Second Quarter Financial Summary

(in thousands, except per share data)

Three Months

Ended June 30

2016

2015

Revenue

$

25,890

$

15,877

Gross Margin

GAAP

70.5

%

65.2

%

Non-GAAP⁽¹⁾

71.6

%

65.6

%

Operating Loss

GAAP

$

(14,516

)

$

(13,273

)

Non-GAAP⁽¹⁾

$

(12,069

)

$

(12,513

)

Net loss

GAAP

$

(14,590

)

$

(13,966

)

Non-GAAP⁽¹⁾

$

(12,143

)

$

(12,535

)

EPS

GAAP⁽²⁾

$

(0.53

)

$

(2.21

)

Non-GAAP⁽¹⁾⁽²⁾

$

(0.44

)

$

(0.59

)

(1)

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

(2)

Q2 2016 and Q2 2015 GAAP share count was 27.6M and 6.3M, 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 second quarter. A few highlights include:

○

Higher Education – Canvas was selected as the primary learning management system by Ohio State University and University of North Carolina at Charlotte.

○

K-12 Schools – Canvas was chosen by the Broward County Public Schools in Florida with its more than 200,000 students, and the San Diego Unified School District which has 100,000 in its student body.

○

International – Canvas was selected by the University of Wolverhampton in the UK, Oslo National Academy of Arts in Norway and Melbourne High School in Australia.

○

Corporate – Bridge was chosen by Starz Entertainment because of its easy integration with their existing talent management system; Jet.com for the training of their 1,000 employees; by the Better Business Bureau to train employees across their more than 100 locations in the US and Canada and Yale School of Medicine for their employee training.

●

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)

June 30,

2016

December 31,

2015

(unaudited)

Assets

Current assets:

Cash and cash equivalents

$

62,027

$

90,471

Short term marketable securities

—

325

Accounts receivable—net of allowances of $199 and $225 at June 30,

   2016 and December 31, 2015, respectively

41,327

9,523

Prepaid expenses

4,983

5,010

Other current assets

583

614

Total current assets

108,920

105,943

Property and equipment, net

13,242

11,732

Goodwill

989

989

Intangible assets, net

576

444

Noncurrent prepaid expenses

785

749

Other assets

1,069

1,203

Total assets

$

125,581

$

121,060

Liabilities and stockholders’ equity

Current liabilities:

Accounts payable

$

3,816

$

3,912

Accrued liabilities

10,428

8,852

Deferred rent

658

541

Deferred revenue

72,983

49,384

Total current liabilities

87,885

62,689

Deferred revenue, net of current portion

3,136

2,941

Deferred rent, net of current portion

8,721

9,078

Warrant liability

25

331

Other long term liabilities

65

402

Total liabilities

99,832

75,441

Commitments and contingencies

Stockholders’ equity:

Common stock

3

4

Treasury stock

—

(1

)

Additional paid-in capital

196,976

188,517

Accumulated other comprehensive income

—

—

Accumulated deficit

(171,230

)

(142,901

)

Total stockholders’ equity

25,749

45,619

Total liabilities and stockholders’ equity

$

125,581

$

121,060

INSTRUCTURE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

Three Months

Ended June 30,

Six Months

Ended June 30,

2016

2015

2016

2015

Revenue:

Subscription and support

$

22,416

$

13,347

$

42,993

$

25,948

Professional services and other

3,474

2,530

6,196

4,554

Total Net revenue

25,890

15,877

49,189

30,502

Cost of Revenue:

Subscription and support

5,586

3,937

11,023

7,613

Professional services and other

2,049

1,595

3,961

2,830

Total cost of revenue

7,635

5,532

14,984

10,443

Gross profit

18,255

10,345

34,205

20,059

Operating expenses:

Sales and marketing

18,038

14,050

34,201

25,131

Research and development

8,730

5,645

16,535

10,916

General and administrative

6,003

3,923

11,739

13,969

Total operating expenses

32,771

23,618

62,475

50,016

Loss from operations

(14,516

)

(13,273

)

(28,270

)

(29,957

)

Other income (expense):

Interest income

61

4

132

7

Interest expense

(12

)

(22

)

(23

)

(44

)

Change in fair value of warrant liability

—

(39

)

62

(527

)

Other income (expense), net

(56

)

10

(131

)

(109

)

Total other income (expense)

(7

)

(47

)

40

(673

)

Loss before income taxes

(14,523

)

(13,320

)

(28,230

)

(30,630

)

Income tax expense

(67

)

(14

)

(99

)

(14

)

Net loss

$

(14,590

)

$

(13,334

)

$

(28,329

)

$

(30,644

)

Deemed dividend to investors

—

(632

)

—

(632

)

Net loss attributable to common stockholders

$

(14,590

)

$

(13,966

)

$

(28,329

)

$

(31,276

)

Net loss per common share attributable to common

   stockholders, basic and diluted

$

(0.53

)

$

(2.21

)

$

(1.03

)

$

(5.00

)

Weighted average shares used to compute net loss

   per share, basic and diluted

27,610

6,316

27,456

6,261

INSTRUCTURE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

Three Months

Ended June 30,

Six Months

Ended June 30,

2016

2015

2016

2015

Operating Activities:

Net loss

$

(14,590

)

$

(13,334

)

$

(28,329

)

$

(30,644

)

Adjustments to reconcile net loss to net cash used in

   operating activities:

Depreciation of property and equipment

974

613

1,886

1,136

Amortization of intangible assets

87

78

164

155

Amortization of deferred financing costs

11

17

23

32

Change in fair value of warrant liability

—

39

(62

)

527

Stock-based compensation

2,662

758

4,897

6,687

Other

(75

)

84

(47

)

111

Changes in assets and liabilities:

Accounts receivable, net

(34,579

)

(23,302

)

(31,978

)

(20,167

)

Prepaid expenses and other assets

(2

)

(1,863

)

133

(2,451

)

Accounts payable and accrued liabilities

1,182

3,263

1,697

3,945

Deferred revenue

35,296

20,633

23,794

13,839

Deferred rent

(205

)

454

(240

)

379

Other liabilities

(303

)

(237

)

(330

)

(261

)

Net cash used in operating activities

(9,542

)

(12,797

)

(28,392

)

(26,712

)

Investing Activities:

Purchases of property and equipment

(1,142

)

(2,212

)

(3,410

)

(3,139

)

Purchases of intangible assets

(145

)

—

(296

)

—

Proceeds from disposal of property and equipment

10

9

18

18

Purchases of marketable securities

—

(1,153

)

—

(1,153

)

Maturities of marketable securities

—

—

325

500

Net cash used in investing activities

(1,277

)

(3,356

)

(3,363

)

(3,774

)

Financing Activities:

Proceeds from exercise of redeemable convertible

   preferred stock warrants

—

—

—

250

Proceeds from issuance of common stock from

   employee equity plans

3,188

46

3,311

111

Payments of line of credit financing costs

—

(32

)

—

(32

)

Repayment of capital lease obligations

—

(76

)

—

(150

)

Net cash provided by financing activities

3,188

(62

)

3,311

179

Net decrease in cash

(7,631

)

(16,215

)

(28,444

)

(30,307

)

Cash, beginning of period

69,658

29,823

90,471

43,915

Cash, end of period

$

62,027

$

13,608

$

62,027

$

13,608

INSTRUCTURE, INC.

RECONCILIATION OF NON-GAAP GROSS MARGIN

(in thousands, except percentages)

(unaudited)

Three Months Ended

June 30,

Six Months Ended

June 30,

2016

2015

2016

2015

GAAP gross profit

$

18,255

$

10,345

$

34,205

$

20,059

Stock-based compensation

273

67

466

115

Non-GAAP gross margin

$

18,528

$

10,412

$

34,671

$

20,174

GAAP gross margin %

70.5

%

65.2

%

69.5

%

65.8

%

Non-GAAP gross margin %

71.6

%

65.6

%

70.5

%

66.1

%

INSTRUCTURE, INC.

RECONCILIATION OF NON-GAAP OPERATING LOSS

(in thousands)

(unaudited)

Three Months Ended

June 30,

Six Months Ended

June 30,

2016

2015

2016

2015

Loss from operations

$

(14,516

)

$

(13,273

)

$

(28,270

)

$

(29,957

)

Stock-based compensation

2,662

758

4,897

6,687

Payroll tax expense on secondary stock purchase

   transactions

—

—

—

1,327

Reversal of payroll tax expense on secondary stock

   purchase transactions

(217

)

—

(217

)

—

Amortization of acquisition related intangibles

2

2

4

4

Non-GAAP operating loss

$

(12,069

)

$

(12,513

)

$

(23,586

)

$

(21,939

)

GAAP operating margin

-56

%

-84

%

-57

%

-98

%

Non-GAAP operating margin

-47

%

-79

%

-48

%

-72

%

INSTRUCTURE, INC.

RECONCILIATION OF NON-GAAP NET LOSS

(in thousands)

(unaudited)

Three Months Ended

June 30,

Six Months Ended

June 30,

2016

2015

2016

2015

Net Loss

$

(14,590

)

$

(13,334

)

$

(28,329

)

$

(30,644

)

Stock-based compensation

2,662

758

4,897

6,687

Payroll tax expense on secondary stock purchase

   transactions

—

—

—

1,327

Reversal of payroll tax expense on secondary stock

   purchase transactions

(217

)

—

(217

)

—

Amortization of acquisition related intangibles

2

2

4

4

Change in fair value of warrant liability

—

39

(62

)

527

Non-GAAP net loss

$

(12,143

)

$

(12,535

)

$

(23,707

)

$

(22,099

)

Non-GAAP net loss per common share, basic and

   diluted

$

(0.44

)

$

(0.59

)

$

(0.86

)

$

(1.04

)

Non-GAAP weighted average common shares used in

   computing basic and diluted net loss per common

   share⁽¹⁾

27,610

21,293

27,456

21,238

(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

June 30,

Six Months Ended

June 30,

2016

2015

2016

2015

GAAP weighted average common shares, basic and

   diluted

27,610

6,316

27,456

6,261

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

27,610

21,293

27,456

21,238

INSTRUCTURE, INC.

RECONCILIATION OF 12-MONTH BILLINGS

(in thousands)

(unaudited)

Trailing Twelve Months Ended

June 30,

2016

2015

Total net revenue

$

91,880

$

56,678

Current deferred revenue

Beginning balance

42,978

29,483

Ending balance

72,983

42,978

Net change in current deferred revenue

30,005

13,495

Long term deferred revenue

Beginning balance

2,815

2,559

Ending balance

3,136

2,815

Net change in long term deferred revenue

321

256

Total 12-month billings

$

122,206

$

70,429

INSTRUCTURE, INC.

RECONCILIATION OF NON-GAAP OPERATING EXPENSES

Three Months Ended June 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

$

18,038

(789

)

57

—

$

17,306

Research and development

8,730

(935

)

57

(2

)

7,850

General and administrative

6,003

(665

)

103

—

5,441

Total operating expenses

$

32,771

(2,389

)

217

(2

)

$

30,597

INSTRUCTURE, INC.

RECONCILIATION OF NON-GAAP OPERATING EXPENSES

Three Months Ended June 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

$

14,050

(241

)

—

—

$

13,809

Research and development

5,645

(287

)

—

(2

)

5,356

General and administrative

3,923

(163

)

—

—

3,760

Total operating expenses

$

23,618

(691

)

—

(2

)

$

22,925

INSTRUCTURE, INC.

RECONCILIATION OF NON-GAAP OPERATING EXPENSES

Six Months Ended June 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

$

34,201

(1,444

)

57

—

$

32,814

Research and development

16,535

(1,720

)

57

(4

)

14,868

General and administrative

11,739

(1,267

)

103

—

10,575

Total operating expenses

$

62,475

(4,431

)

217

(4

)

$

58,257

INSTRUCTURE, INC.

RECONCILIATION OF NON-GAAP OPERATING EXPENSES

Six Months Ended June 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

$

25,131

(422

)

—

—

$

24,709

Research and development

10,916

(527

)

—

(4

)

10,385

General and administrative

13,969

(5,623

)

(1,327

)

—

7,019

Total operating expenses

$

50,016

(6,572

)

(1,327

)

(4

)

$

42,113

INSTRUCTURE, INC.

RECONCILIATION OF NON-GAAP GUIDANCE - NET LOSS

(in thousands)

(unaudited)

Three Months Ending

September 30,

Full Year Ending

December 31,

2016

2016

2016

2016

LOW

HIGH

LOW

HIGH

Net loss

$

(14,623

)

$

(14,123

)

$

(59,287

)

$

(57,787

)

Stock-based compensation

2,721

2,721

10,557

10,557

Reversal of payroll tax expense on secondary stock

   purchase transactions

-

-

(217

)

(217

)

Amortization of acquisition related intangibles

2

2

9

9

Change in fair value of warrant liability

-

-

(62

)

(62

)

Non-GAAP net loss

$

(11,900

)

$

(11,400

)

$

(49,000

)

$

(47,500

)

INSTRUCTURE, INC.

RECONCILIATION OF NON-GAAP GUIDANCE - NET LOSS PER COMMON SHARE

(unaudited)

Three Months Ending

September 30,

Full Year Ending

December 31,

2016

2016

2016

2016

LOW

HIGH

LOW

HIGH

Net loss per common share

$

(0.52

)

$

(0.50

)

$

(2.12

)

$

(2.07

)

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

)

Non-GAAP net loss per common share, basic and

   diluted

$

(0.42

)

$

(0.40

)

$

(1.75

)

$

(1.70

)

Projected weighted average common shares used in

   computing basic and diluted net loss per common

   share

28,100

28,100

27,900

27,900