Three Months

Ended September 30,

2016

2015

Revenue

$

30,145

$

20,894

Gross Margin

GAAP

71.3

%

67.5

%

Non-GAAP⁽¹⁾

72.2

%

67.9

%

Operating Loss

GAAP

(12,267

)

(10,103

)

Non-GAAP⁽¹⁾

(9,461

)

(9,088

)

Net loss

GAAP

(12,317

)

(10,212

)

Non-GAAP⁽¹⁾

(9,501

)

(9,188

)

EPS

GAAP⁽²⁾

$

(0.44

)

$

(1.60

)

Non-GAAP⁽¹⁾⁽²⁾

$

(0.34

)

$

(0.43

)

(1)

Non-GAAP financial measures exclude stock-based compensation, payroll taxes related to secondary stock purchase transactions, amortization of acquisition related intangibles, and the change in fair value of the warrant liability.

(2)

Q3 2016 and Q3 2015 GAAP share count was 28.1M and 6.4M, respectively, due to the conversion of redeemable convertible preferred shares into common stock, which occurred on the closing of Instructure’s IPO on November 18, 2015.  Non-GAAP share count assumes the conversion of the redeemable convertible preferred shares to common stock occurred at the beginning of the annual period.

●

Instructure continued to grow its customer base in the third quarter. A few highlights include:

○

US Higher Education and K-12 Schools – Canvas was selected by Brigham Young University and by the University of Nebraska. Additionally, Orange County Public School District in Florida, the 9^th largest school district in the US, and Kent School District, the 4^th largest district in Washington selected Canvas for their LMS solution.

○

International – Canvas was chosen by TIAS in the Netherlands, the business school of Tilburg University, and by the Brisbane Grammar School in Australia.

○

Corporate – Bridge was selected by various companies across the finance, manufacturing and healthcare industries, including Delta Dental of Washington and Movement Mortgage.

●

Stock-based compensation - Although stock-based compensation is an important aspect of the compensation of our employees and executives, management believes it is useful to exclude stock-based compensation in order to better understand the long-term performance of our core business.  Unlike cash compensation, the value of equity awards is determined using a complex formula that incorporates factors, such as market volatility and forfeiture rates that are beyond our control. Stock-based compensation from the employee sale of securities to investors, prior to our IPO, at a price above the current fair market value was dependent on our fair value assumptions and other factors that were beyond our control.

●

Accrual or reversal of payroll taxes related to secondary stock purchase transactions - In prior periods, operating expenses included employer payroll tax-related items on employee sales of securities to investors prior to our IPO. The amount of employer payroll tax-related items on these transactions was dependent on the fair market value of our stock. In the current period, operating expenses included the reversal of such payroll tax expense due to the reduction of the estimated liability.

●

Amortization of acquisition related intangibles - Expense for the amortization of acquisition related intangibles is a non-cash item, and we believe that the exclusion of this expense provides for a useful comparison of our operating results to prior periods.

●

Change in fair value of the warrant liability - Under GAAP, we are required to record mark-to-market adjustments for the change in fair value of the liability for warrants issued in connection with term debt and our credit facility. This expense or gain is excluded from management's assessment of our operating performance because management believes that these non-cash items are not indicative of ongoing operating performance.

INSTRUCTURE, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands)

September 30,

2016

December 31,

2015

(unaudited)

Assets

Current assets:

Cash and cash equivalents

$

58,975

$

90,471

Short term marketable securities

24,334

325

Accounts receivable—net of allowances of $269 and $225 at

September 30, 2016 and December 31, 2015, respectively

23,087

9,523

Prepaid expenses

4,572

5,010

Other current assets

472

614

Total current assets

111,440

105,943

Property and equipment, net

13,805

11,732

Goodwill

989

989

Intangible assets, net

471

444

Noncurrent prepaid expenses

622

749

Other assets

1,027

1,203

Total assets

$

128,354

$

121,060

Liabilities and stockholders’ equity

Current liabilities:

Accounts payable

$

5,977

$

3,912

Accrued liabilities

10,873

8,852

Deferred rent

708

541

Deferred revenue

81,563

49,384

Total current liabilities

99,121

62,689

Deferred revenue, net of current portion

3,222

2,941

Deferred rent, net of current portion

8,532

9,078

Warrant liability

35

331

Other long term liabilities

36

402

Total liabilities

110,946

75,441

Commitments and contingencies

Stockholders’ equity:

Common stock

3

4

Treasury stock

—

(1

)

Additional paid-in capital

200,961

188,517

Accumulated other comprehensive income

(9

)

—

Accumulated deficit

(183,547

)

(142,901

)

Total stockholders’ equity

17,408

45,619

Total liabilities and stockholders’ equity

$

128,354

$

121,060

INSTRUCTURE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

Three Months

Ended September 30,

Nine Months

Ended September 30,

2016

2015

2016

2015

Revenue:

Subscription and support

$

25,814

$

17,609

$

68,807

$

43,557

Professional services and other

4,331

3,285

10,527

7,839

Total Net revenue

30,145

20,894

79,334

51,396

Cost of Revenue:

Subscription and support

6,312

4,907

17,335

12,520

Professional services and other

2,326

1,887

6,287

4,717

Total cost of revenue

8,638

6,794

23,622

17,237

Gross profit

21,507

14,100

55,712

34,159

Operating expenses:

Sales and marketing

17,788

13,172

51,989

38,303

Research and development

9,297

6,525

25,832

17,441

General and administrative

6,689

4,506

18,428

18,475

Total operating expenses

33,774

24,203

96,249

74,219

Loss from operations

(12,267

)

(10,103

)

(40,537

)

(40,060

)

Other income (expense):

Interest income

104

6

236

13

Interest expense

(31

)

(28

)

(54

)

(72

)

Change in fair value of warrant liability

(10

)

(9

)

52

(536

)

Other income (expense), net

(103

)

(52

)

(234

)

(161

)

Total other income (expense)

(40

)

(83

)

—

(756

)

Loss before income taxes

(12,307

)

(10,186

)

(40,537

)

(40,816

)

Income tax expense

(10

)

(26

)

(109

)

(40

)

Net loss

$

(12,317

)

$

(10,212

)

$

(40,646

)

$

(40,856

)

Deemed dividend to investors

—

—

—

(632

)

Net loss attributable to common stockholders

$

(12,317

)

$

(10,212

)

$

(40,646

)

$

(41,488

)

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

$

(0.44

)

$

(1.60

)

$

(1.47

)

$

(6.61

)

Weighted average shares used to compute net loss per share, basic and diluted

28,084

6,381

27,667

6,279

INSTRUCTURE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

Three Months

Ended September 30,

Nine Months

Ended September 30,

2016

2015

2016

2015

Operating Activities:

Net loss

$

(12,317

)

$

(10,212

)

$

(40,646

)

$

(40,856

)

Adjustments to reconcile net loss to net cash used in

   operating activities:

Depreciation of property and equipment

946

737

2,832

1,873

Amortization of intangible assets

120

77

284

232

Amortization of deferred financing costs

11

22

34

54

Change in fair value of warrant liability

10

9

(52

)

536

Stock-based compensation

2,804

1,012

7,701

7,699

Other

167

54

120

165

Changes in assets and liabilities:

Accounts receivable, net

18,091

16,938

(13,887

)

(3,229

)

Prepaid expenses and other assets

716

(570

)

849

(3,021

)

Accounts payable and accrued liabilities

2,606

(449

)

4,303

3,496

Deferred revenue

8,666

11,957

32,460

25,796

Deferred rent

(139

)

125

(379

)

504

Other liabilities

(31

)

(24

)

(361

)

(285

)

Net cash used in operating activities

21,650

19,676

(6,742

)

(7,036

)

Investing Activities:

Purchases of property and equipment

(1,512

)

(1,324

)

(4,922

)

(4,463

)

Purchases of intangible assets

(15

)

—

(311

)

—

Proceeds from disposal of property and equipment

5

35

23

53

Purchases of marketable securities

(24,363

)

(303

)

(24,363

)

(1,456

)

Maturities of marketable securities

—

—

325

500

Net cash used in investing activities

(25,885

)

(1,592

)

(29,248

)

(5,366

)

Financing Activities:

Proceeds from exercise of redeemable convertible preferred stock warrants

—

—

—

250

Proceeds from issuance of common stock from employee equity plans

1,183

135

4,494

246

Payments of line of credit financing costs

—

—

—

(32

)

Repayment of capital lease obligations

—

(57

)

—

(207

)

Net cash provided by financing activities

1,183

78

4,494

257

Net decrease in cash

(3,052

)

18,162

(31,496

)

(12,145

)

Cash, beginning of period

62,027

(29,823

)

90,471

43,915

Cash, end of period

$

58,975

$

(11,661

)

$

58,975

$

31,770

INSTRUCTURE, INC.

RECONCILIATION OF NON-GAAP GROSS MARGIN

(in thousands, except percentages)

(unaudited)

Three Months Ended

September 30,

Nine Months Ended

September 30,

2016

2015

2016

2015

(unaudited)

(unaudited)

GAAP gross profit

$

21,507

$

14,100

$

55,712

$

34,159

Stock-based compensation

256

94

722

209

Non-GAAP gross margin

$

21,763

$

14,194

$

56,434

$

34,368

GAAP gross margin %

71.3

%

67.5

%

70.2

%

66.5

%

Non-GAAP gross margin %

72.2

%

67.9

%

71.1

%

66.9

%

INSTRUCTURE, INC.

RECONCILIATION OF NON-GAAP OPERATING LOSS

(in thousands)

(unaudited)

Three Months Ended

September 30,

Nine Months Ended

September 30,

2016

2015

2016

2015

(unaudited)

(unaudited)

Loss from operations

$

(12,267

)

$

(10,103

)

$

(40,537

)

$

(40,060

)

Stock-based compensation

2,804

1,012

7,701

7,699

Payroll tax expense on secondary stock purchase transactions

—

—

—

1,327

Reversal of payroll tax expense on secondary stock purchase transactions

—

—

(217

)

—

Amortization of acquisition related intangibles

2

3

6

7

Non-GAAP operating loss

$

(9,461

)

$

(9,088

)

$

(33,047

)

$

(31,027

)

GAAP operating margin

-41

%

-48

%

-51

%

-78

%

Non-GAAP operating margin

-31

%

-43

%

-42

%

-60

%

INSTRUCTURE, INC.

RECONCILIATION OF NON-GAAP NET LOSS

(in thousands)

(unaudited)

Three Months Ended

September 30,

Nine Months Ended

September 30,

2016

2015

2016

2015

(unaudited)

(unaudited)

Net Loss

$

(12,317

)

$

(10,212

)

$

(40,646

)

$

(40,856

)

Stock-based compensation

2,804

1,012

7,701

7,699

Payroll tax expense on secondary stock purchase transactions

—

—

—

1,327

Reversal of payroll tax expense on secondary stock purchase transactions

—

—

(217

)

—

Amortization of acquisition related intangibles

2

3

6

7

Change in fair value of warrant liability

10

9

(52

)

536

Non-GAAP net loss

$

(9,501

)

$

(9,188

)

$

(33,208

)

$

(31,287

)

Non-GAAP net loss per common share, basic and

   diluted

$

(0.34

)

$

(0.43

)

$

(1.20

)

$

(1.47

)

Non-GAAP weighted average common shares used in

   computing basic and diluted net loss per common

   share⁽¹⁾

28,084

21,358

27,667

21,256

(1) Non-GAAP weighted average common shares used in computing basic and diluted net loss per common share on a non-GAAP basis assumes that the redeemable convertible preferred shares that converted to common shares upon execution of our IPO were outstanding for the full year.

INSTRUCTURE, INC.

RECONCILIATION OF NON-GAAP WEIGHTED AVERAGE SHARES OUTSTANDING

(in thousands)

(unaudited)

Three Months Ended

September 30,

Nine Months Ended

September 30,

2016

2015

2016

2015

(unaudited)

(unaudited)

GAAP weighted average common shares, basic and

   diluted

28,084

6,381

27,667

6,279

Effect of redeemable convertible preferred stock

   conversion (assuming converted shares were

   outstanding for the full year)

—

14,977

—

14,977

Non-GAAP weighted average common shares used in

   computing basic and diluted non-GAAP net loss per

   common share

28,084

21,358

27,667

21,256

INSTRUCTURE, INC.

RECONCILIATION OF 12-MONTH BILLINGS

(in thousands)

(unaudited)

Trailing Twelve Months Ended

September 30,

2016

2015

Total net revenue

$

101,131

$

65,132

Current deferred revenue

Beginning balance

53,754

33,201

Ending balance

81,563

53,754

Net change in current deferred revenue

27,809

20,553

Long term deferred revenue

Beginning balance

3,996

2,719

Ending balance

3,222

3,996

Net change in long term deferred revenue

(774

)

1,277

Total 12-month billings

$

128,166

$

86,962

INSTRUCTURE, INC.

RECONCILIATION OF NON-GAAP OPERATING EXPENSES

Three Months Ended September 30, 2016

(in thousands)

(unaudited)

GAAP

Stock-based Compensation Expense

Payroll Tax Associated with Equity Transactions

Amortization of acquired intangibles

NON-GAAP

Operating expenses:

Sales and marketing

$

17,788

(775

)

—

—

$

17,013

Research and development

9,297

(1,022

)

—

(2

)

8,273

General and administrative

6,689

(751

)

—

—

5,938

Total operating expenses

$

33,774

(2,548

)

—

(2

)

$

31,224

INSTRUCTURE, INC.

RECONCILIATION OF NON-GAAP OPERATING EXPENSES

Three Months Ended September 30, 2015

(in thousands)

(unaudited)

GAAP

Stock-based Compensation Expense

Payroll Tax Associated with Equity Transactions

Amortization of acquired intangibles

NON-GAAP

Operating expenses:

Sales and marketing

$

13,172

(346

)

—

—

$

12,826

Research and development

6,525

(344

)

—

(2

)

6,179

General and administrative

4,506

(228

)

—

—

4,278

Total operating expenses

$

24,203

(918

)

—

(2

)

$

23,283

INSTRUCTURE, INC.

RECONCILIATION OF NON-GAAP OPERATING EXPENSES

Nine Months Ended September 30, 2016

(in thousands)

(unaudited)

GAAP

Stock-based Compensation Expense

Payroll Tax Associated with Equity Transactions

Amortization of acquired intangibles

NON-GAAP

Operating expenses:

Sales and marketing

$

51,989

(2,219

)

57

—

$

49,827

Research and development

25,832

(2,742

)

57

(6

)

23,141

General and administrative

18,428

(2,018

)

103

—

16,513

Total operating expenses

$

96,249

(6,979

)

217

(6

)

$

89,481

INSTRUCTURE, INC.

RECONCILIATION OF NON-GAAP OPERATING EXPENSES

Nine Months Ended September 30, 2015

(in thousands)

(unaudited)

GAAP

Stock-based Compensation Expense

Payroll Tax Associated with Equity Transactions

Amortization of acquired intangibles

NON-GAAP

Operating expenses:

Sales and marketing

$

38,303

(768

)

—

—

$

37,535

Research and development

17,441

(871

)

—

(7

)

16,563

General and administrative

18,475

(5,851

)

(1,327

)

—

11,297

Total operating expenses

$

74,219

(7,490

)

(1,327

)

(7

)

$

65,395

INSTRUCTURE, INC.

RECONCILIATION OF NON-GAAP NET LOSS PER COMMON SHARE

Three Months Ending

December 31,

Full Year Ending

December 31,

2016

2016

2016

2016

LOW

HIGH

LOW

HIGH

Net loss per common share

$

(0.54

)

$

(0.52

)

$

(2.01

)

$

(1.99

)

Stock-based compensation

0.10

0.10

0.38

0.38

Reversal of payroll tax expense on secondary stock purchase transactions

-

-

(0.01

)

(0.01

)

Amortization of acquisition related intangibles

0.00

0.00

0.00

0.00

Change in fair value of warrant liability

(0.00

)

(0.00

)

(0.00

)

(0.00

)

Non-GAAP net loss per common share, basic and

   diluted

$

(0.44

)

$

(0.42

)

$

(1.64

)

$

(1.62

)

Non-GAAP weighted average common shares used in

   computing basic and diluted net loss per common

   share

28,300

28,300

27,800

27,800

INSTRUCTURE, INC.

RECONCILIATION OF NON-GAAP NET LOSS

(in thousands)

Three Months Ending

December 31,

Full Year Ending

December 31,

2016

2016

2016

2016

LOW

HIGH

LOW

HIGH

Net loss

$

(15,280

)

$

(14,780

)

$

(55,926

)

$

(55,426

)

Stock-based compensation

2,880

2,880

10,581

10,581

Reversal of payroll tax expense on secondary stock purchase transactions

-

-

(217

)

(217

)

Amortization of acquisition related intangibles

3

3

9

9

Change in fair value of warrant liability

(3

)

(3

)

(55

)

(55

)

Non-GAAP net loss

$

(12,400

)

$

(11,900

)

$

(45,608

)

$

(45,108

)