lrn_Current_Folio 10Q

Table of Contents

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2018

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from          to          

 

Commission File Number: 001-33883

 

K12 Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

95-4774688

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

2300 Corporate Park Drive

 

 

Herndon, VA

 

20171

(Address of Principal Executive Offices)

 

(Zip Code)

 

(703) 483-7000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes   No 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   No 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 

(Do not check if a smaller reporting company)

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 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No 

 

As of October 19, 2018, the Registrant had 40,193,564 shares of common stock, $0.0001 par value per share outstanding.

 

 


 

Table of Contents

K12 Inc.

Form 10-Q

For the Quarterly Period Ended September 30, 2018

Index

 

 

 

Page

 

 

Number

 

 

 

PART I. 

Financial Information

 

Item 1. 

Financial Statements (Unaudited)

3

Item 2. 

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

28

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

36

Item 4. 

Controls and Procedures

36

 

 

 

PART II. 

Other Information

 

Item 1. 

Legal Proceedings

37

Item 1A. 

Risk Factors

37

Item 2. 

Issuer Purchases of Equity Securities

37

Item 3. 

Defaults Upon Senior Securities

37

Item 4. 

Mine Safety Disclosures

37

Item 5. 

Other Information

37

Item 6. 

Exhibits

38

 

 

 

Signatures 

39

 

 

2


 

Table of Contents

PART I — FINANCIAL INFORMATION

 

Item 1.    Financial Statements (Unaudited).

 

K12 INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

September 30, 

 

June 30,

 

    

2018

    

2018

 

 

 

 

 

 

(audited)

 

 

(In thousands except share and per share data)

ASSETS

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

143,049

 

$

231,113

Accounts receivable, net of allowance of $12,222 and $12,384 at September 30, 2018 and June 30, 2018, respectively

 

 

283,806

 

 

176,319

Inventories, net

 

 

18,116

 

 

31,134

Prepaid expenses

 

 

25,205

 

 

10,278

Other current assets

 

 

15,028

 

 

10,388

Total current assets 

 

 

485,204

 

 

459,232

Property and equipment, net

 

 

37,002

 

 

28,868

Capitalized software, net

 

 

54,163

 

 

55,488

Capitalized curriculum development costs, net

 

 

52,952

 

 

53,558

Intangible assets, net

 

 

17,209

 

 

17,951

Goodwill

 

 

90,197

 

 

90,197

Deposits and other assets

 

 

48,075

 

 

36,669

Total assets 

 

$

784,802

 

$

741,963

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Current portion of capital lease obligations

 

$

17,083

 

$

13,353

Accounts payable

 

 

39,062

 

 

29,362

Accrued liabilities

 

 

14,016

 

 

14,345

Accrued compensation and benefits

 

 

18,729

 

 

36,050

Deferred revenue

 

 

69,434

 

 

23,114

Total current liabilities 

 

 

158,324

 

 

116,224

Capital lease obligations, net of current portion

 

 

20,609

 

 

12,665

Deferred rent, net of current portion

 

 

3,015

 

 

3,270

Deferred tax liability

 

 

17,878

 

 

12,577

Other long-term liabilities

 

 

9,280

 

 

10,038

Total liabilities 

 

 

209,106

 

 

154,774

Commitments and contingencies

 

 

 —

 

 

 —

Stockholders’ equity

 

 

 

 

 

 

Common stock, par value $0.0001; 100,000,000 shares authorized; 45,573,280 and 44,902,567 shares issued; and 40,238,537 and 39,567,824 shares outstanding at September 30, 2018 and June 30, 2018, respectively

 

 

 4

 

 

 4

Additional paid-in capital

 

 

701,398

 

 

703,351

Accumulated other comprehensive loss

 

 

(180)

 

 

(252)

Accumulated deficit

 

 

(23,044)

 

 

(13,432)

Treasury stock of 5,334,743 shares at cost at September 30, 2018 and June 30, 2018

 

 

(102,482)

 

 

(102,482)

Total stockholders’ equity 

 

 

575,696

 

 

587,189

Total liabilities and stockholders' equity 

 

$

784,802

 

$

741,963

 

See accompanying notes to unaudited condensed consolidated financial statements.

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K12 INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

 

    

2018

    

2017

    

 

 

 

(In thousands except share and per share data)

 

Revenues 

 

$

251,314

 

$

228,785

 

Cost and expenses

 

 

 

 

 

 

 

Instructional costs and services

 

 

158,985

 

 

147,367

 

Selling, administrative, and other operating expenses

 

 

102,578

 

 

96,282

 

Product development expenses

 

 

3,503

 

 

2,898

 

Total costs and expenses 

 

 

265,066

 

 

246,547

 

Loss from operations 

 

 

(13,752)

 

 

(17,762)

 

Loss from equity method investments

 

 

(97)

 

 

 —

 

Interest income, net

 

 

509

 

 

235

 

Loss before income taxes and noncontrolling interest 

 

 

(13,340)

 

 

(17,527)

 

Income tax benefit

 

 

5,058

 

 

9,368

 

Net loss

 

 

(8,282)

 

 

(8,159)

 

Add net loss attributable to noncontrolling interest

 

 

 —

 

 

103

 

Net loss attributable to common stockholders

 

$

(8,282)

 

$

(8,056)

 

Net loss attributable to common stockholders per share:

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.22)

 

$

(0.21)

 

Weighted average shares used in computing per share amounts:

 

 

 

 

 

 

 

Basic and diluted

 

 

38,434,049

 

 

39,108,172

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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K12 INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

 

    

    

2018

    

2017

 

 

 

 

(In thousands)

 

Net loss

 

 

$

(8,282)

 

$

(8,159)

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

 

72

 

 

(155)

 

Total other comprehensive loss, net of tax

 

 

 

(8,210)

 

 

(8,314)

 

Comprehensive loss attributable to noncontrolling interest

 

 

 

 —

 

 

103

 

 

 

 

 

 

 

 

 

 

Comprehensive loss attributable to common stockholders

 

 

$

(8,210)

 

$

(8,211)

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

5


 

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K12 INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

K12 Inc. Stockholders' Equity

(In thousands except share data)

 

Common Stock

 

Additional 
Paid-in

 

Accumulated Other

Comprehensive

 

Accumulated

 

Treasury Stock

 

 

 

 

    

Shares

    

Amount

    

Capital

    

Loss

    

Deficit

    

Shares

    

Amount

    

Total

Balance, June 30, 2018

 

44,902,567

 

$

 4

 

$

703,351

 

$

(252)

 

$

(13,432)

 

(5,334,743)

 

$

(102,482)

 

$

587,189

Adjustment related to new revenue recognition guidance

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,330)

 

 —

 

 

 —

 

 

(1,330)

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(8,282)

 

 —

 

 

 —

 

 

(8,282)

Foreign currency translation adjustment

 

 —

 

 

 —

 

 

 —

 

 

72

 

 

 —

 

 —

 

 

 —

 

 

72

Stock-based compensation expense

 

 —

 

 

 —

 

 

4,109

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

4,109

Exercise of stock options

 

687

 

 

 —

 

 

10

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

10

Vesting of performance share units, net of tax withholding

 

258,263

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

Issuance of restricted stock awards

 

722,809

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

Forfeiture of restricted stock awards

 

(122,242)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

Repurchase of restricted stock for tax withholding

 

(188,804)

 

 

 —

 

 

(6,072)

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(6,072)

Balance, September 30, 2018

 

45,573,280

 

$

 4

 

$

701,398

 

$

(180)

 

$

(23,044)

 

(5,334,743)

 

$

(102,482)

 

$

575,696

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

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K12 INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

    

2018

    

2017

 

 

(In thousands)

Cash flows from operating activities

 

 

 

 

 

 

Net loss

 

$

(8,282)

 

$

(8,159)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

Depreciation and amortization expense

 

 

18,511

 

 

20,636

Stock-based compensation expense

 

 

4,024

 

 

3,079

Deferred income taxes

 

 

5,865

 

 

7,765

Provision for doubtful accounts

 

 

446

 

 

120

Other

 

 

2,932

 

 

2,423

Changes in assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(107,930)

 

 

(90,704)

Inventories, prepaid expenses and other current assets

 

 

(6,438)

 

 

(17,887)

Deposits and other assets

 

 

664

 

 

(1,220)

Accounts payable

 

 

15,998

 

 

8,168

Accrued liabilities

 

 

(398)

 

 

(8,976)

Accrued compensation and benefits

 

 

(17,321)

 

 

(15,086)

Deferred revenue

 

 

43,854

 

 

40,939

Deferred rent and other liabilities

 

 

(1,017)

 

 

499

Net cash used in operating activities 

 

 

(49,092)

 

 

(58,403)

Cash flows from investing activities

 

 

 

 

 

 

Purchase of property and equipment

 

 

(1,738)

 

 

(5,143)

Capitalized software development costs

 

 

(9,317)

 

 

(7,934)

Capitalized curriculum development costs

 

 

(6,685)

 

 

(2,445)

Acquisitions and investments

 

 

(11,652)

 

 

 —

Net cash used in investing activities 

 

 

(29,392)

 

 

(15,522)

Cash flows from financing activities

 

 

 

 

 

 

Repayments on capital lease obligations

 

 

(3,518)

 

 

(3,743)

Payments of contingent consideration

 

 

 —

 

 

(1,819)

Proceeds from exercise of stock options

 

 

10

 

 

58

Repurchase of restricted stock for income tax withholding

 

 

(6,072)

 

 

(4,093)

Net cash used in financing activities 

 

 

(9,580)

 

 

(9,597)

Net change in cash, cash equivalents and restricted cash

 

 

(88,064)

 

 

(83,522)

Cash, cash equivalents and restricted cash, beginning of period

 

 

233,113

 

 

230,864

Cash, cash equivalents and restricted cash, end of period

 

$

145,049

 

$

147,342

 

 

 

 

 

 

 

Reconciliation of cash, cash equivalents and restricted cash to balance sheet as of September 30th:

 

 

 

 

 

 

Cash and cash equivalents

 

$

143,049

 

$

147,342

Deposits and other assets (restricted cash)

 

 

2,000

 

 

 —

Total cash, cash equivalents and restricted cash

 

$

145,049

 

$

147,342

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

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Table of Contents 

K12 INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.   Description of the Business

 

K12 Inc., together with its subsidiaries (“K12” or the “Company”), is a technology-based education company. The Company offers proprietary and third party curriculum, software systems and educational services designed to facilitate individualized learning for students primarily in kindergarten through 12th grade, or K-12. The Company’s learning systems combine curriculum, instruction, and related support services to create an individualized learning approach well-suited for virtual and blended public schools, school districts, charter schools, and private schools that utilize varying degrees of online and traditional classroom instruction, and other educational applications. These products and services are provided through three lines of business: Managed Public School Programs (curriculum and services sold to 75 managed public schools in 30 states and the District of Columbia), Institutional (curriculum, technology and services provided to school districts, public schools and other educational institutions that the Company does not manage), and Private Pay Schools and Other (private schools for which the Company charges student tuition and makes direct consumer sales).

 

The Company works closely as a partner with public schools, school districts, charter schools, and private schools, enabling them to offer their students an array of solutions, including full-time virtual programs, semester courses and supplemental solutions. In addition to curriculum, systems and programs, the Company provides teacher training, teaching services, and other academic and technology support services.

 

2.   Basis of Presentation

 

The accompanying condensed consolidated balance sheet as of September 30, 2018, the condensed consolidated statements of operations and comprehensive loss for the three months ended September 30, 2018 and 2017, the condensed consolidated statements of cash flows for the three months ended September 30, 2018 and 2017, and the condensed consolidated statement of stockholders’ equity for the three months ended September 30, 2018 are unaudited. The unaudited interim financial statements have been prepared on the same basis as the annual financial statements, and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position and results of operations for the periods presented. The results for the three months ended September 30, 2018 are not necessarily indicative of the results to be expected for the year ending June 30, 2019, for any other interim period or for any other future fiscal year. The condensed consolidated balance sheet as of June 30, 2018 has been derived from the audited consolidated financial statements at that date.

 

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Accordingly, the Company does not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, these statements include all adjustments (consisting of normal recurring adjustments) considered necessary to present a fair statement of the Company’s condensed consolidated results of operations, financial position and cash flows. Preparation of the Company’s financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and footnotes. Actual results could differ from those estimates. This quarterly report on Form 10-Q should be read in conjunction with the financial statements and the notes thereto included in the Company’s latest annual report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on August 8, 2018, which contains the Company’s audited financial statements for the fiscal year ended June 30, 2018.

 

The Company operates in one operating and reportable business segment as a technology-based education company providing proprietary and third party curriculum, software systems and educational services designed to facilitate individualized learning for students primarily in kindergarten through 12th grade. The Chief Operating Decision Maker evaluates profitability based on consolidated results.

 

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K12 INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

 

3.   Summary of Significant Accounting Policies

 

Recent Accounting Pronouncements

 

Accounting Standards Adopted

 

In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-15, Statement of Cash Flows (Topic 230) (“ASU 2016-15”) to establish the classification of certain cash receipts and disbursements into the appropriate operating, investing, or financing categories; where there was diversity in practice previously. The Company has evaluated the standard and determined that the classification of contingent consideration payments should be moved from operating activities to financing activities. The Company retrospectively adopted this standard during the first quarter of fiscal year 2019. The adoption required the restatement of $1.8 million from cash flows from operations to cash flows from financing activities in fiscal year 2018.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), also known as Accounting Standards Codification Topic 606 (“ASC 606”), which supersedes most existing revenue recognition guidance under ASC Topic 605 (“ASC 605”). The core purpose of ASC 606 is to recognize revenues when contracted goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASC 606 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than were required under previous GAAP.

 

The Company performed a detailed review of each of its revenue streams by comparing historical accounting policies and practices to the new standard. The majority of the Company’s business is based on contracts where annual revenue was recognized within each fiscal year, mirroring the school year.

 

The Company adopted this standard during the first quarter of fiscal year 2019 using the modified retrospective approach. Under this method, the Company applied ASC 606 to those contracts whose terms extend beyond July 1, 2018. The comparative information for prior periods has not been restated and continues to be reported under the accounting standards in effect for those periods. The adoption of ASC 606 resulted in an adjustment to decrease retained earnings by $1.3 million.

 

The key impact of ASC 606 was to streamline the recognition of all revenues from the Company’s lines of businesses over the service period, including:

 

·

Revenues that had been previously recognized over a 10-month school year;

·

Revenues from materials, supplies and professional services that had been previously recognized upon delivery; and

·

Revenues in which the Company is the primary obligor, and were recognized when expenses were incurred.

In addition, the adoption of ASC 606 impacted how the Company accounts for its sales commissions. See “Costs to Obtain a Contract with a Customer” section below.

 

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Table of Contents 

K12 INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

 

The impact of adoption on the Company’s condensed consolidated statement of operations for the three months ended September 30, 2018 was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

 

 

As Reported under ASC 606

 

 

Adjustment due to ASC 606

 

 

Amounts under ASC 605

 

 

 

(In thousands)

 

    

 

 

 

 

 

 

 

 

Revenues

 

$

251,314

 

$

3,129

 

$

254,443

Selling, administrative, and other operating expenses

 

 

102,578

 

 

(60)

 

 

102,518

Loss from operations

 

 

(13,752)

 

 

3,189

 

 

(10,563)

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

(8,282)

 

 

3,189

 

 

(5,093)

Net loss attributable to common stockholders

 

$

(8,282)

 

$

3,189

 

$

(5,093)

 

The impact of adoption on the Company’s condensed consolidated balance sheets as of September 30, 2018 was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

 

As Reported under ASC 606

 

 

Adjustment due to ASC 606

 

 

Amounts under ASC 605

 

 

 

(In thousands)

 

    

 

 

 

 

 

 

 

 

Other current assets

 

$

15,028

 

$

(231)

 

$

14,797

Deposits and other assets

 

 

48,075

 

 

(728)

 

 

47,347

Total assets

 

 

784,802

 

 

(959)

 

 

783,843

 

 

 

 

 

 

 

 

 

 

Deferred revenue

 

 

69,434

 

 

(5,595)

 

 

63,839

Total liabilities

 

 

209,106

 

 

(5,595)

 

 

203,511

 

 

 

 

 

 

 

 

 

 

Accumulated deficit

 

 

(23,044)

 

 

3,189

 

 

(19,855)

Total stockholders' equity

 

 

575,696

 

 

3,189

 

 

578,885

 

The following table presents the Company’s revenues disaggregated based on its three lines of business for the three months ended September 30, 2018:

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

 

(In thousands)

 

 

 

 

Managed Public School Programs

 

$

220,543

Institutional

 

 

 

Non-managed Public School Programs

 

 

11,405

Institutional Software & Services

 

 

11,094

Total Institutional

 

 

22,499

Private Pay Schools and Other

 

 

8,272

Total Revenues

 

$

251,314

 

For more discussion surrounding the Company’s revenue recognition accounting policies, please refer to the “Revenue Recognition” section below.

 

Accounting Standards Not Yet Adopted

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02” or “Topic 842”). The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on

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Table of Contents 

K12 INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

 

the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.

 

In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases (“ASU 2018-10”) and ASU 2018-11, Leases (Topic 842), Targeted Improvements (“ASU 2018-11”) to provide additional guidance for the adoption of Topic 842. ASU 2018-10 clarifies certain provisions and corrects unintended applications of the guidance such as the application of implicit rate; lessee reassessment of lease classification; lease term or bargain purchase option; variable lease payments; and certain transition guidance. ASU 2018-11 provides an alternative transition method and practical expedient for separating contract components for the adoption of Topic 842.  ASU 2018-11, ASU 2018-10, and ASU 2016-02 (collectively, “the new lease standards”) are effective for the Company’s fiscal year beginning July 1, 2019, including interim periods therein.

 

The modified retrospective transition approach under ASU 2016-02 requires lessees to include capital and operating leases that exist at, or are entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. ASU 2018-11 allows lessees to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company is currently evaluating the new lease standards, as well as the effect on its condensed consolidated financial statements. The Company anticipates recognizing assets and liabilities arising from any leases that meet the requirements under the new lease standards on the adoption date and including qualitative and quantitative disclosures in the notes to the condensed consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40) (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). It requires an entity in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. ASU 2018-15 is effective for the Company’s fiscal year beginning July 1, 2020. The Company is currently evaluating the impact of this ASU on its condensed consolidated financial statements.

 

Revenue Recognition

 

Revenues are principally earned from long-term contractual agreements to provide online curriculum, books, materials, computers and management services to virtual and blended schools, traditional public schools, school districts, and private schools. Under most contracts the Company provides an integrated package of systems, services, products, and professional expertise that we manage to support online or blended public schools.  Customers for these programs can obtain the administrative support, information technology, academic support services, online curriculum, learning systems platforms and instructional services under the terms of a negotiated service agreement. The schools receive funding on a per student basis from the state in which the public school or school district is located. Shipments of materials for schools that occur in the fourth fiscal quarter and for the upcoming school year are recorded in deferred revenue.

 

The Company generates revenues under turnkey management contracts with virtual and blended public schools and typically include the following components:

 

·

providing each of a school’s students with access to the Company’s online school and lessons;

·

offline learning kits, which include books and materials to supplement the online lessons, where required;

·

the use of a personal computer and associated reclamation services, where required;

·

internet access and technology support services;

·

instruction by a state-certified teacher, where required; and

·

management and technology services necessary to support a virtual public or blended school. In certain managed school contracts, revenues are determined directly by per enrollment funding.

 

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

 

Under ASC 606, revenue is recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration it expects to be entitled to in exchange for those goods or services using the following steps:

 

·

identify the contract, or contracts, with a customer;

·

identify the performance obligations in the contract;

·

determine the transaction price;

·

allocate the transaction price to the performance obligations in the contract; and

·

recognize revenue when, or as, the Company satisfies a performance obligation.

 

School Funding and Revenue Recognition

 

To determine the pro rata amount of revenue to recognize in a fiscal quarter, the Company estimates the total funds each school will receive in a particular school year. Total funds for a school are primarily a function of the number of students enrolled in the school and established per enrollment funding levels, which are generally published on an annual basis by the state or school district. The Company reviews its estimates of funding periodically, and revises as necessary, amortizing any adjustments to earned revenues over the remaining portion of the fiscal year. Actual school funding may vary from these estimates and the impact of these differences could impact the Company’s results of operations. Since the end of the school year coincides with the end of the Company’s fiscal year, annual revenues are generally based on actual school funding and actual costs incurred (including costs for the Company’s services to the schools plus other costs the schools may incur) in the calculation of school operating losses. The Company’s schools’ reported results are subject to annual school district financial audits, which incorporate enrollment counts, funding and other routine financial audit considerations. The results of these audits are incorporated into the Company’s monthly funding estimates for the three months ended September 30, 2018 and 2017.

 

Each state or school district has variations in the school funding formulas and methodologies that it uses to estimate funding for revenue recognition at its respective schools. As the Company estimates funding for each school, it takes into account the state definition for count dates on which reported enrollment numbers will be used for per pupil funding. The parameters the Company considers in estimating funding for revenue recognition purposes include school district count definitions, withdrawal rates, average daily attendance, special needs enrollment, student demographics, academic progress and historical completion, student location, funding caps and other state specified categorical program funding.

 

Under the contracts where the Company provides turnkey management services to schools, the Company has generally agreed to absorb any operating losses of the schools in a given school year. These school operating losses represent the excess of costs incurred over revenues earned by the virtual or blended public school as reflected on its respective financial statements, including Company charges to the schools. To the extent a school does not receive funding for each student enrolled in the school, the school would still incur costs associated with serving the unfunded enrollment. If losses due to unfunded enrollments result in a net operating loss for the year that loss is reflected as a reduction in the revenues and net receivables that the Company collects from the school. A school net operating loss in one year does not necessarily mean the Company anticipates losing money on the entire contract with the school. However, a school operating loss may reduce the Company’s ability to collect its management fees in full and recognized revenues are reduced accordingly to reflect the expected cash collections from such schools. The Company amortizes the estimated school operating loss against revenues based upon the percentage of actual revenues in the period to total estimated revenues for the fiscal year.

 

Management periodically reviews its estimates of full-year school revenues and operating expenses, and amortizes the net impact of any changes to these estimates over the remainder of the fiscal year. Actual school operating losses may vary from these estimates or revisions, and the impact of these differences could have a material impact on results of operations. For the three months ended September 30, 2018 and 2017, the Company’s revenues included a reduction for these school operating losses of $17.3 million and $17.8 million, respectively.

 

Where the Company has determined that it is the principal for substantially all expenses under certain contracts, the Company estimates the associated per student revenues for the fiscal year which will be received by the school from its

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

 

state funding school district and recognizes revenue ratably over the service period. As a result of being the primary obligor, amounts recorded as revenues for the three months ended September 30, 2018 and 2017 were $88.3 million and $63.5 million, respectively. For contracts where the Company is not the primary obligor, the Company records revenues based on its net fees earned under the contractual agreement.

 

The products and services delivered to the Company’s Institutional customers include curriculum and technology for full-time virtual and blended programs, as well as instruction, curriculum and associated materials, supplemental courses, and other educational services. Each of these contracts are considered to be one performance obligation under ASC 606.

 

The Company provides certain online curriculum and services to schools and school districts under subscription agreements. Revenues from the licensing of curriculum under subscription arrangements are recognized on a ratable basis over the subscription period. Revenues from professional consulting, training and support services are deferred and recognized ratably over the service period.

 

Other revenues are generated from individual customers who prepay and have access for one to two years to company-provided online curriculum. The Company recognizes these revenues pro rata over the maximum term of the customer contract.

 

During the three months ended September 30, 2018 and 2017, the Company had one contract that represented 11% of revenues.

 

Contract Balances

 

The timing of revenue recognition, invoicing, and cash collection results in accounts receivable and deferred revenue (a contract liability) in the condensed consolidated balance sheets. Payment from customers is often received in advance of services being provided, resulting in deferred revenue. Accounts receivable is recorded when there is an executed customer contract and the right to the consideration becomes unconditional. Contract assets such as unbilled receivables are included in accounts receivable.

The opening and closing balances of the Company’s accounts receivable, contract assets and deferred revenue are as follows: 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

July 1,

 

    

2018

    

2018

 

 

(In thousands)

 

 

 

 

 

 

 

Accounts receivable

 

$

283,806

 

$

176,319

Contract assets (included in accounts receivable)

 

 

39,713

 

 

12,143

Deferred revenue

 

 

69,434

 

 

25,580

 

The difference between the opening and closing balance of the contract asset relates to the timing of the Company’s billing in relation to month end and contractual agreements. The difference between the opening and closing balance of the deferred revenue relates to the timing difference between the customer’s payment and the Company’s performance under the contract. Typically, each of these balances are at their highest during the first quarter of the fiscal year and lowest at the end of the fiscal year. The amount of revenue recognized in the three months ended September 30, 2018 that was included in the opening July 1, 2018 deferred revenue balance was $11.8 million. The Company recorded a reduction in revenues of $0.6 million during the three months ended September 30, 2018 related to performance obligations satisfied in prior periods.

 

Performance Obligations

 

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC 606. A contract’s transaction price is allocated to each distinct performance obligation and

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

 

recognized as revenue when, or as, the performance obligation is satisfied. The Company’s performance obligations are satisfied over time, as the Company delivers and the customer receives the services, over the service period of the contract. The Company’s payment terms are generally net 30 or net 45, but can vary depending on when the school receives its funding from the state.

 

The Company has elected, as a practical expedient, to not report the value of unsatisfied performance obligations for contracts with customers that have an expected duration of one year or less. The amount of unsatisfied performance obligations for contracts with customers which extend beyond one year as of September 30, 2018 was $2.3 million.

 

Significant Judgments

 

The Company determined that the majority of its contracts with customers contain one performance obligation. The Company markets the products and services as an integrated package building off its curriculum offerings. It does not market distinct products or services to be sold independently from the curriculum offering.

 

The Company has determined that the time elapsed method as described under ASC 606 is the most appropriate  measure of progress towards the satisfaction of the performance obligation. Therefore, the Company will recognize revenue on a straight-line basis. The Company delivers the integrated products and services package largely over the course of the Company’s fiscal year. This package includes enrollment, marketing, teacher training, etc. in addition to the core curriculum and instruction. All of these activities are necessary and contribute to the overall education of its students, which occurs evenly throughout the year.

 

As discussed above, the Company estimates the total funds each school will receive in a particular school year and the amount of full-year school revenues and operating expenses to determine the amount of revenue the Company will receive. To the extent the estimates change during the year, the cumulative impact of the change is recognized over the remaining service period.

 

Costs to Obtain a Contract with a Customer

 

The Company pays commissions on certain sales contracts to its employees and third parties. Commissions that are directly tied to a particular sale are capitalized if they relate to either new business or a renewal whose contract has a duration of greater than one year. The Company has elected, as a practical expedient, to not capitalize commissions paid on contracts that have a duration of one year or less. Commissions that are not directly tied to a particular sale are expensed as incurred.

 

Commissions related to new business are amortized over a four year life which represents the average life of customers in the institutional and private pay businesses, while commissions related to renewals greater than one year are amortized over the contract life. The current portion of the deferred commission is recorded within other current assets and the long-term portion of the deferred commission is recorded within deposits and other assets on the condensed consolidated balance sheets. The amortization of the deferred commission is recorded as selling, administrative and other operating expenses.

 

Consolidation

 

The condensed consolidated financial statements include the accounts of the Company, the wholly-owned and affiliated companies that the Company owns, directly or indirectly, and all controlled subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

 

Inventories

 

Inventories consist primarily of textbooks and curriculum materials, a majority of which are supplied to virtual public schools and blended public schools, and utilized directly by students. Inventories represent items that are purchased and held for sale and are recorded at the lower of cost (first-in, first-out method) or net realizable value. The provision for excess and obsolete inventory is established based upon the evaluation of the quantity on hand relative to

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

 

demand. The excess and obsolete inventory reserve was $3.7 million and $3.5 million at September 30, 2018 and June 30, 2018, respectively.

 

Other Current Assets

 

Other current assets consist primarily of textbooks, curriculum materials and other supplies which are expected to be returned upon the completion of the school year. Materials not returned are expensed as part of instructional costs and services.

 

Property and Equipment

 

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expense is calculated using the straight-line method over the estimated useful life of the asset (or the lesser of the term of the lease and the estimated useful life of the asset under capital lease). Amortization of assets capitalized under capital lease arrangements is included in depreciation expense. Leasehold improvements are amortized over the lesser of the lease term or the estimated useful life of the asset. The Company determines the lease term in accordance with ASC 840, Leases (“ASC 840”), as the fixed non-cancelable term of the lease plus all periods for which failure to renew the lease imposes a penalty on the lessee in an amount such that renewal appears, at the inception of the lease, to be reasonably assured.

 

Property and equipment are depreciated over the following useful lives:

 

 

 

 

 

    

Useful Life

Student and state testing computers

 

3 - 5 years

Computer hardware

 

3 years

Computer software

 

3 - 5 years

Web site development

 

3 years

Office equipment

 

5 years

Furniture and fixtures

 

7 years

Leasehold improvements

 

3 - 12 years

 

The Company makes an estimate of unreturned student computers based on an analysis of recent trends of returns.  The Company recorded accelerated depreciation of $0.5 million and $0.4 million for the three months ended September 30, 2018 and 2017, respectively, related to unreturned student computers. Depreciation expense for property and equipment, including accelerated depreciation, for the three months ended September 30, 2018 and 2017 was $5.6 million and $4.4 million, respectively.

 

The Company fully expenses computer peripheral equipment (e.g. keyboards, mouses) upon shipment as recovery has been determined to be uneconomical. These expenses totaled $2.7 million and $2.1 million for the three months ended September 30, 2018 and 2017, respectively, and are recorded as instructional costs and services.

 

Capitalized Software Costs

 

The Company develops software for internal use. Software development costs incurred during the application development stage are capitalized in accordance with ASC 350, Intangibles – Goodwill and Other (“ASC 350”). The Company amortizes these costs over the estimated useful life of the software, which is generally three years. Capitalized software development costs are stated at cost less accumulated amortization.

 

Capitalized software additions totaled $9.3 million and $7.9 million for the three months ended September 30, 2018 and 2017, respectively. Amortization expense for the three months ended September 30, 2018 and 2017 was $7.7 million and $10.3 million, respectively.

 

During the three months ended September 30, 2017, the Company recorded an out of period adjustment related to the capitalization of software and curriculum development. The adjustment increased capitalized software development

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

 

costs and capitalized curriculum development costs by $2.3 million and $0.6 million, respectively, and decreased net loss by $1.4 million for the period. The Company assessed the materiality of these errors on its prior quarterly and annual financial statements, assessing materiality both quantitatively and qualitatively, in accordance with the SEC’s Staff Accounting Bulletin (“SAB”) No. 99 and SAB No. 108 and concluded that the errors were not material to any of its previously issued financial statements.

 

Capitalized Curriculum Development Costs

 

The Company internally develops curriculum, which is primarily provided as online content and accessed via the Internet. The Company also creates textbooks and other materials that are complementary to online content.

 

The Company capitalizes curriculum development costs incurred during the application development stage in accordance with ASC 350. The Company capitalizes curriculum development costs during the design and deployment phases of the project. As a result, a significant portion of the Company’s courseware development costs qualify for capitalization due to the concentration of its development efforts on the content of the courseware. Capitalization ends when a course is available for general release to its customers, at which time amortization of the capitalized costs begins. The period of time over which these development costs are amortized is generally five years.

 

Total capitalized curriculum development additions were $6.7 million and $2.4 million for the three months ended September 30, 2018 and 2017, respectively. These amounts are recorded on the accompanying condensed consolidated balance sheets net of amortization charges. Amortization is recorded in instructional costs and services on the accompanying condensed consolidated statements of operations. Amortization expense for the three months ended September 30, 2018 and 2017 was $4.5 million and $5.2 million, respectively. As mentioned above, capitalized curriculum development additions for the three months ended September 30, 2017 included an out of period adjustment of $0.6 million.

 

Income Taxes

 

The Company accounts for income taxes in accordance with ASC 740, Income Taxes (“ASC 740”). Under ASC 740, deferred tax assets and liabilities are computed based on the difference between the financial reporting and income tax bases of assets and liabilities using the enacted marginal tax rate. ASC 740 requires that the net deferred tax asset be reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the net deferred tax asset will not be realized.

 

Redeemable Noncontrolling Interests

 

Earnings or losses attributable to minority shareholders of a consolidated affiliated company are classified separately as “noncontrolling interest” in the Company’s condensed consolidated statements of operations. Noncontrolling interests in subsidiaries that are redeemable outside of the Company’s control for cash or other assets are classified outside of permanent equity at redeemable value, which approximates fair value. If the redemption amount is other than fair value (e.g. fixed or variable), the redeemable noncontrolling interest is accounted for at the fixed or variable redeemable value. The redeemable noncontrolling interests are adjusted to their redeemable value at each balance sheet date. The resulting increases or decreases in the estimated redemption amount are affected by corresponding charges against retained earnings, or in the absence of retained earnings, additional paid-in capital.

 

Goodwill and Intangible Assets

 

The Company records as goodwill the excess of the purchase price over the fair value of the identifiable net assets acquired. Finite-lived intangible assets acquired in business combinations subject to amortization are recorded at their fair value. Finite-lived intangible assets include trade names, acquired customers and distributors, developed technology and non-compete agreements. Such intangible assets are amortized on a straight-line basis over their estimated useful lives. Amortization expense for the three months ended September 30, 2018 and 2017 was $0.7 million and $0.7 million, respectively. Future amortization of intangible assets is expected to be $2.2 million, $2.9 million, $2.4 million, $2.2

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

 

million, and $2.0 million in the fiscal years ending June 30, 2019 through June 30, 2023, respectively and $5.2 million thereafter.  At September 30, 2018 and June 30, 2018, the goodwill balance was $90.2 million.

 

The Company reviews its finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. If the total of the expected undiscounted future cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between fair value and the carrying value of the asset. There were no such events during the three months ended September 30, 2018 and 2017.

 

ASC 350 prescribes a two-step process for impairment testing of goodwill and intangible assets with indefinite lives, which is performed annually, as well as when an event triggering impairment may have occurred based on one reporting unit. ASC 350 also allows preparers to qualitatively assess goodwill impairment through a screening process which would permit companies to forgo Step 1 of their annual goodwill impairment process. This qualitative screening process will hereinafter be referred to as “Step 0”. The Company performs its annual assessment on May 31st. During the year ended June 30, 2018, the Company performed “Step 0” of the impairment test and determined that there were no facts and circumstances that indicated that the fair value of the reporting unit may be less than its carrying amount, and as a result, the Company determined that no impairment was required. During the three months ended September 30, 2018 and 2017, there were no events or changes in circumstances that would indicate that the carrying amount of the goodwill was impaired.

 

The following table represents the balance of the Company’s intangible assets as of September 30, 2018 and June 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

June 30, 2018

($ in millions)

    

Gross
Carrying
Amount

    

Accumulated
Amortization

    

Net
Carrying
Value

    

Gross
Carrying
Amount

    

Accumulated
Amortization

    

Net
Carrying
Value

Trade names

    

$

17.6

    

$

(8.7)

    

$

8.9

 

$

17.6

 

$

(8.5)

 

$

9.1

Customer and distributor relationships

 

 

20.5

 

 

(13.7)

 

 

6.8

 

 

20.5

 

 

(13.4)

 

 

7.1

Developed technology

 

 

3.2

 

 

(2.4)

 

 

0.8

 

 

3.2

 

 

(2.2)

 

 

1.0

Other

 

 

1.4

 

 

(0.7)

 

 

0.7

 

 

1.4

 

 

(0.6)

 

 

0.8

Total

 

$

42.7

 

$

(25.5)

 

$

17.2

 

$

42.7

  

$

(24.7)

 

$

18.0

 

Impairment of Long-Lived Assets

 

Long-lived assets include property, equipment, capitalized curriculum and software developed or obtained for internal use. In accordance with ASC 360, Property, Plant and Equipment (“ASC 360”), management reviews the Company’s recorded long-lived assets for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. The Company determines the extent to which an asset may be impaired based upon its expectation of the asset’s future usability as well as on a reasonable assurance that the future cash flows associated with the asset will be in excess of its carrying amount. If the total of the expected undiscounted future cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between fair value and the carrying value of the asset. There was no such impairment charge during the three months ended September 30, 2018 and 2017.

 

Fair Value Measurements

 

ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value as the price that would be received to sell an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

 

ASC 820 describes three levels of inputs that may be used to measure fair value:

 

Level 1:   Inputs based on quoted market prices for identical assets or liabilities in active markets at the measurement date.

 

Level 2:   Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

Level 3:    Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument’s valuation.

 

The carrying values reflected in the accompanying condensed consolidated balance sheets for cash and cash equivalents, receivables, and short and long term debt approximate their fair values. The lease exit liability is discussed in more detail in Note 10, “Restructuring.” 

 

The following table summarizes certain fair value information at September 30, 2018 for assets or liabilities measured at fair value on a nonrecurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

Fair Value Measurements Using:

   

 

 

   

 

Quoted Prices

 

 

 

 

   

 

 

   

 

in Active

 

Significant

 

   

   

 

 

   

 

Markets for

 

Other

 

Significant

   

 

 

   

 

Identical

 

Observable

 

Unobservable

   

 

 

   

 

Assets

 

Input

 

Inputs

Description

    

Fair Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

 

 

(In thousands)

Lease exit liability

 

$

2,424

 

$

 —

 

$

 —

 

$

2,424

 

The following table summarizes certain fair value information at June 30, 2018 for assets and liabilities measured at fair value on a nonrecurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

Fair Value Measurements Using:

   

 

 

   

 

Quoted Prices

 

 

 

 

   

 

 

   

 

in Active

 

Significant

 

   

   

 

 

   

 

Markets for

 

Other

 

Significant

   

 

 

   

 

Identical

 

Observable

 

Unobservable

   

 

 

   

 

Assets

 

Input

 

Inputs

Description

    

Fair Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

 

 

(In thousands)

Lease exit liability

 

$

2,758

 

$

 —

 

$

 —

 

$

2,758

 

The following table summarizes certain fair value information at September 30, 2018 for assets or liabilities measured at fair value on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

Fair Value Measurements Using:

   

 

 

   

 

Quoted Prices

 

 

 

 

   

 

 

   

 

in Active

 

Significant

 

   

   

 

 

   

 

Markets for

 

Other

 

Significant

   

 

 

   

 

Identical

 

Observable

 

Unobservable

   

 

 

   

 

Assets

 

Input

 

Inputs

Description

    

Fair Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

 

 

(In thousands)

Contingent consideration associated with acquisitions

 

$

1,147

 

$

 —

 

$

 —

 

$

1,147

 

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K12 INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

 

The following table summarizes certain fair value information at June 30, 2018 for assets and liabilities measured at fair value on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

Fair Value Measurements Using:

   

 

 

   

 

Quoted Prices

 

 

 

 

   

 

 

   

 

in Active

 

Significant

 

   

   

 

 

   

 

Markets for

 

Other

 

Significant

   

 

 

   

 

Identical

 

Observable

 

Unobservable

   

 

 

   

 

Assets

 

Input

 

Inputs

Description

    

Fair Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

 

 

(In thousands)

Contingent consideration associated with acquisitions

 

$

1,345

 

$

 —

 

$

 —

 

$

1,345

 

The following tables summarize the activity during the three months ended September 30, 2018 and 2017 for assets and liabilities measured at fair value on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

Three Months Ended September 30, 2018

   

 

 

   

 

Purchases,

 

   

 

 

 

   

 

Fair Value

 

Issuances,

 

Unrealized

 

Fair Value

Description

    

June 30, 2018

    

and Settlements

    

Gains/(Losses)

    

September 30, 2018

 

 

 

(In thousands)

Contingent consideration associated with acquisitions

 

$

1,345

 

$

(200)

 

$

 2

 

$

1,147

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2017

   

 

 

   

 

Purchases,

 

 

   

 

 

 

   

 

Fair Value

 

Issuances,

 

Unrealized

 

Fair Value

Description

    

June 30, 2017

    

and Settlements

    

Gains/(Losses)

    

September 30, 2017

 

 

(In thousands)

Contingent consideration associated with acquisitions

 

$

2,806

 

$

(1,819)

 

$

(149)

 

$

838

 

Net Income (Loss) Per Common Share

 

The Company calculates net income (loss) per share in accordance with ASC 260, Earnings Per Share (“ASC 260”). Under ASC 260, basic net income (loss) per common share is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during the reporting period. The weighted average number of shares of common stock outstanding includes vested restricted stock awards. Diluted net income (loss) per share (“EPS”) reflects the potential dilution that could occur assuming conversion or exercise of all dilutive unexercised stock options. The dilutive effect of stock options and restricted stock awards was determined using the treasury stock method. Under the treasury stock method, the proceeds received from the exercise of stock options and restricted stock awards, the amount of compensation cost for future service not yet recognized by the Company and the amount of tax benefits that would be recorded as income tax expense when the stock options become deductible for income tax purposes are all assumed to be used to repurchase shares of the Company’s common stock. Stock options and restricted stock awards are not included in the computation of diluted net income (loss) per share when they are antidilutive. Common stock outstanding reflected in the Company’s condensed consolidated balance sheets includes restricted stock awards outstanding. Securities that may participate in undistributed net income with common stock are considered participating securities.

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K12 INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

 

 

The following schedule presents the calculation of basic and diluted net loss per share:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

 

  

2018

  

2017

 

 

 

 

(In thousands except share and per share data)

 

Basic and diluted net loss per share computation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders

 

$

(8,282)

 

$

(8,056)

 

Weighted average common shares  — basic

 

 

38,434,049

 

 

39,108,172

 

Weighted average common shares  — diluted

 

 

38,434,049

 

 

39,108,172

 

Basic and diluted net loss per share

 

$

(0.22)

 

$

(0.21)

 

 

For the three months ended September 30, 2018 and 2017, shares issuable in connection with stock options and restricted stock of 2,028,846 and 2,645,987, respectively, were excluded from the diluted income per share calculation because the effect would have been antidilutive. As of September 30, 2018, the Company had 45,573,280 shares issued and 40,238,537 shares outstanding.

 

Reclassification 

Certain previous year amounts have been reclassified to conform with current year presentations, as related to the statement of cash flows.

 

4.   Income Taxes

 

The provision for income taxes is based on earnings reported in the condensed consolidated financial statements. A deferred income tax asset or liability is determined by applying currently enacted tax laws and rates to the expected reversal of the cumulative temporary differences between the carrying value of assets and liabilities for financial statement and income tax purposes. Deferred income tax expense or benefit is measured by the change in the deferred income tax asset or liability during the period. For the three months ended September 30, 2018 and 2017, the Company’s effective income tax rate was 37.9% and 53.4%, respectively.

 

On December 22, 2017, the Tax Cuts and Job Act (the “Tax Act”) was enacted into law, which among other provisions, reduced the U.S. statutory federal income tax rate from 35% to 21%.  The Company has included the amount for the impact of the re-measurement of the Company’s net U.S. deferred tax liabilities and the transition tax on the Company’s accumulated unremitted foreign earnings in the Company’s financial statements for the year ended June 30, 2018.

 

The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to allow the registrant to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. The Company has included in its taxable income the provisional impact related to the one-time transition tax and the revaluation of deferred tax balances and included these estimates in its consolidated financial statements for the year ended June 30, 2018. The Company believes the analysis of the various provisions of the Tax Act has been substantially completed, but the ultimate impact may differ from these provisional amounts due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Act. The Company expects to complete its analysis within the measurement period in accordance with SAB 118.

 

5.   Long-term Obligations

 

Capital Leases

 

The Company incurs capital lease obligations for student computers under a non-revolving lease line of credit with PNC Equipment Finance, LLC. As of September 30, 2018 and June 30, 2018, the outstanding balance of capital leases

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Table of Contents 

K12 INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

 

under the current and former lease lines of credit (as discussed in more detail below) was $37.7 million and $26.0 million, respectively, with lease interest rates ranging from 1.97% to 3.87%. Individual leases under the lease lines of credit include 36-month payment terms with a $1 purchase option at the end of each lease term. The Company has pledged the assets financed to secure the outstanding leases. The gross carrying value of leased student computers as of September 30, 2018 and June 30, 2018 was $53.8 million and $42.2 million, respectively. The accumulated depreciation of leased student computers as of September 30, 2018 and June 30, 2018 was $27.4 million and $26.0 million, respectively.

 

The Company executed an extension to its non-revolving lease line of credit in the amount of $20.0 million during the first quarter of fiscal year 2019 with a maturity date of February 6, 2020. The Company had $5.5 million of remaining availability under its current lease line of credit as of September 30, 2018. Interest on unpaid principal under the lease line of credit accrues at a fluctuating rate of LIBOR plus 1.2%.

 

The following is a summary as of September 30, 2018 of the present value of the net minimum lease payments on capital leases under the Company’s commitments:

 

 

 

 

 

As of June 30, 

    

Capital Leases 

 

    

(in thousands)

 

 

 

 

2019

 

$

13,982

2020

 

 

13,840

2021

 

 

9,931

2022

 

 

1,652

Total minimum payments

 

 

39,405

Less amount representing interest (imputed weighted average capital lease interest rate of 3.45%)

 

 

(1,713)

Net minimum payments

 

 

37,692

Less current portion

 

 

(17,083)

Present value of minimum payments, less current portion

 

$

20,609

 

 

6.   Line of Credit

 

On January 31, 2014, the Company executed a $100.0 million unsecured line of credit to be used for general corporate operating purposes with Bank of America, N.A. (“BOA”). The line has a five-year term, bears interest at the higher of the Bank’s prime rate plus 0.25%, the Federal Funds Rates plus 0.75%, or LIBOR plus 1.25%; and incorporates customary financial and other covenants, including but not limited to a maximum debt leverage and a minimum fixed charge coverage ratio. As of September 30, 2018 and June 30, 2018, the Company was in compliance with these covenants. During the three months ended September 30, 2018, there was no borrowing activity on this line of credit, and the Company had no borrowings outstanding on the line of credit as of September 30, 2018.

 

The BOA credit agreement contains a number of financial and other covenants that, among other things, restrict the Company and its subsidiaries’ ability to incur additional indebtedness, grant liens or other security interests, make certain investments, make specified restricted payments including dividends, dispose of assets or stock including the stock of its subsidiaries, make capital expenditures above specified limits and engage in other matters customarily restricted in senior credit facilities.

 

7.   Equity Transactions

 

On December 15, 2016 (the “Effective Date”), the Company’s stockholders approved the 2016 Incentive Award Plan (the “Plan”). The Plan is designed to attract, ret