that may be expected in the future. You should read the summary historical financial data below in conjunction with the sections titled “Unaudited Pro Forma Combined Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes included elsewhere in this prospectus.

 

    Annual Periods           Interim Periods  
    Predecessor           Successor     Combined           Predecessor           Successor  

(in thousands, except per
share data)

  Year Ended
December 31,
2018
    Year Ended
December 31,
2019
    Period from
January 1, 2020
to March 31,
2020
          Period from
April 1, 2020 to
December 31,
2020
    Pro Forma
Year Ended
December 31,
2020 (1)
          Pro Forma
Three Months
Ended
March 31,
2020 (1)
          Three Months
Ended
March 31,
2021
 
                                  (Unaudited)           (Unaudited)           (Unaudited)  

Consolidated Statement of Operations Data:

                       

Revenue:

                       

Subscription and support

  $ 188,501     $     236,241     $       65,968         $       209,148     $     274,070       $      53,513         $ 86,354  

Professional services and other

    21,043       22,232       5,421           21,525       26,931         4,437           7,626  
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

     

 

 

       

 

 

 

Total revenue

    209,544       258,473       71,389           230,673       301,001         57,950                93,980  
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

     

 

 

       

 

 

 

Cost of revenue:

                       

Subscription and support

    46,706       64,170       19,699           108,603       140,257         31,654           39,884  

Professional services and other

    15,137       18,656       4,699           15,547       20,246         4,699           5,750  
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

     

 

 

       

 

 

 

Total cost of revenue

    61,843       82,826       24,398           124,150       160,503         36,353           45,634  
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

     

 

 

       

 

 

 

Gross profit

        147,701       175,647       46,991           106,523       140,498         21,597           48,346  
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

     

 

 

       

 

 

 

Operating expenses:

                       

Sales and marketing

    97,481       121,643       27,010           125,650       165,817         40,167           41,222  

Research and development

    59,391       83,526       19,273           51,066       70,339         19,273           17,089  

General and administrative

    35,602       56,471       17,295           62,572       79,867         17,295           13,351  

Impairment of held-for-sale goodwill

                          29,612       29,612                    

Impairment on disposal group

                          10,166       10,166                   1,218  
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

     

 

 

       

 

 

 

Total operating expenses

    192,474       261,640       63,578           279,066       355,801         76,735           72,880  
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

     

 

 

       

 

 

 

Loss from operations

    (44,773     (85,993     (16,587         (172,543     (215,303       (55,138         (24,534
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

     

 

 

       

 

 

 

Other income (expense):

                       

Interest income

    2,413       1,795       313           49       362         313           27  

Interest expense

    (68     (16     (8         (50,921     (67,324       (16,403         (17,271

Other income (expense), net

    (698     (225     (5,738         1,510       (4,228       (5,738         (634
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

     

 

 

       

 

 

 

Total other income (expense), net

    1,647       1,554       (5,433         (49,362     (71,190       (21,828         (17,878
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

     

 

 

       

 

 

 

Loss before income tax benefit

    (43,126     (84,439     (22,020         (221,905     (286,493       (76,966         (42,412

Income tax benefit (expense)

    (339     3,620       (183         43,924       52,165         10,691           9,341  
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

     

 

 

       

 

 

 

Net loss

  $ (43,465   $ (80,819   $ (22,203       $ (177,981   $ (234,328     $ (66,275       $ (33,071
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

     

 

 

       

 

 

 

Net loss per common share, basic and diluted

  $ (1.27   $ (2.19   $ (0.58       $ (1.41             $ (0.26
 

 

 

   

 

 

   

 

 

       

 

 

             

 

 

 

 

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Table of Contents
    Annual Periods           Interim Periods  
    Predecessor           Successor     Combined           Predecessor           Successor  

(in thousands, except per
share data)

  Year Ended
December 31,
2018
    Year Ended
December 31,
2019
    Period from
January 1, 2020
to March 31,
2020
          Period from
April 1, 2020 to
December 31,
2020
    Pro Forma
Year Ended
December 31,
2020 (1)
          Pro Forma
Three Months
Ended
March 31,
2020 (1)
          Three Months
Ended
March 31,
2021
 
                                  (Unaudited)           (Unaudited)           (Unaudited)  

Pro forma as adjusted net loss per common share, basic and diluted (2)

                                       $ (1.59 )             $ (0.21
             

 

 

           

 

 

 

Weighted-average common shares used in computing basic and diluted net loss per common share

            34,248               36,892               38,369           126,235                                              126,117  
 

 

 

   

 

 

   

 

 

       

 

 

             

 

 

 

Pro forma as adjusted weighted-average common shares used in computing basic and diluted net loss per common share(2)

                137,638               137,521  
           

 

 

         

 

 

 

 

(1)

For the purpose of performing a comparison to the Predecessor’s year ended December 31, 2019, we prepared Unaudited Pro Forma Combined Supplemental Financial Information for the year ended December 31, 2020, which gives effect to the Take-Private Transaction, as if it had occurred on January 1, 2020 (the “Unaudited Pro Forma Combined 2020 Period”). For the purpose of performing a comparison to the Predecessor’s three months ended March 31, 2021, we prepared Unaudited Pro Forma Combined Supplemental Financial Information for the three months ended March 31, 2020, which gives effect to the Take-Private Transaction, as if it had occurred on January 1, 2020 (the “Unaudited Pro Forma Interim 2020 Period”). The Unaudited Pro Forma Combined 2020 Period and Unaudited Pro Forma Interim 2020 Period are being discussed herein for informational purposes only and do not reflect any operating efficiencies or potential cost savings that may result from the consolidation of operations. The amounts in the Predecessor and Successor columns do not total to the amounts in the unaudited pro forma combined column due to the adjustments made in preparing the Unaudited Pro Forma Combined 2020 Period, which is described in “Unaudited Pro Forma Combined Financial Data” and “Management’s Discussion and Analysis of Financial Conditions and Results of Operations.”

(2)

The pro forma as adjusted data gives effect to (i) the Take-Private Transaction and (ii) this offering and the application of the net proceeds therefrom as more fully described in “Use of Proceeds,” including the effect of the repayment of $224.7 million of outstanding borrowings under our Credit Facilities, net of fees.

 

    Annual Periods           Interim Periods  
    Predecessor           Successor           Predecessor           Successor  
(in thousands)   Year Ended
December 31,
2018
    Year Ended
December 31,
2019
    Period from
January 1,
2020 to
March 31,
2020
          Period from
April 1, 2020
to December 31,
2020
          Three
Months
Ended
March 31,
2020
          Three
Months
Ended
March 31,
2021
 

Non-GAAP Financial Data (unaudited):

                     

Revenue

  $ 209,544     $ 258,473     $ 71,389         $ 230,673       $ 71,389         $ 93,980  

Fair value adjustments to deferred revenue in connection with purchase accounting

                          22,751                   4,758  
 

 

 

   

 

 

   

 

 

       

 

 

     

 

 

       

 

 

 

Allocated Combined Receipts (1)

  $   209,544     $   258,473     $   71,389         $     253,424       $     71,389         $   98,738  
 

 

 

   

 

 

   

 

 

       

 

 

     

 

 

       

 

 

 

 

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(1)

“Allocated Combined Receipts” is defined as the combined receipts of our Company and companies that we have acquired allocated to the period of service delivery. We calculate Allocated Combined Receipts as the sum of (i) revenue and (ii) the impact of fair value adjustments to acquired unearned revenue related to the Take-Private Transaction and the Certica Holdings, LLC (“Certica”) acquisition on December 22, 2020 that we do not believe are reflective of our ongoing operations. For a reconciliation of Allocated Combined Receipts to revenue, the most directly comparable measure calculated and presented in accordance with GAAP, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Financial Measures — Allocated Combined Receipts.”

 

     Successor  
            As Adjusted (1)  
(in thousands)    As of
March 31,
2021
     As of
March 31,
2021
 
    

(Unaudited)

 

Consolidated Balance Sheet Data:

     

Cash, cash equivalents and restricted cash

   $ 87,732      $ 89,808  

Working capital, excluding deferred revenue (unaudited)

     116,598        117,282  

Total assets

     2,109,100        2,109,100  

Deferred revenue

     155,440        155,440  

Total debt, including current portion

     778,081        550,010  

Total liabilities

     1,052,084        824,013  

Total stockholders’ equity

     1,057,016        1,285,087  

 

(1)

Reflects our sale of 12,500,000 shares of common stock in this offering at an assumed initial public offering price of $20.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us and the application of the net proceeds from this offering to repay outstanding borrowings under our Credit Facilities as set forth under “Use of Proceeds.”


 

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Risk Factors

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information contained in this prospectus, including our consolidated financial statements and the related notes thereto, before making a decision to invest in our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that affect us. If any of the following risks occur, our business, financial condition, operating results and prospects could be materially and adversely affected. In that event, the price of our common stock could decline, and you could lose all or part of your investment. The ongoing COVID-19 pandemic may also have the effect of heightening many of the risks described in this “Risk Factors” section.

Because of the following factors, as well as other factors affecting our businesses, financial condition, operating results and prospectus, past financial performance should not be considered a reliable indicator of future performance, and investors should not rely on historical trends to anticipate trends or results in the future.

Risks Related to COVID-19

We have benefitted from the U.S. federal government’s stimulus packages focused on educational initiatives approved as a result of the COVID-19 pandemic; however, there is no guarantee that additional funding will be approved, which may adversely affect our business, financial condition and results of operations.

As a result of the COVID-19 pandemic, the U.S. federal government approved certain fiscal stimulus packages, including an additional $82 billion in December 2020 and the American Rescue Plan in March 2021, which allocated $130 billion to support a reopening plan for K-12 schools and $35 billion for public Higher Education institutions to assist in reopening efforts, such as distance learning programs, the implementation of safety protocols, and emergency financial assistance. We are unable to predict the extent, implementation and effectiveness of any government-funded benefit programs and stimulus packages and the corresponding effect on demand for our learning platform or whether any further programs or stimulus packages will be adopted. If such government-funded benefit programs and stimulus packages are approved, our results may not be comparable to future periods.

Further, as a result of the stimulus packages, if potential competitors are attracted to our industry and develop and market new technologies that render our existing or future solutions less competitive, unmarketable or obsolete, our business and operating results may be adversely affected.

Our new customer acquisition and expansion and customer renewals have increased as a result of the COVID-19 pandemic and such increases in customer acquisitions and renewals may not be sustained or may reverse at any time.

We have experienced significant increases in customer acquisition and expansion and customer renewals as a result of the COVID-19 pandemic, particularly as it relates to statewide implementations of our learning platform. You should not rely on the increase in customer acquisitions and renewals in connection with the COVID-19 pandemic as an indication of our future performance. Many factors may contribute to declines in our acquisitions of customers and customer renewals in future periods, including if there is slowing demand for our learning platform, especially once the impact of the COVID-19 pandemic tapers. If our growth rate declines, investors’ perceptions of our business and the trading price of our common stock could be adversely affected.

 

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The increased adoption and usage of our platform stemming from the COVID-19 pandemic may result in interruptions, delays, or outages in our learning platform, has resulted in increased customer interactions and wait times which could result in breach of our standard customer agreements, our performance guarantees and service level standards thereunder, and will result in increased variable costs, all of which could harm our business financial condition and results of operations.

The usage and adoption of our learning platform has increased as a result of the COVID-19 pandemic and customer interactions and wait times for our customers have increased accordingly. If our customer support teams are unable to keep up with our increasing demands of our customers, customers may experience delays or interruptions in service, which could result in the breach of our standard customer agreements including performance guarantees and service level standards that obligate us to provide credits in the event of a significant disruption in our platform.

We rely upon Amazon Web Services (“AWS”) to operate certain aspects of our services and if our arrangement with AWS is unable to keep up with our increasing needs for capacity, particularly in light of the increased adoption and usage of our platform stemming from the COVID-19 pandemic, we will need to adapt our arrangement with AWS to meet increased demand. As our AWS usage demands increase, we will experience higher variable costs and such higher variable costs may disproportionately affect our flat fee arrangements and further be disproportionate to any fee increases for our services, which may harm our business, financial condition, and operating results.

The COVID-19 pandemic could materially adversely affect our business and prospects.

The severity, magnitude and duration of the COVID-19 pandemic is uncertain and rapidly changing. The COVID-19 pandemic has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place orders and shutdowns. These measures have impacted and may further impact all or portions of our facilities and workforce and the operations of our vendors and suppliers. While governmental authorities have taken measures to try to contain the COVID-19 pandemic, there is considerable uncertainty regarding such measures and potential future measures. There is no certainty that measures taken by governmental authorities will be sufficient to mitigate the risks posed by the COVID-19 pandemic, and our ability to perform critical business functions could be harmed.

In response to disruptions caused by the COVID-19 pandemic, we have implemented a number of measures designed to protect the health and safety of our workforce, proactively reduce operating costs, conserve liquidity and position us to maintain our healthy financial position. These measures include restrictions on non-essential business travel, the institution of work-from-home policies wherever feasible and the implementation of strategies for workplace safety at our facilities that remain open. We are following the guidance from public health officials and government agencies, including implementation of enhanced cleaning measures, social distancing guidelines and wearing of masks. We will continue to incur increased costs for our operations during this pandemic that are difficult to predict with certainty. There is no assurance the measures we have taken or may take in the future will be successful in managing the uncertainties caused by the COVID-19 pandemic.

While most of our operations can be performed remotely, there is no guarantee that we will be as effective while working remotely because our team is dispersed, many employees may have additional personal needs to attend to (such as looking after children as a result of school closures or caring for family members who become sick), and employees may become sick themselves and be unable to work. Decreased effectiveness of our team could adversely affect our results due to our inability to meet in person with potential customers, cancellation and inability to participate in conferences and other industry events that lead to sales generation, longer time periods to review and approve work product and a corresponding reduction in innovation, longer time to respond to performance issues with our learning platform, or other decreases in productivity that could seriously harm our business. Significant management time and resources may be diverted from our ordinary business operations in order to develop, implement and manage workplace safety strategies and conditions as we attempt to return to our facilities.

 

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As a result of the COVID-19 pandemic, we may experience difficulties in recruiting or retaining personnel, which may impact our ability to respond to our customers’ needs and fulfill contractual obligations. In addition, as a result of financial or operational difficulties that they may be experiencing, our suppliers, system integrators and channel partners may experience delays or interruptions in their ability to provide services to us or our customers, if they are able to do so at all, which could interrupt our customers’ access to our services which could adversely affect their perception of our learning platform’s reliability and result in increased liability exposure. We rely upon third parties for certain critical inputs to our business and learning platform, such as data centers and technology infrastructure. Any disruptions to services provided to us by third parties that we rely upon to provide our learning platform, including as a result of actions outside of our control, could significantly impact the continued performance of our learning platform.

The COVID-19 pandemic has also significantly increased economic uncertainty globally, and has led to record levels of unemployment in the U.S. As a result, the COVID-19 pandemic has caused an economic slowdown, and it is possible that it could cause a global recession. Concerns about the systemic impact of a potential widespread recession (in the U.S. or internationally) and geopolitical issues have led to increased market volatility and diminished growth expectations in the U.S. economy and abroad, which in turn could result in reductions in IT spending by our existing and prospective customers, reduced enrollments, and pressure on tuition rates and collection thereof. Some of our customers have experienced and may continue to experience financial hardships that, to date, have resulted in certain immaterial instances in delayed or uncollectible payments from our existing customers, and this could increase in the future. It is unclear when and how quickly the economy will recover after this unprecedented shutdown. All of these factors could have a negative impact on our revenue, cash flows and results of operations.

The severity, magnitude and duration of the COVID-19 pandemic is uncertain, rapidly changing and hard to predict and depends on events beyond our knowledge or control. These and other impacts of the COVID-19 pandemic could have the effect of heightening many of the other risks described in this “Risk Factors” section, such as those relating to our reputation and learning platform sales. We may not be able to predict or respond to all impacts on a timely basis to prevent near- or long-term adverse impacts to our results. As a result, we cannot at this time predict the impact of the COVID-19 pandemic, but it could have a material adverse effect on our business, results of operations, financial condition and cash flows.

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 $80.8 million, $22.2 million and $178.0 million in the year ended December 31, 2019 (which relates to the Predecessor), the Predecessor 2020 Period and the Successor 2020 Period, respectively. We had an accumulated deficit of $178.0 million at December 31, 2020. 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 continue to decline over time. Accordingly, we may not be able to generate

 

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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 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 platform and applications and cross-selling additional offerings into our existing customer base. Our growth today is primarily driven by new subscriptions and the related services and support bookings. 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 customers may make their decision to renew based on a number of factors, including their respective resources, pricing changes, their adoption and utilization of our applications and services, their satisfaction with our learning platform and applications, 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 platform and applications, or decrease the amount they spend with us, our revenue will decline and our business will be harmed.

If the markets for our applications develop more slowly than we expect or market conditions reduce IT spending, our growth may slow or stall as demand for our learning platform reduces, and our operating results would be harmed.

The markets for learning platforms are still evolving, and we depend on continued growth of these markets. In particular, we do not know whether the trend of adoption of cloud applications and infrastructure 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 our learning platform to new customers in Higher Education and K-12. The adoption trend for our academic customers is subject to influence from federal, state and local policymakers. 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 our learning platform does not develop as we anticipate, or does not continue to grow, or grows more slowly than we expect, our operating results would be harmed.

We have also benefited from increasing trends toward remote learning and have experienced significant revenue growth in prior periods. You should not rely on the revenue growth of any prior quarterly or annual period as an indication of our future performance. To the extent these trends slow or reverse, our sales and profitability would be adversely affected.

Additionally, concerns about the systemic impact of a potential widespread recession (in the U.S. or internationally) or geopolitical issues could lead to increased market volatility and diminished growth expectations in the U.S. economy and abroad, which in turn could result in reductions in IT spending by our existing and prospective customers, reduced enrollments, and pressure on tuition rates and collection thereof. Prolonged economic slowdowns may result in customers delaying or canceling IT projects or seeking to lower their costs by requesting us to renegotiate existing contracts on less advantageous terms or defaulting on payments due on existing contracts or not renewing at the end of existing contract terms. As a result, broadening or protracted extension of an economic downturn could harm our business, revenue, results of operations and cash flows.

We could lose customers and revenue if there are changes in the spending policies or budget priorities for government funding of colleges, universities, K-12 schools and other education providers.

Our 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

 

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or local funding for colleges, universities, schools and other education providers could cause our current and potential customers to reduce their purchases of our learning platform, 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 platform could also cause us to lose customers and revenue.

Our business may be adversely affected by changes in state educational funding, resulting from changes in legislation, both at the federal and state levels, changes in the state procurement process, changes in government leadership, declines in K-12 school enrollment, emergence of other priorities and changes in the condition of the local, state or U.S. economy. Moreover, future reductions in federal funding and the state and local tax bases could create an unfavorable environment, leading to budget shortfalls resulting in a decrease in educational funding. Any decreased funding for schools may harm our recurring and new business materially if our customers are not able to find and obtain alternative sources of funding.

Interruptions or performance problems associated with our learning platform may adversely affect our business, financial condition and results of operations.

Our continued growth depends in part on the ability of our existing and potential customers to access our learning platform and its capabilities at any time and within an acceptable amount of 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, capacity constraints due to an overwhelming number of users accessing our learning platform and its capabilities simultaneously, 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 learning platform and its capabilities become more complex and our user traffic increases. If our learning and its capabilities are unavailable or if our users are unable to access our learning platforms and its capabilities within a reasonable amount of time or at all, we may experience a loss of customers, lost or delayed market acceptance of our learning platform, delays in payment to us by customers, injury to our reputation and brand, legal claims against us, particularly potential contractual liabilities with our customers, and the diversion of our resources. In addition, to the extent that 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, financial condition and results of operations may be adversely affected.

Moreover, our standard customer agreements include performance guarantees and service level standards that obligate us to provide credits 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.

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

Our growth has placed, and will continue to place, a significant strain on our operational, financial and management infrastructure. 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 new employees, particularly technical personnel and members of our management and sales teams;

 

   

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

 

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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 renewals, enhance existing solutions, develop new solutions, 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 have expanded specific functions over time in order to scale efficiently, to improve our cost structure and help scale our business. Our need to scale our business has placed, and will continue to place, a significant strain on our administrative and operational business processes, infrastructure, facilities and other resources. Our ability to manage our operations will require significant expenditures and allocation of valuable management resources to improve internal business processes and systems, including investments in automation. Further, we expect to continue to expand our business globally, which will require additional resources and controls. If our operations, infrastructure and business processes fail to keep pace with our business and customer requirements, customers may experience disruptions in service or support or we may not scale the business efficiently, which could adversely affect our reputation and adversely affect our revenue. There is no guarantee that we will be able to continue to develop and expand our infrastructure and business processes at the pace necessary to scale the business, and our failure to do so may have an adverse effect on our business. If we fail to efficiently expand our engineering, operations, customer support, professional services, cloud infrastructure, IT and financial organizations and systems, or if we fail to implement or maintain effective internal business processes, controls and procedures, our costs and expenses may increase more than we planned or we may fail to execute on our learning platform roadmap or our business plan, any of which would likely seriously harm our business, operating results and financial condition.

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 platform 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.

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

We intend to expand by making acquisitions that could be material to our business. We have completed four acquisitions since 2017 and our ability as an organization to successfully acquire and integrate technologies or businesses is 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

 

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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 successfully selling, or may be unable to 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;

 

   

if we incur debt to fund such acquisitions, such debt may subject us to material restrictions on our ability to conduct our business and financial maintenance covenants, and materially increase our interest expense;

 

   

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 use net operating losses to offset future taxable income may be subject to limitations.

As of December 31, 2020, we had approximately $481.0 million and $474.8 million of federal and state net operating loss carryforwards, respectively, available to reduce future taxable income that will begin to expire in 2028 for federal purposes and 2020 for state tax purposes. Unused federal net operating loss carryforwards for the tax year ended December 31, 2017 and prior years could expire unused and be unavailable to offset future income tax liabilities. Under the Tax Cuts and Jobs Act (the “TCJA”), as modified by the CARES Act, federal net operating losses incurred after December 31, 2017 and in future years may be carried forward indefinitely, but the deductibility of such federal net operating losses after 2020 is limited to 80% of current year taxable income in any given year. The CARES Act temporarily repealed the 80% taxable income limitation for tax years beginning before January 1, 2021; net operating loss carryforwards generated after December 31, 2017 and carried forward to taxable years beginning after December 31, 2020 will be subject to the 80% limitation. Also, under the CARES Act, net operating losses arising in 2018, 2019 and 2020 can be carried back 5 years. It is

 

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uncertain if and to what extent various states will conform to the TCJA or the CARES Act. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50% change, by value, in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income or taxes may be limited. We may experience ownership changes in the future as a result of subsequent shifts in our stock ownership, some of which may be outside of our control. If an ownership change occurs and our ability to use our net operating loss carryforwards is materially limited, it would harm our future operating results by effectively increasing our future tax obligations.

Changes in our pricing models could adversely affect our revenue, gross profit and financial position.

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 September 2020, we raised our subscription prices for North America. As the market for our 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 adoption of our learning platform 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.

The length and unpredictability of the sales cycle for our learning platform 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 subscription agreement 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 our 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 our 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 learning platform.

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 platform and applications could be harmed.

To increase the number of customers and increase the market share of our platform and applications, we will need to continue to develop our sales and marketing operations, including our domestic and international sales force. 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 may vary in the future. Our business will be harmed if our efforts do not generate a correspondingly significant increase in revenue. We may not achieve anticipated

 

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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, and the risk of new established entrants, offering learning platforms, which may harm our ability to gain new customers, retain existing customers and grow our business.

The learning platform market is evolving and highly competitive, particularly in the Higher Education and K-12 market. 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 platforms. With respect to LMS, companies such as Blackboard, D2L, Moodle, and Schoology have offerings that compete with certain of our products across our different end markets. We may also in the future face competition from new entrants to our market, some of whom would be able to invest massive resources to develop a unified platform that competes directly with ours or to acquire one or more of our competitors to compete with us. If existing or new companies develop or market a learning platform similar to ours, develop an entirely new software platform for the Higher Education and K-12 sector, acquire one of our existing competitors or form a strategic alliance with one of our competitors or other industry participants, our ability to compete effectively could be significantly impacted, which would have a material adverse effect on our business, results of operations and financial condition.

Competition could significantly impede our ability to sell or renew subscriptions to our 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 solutions less competitive, unmarketable or obsolete. In addition, if these competitors develop platforms and applications with similar or superior functionality to our learning platform, 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.

Certain 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 learning platform 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.

Joint ventures, platform partnerships, and strategic alliances may have a material adverse effect on our business, results of operations and prospects.

We may enter into joint ventures, platform partnerships, and strategic alliances as part of our long-term business strategy, including with current and future competitors. Joint ventures, platform partnerships, strategic alliances, and other similar arrangements involve significant investments of both time and resources, and there can be no assurances that they will be successful. They may present significant challenges and risks, including that they may not advance our business strategy, we may get an unsatisfactory return on our investment or lose some or all of our investment, they may distract management and divert resources from our core business, they

 

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may expose us to unexpected liabilities, or we may choose a partner that does not cooperate as we expect them to and that fails to meet its obligations or that has economic, business, or legal interests or goals that are inconsistent with ours.

Entry into certain joint ventures, platform partnerships, or strategic alliances now or in the future, particularly if entered into with a current and future competitor, may be subject to government regulation, including review by U.S. or foreign government entities. If a joint venture or similar arrangement were subject to regulatory review, such regulatory review might limit our ability to enter into the desired strategic alliance and thus our ability to carry out our long-term business strategy.

As our joint ventures, platform partnerships, and strategic alliances come to an end or terminate, we may be unable to renew or replace them on comparable terms, or at all. In the event we enter into an arrangement with a particular partner, we may be less likely (or unable) to work with one or more direct competitors of our partner with which we would have worked absent the arrangement. We may have interests that are different from our joint venture partners and/or which may affect our ability to successfully collaborate with a given partner. Similarly, one or more of our partners in a joint venture, platform partnership, or strategic alliance may independently suffer a bankruptcy or other economic hardship that negatively affects its ability to continue as a going concern or successfully perform on its obligation under the arrangement. Further, some of our strategic partners may offer competing products and services or work with our competitors. As a result of these and other factors, many of the companies with which we may enter into joint ventures, platform partnerships, or strategic alliances with may choose to pursue alternative technologies and develop alternative products and services in addition to or in lieu of our learning platform, either on their own or in collaboration with others, including our competitors. If we are unsuccessful in establishing or maintaining our relationships with these partners, our ability to compete in a given marketplace or to grow our revenue would be impaired, and our results of operations may suffer. Even if we are successful in establishing and maintaining these relationships with our partners, we cannot assure you that these relationships will result in increased customer usage of our learning platform or increased revenue.

Further, winding down joint ventures, platform partnerships, or other strategic alliances can result in additional costs, litigation, and negative publicity. Any of these events could adversely affect our business, financial condition, results of operations, and growth prospects.

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 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.

Our expense reduction plan may not produce the savings expected and may negatively impact our other initiatives and efforts to grow our business.

We are consistently exploring measures aimed at improving our profitability and maintaining flexibility in our capital resources, including the introduction of our expense reduction plan. We restructured our mix of onshore and offshore research and development through a variety of initiatives, including moving a portion of our development efforts to Budapest, Hungary. Additionally, we simplified our organizational design and aligned the organization with our sole focus on serving education, eliminating low ROI program expenses, and closing and consolidating facilities internationally and within the U.S. We expect to continue to take measures to improve our profitability and cash flows from operating activities. However, there can be no assurance that the cost control measures will be successful. In addition, these and any future spending reductions, if any, may negatively impact our other initiatives or our efforts to grow our business, which may negatively impact our future results of operations and increase the burden on existing management, systems, and resources.

 

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Our business outside the U.S. exposes us to risks associated with international operations.

For 2020, 19% of our revenue was derived from outside the U.S. We opened our international headquarters in London, England in 2014 and have offices in Sydney, Australia, Hong Kong, Sao Paulo, Brazil, and Budapest, Hungary. Our international efforts strategy focuses on the United Kingdom (the “U.K.”), the Nordics, Australia, and New Zealand, and will be bolstered in the future in growing markets such as the Benelux region, Spain, Singapore, Philippines, and Brazil. 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 (the “EU”);

 

   

technical or latency issues in delivering our platform and applications;

 

   

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

 

   

unexpected changes in regulatory requirements, taxes or trade laws;

 

   

differing labor regulations, especially in the EU, where labor laws are generally more advantageous to employees as compared to the U.S., including deemed hourly wage and overtime regulations in these locations;

 

   

challenges inherent in efficiently managing an increased number of employees over large geographic distance, 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 of 1977, as amended (the “FCPA”) and the U.K. Bribery Act 2010, 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.

 

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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 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. We also are dependent on the continued service of our existing software engineers and information technology personnel because of the complexity of our learning platform, technologies and infrastructure.

Further, we have recently experienced significant changes to our executive leadership team. In 2020, we named several new key leaders, including a Chief Executive Officer and a Chief Financial Officer. These types of management changes have the potential to disrupt our operations due to the operational and administrative inefficiencies, added costs, increased likelihood of turnover, and the loss of personnel with vital institutional knowledge, experience and expertise, which could result in significant disruptions to our operations. In addition, we must successfully integrate the new executive leadership team members within our organization in order to achieve our operating objectives, and changes in key leadership positions may temporarily affect our financial performance and results of operations as new leadership becomes familiar with our business.

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. In addition, as remote working arrangements continue to become normalized, we anticipate increased competition in attracting and retaining the professionals we need, particularly in Utah, from companies located elsewhere in the U.S. and internationally. For instance, companies based in Silicon Valley may offer remote working arrangements and compete for the same employees in our target markets. 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 openness, relationships, equality, ownership 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, we may find it difficult to maintain these important aspects of our company culture. If we fail to maintain our company culture, our business may be harmed.

 

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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 markets 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 err- 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;

 

   

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 or delays on our platform or applications;

 

   

cyber-attacks on or security breaches of our platform and applications or the platforms of certain of our subcontractors; 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 learning platform 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.

Our billing and collections processing activities are complex and time-consuming, and any delay in transmitting and collecting payment could have an adverse effect on our future revenue.

Billing for our learning platform is complex, time-consuming and expensive. Depending on the billing arrangement and applicable law, we often bill various entities within a school district, all of which may have different billing requirements. In addition, because many of our customers are educational institutions that provide fundamental services, it is difficult to cease service when bills are not paid, which limits our collection methods. These factors create increased risk in our collection efforts, including long collection cycles and the risk that we may never collect at all, either of which could adversely affect our business, financial condition and results of operations.

Risks Related to our Technology and our Intellectual Property Rights

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 platform to our customers, resulting in customer dissatisfaction, damage to our reputation, loss of customers and harm to our business.

AWS provides a distributed computing infrastructure platform for business operations, or what is commonly referred to as a cloud computing service. We have designed our learning platform, software and computer

 

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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 learning platform as well as delays and additional expenses in arranging new facilities and services.

Additionally, if our arrangement with AWS is unable to keep up with our increasing needs for capacity, customers may experience delays or interruptions in their use of our learning platform. We plan to continue adapting our arrangement with AWS to meet increased demand, but we may be unable to do so in a timely manner. As our AWS usage demands increase, we will experience higher variable costs and such higher variable costs may disproportionately affect our flat fee arrangements and further be disproportionate to any fee increases for our services, which may harm our business, financial condition, and operating results.

We utilize third-party data center hosting facilities operated by AWS, located in various sites within the states of Virginia, Ohio and Oregon. For international customers, we utilize third-party data center hosting facilities operated by AWS located in Dublin, Ireland, Frankfurt, Germany, Sydney, Australia, Montreal, Canada 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 or negatively impact our brand.

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

Our future success depends on our ability to adapt and enhance our learning platform. 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 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 learning platform. Further, our competitors may 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 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 platforms and related applications at lower prices, more efficiently, more conveniently or more securely, such technologies could adversely affect our ability to compete.

 

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

A significant percentage of our customers choose to integrate our applications and platform with certain capabilities of third-party publishers and software providers using 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 the use of their applications and software 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 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 or other data is reported to have occurred or information is otherwise actually obtained, our 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 platform involves the storage, transmission and processing of our customers’ data, including personal or identifying information regarding their students or employees. Our systems that house this data are potentially vulnerable to security breaches from inadvertent or intentional actions by our employees, contractors, consultants, business partners, and/or other third parties, or from cyber-attacks by malicious third parties (including the deployment of harmful malware, ransomware, denial-of-service attacks, social engineering and other means to affect service reliability and threaten the confidentiality, integrity and availability of information), which may compromise our system infrastructure or lead to the loss, destruction, alteration or dissemination of, or damage to, our data. For example, companies have experienced an increase in phishing and social engineering attacks from third parties in connection with the COVID-19 pandemic. Also, due to the COVID-19 pandemic, substantially all of our employees are working remotely. As a result, we may have increased cyber security and data security risks, due to increased use of home Wi-Fi networks and virtual private networks, as well as increased disbursement of physical machines. Cyber-attacks and other accidental or malicious internet-based activities continue to increase generally, and cloud-based platform providers of software and services have been targeted by bad actors. If any unauthorized access to or security breaches of our platform or applications, 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 or unauthorized processing 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. Moreover, failure to maintain effective internal accounting controls related to data security breaches and cybersecurity in general could impact our ability to produce timely and accurate financial statements and could subject us to regulatory scrutiny.

 

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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 or confidential information or the transmission of such information over the internet, our business will be harmed. Customers’ concerns about security or privacy may deter them from using our platform and applications for activities that involve personal or other sensitive or confidential information.

Although we maintain liability insurance for liabilities incurred as a result of some security and privacy incidents and 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 sabotage or obtain unauthorized access to 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 learning 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 (the “FTC”), federal, state, local, or foreign regulators, and private litigants.

Our use of open source software could impose limitations on our ability to commercialize our learning platform or 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. The open source software used in our applications may contain real or perceived defects or security vulnerabilities which could adversely affect our reputation or subject us to claims or disputes if our customers are specifically targeted by attackers exploiting such vulnerabilities in our applications. Use and distribution of open source software may entail greater risks than use of third-party commercial software. Open source software licensors generally do not provide warranties or other contractual protections regarding infringement, misappropriation or other violation claims or the quality of the code. In addition, certain open source licenses, like the GNU Affero General Public License (the “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 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, or make generally available, in source code form, all or a portion of our proprietary source code, any of which could materially and adversely affect our business and operating results.

 

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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 proprietary software in a manner that will not subject us to liability, or in a manner that is consistent with our current policies and procedures, and we may inadvertently use open source software in a manner that we do not intent or that could expose us to claims for breach of contract or intellectual property infringement, misappropriation or other violation.

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 platform and applications or subject us to possible litigation.

To promote our open platform philosophy, we make 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.

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, subject us to financial penalties and liability under our SLAs, result in a loss of customers and harm our business and operating results.

Real or perceived errors, failures, or bugs in our learning platform 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, bugs or defects may not be found in our platform or applications until after they are deployed to our customers. We have discovered and expect we will continue to discover software errors, failures, bugs or defects in our platform or applications and anticipate that certain of these errors, failures, bugs or defects will only be discovered and remediated after deployment to customers. Real or perceived errors, failures, bugs or defects in our platform and

 

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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 significant 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.

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 purchase 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 learning platform or services 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 or violation 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 learning platform. 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 learning platform, 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 applications if they are concerned that such applications may infringe or violate 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 learning platform or services 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

 

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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 and proprietary rights.

Our success is dependent, in part, upon protecting our proprietary technology. We rely on a combination of patents, copyrights, trademarks, service marks, trade secret laws and contractual restrictions to establish and protect our intellectual property and proprietary rights in our applications and services. However, the steps we take to protect our intellectual property and proprietary rights may be inadequate. We will not be able to protect our intellectual property and proprietary rights if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property and proprietary rights. Any of our trademarks or other intellectual property or proprietary 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 and proprietary 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 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, including countries in which our solutions are sold, may not be as protective of intellectual property and proprietary rights as those in the U.S., and mechanisms for enforcement of intellectual property and proprietary 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, or violating, our technology and intellectual property and proprietary rights.

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 learning platform, and we may be unable to prevent this competition.

We may be required to spend significant resources to monitor and protect our intellectual property and proprietary rights. Litigation may be necessary in the future to enforce our intellectual property and proprietary 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 and proprietary rights. Furthermore, our efforts to enforce our intellectual property and proprietary rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property and proprietary 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 learning platform, impair the functionality of our learning platform, delay introductions of new features or enhancements, result in our substituting inferior or more costly technologies into our learning platform, or injure our reputation.

 

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Incorrect or improper use of our solutions or our failure to property train customers on how to use our solutions could result in customer dissatisfaction and negatively affect our business.

Our solutions are complex and the proper use of such solutions requires training of the customer and end user. If our solutions are not used correctly or as intended, inadequate performance may result. Because our customers rely on our solutions, services and maintenance support to manage a wide range of operations, the incorrect or improper use of our solutions, our failure to properly train customers on how to efficiently and effectively use our solutions, or our failure to properly provide maintenance services to our customers may result in negative publicity or legal claims against us.

Risks Related to Laws and Regulation

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

Privacy and information security are significant issues in the U.S. and the other jurisdictions where we offer our learning platform. The legislative and regulatory framework for privacy and security issues worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future. The education technology community has been the subject of particular scrutiny. For instance, in 2019, a letter was circulated by certain members of the U.S. Senate to various educational technology companies, including us, reiterating its concerns about the amount of data being collected regarding students and the potential safety and security risks to children. Our handling of data is subject to a variety of laws and regulations, including laws and regulations enforced by various government agencies, such as the FTC and various federal, state, local and foreign agencies. We collect personal information (“PI”) and other data from our employees, customers and users. We use this information to provide services to our customers and users and to operate, support, expand and improve our business. We may also share customers’ or users’ PI with third parties as allowed by applicable law and agreements, as authorized by the customer, or as described in our privacy policies.

The U.S. federal and various state and foreign governments have adopted or proposed limitations on the collection, distribution, use storage and other processing of PI. In the U.S., the FTC and many state attorneys general are applying federal and state consumer protection laws to impose standards on the online collection, use, dissemination, processing and security of data. Furthermore, many states have enacted laws that apply directly to the operators of online services that are intended for Higher Education and K-12 purposes or are proposing legislation to mandate privacy and data security obligations on the collection, use, disclosure, processing and security of PI generally. For example, the California Consumer Privacy Act of 2018 (the “CCPA”), which took effect on January 1, 2020, imposes a number of privacy and security obligations on companies who collect, use, disclose or otherwise process PI of California residents. The law broadly defines personal information, gives California residents expanded privacy rights, allows consumers to opt out of certain data sharing with third parties, and provides for civil penalties for violations, and includes a new cause of action for data breaches. Moreover, a new privacy law, the California Privacy Rights Act (the “CPRA”) was approved by Californians during the November 3, 2020 election. The CPRA will significantly modify the CCPA, and will impose additional data protection obligations on companies doing business in California, potentially resulting in further complexity. The effects of this legislation are potentially far-reaching and may require us to modify our data management practices and to incur substantial expense in an effort to comply.

Many foreign countries and governmental bodies, including the EU, Canada, Australia and other jurisdictions, have laws and regulations concerning the collection, use, disclosure, processing and security of PI obtained from their residents or by businesses operating within their jurisdiction. These laws and regulations often are more restrictive than those in the U.S. laws and regulations in these jurisdictions may apply broadly to the collection, use, storage, disclosure, processing and security of data that identifies or may be used to identify

 

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or locate an individual and other personal information, such as names, email addresses and Internet Protocol addresses and other online identifiers. We publicly post our privacy policies and practices concerning our collection, use, disclosure and other processing of PI. 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.

In the EU, where companies must meet specified privacy and security standards, the General Data Protection Regulation (“GDPR”) became enforceable on May 25, 2018. The GDPR introduced new and enhanced data protection requirements throughout the EU and significant penalties of up to the greater of 4% of worldwide turnover or €20 million for violations of data protection rules. The GDPR notably has extra-territorial reach and has a significant impact on ‘data controllers’ and ‘data processors’ either with an establishment in the EU, or which offer goods or services to EU data subjects or monitor EU data subjects’ behavior within the EU. We are maintaining our ongoing compliance with the GDPR. As GDPR enforcement evolves, we may find it necessary to establish systems to maintain EU-origin data in the European Economic Area (the “EEA”), or to amend agreements with our customers which may involve substantial expense and distraction from other aspects of our business. In addition, data protection authorities in each member state of the EU have the ability to interpret certain aspects of the GDPR, which has the potential to create inconsistencies on a country-by-country basis. Ongoing implementation of the GDPR could require us to change certain business practices and result in increased costs. Further, the EU’s draft proposed Regulation on Privacy and Electronic Communications (the “ePrivacy Regulation”) is in the process of being finalized by the Council of the EU (with support from the Committee of Permanent Representatives), and anticipated to become subject to trilogue negotiations (between the Council of the EU, the European Parliament and the European Commission) later in 2021. Although it remains under debate, drafts of the proposed ePrivacy Regulation would alter rules on third-party cookies, web beacons and similar technologies, and significantly increase penalties for non-compliance. The ePrivacy Regulation is unlikely to come into effect for several more years, and we cannot yet determine the impact such future laws, regulations, and standards may have on our business.

The GDPR principles on the processing of PI have been implemented into laws enforceable in the U.K. by the Data Protection Act 2018 and the U.K. GDPR. The European Commission is currently considering whether to issue an ‘adequacy decision’ in favor of the U.K. On December 24, 2020, the U.K. government and the European Commission provisionally agreed a trade and cooperation agreement governing their future relationship, which has introduced a “bridge period” from January 1, 2021 until June 30, 2021, or, if earlier, the date upon which an adequacy decision is issued in favor of the U.K. In this bridge period, transfers of PI from the EEA to the U.K. do not need to be legitimized by a data transfer mechanism. However, if an adequacy decision is not issued in favor of the U.K., then from the expiry of the bridge period, the U.K. will be deemed a “third country” for the purposes of EU data protection law and additional mechanisms may be required to legitimize transfers of PI from the EEA to the U.K. The U.K.’s exit from the EU may therefore lead to an increase in data protection compliance costs.

On July 16, 2020, the Court of Justice of the European Union (the “CJEU”) issued its landmark judgment in Data Protection Commissioner v Facebook Ireland Limited, Maximillian Schrems (Case C-311/18) (“Schrems II”), which invalidated the EU-U.S. Privacy Shield with immediate effect, while upholding the European Commission’s standard contractual clauses (“SCCs”) as a means for legitimizing the transfer of PI by U.S. companies doing business in the EU from the EEA to the U.S. While the use of such SCCs was upheld, the CJEU held that compliance with the SCCs must be closely monitored by parties and the data exporter relying on them must perform a case-by-case assessment as to whether the laws of the country of importation of personal data provide adequate protection, as under EU data protection laws. The decision in Schrems II is likely to impact our current and planned business activities which involve transfers of PI outside of the EEA (both intra-group and to third parties) and will require ongoing monitoring of the latest legal and regulatory developments and as such, may involve compliance costs to address any changes required. 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 uncertainty around the legality of cross-border data transfer methods on

 

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which we rely. Ongoing legal challenges to the SCCs may render either or both methods invalid or could result in further limitations on the ability to transfer data across borders. Additionally, certain countries have passed or are considering passing laws requiring local data residency, and there are also plans to replace the SCCs with a revised set of clauses during the course of 2021, a draft of which were published by the European Commission on November 12, 2020 and for which comments were accepted until December 10, 2020.

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, particularly in our industry, 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 learning 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 PI 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 materially adversely affect our business.

We also expect that this will continue to be a point of focus for legislation and there will continue to be new proposed laws, regulations and industry standards concerning privacy, data protection and information security in the U.S., the EU and other 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, disclose or process 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 or update 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 PI for certain purposes. In addition, a foreign government could require that any PI 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 learning platform or restrict our customers’ ability to collect and use email addresses, page viewing data and personal information, which may reduce demand for our learning platform. 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, disclosure and processing 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 (“FERPA”) generally prohibits educational institutions that receive federal funding from disclosing personally identifiable information (“PII”) from a student’s education

 

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records without the student’s consent. Through our learning platform, 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. 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 also subject to the Children’s Online Privacy Protection Act (“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. Our learning platform is directed, in part, at children under the age of 13. Through our learning platform, 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 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.

In addition to government regulation, privacy advocates and industry groups may propose self-regulatory standards, such as the Student Privacy Pledge, from time to time. These and other industry standards may legally or contractually apply to us, or we may elect to comply with such standards or to facilitate our customer’s compliance with such standards. Following these privacy standards and adapting to future standards involves significant operational challenges. In addition, any inability or decision not to join these industry initiatives could damage our reputation, inhibit sales, slow our sales cycles and adversely affect our business.

Because the interpretation and application of many privacy and data protection laws along with contractually imposed industry standards are uncertain, it is possible that these laws may be interpreted and applied in a manner that is inconsistent with our existing data management practices or the features of our learning platform and platform capabilities. If so, in addition to the possibility of fines, lawsuits and other claims and penalties, we could be required to fundamentally change our business activities and practices or modify our learning platform and platform capabilities, which could have an adverse effect on our business. Any inability to adequately address privacy and security concerns, even if unfounded, or comply with applicable privacy and data security laws, regulations and policies, could result in additional cost and liability to us, damage our reputation, inhibit sales, and adversely affect our business. Furthermore, the costs of compliance with, and other burdens imposed by, the laws, regulations and policies that are applicable to the businesses of our customers may limit the use and adoption of, and reduce the overall demand for, our learning platform. Privacy and data security concerns, whether valid or not valid, may inhibit market adoption of our learning platform, particularly in certain industries and foreign countries. If we are not able to adjust to changing laws, regulations and standards related to the Internet, our business may be harmed.

 

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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 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 (“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 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 U.S. 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 learning platform to store or process PI, including sensitive PI, 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.

Changes in tax laws or regulations that are applied adversely to us or our customers could increase the costs of our learning platform 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 interpreted, changed, modified or applied adversely to us. For example, the TCJA, as modified by the CARES Act, enacted many significant changes to the U.S. tax laws. Future guidance from the U.S. Internal Revenue Service and other tax authorities with respect to the TCJA, the CARES Act or other tax legislation may affect us, and certain aspects of any such tax legislation could be repealed or modified in future legislation. In addition, it is

 

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uncertain if and to what extent various states will conform to the TCJA, the CARES Act or any newly enacted federal tax legislation. Changes in corporate tax rates, the realization of net deferred tax assets relating to our operations, the taxation of foreign earnings, and the deductibility of expenses under the TCJA, the CARES Act or future reform legislation could have a material impact on the value of our deferred tax assets, could result in significant one-time charges, and could increase our future U.S. tax expense. 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 purchase our learning platform 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 learning platform. Any or all of these events could harm our business and operating results.

In addition, the public schools we contract with are financed with government funding from federal, state and local taxpayers. Our business may be adversely affected by changes in tax laws, statutes, rules, regulations, or ordinances or by diminished tax revenues which could lead to significant declines in public school funding. The results of federal, state and local elections can also result in shifts in education policy and the amount of funding available for various education programs. Any decreased funding for schools may harm our recurring and new business materially if our customers are not able to find and obtain alternative sources of funding.

We are subject to export controls and economic sanctions laws, and our customers and channel partners are subject to import controls that could subject us to liability if we are not in full compliance with applicable laws.

Certain of our solutions are subject to U.S. export controls and we are permitted to export such solutions to certain countries outside the U.S. only by first obtaining an export license from the U.S. government or by utilizing an existing export license exception. Obtaining the necessary export license for a particular export may be time-consuming and may result in the delay or loss of sales opportunities. Furthermore, U.S. export control laws and economic sanctions, including economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Control, prohibit the sale or supply of our solutions and services to U.S. embargoed or sanctioned countries, regions, governments, persons and entities.

Although we take precautions to prevent our solutions from being provided in violation of U.S. export control and economic sanctions laws, our solutions may have been in the past, and could in the future be, provided inadvertently in violation of such laws. If we were to fail to comply with U.S. export law requirements, U.S. customs regulations, U.S. economic sanctions or other applicable U.S. laws, we could be subject to substantial civil and criminal penalties, including fines, incarceration for responsible employees and managers and the possible loss of export or import privileges. U.S. export controls, sanctions and regulations apply to our channel partners as well as to us. Any failure by our channel partners to comply with such laws, regulations or sanctions could have negative consequences, including reputational harm, government investigations and penalties.

Also, various countries, in addition to the United States, regulate the import and export of certain encryption and other technology, including import and export licensing requirements, and have enacted laws that could limit our ability to distribute our products or could limit our end-customers’ ability to implement our products in those countries. Changes in our solutions or changes in export and import regulations may create delays in the introduction of our solutions into international markets, prevent our customers with international operations from deploying our solutions globally or, in some cases, prevent the export or import of our solutions to certain countries, governments or persons altogether. In addition, any change in export or import regulations, economic sanctions or related legislation, shift in the enforcement or scope of existing regulations, or change in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use of our solutions by, or in our decreased ability to export or sell our solutions to, existing or potential customers with international operations. Any decreased use of our solutions or limitation on our ability to export or sell our solutions would likely adversely affect our business, financial condition and operating results.

 

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We are subject to anti-corruption, anti-bribery and similar laws, and non-compliance with such laws can subject us to criminal penalties or significant fines and harm our business and reputation.

We are subject to anti-corruption and anti-bribery and similar laws, such as the FCPA, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, the U.K. Bribery Act 2010 and other anti-corruption, anti-bribery and anti-money laundering laws in countries in which we conduct activities. Anti-corruption and anti-bribery laws have been enforced aggressively in recent years and are interpreted broadly and prohibit companies and their employees and agents from promising, authorizing, making, offering, soliciting, or accepting, directly or indirectly, improper payments or other improper benefits to or from any person whether in the public or private sector. As we increase our international sales and business, our risks under these laws may increase. Noncompliance with these laws could subject us to investigations, sanctions, settlements, prosecution, other enforcement actions, disgorgement of profits, significant fines, damages, other civil and criminal penalties or injunctions, adverse media coverage and other consequences. Any investigations, actions or sanctions could adversely affect our business, results of operations and financial condition. These laws also require that we keep accurate books and records and maintain internal controls and compliance procedures designed to prevent any such actions. While we have policies and procedures to address compliance with such laws, we cannot assure you that our third-party business partners or intermediaries, employees, representatives, contractors, and agents will not take actions in violation of our policies and applicable law, for which we may be ultimately held responsible.

Our failure to comply with a variety of complex procurement rules and regulations could damage our reputation and result on our being liable for penalties, including termination of our government contracts, disqualification from bidding on future government contracts, suspension or debarment from government contracting.

We must comply with laws and regulations relating to government contracts, which affect how we do business with our customers and may impose added costs on our business. Some significant laws and regulations that affect us include:

 

   

federal, state and local laws and regulations (including the Federal Acquisition Regulation) regarding the formation, administration and performance of government contracts;

 

   

the Civil False Claims Act (and similar state and local false claims acts), which provides for substantial civil penalties for violations, including for submission of a false or fraudulent claim to the U.S. government for payment or approval; and

 

   

federal, state and local laws and regulations regarding procurement integrity including gratuity, bribery and anti-corruption requirements as well as limitations on political contributions and lobbying.

Any failure to comply with applicable laws and regulations could result in contract termination, damage to our reputation, price or fee reductions or suspension or debarment from contracting with the government, each of which could materially adversely affect our business, results of operations and financial condition.

In addition, federal, state and local government entities may revise existing contract rules and regulations or adopt new contract rules and regulations at any time and may also face restrictions or pressure regarding the type and amount of services that they may obtain from private contractors. Any of these changes could impair our ability to obtain new contracts or renew contracts under which we currently perform when those contracts are eligible for recompetition.

Any future litigation against us could damage our reputation and be costly and time-consuming to defend.

We may become subject, from time to time, to legal proceedings and claims that arise in the ordinary course of business, such as claims brought by our customers in connection with commercial disputes or employment

 

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claims made by current or former employees, including as a result of actions taken by us in response to the COVID-19 pandemic. Litigation might result in reputational damage and substantial costs and may divert management’s attention and resources, which might adversely impact our business, overall financial condition and results of operations. Insurance might not cover such claims, might not provide sufficient payments to cover all the costs to resolve one or more such claims and might not continue to be available on terms acceptable to us. Moreover, any negative impact to our reputation will not be adequately covered by any insurance recovery. A claim brought against us that is uninsured or underinsured could result in unanticipated costs, thereby reducing our results of operations and leading analysts or potential investors to reduce their expectations of our performance, which could reduce the value of our common stock. While we currently are not aware of any material pending or threatened litigation against us, we can make no assurances the same will continue to be true in the future.

Risks Related to Being a Public Company

The requirements of being a public company may strain our resources and distract our management, which could make it difficult to manage our business.

As a public company, we will incur legal, accounting and other expenses that we did not incur as a private company. We will become subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the Sarbanes-Oxley Act, the listing requirements of NYSE and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business, financial condition, results of operations, cash flows and prospects. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal controls and procedures for financial reporting. Furthermore, the need to re-establish the corporate infrastructure demanded of a public company may divert our management’s attention from implementing our growth strategy, which could prevent us from improving our business, financial condition, results of operations, cash flows and prospects. We have made, and will continue to make, changes to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a public company. However, the measures we take may not be sufficient to satisfy our obligations as a public company. In addition, these rules and regulations will increase our legal and financial compliance costs and will 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 incur substantial costs to maintain the same or similar coverage. These additional obligations could have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects.

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of our management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and there could be a material adverse effect on our business, financial condition, results of operations, cash flows and prospects.

 

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As a result of becoming a public company, we will be obligated to develop and maintain proper and effective internal control over financial reporting in order to comply with Section 404 of the Sarbanes-Oxley Act. We may not complete our analysis of our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in us and, as a result, the value of our common stock.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. As a prior reporting company, the framework of our system and processing documentation is established; however, we are in the process of updating as necessary to perform the evaluation needed to comply with Section 404 of the Sarbanes-Oxley Act. We may not be able to complete our evaluation, testing and any required remediation prior to becoming a public company or in a timely manner thereafter. If we are unable to assert that our internal control over financial reporting is effective, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our common stock to decline, and we may be subject to investigation or sanctions by the Securities and Exchange Commission (the “SEC”).

We will be required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting as of the end of the fiscal year that coincides with the filing of our second Annual Report on Form 10-K. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. We will also be required to disclose changes made in our internal control and procedures on a quarterly basis. However, our independent registered public accounting firm will not be required to report on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act until the later of the year following our first annual report required to be filed with the SEC. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating.

Additionally, the existence of any material weakness or significant deficiency would require management to devote significant time and incur significant expense to remediate any such material weaknesses or significant deficiencies and management may not be able to remediate any such material weaknesses or significant deficiencies in a timely manner. The existence of any material weakness in our internal control over financial reporting could also result in errors in our financial statements that could require us to restate our financial statements, cause us to fail to meet our reporting obligations and cause stockholders to lose confidence in our reported financial information, all of which could materially and adversely affect our business and stock price. To comply with the requirements of being a public company, we may need to undertake various costly and time-consuming actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff, which may adversely affect our business, financial condition and results of operations.

Our management team has limited experience managing a public company.

Many members of our management team, including our Chief Executive Officer and Chief Financial Officer, have limited experience managing a publicly-traded company, interacting with public company investors and complying with the increasingly complex laws pertaining to public companies. Our management team may not successfully or efficiently manage us as a public company that is subject to significant regulatory oversight and reporting obligations under the federal securities laws and the continuous scrutiny of securities analysts and investors. These new obligations and constituents require significant attention from our senior management and could divert their attention away from the day-to-day management of our business, which could adversely affect our business, results of operations and financial condition.

 

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Risks Related to Our Indebtedness

Our existing indebtedness could adversely affect our business and growth prospects.

As of March 31, 2021 and December 31, 2020, we had total current and long-term indebtedness outstanding of approximately $789.6 million and $839.2 million, respectively, in term loans and unamortized debt issuance costs of $11.6 million and $12.1 million, respectively. Our indebtedness, or any additional indebtedness we may incur, could require us to divert funds identified for other purposes for debt service and impair our liquidity position. If we cannot generate sufficient cash flow from operations to service our debt, we may need to refinance our debt, dispose of assets or issue equity to obtain necessary funds. We do not know whether we would be able to take any of these actions on a timely basis, on terms satisfactory to us or at all.

Our indebtedness, the cash flow needed to satisfy our debt and the covenants contained in our credit agreement with a syndicate of lenders and Golub Capital Markets LLC, as administrative agent and collateral agent, and Golub Capital Markets LLC and Owl Rock Capital Advisors LLC, as joint bookrunners and joint lead arrangers (the “Credit Agreement”) have important consequences, including:

 

   

limiting funds otherwise available for financing our capital expenditures by requiring us to dedicate a portion of our cash flows from operations to the repayment of debt and the interest on this debt;

 

   

limiting our ability to incur or prepay existing indebtedness, pay dividends or distributions, dispose of assets, engage in mergers and consolidations, make acquisitions or other investments and make changes in the nature of the business, among other things;

 

   

making us more vulnerable to rising interest rates, as substantially all of our borrowings, including borrowings under the Credit Facilities, bear variable rates of interest; and

 

   

making us more vulnerable in the event of a downturn in our business.

Our level of indebtedness may place us at a competitive disadvantage to our competitors that are not as highly leveraged. Fluctuations in interest rates can increase borrowing costs. Increases in interest rates may directly impact the amount of interest we are required to pay and reduce earnings accordingly. In addition, tax laws, including the disallowance or deferral of tax deductions for interest paid on outstanding indebtedness, could have an adverse effect on our liquidity and our business, financial condition, results of operations, cash flows and prospects. Further, our Credit Agreement contains customary affirmative and negative covenants and certain restrictions on operations that could impose operating and financial limitations and restrictions on us, including restrictions on our ability to enter into particular transactions and to engage in other actions that we may believe are advisable or necessary for our business.

Interest rates under the Credit Agreement are based partly on the London interbank offered rate (“LIBOR”), the basic rate of interest used in lending between banks on the London interbank market and is widely used as a reference for setting the interest rate on loans globally. LIBOR is currently expected to be phased out by the middle of 2023. The U.S. Federal Reserve has begun publishing a Secured Overnight Funding Rate which is currently intended to serve as an alternative reference rate to LIBOR. If the method for calculation of LIBOR changes, if LIBOR is no longer available, or if lenders have increased costs due to changes in LIBOR, we may suffer from potential increases in interest rates on our borrowings. Further, we may need to renegotiate our agreements or any other borrowings that utilize LIBOR as a factor in determining the interest rate to replace LIBOR with the new standard that is established.

We expect to use cash flow from operations to meet current and future financial obligations, including funding our operations, debt service requirements and capital expenditures. The ability to make these payments depends on our financial and operating performance, which is subject to prevailing economic, industry and competitive conditions and to certain financial, business, economic and other factors beyond our control.

 

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Despite current indebtedness levels, we may incur substantially more indebtedness, which could further exacerbate the risks associated with our substantial indebtedness.

We may incur significant additional indebtedness in the future. We may also consider investments in joint ventures or acquisitions, which may increase our indebtedness. If new debt is added to our current indebtedness levels, the related risks that we face could intensify.

Variable rate indebtedness that we have incurred or may in the future incur will subject us to interest rate risk, which could cause our debt service obligations to increase significantly.

Substantially all of our borrowings, including borrowings under our Credit Facilities, bear variable rates of interest. An increase in prevailing interest rates would increase our debt service obligations, which would have a negative impact on our net income and cash flows, including cash available for servicing our indebtedness.

We may not be able to generate sufficient cash flow to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under such indebtedness, which may not be successful.

Our ability to make scheduled payments or to refinance outstanding debt obligations depends on our financial and operating performance, which will be affected by prevailing economic, industry and competitive conditions and by financial, business and other factors beyond our control. We may not be able to maintain a sufficient level of cash flow from operating activities to permit us to pay the principal, premium, if any, and interest on our indebtedness. Any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit worthiness, which would also harm our ability to incur additional indebtedness.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures and acquisitions, sell assets, seek additional capital or seek to restructure or refinance our indebtedness. Any refinancing of our indebtedness could be at higher interest rates and may require us to comply with more onerous covenants. Refinancings may not be successful and may not permit us to meet our scheduled debt service obligations. In the absence of such cash flows and resources, we could face substantial liquidity problems and might be required to sell material assets or operations to attempt to meet our debt service obligations. The financing documents governing our Credit Facilities include certain restrictions on our ability to conduct asset sales and/or use the proceeds from asset sales for certain purposes. We may not be able to consummate these asset sales to raise capital or sell assets at prices and on terms that we believe are fair and any proceeds that we do receive may not be adequate to meet any debt service obligations then due. If we cannot meet our debt service obligations, the holders of our indebtedness may accelerate such indebtedness and, to the extent such indebtedness is secured, foreclose on our assets. In such an event, we may not have sufficient assets to repay all of our indebtedness.

The terms of the financing documents governing our Credit Facilities restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.

The financing documents governing our Credit Facilities contain a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interests, including restrictions on our ability to:

 

   

incur additional indebtedness;

 

   

incur liens;

 

   

merge, dissolve, liquidate, amalgamate, consolidate or sell all or substantially all of our assets;

 

   

declare or pay certain dividends, payments or distribution or repurchase or redeem certain capital stock;

 

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permit our subsidiaries to enter into agreements restricting their ability to pay dividends, make loans, incur liens and sell assets; and

 

   

make certain investments.

These restrictions could limit, potentially significantly, our operational flexibility and affect our ability to finance our future operations or capital needs or to execute our business strategy.

We may be unable to refinance our indebtedness.

Our Credit Facilities mature on March 24, 2026. In addition, we may need to refinance all or a portion of our indebtedness before maturity. Our ability to repay, refinance, replace or extend these facilities by their maturity dates will be dependent on, among other things, business conditions, our financial performance and the general condition of the financial markets. If a financial disruption were to occur at the time that we are required to repay indebtedness outstanding under these facilities, we could be forced to undertake alternate financings, including a sale of additional common stock, negotiate for an extension of the maturity of the applicable facility or sell assets and delay capital expenditures in order to generate proceeds that could be used to repay indebtedness. There can be no assurance that we will be able to obtain sufficient funds to enable us to repay or refinance our debt obligations on commercially reasonable terms, or at all.

Risks Related to Our Common Stock and this Offering

Thoma Bravo controls us, and its interests may conflict with ours or yours in the future.

Immediately following this offering, investment entities affiliated with Thoma Bravo will control approximately 88.1% of the voting power of our outstanding common stock, or 87.0% if the underwriters exercise in full their over-allotment option, which means that, based on its percentage voting power controlled after the offering, Thoma Bravo will control the vote of all matters submitted to a vote of our stockholders. This control will enable Thoma Bravo to control the election of the members of our board of directors (the “Board”) and all other corporate decisions. Even when Thoma Bravo ceases to control a majority of the total voting power, for so long as Thoma Bravo continues to own a significant percentage of our common stock, Thoma Bravo will still be able to significantly influence the composition of our Board and the approval of actions requiring stockholder approval. Accordingly, for such period of time, Thoma Bravo will have significant influence with respect to our management, business plans and policies, including the appointment and removal of our officers, decisions on whether to raise future capital and amending our charter and bylaws, which govern the rights attached to our common stock. In particular, for so long as Thoma Bravo continues to own a significant percentage of our common stock, Thoma Bravo will be able to cause or prevent a change of control of us or a change in the composition of our Board and could preclude any unsolicited acquisition of us. The concentration of ownership could deprive you of an opportunity to receive a premium for your shares of common stock as part of a sale of us and ultimately might affect the market price of our common stock.

In addition, in connection with this offering, we will enter into a Director Nomination Agreement with Thoma Bravo that provides it the right to designate: (i) all of the nominees for election to our Board for so long as Thoma Bravo beneficially owns 40% or more of the Original Amount (ii) a number of directors (rounded up to the nearest whole number) equal to 40% of the total directors for so long as Thoma Bravo beneficially owns at least 30% and less than 40% of the Original Amount; (iii) a number of directors (rounded up to the nearest whole number) equal to 30% of the total directors for so long as Thoma Bravo beneficially owns at least 20% and less than 30% of the Original Amount; (iv) a number of directors (rounded up to the nearest whole number) equal to 20% of the total directors for so long as Thoma Bravo beneficially owns at least 10% and less than 20% of the Original Amount; and (v) one director for so long as Thoma Bravo beneficially owns at least 5% of the Original Amount. The Director Nomination Agreement will also provide that Thoma Bravo may assign such right to an affiliate. The Director Nomination Agreement will prohibit us from increasing or decreasing the size of our

 

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Board without the prior written consent of Thoma Bravo. See “Certain Relationships and Related Party Transactions—Policies for Approval of Related Party Transactions—Director Nomination Agreement” for more details with respect to the Director Nomination Agreement.

Thoma Bravo and its affiliates engage in a broad spectrum of activities, including investments in our industry generally. In the ordinary course of their business activities, Thoma Bravo and its affiliates may engage in activities where their interests conflict with our interests or those of our other stockholders, such as investing in or advising businesses that directly or indirectly compete with certain portions of our business or are suppliers or customers of ours. Our certificate of incorporation to be effective at or prior to the consummation of this offering will provide that none of Thoma Bravo, any of its affiliates or any director who is not employed by us (including any non-employee director who serves as one of our officers in both his or her director and officer capacities) or its affiliates will have any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we operate. Thoma Bravo also may pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. In addition, Thoma Bravo may have an interest in pursuing acquisitions, divestitures and other transactions that, in their judgment, could enhance their investment, even though such transactions might involve risks to you or may not prove beneficial.

Upon listing of our shares of common stock on NYSE, we will be a “controlled company” within the meaning of the rules of NYSE and, as a result, we will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections as those afforded to stockholders of companies that are subject to such governance requirements.

After completion of this offering, Thoma Bravo will continue to control a majority of the voting power of our outstanding common stock. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of NYSE. Under these rules, a company of which more than 50% of the voting power for the election of directors is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including:

 

   

the requirement that a majority of our Board consist of independent directors;

 

   

the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

   

the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

   

the requirement for an annual performance evaluation of the nominating and corporate governance and compensation committees.

Following this offering, we intend to utilize these exceptions. As a result, we may not have a majority of independent directors on our Board, our compensation and nominating and corporate governance committees may not consist entirely of independent directors and our compensation and nominating and corporate governance committees may not be subject to annual performance evaluations. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of NYSE.

We may allocate the net proceeds from this offering in ways that you and other stockholders may not approve.

Our management will have broad discretion in the application of the net proceeds from this offering, including for any of the purposes described in the section titled “Use of Proceeds.” Because of the number and

 

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variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. Our management might not apply our net proceeds in ways that ultimately increase the value of your investment, and the failure by our management to apply these funds effectively could harm our business. Pending their use, we may invest the net proceeds from this offering in short- and intermediate-term interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government. These investments may not yield a favorable return to our stockholders. 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 results, which could cause our stock price to decline.

Provisions of our corporate governance documents could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management, even if beneficial to our stockholders.

Our certificate of incorporation and bylaws to be effective at or prior to the consummation of this offering and the Delaware General Corporation Law (the “DGCL”) contain provisions that could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders. Among other things:

 

   

these provisions allow us to authorize the issuance of undesignated preferred stock, the terms of which may be established and the shares of which may be issued without stockholder approval, and which may include supermajority voting, special approval, dividend, or other rights or preferences superior to the rights of stockholders;

 

   

these provisions provide for a classified board of directors with staggered three-year terms;

 

   

these provisions provide that, at any time when Thoma Bravo controls, in the aggregate, less than 40% in voting power of our stock entitled to vote generally in the election of directors, directors may only be removed for cause, and only by the affirmative vote of holders of at least sixty-six and two-thirds percent (66 2/3%) in voting power of all the then-outstanding shares of our stock entitled to vote thereon, voting together as a single class;

 

   

these provisions prohibit stockholder action by written consent from and after the date on which Thoma Bravo controls, in the aggregate, less than 35% in voting power of our stock entitled to vote generally in the election of directors;

 

   

these provisions provide that for as long as Thoma Bravo controls, in the aggregate, at least 50% in voting power of our stock entitled to vote generally in the election of directors, any amendment, alteration, rescission or repeal of our bylaws by our stockholders will require the affirmative vote of a majority in voting power of the outstanding shares of our capital stock and at any time when Thoma Bravo controls, in the aggregate, less than 50% in voting power of all outstanding shares of our stock entitled to vote generally in the election of directors, any amendment, alteration, rescission or repeal of our bylaws by our stockholders will require the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) in voting power of all the then-outstanding shares of our stock entitled to vote thereon, voting together as a single class; and

 

   

these provisions establish advance notice requirements for nominations for elections to our Board or for proposing matters that can be acted upon by stockholders at stockholder meetings; provided, however, at any time when Thoma Bravo controls, in the aggregate, at least 10% in voting power of our stock entitled to vote generally in the election of directors, such advance notice procedure will not apply to Thoma Bravo.

We will opt out of Section 203 of the DGCL, 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. However, our certificate of incorporation to be effective at or prior to the consummation of this offering will contain a provision that provides us with protections similar to Section 203, and will prevent us from engaging in a business combination

 

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with a person (excluding Thoma Bravo and any of their direct or indirect transferees and any group as to which such persons are a party) who acquires at least 15% of our common stock for a period of three years from the date such person acquired such common stock, unless board or stockholder approval is obtained prior to the acquisition. See “Description of Capital Stock—Anti-Takeover Effects of Our Certificate of Incorporation and Our Bylaws.” These provisions could discourage, delay or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and cause us to take other corporate actions you desire, including actions that you may deem advantageous, or negatively affect the trading price of our common stock. In addition, because our Board is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team.

These and other provisions in our certificate of incorporation, bylaws and Delaware law could make it more difficult for stockholders or potential acquirers to obtain control of our Board or initiate actions that are opposed by our then-current Board, including actions to delay or impede a merger, tender offer or proxy contest involving our company. The existence of these provisions could negatively affect the price of our common stock and limit opportunities for you to realize value in a corporate transaction.

For information regarding these and other provisions, see “Description of Capital Stock.”

Our certificate of incorporation will designate the Court of Chancery of the State of Delaware as the exclusive forum for certain litigation that may be initiated by our stockholders and the federal district courts of the U.S. as the exclusive forum for litigation arising under the Securities Act, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.

Pursuant to our certificate of incorporation, which we will adopt at or prior to the consummation of this offering, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for any claims in state court for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (3) any action asserting a claim against us arising pursuant to any provision of the DGCL, our certificate of incorporation or our bylaws or (4) any other action asserting a claim against us that is governed by the internal affairs doctrine; provided that for the avoidance of doubt, the forum selection provision that identifies the Court of Chancery of the State of Delaware as the exclusive forum for certain litigation, including any “derivative action,” will not apply to suits to enforce a duty or liability created by the Securities Act, the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. Our certificate of incorporation will also provide that, unless we consent in writing to the selection of an alternative forum, the federal district courts of the U.S. shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. Our certificate of incorporation will further provide that any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock is deemed to have notice of and consented to the provisions of our certificate of incorporation described above. See “Description of Capital Stock—Exclusive Forum.” The forum selection provisions in our certificate of incorporation may have the effect of discouraging lawsuits against us or our directors and officers and may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us. If the enforceability of our forum selection provisions were to be challenged, we may incur additional costs associated with resolving such challenge. While we currently have no basis to expect any such challenge would be successful, if a court were to find our forum selection provisions to be inapplicable or unenforceable with respect to one or more of these specified types of actions or proceedings, we may incur additional costs associated with having to litigate in other jurisdictions, which could have an adverse effect on our business, financial condition, results of operations, cash flows and prospects and result in a diversion of the time and resources of our employees, management and Board.

 

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If you purchase shares of common stock in this offering, you will suffer immediate and substantial dilution of your investment.

The initial public offering price of our common stock is substantially higher than the net tangible book value per share of our common stock. Therefore, if you purchase shares of our common stock in this offering, you will pay a price per share that substantially exceeds our net tangible book value per share after this offering. Based on an assumed initial public offering price of $20.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, you will experience immediate dilution of $24.40 per share, representing the difference between our pro forma net tangible book deficit per share after giving effect to this offering and the initial public offering price. In addition, purchasers of common stock in this offering will have contributed 11.5% of the aggregate price paid by all purchasers of our common stock but will own only approximately 9.0% of our common stock outstanding after this offering. See “Dilution” for more detail.

An active, liquid trading market for our common stock may not develop, which may limit your ability to sell your shares.

Prior to this offering, there was no public market for our common stock. Although we have been approved to list our common stock on NYSE under the trading symbol INST, an active trading market for our common stock may never develop or be sustained following this offering. The initial public offering price will be determined by negotiations between us and the underwriters and may not be indicative of market prices of our common stock that will prevail in the open market after the offering. A public trading market having the desirable characteristics of depth, liquidity and orderliness depends upon the existence of willing buyers and sellers at any given time, such existence being dependent upon the individual decisions of buyers and sellers over which neither we nor any market maker has control. The failure of an active and liquid trading market to develop and continue would likely have a material adverse effect on the value of our common stock. The market price of our common stock may decline below the initial public offering price, and you may not be able to sell your shares of our common stock at or above the price you paid in this offering, or at all. An inactive market may also impair our ability to raise capital to continue to fund operations by issuing additional shares of our common stock or other equity or equity-linked securities and may impair our ability to acquire other companies or technologies by using any such securities as consideration.

A significant portion of our total outstanding shares of common stock are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well.

Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares of common stock intend to sell shares, could reduce the market price of our common stock. After this offering, we will have 138,500,000 outstanding shares of common stock. This includes shares of common stock that we are selling in this offering, which may be resold in the public market immediately. Following the consummation of this offering, substantially all of the shares that are not being sold in this offering will be subject to a 180-day lock-up period provided under lock-up agreements executed in connection with this offering described in “Underwriting” and restricted from immediate resale under the federal securities laws as described in “Shares Eligible for Future Sale.” All of these shares of common stock will, however, be able to be resold after the expiration of the lock-up period, as well as pursuant to customary exceptions thereto or upon the waiver of the lock-up agreement by the representatives on behalf of the underwriters. We also intend to register shares of common stock that we may issue under our equity compensation plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to the lock-up agreements. As restrictions on resale end, the market price of our stock could decline if the holders of currently restricted shares of common stock sell them or are perceived by the market as intending to sell them.

 

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As further described in “Certain Relationships and Related Party Transactions—Related Party Transactions—Registration Rights Agreement,” we are party to a registration rights agreement with Thoma Bravo in connection with this offering, which will require us to effect the registration of Thoma Bravo’s shares in certain circumstances following the expiration of the 180-day lock-up period. If Thoma Bravo exercises its rights under this agreement to resell a significant amount of its shares of our common stock, we will not receive any proceeds from those offerings.

Because we have no current plans to pay regular cash dividends on our common stock following this offering, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.

We do not anticipate paying any regular cash dividends on our common stock following this offering. Any decision to declare and pay dividends in the future will be made at the discretion of our Board and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our Board may deem relevant. In addition, our ability to pay dividends is, and may be, limited by covenants of existing and any future outstanding indebtedness we or our subsidiaries incur, including under our Credit Agreement. Therefore, any return on investment in our common stock is solely dependent upon the appreciation of the price of our common stock on the open market, which may not occur. See “Dividend Policy” for more detail.

Our quarterly operating results and other metrics may vary significantly and be unpredictable, which could cause the trading price of our stock to decline.

Our quarterly operating results are likely to fluctuate in the future. In addition, securities markets worldwide have experienced, and are likely to continue to experience, significant price and volume fluctuations, including as a result of the COVID-19 pandemic. This market volatility, as well as general economic, market or political conditions, could subject the market price of our common stock to wide price fluctuations regardless of our operating performance. Our operating results and the trading price of our common stock may fluctuate in response to various factors, including:

 

   

the impact of the COVID-19 pandemic on our customers’ budgets and their ability to purchase or renew at similar volumes to prior periods;

 

   

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

 

   

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 customers’ use of our applications;

 

   

customer renewals and the amounts for which agreements are renewed;

 

   

awareness of our brand;

 

   

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 U.S.;

 

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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;

 

   

insolvency or credit difficulties confronting our customers, affecting their ability to purchase or pay for our learning platform;

 

   

litigation-related costs, settlements or adverse litigation judgments;

 

   

our ability to maintain scalable internal systems for reporting, order processing, license fulfillment, solution delivery, purchasing, billing and general accounting, among other functions;

 

   

significant security breaches of, technical difficulties with, or interruptions to, the delivery and use of our offerings;

 

   

foreign currency exchange rate fluctuations;

 

   

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

 

   

costs related to the acquisition of businesses, talent, technologies or intellectual property by us, including potentially significant amortization costs and possible write-downs; and

 

   

future accounting pronouncements or changes in our accounting policies.

Any one of the factors above or the cumulative effect of some of the factors referred to above may result in significant fluctuations in our financial and other operating results, including fluctuations in our key metrics. Fluctuations in our quarterly operating results could limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the market price and liquidity of our shares of common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business, which could significantly harm our profitability and reputation.

If securities or industry analysts do not publish research or reports about our business, if they publish unfavorable research or reports, or adversely change their recommendations regarding our common stock or if our results of operations do not meet their expectations, our stock price and trading volume could decline.

If a trading market for our common stock develops following the completion of this offering, the trading market will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not have any control over these analysts or the information contained in their reports. As a newly public company, we may be slow to attract research coverage. In the event we obtain securities or industry analyst coverage, if any of the analysts who cover us provide inaccurate or unfavorable research, issue an adverse opinion regarding our stock price or if our results of operations do not meet their expectations, our stock price could decline. Moreover, if one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

We may issue shares of preferred stock in the future, which could make it difficult for another company to acquire us or could otherwise adversely affect holders of our common stock, which could depress the price of our common stock.

Our certificate of incorporation will authorize us to issue one or more series of preferred stock. Our Board will have the authority to determine the preferences, limitations and relative rights of the shares of preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by our stockholders. Our preferred stock could be issued with voting, liquidation, dividend

 

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and other rights superior to the rights of our common stock. The potential issuance of preferred stock may delay or prevent a change in control of us, discouraging bids for our common stock at a premium to the market price, and materially adversely affect the market price and the voting and other rights of the holders of our common stock.

General Risk Factors

Certain estimates of market opportunity and forecasts of market growth included in this prospectus may prove to be inaccurate.

This prospectus includes estimates of the addressable market for our learning platform. Market opportunity estimates and growth forecasts, whether obtained from third-party sources or developed internally, are subject to significant uncertainty and are based on assumptions and estimates that may prove to be inaccurate. This is especially so at the present time due to the uncertain and rapidly changing projections of the severity, magnitude and duration of the COVID-19 pandemic. The estimates and forecasts in this prospectus relating to the size and expected growth of our target market, market demand and adoption, capacity to address this demand and pricing may also prove to be inaccurate. In particular, our estimates regarding our current and projected market opportunity are difficult to predict. The addressable market we estimate may not materialize for many years, if ever, and even if the markets in which we compete meet the size estimates and growth forecasted in this prospectus, our business could fail to grow at similar rates, if at all.

Our business is subject to the risks of fire, floods and other natural catastrophic events, and to interruption by man-made problems such as power disruptions, computer viruses, data security breaches or terrorism.

A significant natural disaster, such as a fire or flood, occurring at our headquarters, at one of our other facilities, at any of our cloud hosting provider facilities, or where a business partner is located could adversely affect our business, results of operations and financial condition. Prolonged health concerns or political or governmental developments in countries in which we or our customers, partners and service providers operate could result in further economic, social or labor instability, slow our sales process, result in customers not purchasing or renewing our learning platform or failing to make payments, and could otherwise have a material adverse effect on our business and our results of operations and financial condition.

Further, if a natural disaster or man-made incident were to affect Internet service providers, this could adversely affect the ability of our customers to use our learning platform. Although we maintain incident management and disaster response plans, in the event of a major disruption caused by a natural disaster or man-made incident, we may be unable to continue our operations and may endure system interruptions, reputational harm, delays in our development activities and lengthy interruptions in service, any of which could adversely affect our business, results of operations and financial condition.

Our failure to raise additional capital or generate cash flows necessary to expand our operations and invest in new technologies in the future could reduce our ability to compete successfully and harm our competitive position and results of operations.

We may need to raise additional funds, and we may not be able to obtain additional debt or equity financing on favorable terms or at all. If we raise additional equity financing, our security holders may experience significant dilution of their ownership interests. If we engage in additional debt financing, we may be required to accept terms that restrict our ability to incur additional indebtedness, force us to maintain specified liquidity or other ratios or restrict our ability to pay dividends or make acquisitions. If we need additional capital and cannot raise it on acceptable terms, or at all, we may not be able to, among other things:

 

   

develop and enhance our solution offerings;

 

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continue to expand our organization;

 

   

hire, train and retain employees;

 

   

respond to competitive pressures or unanticipated working capital requirements; or

 

   

pursue acquisition opportunities.

In addition, if we issue additional equity to raise capital, your interest in us will be diluted.

 

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Forward-Looking Statements

This prospectus contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this prospectus are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “will,” “should,” “can have,” “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected costs, expenditures, cash flows, growth rates and financial results or our plans and objectives for future operations, growth initiatives, or strategies are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including:

 

   

risks associated with future stimulus packages approved by the U.S. federal government;

 

   

risks associated with failing to continue our recent growth rates;

 

   

our ability to acquire new customers and successfully retain existing customers;

 

   

the effects of the increased usage of, or interruptions or performance problems associated with, our learning platform;

 

   

the impact on our business and prospects from the effects of the current COVID-19 pandemic;

 

   

our history of losses and expectation that we will not be profitable for the foreseeable future;

 

   

the impact of adverse general and industry-specific economic and market conditions;

 

   

risks to our revenue from changes in the spending policies or budget priorities for government funding of Higher Education and K-12 institutions;

 

   

our ability to grow our business effectively, to scale our business and to manage our expenses;

 

   

risks caused by delays in upturns or downturns being reflected in our operating results;

 

   

risks and uncertainties associated with potential acquisitions;

 

   

our ability to use net operating losses to offset future taxable income;

 

   

our ability to change our pricing models, if necessary to compete successfully;

 

   

the length and unpredictability of our sales cycles;

 

   

risks associated with failure to develop our sales and marketing capabilities;

 

   

the competitiveness of the market in which we operate;

 

   

risks associated with joint ventures, platform partnerships and strategic alliances;

 

   

our ability to offer high-quality professional services and support;

 

   

the effectiveness of our expense reduction plan;

 

   

risks associated with international operations;

 

   

our reliance on our management team and other key employees, including the effects of recent significant changes to our executive leadership team and the resulting transitions;

 

   

our ability to attract and retain qualified personnel;

 

   

our ability to maintain our company culture as we grow;

 

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risks related our brand recognition and reputation;

 

   

the complexity and time-consuming nature of our billing and collections processing;

 

   

our ability to adapt and respond to rapidly changing technology, evolving industry standards and changing customer needs;

 

   

the impact of potential information technology or data security breaches or other cyberattacks or other disruptions;

 

   

risks associated with our use of open source software, including that we make a substantial portion of the source code for Canvas available under the terms of an open source license;

 

   

risks relating to our reliance on third-party software and intellectual property licenses;

 

   

the impact of real or perceived errors, failures or bugs in our solutions;

 

   

risks associated with lawsuits by third parties for alleged infringement, misappropriation or other violation of their intellectual property and proprietary rights;

 

   

our ability to obtain, maintain, protect and enforce our intellectual property and proprietary rights;

 

   

risks related to incorrect or improper use of our solutions or our failure to properly train customers on how to utilize our solutions;

 

   

privacy laws and regulations, including changes thereto, applicable to our business;

 

   

risks relating to non-compliance with FERPA, COPPA and other regulatory regimes applicable to our business;

 

   

risks related to changes in tax laws;

 

   

the impact of export and import control laws and regulations;

 

   

risk relating to non-compliance with anti-corruption, anti-bribery and similar laws;

 

   

our ability to comply with complex procurement rules and regulations;

 

   

risks related to future litigation;

 

   

risks related to our existing and future indebtedness;

 

   

our ability to develop and maintain proper and effective internal control over financial reporting;

 

   

our management team’s limited experience managing a public company

 

   

our ability to correctly estimate market opportunity and forecast market growth;

 

   

the impact of any catastrophic events;

 

   

our ability to raise additional capital or generate cash flows necessary to expand operations and invest in new technologies; and

 

   

other factors disclosed in the section entitled “Risk Factors” and elsewhere in this prospectus.

We derive many of our forward-looking statements from our operating budgets and forecasts, which are based on many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements as well as other cautionary statements that are made from time to time in our other SEC filings and public communications. You should evaluate all forward-looking statements made in this prospectus in the context of these risks and uncertainties.

 

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We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this prospectus are made only as of the date hereof. We undertake no obligation to update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

 

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Market and Industry Data

Unless otherwise indicated, information in this prospectus concerning economic conditions, our industry, our markets and our competitive position is based on a variety of sources, including information from independent industry analysts and publications, as well as our own estimates and research. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. While we believe the information presented in this prospectus is generally reliable, forecasts, assumptions, expectations, beliefs, estimates and projects involve risk and uncertainties and are subject to change based on various factors, including those described under “Forward-Looking Statements” and “Risk Factors.” In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on 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 on these statements.

Certain information in the text of this prospectus is contained in independent industry publications. The sources of these independent industry publications are provided below:

 

   

HolonIQ Global EdTech Market to reach $404B by 2025—16.3% CAGR (August 2020)

 

   

National Education Association Biden Pledges Critical Investments in Public Education to Combat COVID-19 Crisis (January 2021)

 

   

Office of Elementary & Secondary Education Elementary and Secondary School Emergency Relief Fund (January 2021)

 

   

CB Insights Education In The Post-Covid World: 6 Ways Tech Could Transform How We Teach And Learn (2020)

 

   

Future Ready Schools Students of Color Caught in the Homework Gap (2017 – 2020)

 

   

U.S. Census Bureau Top 10 Largest School Districts by Enrollment and Per Pupil Current Spending (May 2019)

 

   

U.S. Census Bureau Nearly 93% of Households With School-Age Children Report Some Form of Distance Learning During COVID-19 (August 2020)

 

   

U.S. Census Bureau Census Bureau Reports Nearly 77 Million Students Enrolled in U.S. Schools (December 2019)

 

   

U.S. Census Bureau Educational Attainment by Presence of a Computer and Types of Internet Subscriptions in Household (2019)

 

   

U.S. Census Bureau Measuring Household Experiences during the Coronavirus Pandemic (June 2020)

 

   

National Center for Education Statistics Number of educational institutions, by level and control of institution: Selected years, 1980-81 through 2017-18 (January 2020)

 

   

U.S. Department of Education U.S. Department of Education Quickly Makes Available More Than $21 Billion in Taxpayer Funds to Support Continued Education at Colleges, Universities (January 2021)

 

   

National Student Clearinghouse Research Center Term Enrollment Estimates (2020)

 

   

Agile Education Marketing U.S. State Education Map

 

   

UNESCO Institute for Statistics Dataset: National Monitoring (2020)

 

   

UNESCO 1.37 Billion Students Now Home as COVID-19 School Closures Expand, Ministers Scale Up Multimedia Approaches to Ensure Learning Continuity (March 24, 2020)

 

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Use of Proceeds

We estimate that our net proceeds from this offering will be approximately $228.1 million (or approximately $263.0 million if the underwriters’ over-allotment option is exercised in full), assuming an initial public offering price of $20.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

The principal purposes of this offering are to reduce our indebtedness, increase our capitalization and financial flexibility, create a public market for our common stock and enable access to the public equity markets for us and our stockholders. We expect to use approximately $228.1 million of the net proceeds of this offering to repay $224.7 million of outstanding borrowings under our Credit Facilities (or $263.0 million if the underwriters exercise their option to purchase additional shares in full to repay $259.1 million of outstanding borrowings under our Credit Facilities), net of fees incurred in conjunction with the Applicable Prepayment Premium, as more fully described in the Credit Agreement.

On March 24, 2020, we entered into our $825.0 million Credit Agreement with a syndicate of lenders, comprised of the $775.0 million Initial Term Loan and the $50.0 million Revolving Credit Facility. On December 22, 2020, we supplemented the Initial Term Loan with a $70.0 million Incremental Term Loan. As of March 31, 2021 and December 31, 2020, we had $789.6 million and $839.2 million, respectively, outstanding under our Term Loan. As of March 31, 2021 and December 31, 2020, respectively, the interest rate on our Term Loan was 8.0%. As of March 31, 2021 and December 31, 2020, respectively, we did not have any borrowings outstanding under the Revolving Credit Facility. The Term Loan matures on March 24, 2026. Borrowings under the Revolving Credit Facility mature on March 24, 2026.

Each $1.00 increase or decrease in the assumed initial public offering price of $20.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase or decrease the net proceeds to us from this offering by approximately $11.7 million, assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

Each 1,000,000 increase or decrease in the number of shares offered would increase or decrease the net proceeds to us from this offering by approximately $18.7 million, assuming that the assumed initial public offering price per share for the offering remains at $20.00, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

In connection with our entry into our Credit Facilities on March 24, 2020, affiliates of Thoma Bravo collectively acquired $129.2 million of our term loans under our Term Loan and as of March 31, 2021, affiliates of Thoma Bravo collectively owned $131.6 million of our Term Loan. As a result, Thoma Bravo will receive a portion of the net proceeds of this offering in connection with the repayment of our Term Loan. Based upon our estimated receipt of net proceeds from this offering of approximately $228.1 million (or $263.0 million if the underwriters exercise their option to purchase additional shares in full) as described above, we expect that Thoma Bravo will receive $38.0 million of the total $228.1 million (or $43.8 million of the total $263.0 million if the underwriters exercise their option to purchase additional shares in full) of such net proceeds used to repay outstanding borrowings under our Term Loan.

 

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Dividend Policy

We currently intend to retain all available funds and any future earnings to fund the development and expansion of our business and we do not anticipate paying any cash dividends in the foreseeable future. Additionally, the terms of our Credit Agreement 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, subject to compliance with covenants in current and future agreements governing our and or our subsidiaries’ indebtedness (see “Description of Certain Indebtedness”) and requirements under Delaware law, and will depend on our results of operations, financial condition, capital requirements and other factors that our Board may deem relevant. See “Risk Factors—Risks Related to Our Common Stock and This Offering—Because we have no current plans to pay regular cash dividends on our common stock following this offering, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.”

 

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Capitalization

The following table describes our cash and cash equivalents and capitalization as of March 31, 2021, as follows:

 

   

on an actual basis; and

 

   

on a pro forma as adjusted basis, after giving effect to our sale of 12,500,000 shares of common stock in this offering and the application of a portion of the net proceeds from this offering to repay $224.7 million of outstanding borrowings under our Credit Facilities, net of $3.4 million in fees, as set forth under “Use of Proceeds,” assuming an initial public offering price of $20.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us and our Corporate Reorganization effected prior to the consummation of this offering.

The as adjusted information set forth in the table below is illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table in conjunction with our consolidated financial statements and the related notes, “Use of Proceeds” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

     As of March 31, 2021  
(in thousands, except per share amounts)    Actual     Pro Forma
As Adjusted
 
    

(Unaudited)

 

Cash, cash equivalents and restricted cash

   $ 87,732     $ 89,808  
  

 

 

   

 

 

 

Total debt, including current portion:

    

Term Loan(1)

     778,081       550,010  
  

 

 

   

 

 

 

Total long term debt

     778,081       550,010  

Stockholders’ equity:

    

Common stock, $0.01 par value, 500,000 shares authorized,
126,000 shares issued and outstanding, actual; 500,000 shares
authorized, 138,500 shares issued and outstanding, pro forma as adjusted

     1,260       1,385  

Additional paid-in capital

     1,266,808       1,494,754  

Accumulated deficit

     (211,052     (211,052
  

 

 

   

 

 

 

Stockholders’ equity

     1,057,016       1,285,087  
  

 

 

   

 

 

 

Total capitalization

   $ 1,835,097     $ 1,835,097  
  

 

 

   

 

 

 

 

(1)

Net of debt issuance costs of $11.6 million and $15.0 million as of March 31, 2021, actual and pro forma as adjusted, respectively.

A $1.00 increase or decrease in the assumed initial public offering price of $20.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase or decrease each of cash, cash equivalents and restricted cash, additional paid-in capital, stockholders’ equity and total capitalization on an as adjusted basis by approximately $11.7 million, assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

Each 1,000,000 increase or decrease in the number of shares of common stock offered in this offering would increase or decrease each of cash, cash equivalents and restricted cash, additional paid-in capital, stockholders’ equity and total capitalization on an as adjusted basis by approximately $18.7 million, based on an assumed

 

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initial public offering price of $20.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

Except as otherwise indicated, the above discussion and table are based on 126,000,000 shares of our common stock outstanding as of March 31, 2021, and excludes:

 

   

1,648,824 shares of common stock issuable upon vesting and settlement of the IPO Grants;

 

   

4,010,648 shares of common stock issuable upon the vesting and settlement of the Exchange Grants;

 

   

18,000,000 shares of common stock reserved for future issuance under our 2021 Plan, which will become effective in connection with this offering (inclusive of shares reserved for the IPO Grants and the Exchange Grants);

 

   

1,900,000 shares of our common stock that will become available for future issuance under our 2021 ESPP, which will become effective in connection with this offering; and

 

   

86,343 shares of common stock repurchased by us from former employees after March 31, 2021.

 

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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 our common stock in this offering and the pro forma net tangible book value per share of our common stock immediately after this offering.

As of March 31, 2021, we had a net tangible book deficit of $837.4 million, or $6.65 per share of common stock, which gives effect to the 126,239.815-for-1 stock split of our common stock effected on July 9, 2021. Net tangible book deficit per share is equal to our total tangible assets, less total liabilities, divided by the number of outstanding shares of our common stock.

After giving effect to the sale of shares of common stock in this offering, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, and the application of the net proceeds of this offering to repay $224.7 million of outstanding borrowings under our Credit Facilities, net of fees, as set forth under “Use of Proceeds,” at an assumed initial public offering price of $20.00 per share, which is the midpoint of the estimated price range set forth on the cover of this prospectus, and the stock split described above, our pro forma as adjusted net tangible book deficit as of March 31, 2021 would have been $609.3 million, or $4.40 per share of common stock. This represents an immediate decrease in net tangible book deficit of $(2.25) per share to our existing stockholders and an immediate dilution in net tangible book deficit of $24.40 per share to investors participating in this offering at the assumed initial public offering price. The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

     $ 20.00

Pro forma net tangible book deficit per share as of March 31, 2021

   $ 6.65    

Decrease in net tangible book deficit per share attributable to the investors in this offering

     (2.25  
  

 

 

   

Pro forma as adjusted net tangible book deficit per share after giving effect to this offering

       4.40  
    

 

 

 

Dilution in pro forma net tangible book deficit per share to the investors in this offering

     $ 24.40  
    

 

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $20.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase or decrease our pro forma as adjusted net tangible book deficit per share after this offering by $0.08, and would increase or decrease the dilution per share to the investors in this offering by $0.92, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase or decrease of one million shares in the number of shares of common stock offered by us would increase or decrease our pro forma as adjusted net tangible book deficit per share after this offering by $0.17 and would increase or decrease dilution per share to investors in this offering by $0.17, assuming the assumed initial public offering price, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise their over-allotment option in full, the pro forma as adjusted net tangible book deficit per share after this offering would be $4.09, and the dilution in pro forma as adjusted net tangible book deficit per share to new investors in this offering would be $24.09.

 

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The following table presents, on a pro forma basis as described above, as of March 31, 2021, the differences between our existing stockholders and the investors purchasing shares of our common stock in this offering, with respect to the number of shares purchased, the total consideration paid to us, and the average price per share paid by our existing stockholders or to be paid to us by investors purchasing shares in this offering at an assumed offering price of $20.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, before deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

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

Existing Stockholders

     126,000,000      91.0   $ 1,931,353,500        88.5   $  11.27

New Investors

     12,500,000      9.0   $ 250,000,000        11.5   $ 20.00  
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     138,500,000              100.0   $ 2,181,353,500              100.0  
  

 

 

    

 

 

   

 

 

    

 

 

   

A $1.00 increase or in the assumed initial public offering price of $20.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease the total consideration paid by new investors by $11.7 million and increase or decrease the percent of total consideration paid by new investors by 0.5%, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and before deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters’ over-allotment option. After giving effect to sales of shares in this offering, assuming the underwriters’ over-allotment option is exercised in full, our existing stockholders would own 89.8% and our new investors would own 10.2% of the total number of shares of our common stock outstanding after this offering.

In addition, to the extent we issue any additional stock options or any stock options are exercised, or we issue any other securities or convertible debt in the future, investors participating in this offering may experience further dilution.

Except as otherwise indicated, the above discussion and tables are based on 126,000,000 shares of our common stock outstanding as of March 31, 2021 after giving effect to the 126,239.815-for-1 stock split of our common stock effected on July 9, 2021, and excludes:

 

   

1,648,824 shares of common stock issuable upon vesting and settlement of the IPO Grants;

 

   

4,010,648 shares of common stock issuable upon the vesting and settlement of the Exchange Grants;

 

   

18,000,000 shares of common stock reserved for future issuance under our 2021 Plan, which will become effective in connection with this offering (inclusive of shares reserved for the IPO Grants and the Exchange Grants);

 

   

1,900,000 shares of our common stock that will become available for future issuance under our 2021 ESPP, which will become effective in connection with this offering; and

 

   

86,343 shares of common stock repurchased by us from former employees after March 31, 2021.

 

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Selected Consolidated Financial Data

The following table sets forth our selected historical consolidated financial and other data for the periods and as of the dates indicated. As a result of the Take-Private Transaction on March 24, 2020, our summary historical consolidated financial and other data are presented in two distinct periods to indicate the application of two different bases of accounting between the periods presented and are therefore not comparable. The period prior to and including March 31, 2020 includes all of the accounts of Instructure, Inc. and is identified as “Predecessor” and the period after March 31, 2020 includes all of the accounts of Instructure Holdings, Inc. and is identified as “Successor.” For accounting purposes, management has designated the Acquisition Date as March 31, 2020, as the operating results and change in financial position for the intervening period is not material.

We derived the selected historical consolidated financial and other data for the year ended December 31, 2018 and 2019 from the Predecessor’s audited consolidated financial statements included elsewhere in this prospectus. We derived the selected historical consolidated financial and other data for the periods from January 1, 2020 to March 31, 2020, which relate to the Predecessor, April 1, 2020 to December 31, 2020, which relate to the Successor, and as of December 31, 2020 from the Successor’s audited consolidated financial statements included elsewhere in this prospectus. We derived the selected historical consolidated financial and other data for the three months ended March 31, 2020, which relates to the Predecessor, and the three months ended March 31, 2021, which relates to the Successor, from the Successor’s unaudited consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited consolidated financial statements on the same basis as the audited consolidated financial statements of the Successor.

Our historical results are not necessarily indicative of the results that may be expected in the future. You should read the selected historical financial data below in conjunction with the sections titled “Summary Consolidated Financial Data,” “Unaudited Pro Forma Combined Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes included elsewhere in this prospectus.

 

    Annual Periods           Interim Periods  
    Predecessor           Successor           Predecessor           Successor  
(in thousands)   Year Ended
December 31,
2018
    Year Ended
December 31,
2019
    Period from
January 1, 2020
to March 31,
2020
          Period from
April 1, 2020 to
December 31,
2020
          Three Months
Ended
March 31,
2020
          Three Months
Ended
March 31,
2021
 
                                       

(Unaudited)

          (Unaudited)  

Consolidated Statement of Operations Data:

                     

Revenue:

                     

Subscription and support

  $ 188,501     $ 236,241     $ 65,968         $ 209,148       $ 65,968         $ 86,354  

Professional services and other

    21,043       22,232       5,421           21,525         5,421           7,626  
 

 

 

   

 

 

   

 

 

       

 

 

     

 

 

       

 

 

 

Total revenue

        209,544           258,473             71,389                 230,673              71,389               93,980  
 

 

 

   

 

 

   

 

 

       

 

 

     

 

 

       

 

 

 

Cost of revenue:

                     

Subscription and
support (1) (2) (3) (4)

    46,706       64,170       19,699           108,603         19,699           39,884  

Professional services and other (1) (3)

    15,137       18,656       4,699           15,547         4,699           5,750  
 

 

 

   

 

 

   

 

 

       

 

 

     

 

 

       

 

 

 

Total cost of revenue

    61,843       82,826       24,398           124,150         24,398           45,634  
 

 

 

   

 

 

   

 

 

       

 

 

     

 

 

       

 

 

 

Gross profit

    147,701       175,647       46,991           106,523         46,991           48,346  
 

 

 

   

 

 

   

 

 

       

 

 

     

 

 

       

 

 

 

 

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    Annual Periods           Interim Periods  
    Predecessor           Successor           Predecessor           Successor  
(in thousands)   Year Ended
December 31,
2018
    Year Ended
December 31,
2019
    Period from
January 1, 2020
to March 31,
2020
          Period from
April 1, 2020 to
December 31,
2020
          Three Months
Ended
March 31,
2020
          Three Months
Ended
March 31,
2021
 
                                       

(Unaudited)

          (Unaudited)  

Operating expenses:

                                      

Sales and marketing (1) (2) (3) (4)

          97,481         121,643             27,010               125,650               27,010               41,222  

Research and
development (1) (3) (4)

    59,391       83,526       19,273           51,066         19,273           17,089  

General and
administrative (1) (3) (4)

    35,602       56,471       17,295           62,572         17,295           13,351  

Impairment of held-for-sale goodwill (3)

                          29,612                    

Impairment on disposal group (3)

                          10,166                   1,218  
 

 

 

   

 

 

   

 

 

       

 

 

     

 

 

       

 

 

 

Total operating expenses

    192,474       261,640       63,578           279,066         63,578           72,880  
 

 

 

   

 

 

   

 

 

       

 

 

     

 

 

       

 

 

 

Loss from operations

    (44,773     (85,993     (16,587         (172,543       (16,587         (24,534
 

 

 

   

 

 

   

 

 

       

 

 

     

 

 

       

 

 

 

Other income (expense):

                     

Interest income

    2,413       1,795       313           49         313           27  

Interest expense

    (68     (16     (8         (50,921       (8         (17,271

Other income (expense), net (3)

    (698     (225     (5,738         1,510         (5,738         (634
 

 

 

   

 

 

   

 

 

       

 

 

     

 

 

       

 

 

 

Total other income (expense), net

    1,647       1,554       (5,433         (49,362       (5,433         (17,878
 

 

 

   

 

 

   

 

 

       

 

 

     

 

 

       

 

 

 

Loss before income tax benefit

    (43,126     (84,439     (22,020         (221,905       (22,020         (42,412

Income tax benefit (expense)

    (339     3,620       (183         43,924         (183         9,341  
 

 

 

   

 

 

   

 

 

       

 

 

     

 

 

       

 

 

 

Net loss

  $ (43,465   $ (80,819   $ (22,203       $ (177,981     $ (22,203         (33,071
 

 

 

   

 

 

   

 

 

       

 

 

     

 

 

       

 

 

 

 

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(1)

Includes stock-based compensation as follows:

 

    Annual Periods           Interim Periods  
    Predecessor           Successor           Predecessor           Successor  
(in thousands)   Year Ended
December 31,
2018
    Year Ended
December 31,
2019
    Period from
January 1,2020
to March 31,
2020
          Period from
April 1, 2020 to
December 31,
2020
          Three Months
Ended
March 31,
2020
          Three Months
Ended
March 31,
2021
 
                                       

(Unaudited)

          (Unaudited)  

Cost of revenue

                     

Subscription and support

  $ 1,235     $ 1,769     $ 301         $ 1,020       $ 301         $ 224  

Professional services and other

    975       2,111       285           687         285           177  

Sales and marketing

    6,022       15,098       1,977           7,580         1,977           1,582  

Research and development

    8,338       19,550       1,874           9,903         1,874           1,670  

General and administrative

    6,177       17,984       2,672           30,972         2,672           1,932  
 

 

 

   

 

 

   

 

 

       

 

 

     

 

 

       

 

 

 

Total stock-based compensation

  $     22,747     $     56,512     $         7,109         $       50,162       $       7,109         $       5,585  
 

 

 

   

 

 

   

 

 

       

 

 

     

 

 

       

 

 

 

 

(2)

Includes amortization of acquisition-related intangibles as follows:

 

    Annual Periods           Interim Periods  
    Predecessor           Successor           Predecessor           Successor  
(in thousands)   Year Ended
December 31,
2018
    Year Ended
December 31,
2019
    Period from
January 1,2020
to March 31,
2020
          Period from
April 1,2020 to
December 31,
2020
          Three Months
Ended
March 31,
2020
          Three Months
Ended
March 31,
2021
 
                                        (Unaudited)           (Unaudited)  

Cost of revenue

                     

Subscription and support

  $ 1,339     $ 4,549     $ 1,293         $ 44,167       $ 1,293         $ 15,415  

Sales and marketing

    1,158       4,567       1,293           51,143         1,293           17,946  
 

 

 

   

 

 

   

 

 

       

 

 

     

 

 

       

 

 

 

Total amortization of acquisition-related intangibles

  $         2,497     $         9,116     $         2,586         $       95,310       $         2,586         $     33,361  
 

 

 

   

 

 

   

 

 

       

 

 

     

 

 

       

 

 

 

 

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(3)

Includes restructuring, transaction and sponsor related costs as follows:

 

    Annual Periods           Interim Periods  
    Predecessor           Successor           Predecessor           Successor  
(in thousands)   Year Ended
December 31,
2018
    Year Ended
December 31,
2019
    Period from
January 1,
2020 to
March 31,
2020
          Period from
April 1,
2020 to
December 31,
2020
          Three Months
Ended
March 31,
2020
          Three Months
Ended
March 31,
2021
 
                                        (Unaudited)           (Unaudited)  

Cost of revenue

                     

Subscription and support

  $     $     $         $ 2,235       $         $ 1,921  

Professional services and other

                66           902         66           849  

Sales and marketing

                556           7,395         556           2,251  

Research and development

                1,273           4,760         1,273           2,551  

General and administrative

                6,465           11,889         6,465           4,267  

Impairment of held-for-sale goodwill

                          29,612                    

Impairment on disposal group

                          10,166                   1,218  

Other income (expense), net

                (5,757         1,510         (5,757          
 

 

 

   

 

 

   

 

 

       

 

 

     

 

 

       

 

 

 

Total restructuring, transaction and sponsor related costs

  $           —     $         —     $   14,117         $   65,449       $   14,117         $     13,057  
 

 

 

   

 

 

   

 

 

       

 

 

     

 

 

       

 

 

 

 

(4)

Includes payroll tax expense on secondary stock purchase transactions or the reversal of such expense due to the reduction of the estimated liability as follows:

 

    Annual Periods           Interim Periods  
    Predecessor           Successor           Predecessor           Successor  
(in thousands)   Year Ended
December 31,
2018
    Year Ended
December 31,
2019
    Period from
January 1,
2020 to
March 31,
2020
          Period from
April 1,
2020 to
December 31,
2020
          Three Months
Ended
March 31,
2021
          Three Months
Ended
March 31,
2021
 
                                        (Unaudited)           (Unaudited)  

Cost of revenue

                                        

Subscription and support

  $ (49   $           —     $         $       $         $  

Sales and marketing

    (430                                        

Research and development

    (616                                        

General and administrative

    (130     (1,327                                  
 

 

 

   

 

 

   

 

 

       

 

 

     

 

 

       

 

 

 

Total payroll tax expense

  $ (1,225   $ (1,327   $         —         $           —       $           —         $           —  
 

 

 

   

 

 

   

 

 

       

 

 

     

 

 

       

 

 

 

 

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     Annual Periods      Interim Period  
     Predecessor             Successor      Successor  
                                    
(in thousands)    Year Ended
December 31,
2018 (1)
     Year Ended
December 31,
2019
            As of
December 31,
2020
     Three Months
Ended
March 31, 2021
 
                                 (Unaudited)  

Consolidated Balance Sheet Data:

                

Cash, cash equivalents and restricted cash

   $ 94,320      $ 101,236           $ 150,953      $ 87,732  

Working capital, excluding deferred revenue (unaudited)

         197,908            150,810             212,411        116,598  

Total assets

     273,997        367,500               2,268,631            2,109,100  

Deferred revenue

     120,670        147,755             204,879        155,440  

Total debt, including current portion

                        827,043        778,081  

Total liabilities

     145,559        221,943             1,180,647        1,052,084  

Total stockholders’ equity

     128,438        145,557             1,087,984        1,057,016  

 

(1)

In February 2018, our subsidiary, Instructure, Inc., completed an underwritten public offering of 2,875,000 shares of common stock, which included 375,000 shares of common stock issued pursuant to the underwriters’ exercise of their option to purchase additional shares. Instructure, Inc. received $109.8 million in net proceeds, after deducting underwriting discounts and commissions and offering expenses.

 

    Annual Periods           Interim Periods  
    Predecessor           Successor           Predecessor           Successor  
(in thousands)   Year Ended
December 31,
2018
    Year Ended
December 31,
2019
    Period from
January 1, 2020
to March 31,
2020
          Period from
April 1, 2020 to
December 31,
2020
          Three Months
Ended
March 31,
2020
          Three Months
Ended
March 31,
2021
 
                                        (Unaudited)           (Unaudited)  

Consolidated Statement of Cash Flow Data:

                     

Net cash provided by (used in) operating activities

  $ 98     $ 18,861     $ (57,058       $ 36,884       $ (57,058       $ (58,732

Net cash provided by (used in) investing activities

  $ (63,304   $ (21,576   $ 14,871         $ (2,026,790     $ 14,871         $ 45,616  

Net cash provided by (used in) financing activities

  $ 121,833     $ 9,631     $ (346       $ 2,082,156       $ (346       $ (50,105

Non-GAAP Financial Data (unaudited)(1):

                     

Free Cash Flow(2)

  $ (10,946   $ 8,721     $ (57,771       $ 35,331       $ (57,771       $ (59,134

Non-GAAP Operating (Loss) Income(3)

  $ (21,898   $ (21,712   $ 1,468         $ 62,639       $ 1,468         $ 32,227  

Adjusted EBITDA(4)

  $ (11,213   $ (9,297   $ 4,809         $ 66,325       $ 4,809         $ 32,560  

Allocated Combined Receipts(5)

  $   209,544     $   258,473     $     71,389         $ 253,424       $
 
 
    71,389
 
 
      $   98,738  

 

(1)

In addition to our results determined in accordance with GAAP, we believe certain non-GAAP measures are useful in evaluating our operating performance and liquidity. These measures include, but are not limited to, free cash flow, non-GAAP operating (loss) income, adjusted EBITDA and Allocated Combined Receipts, which are used by management in making operating decisions, allocating financial resources, and internal planning and forecasting, and for business strategy purposes. We believe that non-GAAP financial information is useful to investors because it eliminates certain items that affect period-over-period comparability and it provides consistency with past financial performance and additional information about our underlying results and trends by excluding certain items that may not be indicative of our business, results of operations, or outlook.

 

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Non-GAAP financial measures are not meant to be considered in isolation or as a substitute for the comparable GAAP measures, but rather as supplemental information to our business results. This information should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP. There are limitations to these non-GAAP financial measures because they are not prepared in accordance with GAAP and may not be comparable to similarly titled measures of other companies due to potential differences in methods of calculation

We compensate for these limitations by providing investors and other users of our financial information, reconciliations of net cash provided by operating activities to free cash flow, of loss from operations to non-GAAP operating (loss) income, of net loss to adjusted EBITDA, and of revenue to Allocated Combined Receipts. We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure and to view free cash flow, non-GAAP operating (loss) income, adjusted EBITDA and Allocated Combined Receipts in conjunction with the related GAAP financial measure.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Financial Measures” for a reconciliation to their respective most directly comparable GAAP financial measures.

(2)

We define “free cash flow” as net cash provided by (used in) operating activities less purchases of property and equipment and intangible assets, net of proceeds from disposals of property and equipment.

(3)

We define “non-GAAP operating (loss) income” as (loss) income from operations excluding the impact of stock-based compensation, restructuring, transaction and sponsor related costs, reversal of payroll tax expense recorded in relation to the previous secondary stock purchase transaction, amortization of acquisition-related intangibles, changes in fair value of contingent liabilities, and the impact of fair value adjustments to acquired unearned revenue relating to the Take-Private Transaction and Certica acquisition that we do not believe are reflective of our ongoing operations.

(4)

“EBITDA” is defined as earnings before debt-related costs, including interest and loss on debt extinguishment, provision for taxes, depreciation, and amortization. We further adjust EBITDA to exclude certain items of a significant or unusual nature, including stock-based compensation, restructuring, transaction and sponsor related costs, reversal of payroll tax expense recorded in relation to the previous secondary stock purchase transaction, amortization of acquisition-related intangibles, changes in fair value of contingent liabilities, and the impact of fair value adjustments to acquired unearned revenue relating to the Take-Private Transaction and Certica acquisition.

(5)

“Allocated Combined Receipts” is defined as the combined receipts of our Company and companies that we have acquired allocated to the period of service delivery. We calculate Allocated Combined Receipts as the sum of (i) revenue and (ii) the impact of fair value adjustments to acquired unearned revenue related to the Take-Private Transaction and Certica acquisition that we do not believe are reflective of our ongoing operations.

 

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Unaudited Pro Forma Combined Financial Data

The following table presents selected unaudited pro forma combined financial information about our consolidated statements of operations, after giving effect to the Take-Private Transaction, along with the acquisition of Certica, the related financing activities and as a result of this offering, the payment of $224.7 million of outstanding borrowings under our Credit Facilities, net of fees, as if they occurred on January 1, 2020. In May 2020, the SEC adopted Release No. 33-10786 “Amendments to Financial Disclosures about Acquired and Disposed Businesses” (the “Final Rule”). We have adopted the provisions of the Final Rule, and the unaudited pro forma combined financial information herein is presented in accordance therewith.

On March 24, 2020, Thoma Bravo acquired Instructure in the Take-Private Transaction for approximately $2.0 billion (before related transaction fees and expenses), of which approximately $1.93 billion was paid to acquire then-outstanding Predecessor’s common stock and $49.5 million was paid in connection with the cancellation and conversion into cash consideration of outstanding equity awards, subject to certain vesting conditions, granted under the Predecessor’s equity incentive plan, including stock options and restricted stock unit awards. The Take-Private Transaction was funded with a combination of the proceeds of equity financing provided by the Thoma Bravo Funds, debt financing sources and a portion of Instructure’s cash on hand. Assets and liabilities were recorded at the estimated fair value initially at the transaction closing date. Goodwill has been recorded based on the amount that the purchase price exceeds the fair value of the net assets recognized.

As a result of the Take-Private Transaction, our historical consolidated financial and other data are presented in two distinct periods to indicate the application of two different bases of accounting between the periods presented and are therefore not comparable. The period prior to and including March 31, 2020 includes all of the accounts of Instructure, Inc. and is identified as “Predecessor” and the period after March 31, 2020 includes all of the accounts of Instructure Holdings, Inc. and is identified as “Successor.” For accounting purposes, management has designated the Acquisition Date as March 31, 2020, as the operating results and change in financial position for the intervening period is not material.

To facilitate comparability of the year ended December 31, 2020 to the year ended December 31, 2019, we present combined results for the combination of consolidated results from January 1, 2020 to December 31, 2020, comprising the Predecessor consolidated results from January 1, 2020 to March 31, 2020, the Successor consolidated results for the period from April 1, 2020 to December 31, 2020 and certain pro forma adjustments that give effect to the Take-Private Transaction as if it had occurred on January 1, 2020 (the “Unaudited Pro Forma Combined 2020 Period”). To facilitate comparability of the unaudited three months ended March 31, 2021 to the unaudited three months ended March 31, 2020, we present the unaudited three months ended March 31, 2020 with certain pro forma adjustments that give effect to the Take-Private Transaction as if it had occurred on January 1, 2020 (the “Unaudited Pro Forma Interim 2020 Period”).

As described in “Prospectus Summary—Corporate Reorganization,” we effected a 126,239.815-for-1 stock split of our issued and outstanding common stock on July 9, 2021. Upon the effectiveness of the stock split, the audited Successor period financial statements and the interim financial statements for the three months ended March 31, 2021 are retrospectively recast to reflect the stock split. As such, the impacts of the stock split are presented in the historical columns of the unaudited pro forma combined financial information within the Successor 2020 Period, the Unaudited Pro Forma Combined 2020 Period, the Total Unaudited Pro Forma 2020 Period, the Unaudited Pro Forma Interim 2020 Period, and the Total Unaudited Pro Forma Interim 2020 Period, and therefore no pro forma adjustment for the stock split is reflected herein.

Subsequent to our Corporate Reorganization and in conjunction with the offering, the selected unaudited pro forma combined financial information will give effect to us selling 12,500,000 shares of common stock as part of this offering and the application of the proceeds of this offering as described in “Use of Proceeds,” based on an assumed initial public offering price of $20.00 per share, which represents the midpoint of the range on the front cover of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us in connection with this offering.

 

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Instructure acquired all outstanding capital stock of Certica on December 22, 2020 for approximately $133.4 million (before related transaction fees and expenses). The acquisition was funded with a combination of debt financing sources and cash. Assets and liabilities were recorded at the estimated fair value initially at the transaction closing date. Goodwill has been recorded based on the amount that the purchase price exceeds the fair value of the net assets recognized.

To facilitate comparability of the year end December 31, 2020 to the year ended December 31, 2019 as a result of the Certica acquisition, but subsequent to the Take-Private Transaction, we have made certain pro forma adjustments that give effect to the Certica acquisition as if it had occurred on January 1, 2020 (the “Total Unaudited Pro Forma 2020 Period”). To facilitate comparability of the unaudited three months ended March 31, 2021 to the unaudited three months ended March 31, 2020, as a result of the Certica acquisition, but subsequent to the Take-Private Transaction, we have made certain pro forma adjustments that give effect to the Certica acquisition as if it had occurred on January 1, 2020 (the “Total Unaudited Pro Forma Interim 2020 Period”).

The unaudited pro forma combined financial information should be read in conjunction with the accompanying notes to the unaudited pro forma combined financial statements, “Summary Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes included elsewhere in this prospectus.

The unaudited pro forma combined financial information has been presented for informational purposes only. The unaudited combined pro forma financial information should not be relied upon as being indicative of what our results of operations would have been had the Take-Private Transaction, Certica acquisition, related financing activities, our Corporate Reorganization, and the offering been completed as of the date indicated. The unaudited pro forma combined financial information also does not project our financial position or results of operations for any future period or date. Future results may vary significantly from the results reflected in the Unaudited Pro Forma Combined Financial Data and should not be relied on as an indication of our results after the consummation of this offering contemplated by such unaudited pro forma combined financial statements.

 

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Combined and Total Unaudited Pro Forma 2020 Financial Information

 

    Predecessor           Successor                 Combined                 Total           Complete  
(in thousands, except per share data)   Period from
January 1, 2020
to March 31,

2020
          Period from
April 1, 2020
to December 31,

2020
    Take-
Private

Pro Forma
Adjustments
          Pro Forma
Year Ended
December 31,
2020
    Certica
January 1,
2020
through
December
22, 2020
    Certica Pro
Forma
Adjustments
    Pro Forma
Year Ended
December 31,
2020
    Offering
Adjustments
    Instructure
Holdings,
Inc. Pro
Forma
 
                      (Unaudited)           (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  

Revenue:

                     

Subscription and support

  $ 65,968       $ 209,148     $ (1,046 )(a)      $ 274,070     $ 32,007     $ (9,270 )(f)(j)    $ 296,807     $     $ 296,807  

Professional services and other

    5,421         21,525       (15 )(a)        26,931       1,832       (531 )(f)(j)      28,232             28,232  
 

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    71,389         230,673       (1,061       301,001       33,839       (9,801     325,039         325,039  
 

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

                     

Subscription and support

    19,699         108,603       11,955 (b) (c)        140,257       7,761       1,660 (g)(h)(j)      149,678             149,678  

Professional services and other

    4,699         15,547               20,246       444             20,690             20,690  
 

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    24,398         124,150       11,955         160,503       8,205       1,660       170,368             170,368  
 

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    46,991         106,523       (13,016       140,498       25,634       (11,461     154,671             154,671  
 

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

                     

Sales and marketing

    27,010         125,650       13,157 (b)(c)        165,817       4,591       8,933 (g)(h)      179,341             179,341  

Research and development

    19,273         51,066               70,339       6,649             76,988             76,988  

General and administrative

    17,295         62,572               79,867       15,154       (10,890 )(g)(h)      84,131             84,131  

Impairment of held-for-sale goodwill

            29,612               29,612                   29,612             29,612  

Impairment on disposal group

            10,166               10,166                   10,166             10,166  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    63,578         279,066       13,157         355,801       26,394       (1,957     380,238             380,238  
 

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (16,587       (172,543     (26,173       (215,303     (760     (9,504     (225,567           (225,567
 

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

                     

Interest income

    313         49               362                   362             362  

Interest expense

    (8       (50,921     (16,395 )(d)        (67,324     (3,217     (2,928 )(i)      (73,469     19,162 (k)      (54,307

Other income (expense), net

    (5,738       1,510               (4,228                 (4,228           (4,228
 

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

    (5,433       (49,362     (16,395       (71,190     (3,217     (2,928     (77,335     19,162       (58,173
 

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax benefit

    (22,020       (221,905     (42,568       (286,493     (3,977     (12,432     (302,902     19,162       (283,740

Income tax benefit (expense)

    (183       43,924       8,424 (e)        52,165       (113     2,460 (e)      54,513       (3,792 )(e)      50,721  
 

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (22,203     $ (177,981   $ (34,144     $ (234,328   $ (4,090   $ (9,972   $ (248,389   $ 15,370     $ (233,019
 

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share, basic and diluted

                     

 

(1.69

)(l) 

                     

 

 

 

Weighted-average common shares used in computing basic and diluted net loss per common share

                     

 

137,638

(l) 

                     

 

 

 

Notes to the Unaudited Pro Forma Combined and Total Financial Statements

(1) Basis of Presentation

The unaudited pro forma consolidated financial information was prepared in accordance with Article 11 of Regulation S-X as amended by the Final Rule using the assumptions set forth in the notes to the unaudited pro forma consolidated financial information. The unaudited pro forma consolidated financial information has been adjusted to include Transaction Accounting Adjustments, which reflect the application of the accounting required by GAAP, linking the effects of the Take-Private Transaction, the Certica acquisition and as a result of the offering, the payment of $224.7 million of outstanding borrowings under our Credit Facilities, net of fees, to the Company’s historical consolidated financial statements.

 

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The unaudited pro forma combined financial information is based on the historical financial statements of the Predecessor and the Successor and was prepared using the acquisition method of accounting assuming both the Take-Private Transaction, the Certica acquisition, and the related financing activities occurred on January 1, 2020. The acquisition method of accounting is based on Accounting Standard Code (“ASC”) Topic 805, Business Combinations (“ASC 805”), and uses the fair value concepts defined in ASC Topic 820, Fair Value Measurements (“ASC 820”). Application of ASC 820 to determine fair value of acquired assets and liabilities in accordance to ASC 805 requires us to make judgments and estimates and it is possible that others applying reasonable judgment to the same facts and circumstances could develop and support a range of alternative estimated amounts.

(2) Pro Forma Adjustments

This note should be read in conjunction with other notes in the unaudited pro forma combined and total financial statements. Adjustments included in the columns under the headings “Pro Forma Adjustments” represent the following:

 

  (a)   Represents deferred revenue purchase accounting adjustments as a result of the Take-Private Transaction. In accordance with ASC 805, deferred revenue is recognized at fair value representing direct costs to fulfill plus a reasonable margin. The pro forma combined statement of operations reflects the purchase accounting associated with the Take-Private Transaction as if it had occurred on January 1, 2020.

 

  (b)   Represents adjustments related to amortization for deferred commissions totaling $3.2 million and capitalized software development costs totaling $4.3 million for the period from January 1, 2020 to March 31, 2020, as if the Take-Private Transaction had occurred on January 1, 2020. In connection with the Take-Private Transaction, deferred commissions and capitalized software development costs were set to zero reflecting their fair value as a result of purchase accounting application.

 

  (c)   The table below sets forth incremental amortization expenses related to intangible assets recognized as a result of the Take-Private Transaction in accordance with ASC 805. The pro forma combined statements of operations reflect the purchase accounting associated with the Take-Private Transaction as if it had occurred on January 1, 2020. The pro forma incremental amortization expenses are calculated based on the fair value of the acquired assets and liabilities as of the date of the Take-Private Transaction.

 

                          Predecessor  

(in thousands)

 

Intangible Assets

   Useful Lives      Value      Amortization
Method
     Period from
January 1, 2020 to
March 31, 2020
 

Trade names

     60 -120 months      $ 130,900        Straight-line      $ 3,510  

Developed technology

     60 months      $ 300,000        Straight-line      $ 15,000  

Customer relationships

     84 months      $ 395,000        Straight-line      $ 14,107  
           

 

 

 
            $            32,617  
           

 

 

 

The table below sets forth the future amortization as of December 31, 2020 associated with the intangible assets recognized as a result of the Take-Private Transaction (less assets held for sale):

 

     Year Ended December 31,                
(in thousands)    2021      2022      2023      2024      2025      Thereafter      Total  

Trade names

   $ 12,880      $ 12,880      $ 12,880      $ 12,880      $ 12,140      $ 48,560      $ 112,220  

Developed technology

   $ 56,000      $ 56,000      $ 56,000      $ 56,000      $      $      $ 224,000  

Customer relationships

   $ 49,972      $ 49,972      $ 49,972      $ 49,972      $ 49,972      $ 49,972      $ 299,832  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 118,852      $ 118,852      $ 118,852      $ 118,852      $ 62,112      $ 98,532      $ 636,052  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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  (d)   The table below sets forth incremental interest expense resulting from the debt issuance in connection with the Take-Private Transaction. Our indebtedness is described in further detail in Note 7—Credit Facility to the consolidated financial statements. The pro forma combined statements of operations reflect this activity as if it had occurred on January 1, 2020.

 

                  Predecessor  

(in thousands)

 

Debt

   Principal      Interest Rate     Period from
January 1, 2020 to
March 31, 2020
 

Initial Term Loan

   $ 775,000        8.21   $ 16,395  
       

 

 

 
        $             16,395  
       

 

 

 

 

  (e)   A combined statutory tax rate of 19.79% is applied to the pro forma adjustments.

 

  (f)   Represents deferred revenue purchase accounting adjustments totaling $5.9 million as a result of the Certica acquisition. In accordance with ASC 805, deferred revenue is recognized at fair value representing direct costs to fulfill plus a reasonable margin. The statements of operations for the Total Unaudited Pro Forma 2020 Period reflect the purchase accounting associated with the Certica acquisition as if it had occurred on January 1, 2020.

 

  (g)   Represents adjustments related to amortization for deferred commissions totaling $7.6 million and capitalized software development costs totaling $3.3 million for the period from January 1, 2020 to December 31, 2020, as if the Certica acquisition had occurred on January 1, 2020. In connection with the Certica acquisition, deferred commission and capitalized software development costs were set to zero reflecting their fair value as a result of purchase accounting application.

 

  (h)   The table below sets forth incremental amortization expenses related to intangible assets recognized as a result of the Certica acquisition in accordance with ASC 805. The statements of operations for the Total Unaudited Pro Forma 2020 Period reflect the purchase accounting associated with the Certica acquisition as if it had occurred on January 1, 2020. The pro forma incremental amortization expenses are calculated based on the fair value of the acquired assets and liabilities as of the date of the Certica acquisition.

 

(in thousands)                            

Intangible Assets

   Useful Lives      Value      Amortization
Method
     Period from
January 1, 2020 to
December 31, 2020
 

Trade names

     36 months      $ 700        Straight-line      $ 233  

Developed technology