| Summary of Significant Accounting Policies (Policies) | 12 Months Ended |
| Jun. 30, 2019 |
| Summary of Significant Accounting Policies | |
| Recent Accounting Pronouncements | 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 as of July 1, 2018.
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.
The impact of adoption on the Company’s consolidated statements of operations for the year ended June 30, 2019 was as follows:
Year Ended June 30, 2019
As
Reported
Adjustment
Amounts
Under
due to ASC
under
ASC 606
606
ASC 605
(In thousands)
Revenues
$
1,015,752
$
(203)
$
1,015,549
Selling, administrative, and other operating expenses
297,350
(263)
297,087
Income from operations
45,486
60
45,546
Net income
37,209
60
37,269
Net income attributable to common stockholders
$
37,209
$
60
$
37,269
The impact of adoption on the Company’s consolidated balance sheets as of June 30, 2019 was as follows:
June 30, 2019
As Reported
Adjustment
Amounts
Under ASC
due to ASC
under ASC
606
606
605
(In thousands)
Other current assets
$
12,307
$
(273)
$
12,034
Deposits and other assets
48,330
(629)
47,701
Total assets
819,606
(902)
818,704
Deferred revenue
22,828
(2,263)
20,565
Total liabilities
186,241
(2,263)
183,978
Retained earnings (accumulated deficit)
22,447
60
22,507
Total stockholders' equity
633,365
60
633,425
The following table presents the Company’s revenues disaggregated based on its three lines of business for the year ended June 30, 2019
Year Ended
June 30, 2019
(In thousands)
Managed Public School Programs
$
890,275
Institutional
Non-managed Public School Programs
50,623
Institutional Software & Services
39,330
Total Institutional
89,953
Private Pay Schools and Other
35,524
Total Revenues
$
1,015,752
For more discussion surrounding the Company’s revenue recognition accounting policies, please refer to the “Contracts with Customers” section below.
Accounting Standards Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02” or “Topic 842”) . The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the 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 of approximately $23 million and a ROU asset of approximately $18 million. The impact on the statements of operations is expected to be immaterial.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) (“ASU 2016‑13”) related to the methodology for recognizing credit losses. The new standard revises the accounting requirements related to the measurement of credit losses and will require organizations to measure all expected credit losses for financial assets based on historical experience, current conditions and reasonable and supportable forecasts about collectability. Assets must be presented in the financial statements at the net amount expected to be collected. This ASU will be effective for the Company in the first quarter of fiscal year 2021, and early adoption is permitted. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350) (“ASU 2017‑04”) . This amendment simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The update is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. An entity should apply the amendments in this update on a prospective basis. An entity is required to disclose the nature of and reason for the change in accounting principle upon transition. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating this standard, as well as the effect on its 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; however, the Company plans to early adopt this standard in the first quarter of fiscal year 2020. The Company believes that the adoption of ASU 2018-15 will not have a significant impact on its consolidated financial statements. |
| Use of Estimates | Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities and contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates and assumptions, including those related to the allowance for doubtful accounts, inventory reserves, amortization periods, the allocation of purchase price to the fair value of net assets and liabilities acquired in business combinations, fair values used in asset impairment evaluations, valuation of long-lived assets, accrual for incurred but not reported (“IBNR”) claims, fair value of redeemable noncontrolling interest, fair value of lease exit liabilities, contingencies, income taxes and stock-based compensation expense. The Company bases its estimates on historical experience and various assumptions that it believes are reasonable under the circumstances. The results of the analysis form the basis for making assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. |
| Contracts with Customers | 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:
·
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 administer to support an online or blended public school. 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, and for the years ended June 30, 2018, 2017 and 2016, the Company’s aggregate funding estimates differed from actual reimbursements impacting total reported revenue by approximately 0.4%, (0.3)%, and (0.1)%, respectively.
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 the Company anticipates losing money on the entire contract with the school. However, a school operating loss may reduce the Company’s ability to collect its management fees in full and recognized revenues are reduced accordingly to reflect the expected cash collections from such schools. The Company amortizes the estimated school operating loss against revenues based upon the percentage of actual revenues in the period to total estimated revenues for the fiscal year.
Management periodically reviews its estimates of full-year school revenues and operating expenses, and amortizes the net impact of any changes to these estimates over the remainder of the fiscal year. Actual school operating losses may vary from these estimates or revisions, and the impact of these differences could have a material impact on results of operations. For the years ended June 30, 2019, 2018 and 2017, the Company’s revenues included a reduction for these school operating losses of $54.7 million, $66.7 million, and $61.0 million, 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 years ended June 30, 2019, 2018 and 2017, were $342.7 million, $314.8 million and $292.0 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 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.
Concentration of Customers
During the years ended June 30, 2019, 2018 and 2017, approximately 88%, 85% and 83%, respectively, of the Company’s revenues were recognized from schools that contracted with the Company for Managed Public School Programs. During the years ended June 30, 2019, 2018 and 2017, the Company had one, zero and zero contracts, respectively, that represented greater than 10% of total revenues.
In fiscal year 2018, the Company and Agora entered into an agreement related to its outstanding receivable of $28.7 million at June 30, 2018 to be paid over a four-year period. In addition, the term of the service agreement was extended through June 30, 2022. The Company reclassified the long-term portion of $23.2 million to deposits and other assets on the consolidated balance sheets as of June 30, 2018. The aggregate current and long-term balance as of June 30, 2019 was $25.1 million. The Company accrues interest on its long-term receivables based on contracted terms.
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 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 probable 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.
June 30,
July 1,
2019
2018
(In thousands)
Accounts receivable
$
191,639
$
176,319
Unbilled receivables (included in accounts receivable)
16,189
12,143
Deferred revenue
22,828
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 service periods under the contract. Typically, each of these balances are at their highest during the first quarter of the fiscal year and lowest at the end of the fiscal year. The amount of revenue recognized during the year ended June 30, 2019 that was included in the opening July 1, 2018 deferred revenue balance was $23.7 million. During the year ended June 30, 2019, the Company recorded revenues of $4.1 million 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, not to report the value of unsatisfied performance obligations for contracts with customers that have an expected duration of one year or less. The amount of unsatisfied performance obligations for contracts with customers which extend beyond one year as of June 30, 2019 was $1.5 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. Enrollment is a key input to this estimate. To the extent the estimates change during the year, the cumulative impact of the change is recognized over the remaining service period.
Sales Taxes
Sales tax collected from customers is excluded from revenues. Collected but unremitted sales tax is included as part of accrued liabilities in the accompanying consolidated balance sheets. Revenues do not include sales tax as the Company considers itself a pass‑through conduit for collecting and remitting sales tax.
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 consolidated balance sheets. The amortization of deferred commissions is recorded as selling, administrative and other operating expenses. |
| Shipping and Handling Costs | Shipping and Handling Costs
Shipping and handling costs are expensed when incurred and are classified as instructional costs and services in the accompanying consolidated statements of operations. Shipping and handling charges invoiced to a customer are included in revenues. |
| Research and Developments Costs | Research and Development Costs
All research and development costs, including patent application costs, are expensed as incurred. |
| Cash, Cash Equivalents and Restricted Cash | Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents generally consist of cash on hand and cash held in money market and demand deposit accounts. The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. The Company periodically has cash balances which exceed federally insured limits.
Restricted cash consists of amounts held in escrow related to the Company’s settlement agreement with Agora. The restricted cash which is short-term in nature is included in other current assets, while the portion that is long-term is included in deposits and other assets on the consolidated balance sheets. |
| Allowance for Doubtful Accounts | Allowance for Doubtful Accounts
The Company maintains an allowance for uncollectible accounts primarily for estimated losses resulting from the inability or failure of individual customers to make required payments. The Company analyzes accounts receivable, historical percentages of uncollectible accounts, and changes in payment history when evaluating the adequacy of the allowance for uncollectible accounts. The Company writes-off accounts receivable based on the age of the receivable and the facts and circumstances surrounding the customer and reasons for non-payment. The Company records an allowance for estimated uncollectible accounts in an amount approximating estimated losses. Actual write-offs might differ from the recorded allowance. |
| Inventories | 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 Company classifies its inventory as current or long-term based on the holding period. As of June 30, 2019 and 2018, $4.1 million and $5.2 million, respectively, of inventory was deemed long-term and included in deposits and other assets on the consolidated balance sheets.
The provision for excess and obsolete inventory is established based upon the evaluation of the quantity on hand relative to demand. During the years ended June 30, 2019 and 2018, the Company increased the provision for excess and obsolete inventory by $0.6 million and $1.2 million, respectively, primarily related to inventory in excess of anticipated demand and the decision to discontinue certain products. The Company decreased the provision during the year ended June 30, 2017 by $0.3 million. The excess and obsolete inventory reserve was $4.1 million and $3.5 million at June 30, 2019 and 2018, respectively. |
| Other Current Assets | 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
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expense is calculated using the straight-line method over the estimated useful life of the asset (or the lesser of the term of the lease and the estimated useful life of the asset under capital lease). Amortization of assets capitalized under capital lease arrangements is included in depreciation expense. Leasehold improvements are amortized over the lesser of the lease term or the estimated useful life of the asset. The Company determines the lease term in accordance with ASC 840, Leases (“ASC 840”) , as the fixed non-cancelable term of the lease plus all periods for which failure to renew the lease imposes a penalty on the lessee in an amount such that renewal appears, at the inception of the lease, to be reasonably assured.
Property and equipment are depreciated over the following useful lives:
Useful Life
Student and state testing computers
3 - 5 years
Computer hardware
3 years
Computer software
3 - 5 years
Web site development
3 years
Office equipment
5 years
Furniture and fixtures
7 years
Leasehold improvements
3 - 12 years
The Company makes an estimate of unreturned student computers based on an analysis of recent trends of returns. In addition, during fiscal year 2017, the Company accelerated depreciation on property and equipment associated with the operating leases that were exited during that period (see Note 11, “Restructuring”). The Company recorded accelerated depreciation of $2.3 million, $2.1 million and $3.5 million for the years ended June 30, 2019, 2018 and 2017, respectively, related to the leases exited and unreturned student computers.
The Company fully expenses computer peripheral equipment (e.g. keyboards, mouses) upon purchase as recovery has been determined to be uneconomical. These expenses totaled $4.1 million, $3.4 million and $3.5 million for the years ended June 30, 2019, 2018 and 2017, respectively, and are recorded as instructional costs and services. |
| Capitalized Software Costs | 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 $26.3 million, $24.5 million and $26.9 million for the years ended June 30, 2019, 2018 and 2017, respectively. There were no material write-downs of capitalized software projects for the years ended June 30, 2019, 2018 and 2017.
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 increased net income by $1.4 million for the year. 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 Securities and Exchange Commission’s (“SEC”) 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 | Capitalized Curriculum Development Costs
The Company internally develops curriculum, which is primarily provided as online content and accessed via the Internet. The Company also creates textbooks and other materials that are complementary to online content.
The Company capitalizes curriculum development costs incurred during the application development stage in accordance with ASC 350. The Company capitalizes curriculum development costs during the design and deployment phases of the project. As a result, a significant portion of the Company’s courseware development costs qualify for capitalization due to the concentration of its development efforts on the content of the courseware. Capitalization ends when a course is available for general release to its customers, at which time amortization of the capitalized costs begins. The period of time over which these development costs are amortized is generally five years.
Total capitalized curriculum development additions were $16.6 million, $9.9 million and $19.1 million for the years ended June 30, 2019, 2018 and 2017, respectively. These amounts are recorded on the accompanying consolidated balance sheets, net of amortization charges. There were no material write‑downs of capitalized curriculum development costs for the years ended June 30, 2019, 2018 and 2017.
As mentioned above, capitalized curriculum development additions included an out of period adjustment of $0.6 million. |
| Redeemable Noncontrolling Interests | 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 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 | 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 years ended June 30, 2019, 2018 and 2017 was $3.0 million, $3.0 million and $2.9 million, respectively. Future amortization of intangible assets is expected to be $2.9 million, $2.4 million, $2.2 million, $2.0 million and $1.4 million in the fiscal years ending June 30, 2020 through June 30, 2024, respectively and $3.8 million thereafter. As of June 30, 2019 and 2018, the goodwill balance was $90.2 million.
The Company reviews its finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. If the total of the expected undiscounted future cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between fair value and the carrying value of the asset. There were no such events during the year ended June 30, 2019.
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. Examples of such events or circumstances include, but are not limited to, significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of acquired assets or the strategy for the Company’s business, significant negative industry or economic trends, and/or a significant decline in the Company’s stock price for a sustained period.
ASC 350 prescribes a two-step process for impairment testing of goodwill and intangible assets with indefinite lives, which is performed annually, as well as when an event triggering impairment may have occurred based on one reporting unit. ASC 350 also allows preparers to qualitatively assess goodwill impairment through a screening process which would permit companies to forgo Step 1 of their annual goodwill impairment process. This qualitative screening process will hereinafter be referred to as “Step 0”. The Company performs its annual assessment on May 31 st . Under the two-step process, the first step tests for potential impairment by comparing the fair value of reporting units with reporting units’ net asset values. If the fair value of a reporting unit exceeds the carrying value of the reporting unit’s net assets, then goodwill is not impaired and no further testing is required. If the fair value of the reporting unit is below the reporting unit’s carrying value, then the second step is required to measure the amount of potential impairment. The second step requires an assignment of the reporting unit’s fair value to the reporting unit’s assets and liabilities, using the initial acquisition accounting guidance related to business combinations, to determine the implied fair value of the reporting unit’s goodwill. The implied fair value of the reporting unit’s goodwill is then compared with the carrying amount of the reporting unit’s goodwill to determine the goodwill impairment loss to be recognized, if any. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, an impairment loss equal to the difference is recorded.
As of June 30, 2019, the Company performed “Step 0” of the impairment test and determined that there were no facts and circumstances that indicated that the fair value of the reporting unit may be less than its carrying amount, and as a result, the Company determined that no impairment was required.
On October 2, 2017, the Company acquired 100% interest in Big Universe, Inc. for $3.3 million in cash and contingent consideration.
The following table represents goodwill additions/reductions resulting from the acquisition mentioned above during the years ended June 30, 2019, 2018 and 2017:
($ in millions)
Amount
Goodwill
Balance as of June 30, 2016
$
87.3
Adjustment to purchase price of LTS Education Systems ("LTS")
(0.1)
Balance as of June 30, 2017
$
87.2
Acquisition of Big Universe, Inc.
3.0
Balance as of June 30, 2018
$
90.2
Adjustments
—
Balance as of June 30, 2019
$
90.2
The following table represents the balance of the Company’s intangible assets as of June 30, 2019 and 2018:
June 30, 2019
June 30, 2018
($ in millions)
Gross
Accumulated
Net
Gross
Accumulated
Net
Trade names
$
17.6
$
(9.4)
$
8.2
$
17.6
$
(8.5)
$
9.1
Customer and distributor relationships
20.5
(14.7)
5.8
20.5
(13.4)
7.1
Developed technology
3.2
(2.8)
0.4
3.2
(2.2)
1.0
Other
1.4
(0.8)
0.6
1.4
(0.6)
0.8
Total
$
42.7
$
(27.7)
$
15.0
$
42.7
$
(24.7)
$
18.0 |
| Impairment of Long-Lived Assets | Impairment of Long‑Lived Assets
Long-lived assets include property, equipment, capitalized curriculum and software developed or obtained for internal use. In accordance with ASC 360, Property, Plant and Equipment (“ASC 360”) , management reviews the Company’s recorded long-lived assets for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. The Company determines the extent to which an asset may be impaired based upon its expectation of the asset’s future usability as well as on a reasonable assurance that the future cash flows associated with the asset will be in excess of its carrying amount. If the total of the expected undiscounted future cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between fair value and the carrying value of the asset. There was no such impairment charge during the year ended June 30, 2019. |
| Income Taxes | 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. |
| Stock-Based Compensation | Stock‑Based Compensation
The Company estimates the fair value of share-based awards on the date of grant. The fair value of restricted stock awards is based on the closing price of the Company’s common stock on the date of grant. Certain restricted stock awards with a market-based performance component are valued using a Monte Carlo simulation model that considers a variety of factors including, but not limited to, the Company’s common stock price, risk-free rate, and expected stock price volatility over the expected life of awards. 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. |
| Advertising and Marketing Costs | Advertising and Marketing Costs
Advertising and marketing costs consist primarily of internet advertising, online marketing, direct mail, print media and television commercials and are expensed when incurred. Advertising costs totaled $38.0 million, $37.5 million and $36.8 million for the years ended June 30, 2019, 2018 and 2017, respectively, and are included within s elling, administrative, and other operating expenses in the consolidated statements of operations . |
| Net Income Per Common Share | Net Income 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 consolidated balance sheets includes restricted stock awards outstanding.
The following schedule presents the calculation of basic and diluted net income per share:
Year Ended June 30,
2019
2018
2017
(In thousands except share and per share data)
Basic net income per share computation:
Net income attributable to common stockholders
$
37,209
$
27,620
$
451
Weighted average common shares — basic
38,848,780
39,282,674
38,298,581
Basic net income per share
$
0.96
$
0.70
$
0.01
Diluted net income per share computation:
Net income attributable to common stockholders
$
37,209
$
27,620
$
451
Share computation:
Weighted average common shares — basic
38,848,780
39,282,674
38,298,581
Effect of dilutive stock options and restricted stock awards
2,096,020
1,355,070
1,202,353
Weighted average common shares — diluted
40,944,800
40,637,744
39,500,934
Diluted net income per share
$
0.91
$
0.68
$
0.01
For the years ended June 30, 2019, 2018 and 2017, shares issuable in connection with stock options and restricted stock of 140,657, 1,026,472 and 1,965,283 respectively, were excluded from the diluted income per common share calculation because the effect would have been antidilutive. As of June 30, 2019, the Company had 45,575,236 shares of common stock issued and 40,240,493 shares outstanding. |
| Fair Value Measurements | 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 consolidated balance sheets for cash and cash equivalents, receivables, and short and long term debt approximate their fair values.
The lease exit liability is discussed in more detail in Note 11, “Restructuring.” The Tallo, Inc. convertible note is discussed in more detail in Note 13, “Acquisitions and Investments.”
The following table summarizes certain fair value information at June 30, 2019 for assets or liabilities measured at fair value on a nonrecurring basis.
Fair Value Measurements Using:
Quoted Prices
in Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
Assets
Input
Inputs
Description
Fair Value
(Level 1)
(Level 2)
(Level 3)
(In thousands)
Lease exit liability
$
1,779
$
—
$
—
$
1,779
The following table summarizes certain fair value information at June 30, 2018 for assets or liabilities measured at fair value on a nonrecurring basis.
Fair Value Measurements Using:
Quoted Prices
in Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
Assets
Input
Inputs
Description
Fair Value
(Level 1)
(Level 2)
(Level 3)
(In thousands)
Lease exit liability
$
2,758
$
—
$
—
$
2,758
The following table summarizes certain fair value information at June 30, 2019 for assets or liabilities measured at fair value on a recurring basis.
Fair Value Measurements Using:
Quoted Prices
in Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
Assets
Input
Inputs
Description
Fair Value
(Level 1)
(Level 2)
(Level 3)
(In thousands)
Convertible note received in acquisition
$
5,006
—
—
5,006
The following table summarizes certain fair value information at June 30, 2018 for assets or liabilities measured at fair value on a recurring basis.
Fair Value Measurements Using:
Quoted Prices
in Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
Assets
Input
Inputs
Description
Fair Value
(Level 1)
(Level 2)
(Level 3)
(In thousands)
Contingent consideration associated with acquisitions
$
1,345
$
—
$
—
$
1,345
The following table presents activity related to the Company’s fair value measurements categorized as Level 3 of the valuation hierarchy, valued on a recurring basis, for the year ended June 30, 2019.
Year Ended June 30, 2019
Purchases,
Fair Value
Issuances,
Unrealized
Fair Value
Description
June 30, 2018
and Settlements
Gains (Losses)
June 30, 2019
(In thousands)
Contingent consideration associated with acquisitions
$
1,345
$
(1,347)
$
2
$
—
Convertible note received in acquisition
—
5,006
—
5,006
The following table presents activity related to the Company’s fair value measurements categorized as Level 3 of the valuation hierarchy, valued on a recurring basis, for the year ended June 30, 2018.
Year Ended June 30, 2018
Purchases,
Fair Value
Issuances,
Unrealized
Fair Value
Description
June 30, 2017
and Settlements
Gains (Losses)
June 30, 2018
(In thousands)
Contingent consideration associated with acquisitions
2,806
(1,319)
(142)
1,345
The following table presents activity related to the Company’s fair value measurements categorized as Level 3 of the valuation hierarchy, valued on a recurring basis, for the year ended June 30, 2017.
Year Ended June 30, 2017
Purchases,
Fair Value
Issuances,
Unrealized
Fair Value
Description
June 30, 2016
and Settlements
Gains (Losses)
June 30, 2017
(In thousands)
Redeemable noncontrolling interest in Middlebury Interactive Learning
$
6,801
$
(9,134)
$
2,333
$
—
Contingent consideration associated with acquisitions
2,947
—
(141)
2,806
Total
$
9,748
$
(9,134)
$
2,192
$
2,806
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 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. |
| Revision to Previously Issued Financial Statements | Revision to Previously Issued Financial Statements
Inventory of $5.2 million was moved to deposits and other assets on the June 30, 2018 balance sheet to correctly classify a portion of inventory as long-term. In addition, certain items in the statement of cash flows were revised to conform with current year presentations. |
