You should read the following discussion and analysis together with the
financial statements and the related notes to those statements included
elsewhere in this report. This discussion contains forward-looking statements
that involve risks and uncertainties. As a result of many factors, such as those
set forth in the section of this report captioned "Risk Factors" and elsewhere
in this report, our actual results may differ materially from those anticipated
in these forward-looking statements. Forward-looking statements, other than the
statements regarding the proposed acquisition by
Overview
We offer our platform through a Software-as-a-Service, or SaaS, business model. Customers can rapidly deploy our applications with minimal upfront implementation. They also benefit from regular software benefits and 99.9% uptime. Our SaaS business model reduces the cost, complexity and disruptions associated with implementations and upgrades of on-premise software.
We were founded in 2008, and in 2011, we launched Canvas, with the goal to make
teaching and learning easier. Initially, we focused on the
We sell our applications and services through a direct sales force. Our sales organization includes technical sales engineers who serve as experts in the technical aspects of our applications and customer implementations. Many of our sales efforts require us to respond to request for proposals, particularly in the higher education space and to a lesser extent in K-12, and to a minimal extent in the corporate market. As we grow internationally, we may use reseller partnerships as needed to penetrate certain new markets.
As of
Our subscription fee includes the use of our platform and our technical support
and is based on the number of users. We also generate revenue from training,
implementation services and other types of professional services. We have
experienced net revenue retention rates of over 100% at each of
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Merger Agreement
On
Under the terms of the Merger Agreement, Purchaser's obligation to accept and
pay for shares of
The Merger Agreement provides certain termination rights for both
The Merger Agreement contains customary representations, warranties and
covenants for
For additional information related to the Offer and the Merger, refer to
Key Factors Affecting Our Performance
Investment in
We invested in our sales and marketing organization to drive additional revenue and support the growth of our customer base. Any investments we have made in our sales and marketing organization have occurred in advance of experiencing any benefits from such investments, so it may be difficult for us to determine if we are efficiently allocating our resources in these areas.
In 2019, 2018 and 2017, 20%, 19% and 15%, respectively, of our revenue was
derived from outside
Investment in Technology
We have aggressively invested in developing technology to support our growth. While we have invested heavily in research and development, we have also built a foundation for innovation through our approach to the learning management system as a learning platform. However, our continued investments in research and development may result in enhancements or new applications that may not achieve market adoption, are more expensive to develop than anticipated, may take longer to generate revenue or may generate less revenue than we anticipate.
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Development of Markets and Complementary Products or Services
As our more developed markets, such as higher education, continue to mature, our opportunities for future growth may be increasingly dependent on less developed markets, such as K-12 or corporate, or on new or complementary products or services.
Net Revenue Retention Rate
We calculate our net revenue retention rate by dividing the total revenue
obtained from a particular customer in a given month by the total revenue from
that customer from the same month in the immediately preceding year. This
calculation contemplates all changes to revenue for the designated customer,
which includes customer terminations, changes in quantities of users, changes in
pricing, additional applications purchased or applications no longer used. We
calculate the net revenue retention for our entire customer base at a given
point in time. We believe our net revenue retention rate is an important metric
to measure the long-term value of customer agreements and our ability to retain
our customers. Our net revenue retention rate was over 100% at each of
Backlog
Backlog represents future non-cancellable amounts to be invoiced under our
agreements. We have generally signed multiple year subscription contracts for
our applications. For these agreements, it is common to invoice an initial
amount at contract signing followed by subsequent periodic invoices, generally
annually. At any point in the contract term, there can be amounts that we have
not yet been contractually able to invoice. Until such time as these amounts are
invoiced, they are not recorded in revenue, deferred revenue, accounts
receivable or elsewhere in our consolidated financial statements, and are
considered by us to be backlog. Multiple-year payments are recorded as deferred
revenue until recognized as revenue according to our revenue recognition
policies and are not considered a component of backlog. As of
Focus on Free Cash Flow
We define free cash flow as net cash provided by (used in) operating activities less purchases of property and equipment and intangible assets, net of proceeds from disposals of property and equipment. We consider free cash flow to be an important measure that we are focused on to run our business. For more information about free cash flow, see the section titled "Selected Consolidated Financial Data-Non-GAAP Financial Measures."
Financial Operations Overview
Revenue
We generate revenue primarily from two main sources: (1) subscription and support revenue, which is comprised of SaaS fees from customers accessing our learning management systems and from customers purchasing additional support beyond the standard support that is included in the basic SaaS fees; and (2) related professional services revenue, which is comprised of training, implementation services and other types of professional services.
Subscription revenue is derived from customers using our cloud-based learning platform and is driven primarily by the number of customers, the number of users at each customer, the price of our applications and renewal rates. Support revenue is derived from customers purchasing additional support beyond the standard support that is included in the basic SaaS fee. Our contracts typically vary in length between one and five years. Subscriptions and support are non-cancelable and are billed in advance on an annual basis. All subscription and support fees billed are initially recorded in deferred revenue and recognized ratably over the subscription term.
Professional services and other revenue are derived primarily from implementation, training, and other consulting fees. Implementation services includes training and consulting services that generally take anywhere from 30 to 90 days to complete depending on customer-side complexity and timelines. It includes regularly scheduled and highly-structured activities to ensure customers progress toward better utilizing our applications. Most of these interactions take place over the phone and through the use of web meeting technology. Implementation services are recognized over time as the services are rendered, using an efforts-expended input method. Implementation services also include nonrefundable upfront setup fees, which are allocated to the remaining performance obligations.
We include training with every implementation and offer additional training for a fee. The training offered is focused on creating confidence among users so they can be successful with our applications. Most training is performed remotely using web meeting technology. Because we have determined that trainings are distinct, we record training revenue upon the delivery of the training. Subscription training is recognized ratably in the same manner as subscription and support revenue described above.
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In addition to our implementation and training offerings, we provide consulting services for custom application development, integrations, content services and change management consulting. These services are architected to boost customer adoption of our applications and to drive usage of features and capabilities that are unique to our company. We have determined that these services are distinct. Professional services revenue is typically recognized over time as the services are rendered, using an efforts-expended (labor hours) input method.
Cost of Revenue
Cost of subscription and support revenue consists primarily of the costs of our managed hosting provider and other third-party service providers, employee-related costs including payroll, benefits and stock-based compensation expense for our operations and customer support teams, amortization of capitalized software development costs and acquired technology, and allocated overhead costs, which we define as rent, facilities and costs related to information technology, or IT.
Cost of professional services and other revenue consists primarily of personnel costs of our professional services organization, including salaries, benefits, travel, bonuses and stock-based compensation, as well as allocated overhead costs.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of personnel costs of our sales and marketing employees, including sales commissions and incentives, benefits and stock-based compensation expense, marketing programs, including lead generation, costs of our annual InstructureCon and BridgeCon user conferences and allocated overhead costs. We defer and amortize on a straight-line basis sales commission costs related to acquiring new customers and upsells from existing customers over a period of benefit that we have determined to be generally four years.
Research and Development. Research and development expenses consist primarily of personnel costs of our development team, including payroll, benefits and stock-based compensation expense and allocated overhead costs. We capitalize certain software development costs that are attributable to developing new applications, features and adding incremental functionality to our platform. We amortize these costs to subscription and support cost of revenue in the consolidated statements of operations over the estimated life of the new application or incremental functionality, which is generally three years.
General and Administrative. General and administrative expenses consist of personnel costs and related expenses for executive, finance, legal, human resources, recruiting, employee-related information technology, administrative personnel, including payroll, benefits and stock-based compensation expense; professional fees for external legal, accounting and other consulting services; and allocated overhead costs.
Other Income (Expense)
Other income (expense) consists primarily of interest income, interest expense,
the change in fair value of the warrant liability, which is subject to
mark-to-market adjustments as of each reporting period, and the impact of
foreign currency transaction gains and losses. Interest expense is related to
fees incurred to have access to our credit facility with
Income Tax Expense
We are subject to income taxes in
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Results of Operations
The following tables set forth certain consolidated financial data in dollar amounts and as a percentage of total revenue. Prior period adjustments have been made as a result of the adoption of Topic 606, see footnote 1 in the Notes to Consolidated Financial Statements for a summary of adjustments made.
Year Ended December 31, 2019 2018 2017 *As Adjusted (in thousands) Revenue: Subscription and support$ 236,241 $ 188,501 $ 144,108 Professional services and other 22,232 21,043 16,867 Total revenue 258,473 209,544 160,975 Cost of revenue: Subscription and support 64,170 46,706 34,351 Professional services and other 18,656 15,137 12,211 Total cost of revenue 82,826 61,843 46,562 Gross profit 175,647 147,701 114,413 Operating expenses: Sales and marketing 121,643 97,481 78,726 Research and development 83,526 59,391 48,293 General and administrative 56,471 35,602 31,196 Total operating expenses 261,640 192,474 158,215 Loss from operations (85,993 ) (44,773 ) (43,802 ) Other income (expense): Interest income 1,795 2,413 361 Interest expense (16 ) (68 ) (55 ) Other income (expense), net (225 ) (698 ) 257 Total other income, net 1,554 1,647 563
Loss before income tax benefit (expense) (84,439 ) (43,126 ) (43,239 ) Income tax benefit (expense)
3,620 (339 ) 155 Net loss$ (80,819 ) $ (43,465 ) $ (43,084 ) * See Note 1 of the notes to the consolidated financial statements for a summary of adjustments. 47
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Year Ended December 31, 2019 2018 2017 *As Adjusted (as a percentage of total revenue) Revenue: Subscription and support 91 % 90 % 90 % Professional services and other 9 10 10 Total revenue 100 100 100 Cost of revenue: Subscription and support 25 22 21 Professional services and other 7 7 8 Total cost of revenue 32 29 29 Gross profit 68 71 71 Operating expenses: Sales and marketing 47 47 49 Research and development 32 28 30 General and administrative 22 17 19 Total operating expenses 101 92 98 Loss from operations (33 ) (21 ) (27 ) Other income (expense): Interest income 1 1 0 Interest expense (0 ) (0 ) (0 ) Other income (expense), net (0 ) (0 ) 0 Total other income, net 1 1 0 Loss before income tax benefit (expense) (32 ) (20 ) (27 ) Income tax benefit (expense) 1 (0 ) 0 Net loss (31 )% (20 )% (27 )% * See Note 1 of the notes to the consolidated financial statements for a summary of adjustments.
Year Ended
Revenue Year Ended December 31, Change 2019 2018 Amount % (dollars in thousands)
Subscription and support
$ 258,473 $ 209,544 $ 48,929 23 %
Subscription and support revenue increased
Professional services and other revenue increased
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Cost of Revenue and Gross Margin
Year Ended December 31, Change 2019 2018 Amount % (dollars in thousands)
Cost of revenue:
Subscription and support
$ 82,826 $ 61,843 $ 20,983 34 % Gross margin percentage: Subscription and support 73 % 75 % Professional services and other 16 28 Total gross margin 68 % 70 %
Total cost of revenue increased
Subscription and support cost of revenue increased
Professional services and other cost of revenue increased
Operating Expenses Sales and Marketing Year Ended December 31, Change 2019 2018 Amount % (dollars in thousands) Sales and marketing$ 121,643 $ 97,481 $ 24,162 25 %
Sales and marketing expenses increased
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Research and Development Year Ended December 31, Change 2019 2018 Amount % (dollars in thousands) Research and development$ 83,526 $ 59,391 $ 24,135 41 %
Research and development expenses increased
General and Administrative Year Ended December 31, Change 2019 2018 Amount % (dollars in thousands) General and administrative$ 56,471 $ 35,602 $ 20,869 59 %
General and administrative expenses increased
Other Income Year Ended December 31, Change 2019 2018 Amount % (dollars in thousands) Other income, net$ 1,554 $ 1,647 $ (93 ) -6 %
Other income, net includes interest income and expense, unrealized gains and
losses on marketable securities and the impact of foreign currency transaction
gains and losses. Other income, net decreased
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Income Tax Benefit (Expense) Year Ended December 31, Change 2019 2018 Amount % (dollars in thousands) Income tax benefit (expense)$ 3,620 $ (339 ) $ 3,959 -1168 %
Income tax benefit (expense) consists of current and deferred taxes for
Fiscal 2018 Compared to Fiscal 2017
For a comparison of our results of operations for the fiscal years ended
Liquidity and Capital Resources
As of
In
To secure our obligations under the credit facility, we granted SVB a security
interest in substantially all of our tangible and intangible assets, excluding
intellectual property. The credit facility contains customary events of default,
conditions to borrowing, and covenants, including restrictions on our ability to
make acquisitions, make distributions and dividends to stockholders, and
maintain certain amounts of cash or debt with other financial institutions. The
agreement also includes a financial covenant to maintain a certain adjusted
quick ratio, reported quarterly. In the event the accordion feature of the line
is utilized the covenants convert to a recurring revenue measurement. During the
continuance of an event of default, SVB may accelerate amounts outstanding,
terminate the credit facility and foreclose on the collateral. As of
The following table shows our cash flows for 2019, 2018 and 2017:
Year Ended December 31, 2019 2018 2017 (in thousands)
Net cash provided by (used in) operating activities
9,631 121,833 10,052 51
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Our cash flows are subject to seasonal fluctuations. A significant portion of
our contracts have terms that coincide with our academic customers' typical
fiscal year-end of
Operating Activities
Net cash provided by operating activities consists primarily of net loss adjusted for certain non-cash items, including stock-based compensation, depreciation and amortization and other non-cash charges, net.
Net cash provided by operating activities during 2019 was
Net cash provided by operating activities during 2018 was
Net cash used in operating activities during 2017 was
Investing Activities
Our investing activities have consisted primarily of business acquisitions, purchases and maturities of marketable securities, property and equipment purchases for computer-related equipment and capitalization of software development costs. Capitalized software development costs are related to new applications or improvements to our existing software platform that expand the functionality for our customers.
Net cash used in investing activities during 2019 was
Net cash used in investing activities during 2018 was
Net cash provided by investing activities during 2017 was
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Financing Activities
Our financing activities have consisted primarily of proceeds from the issuance of common stock from employee equity plans and shares repurchased for tax withholdings on vesting of restricted stock.
Net cash provided by financing activities for 2019 was
Net cash provided by financing activities for 2018 was
Net cash provided by financing activities for 2017 was
Contractual Obligations and Commitments
Contractual obligations are cash that we are obligated to pay as part of certain
contracts that we have entered into during the course of business. Below is a
table that shows the projected outlays as of
Leases Payments due by Period: Less More than 1-3 3-5 than Total 1 Year Years Years 5 Years (in thousands) Operating lease obligations$ 61,139 $ 9,737 $ 18,672 $ 17,473 $ 15,257
Leases for new office space that have commenced are disclosed in Note 12 in the notes to the consolidated financial statements. Two leases have not yet commenced and are not disclosed in the notes to the consolidated financial statements.
The first lease commences in
The second lease commences in
Letters of Credit
As of
Off-Balance Sheet Arrangements
During 2019, 2018 and 2017, we did not have any relationships with any entities or financial partnerships, such as structured finance or special purpose entities established for the purpose of facilitating off-balance sheet arrangements or other purposes.
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Income Taxes
As of
Utilization of the net operating loss carryforwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.
Due to our cumulative losses, we maintain a valuation allowance against the
majority of our net deferred tax assets as of
Critical Accounting Policies and Estimates
Our management's discussion and analysis of financial condition and results of operations is based on our consolidated financial statements which have been prepared in accordance with GAAP. In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our reported revenue, results of operations and net income or loss, as well as on the value of certain assets and liabilities on our balance sheet during and as of the reporting periods. These estimates, assumptions and judgments are necessary because future events and their effects on our results and the value of our assets cannot be determined with certainty, and are made based on our historical experience and on other assumptions that we believe to be reasonable under the circumstances. These estimates may change as new events occur or additional information is obtained, and we may periodically be faced with uncertainties, the outcomes of which are not within our control and may not be known for a prolonged period of time. Because the use of estimates is inherent in the financial reporting process, actual results could differ from those estimates.
The critical accounting estimates, assumptions and judgments that we believe have the most significant impact on our consolidated financial statements are described below.
Revenue Recognition
We generate revenue primarily from two main sources: (1) subscription and support revenue, which is comprised of SaaS fees from customers accessing our learning, assessment and talent management systems and from customers purchasing additional support beyond the standard support that is included in the basic SaaS fees; and (2) related professional services revenue, which is comprised of training, implementation services and other types of professional services. Revenue is recognized when control of these services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services.
We determined revenue recognition through the following steps:
• Identification of the contract, or contracts, with a customer • Identification of the performance obligations in the contract • Determination of the transaction price • Allocation of the transaction price to the performance obligations in the contract • Recognition of revenue when, or as, we satisfy a performance obligation
The following describes the nature of our primary types of revenue and the revenue recognition policies and significant payment terms as they pertain to the types of transactions we enter into with our customers.
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Subscription and Support
Subscription and support revenue is derived from fees from customers to access our learning, assessment and talent management systems and support beyond the standard support that is included with all subscriptions. The terms of our subscriptions do not provide customers the right to take possession of the software. Subscription and support revenue is generally recognized on a ratable basis over the contract term. Payments from customers are primarily due annually in advance.
Professional Services and Other
Professional services revenue is derived from implementation, training, and consulting services. Our professional services are typically considered distinct from the related subscription services as the promise to transfer the subscription can be fulfilled independently from the promise to deliver the professional services (i.e., customer receives standalone functionality from the subscription and the customer obtains the intended benefit of the subscription without the professional services). Professional services revenue is typically recognized over time as the services are rendered, using an efforts-expended (labor hours) input method. Implementation services also include nonrefundable upfront setup fees, which are allocated to the remaining performance obligations.
Contracts with Multiple Performance Obligations
Many of our contracts with customers contain multiple performance obligations. We account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price (SSP) basis. We determine the standalone selling prices based on our overall pricing objectives by reviewing our significant pricing practices, including discounting practices, geographical locations, the size and volume of our transactions, the customer type, price lists, our pricing strategy, and historical standalone sales. Standalone selling price is analyzed on a periodic basis to identify if we have experienced significant changes in our selling prices.
Deferred Commissions
Sales commissions earned by our sales force, as well as related payroll taxes, are considered incremental and recoverable costs of obtaining a contract with a customer. These costs are deferred and then amortized on a straight-line basis over a period of benefit that we have determined to be generally four years. We determined the period of benefit by taking into consideration our customer contracts, our technology and other factors. Amortization of deferred commissions is included in sales and marketing expenses in the accompanying consolidated statements of operations.
Deferred Revenue
Deferred revenue consists of billings and payments received in advance of revenue recognition generated by our subscription and support services and professional services and other, as described above. ASC 606 introduced the concept of contract liabilities, which is substantially similar to deferred revenue under previous accounting guidance.
Stock-Based Compensation
We account for all stock options and awards granted to employees and nonemployees using a fair value method. Stock-based compensation is recognized as an expense and is measured at the fair value of the award. The measurement date for employee awards is generally the date of the grant. Stock-based compensation costs are recognized as expense over the requisite service period, which is generally the vesting period for awards, on a straight-line basis for awards with only a service condition, and using the accelerated attribution method for awards with both a performance and service condition. Forfeitures are accounted for as they occur.
We use the market closing price of our common stock as reported on the
We use the Black-Scholes option pricing model to measure the fair value of our stock options and purchase rights issued to employees under our 2015 Employee Stock Purchase Plan, or ESPP, when they are granted. We make several estimates in determining our stock-based compensation for these stock options and purchase rights. These assumptions and estimates are as follows:
• Fair Value of Common Stock. We rely on the closing price of our common stock as reported by theNew York Stock Exchange on the date of grant to determine the fair value of our common stock. 55
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• Expected Term. The expected term represents the period that our stock-based awards are expected to be outstanding. The expected term assumptions were determined based on the vesting terms, exercise terms and contractual lives of the options. The expected term of employee option awards is determined using the average midpoint between vesting and the contractual term for outstanding awards, or the simplified method, because we do not yet have a sufficient history of option exercises. We consider this appropriate as we plan to see significant changes to our equity structure in the future and there is no other method that would be more indicative of exercise activity. For the ESPP, we use an expected term of 0.5 years to match the offering period. • Expected Volatility. Since, we did not have a trading history of our common stock, the expected volatility was determined based on the historical stock volatilities of our comparable companies. To determine our peer companies, we used the following criteria: software or software-as-a-service companies; similar histories and relatively comparable financial leverage; sufficient public company trading history; and in similar businesses and geographical markets. We used the peers' stock price volatility over the expected life of our granted options to calculate the expected volatility. We intend to continue to apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own share price becomes available, or unless circumstances change such that the identified companies are no longer similar to us, in which case, more suitable companies whose share prices are publicly available would be used in the calculation. For the ESPP, we use the trading history of our own common stock to determine expected volatility. • Risk-Free Interest Rate. The risk-free interest rate is based on the implied yield available onU.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options. • Expected Dividend Yield. We have never declared or paid any cash dividends and do not plan to pay cash dividends in the foreseeable future, and, therefore, use an expected dividend yield of zero.
We will continue to use judgment in evaluating the assumptions related to our stock-based compensation expense calculations on a prospective basis.
Recent Accounting Pronouncement
For information on recent accounting pronouncements, see Recent Accounting Pronouncements in the notes to the consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
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