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 DecemberMarch 31, 20172019
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.) |
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2300 Corporate Park Drive |
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|
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 JanuaryApril 19, 2018,2019, the Registrant had 41,414,86240,201,223 shares of common stock, $0.0001 par value per share outstanding.
K12 Inc.
Form 10-Q
For the Quarterly Period Ended DecemberMarch 31, 20172019
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3 | ||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||
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2
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
K12 INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
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| December 31, |
| June 30, |
| March 31, |
| June 30, | ||||
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| 2017 |
| 2017 |
| 2019 |
| 2018 | ||||
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| (audited) |
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| (audited) |
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| (In thousands except share and per share data) |
| (In thousands except share and per share data) | ||||||||
ASSETS |
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Current assets |
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Cash and cash equivalents |
| $ | 189,502 |
| $ | 230,864 |
| $ | 234,025 |
| $ | 231,113 |
Accounts receivable, net of allowance of $10,168 and $14,791 at December 31, 2017 and June 30, 2017, respectively |
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| 244,124 |
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| 192,205 | ||||||
Accounts receivable, net of allowance of $9,008 and $12,384 at March 31, 2019 and June 30, 2018, respectively |
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| 238,614 |
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| 176,319 | ||||||
Inventories, net |
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| 18,388 |
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| 30,503 |
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| 17,195 |
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| 31,134 |
Prepaid expenses |
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| 21,988 |
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| 8,006 |
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| 17,958 |
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| 10,278 |
Other current assets |
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| 14,753 |
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| 12,004 |
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| 14,181 |
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| 10,388 |
Total current assets |
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| 488,755 |
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| 473,582 |
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| 521,973 |
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| 459,232 |
Property and equipment, net |
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| 29,472 |
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| 26,297 |
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| 32,778 |
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| 28,868 |
Capitalized software, net |
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| 57,904 |
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| 62,695 |
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| 51,693 |
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| 55,488 |
Capitalized curriculum development costs, net |
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| 54,816 |
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| 59,213 |
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| 51,160 |
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| 53,558 |
Intangible assets, net |
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| 19,449 |
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| 20,226 |
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| 15,723 |
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| 17,951 |
Goodwill |
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| 90,197 |
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| 87,214 |
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| 90,197 |
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| 90,197 |
Deposits and other assets |
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| 8,063 |
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| 6,057 |
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| 45,486 |
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| 36,669 |
Total assets |
| $ | 748,656 |
| $ | 735,284 |
| $ | 809,010 |
| $ | 741,963 |
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND STOCKHOLDERS' EQUITY |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current liabilities |
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Current portion of capital lease obligations |
| $ | 13,416 |
| $ | 11,880 |
| $ | 24,499 |
| $ | 13,353 |
Accounts payable |
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| 17,162 |
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| 30,052 |
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| 23,208 |
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| 29,362 |
Accrued liabilities |
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| 12,479 |
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| 21,622 |
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| 17,706 |
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| 14,345 |
Accrued compensation and benefits |
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| 19,667 |
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| 29,367 |
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| 30,549 |
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| 36,050 |
Deferred revenue |
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| 54,945 |
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| 24,830 |
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| 52,827 |
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| 23,114 |
Total current liabilities |
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| 117,669 |
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| 117,751 |
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| 148,789 |
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| 116,224 |
Capital lease obligations, net of current portion |
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| 13,931 |
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| 10,025 |
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| 6,698 |
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| 12,665 |
Deferred rent, net of current portion |
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| 3,745 |
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| 4,157 |
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| 2,524 |
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| 3,270 |
Deferred tax liability |
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| 16,023 |
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| 16,726 |
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| 18,211 |
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| 12,577 |
Other long-term liabilities |
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| 10,946 |
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| 11,579 |
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| 8,048 |
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| 10,038 |
Total liabilities |
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| 162,314 |
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| 160,238 |
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| 184,270 |
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| 154,774 |
Commitments and contingencies |
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| — |
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| — |
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| — |
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| — |
Redeemable noncontrolling interest |
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| 500 |
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| 700 | ||||||
Stockholders’ equity |
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Common stock, par value $0.0001; 100,000,000 shares authorized; 44,898,430 and 44,325,772 shares issued, and 41,395,832 and 40,823,174 shares outstanding at December 31, 2017 and June 30, 2017, respectively |
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| 4 |
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| 4 | ||||||
Common stock, par value $0.0001; 100,000,000 shares authorized; 45,542,026 and 44,902,567 shares issued; and 40,207,283 and 39,567,824 shares outstanding at March 31, 2019 and June 30, 2018, respectively |
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| 4 |
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| 4 | ||||||
Additional paid-in capital |
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| 697,044 |
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| 690,488 |
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| 708,269 |
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| 703,351 |
Accumulated other comprehensive loss |
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| (364) |
|
| (170) |
|
| (181) |
|
| (252) |
Accumulated deficit |
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| (35,842) |
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| (40,976) | ||||||
Treasury stock of 3,502,598 shares at cost at December 31, 2017 and June 30, 2017 |
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| (75,000) |
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| (75,000) | ||||||
Retained earnings (accumulated deficit) |
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| 19,130 |
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| (13,432) | ||||||
Treasury stock of 5,334,743 shares at cost at March 31, 2019 and June 30, 2018 |
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| (102,482) |
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| (102,482) | ||||||
Total stockholders’ equity |
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| 585,842 |
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| 574,346 |
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| 624,740 |
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| 587,189 |
Total liabilities, redeemable noncontrolling interest and stockholders' equity |
| $ | 748,656 |
| $ | 735,284 | ||||||
Total liabilities and stockholders' equity |
| $ | 809,010 |
| $ | 741,963 |
See accompanying summary of accounting policies and notes to unaudited condensed consolidated financial statements.
3
K12 INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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| Three Months Ended December 31, |
| Six Months Ended December 31, |
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| Three Months Ended March 31, |
| Nine Months Ended March 31, |
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| 2017 |
| 2016 |
| 2017 |
| 2016 |
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| 2019 |
| 2018 |
| 2019 |
| 2018 |
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| (In thousands except share and per share data) |
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| (In thousands except share and per share data) |
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Revenues |
| $ | 217,211 |
| $ | 221,090 |
| $ | 445,996 |
| $ | 450,228 |
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| $ | 253,252 |
| $ | 232,864 |
| $ | 759,438 |
| $ | 678,860 |
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Cost and expenses |
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Instructional costs and services |
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| 139,163 |
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| 137,542 |
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| 286,530 |
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| 281,641 |
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| 168,260 |
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| 148,878 |
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| 487,574 |
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| 435,408 |
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Selling, administrative, and other operating expenses |
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| 61,958 |
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| 62,352 |
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| 158,240 |
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| 166,998 |
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| 59,382 |
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| 62,267 |
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| 222,143 |
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| 220,507 |
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Product development expenses |
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| 2,376 |
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| 2,873 |
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| 5,274 |
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| 5,935 |
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| 2,343 |
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| 2,002 |
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| 6,916 |
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| 7,276 |
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Total costs and expenses |
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| 203,497 |
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| 202,767 |
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| 450,044 |
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| 454,574 |
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| 229,985 |
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| 213,147 |
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| 716,633 |
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| 663,191 |
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Income (loss) from operations |
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| 13,714 |
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| 18,323 |
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| (4,048) |
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| (4,346) |
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Income from operations |
| 23,267 |
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| 19,717 |
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| 42,805 |
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| 15,669 |
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Interest income, net |
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| 39 |
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| 264 |
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| 274 |
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| 606 |
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| 754 |
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| 261 |
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| 1,547 |
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| 535 |
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Income (loss) before income taxes and noncontrolling interest |
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| 13,753 |
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| 18,587 |
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| (3,774) |
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| (3,740) |
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Other income (expense), net |
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| 556 |
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| — |
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| (40) |
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| — |
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Income before income taxes, loss from equity method investments and noncontrolling interest |
| 24,577 |
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| 19,978 |
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| 44,312 |
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| 16,204 |
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Income tax benefit (expense) |
|
| (564) |
|
| (7,688) |
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| 8,804 |
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| 1,002 |
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| (5,842) |
|
| (6,935) |
|
| (9,858) |
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| 1,869 |
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Net income (loss) |
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| 13,189 |
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| 10,899 |
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| 5,030 |
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| (2,738) |
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Loss from equity method investments |
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| (273) |
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| — |
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| (562) |
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| — |
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Net income |
| 18,462 |
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| 13,043 |
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| 33,892 |
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| 18,073 |
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Add net loss attributable to noncontrolling interest |
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| 70 |
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| 753 |
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| 173 |
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| 557 |
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|
| — |
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| 27 |
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| — |
|
| 200 |
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Net income (loss) attributable to common stockholders |
| $ | 13,259 |
| $ | 11,652 |
| $ | 5,203 |
| $ | (2,181) |
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Net income (loss) attributable to common stockholders per share: |
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Net income attributable to common stockholders |
| $ | 18,462 |
| $ | 13,070 |
| $ | 33,892 |
| $ | 18,273 |
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Net income attributable to common stockholders per share: |
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Basic |
| $ | 0.34 |
| $ | 0.31 |
| $ | 0.13 |
| $ | (0.06) |
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| $ | 0.47 |
| $ | 0.33 |
| $ | 0.87 |
| $ | 0.46 |
|
Diluted |
| $ | 0.33 |
| $ | 0.30 |
| $ | 0.13 |
| $ | (0.06) |
|
| $ | 0.44 |
| $ | 0.32 |
| $ | 0.84 |
| $ | 0.45 |
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Weighted average shares used in computing per share amounts: |
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Basic |
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| 39,347,244 |
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| 38,104,909 |
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| 39,227,708 |
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| 38,021,807 |
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| 39,008,990 |
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| 39,644,074 |
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| 38,753,236 |
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| 39,366,497 |
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Diluted |
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| 40,685,667 |
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| 39,007,276 |
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| 40,773,017 |
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| 38,021,807 |
|
|
| 41,753,323 |
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| 40,766,203 |
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| 40,548,959 |
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| 40,771,437 |
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See accompanying summary of accounting policies and notes to unaudited condensed consolidated financial statements.
4
K12 INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSSINCOME
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| Three Months Ended December 31, |
| Six Months Ended December 31, |
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| Three Months Ended |
| Nine Months Ended |
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|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
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| March 31, |
| March 31, |
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| (In thousands) |
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| 2019 |
| 2018 |
| 2019 |
| 2018 |
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Net income (loss) |
| $ | 13,189 |
| $ | 10,899 |
| $ | 5,030 |
| $ | (2,738) |
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| (In thousands) |
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Net income |
| $ | 18,462 |
| $ | 13,043 |
| $ | 33,892 |
| $ | 18,073 |
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Other comprehensive income, net of tax: |
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Foreign currency translation adjustment |
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| (39) |
|
| 238 |
|
| (194) |
|
| 390 |
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|
| (122) |
|
| (198) |
|
| 71 |
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| (392) |
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Total other comprehensive income (loss), net of tax |
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| 13,150 |
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| 11,137 |
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| 4,836 |
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| (2,348) |
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Total other comprehensive income, net of tax |
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| 18,340 |
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| 12,845 |
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| 33,963 |
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| 17,681 |
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Comprehensive loss attributable to noncontrolling interest |
|
| 70 |
|
| 753 |
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| 173 |
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| 557 |
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|
| — |
|
| 27 |
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| — |
|
| 200 |
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Comprehensive income (loss) attributable to common stockholders |
| $ | 13,220 |
| $ | 11,890 |
| $ | 5,009 |
| $ | (1,791) |
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Comprehensive income attributable to common stockholders |
| $ | 18,340 |
| $ | 12,872 |
| $ | 33,963 |
| $ | 17,881 |
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See accompanying summary of accounting policies and notes to unaudited condensed consolidated financial statements.
5
K12 INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
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| K12 Inc. Stockholders' Equity | ||||||||||||||||||||
(In thousands except share data) |
| Common Stock |
| Additional |
| Other |
| Accumulated |
| Treasury Stock |
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| Shares |
| Amount |
| Capital |
| Loss |
| Deficit |
| Shares |
| Amount |
| Total | ||||||
Balance, June 30, 2017 |
| 44,325,772 |
| $ | 4 |
| $ | 690,488 |
| $ | (170) |
| $ | (40,976) |
| (3,502,598) |
| $ | (75,000) |
| $ | 574,346 |
Adjustment related to new stock-based compensation guidance |
| — |
|
| — |
|
| 112 |
|
| — |
|
| (69) |
| — |
|
| — |
|
| 43 |
Net income (1) |
| — |
|
| — |
|
| — |
|
| — |
|
| 5,203 |
| — |
|
| — |
|
| 5,203 |
Foreign currency translation adjustment |
| — |
|
| — |
|
| — |
|
| (194) |
|
| — |
| — |
|
| — |
|
| (194) |
Stock-based compensation expense |
| — |
|
| — |
|
| 12,116 |
|
| — |
|
| — |
| — |
|
| — |
|
| 12,116 |
Exercise of stock options |
| 3,350 |
|
| — |
|
| 58 |
|
| — |
|
| — |
| — |
|
| — |
|
| 58 |
Vesting of performance share units |
| 60,324 |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
Issuance of restricted stock awards |
| 956,312 |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
Forfeiture of restricted stock awards |
| (157,724) |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
Adjustment to redeemable noncontrolling interest to estimated redemption value |
| — |
|
| — |
|
| 27 |
|
| — |
|
| — |
| — |
|
| — |
|
| 27 |
Repurchase of restricted stock for tax withholding |
| (289,604) |
|
| — |
|
| (5,757) |
|
| — |
|
| — |
| — |
|
| — |
|
| (5,757) |
Balance, December 31, 2017 |
| 44,898,430 |
| $ | 4 |
| $ | 697,044 |
| $ | (364) |
| $ | (35,842) |
| (3,502,598) |
| $ | (75,000) |
| $ | 585,842 |
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| K12 Inc. Stockholders' Equity | ||||||||||||||||||||
(In thousands except share data) |
| Common Stock |
| Additional |
| Accumulated Other |
| Retained |
| 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 |
Net income |
| — |
|
| — |
|
| — |
|
| — |
|
| 23,712 |
| — |
|
| — |
|
| 23,712 |
Foreign currency translation adjustment |
| — |
|
| — |
|
| — |
|
| 121 |
|
| — |
| — |
|
| — |
|
| 121 |
Stock-based compensation expense |
| — |
|
| — |
|
| 4,235 |
|
| — |
|
| — |
| — |
|
| — |
|
| 4,235 |
Exercise of stock options |
| 51,050 |
|
| — |
|
| 1,025 |
|
| — |
|
| — |
| — |
|
| — |
|
| 1,025 |
Issuance of restricted stock awards |
| 26,000 |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
Forfeiture of restricted stock awards |
| (54,054) |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
Repurchase of restricted stock for tax withholding |
| (45,960) |
|
| — |
|
| (833) |
|
| — |
|
| — |
| — |
|
| — |
|
| (833) |
Balance, December 31, 2018 |
| 45,550,316 |
| $ | 4 |
| $ | 705,825 |
| $ | (59) |
| $ | 668 |
| (5,334,743) |
| $ | (102,482) |
| $ | 603,956 |
Net income |
| — |
|
| — |
|
| — |
|
| — |
|
| 18,462 |
| — |
|
| — |
|
| 18,462 |
Foreign currency translation adjustment |
| — |
|
| — |
|
| — |
|
| (122) |
|
| — |
| — |
|
| — |
|
| (122) |
Stock-based compensation expense |
| — |
|
| — |
|
| 4,047 |
|
| — |
|
| — |
| — |
|
| — |
|
| 4,047 |
Exercise of stock options |
| 54,753 |
|
| — |
|
| 1,148 |
|
| — |
|
| — |
| — |
|
| — |
|
| 1,148 |
Issuance of restricted stock awards |
| 73,524 |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
Forfeiture of restricted stock awards |
| (51,435) |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
Repurchase of restricted stock for tax withholding |
| (85,132) |
|
| — |
|
| (2,751) |
|
| — |
|
| — |
| — |
|
| — |
|
| (2,751) |
Balance, March 31, 2019 |
| 45,542,026 |
| $ | 4 |
| $ | 708,269 |
| $ | (181) |
| $ | 19,130 |
| (5,334,743) |
| $ | (102,482) |
| $ | 624,740 |
See accompanying summarynotes to unaudited condensed consolidated financial statements.
6
K12 INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| K12 Inc. Stockholders' Equity | ||||||||||||||||||||
(In thousands except share data) |
| Common Stock |
| Additional |
| Other |
| Accumulated |
| Treasury Stock |
|
|
| |||||||||
|
| Shares |
| Amount |
| Capital |
| Loss |
| Deficit |
| Shares |
| Amount |
| Total | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2017 |
| 44,325,772 |
| $ | 4 |
| $ | 690,488 |
| $ | (170) |
| $ | (40,976) |
| (3,502,598) |
| $ | (75,000) |
| $ | 574,346 |
Adjustment related to new stock-based compensation guidance |
| — |
|
| — |
|
| 112 |
|
| — |
|
| (69) |
| — |
|
| — |
|
| 43 |
Net loss |
| — |
|
| — |
|
| — |
|
| — |
|
| (8,056) |
| — |
|
| — |
|
| (8,056) |
Foreign currency translation adjustment |
| — |
|
| — |
|
| — |
|
| (155) |
|
| — |
| — |
|
| — |
|
| (155) |
Stock-based compensation expense |
| — |
|
| — |
|
| 4,832 |
|
| — |
|
| — |
| — |
|
| — |
|
| 4,832 |
Exercise of stock options |
| 3,350 |
|
| — |
|
| 58 |
|
| — |
|
| — |
| — |
|
| — |
|
| 58 |
Issuance of restricted stock awards |
| 867,388 |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
Forfeiture of restricted stock awards |
| (129,286) |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
Adjustment to redeemable noncontrolling interest to estimated redemption value |
| — |
|
| — |
|
| (103) |
|
| — |
|
| — |
| — |
|
| — |
|
| (103) |
Repurchase of restricted stock for tax withholding |
| (230,158) |
|
| — |
|
| (4,093) |
|
| — |
|
| — |
| — |
|
| — |
|
| (4,093) |
Balance, September 30, 2017 |
| 44,837,066 |
| $ | 4 |
| $ | 691,294 |
| $ | (325) |
| $ | (49,101) |
| (3,502,598) |
| $ | (75,000) |
| $ | 566,872 |
Net income |
| — |
|
| — |
|
| — |
|
| — |
|
| 13,259 |
| — |
|
| — |
|
| 13,259 |
Foreign currency translation adjustment |
| — |
|
| — |
|
| — |
|
| (39) |
|
| — |
| — |
|
| — |
|
| (39) |
Stock-based compensation expense |
| — |
|
| — |
|
| 7,284 |
|
| — |
|
| — |
| — |
|
| — |
|
| 7,284 |
Vesting of performance share units, net of tax withholding |
| 60,324 |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
Issuance of restricted stock awards |
| 88,924 |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
Forfeiture of restricted stock awards |
| (28,438) |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
Adjustment to redeemable noncontrolling interest to estimated redemption value |
| — |
|
| — |
|
| 130 |
|
| — |
|
| — |
| — |
|
| — |
|
| 130 |
Repurchase of restricted stock for tax withholding |
| (59,446) |
|
| — |
|
| (1,664) |
|
| — |
|
| — |
| — |
|
| — |
|
| (1,664) |
Balance, December 31, 2017 |
| 44,898,430 |
| $ | 4 |
| $ | 697,044 |
| $ | (364) |
| $ | (35,842) |
| (3,502,598) |
| $ | (75,000) |
| $ | 585,842 |
Net income |
| — |
|
| — |
|
| — |
|
| — |
|
| 13,070 |
| — |
|
| — |
|
| 13,070 |
Foreign currency translation adjustment |
| — |
|
| — |
|
| — |
|
| (198) |
|
| — |
| — |
|
| — |
|
| (198) |
Stock-based compensation expense |
| — |
|
| — |
|
| 4,625 |
|
| — |
|
| — |
| — |
|
| — |
|
| 4,625 |
Exercise of stock options |
| 10,250 |
|
| — |
|
| 126 |
|
| — |
|
| — |
| — |
|
| — |
|
| 126 |
Vesting of performance share units, net of tax withholding |
| 89,352 |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
Issuance of restricted stock awards |
| 55,293 |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
Forfeiture of restricted stock awards |
| (173,539) |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
Adjustment to redeemable noncontrolling interest to estimated redemption value |
| — |
|
| — |
|
| (27) |
|
| — |
|
| — |
| — |
|
| — |
|
| (27) |
Repurchase of restricted stock for tax withholding |
| (214,988) |
|
| — |
|
| (4,006) |
|
| — |
|
| — |
| — |
|
| — |
|
| (4,006) |
Balance, March 31, 2018 |
| 44,664,798 |
| $ | 4 |
| $ | 697,762 |
| $ | (562) |
| $ | (22,772) |
| (3,502,598) |
| $ | (75,000) |
| $ | 599,432 |
See accompanying notes to unaudited condensed consolidated financial statements.
67
K12 INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended December 31, |
| Nine Months Ended March 31, | ||||||||
|
| 2017 |
| 2016 |
| 2019 |
| 2018 | ||||
|
| (In thousands) |
| (In thousands) | ||||||||
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | 5,030 |
| $ | (2,738) | ||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
|
|
|
|
|
| ||||||
Net income |
| $ | 33,892 |
| $ | 18,073 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
| ||||||
Depreciation and amortization expense |
|
| 39,186 |
|
| 36,375 |
|
| 53,259 |
|
| 57,612 |
Stock-based compensation expense |
|
| 10,296 |
|
| 9,292 |
|
| 12,114 |
|
| 14,853 |
Excess tax benefit from stock-based compensation |
|
| — |
|
| (250) | ||||||
Deferred income taxes |
|
| (51) |
|
| 4,123 |
|
| 5,327 |
|
| (4,978) |
Provision for doubtful accounts |
|
| 468 |
|
| 273 |
|
| 2,854 |
|
| 605 |
Provision for excess and obsolete inventory |
|
| 959 |
|
| 497 | ||||||
Provision for student computer shrinkage and obsolescence |
|
| (5) |
|
| 265 | ||||||
Expensed computer peripherals |
|
| 2,531 |
|
| 2,729 | ||||||
Other |
|
| 5,291 |
|
| 4,757 | ||||||
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (52,202) |
|
| (49,449) |
|
| (65,147) |
|
| (16,220) |
Inventories |
|
| 11,156 |
|
| 12,420 | ||||||
Prepaid expenses |
|
| (13,982) |
|
| (8,172) | ||||||
Other current assets |
|
| (2,748) |
|
| (1,330) | ||||||
Deposits and other assets |
|
| (2,185) |
|
| 5,653 | ||||||
Inventories, prepaid expenses, deposits and other current and long-term assets |
|
| 4,620 |
|
| (24,138) | ||||||
Accounts payable |
|
| (9,106) |
|
| (7,540) |
|
| (3,134) |
|
| (9,215) |
Accrued liabilities |
|
| (11,078) |
|
| (13,191) |
|
| 5,211 |
|
| (7,364) |
Accrued compensation and benefits |
|
| (9,711) |
|
| (10,151) |
|
| (5,501) |
|
| 111 |
Deferred revenue |
|
| 29,755 |
|
| 33,261 | ||||||
Deferred rent and other liabilities |
|
| (1,050) |
|
| (1,816) | ||||||
Net cash provided by (used in) operating activities |
|
| (2,737) |
|
| 10,251 | ||||||
Deferred revenue, rent and other liabilities |
|
| 24,510 |
|
| 21,134 | ||||||
Net cash provided by operating activities |
|
| 73,296 |
|
| 55,230 | ||||||
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
| (5,917) |
|
| (1,276) |
|
| (2,397) |
|
| (6,580) |
Capitalized software development costs |
|
| (13,378) |
|
| (13,446) |
|
| (20,580) |
|
| (18,852) |
Capitalized curriculum development costs |
|
| (4,474) |
|
| (9,141) |
|
| (13,746) |
|
| (7,770) |
Acquisition of Big Universe, Inc., net of cash acquired |
|
| (2,170) |
|
| — | ||||||
Purchase of noncontrolling interest |
|
| — |
|
| (9,134) | ||||||
Sale of long-lived assets |
|
| 389 |
|
| — | ||||||
Acquisitions and investments |
|
| (11,652) |
|
| (3,274) | ||||||
Net cash used in investing activities |
|
| (25,939) |
|
| (32,997) |
|
| (47,986) |
|
| (36,476) |
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Repayments on capital lease obligations |
|
| (6,987) |
|
| (8,116) |
|
| (13,898) |
|
| (10,313) |
Payments of contingent consideration |
|
| (1,027) |
|
| (1,819) | ||||||
Proceeds from exercise of stock options |
|
| 58 |
|
| 437 |
|
| 2,183 |
|
| 184 |
Excess tax benefit from stock-based compensation |
|
| — |
|
| 250 | ||||||
Repurchase of restricted stock for income tax withholding |
|
| (5,757) |
|
| (1,650) |
|
| (9,656) |
|
| (9,763) |
Net cash used in financing activities |
|
| (12,686) |
|
| (9,079) |
|
| (22,398) |
|
| (21,711) |
Effect of foreign exchange rate changes on cash and cash equivalents |
|
| — |
|
| (18) | ||||||
Net change in cash and cash equivalents |
|
| (41,362) |
|
| (31,843) | ||||||
Cash and cash equivalents, beginning of period |
|
| 230,864 |
|
| 213,989 | ||||||
Cash and cash equivalents, end of period |
| $ | 189,502 |
| $ | 182,146 | ||||||
Net change in cash, cash equivalents and restricted cash |
|
| 2,912 |
|
| (2,957) | ||||||
Cash, cash equivalents and restricted cash, beginning of period |
|
| 233,113 |
|
| 230,864 | ||||||
Cash, cash equivalents and restricted cash, end of period |
| $ | 236,025 |
| $ | 227,907 | ||||||
|
|
|
|
|
|
| ||||||
Reconciliation of cash, cash equivalents and restricted cash to balance sheet as of March 31st: |
|
|
|
|
|
| ||||||
Cash and cash equivalents |
| $ | 234,025 |
| $ | 227,907 | ||||||
Deposits and other assets (restricted cash) |
|
| 2,000 |
|
| — | ||||||
Total cash, cash equivalents and restricted cash |
| $ | 236,025 |
| $ | 227,907 |
See accompanying summary of accounting policies and notes to unaudited condensed consolidated financial statements.
78
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 primarily tothrough three lines of business: Managed Public School Programs (curriculum and services sold to 75 managed public schools in a majority of states throughout the United States), Institutional (curriculum, technology and services provided to school districts, public schools and other educational institutions that the Company does not manage),
· | Managed Public School Programs (programs which offer an integrated package of systems, services, products, and professional expertise that K12 manages in order to support an online or blended public school, including administrative support, information technology, academic support services, online curriculum, learning system platforms, and instructional services); |
· | Institutional (Non-managed Public School Programs – programs which provide instruction, curriculum, supplemental courses, marketing, enrollment and other educational services where K12 does not provide primary administrative support services, and Institutional Software and Services – educational software and services provided to school districts, public schools and other educational institutions); 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 DecemberMarch 31, 2017,2019, the condensed consolidated statements of operations and comprehensive lossincome for the three and sixnine months ended DecemberMarch 31, 20172019 and 2016,2018, the condensed consolidated statements of cash flows for the sixnine months ended DecemberMarch 31, 20172019 and 2016,2018, and the condensed consolidated statementstatements of stockholders’ equity for the sixthree and nine months ended DecemberMarch 31, 20172019 and 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 and sixnine months ended DecemberMarch 31, 20172019 are not necessarily indicative of the results to be expected for the year ending June 30, 2018 or2019, for any other interim period or for any other future fiscal year. The condensed consolidated balance sheet as of June 30, 20172018 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 9, 2017,8, 2018, which contains the Company’s audited financial statements for the fiscal year ended June 30, 2017.2018.
9
K12 INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
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.
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 principal 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 is 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.
810
K12 INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
3. SummaryThe impact of Significant Accounting Policiesadoption on the Company’s condensed consolidated statements of operations for the three and nine months ended March 31, 2019 was as follows:
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|
| Three Months Ended March 31, 2019 |
| Nine Months Ended March 31, 2019 | ||||||||||||||
|
| As |
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|
| As |
|
|
|
|
|
| ||
|
| Reported |
| Adjustment |
| Amounts |
| Reported |
| Adjustment |
| Amounts | ||||||
|
| Under ASC |
| due to ASC |
| under ASC |
| Under |
| due to ASC |
| under | ||||||
|
| 606 |
| 606 |
| 605 |
| ASC 606 |
| 606 |
| ASC 605 | ||||||
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| (In thousands) | |||||||||||||||
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|
|
Revenues |
| $ | 253,252 |
| $ | 6,536 |
| $ | 259,788 |
| $ | 759,438 |
| $ | 3,799 |
| $ | 763,237 |
Selling, administrative, and other operating expenses |
|
| 59,382 |
|
| (68) |
|
| 59,314 |
|
| 222,143 |
|
| (193) |
|
| 221,950 |
Income from operations |
|
| 23,267 |
|
| 6,604 |
|
| 29,871 |
|
| 42,805 |
|
| 3,992 |
|
| 46,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
| 18,462 |
|
| 6,604 |
|
| 25,066 |
|
| 33,892 |
|
| 3,992 |
|
| 37,884 |
Net income attributable to common stockholders |
| $ | 18,462 |
| $ | 6,604 |
| $ | 25,066 |
| $ | 33,892 |
| $ | 3,992 |
| $ | 37,884 |
The impact of adoption on the Company’s condensed consolidated balance sheets as of March 31, 2019 was as follows:
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| March 31, 2019 |
| |||||||
|
| As Reported |
| Adjustment |
| Amounts |
| |||
|
| Under ASC |
| due to ASC |
| under ASC |
| |||
|
| 606 |
| 606 |
| 605 |
| |||
|
|
| (In thousands) |
| ||||||
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|
|
|
|
|
|
|
|
|
|
Other current assets |
| $ | 14,181 |
| $ | (266) |
| $ | 13,915 |
|
Deposits and other assets |
|
| 45,486 |
|
| (574) |
|
| 44,912 |
|
Total assets |
|
| 809,010 |
|
| (840) |
|
| 808,170 |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue |
|
| 52,827 |
|
| (6,264) |
|
| 46,563 |
|
Total liabilities |
|
| 184,270 |
|
| (6,264) |
|
| 178,006 |
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings (accumulated deficit) |
|
| 19,130 |
|
| 3,992 |
|
| 23,122 |
|
Total stockholders' equity |
|
| 624,740 |
|
| 3,992 |
|
| 628,732 |
|
The following table presents the Company’s revenues disaggregated based on its three lines of business for the three and nine months ended March 31, 2019:
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|
|
|
|
| Three Months Ended |
| Nine Months Ended | ||
|
| March 31, 2019 |
| March 31, 2019 | ||
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| (In thousands) | ||||
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|
Managed Public School Programs |
| $ | 222,645 |
| $ | 665,981 |
Institutional |
|
|
|
|
|
|
Non-managed Public School Programs |
|
| 12,776 |
|
| 37,398 |
Institutional Software & Services |
|
| 8,530 |
|
| 29,515 |
Total Institutional |
|
| 21,306 |
|
| 66,913 |
Private Pay Schools and Other |
|
| 9,301 |
|
| 26,544 |
Total Revenues |
| $ | 253,252 |
| $ | 759,438 |
For more discussion surrounding the Company’s revenue recognition accounting policies, please refer to the “Contracts with Customers” section below.
Revenue Recognition
11
K12 INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
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 Concentrationa lease liability on 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 Revenuesexpense recognition in the statement of operations.
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, “ASC 842”) 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 anticipates that the impact of ASC 842 will be centered around its facility leases. The Company will record a lease liability with an expected present value in the range of $22 - $25 million and a ROU asset in the range of $17 - $20 million, based on its current leasing arrangements. The impact on the statements of operations is expected to be immaterial. The Company continues to evaluate ASC 842, as well as the effect on its 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.
Contracts with Customers
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. In additionschools through its three lines of business; Managed Public School Programs, Institutional, and Private Pay and Other.
Under ASC 606, revenue is recognized when control of the promised goods or services is transferred to providing the curriculum, books, and materials, under most contracts,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. |
12
K12 INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
Revenue Recognition
Managed Public School Programs
The Company provides managementan integrated package of systems, services, products, and technologyprofessional expertise that we manage to virtual andsupport online or blended public schools, including monitoringschools. Contractual agreements generally span multiple years with performance obligations being isolated to annual periods. Customers for these programs can obtain the administrative support, information technology, academic achievement, teacher recommendationssupport services, online curriculum, learning systems platforms and hiring, teacher training, compensationinstructional services under the terms of school personnel, financial management, enrollment processing, and development and procurement of curriculum, equipment, and required services.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.
Where the Company has determined that it is the primary obligor for substantially all expenses under these contracts, the Company records the associated per student revenues received by the school from its state funding school district or from other sources up to the expenses incurred in accordance with Accounting Standards Codification (“ASC”) 605, Revenue Recognition (“ASC 605”). As a result of being the primary obligor, amounts recorded as revenues and school operating expenses for the three months ended December 31, 2017 and 2016 were $76.1 million and $74.9 million, respectively, and for the six months ended December 31, 2017 and 2016 were $139.6 million and $137.4 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 Company generates revenues under turnkey management contracts with virtual and blended public schools whichand include multiple elements. These elements typically include:the following components, where required:
· | 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 |
· | the use of a personal computer and associated reclamation |
· | internet access and technology support services; |
· | instruction by a state-certified |
· | management and technology services necessary to |
The Company has determined that the elements of its contracts are valuable to schools in combination, but do not have standalone value. As a result, the elements within the Company’s multiple-element contracts do not qualify as separate units of accounting. Accordingly, the Company accounts for revenues under multiple element arrangements as a single unit of accounting and recognizes the entire arrangement based upon the approximate rate at which it incurs the costs associated with each element. Revenues from certain managed schools are recognized ratably over the period services are performed.
To determine the pro rata amount of revenuesrevenue 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
9
K12 INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
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 and sixnine months ended DecemberMarch 31, 20172019 and 2016.2018.
Each state and/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
13
K12 INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
against revenues based upon the percentage of actual revenues in the period to total estimated revenues for the fiscal year.
For turnkey service contract revenues, a school operating loss may reduce the Company’s ability to collect its management fees in full, though as noted it does not necessarily mean that the Company incurs a loss during the period with respect to its services to that school. The Company recognizes revenues, net of its estimated portion of school operating losses, to reflect the expected cash collections from such schools. Revenues are recognized based on the Company’s performance of services under the contract, which it believes is proportionate to its incurrence of costs. The Company incurs costs directly related to the delivery of services. Most of these costs are recognized throughout the year; however, certain costs related to upfront delivery of printed materials, workbooks, laboratory materials and other items are provided at the beginning of the school year and are recognized as expenses when shipped.
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 builds the funding estimates for each school, it is mindful of 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.
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. 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. For the three months ended DecemberMarch 31, 20172019 and 2016,2018, the Company’s revenues included a reduction for these school operating losses of $13.7for $9.2 million and $12.6$18.7 million, respectively, and $31.5$43.2 million and $28.3$50.2 million for the sixnine months ended DecemberMarch 31, 20172019 and 2016,2018, respectively.
The Company has certain contracts where it is responsible for substantially all of the expenses incurred by the school. For these contracts, the Company records both revenue and expenses incurred by the schools. Amounts recorded as revenues for the three months ended March 31, 2019 and 2018 were $85.8 million and $81.4 million, respectively, and for the nine months ended March 31, 2019 and 2018 were $259.9 million and $221.0 million, respectively.
Institutional
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, marketing, enrollment 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 and perpetual license agreements. Revenues under these agreements are recognized when all of the following conditions are met: there is persuasive evidence of an arrangement; delivery has occurred or services have been rendered; the amount of fees to be paid by the customer is fixed and determinable; and the collectability of the fee is probable. Revenues from the licensing of curriculum under subscription arrangements are recognized on a ratable basis over the subscription period. Revenues from the licensing of curriculum under non-cancelable perpetual arrangements are recognized when all revenue recognition criteria have been met. Revenues from professional consulting, training and support services are deferred and recognized ratably over the service period.
Private Pay Schools and Other
Private Pay Schools and Other revenues are generated from individual customers who prepay and have access for one to two years to company-provided online curriculum. Each of these contracts are considered to be one performance obligation under ASC 606. The Company recognizes these revenues pro rata over the maximum term of the customer contract.
Concentration of Customers
During the three and nine months ended March 31, 2019 and nine months ended March 31, 2018, the Company had one contract that represented 10% of revenues. For the three months ended March 31, 2018, the Company had no contracts greater than 10% of revenues.
Contract Balances
The timing of revenue recognition, invoicing, and cash collection results in accounts receivable, unbilled receivables (a contract asset) and deferred revenue (a contract liability) in the condensed consolidated balance sheets. Accounts receivable is recorded when there is an executed customer contract and the customer is billed. The collectability of outstanding receivables is evaluated regularly by the Company and an allowance is recorded to reflect anticipated losses. Unbilled receivables are created when revenue is earned prior to the customer being billed. Deferred revenue is recorded when customers are billed in advance of services being provided.
1014
K12 INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
Other revenues are generated from individual customers who prepayThe opening and have access for one to two years to company-provided online curriculum. The Company recognizes these revenues pro rata over the maximum termclosing balances of the customerCompany’s accounts receivable, unbilled receivables and deferred revenue are as follows:
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| March 31, |
| July 1, | ||||
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|
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| 2019 |
| 2018 | ||||
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| (In thousands) | ||||||||
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Accounts receivable |
|
|
|
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|
|
|
|
|
| $ | 238,614 |
| $ | 176,319 |
Unbilled receivables (included in accounts receivable) |
|
|
|
|
|
|
|
|
|
|
| 22,617 |
|
| 12,143 |
Deferred revenue |
|
|
|
|
|
|
|
|
|
|
| 52,827 |
|
| 25,580 |
The difference between the opening and closing balance of the accounts receivable and unbilled receivables 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 billings to customers and the Company’s performance under the contract. Revenues from associated offline learning kitsTypically, 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 upon shipment.during the three months ended March 31, 2019 that was included in the opening January 1, 2019 deferred revenue balance was $24.9 million. The amount of revenue recognized during the nine months ended March 31, 2019 that was included in the opening July 1, 2018 deferred revenue balance was $21.5 million.
During the three and sixnine months ended DecemberMarch 31, 2017,2019, the Company hadrecorded revenues of $3.2 million and $3.7 million, respectively, 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 recognized as revenue when, or as, the performance obligation is satisfied. For the majority of its contracts, 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 contract that represented approximately 10%year or less. The amount of revenues, whileunsatisfied performance obligations for the three and six months ended December 31, 2016,contracts with customers which extend beyond one contract represented approximately 9% and 10% of revenues, respectively. Approximately 7% of accounts receivable was attributable to one contractyear as of DecemberMarch 31, 2017.2019 was $1.7 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. The Company delivers the integrated products and services package related to its Managed Public School Programs 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. Accordingly, the Company will recognize revenue on a straight-line basis.
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.
15
K12 INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
Costs to Obtain a Contract with a Customer
Where permitted, 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 deferred commissions is recorded within other current assets and the long-term portion of deferred commissions is recorded within deposits and other assets on the condensed consolidated balance sheets. The amortization of deferred commissions is recorded as selling, administrative and other operating expenses.
Consolidation
The condensed consolidated financial statements include the accounts of the Company, itsthe 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 demand. The excess and obsolete inventory reserve was $3.2$4.1 million and $2.3$3.5 million at DecemberMarch 31, 20172019 and June 30, 2017,2018, 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.
16
K12 INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
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 $0.5$0.8 million for the three months ended
11
K12 INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
December March 31, 20172019 and 2016,2018, respectively, and $0.9$1.6 million and $1.0$1.7 million for the sixnine months ended DecemberMarch 31, 20172019 and 2016,2018, respectively, related to unreturned student computers. Depreciation expense for property and equipment, including accelerated depreciation, for unreturned student computers, for the three months ended DecemberMarch 31, 20172019 and 20162018 was $4.5$4.9 million and $4.2$4.8 million, respectively, and $8.9$15.2 million and $8.6$13.7 million for the sixnine months ended DecemberMarch 31, 20172019 and 2016,2018, respectively.
The Company fully expenses computer peripheral equipment (e.g. keyboards, mouses) upon shipmentpurchase as recovery has been determined to be uneconomical. These expenses totaled $0.4$0.7 million and $0.8 million for the three months ended DecemberMarch 31, 20172019 and 2016,2018, respectively, and $2.5$4.0 million and $2.7$3.3 million for the sixnine months ended DecemberMarch 31, 20172019 and 2016,2018, 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 $13.4$20.6 million and $13.4$18.9 million for the sixnine months ended DecemberMarch 31, 20172019 and 2016,2018, respectively. Amortization expense for the three months ended DecemberMarch 31, 20172019 and 20162018 was $8.4$7.0 million and $8.8$8.2 million, respectively, and $18.7$22.4 million and $16.8$26.9 million for the sixnine months ended DecemberMarch 31, 20172019 and 2016,2018, 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 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
17
K12 INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
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 $4.5$13.7 million and $9.1$7.8 million for the sixnine months ended DecemberMarch 31, 20172019 and 2016,2018, 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 DecemberMarch 31, 20172019 and 20162018 was $4.9$4.5 million and $5.0$4.7 million, respectively, and $10.1$13.5 million and $9.6$14.8 million for the sixnine months ended DecemberMarch 31, 20172019 and 2016,2018, respectively. As mentioned above, capitalized curriculum development additions for the nine months ended March 31, 2018 included an out of period adjustment of $0.6 million.
12
K12 INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
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 DecemberMarch 31, 20172019 and 20162018 was $0.8$0.7 million and $0.7 million, respectively, and for the sixnine months ended DecemberMarch 31, 20172019 and 20162018 was $1.5$2.2 million and $1.4$2.2 million, respectively. Future amortization of intangible assets is $1.5 million, $3.0expected to be $0.7 million, $2.9 million, $2.4 million, $2.2 million, and $2.2$2.0 million in the fiscal years ending June 30, 20182019 through June 30, 2022,2023, respectively and $7.2$5.2 million thereafter. At DecemberMarch 31, 20172019 and June 30, 2017,2018, the goodwill balance was $90.2 million and $87.2 million, respectively.million.
The Company reviews its recorded 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. DuringThere were no such events during the sixthree and nine months ended DecemberMarch 31, 20172019 and 2016, there were no events or changes in circumstances that would indicate that the carrying amount of the goodwill was impaired.2018.
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.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. Goodwill and intangible assets deemed to have an indefinite life are tested for impairment on an annual basis, or earlier when events or changes in circumstances suggest the carrying amount may not be fully recoverable. During the year ended June 30, 2017,2018, the Company performed “Step 0” of the impairment test and determined that there were
18
K12 INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
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 sixthree and nine months ended DecemberMarch 31, 20172019 and 2016,2018, there were no events or changes in circumstances that would indicate that the carrying amount of the goodwill was impaired.
13
K12 INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
The following table represents the balance of the Company’s intangible assets as of DecemberMarch 31, 20172019 and June 30, 2017:2018:
|
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|
|
|
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|
|
| December 31, 2017 |
| June 30, 2017 |
| March 31, 2019 |
| June 30, 2018 | ||||||||||||||||||||||||||||
($ in millions) |
| Gross |
| Accumulated |
| Net |
| Gross |
| Accumulated |
| Net |
| Gross |
| Accumulated |
| Net |
| Gross |
| Accumulated |
| Net | ||||||||||||
Trade names |
| $ | 17.6 |
| $ | (8.1) |
| $ | 9.5 |
| $ | 17.6 |
| $ | (7.6) |
| $ | 10.0 |
| $ | 17.6 |
| $ | (9.2) |
| $ | 8.4 |
| $ | 17.6 |
| $ | (8.5) |
| $ | 9.1 |
Customer and distributor relationships |
|
| 20.5 |
|
| (12.7) |
|
| 7.8 |
|
| 20.1 |
|
| (12.0) |
|
| 8.1 |
|
| 20.5 |
|
| (14.4) |
|
| 6.1 |
|
| 20.5 |
|
| (13.4) |
|
| 7.1 |
Developed technology |
|
| 3.2 |
|
| (2.0) |
|
| 1.2 |
|
| 2.9 |
|
| (1.7) |
|
| 1.2 |
|
| 3.2 |
|
| (2.6) |
|
| 0.6 |
|
| 3.2 |
|
| (2.2) |
|
| 1.0 |
Other |
|
| 1.4 |
|
| (0.5) |
|
| 0.9 |
|
| 1.4 |
|
| (0.5) |
|
| 0.9 |
|
| 1.4 |
|
| (0.8) |
|
| 0.6 |
|
| 1.4 |
|
| (0.6) |
|
| 0.8 |
Total |
| $ | 42.7 |
| $ | (23.3) |
| $ | 19.4 |
| $ | 42.0 |
| $ | (21.8) |
| $ | 20.2 |
| $ | 42.7 |
| $ | (27.0) |
| $ | 15.7 |
| $ | 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. During the three and six months ended December 31, 2017 and 2016, thereThere was no such impairment charge.charge during the three and nine months ended March 31, 2019 and 2018.
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.
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 held for sale asset is discussed in more detail in Note 11, “Investments.” The lease exit liability is discussed in more detail in Note 10, “Restructuring.” The redeemable noncontrolling interest includes the Company’s joint venture with Middlebury College to form Middlebury Interactive Languages (“MIL”). Under the agreement, Middlebury College had an irrevocable election to sell all of its membership interest to the Company (put right). Middlebury College
1419
K12 INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
exercised its put right on May 4, 2015 and a transaction to acquire the remaining 40% noncontrolling interest for $9.1 million in cash was consummated on December 27, 2016.more detail in Note 9, “Restructuring.” The Tallo, Inc. convertible note is discussed in more detail in Note 10, “Investments.”
The following table summarizes certain fair value information at DecemberMarch 31, 20172019 for assets or liabilities measured at fair value on a nonrecurring basis:
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|
|
|
|
| Fair Value Measurements Using: |
| Fair Value Measurements Using: | ||||||||||||||||||||
|
|
|
|
| Quoted Prices |
|
|
|
|
|
|
|
| Quoted Prices |
|
|
|
| ||||||
|
|
|
|
| in Active |
| Significant |
|
|
|
|
|
| in Active |
| Significant |
|
| ||||||
|
|
|
|
| Markets for |
| Other |
| Significant |
|
|
|
| Markets for |
| Other |
| Significant | ||||||
|
|
|
|
| Identical |
| Observable |
| Unobservable |
|
|
|
| Identical |
| Observable |
| Unobservable | ||||||
|
|
|
|
| Assets |
| Input |
| Inputs |
|
|
|
| Assets |
| Input |
| Inputs | ||||||
Description |
| Fair Value |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Fair Value |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||||||
|
|
| (In thousands) |
|
| (In thousands) | ||||||||||||||||||
Held for sale asset |
| $ | 1,200 |
| $ | — |
| $ | — |
| $ | 1,200 | ||||||||||||
Lease exit liability |
|
| 4,000 |
|
| — |
|
| — |
|
| 4,000 |
| $ | 2,185 |
| $ | — |
| $ | — |
| $ | 2,185 |
The following table summarizes certain fair value information at June 30, 20172018 for assets and liabilities measured at fair value on a nonrecurring basis:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value Measurements Using: |
| Fair Value Measurements Using: | ||||||||||||||||||||
|
|
|
|
| Quoted Prices |
|
|
|
|
|
|
|
| Quoted Prices |
|
|
|
| ||||||
|
|
|
|
| in Active |
| Significant |
|
|
|
|
|
| in Active |
| Significant |
|
| ||||||
|
|
|
|
| Markets for |
| Other |
| Significant |
|
|
|
| Markets for |
| Other |
| Significant | ||||||
|
|
|
|
| Identical |
| Observable |
| Unobservable |
|
|
|
| Identical |
| Observable |
| Unobservable | ||||||
|
|
|
|
| Assets |
| Input |
| Inputs |
|
|
|
| Assets |
| Input |
| Inputs | ||||||
Description |
| Fair Value |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Fair Value |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||||||
|
|
| (In thousands) |
|
| (In thousands) | ||||||||||||||||||
Held for sale asset |
| $ | 1,200 |
| $ | — |
| $ | — |
| $ | 1,200 | ||||||||||||
Lease exit liability |
|
| 4,841 |
|
| — |
|
| — |
|
| 4,841 |
| $ | 2,758 |
| $ | — |
| $ | — |
| $ | 2,758 |
The following table summarizes certain fair value information at DecemberMarch 31, 20172019 for assets or liabilities measured at fair value on a recurring basis:
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|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
| Fair Value Measurements Using: |
| Fair Value Measurements Using: | ||||||||||||||||||||
|
|
|
|
| Quoted Prices |
|
|
|
|
|
|
|
| Quoted Prices |
|
|
|
| ||||||
|
|
|
|
| in Active |
| Significant |
|
|
|
|
|
| in Active |
| Significant |
|
| ||||||
|
|
|
|
| Markets for |
| Other |
| Significant |
|
|
|
| Markets for |
| Other |
| Significant | ||||||
|
|
|
|
| Identical |
| Observable |
| Unobservable |
|
|
|
| Identical |
| Observable |
| Unobservable | ||||||
|
|
|
|
| Assets |
| Input |
| Inputs |
|
|
|
| Assets |
| Input |
| Inputs | ||||||
Description |
| Fair Value |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Fair Value |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||||||
|
|
| (In thousands) |
|
| (In thousands) | ||||||||||||||||||
Contingent consideration associated with acquisitions |
| $ | 1,340 |
| $ | — |
| $ | — |
| $ | 1,340 | ||||||||||||
Convertible note |
| $ | 5,006 |
| $ | — |
| $ | — |
| $ | 5,006 |
The following table summarizes certain fair value information at June 30, 20172018 for assets and liabilities measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value Measurements Using: |
| Fair Value Measurements Using: | ||||||||||||||||||||
|
|
|
|
| Quoted Prices |
|
|
|
|
|
|
|
| Quoted Prices |
|
|
|
| ||||||
|
|
|
|
| in Active |
| Significant |
|
|
|
|
|
| in Active |
| Significant |
|
| ||||||
|
|
|
|
| Markets for |
| Other |
| Significant |
|
|
|
| Markets for |
| Other |
| Significant | ||||||
|
|
|
|
| Identical |
| Observable |
| Unobservable |
|
|
|
| Identical |
| Observable |
| Unobservable | ||||||
|
|
|
|
| Assets |
| Input |
| Inputs |
|
|
|
| Assets |
| Input |
| Inputs | ||||||
Description |
| Fair Value |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Fair Value |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||||||
|
|
| (In thousands) |
|
| (In thousands) | ||||||||||||||||||
Contingent consideration associated with acquisitions |
| $ | 2,806 |
| $ | — |
| $ | — |
| $ | 2,806 |
| $ | 1,345 |
| $ | — |
| $ | — |
| $ | 1,345 |
1520
K12 INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
The following tables summarize the activity during the three and sixnine months ended DecemberMarch 31, 20172019 and 20162018 for assets and liabilities measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended December 31, 2017 |
| Three Months Ended March 31, 2019 | ||||||||||||||||||||
|
|
|
|
| Purchases, |
|
|
|
|
|
|
|
|
| Purchases, |
|
|
|
|
| ||||
|
| Fair Value |
| Issuances, |
| Unrealized |
| Fair Value |
| Fair Value |
| Issuances, |
| Unrealized |
| Fair Value | ||||||||
Description |
| September 30, 2017 |
| and Settlements |
| Gains/(Losses) |
| December 31, 2017 |
| December 31, 2018 |
| and Settlements |
| Gains/(Losses) |
| March 31, 2019 | ||||||||
|
|
| (In thousands) |
|
| (In thousands) | ||||||||||||||||||
Contingent consideration associated with acquisitions |
| $ | 838 |
| $ | 500 |
| $ | 2 |
| $ | 1,340 |
| $ | 40 |
| $ | (40) |
| $ | — |
| $ | — |
Total |
| $ | 838 |
| $ | 500 |
| $ | 2 |
| $ | 1,340 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Convertible note |
|
| 5,006 |
|
| — |
|
| — |
|
| 5,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended December 31, 2016 |
| Three Months Ended March 31, 2018 | ||||||||||||||||||||
|
|
|
|
| Purchases, |
|
|
|
|
|
|
|
|
|
| Purchases, |
|
|
|
|
|
| ||
|
| Fair Value |
| Issuances, |
| Unrealized |
| Fair Value |
| Fair Value |
| Issuances, |
| Unrealized |
| Fair Value | ||||||||
Description |
| September 30, 2016 |
| and Settlements |
| Gains (Losses) |
| December 31, 2016 |
| December 31, 2017 |
| and Settlements |
| Gains/(Losses) |
| March 31, 2018 | ||||||||
|
| (In thousands) |
| (In thousands) | ||||||||||||||||||||
Redeemable Noncontrolling Interest in Middlebury Interactive Learning |
| $ | 9,201 |
| $ | (9,134) |
| $ | (67) |
| $ | — | ||||||||||||
Contingent consideration associated with acquisitions |
|
| 2,955 |
|
| — |
|
| 8 |
|
| 2,963 |
| $ | 1,340 |
| $ | — |
| $ | 2 |
| $ | 1,342 |
Total |
| $ | 12,156 |
| $ | (9,134) |
| $ | (59) |
| $ | 2,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended March 31, 2019 | |||||||||
|
|
|
|
| Purchases, |
|
|
|
|
|
| |
|
| Fair Value |
| Issuances, |
| Unrealized |
| Fair Value | ||||
Description |
| June 30, 2018 |
| and Settlements |
| Gains (Losses) |
| March 31, 2019 | ||||
|
| (In thousands) | ||||||||||
Contingent consideration associated with acquisitions |
| $ | 1,345 |
| $ | (1,347) |
| $ | 2 |
| $ | — |
Convertible note |
|
| — |
|
| 5,006 |
|
| — |
|
| 5,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended December 31, 2017 |
|
| Nine Months Ended March 31, 2018 | ||||||||||||||||||
|
|
|
|
| Purchases, |
|
|
|
|
|
|
|
|
|
| Purchases, |
|
|
|
|
|
| ||
|
| Fair Value |
| Issuances, |
| Unrealized |
| Fair Value |
| Fair Value |
| Issuances, |
| Unrealized |
| Fair Value | ||||||||
Description |
| June 30, 2017 |
| and Settlements |
| Gains (Losses) |
| December 31, 2017 |
| June 30, 2017 |
| and Settlements |
| Gains (Losses) |
| March 31, 2018 | ||||||||
|
| (In thousands) |
| (In thousands) | ||||||||||||||||||||
Contingent consideration associated with acquisitions |
| $ | 2,806 |
| $ | (1,319) |
| $ | (147) |
| $ | 1,340 |
|
| 2,806 |
|
| (1,319) |
|
| (145) |
|
| 1,342 |
Total |
| $ | 2,806 |
| $ | (1,319) |
| $ | (147) |
| $ | 1,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended December 31, 2016 | |||||||||
|
|
|
|
| Purchases, |
|
|
|
|
|
| |
|
| Fair Value |
| Issuances, |
| Unrealized |
| Fair Value | ||||
Description |
| June 30, 2016 |
| and Settlements |
| Gains (Losses) |
| December 31, 2016 | ||||
|
| (In thousands) | ||||||||||
Redeemable Noncontrolling Interest in Middlebury Interactive Learning |
| $ | 6,801 |
| $ | (9,134) |
| $ | 2,333 |
| $ | — |
Contingent consideration associated with acquisitions |
|
| 2,947 |
|
| — |
|
| 16 |
|
| 2,963 |
Total |
| $ | 9,748 |
| $ | (9,134) |
| $ | 2,349 |
| $ | 2,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
1621
K12 INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
outstanding. Securities that may participate in undistributed
The following schedule presents the calculation of basic and diluted net income with common stock are considered participating securities.per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| December 31, |
| December 31, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
|
|
| (In thousands except share and per share data) |
| |||||||||
Basic net income (loss) per share computation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders |
| $ | 13,259 |
| $ | 11,652 |
| $ | 5,203 |
| $ | (2,181) |
|
Weighted average common shares — basic |
|
| 39,347,244 |
|
| 38,104,909 |
|
| 39,227,708 |
|
| 38,021,807 |
|
Basic net income (loss) per share |
| $ | 0.34 |
| $ | 0.31 |
| $ | 0.13 |
| $ | (0.06) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share computation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders |
| $ | 13,259 |
| $ | 11,652 |
| $ | 5,203 |
| $ | (2,181) |
|
Share computation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares — basic |
|
| 39,347,244 |
|
| 38,104,909 |
|
| 39,227,708 |
|
| 38,021,807 |
|
Effect of dilutive stock options and restricted stock awards |
|
| 1,338,423 |
|
| 902,367 |
|
| 1,545,309 |
|
| — |
|
Weighted average common shares — diluted |
|
| 40,685,667 |
|
| 39,007,276 |
|
| 40,773,017 |
|
| 38,021,807 |
|
Diluted net income (loss) per share |
| $ | 0.33 |
| $ | 0.30 |
| $ | 0.13 |
| $ | (0.06) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| March 31, |
| March 31, |
| ||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| ||||
|
|
| (In thousands except share and per share data) |
| |||||||||
Basic net income per share computation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders |
| $ | 18,462 |
| $ | 13,070 |
| $ | 33,892 |
| $ | 18,273 |
|
Weighted average common shares — basic |
|
| 39,008,990 |
|
| 39,644,074 |
|
| 38,753,236 |
|
| 39,366,497 |
|
Basic net income per share |
| $ | 0.47 |
| $ | 0.33 |
| $ | 0.87 |
| $ | 0.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share computation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders |
| $ | 18,462 |
| $ | 13,070 |
| $ | 33,892 |
| $ | 18,273 |
|
Share computation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares — basic |
|
| 39,008,990 |
|
| 39,644,074 |
|
| 38,753,236 |
|
| 39,366,497 |
|
Effect of dilutive stock options and restricted stock awards |
|
| 2,744,333 |
|
| 1,122,129 |
|
| 1,795,723 |
|
| 1,404,940 |
|
Weighted average common shares — diluted |
|
| 41,753,323 |
|
| 40,766,203 |
|
| 40,548,959 |
|
| 40,771,437 |
|
Diluted net income per share |
| $ | 0.44 |
| $ | 0.32 |
| $ | 0.84 |
| $ | 0.45 |
|
ForDuring the three months ended DecemberMarch 31, 20172019 and 20162018, 119,343 and six months ended December 31, 2017, shares issuable in connection with stock options and restricted stock of 1,433,694, 2,039,395, and 1,145,471, respectively, were excluded from the diluted income per share calculation because the effect would have been antidilutive. For the six months ended December 31, 2016, 2,996,1861,422,500 shares issuable in connection with stock options and restricted stock were excluded from the diluted income per share calculation because the effect would have been antidilutive due toantidilutive. During the Company’s net loss during the sixnine months ended DecemberMarch 31, 2016.2019 and 2018, 148,355 and 1,086,880 shares were excluded, respectively. As of DecemberMarch 31, 2017,2019, the Company had 44,898,43045,542,026 shares issued and 41,395,83240,207,283 shares outstanding.
Reclassification
Certain previous year amounts have been reclassified to conform with current year presentations, as related to the statement of cash flows.
Recent Accounting Pronouncements
Accounting Standards Adopted
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Compensation - Stock Compensation (Topic 718) (“ASU 2016‑09”). This update was issued as part of the FASB’s simplification initiative and affects all entities that issue share-based payment awards to their employees. The amendments in this update cover such areas as the recognition of excess tax benefits and deficiencies and an accounting policy election for forfeitures. As part of the new guidance:
|
|
|
|
|
|
17
K12 INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
|
|
|
The Company adopted this guidance during the first quarter of fiscal 2018. As part of its adoption of ASU 2016‑09, the Company made an accounting policy election to change the way in which it accounts for forfeitures of share-based awards. Specifically, beginning in the first quarter of fiscal 2018, the Company recognizes forfeitures of share-based awards as they occur in the period of forfeiture rather than estimating the number of awards expected to be forfeited at the grant date and subsequently adjusting the estimate when awards are actually forfeited. The change in accounting policy resulted in an adjustment to decrease retained earnings as of July 1, 2017 by $0.1 million.
The Company has adopted the remaining provisions as follows:
|
|
|
|
|
|
Accounting Standards Not Yet Adopted
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which supersedes most existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised 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. ASU 2014-09 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 are required under existing GAAP. The standard is effective for the Company’s next fiscal year beginning July 1, 2018, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). The Company is currently evaluating the impact this standard will have on its consolidated financial statements which includes performing a detailed review of each of its revenue streams and comparing historical accounting policies and practices to the new standard. The majority of the Company’s business is based on contracts where annual revenue is recognized within each fiscal year, mirroring the school year. The Company expects revenue recognition will remain largely unchanged under the new standard on a full year basis, however, there may be some shifting of revenue between periods.
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 DecemberMarch 31, 20172019 and 2016,2018, the Company’s effective income tax rate was 4.1%23.8% and 41.4%34.7%, respectively, and for the sixnine months ended DecemberMarch 31, 20172019 and 2016,2018, the rate was 233.3%22.2% and 26.8%(11.5)%, 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 estimated and included the provisional amount for the potential 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. During the three months ended December 31, 2018, the Company completed the analysis of the various provisions of the Tax
1822
K12 INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
forAct and recognized immaterial adjustments to the six months ended December 31, 2017.provisional amounts. The analysis of the foreign earnings that is required to be completed for the transition tax is an estimate at this time and an updated transition tax will be reflected in subsequent periods once the final amounts are determined. The provisional amount for the impact of the rate change on the net deferred tax liabilities was based on an estimate which the Company will continue to refine as the year progresses.
The change in the effectiveincluded these adjustments within income tax rate for the three and six months ended December 31, 2017 is predominantly due to the impact of the Tax Act as well as the adoption of ASU 2016-09 related to stock compensation. The Company will continue to analyze the Tax Act to determine the full effects of the new law.expense from continuing operations.
5. Long-term Obligations
Capital Leases
The Company incurs capital lease obligations for student computers and peripherals under a non-revolving lease line of creditagreements with PNC Equipment Finance, LLC.LLC (“PNC”) and Banc of America Leasing & Capital, LLC (“BALC”). As of DecemberMarch 31, 20172019 and June 30, 2017,2018, the outstanding balance of capital leases under the current and former lease lines of credit (as discussed in more detail below) was $27.3$31.2 million and $21.9$26.0 million, respectively, with lease interest rates ranging from 1.95%1.97% to 3.12%4.05%. The gross carrying value of leased student computers as of March 31, 2019 and June 30, 2018 was $52.9 million and $42.2 million, respectively. The accumulated depreciation of leased student computers as of March 31, 2019 and June 30, 2018 was $30.1 million and $26.0 million, respectively.
Individual leases under the lease lines of creditagreement with PNC include 36-month payment terms, at varying rates, 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 December 31, 2017 and June 30, 2017 was $43.9 million and $39.1 million, respectively. The accumulated depreciation of leased student computers as of December 31, 2017 and June 30, 2017 was $25.5 million and $25.1 million, respectively.
The Company had $24.2Company’s $16.0 million agreement with BALC that was executed in December 2018, was increased to $25 million in February 2019 and $31.9 million of remaining availability under its lease line of credit as ofextended through December 31, 2017 and June 30, 2017, respectively. Interest on unpaid principal under the lease line of credit is2019 at a fluctuating rate of LIBOR plus 1.2%1.25%. Individual leases with BALC include 12-month payment terms, a fixed rate of 4.05%, and a $1 purchase option at the end of each lease term. The Company has pledged the assets financed to secure the outstanding leases.
The following is a summary as of DecemberMarch 31, 20172019 of the present value of the net minimum lease payments on capital leases under the Company’s commitments:
|
|
|
|
|
|
|
As of June 30, |
| Capital Leases |
| Capital Leases | ||
|
| (in thousands) |
| (in thousands) | ||
2018 (remaining six months) |
| $ | 7,395 | |||
2019 |
|
| 12,153 | |||
|
|
|
| |||
2019 (remaining three months) |
| $ | 7,859 | |||
2020 |
|
| 6,711 |
|
| 18,987 |
2021 |
|
| 1,976 |
|
| 4,819 |
2022 |
|
| 340 | |||
Total minimum payments |
|
| 28,235 |
|
| 32,005 |
Less amount representing interest (imputed weighted average capital lease interest rate of 2.65%) |
|
| (888) | |||
Less amount representing interest (imputed weighted average capital lease interest rate of 3.67%) |
|
| (808) | |||
Net minimum payments |
|
| 27,347 |
|
| 31,197 |
Less current portion |
|
| (13,416) |
|
| (24,499) |
Present value of minimum payments, less current portion |
| $ | 13,931 |
| $ | 6,698 |
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 December 31, 2017 and June 30, 2017, the Company was in compliance with these covenants. During the six months ended December 31, 2017, there was no borrowing activity on this line of credit, and the Company had no borrowings outstanding on the line of credit as of December 31, 2017.
19
K12 INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
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.
7.6. 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, retain and motivate personsemployees who make important contributions to the Company by providing such individuals with equity ownership opportunities. Awards granted under the Plan may include stock options, stock appreciation rights, restricted stock, restricted stock units, and other stock-based awards. Under the Plan, the following types of shares go back into the pool of shares available for issuance:
· | unissued shares related to forfeited or cancelled restricted stock and stock options from Plan awards and Prior Plan awards (that were outstanding as of the Effective Date) |
23
K12 INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
· | shares tendered to satisfy the tax withholding obligation related to the vesting of restricted stock (but not stock options). |
Unlike the Company’s 2007 Equity Incentive Award Plan (the “Prior Plan”), the Plan has no evergreen provision to increase the shares available for issuance; any new shares would require stockholder approval. The Prior Plan was set to expireexpired in October 2017; however, with the approval of the Plan, the Company will no longer award equity from the Prior Plan. As of DecemberMarch 31, 2017,2019, the remaining aggregate number of shares of the Company’s common stock authorized for future issuance under the Plan was 3,899,933.2,098,278. As of DecemberMarch 31, 2017,2019, there were 4,516,0674,823,629 shares of the Company’s common stock that remain outstanding or nonvested under the Plan and Prior Plan.
Stock Options
Stock option activity including stand-alone agreements during the sixnine months ended DecemberMarch 31, 20172019 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted |
|
|
|
|
|
|
|
|
|
| Weighted |
|
|
|
|
|
|
|
| Weighted |
| Average |
|
|
|
|
|
|
| Weighted |
| Average |
|
|
|
| ||
|
|
|
| Average |
| Remaining |
| Aggregate |
|
|
|
| Average |
| Remaining |
| Aggregate |
| ||||
|
|
|
| Exercise |
| Contractual |
| Intrinsic |
|
|
|
| Exercise |
| Contractual |
| Intrinsic |
| ||||
|
| Shares |
| Price |
| Life (Years) |
| Value |
|
| Shares |
| Price |
| Life (Years) |
| Value |
| ||||
Outstanding, June 30, 2017 |
| 1,356,528 |
| $ | 20.19 |
| 4.46 |
| $ | 1,481,585 |
| |||||||||||
Outstanding, June 30, 2018 |
| 1,199,307 |
| $ | 19.97 |
|
|
|
|
|
| |||||||||||
Granted |
| — |
|
| — |
|
|
|
|
|
|
| — |
|
| — |
|
|
|
|
|
|
Exercised |
| (3,350) |
|
| 17.46 |
|
|
|
|
|
|
| (106,490) |
|
| 20.50 |
|
|
|
|
|
|
Forfeited or canceled |
| (49,077) |
|
| 24.67 |
|
|
|
|
|
|
| (13,000) |
|
| 29.82 |
|
|
|
|
|
|
Outstanding, December 31, 2017 |
| 1,304,101 |
|
| 20.03 |
| 3.83 |
|
| 734,842 |
| |||||||||||
Stock options exercisable at December 31, 2017 |
| 1,112,239 |
| $ | 20.93 |
| 3.58 |
| $ | 399,633 |
| |||||||||||
Outstanding, March 31, 2019 |
| 1,079,817 |
| $ | 19.80 |
| 2.91 |
| $ | 15,457,203 |
| |||||||||||
Exercisable, March 31, 2019 |
| 1,046,552 |
| $ | 20.00 |
| 2.86 |
| $ | 14,792,194 |
|
The aggregatetotal intrinsic value of options exercised during the sixnine months ended DecemberMarch 31, 20172019 and 20162018 was not material$0.7 million and $0.1 million,zero, respectively.
As of DecemberMarch 31, 2017,2019, there was $1.2$0.2 million of total unrecognized compensation expense related to nonvested stock options granted. The cost is expected to be recognized over a weighted average period of 1.30.4 years. During the three months ended DecemberMarch 31, 20172019 and 2016,2018, the Company recognized $0.4$0.2 million and $0.5$0.2 million, respectively, of stock-based compensation expense related to stock options. During the sixnine months ended DecemberMarch 31, 20172019 and 2016,2018, the expense was $0.8$0.5 million and $1.1$1.0 million, respectively.
Restricted Stock Awards
Restricted stock award activity during the sixnine months ended DecemberMarch 31, 20172019 was as follows:
|
|
|
|
|
|
|
|
|
|
| Weighted |
| |
|
|
|
| Average |
| |
|
|
|
| Grant-Date |
| |
|
| Shares |
| Fair Value |
| |
Nonvested, June 30, 2018 |
| 1,676,907 |
| $ | 15.12 |
|
Granted |
| 822,333 |
|
| 18.34 |
|
Vested |
| (918,196) |
|
| 14.67 |
|
Canceled |
| (227,731) |
|
| 17.42 |
|
Nonvested, March 31, 2019 |
| 1,353,313 |
| $ | 16.99 |
|
Performance Based Restricted Stock Awards (included above)
During the nine months ended March 31, 2019, 37,378 new performance based restricted stock awards were granted and 271,455 remain nonvested at March 31, 2019. During the nine months ended March 31, 2019, 312,383 performance
2024
K12 INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
|
|
|
|
|
|
|
|
|
|
| Weighted- |
| |
|
|
|
| Average |
| |
|
|
|
| Grant-Date |
| |
|
| Shares |
| Fair Value |
| |
Nonvested, June 30, 2017 |
| 2,141,047 |
| $ | 12.34 |
|
Granted |
| 956,312 |
|
| 17.49 |
|
Vested |
| (735,825) |
|
| 13.30 |
|
Canceled |
| (157,724) |
|
| 13.53 |
|
Nonvested, December 31, 2017 |
| 2,203,810 |
| $ | 14.17 |
|
Performance Based Restricted Stock Awards (included above)
During the six months ended December 31, 2017, 398,442 new performance based restricted stock awards were granted and 610,633 remain nonvested at December 31, 2017. During the six months ended December 31, 2017, 209,940 performance-based restricted stock awards vested. Vesting of the performance-basedperformance based restricted stock awards is contingent on the achievement of certain financial performance goals and service vesting conditions.
Included above are 34,760During fiscal year 2018, the Company granted performance based restricted stock awards thatwhich were granted to Company executives with a weighted average grant date fair value of $17.70 per share. These awards were granted pursuant to the Plan and are subject to the achievement of a target free cash flow metric in fiscal year 2018 and will be adjusted upwards or downwards based on the Company’s relative total shareholder return for fiscal year 2018 ranked against other companies in the Russell 2000 Index. IfOn August 1, 2018, the free cash flow metric was certified by the Compensation Committee of the Board of Directors as Outperform and the total shareholder return metric was certified as below Threshold resulting in the performance goals are achieved, 20%based restricted stock awards granted at 100% of thetarget, or 46,845 shares granted vest immediately, and the remaining 80% vest ratably in semi-annual intervals until the three year anniversary from grant date.earned by Company executives.
Equity Incentive Market Based Restricted Stock Awards (included above)
During fiscal year 2017, the Company granted equity incentive market based restricted stock awards which were subject to the attainment of an average stock price of $14.35 for 30 consecutive days after the date of the Company’s earnings release for the fourth quarter and fiscal year ended June 30, 2017. During the sixnine months ended DecemberMarch 31, 2017, 10,0002019, 18,400 of these equity incentive market based awards vested. Additionally, during fiscal year 2017, the Company granted equity incentive market based awards which were subject to the attainment of average prices of $13, $16 and $19 per share. These targets were achieved during fiscal year 2017. During the six months ended December 31, 2017, 91,732 of these equity incentive market basedrestricted stock awards vested. As of DecemberMarch 31, 2017, 205,3432019, 6,800 equity incentive market based restricted stock awards remain nonvested.
Service-BasedService Based Restricted Stock Awards (included above)
During the sixnine months ended DecemberMarch 31, 2017, 557,8702019, 784,955 new service-basedservice based restricted stock awards were granted and 1,387,8341,075,058 remain nonvested at DecemberMarch 31, 2017.2019. During the sixnine months ended DecemberMarch 31, 2017, 424,153 service-based2019, 587,413 service based restricted stock awards vested.
Summary of All Restricted Stock Awards
As of DecemberMarch 31, 2017,2019, there was $22.0$17.2 million of total unrecognized compensation expense related to nonvested restricted stock awards. The cost is expected to be recognized over a weighted average period of 1.61.7 years. The fair value of restricted stock awards granted for the sixnine months ended DecemberMarch 31, 20172019 and 20162018 was $16.7$15.1 million and $13.3$17.5 million, respectively. The total fair value of shares vested for the sixnine months ended DecemberMarch 31, 20172019 and 20162018 was $12.9$19.6 million and $6.0$21.7 million, respectively. During the three months ended DecemberMarch 31, 20172019 and 2016,2018, the Company recognized $3.9$2.6 million and $4.2$3.9 million, respectively, of stock-based compensation expense related to restricted stock awards. During the sixnine months ended DecemberMarch 31, 20172019 and 2016,2018, the expense was $7.8$9.5 million and $8.2$11.7 million, respectively.
21
K12 INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
Performance Share Units (“PSU”)
TheCertain PSUs vest upon achievement of certain performance criteria associated with a Board-approved Long Term Incentive Plan (“LTIP”) and continuation of employee service over a two to three yeardefined period. The level of performance will determine the number of PSUs earned as measured against threshold, target and stretchoutperform achievement levels of the LTIP. Each PSU represents the right to receive one share of the Company’s common stock, or at the option of the Company, an equivalent amount of cash, and is classified as an equity award in accordance with ASC 718.
In addition to the LTIP performance conditions, there is a service vesting condition which stipulates that thirty percent of the earned award (“Tranche #1”) will vest quarterly beginning November 15, 2017 and seventy percent of the earned award (“Tranche #2”) will vest on August 15, 2018, in both casesis dependent upon continuing service by the grantee as an employee of the Company, unless the grantee is eligible for earlier vesting upon a change in control and qualifying termination, as defined by the PSU agreement. For equity performance awards, including the PSUs, subject to graduated vesting schedules for which vesting is based on achievement of a performance metric in addition to grantee service, stock-based compensation expense is recognized on an accelerated basis by treating each vesting tranche as if it was a separate grant.
Fiscal Year 2016 LTIP
During fiscal year 2016, the Company granted PSUs under a LTIP that was driven by an academic measure and a lifetime value measure. Thirty percent of the earned award (“Tranche #1”) vested quarterly beginning November 15,
25
K12 INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
2017 and seventy percent of the earned award (“Tranche #2”) vested on August 15, 2018, in both cases dependent upon continuing service by the grantee as an employee of the Company.
For the year ended June 30, 2017, the Company determined the achievement of the performance condition was probable on Tranche #1. Achievement was believed to be probable at the highest level which equals 150% of the target award. Therefore, during the fourth quarter of fiscal 2017, the Company recorded $3.8 million of expense for the period of grant date (September 2015) through June 2017.
On August 2, 2017, the Compensation Committee of the Company’s Board of Directors certified that as of August 1, 2017, 97% of the MPS schools were not in academic jeopardy, as determined by the independent members of the Academic Committee of the Board of Directors on that date, and that the Academic Metric for Tranche #1 of the LTIP was achieved at the Outperform level. This resulted in 446,221 PSUs (including 138,241 additional PSUs due to the Outperform level) earned by the participants, consisting of 90,000 PSUs for Mr. Davis and 70,021 PSUs for Mr. Udell.
DuringFor the three monthsyear ended December 31, 2017,June 30, 2018, the Company determined the achievement of one of the two performance conditions waswere probable on a portion of Tranche #2.#2 at Target. Tranche #2 is comprised of two performance measures, an academic measure (similar to Tranche #1) and a lifetime value measure. The Company believes that achievement is probable only as it relates to the academic measure and is currently expected to meet the threshold level. Therefore, during the second quarter of fiscal 2018, the Company recorded $2.5$3.9 million of expense for the period of grant date (September 2015) through December 2017.
ForJune 2018. On August 1, 2018, the six months ended December 31, 2017,Compensation Committee of the Company’s Board of Directors certified that as of August 1, 2018, the Company determinedachieved less than 1% below Target for the academic measure. This resulted in 349,996 PSUs (including a reduction of 15,345 PSUs due to the below Target performance) earned by the participants, consisting of 76,640 PSUs for Mr. Davis and 59,626 PSUs for Mr. Udell. The Compensation Committee also certified that achievement of the performance conditions associated with the lifetime value measure of Tranche #2 were not met and therefore no expense was recorded.
Fiscal Year 2019 LTIP
During the third quarter of fiscal 2019, the Company granted 263,936 PSUs at target under a LTIP that was driven by certain revenue targets and enrollment levels, as well as students’ academic progress. These PSUs had a grant date fair value of $7.9 million, or $30.05 per share. Forty-five percent of the earned award is based on students’ academic progress (“Tranche #1”) and twenty-five percent of the earned award is based on certain enrollment levels (“Tranche 2”), both of which will vest on October 15, 2021. The remaining thirty percent of the earned award is based on certain revenue targets (“Tranche #3”) will vest on August 15, 2022. In all cases, vesting is dependent upon continuing service by the grantee as an employee of the Company. The Company determined the achievement of the performance conditions associated with all three tranches were not probable and therefore no expense was recorded. Asrecorded during the three and nine months ended March 31, 2019.
Fiscal Year 2019 SPP
During fiscal year 2019, the Company adopted a new long-term shareholder performance plan (“2019 SPP”) that provides for incentive award opportunities to its key senior executives. The awards were granted in the form of December 31, 2017,PSUs and will be earned based on the Company’s market capitalization growth over a completed three-year performance period. The 2019 SPP was designed to provide the executives with a percentage of shareholder value growth. No amounts will be earned if total stock price growth over the three-year period is below 25% (7.6% annualized). An amount of 6% of total value growth will be earned based on achieving total stock price growth of 33% (10% annualized) and a maximum of 7.5% of total value growth will be earned if total stock price growth equals or exceeds 95% (25% annualized).
During the first quarter of fiscal year 2019, the Company granted 1,766,932 PSUs from the 2019 SPP with a grant date fair value of $10.5 million, or $5.97 per share, based on the highest level of performance. During the third quarter of fiscal year 2019, there was $3.5a modification of certain terms of the original grant which resulted in an increase of 23,670 shares with a fair value of $0.4 million, of total unrecognized compensation expense related to the lifetime value measure of Tranche #2 assuming achievement at the target level.or $17.45 per share. Additionally, if actual performance exceeds the target criteria for all of Tranche #2, then additional expense of $5.6 million of expense would be incurred.
As of December 31, 2017, there was $1.4 million of total unrecognized compensation expense related to nonvested PSUs for Tranches #1 and #2. During the three months ended December 31, 2017 and 2016, the Company recognized $3.0granted 317,703 PSUs from the 2019 SPP with a grant date fair value of $6.3 million, or $19.76 per share, based on the highest level of performance. The final amount of PSUs will be determined (and vesting will occur) based on the 30-day average price of the Company’s stock subsequent to seven days after the release of fiscal year 2021 results. The fair value was determined using a Monte Carlo simulation model and zero, respectively, of stock-based compensation expense related to PSUs. Duringwill be amortized on a straight-line basis over the six months ended December 31, 2017 and 2016, the expense was $3.5 million and zero, respectively.
vesting period.
2226
K12 INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
Summary of All Performance Share Units
As of March 31, 2019, there was $14.9 million of total unrecognized compensation expense related to nonvested PSUs. The cost is expected to be recognized over a weighted average period of 2.5 years. During the three months ended March 31, 2019 and 2018, the Company recognized $1.3 million and $0.6 million, respectively, of stock-based compensation expense related to PSUs. During the nine months ended March 31, 2019 and 2018, the expense was $2.4 million and $4.1 million, respectively.
Performance share unit activity during the sixnine months ended DecemberMarch 31, 20172019 was as follows:
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|
|
| Weighted- |
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|
| Weighted | ||
|
|
|
| Average |
|
|
| Average | ||
|
|
|
| Grant-Date |
|
|
| Grant-Date | ||
|
| Shares |
| Fair Value |
| Shares |
| Fair Value | ||
Nonvested, June 30, 2017 |
| 1,043,602 |
| $ | 13.16 | |||||
Nonvested, June 30, 2018 |
| 708,979 |
| $ | 13.15 | |||||
Granted |
| 138,241 |
|
| 18.07 |
| 2,372,241 |
|
| 10.61 |
Vested |
| (103,687) |
|
| 12.81 |
| (427,954) |
|
| 13.24 |
Canceled |
| (70,000) |
|
| 13.45 |
| (281,025) |
|
| 13.02 |
Nonvested, December 31, 2017 |
| 1,008,156 |
| $ | 13.66 | |||||
Nonvested, March 31, 2019 |
| 2,372,241 |
| $ | 10.61 | |||||
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|
Deferred Stock Units (“DSU”)
8.During fiscal year 2019, the Company granted 18,258 DSUs at a weighted average grant-date fair value of $25.41. The DSUs vest on the grant-date anniversary and are settled in the form of shares of common stock issued to the holder upon separation from the Company. The DSUs are excluded from the tables above. As of March 31, 2019, 18,258 DSUs remain nonvested.
7. Related Party Transactions
On September 11, 2013,During fiscal years 2019 and 2018, the Company issued a mortgage notecontributed to The Foundation for Blended and Online Learning (“Mortgage”) lending $2.1 million to a managed school partner (“Partner”Foundation”). The note bore interest atFoundation is a fixed raterelated party as an executive officer of 5.25% per year with a five year maturity datethe Company serves on the Board of the Foundation. For the three months ended March 31, 2019 and it was secured2018, contributions made by the underlying property. During fiscal year 2016, the borrower defaulted on the loan payment, and in March 2017 the Company received the deed of ownership to the property. See Note 11, “Investments – Investment in School Mortgage.”Foundation were $0.1 million and $0.0 million, respectively, and $0.9 million and $0.3 million for the nine months ended March 31, 2019 and 2018, respectively.
9.8. Commitments and Contingencies
Litigation
In the ordinary conduct of the Company’s business, the Company is subject to lawsuits, arbitrations and administrative proceedings from time to time. The Company believes that the outcome of any existing or known threatened proceedings, even if determined adversely, should not have a material adverse effect on the Company’s business, financial condition, liquidity or results of operations.
On July 20 and September 15, 2016, atwo securities class action lawsuit lawsuits—captioned Babulal Tarapara v. K12 Inc., et al wasal., Case No. 3:16-cv-04069, and Gil Tuinenburg v. K12 Inc., et al., Case No. 3:16-cv-05305, respectively—were filed against the Company, two of its officers and one of its former officers in the United States District Court for the Northern District of California, Case No. 3:16-cv-04069 (“Tarapara Case”). The plaintiff purports to represent a class of persons who purchased or otherwise acquired the Company’s common stock between November 7, 2013 and October 27, 2015, inclusive, and alleges violations by the Company and the individual defendants of Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated under the Exchange Act, and violations by the individual defendants of Section 20(a) of the Exchange Act. The complaint sought unspecified monetary damages and other relief. Additionally, on September 15, 2016, a second securities class action lawsuit captioned Gil Tuinenburg v.K12 Inc. et al was filed against the Company, two of its officers and one of its former officers in the United States District Court for the Northern District of California, Case No. 3:16-cv-05305 (“Tuinenburg Case”).California. On October 6, 2016, the Court consolidated the Tarapara Case and the Tuinenburg Case, appointed Babul Tarapara and Mark Beadle as lead plaintiffs,cases and recaptioned the matter as In Re K12 Inc. Securities Litigation, Master File No. 4:16-cv-04069-PJH. On December 2, 2016,August 30, 2017, the lead plaintiffs filed an amended complaint againstCourt dismissed the Company. The amended complaint named an additional former officer as a defendant and specified a class period start date of October 10, 2013. The amended complaint alleges materiallyplaintiffs’ claims alleging false or misleading statements and omissions regarding the decision of the Agora Cyber Charter School notrelated to renew its managed public school agreement with the Company, student academic and Scantron results and other statements regarding student academic performancethe quality and effectiveness of K12’s academic services and offerings. On January 30, 2017, the Company filed its motion to dismiss the amended complaint. On August 30, 2017,September 5, 2018, and as a result of a hearing on April 19, 2017,Court ordered mediation, the Court granted with prejudiceparties reached an agreement in principle to settle the Company’s motion to dismiss the allegationsremaining claim concerning disclosure of false statements regarding Scantron scores, but denied the motion on the allegations pertaining to non-disclosure of Agora’s 2012a notice of non-renewal and other statements regarding the Company’s replacement contract with Agora, and permitted the plaintiffs to amend their complaint with respect to certain statements on the quality and effectiveness of the Company’s programs. The plaintiffs were given until October 2, 2017 to amend. On October 2, 2017, the plaintiffs filed a seconded amended complaint and elected not to pursue their claims regarding the statements pertaining to the quality and effectiveness of the
2327
K12 INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
Company’s academic programs,of non-automatic renewal of a managed school contract. Although we believe that the remaining claim in this matter lacked merit, we agreed to settle the case to avoid continued distraction and further dismissed twomanagement time, and our insurance carriers agreed to pay $3.5 million into a settlement fund for the alleged class and attorneys’ fees and costs. The Court granted preliminary approval of the Company’s former officers as defendants in the case. The Court accepted these stipulationssettlement on October 4, 2017. The Company intends to continue to defend vigorously against eachFebruary 14, 2019, and every allegation and claim set forth in the second amended complaint.
a final hearing is scheduled for July 10, 2019.
Employment Agreements
The Company has entered into employment agreements with certain executive officers that provide for severance payments and, in some cases other benefits, upon certain terminations of employment. Except for the agreementsagreement with the Company’s Executive Chairman and Chief Executive Officer that have two and three year terms, respectively,with an amended extended term to September 30, 2019, all other agreements provide for employment on an “at-will” basis. If the employee resigns for “good reason” or is terminated without cause, the employee is entitled to salary continuation, and in some cases benefit continuation, for varying periods depending on the agreement.
Off-Balance Sheet Arrangements
As of DecemberMarch 31, 2017,2019, the Company provided guarantees of approximately $2.3$1.7 million related to lease commitments on the buildings for certain of the Company’s schools.
In addition, the Company contractually guarantees that certain schools under the Company’s management will not have annual operating deficits and the Company’s management fees from these schools may be reduced accordingly to cover any school operating deficits.
Other than these lease and operating deficit guarantees, the Company did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
In the third quarter of fiscal year 2017, the Company consolidated its corporate workforce and exited three facilities that were no longer being utilized, which were subject to operating leases.
The present value of the remaining lease payments was calculated using a credit adjusted risk-free rate and estimated sublease rentals for each lease. In aggregate, during fiscal year 2017, the Company recorded an impairment of $5.4 million for the three leases. The current portion of the liability of $1.7 million was included in accrued liabilities and the long-term portion of $3.7 million was included in other long-term liabilities on the condensed consolidated balance sheet.sheet as of March 31, 2017. In addition to the lease impairment, the Company accelerated the useful life of each lease’s property and equipment to the cease-use date and recorded accelerated depreciation of $1.4 million. The Company also wrote off the deferred rent and the liability for tenant improvements associated with each lease which resulted in income of $1.9 million. The $4.9 million net impact of these actions was recorded in selling, administrative, and other operating expenses in the condensed consolidated statements of operations.
The following table summarizes the activity during the sixnine months ended DecemberMarch 31, 2017:2019:
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| Balance at |
| Payments, net of |
| Accretion |
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| Balance at |
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| Balance at |
| Payments, net of |
| Accretion |
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| Balance at | ||||||||||||
Description |
| Initial Value |
| June 30, 2017 |
| sublease income |
| Expense |
| Adjustments |
| December 31, 2017 |
| Initial Value |
| June 30, 2018 |
| sublease income |
| Expense |
| Adjustments |
| March 31, 2019 | ||||||||||||||
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| (In thousands) |
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| (In thousands) | ||||||||||||||||||||||||||||||||
Lease #1 |
| $ | 1,652 |
|
| $ | 1,421 |
| $ | (175) |
| $ | 18 |
| $ | — |
| $ | 1,264 |
| $ | 1,652 |
|
| $ | 1,092 |
| $ | (275) |
| $ | 22 |
| $ | — |
| $ | 839 |
Lease #2 |
|
| 1,311 |
|
|
| 1,138 |
|
| (364) |
|
| 12 |
|
| — |
|
| 786 |
|
| 1,311 |
|
|
| 475 |
|
| (355) |
|
| 5 |
|
| — |
|
| 125 |
Lease #3 |
|
| 2,443 |
|
|
| 2,282 |
|
| (364) |
|
| 32 |
|
| — |
|
| 1,950 |
|
| 2,443 |
|
|
| 1,191 |
|
| 6 |
|
| 24 |
|
| — |
|
| 1,221 |
Total |
| $ | 5,406 |
|
| $ | 4,841 |
| $ | (903) |
| $ | 62 |
| $ | — |
| $ | 4,000 |
| $ | 5,406 |
|
| $ | 2,758 |
| $ | (624) |
| $ | 51 |
| $ | — |
| $ | 2,185 |
2428
K12 INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
11.10. Investments
Investment in Web International Education Group, Ltd. (“Web”Tallo (FKA STEM Premier Inc.)
In January 2011,August 2018, the Company invested $10.0$6.7 million to obtainfor a 20%39.5% minority interest in Web International Education Group, Ltd.Tallo, Inc. (“Web”Tallo”),. This investment in preferred stock that contains additional rights over common stock and has no readily determinable fair value, was recorded at cost and will be adjusted, as necessary, for impairment. In the event Tallo issues equity at a provider of English language learning centers in cities throughout China. On May 6, 2013,materially different price than what the Company exercised its right to put its investment back to Web for return of its original $10.0 million investment. The Company reclassified this $10.0 million investment, recording it in other current assets. During the fourth quarter of fiscal 2017,paid, the Company recorded an impairment of $10.0 million inwould also assess changing the condensed consolidated statement of operations. The Company continues to work with Web, andcarrying value. Tallo also issued a convertible note to the extent it collects inCompany for $5.0 million that will be accounted for as an available-for-sale debt security and adjusted to fair value quarterly. The note bears interest at the mid-term Applicable Federal Rate plus 25 bps per annum with a subsequent period,maturity of 48 months. The note is convertible at the Company’s option into 3.67 million Series D Preferred Shares that would give the Company will record the amount collectedan effective ownership of 56% if exercised. The Company’s investment in other incomeTallo is included in the period received.
Investment in School Mortgage
On September 11, 2013, the Company issued a mortgage note (“Mortgage”) lending $2.1 million to a managed school partner (“Partner”). The note bore interest at a fixed rate of 5.25% per year with a five year maturitydeposits and it was secured by the underlying property. During fiscal year 2016, the borrower defaulted on the loan payment, and in March 2017 the Company received the deed of ownership to the property.
In the third quarter of fiscal 2017, the Company decided to dispose of the property and classified it as an asset held for sale, and included it in other current assets on the condensed consolidated balance sheet. Also, during the third quarter of fiscal year 2017, management approved a plan to sell, and began actively marketing the property. The Company reduced the property’s estimated carrying value to $1.2 million, resulting in an impairment loss of $0.6 million, which was included in selling, administrative and other operating expenses on the condensed consolidated statements of operations. As of December 31, 2017, the Company continues to market the property and determined that there had been no change to its estimated carrying value.
12.11. Supplemental Disclosure of Cash Flow Information
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| Six Months Ended December 31, |
|
| Nine Months Ended March 31, |
| ||||||||
|
| 2017 |
| 2016 |
|
| 2019 |
| 2018 |
| ||||
|
| (In thousands) |
|
| (In thousands) |
| ||||||||
Cash paid for interest |
| $ | 350 |
| $ | 337 |
|
| $ | 862 |
| $ | 546 |
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Cash paid for taxes |
| $ | 10,610 |
| $ | 4,636 |
|
| $ | 1,010 |
| $ | 11,211 |
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Supplemental disclosure of non-cash financing activities: |
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Property and equipment financed by capital lease obligations, including student peripherals |
| $ | 12,429 |
| $ | 10,265 |
|
| $ | 19,076 |
| $ | 16,119 |
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Supplemental disclosure of non-cash investing activities: |
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Stock-based compensation expense capitalized on software development |
| $ | 995 |
| $ | — |
|
| $ | 101 |
| $ | 1,053 |
|
Stock-based compensation expense capitalized on curriculum development |
| $ | 825 |
| $ | — |
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| $ | 176 |
| $ | 835 |
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Business combinations: |
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Current assets |
| $ | 209 |
| $ | — |
|
| $ | — |
| $ | 209 |
|
Intangible assets |
|
| 695 |
|
| — |
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|
| — |
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| 695 |
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Goodwill |
|
| 2,983 |
|
| — |
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| — |
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| 2,983 |
|
Assumed liabilities |
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| (234) |
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| — |
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| — |
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| (734) |
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Deferred revenue |
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| (361) |
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| — |
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| — |
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| (361) |
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2529
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Certain statements in Management’s Discussion and Analysis or MD&A, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Historical results may not indicate future performance. Our forward-looking statements reflect our current views about future events, are based on assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those contemplated by these statements. Factors that may cause differences between actual results and those contemplated by forward-looking statements include, but are not limited to, those discussed in “Risk Factors” in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended June 30, 2017,2018, which we refer to as our Annual Report. We undertake no obligation to publicly update or revise any forward-looking statements, including any changes that might result from any facts, events or circumstances after the date hereof that may bear upon forward-looking statements. Furthermore, we cannot guarantee future results, events, levels of activity, performance or achievements.
This MD&A is intended to assist in understanding and assessing the trends and significant changes in our results of operations and financial condition. As used in this MD&A, the words, “we,” “our” and “us” refer to K12 Inc. and its consolidated subsidiaries. This MD&A should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this report, as well as the consolidated financial statements and MD&A of our Annual Report. The following overview provides a summary of the sections included in our MD&A:
· | Executive Summary — a general description of our business and key highlights of the |
· | Critical Accounting Policies and Estimates — a discussion of critical accounting policies requiring |
· | Results of Operations — an analysis of our results of operations in our condensed consolidated financial statements. |
· | Liquidity and Capital Resources — an analysis of cash flows, sources and uses of cash, commitments and contingencies and quantitative and qualitative disclosures about market risk. |
Executive Summary
We are a technology-based education company and offer 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. Our 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 tothrough three lines of business: Managed Public School Programs, Institutional,Programs; Institutional; and Private Pay Schools and Other.
Managed Public School Programs accounted for approximately 83%88% of our revenues induring the sixnine months ended DecemberMarch 31, 2017. A2019. The Managed Public School Program provides substantially allPrograms offer an integrated package of thesystems, services, products, and professional expertise that we manage to support online or blended public schools, including: administrative functions,support (e.g., budget proposals, financial reporting, student data reporting, and staff recruitment), information technology, and academic support services, online curriculum, learning systems, and instructional services. We provide our Managed Public School Programs to virtual and blended public charter schools and school districts. These arrangementscontracts are negotiated with and approved by the governing authorities of the customer. The duration of the Managed Public School Program service agreements are typically 2-5 years, and most provide for automatic renewals absent a customer notification within a negotiated time frame. During any fiscal year, the Company may enter into new Managed Public School agreements, receive non-automatic renewal notices and negotiate replacement agreements, terminate the contract or receive notice of
30
termination, or transition a school between a Managed Public School Program and a Non-managed Public School Program. The governing boards may also establish school policies and other terms and conditions over the course of a contract, such as enrollment parameters. The authorizers who issue the charters to our Managed Public School customers which are mostly virtual and blended public schools. Wecan renew, revoke, or modify those charters as well.
As of March 31, 2019, we provided our Managed Public School Programs to 75 schools in a majority of states throughout the United States. As previously disclosed,States and the California Teachers Association ("CTA") was recognizedDistrict of Columbia. During this period, we entered into a new contract in June 2016 asone state to open a Managed Public School Program, auto renewed eight agreements for schools in five states, are now engaged in renewal negotiations in one state and completed renewal negotiations in five states, with varying degrees of contract modifications. At four schools, the exclusive representativeapplicable authorizer invoked its right not to renew its agreement for the teachers employed by the California Virtual Academies ("CAVA"), and collective bargaining negotiations pursuant to a non-binding settlement process of the Public Employee Relations Board ("PERB") remain ongoing. It is uncertain at this time if an agreement between the CAVA school boards and the teachers will be concluded during the currentupcoming 2019-2020 school year whether and when the teachers may exercise their authorization to
26
strike, the potential effect on CAVA enrollments should the PERB process be unsuccessful, or if the final terms of any CTA-CAVA agreementthereafter, and therefore such schools will materially impact the revenue we receive or our profit margins in providing management services for the CAVA schools commencing in FY 2019.close unless a new authorizer is found.
With our Institutional business, we do not assume primary management responsibilities for the schools. Rather, the Institutional business sells online curriculum programs and technology (full time and part time), courses, teacher instruction, and various support tools and platforms to schools and school districts. Our Institutional business consists of both Non-managed Public School Programs and Institutional Software and Services. Non-managedUnlike Managed Public School Programs, include schools where K12 provides the curriculum and technology for full-time virtual and blended programs, and the school can also contract for instruction, marketing, enrollment or other educational services. Non-managed Public School Programs doInstitutional business does not offer primary administrative oversight.support services, which remain the responsibility of the school district or the school customer. Rather, the Institutional business offers options whereby the school can contract for instruction, curriculum, supplemental courses, marketing, enrollment and other educational services. The Institutional Software and Services offerings provide an array of onlineschool districts, individual public schools, charter schools and private schools with educational products and support services to meet the specific needs of the school or school district and its students.solutions. In addition to curriculum, systems and programs, the support services we provideoffer to theseInstitutional customers are designed tocan also assist them in launching their own online and blended learning programs tailored to their own requirements and may include teacher training programs, administratorinstructional support, and our reporting dashboardtools and content libraries. With our services,For the 2017-18 school year, we served school districts or individual schools in all 50 states and districts can offer programs that allow students to participate part-time, supplementing their education with core courses, electives, credit recovery options, remediation and supplemental content options.
the District of Columbia, including those states where the regulatory environment restricts or prohibits statewide online programs.
Our Private Pay Schools and Other include three accredited, onlinetuition-based private schools that we operate in which parents can enroll students onmeet a tuition basis for a full-time online education orrange of student needs from individual coursescourse credit recovery to supplement their children’s traditional instruction.college preparatory programs. These schools are: (1) K12 International Academy, an online private school that enables us to offer students worldwide the same full-time education programs and curriculum that we provide to the virtual and blended public schools, (2) The Keystone School, a private school that offers online and correspondence courses, and (3) the George Washington University Online High School, a school that offers a college preparatory program and is designed for middle and high school students who are seeking a challenging academic experience.
For the sixnine months ended DecemberMarch 31, 2017,2019, revenues decreasedincreased to $446.0$759.4 million from $450.2$678.9 million in the prior year, period, a decreasean increase of 0.9%11.9%. Over the same period, operating loss decreasedincome increased to $4.0$42.8 million, from $4.3$15.7 million in the prior year period.year. Net income to common stockholders was $5.2$33.9 million, as compared to a net loss of $2.2$18.3 million in the prior year period.year.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with Generally Accepted Accounting Principlesaccounting principles generally accepted in the United States of America (“GAAP”) requires us to make estimates and assumptions about future events that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Future events and their effects cannot be determined with certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and any such differences may be material to our consolidated financial statements. Critical accounting policies are disclosed in our Annual Report. ThereOther than revenue recognition (discussed below), there have been no significant updates to our critical accounting policies disclosed in our Annual Report.
Contracts with Customers
Revenues are principally earned from 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 through its three lines of business; Managed Public School Programs, Institutional, and Private Pay and Other.
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:
31
· | 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. |
Revenue Recognition
Managed Public School Programs
The Company provides an integrated package of systems, services, products, and professional expertise that we manage to support online or blended public schools. Contractual agreements generally span multiple years with performance obligations being isolated to annual periods. 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 contracts with virtual and blended public schools and include the following components, where required:
· | 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; |
· | the use of a personal computer and associated reclamation services; |
· | internet access and technology support services; |
· | instruction by a state-certified teacher; 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. |
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 and nine months ended March 31, 2019 and 2018.
Each state and/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 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
32
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.
The Company has certain contracts where it is responsible for substantially all of the expenses incurred by the school. For these contracts, the Company records both revenue and expenses incurred by the schools.
Institutional
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, marketing, enrollment 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.
Private Pay Schools and Other
Private Pay Schools and Other revenues are generated from individual customers who prepay and have access for one to two years to company-provided online curriculum. Each of these contracts are considered to be one performance obligation under ASC 606. The Company recognizes these revenues pro rata over the maximum term of the customer contract.
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 recognized as revenue when, or as, the performance obligation is satisfied. For the majority of its contracts, 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.
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. The Company delivers the integrated products and services package related to its Managed Public School Programs 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. Accordingly, the Company will recognize revenue on a straight-line basis.
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
33
receive. To the extent the estimates change during the year, the cumulative impact of the change is recognized over the remaining service period.
Results of Operations
We have three lines of business: Managed Public School Programs, Institutional,Programs; Institutional; and Private Pay Schools and Other.
Managed Public School |
| Institutional |
| Private Pay Schools and Other |
Virtual public schools |
| Non-managed Public School Programs |
| Managed private schools —K12 International Academy |
Blended public schools |
| Institutional software and services |
| —George Washington University Online High School |
|
|
|
| —The Keystone School |
27
Enrollment Data
The following table sets forth total enrollment data for students in our Managed Public School Programs and Non-managed Public School Programs. Our Managed Public School Programs offer an integrated package of systems, services, products, and professional expertise that we manage in order to support an online or blended public school. Customers for these programs can obtain the administrative support, information technology, academic support services, online curriculum, learning system platforms and instructional services under the terms of a negotiated service agreement. Unlike Managed Public School Programs, Non‑managed Public School Programs do not offer primary administrative support services, which remain the responsibility of the school district or the school customer. Rather, Non-Managed Public School Programs offer options whereby the school can contract for instruction, curriculum, supplemental courses, marketing, enrollment and other educational services. Enrollments in Managed Public School Programs on average generate more revenues than enrollments served through our Institutional business where we provide limited or no management services. We do not award or permit incentive compensation to be paid to our public school program enrollment staff or contractors based on the number of students enrolled. If the mix of enrollments changes, our revenues will be impacted to the extent the average revenues per enrollments are significantly different.
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| Six Months Ended |
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| December 31, |
| 2017 / 2016 |
| December 31, |
| 2017 / 2016 |
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| 2019 / 2018 |
| March 31, |
| 2019 / 2018 |
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| 2017 |
| 2016 |
| Change |
| Change % |
| 2017 |
| 2016 |
| Change |
| Change % |
|
| 2019 |
| 2018 |
| Change |
| Change % |
| 2019 |
| 2018 |
| Change |
| Change % |
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Managed Public School Programs (1)(2) |
|
| 108.5 |
|
| 106.2 |
|
| 2.3 |
| 2.2% |
|
| 109.1 |
|
| 106.8 |
|
| 2.3 |
| 2.2% |
|
|
| 117.1 |
|
| 110.8 |
|
| 6.3 |
| 5.7% |
|
| 117.0 |
|
| 109.8 |
|
| 7.2 |
| 6.6% |
|
Non-managed Public School Programs (1) |
|
| 23.9 |
|
| 28.7 |
|
| (4.8) |
| (16.7%) |
|
| 23.9 |
|
| 28.5 |
|
| (4.6) |
| (16.1%) |
|
|
| 24.5 |
|
| 24.3 |
|
| 0.2 |
| 0.8% |
|
| 24.0 |
|
| 24.1 |
|
| (0.1) |
| (0.4%) |
|
(1) | If a school changes from a Managed to a Non-managed Public School Program, the corresponding enrollment classification would change in the period in which the contract arrangement changed. Enrollments reported for the first quarter are equal to the official count date number, which is the first Wednesday of October in a year, or October 3, 2018 for the first quarter of fiscal year 2019 and October 4, 2017 for the first quarter of fiscal year |
(2) | Managed Public School Programs include enrollments for which K12 receives no public funding or revenue. |
34
Revenues by Business Lines
Revenues are captured by business line based on the underlying customer contractual agreements. Periodically, a customer may change business line classification, normallyclassification. Alternatively, a Managed Public School may become a Non-managed Public School and seek to renegotiate an existing contract or the scope of services we provide to the school. A re-classification of a public school from one business line to another would be reflected in our disclosure of revenues and total student enrollment between Institutional line items.the two business lines. For example, a district that purchases a single course (Institutional business customer) may decide to convert to a full‑time virtual school program (Managed Public School customer). Changes in business line classification are effectiveoccur at the time the contractual agreement is modified. The mix of our revenue between our Managed Public School Programs and our Institutional business could change as one or more of our managed schools transitions to a self-managed model such that we would provide only selected services to the school. This transition could occur due to a change in focus sought by the independent school board, or by state legislative or regulatory developments, and thus reducing revenue we generate from the school. The following represents our revenues for these lines of business for each of the periods indicated:
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| Three Months Ended |
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| Nine Months Ended |
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| March 31, |
| Change 2019 / 2018 |
| March 31, |
| Change 2019 / 2018 |
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| 2019 |
| 2018 |
| $ |
| % |
| 2019 |
| 2018 |
| $ |
| % |
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| (In thousands, except percentages) |
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Managed Public School Programs |
| $ | 222,645 |
| $ | 200,580 |
| $ | 22,065 |
| 11.0% |
| $ | 665,981 |
| $ | 572,478 |
| $ | 93,503 |
| 16.3% |
|
Institutional |
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Non-managed Public School Programs |
|
| 12,776 |
|
| 13,250 |
|
| (474) |
| (3.6%) |
|
| 37,398 |
|
| 44,401 |
|
| (7,003) |
| (15.8%) |
|
Institutional Software & Services |
|
| 8,530 |
|
| 9,605 |
|
| (1,075) |
| (11.2%) |
|
| 29,515 |
|
| 34,500 |
|
| (4,985) |
| (14.4%) |
|
Total Institutional |
|
| 21,306 |
|
| 22,855 |
|
| (1,549) |
| (6.8%) |
|
| 66,913 |
|
| 78,901 |
|
| (11,988) |
| (15.2%) |
|
Private Pay Schools and Other |
|
| 9,301 |
|
| 9,429 |
|
| (128) |
| (1.4%) |
|
| 26,544 |
|
| 27,481 |
|
| (937) |
| (3.4%) |
|
Total Revenues |
| $ | 253,252 |
| $ | 232,864 |
| $ | 20,388 |
| 8.8% |
| $ | 759,438 |
| $ | 678,860 |
| $ | 80,578 |
| 11.9% |
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| Three Months Ended |
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| Six Months Ended |
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| December 31, |
| Change 2017 / 2016 |
| December 31, |
| Change 2017 / 2016 |
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| 2017 |
| 2016 |
| $ |
| % |
| 2017 |
| 2016 |
| $ |
| % |
| ||||||
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| (In thousands, except percentages) |
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Managed Public School Programs |
| $ | 183,392 |
| $ | 182,396 |
| $ | 996 |
| 0.5% |
| $ | 371,898 |
| $ | 366,935 |
| $ | 4,963 |
| 1.4% |
|
Institutional |
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Non-managed Public School Programs |
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| 13,991 |
|
| 17,634 |
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| (3,643) |
| (20.7%) |
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| 31,150 |
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| 35,929 |
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| (4,779) |
| (13.3%) |
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Institutional Software & Services |
|
| 11,437 |
|
| 12,770 |
|
| (1,333) |
| (10.4%) |
|
| 24,895 |
|
| 28,733 |
|
| (3,838) |
| (13.4%) |
|
Total Institutional |
|
| 25,428 |
|
| 30,404 |
|
| (4,976) |
| (16.4%) |
|
| 56,045 |
|
| 64,662 |
|
| (8,617) |
| (13.3%) |
|
Private Pay Schools and Other |
|
| 8,391 |
|
| 8,290 |
|
| 101 |
| 1.2% |
|
| 18,053 |
|
| 18,631 |
|
| (578) |
| (3.1%) |
|
Total |
| $ | 217,211 |
| $ | 221,090 |
| $ | (3,879) |
| (1.8%) |
| $ | 445,996 |
| $ | 450,228 |
| $ | (4,232) |
| (0.9%) |
|
2835
Financial Information
The following table sets forth statements of operations data and the amounts as a percentage of revenues for each of the periods indicated:
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| Three Months Ended December 31, |
| Six Months Ended December 31, |
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| Three Months Ended March 31, |
| Nine Months Ended March 31, |
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| 2017 |
| 2016 |
| 2017 |
| 2016 |
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| 2019 |
| 2018 |
| 2019 |
| 2018 |
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| (Dollars in thousands) |
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| (Dollars in thousands) |
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| ||||||||||||||||||||||||||||||||||
Revenues |
| $ | 217,211 |
| 100.0 | % | $ | 221,090 |
| 100.0 | % | $ | 445,996 |
| 100.0 | % | $ | 450,228 |
| 100.0 | % |
|
| $ | 253,252 |
| 100.0 | % | $ | 232,864 |
| 100.0 | % | $ | 759,438 |
| 100.0 | % | $ | 678,860 |
| 100.0 | % |
|
Cost and expenses |
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|
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|
|
|
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|
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|
|
|
|
|
|
Instructional costs and services |
|
| 139,163 |
| 64.1 |
|
| 137,542 |
| 62.2 |
|
| 286,530 |
| 64.2 |
|
| 281,641 |
| 62.6 |
|
|
|
| 168,260 |
| 66.4 |
|
| 148,878 |
| 63.9 |
|
| 487,574 |
| 64.2 |
|
| 435,408 |
| 64.1 |
|
|
Selling, administrative, and other operating expenses |
|
| 61,958 |
| 28.5 |
|
| 62,352 |
| 28.2 |
|
| 158,240 |
| 35.5 |
|
| 166,998 |
| 37.1 |
|
|
|
| 59,382 |
| 23.4 |
|
| 62,267 |
| 26.7 |
|
| 222,143 |
| 29.3 |
|
| 220,507 |
| 32.5 |
|
|
Product development expenses |
|
| 2,376 |
| 1.1 |
|
| 2,873 |
| 1.3 |
|
| 5,274 |
| 1.2 |
|
| 5,935 |
| 1.3 |
|
|
|
| 2,343 |
| 0.9 |
|
| 2,002 |
| 0.9 |
|
| 6,916 |
| 0.9 |
|
| 7,276 |
| 1.1 |
|
|
Total costs and expenses |
|
| 203,497 |
| 93.7 |
|
| 202,767 |
| 91.7 |
|
| 450,044 |
| 100.9 |
|
| 454,574 |
| 101.0 |
|
|
|
| 229,985 |
| 90.8 |
|
| 213,147 |
| 91.5 |
|
| 716,633 |
| 94.4 |
|
| 663,191 |
| 97.7 |
|
|
Income (loss) from operations |
|
| 13,714 |
| 6.3 |
|
| 18,323 |
| 8.3 |
|
| (4,048) |
| (0.9) |
|
| (4,346) |
| (1.0) |
|
| ||||||||||||||||||||||
Income from operations |
|
| 23,267 |
| 9.2 |
|
| 19,717 |
| 8.5 |
|
| 42,805 |
| 5.6 |
|
| 15,669 |
| 2.3 |
|
| ||||||||||||||||||||||
Interest income, net |
|
| 39 |
| 0.0 |
|
| 264 |
| 0.1 |
|
| 274 |
| 0.1 |
|
| 606 |
| 0.1 |
|
|
|
| 754 |
| 0.3 |
|
| 261 |
| 0.1 |
|
| 1,547 |
| 0.2 |
|
| 535 |
| 0.1 |
|
|
Income (loss) before income taxes and noncontrolling interest |
|
| 13,753 |
| 6.3 |
|
| 18,587 |
| 8.4 |
|
| (3,774) |
| (0.8) |
|
| (3,740) |
| (0.8) |
|
| ||||||||||||||||||||||
Other income (expense), net |
|
| 556 |
| 0.2 |
|
| — |
| — |
|
| (40) |
| (0.0) |
|
| — |
| — |
|
| ||||||||||||||||||||||
Income before income taxes, loss from equity method investments and noncontrolling interest |
|
| 24,577 |
| 9.7 |
|
| 19,978 |
| 8.6 |
|
| 44,312 |
| 5.8 |
|
| 16,204 |
| 2.4 |
|
| ||||||||||||||||||||||
Income tax benefit (expense) |
|
| (564) |
| (0.3) |
|
| (7,688) |
| (3.5) |
|
| 8,804 |
| 2.0 |
|
| 1,002 |
| 0.2 |
|
|
|
| (5,842) |
| (2.3) |
|
| (6,935) |
| (3.0) |
|
| (9,858) |
| (1.3) |
|
| 1,869 |
| 0.3 |
|
|
Net income (loss) |
|
| 13,189 |
| 6.1 |
|
| 10,899 |
| 4.9 |
|
| 5,030 |
| 1.1 |
|
| (2,738) |
| (0.6) |
|
| ||||||||||||||||||||||
Loss from equity method investments |
|
| (273) |
| (0.1) |
|
| — |
| — |
|
| (562) |
| (0.1) |
|
| — |
| — |
|
| ||||||||||||||||||||||
Net income |
|
| 18,462 |
| 7.3 |
|
| 13,043 |
| 5.6 |
|
| 33,892 |
| 4.5 |
|
| 18,073 |
| 2.7 |
|
| ||||||||||||||||||||||
Add net loss attributable to noncontrolling interest |
|
| 70 |
| 0.0 |
|
| 753 |
| 0.3 |
|
| 173 |
| 0.0 |
|
| 557 |
| 0.1 |
|
|
|
| — |
| — |
|
| 27 |
| 0.0 |
|
| — |
| — |
|
| 200 |
| 0.0 |
|
|
Net income (loss) attributable to common stockholders |
| $ | 13,259 |
| 6.1 | % | $ | 11,652 |
| 5.3 | % | $ | 5,203 |
| 1.2 | % | $ | (2,181) |
| (0.5) | % |
| ||||||||||||||||||||||
Net income attributable to common stockholders |
| $ | 18,462 |
| 7.3 | % | $ | 13,070 |
| 5.6 | % | $ | 33,892 |
| 4.5 | % | $ | 18,273 |
| 2.7 | % |
|
Comparison of the Three Months Ended DecemberMarch 31, 20172019 and 20162018
Revenues. Our revenues for the three months ended DecemberMarch 31, 20172019 were $217.2$253.3 million, representing a decreasean increase of $3.9$20.4 million, or 1.8%8.8%, from $221.1$232.9 million for the same period in the prior year. Managed Public School Program revenues increased $1.0$22.1 million, or 0.5%11.0%, year over year. The increase in Managed Public School Program revenues was primarily attributabledue to the 2.2%5.7% increase in enrollments in both new and existing schools and increases in the per-pupil achieved funding, school mix (distribution of enrollments by school), and other factors.
Total Institutional revenues decreased $5.0$1.5 million, or 16.4%6.8%, primarily due to a (16.7%) decreasedecline in software sales, partially offset by a slight increase in enrollments in our non-managed public school programs, as well as a decline in software sales.Non-managed Public School Programs. Private Pay Schools and Other revenues increaseddecreased $0.1 million, or 1.2%1.4%, over the prior year period.
Enrollments in Managed Public School Programs on average generate more revenues than enrollments served through our Institutional business where we provide limited or no management services. As we continue to build our Institutional business and the Managed Public School Programs business continues to mature, enrollment mix may shift and impact growth in revenues relative to the growth in enrollments.
Instructional costs and services expenses. Instructional costs and services expenses for the three months ended DecemberMarch 31, 20172019 were $139.2$168.3 million, representing an increase of $1.7$19.4 million, or 1.2%13.0%, from $137.5$148.9 million for the same period in the prior year. This increase in expense was primarily associated withdue to the incremental personnel and related
36
benefit costs associated with servingdue to supporting higher enrollments. Instructional costs and services expenses were 64.1%66.4% of revenues during the three months ended DecemberMarch 31, 2017,2019, an increase from 62.2%63.9% for the three months ended DecemberMarch 31, 2016.2018.
Selling, administrative, and other operating expenses. Selling, administrative, and other operating expenses for the three months ended DecemberMarch 31, 20172019 were $62.0$59.4 million, representing a decrease of $0.4$2.9 million, or 0.6%4.7% from $62.4
29
$62.3 million for the same period in the prior year. The decrease was primarily due to a decrease in personnel and related benefit costs. Selling, administrative, and other operating expenses were 28.5%23.4% of revenues during the three months ended DecemberMarch 31, 2017, an increase2019, a decrease from 28.2%26.7% for the three months ended DecemberMarch 31, 2016.2018.
Product development expenses. Product development expenses for the three months ended DecemberMarch 31, 20172019 were $2.4$2.3 million, representing a decreasean increase of $0.5$0.3 million, or 17.2%15.0% from $2.9$2.0 million for the same period in the prior year. The increase was primarily due to an increase in personnel salary expenses. Product development expenses were 1.1%0.9% of revenues during the three months ended DecemberMarch 31, 2017, a decrease from 1.3% for three months ended December 31, 2016.
Interest income, net. Net interest income for the three months ended December 31, 2017 was not material as compared to $0.3 million in the same period in the prior year. The decrease was primarily associated with lower interest income on certain accounts receivable partially offset by higher interest expense associated with capital leases during the three months ended December 31, 2017, as compared to the same period in the prior year.2019 and 2018.
Income tax benefit (expense). We had an income tax expense of $0.6$5.8 million for the three months ended DecemberMarch 31, 2017,2019, or 4.1%23.8% of income before income taxes, as compared to $7.7$6.9 million, or 41.4%34.7% of income before income taxes for the same period in the prior year.
On December 22, 2017, the Tax Cuts and Job Act (the “Tax Act”) was enacted into law, which among other provisions, reduced the statutory federal income tax rate from 35% to 21%. We have estimated and included the provisional amounts for the potential 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 our financial statements for the three months ended December 31, 2017. The analysis of the foreign earnings that is required to be completed for the transition tax is an estimate at this time and an updated transition tax will be reflected in subsequent periods once the final amounts are determined. The provisional amount for the impact of the rate change on the net deferred tax liabilities was based on an estimate which we will continue to refine as the year progresses.
The decrease in the effective tax rate for the three months ended DecemberMarch 31, 2017 is predominantly2019 was primarily due to the impact of the Tax Act. We will continue to analyzeCuts and Job Act (the “Tax Act”) in the Tax Act to determine the full effects of the new law.prior year.
Net income (loss).income. Net income was $13.2$18.5 million for the three months ended DecemberMarch 31, 2017,2019, compared to $10.9$13.0 million for the same period in the prior year, representing an increase of $2.3$5.5 million.
Noncontrolling interest loss. Net loss attributable to noncontrolling interest for the three months ended December 31, 2017 was $0.1 million as compared to $0.8 million for the same period in the prior year. The decrease is primarily related to the purchase of the remaining 40% noncontrolling interest of Middlebury Interactive Languages in December 2016. Noncontrolling interest reflects the after-tax income attributable to minority interest owners in our investments, and fluctuates in proportion to the operating results of the investments.
Comparison of the SixNine Months Ended DecemberMarch 31, 20172019 and 20162018
Revenues. Our revenues for the sixnine months ended DecemberMarch 31, 20172019 were $446.0$759.4 million, representing a decreasean increase of $4.2$80.5 million, or 0.9%11.9%, from $450.2$678.9 million for the same period in the prior year. Managed Public School Program revenues increased $5.0$93.5 million, or 1.4%16.3%, year over year. The increase in Managed Public School Program revenues was primarily attributabledue to the 2.2%6.6% increase in enrollments in both new and existing schools and increases in the per-pupil achieved funding, school mix (distribution of enrollments by school), and other factors.
Total Institutional revenues decreased $8.6$12.0 million, or 13.3%15.2%, primarily due to a (16.1%)slight decrease in enrollments in our non-managed public school programs, as well asNon-managed Public School Programs, and a decline in software sales. Private Pay Schools and Other revenues decreased $0.6$0.9 million, or 3.1%3.4%, over the prior year period.
Enrollments in Managed Public School Programs on average generate more revenues than enrollments served through our Institutional business where we provide limited or no management services. As we continue to build our Institutional business and the Managed Public School Programs business continues to mature, enrollment mix may shift and impact growth in revenues relative to the growth in enrollments.
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Instructional costs and services expenses. Instructional costs and services expenses for the sixnine months ended DecemberMarch 31, 20172019 were $286.5$487.6 million, representing an increase of $4.9$52.2 million, or 1.7%12.0%, from $281.6$435.4 million for the same period in the prior year. This increase in expense was primarily associated withdue to the incremental personnel and related benefit costs associated with servingdue to supporting higher enrollments. Instructional costs and services expenses were 64.2% of revenues during the sixnine months ended DecemberMarch 31, 2017,2019, an increase from 62.6%64.1% for the sixnine months ended DecemberMarch 31, 2016.2018.
Selling, administrative, and other operating expenses. Selling, administrative, and other operating expenses for the sixnine months ended DecemberMarch 31, 20172019 were $158.2$222.1 million, representing a decreasean increase of $8.8$1.6 million, or 5.3%0.7% from $167.0$220.5 million for the same period in the prior year. This decreaseincrease was primarily associated with a decreasesdue to an increase in outside professional services salaries and benefits and rent expense,marketing, partially offset by an increasea decrease in stock-based compensation expense.personnel and related benefits costs. Selling, administrative, and other operating expenses were 35.5%29.3% of revenues during the sixnine months ended DecemberMarch 31, 2017,2019, a decrease from 37.1%32.5% for the sixnine months ended DecemberMarch 31, 2016.2018.
Product development expenses. Product development expenses for the sixnine months ended DecemberMarch 31, 20172019 were $5.3$6.9 million, representing a decrease of $0.6$0.4 million, or 10.2%5.5% from $5.9$7.3 million for the same period in the prior year. Product development expenses were 1.2%0.9% of revenues during threenine months ended DecemberMarch 31, 2017,2019, a decrease from 1.3%1.1% for the threenine months ended DecemberMarch 31, 2016.
Interest income, net. Net interest income for the six months ended December 31, 2017 was $0.3 million as compared to $0.6 million in the same period in the prior year. The decrease was primarily associated with lower interest income on certain accounts receivable partially offset by higher interest expense associated with capital leases during the six months ended December 31, 2017, as compared to the same period in the prior year.2018.
Income tax benefit (expense). We had an income tax benefitexpense of $8.8$9.9 million for the sixnine months ended DecemberMarch 31, 2017,2019, or 233.3%22.2% of lossincome before income taxes, as compared to $1.0a benefit of $1.9 million, or 26.8%(11.5)% of lossincome before income taxes for the same period in the prior year.
On December 22, 2017, the Tax Act was enacted into law, which among other provisions, reduced the statutory federal income tax rate from 35% to 21%. We have estimated and included the provisional amounts for the potential impact of 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 our financial statements for the six months ended December 31, 2017. The analysis of the foreign earnings that is required to be completed for the transition tax is an estimate at this time and an updated transition tax will be reflected in subsequent periods once the final amounts are determined. The provisional amount for the impact of the rate change on the net deferred tax liabilities was based on an estimate which we will continue to refine as the year progresses.
The increase in the incomeeffective tax benefitrate for the sixnine months ended DecemberMarch 31, 2017 is predominantly2019 was primarily due to the impact of the Tax Act andin the tax impact of the as the adoption of Accounting Standards Update 2016-09, Compensation - Stock Compensation (“ASU 2016-09”) related to stock compensation. We will continue to analyze the Tax Act to determine the full effects of the new law.prior year.
37
Net income (loss).income. Net income was $5.0$33.9 million for the sixnine months ended DecemberMarch 31, 2017,2019, compared to net loss of $2.7$18.1 million for the same period in the prior year, representing an increase in net income of $7.7$15.8 million.
Noncontrolling interest loss. Net loss attributable to noncontrolling interest for the six months ended December 31, 2017 was $0.2 million as compared to $0.6 million for the same period in the prior year. The decrease is primarily related to the purchase of the remaining 40% noncontrolling interest of Middlebury Interactive Languages in December 2016. Noncontrolling interest reflects the after-tax income attributable to minority interest owners in our investments, and fluctuates in proportion to the operating results of the investments.
Liquidity and Capital Resources
As of DecemberMarch 31, 2017,2019, we had net working capital, or current assets minus current liabilities, of $371.1$373.2 million. Our working capital includes cash and cash equivalents of $189.5$234.0 million and accounts receivable of $244.1$238.6 million. Our working capital provides a significant source of liquidity for our normal operating needs. Our accounts receivable balance fluctuates throughout the fiscal year based on the timing of customer billings and collections and tends to be
31
highest in our first fiscal quarter as we begin billing for students. In addition, our cash and accounts receivable were significantly in excess of our accounts payable and short-term accrued liabilities at DecemberMarch 31, 2017.
On January 31, 2014, we 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 December 31, 2017, we were in compliance with these covenants and we had no borrowings outstanding on the line of credit.2019.
We incur capital lease obligations for student computers and peripherals under a lease line of creditagreements with PNC Equipment Finance, LLC.LLC (“PNC”) and Banc of America Leasing & Capital, LLC (“BALC”). As of DecemberMarch 31, 20172019 and June 30, 2017,2018, the outstanding balance of capital leases under the current and former lease lines of credit is $27.3was $31.2 million and $21.9$26.0 million, respectively, with lease interest rates ranging from 1.95%1.97% to 3.12%4.05%.
Individual leases under the lease lines of creditwith PNC include 36-month payment terms, at varying rates, with a $1 purchase option at the end of each lease term. We have pledged the assets financed to secure the outstanding leases.
We had $24.2Our $16.0 million agreement with BALC that was executed in December 2018, was increased to $25 million in February 2019 and $31.9 million of remaining availability under our lease line of credit as ofextended through December 31, 2017 and June 30, 2017, respectively. Interest on unpaid principal under the lease line of credit is2019 at a fluctuating rate of LIBOR plus 1.2%1.25%. Individual leases with BALC include 12-month payment terms, a fixed rate of 4.05%, and a $1 purchase option at the end of each lease term. We pledged the assets financed to secure the outstanding leases.
Our cash requirements consist primarily of day-to-day operating expenses, capital expenditures and contractual obligations with respect to office facility leases, capital equipment leases and other operating leases. We expect to make future payments on existing leases from cash generated from operations. We believe that the combination of funds to be generated from operations, net working capital on hand and access to our line of credit will be adequate to finance our ongoing operations for the foreseeable future. In addition, to a lesser degree, we continue to explore acquisitions, strategic investments and joint ventures related to our business that we may acquire using cash, stock, debt, contribution of assets or a combination thereof.
On May 4, 2015, Middlebury College, under the joint venture agreement, exercised its right to require the Company to purchase all of its ownership interest in the joint venture. On December 27, 2016, we consummated the acquisition of the remaining 40% noncontrolling interest for $9.1 million in cash.
Operating Activities
Net cash used inprovided by operating activities for the sixnine months ended DecemberMarch 31, 20172019 was $2.7$73.3 million compared to net cash provided by operating activities of $10.3$55.2 million for the sixnine months ended DecemberMarch 31, 2016.2018. The decreaseincrease of $13.0$18.1 million in cash provided inby operations between periods was primarily attributabledue to a decrease in working capital of $20.8 million, partially offset by an increase in net income of $7.7$15.8 million. The changes in working capital were primarily attributable to increases in accounts receivable, prepaid expenses (primarily for income taxes), as well as a decrease in deferred revenue.
Investing Activities
Net cash used in investing activities for the sixnine months ended DecemberMarch 31, 20172019 was $25.9$48.0 million compared to $33.0$36.5 million for the sixnine months ended DecemberMarch 31, 2016, a decrease2018, an increase of $7.1$11.5 million. For the six months ended December 31, 2017, the Company invested $2.2 million for the acquisition of Big Universe, Inc., and for the six months ended December 31, 2016, the Company invested $9.1 million for the acquisition of the remaining 40% noncontrolling interest of Middlebury Interactive Languages. The increase is primarily due to the investment in property and equipment expenditures was offset by a decreaseTallo, Inc. (FKA Stem Premier, Inc.) in curriculum development expenses.August 2018.
During the sixnine months ended DecemberMarch 31, 2017,2018, we recorded an adjustment related to the capitalization of software and curriculum development. See Note 3 – “Summary of Significant Accounting Policies,” to our condensed consolidated financial statements for further detail.
Financing Activities
Net cash used in financing activities for the nine months ended March 31, 2019 was $22.4 million compared to $21.7 million during the nine months ended March 31, 2018, an increase of $0.7 million. The increase is primarily due to an increase in payments of capital lease obligations incurred for the acquisition of student computers of $3.6 million, partially offset by an increase in proceeds from stock option exercises of $2.0 million.
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Financing Activities
Net cash used in financing activities for the six months ended December 31, 2017 was $12.7 million compared to $9.1 million during the six months ended December 31, 2016. Our primary uses of cash in financing activities during the six months ended December 31, 2017 was in connection with the repurchase of restricted stock for income tax withholding and in connection with payments of capital lease obligations incurred for the acquisition of student computers. The increase in cash used in financing was due primarily to an increase of $4.1 million in the repurchase of restricted stock for income tax withholding, partially offset by a decrease of 1.1 million in capital lease payments.
Off Balance Sheet Arrangements, Contractual Obligations and Commitments
As of DecemberMarch 31, 2017,2019, we provided guarantees of approximately $2.3$1.7 million related to lease commitments on the buildings for certain of the Company’s schools.
In addition, we contractually guarantee that certain schools under our management will not have annual operating deficits and our management fees from these schools may be reduced accordingly to cover any school operating deficits.
Other than these lease and operating deficit guarantees, we do not have any off‑balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
As of DecemberMarch 31, 20172019 and June 30, 2017,2018, we had cash and cash equivalents totaling $189.5$234.0 million and $230.9$231.1 million, respectively. Our excess cash has been invested primarily in U.S. Treasury money market funds although we may also invest in money market accounts, government securities, corporate debt securities and similar investments. Future interest and investment income is subject to the impact of interest rate changes and we may be subject to changes, in the fair value of our investment portfolio as a result of changes in interest rates. At DecemberMarch 31, 2017,2019, a 1% gross increase in interest rates earned on cash would result in a $1.9$2.3 million annualized increase in interest income.
Our short-term debt obligations under our revolving credit facility are subject to interest rate exposure; however, as we had no outstanding balance on this facility during the six months ended Decemberas of March 31, 20172019, fluctuations in interest rates had no impact on our interest expense.
Foreign Currency Exchange Risk
We currently operate in several foreign countries, but we do not transact a material amount of business in a foreign currency. If we enter into any material transactions in a foreign currency or establish or acquire any subsidiaries that measure and record their financial condition and results of operations in a foreign currency, we will be exposed to currency transaction risk and/or currency translation risk. Exchange rates between U.S. dollars and many foreign currencies have fluctuated significantly over the last few years and may continue to do so in the future. Accordingly, we may decide in the future to undertake hedging strategies to minimize the effect of currency fluctuations on our financial condition and results of operations.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(f) of the Exchange Act) that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control
33
objectives, and management necessarily was required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures.
We carried out an evaluation, required by paragraph (b) of Rule 13a-15 or Rule 15d-15 under the Exchange Act, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this review, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of DecemberMarch 31, 2017.2019.
39
Changes to Internal Control over Financial Reporting
There have been no changes in our internal controls over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
3440
In the ordinary conduct of our business, we are subject to lawsuits, arbitrations and administrative proceedings from time to time. We vigorously defend these claims; however, no assurances can be given as to the outcome of any pending legal proceedings. We believe, based on currently available information, that the outcome of any existing or known threatened proceedings, even if determined adversely, should not have a material adverse effect on our business, financial condition, liquidity or results of operations.
On July 20 and September 15, 2016, atwo securities class action lawsuit lawsuits—captioned Babulal Tarapara v. K12 Inc., et al., Case No. 3:16-cv-04069, and Gil Tuinenburg v. K12 Inc., et al wasal., Case No. 3:16-cv-05305, respectively—were filed against the Company, two of its officers and one of its former officers in the United States District Court for the Northern District of California, Case No. 3:16-cv-04069 (“Tarapara Case”). The plaintiff purports to represent a class of persons who purchased or otherwise acquired the Company’s common stock between November 7, 2013 and October 27, 2015, inclusive, and alleges violations by the Company and the individual defendants of Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated under the Exchange Act, and violations by the individual defendants of Section 20(a) of the Exchange Act. The complaint sought unspecified monetary damages and other relief. Additionally, on September 15, 2016, a second securities class action lawsuit captioned Gil Tuinenburg v. K12 Inc. et al was filed against the Company, two of its officers and one of its former officers in the United States District Court for the Northern District of California, Case No. 3:16-cv-05305 (“Tuinenburg Case”).California. On October 6, 2016, the Court consolidated the Tarapara Case and the Tuinenburg Case, appointed Babul Tarapara and Mark Beadle as lead plaintiffs,cases and recaptioned the matter as In Re K12 Inc. Securities Litigation, Master File No. 4:16-cv-04069-PJH. On December 2, 2016,August 30, 2017, the lead plaintiffs filed an amended complaint against us. The amended complaint named an additional former officer as a defendant and specified a class period start date of October 10, 2013. The amended complaint alleges materiallyCourt dismissed the plaintiffs’ claims alleging false or misleading statements and omissions regarding the decision of the Agora Cyber Charter School notrelated to renew its managed public school agreement with us, student academic and Scantron results and other statements regarding student academic performancethe quality and effectiveness of K12’s academic services and offerings. On January 30, 2017, the Company filed its motion to dismiss the amended complaint. On August 30, 2017,September 5, 2018, and as a result of a hearing on April 19, 2017,Court ordered mediation, the Court granted with prejudiceparties reached an agreement in principle to settle the Company’s motion to dismiss the allegationsremaining claim concerning disclosure of false statements regarding Scantron scores, but denied the motion on the allegations pertaining to non-disclosure of Agora’s 2012a notice of non-renewalnon-automatic renewal of a managed school contract. Although we believe that the remaining claim in this matter lacked merit, we agreed to settle the case to avoid continued distraction and other statements regardingmanagement time, and our replacement contract with Agora,insurance carriers agreed to pay $3.5 million into a settlement fund for the alleged class and permitted the plaintiffsattorneys’ fees and costs. This proposed settlement is subject to amend their complaint with respect to certain statements on the qualityfinal documentation and effectivenesscourt approval. The Court granted preliminary approval of the Company’s programs. The plaintiffs were given until October 2, 2017 to amend. On October 2, 2017, the plaintiffs filedsettlement on February 14, 2019, and a seconded amended complaint and elected not to pursue their claims regarding the statements pertaining to the quality and effectiveness of our academic programs, and further dismissed two of our former officers as defendants in the case. The Court accepted these stipulations on October 4, 2017. final settlement hearing is scheduled for July 10, 2019.The Company intends to continue to defend vigorously against each and every allegation and claim set forth in the second amended complaint.
There have been no material changes to the risk factors disclosed in “Risk Factors” in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended June 30, 20172018 as filed with the SEC on August 9, 2017.8, 2018.
Item 2. Issuer Purchases of Equity Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
None.
35
41
(a) Exhibits.
Number |
| Description |
|
|
|
31.1 |
| |
31.2 |
| |
32.1 |
| |
32.2 |
| |
101 |
| The following financial statements and footnotes from the K12 Inc. Quarterly Report on Form 10-Q for the fiscal quarter ended |
3642
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| K12 Inc. |
|
|
|
|
| /s/ JAMES J. RHYU |
| Name: | James J. Rhyu |
| Title: | Chief Financial Officer, Principal Accounting Officer and Authorized Signatory |
|
|
|
Date: January 26, 2018April 24, 2019
3743