| Summary of Significant Accounting Policies | 3. Summary of Significant Accounting Policies Recent Accounting Pronouncements Accounting Standards Adopted On July 1, 2021, the Company early adopted Accounting Standards Update (“ASU”) 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40) During the second quarter of fiscal year 2022, the Company early adopted ASU 2021-08, Business Combinations (Topic 805)—Accounting for Contract Assets and Contract Liabilities from Contracts with Customers Accounting Standards Not Yet Adopted In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-04, Reference Rate Reform Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“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 consolidated 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, contingencies, income taxes, fair value of contingent consideration 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. Revenue Recognition 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. Revenues related to the products and services that the Company provides to students in kindergarten through twelfth grade or adult learners are considered to be General Education or Career Learning based on the school or adult program in which the student is enrolled. General Education products and services are focused on core subjects, including math, English, science and history, for kindergarten through twelfth grade students to help build a common foundation of knowledge. Career Learning products and services are focused on developing skills to enter and succeed in careers in high-growth, in-demand industries—including information technology, business, and health services, for students in middle school through high school and adult learners. The majority of the Company’s contracts are with the following types of customers: ● a virtual or blended school whereby the amount of revenue is primarily determined by funding the school receives; ● a school or individual who licenses certain curriculum on a subscription or course-by-course basis; or ● an enterprise who contracts with the Company to provide job training. Funding-based Contracts The Company provides an integrated package of systems, services, products, and professional expertise that is administered together to support a virtual or blended public school. Contractual agreements generally span multiple years with performance obligations being isolated to annual periods which generally coincide with the Company’s fiscal year. Customers of these programs can obtain 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 or blended school. In certain 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 expected 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 updates as necessary, by adjusting its year-to-date earned revenues to be proportional to the total expected revenues to be earned during 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). 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 current and prior periods. For the years ended June 30, 2021, 2020 and 2019, the Company’s aggregate funding estimates differed from actual reimbursements impacting total reported revenue by approximately 1.4%, (0.1%), and 0.6%, 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, new registrations, average daily attendance, special needs enrollment, academic progress, historical completion, student location, funding caps and other state specified categorical program funding. Under the contracts where the Company provides products and services to schools, the Company is responsible for substantially all of the expenses incurred by the school and 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 (the school’s expected funding), as reflected in its respective financial statements, including Company charges to the schools. To the extent a school does not receive sufficient 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’s net operating loss may reduce the Company’s ability to collect its management fees in full and recognized revenues are constrained to reflect the expected cash collections from such schools. The Company records the school’s estimated net operating loss against revenues based upon the percentage of actual revenues in the period to total estimated revenues for the fiscal year. Actual school net 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, 2022, 2021 and 2020, the Company’s revenues included a reduction for net school operating losses at the schools of $36.3 million, $63.4 million, and $45.4 million, respectively. Because the Company has agreed to absorb any operating losses of the schools, the Company records the expenses incurred by the school as both revenue and expenses in the consolidated statements of operations. Amounts recorded as revenues and expenses for the years ended June 30, 2022, 2021 and 2020, were $460.5 million, $412.1 million and $325.5 million, respectively. Subscription-based Contracts 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. In addition, the Company contracts with individual customers who have access for one Enterprise Contracts The Company provides job training over a specified contract period to enterprises. Each of these contracts are considered to be one performance obligation. The Company recognizes these revenues based on the number of students trained during the term of the contract based on the defined contract price. Disaggregated Revenues The revenue recognition related to the types of contracts discussed above can span both of the Company’s lines of revenue as shown below. For example, a funding-based contract may include both General Education and Career Learning students. In total, there is one performance obligation and revenue is recognized over the Company’s fiscal year. The revenue is then disaggregated between General Education and Career Learning based on the Company’s estimated full-year enrollment totals of each category. During the years ended June 30, 2022, 2021 and 2020, approximately 89%, 88%, and 88%, respectively, of the Company’s General Education revenues, and 99%, 98% and 99%, respectively, of the Company’s Middle – High School Career Learning revenues, were from funding-based contracts. The following table presents the Company’s revenues disaggregated based on its two lines of business for years ended June 30, 2022, 2021 and 2020: Year Ended June 30, 2022 2021 2020 General Education $ 1,273,783 $ 1,280,199 $ 933,809 Career Learning Middle - High School 321,416 200,774 96,003 Adult 91,467 55,787 10,953 Total Career Learning 412,883 256,561 106,956 Total Revenues $ 1,686,666 $ 1,536,760 $ 1,040,765 Concentration of Customers During the years ended June 30, 2022, 2021 and 2020, the Company had no contracts that represented 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 consolidated balance sheets. Accounts receivable are recorded when there is an executed customer contract and the customer is billed. An allowance is recorded to reflect expected losses at the time the receivable is recorded. The collectability of outstanding receivables is evaluated regularly by the Company to determine if additional allowances are needed. Unbilled receivables are created when revenue is earned prior to the customer being billed. Deferred revenue is recorded when customers are billed or cash is collected in advance of services being provided. The opening and closing balance of the Company’s accounts receivable, unbilled receivables and deferred revenue are as follows: June 30, 2022 2021 (In thousands) Accounts receivable $ 418,558 $ 369,303 Unbilled receivables (included in accounts receivable) 19,702 24,794 Deferred revenue 53,630 38,110 Deferred revenue, long-term (included in other long-term liabilities) 3,099 1,973 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 years ended June 30, 2022, 2021 and 2020, that was included in the previous July 1 st 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. 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 the customer or when the school receives its funding from the state. Significant Judgments The Company has determined that the time elapsed method is the most appropriate measure of progress towards the satisfaction of the performance obligation. Generally, the Company delivers the integrated products and services package 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 recognizes revenue on a straight-line basis. recognize. Enrollment and state funding rates are key inputs to this estimate. The estimates are adjusted monthly, and a cumulative catch-up adjustment is recorded to revenue as necessary to reflect the total revenues earned to date to be proportional to the total revenues to be earned in the fiscal year. The Company builds in known constraints (i.e. enrollment, funding, net operating losses, etc.) into the estimate of the variable consideration to record the most probable amount. 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. 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 Development Costs All research and development costs, including patent application costs, are expensed as incurred. Research and development costs totaled $7.5 million, $3.7 million and $9.7 million for the years ended June 30, 2022, 2021 and 2020, respectively, and are included within selling, general and administrative expenses in the consolidated statements of operations. 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 Cyber Charter School. 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. Investments in Marketable Securities The Company’s marketable securities generally consist of bonds and other securities which are classified as held-to-maturity. The securities with maturities between three months and one year are classified as short-term and are included in other current assets on the consolidated balance sheets. The securities with maturities greater than one year are classified as long-term and are included in deposits and other assets on the consolidated balance sheets. Held-to-maturity securities are recorded at their amortized cost. Interest income and dividends are recorded within the consolidated statements of operations. The Company reviews the held-to-maturity debt securities for declines in fair value below the amortized cost basis under the credit loss model of ASC Topic 326, Financial Instruments – Credit Losses As of June 30, 2022, the Company’s marketable securities consisted of investments in corporate bonds, U.S. treasury notes and commercial paper. The short-term and long-term portions were $63.0 million and $21.7 million, respectively. The maturities of the Company’s long-term marketable debt securities range from one two following table summarizes the amortized cost, net carrying amount, and fair value disaggregated by class of instrument (in thousands). Allowance for Net Carrying Gross Unrealized Amortized Cost Credit Losses Amount Gains (Losses) Fair Value Corporate Bonds $ 50,067 $ - $ 50,067 $ (691) $ 49,376 U.S. Treasury Notes 16,399 - 16,399 (199) 16,200 Commercial Paper 18,186 - 18,186 - 18,186 Total $ 84,652 $ - $ 84,652 $ (890) $ 83,762 one two Allowance for Net Carrying Gross Unrealized Amortized Cost Credit Losses Amount Gains (Losses) Fair Value Corporate Bonds $ 28,852 $ - $ 28,852 $ (24) $ 28,828 U.S. Treasury Notes 8,692 - 8,692 - 8,692 Commercial Paper 2,998 - 2,998 - 2,998 Total $ 40,542 $ - $ 40,542 $ (24) $ 40,518 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 maintains an allowance under ASC 326 based on historical losses, customer-specific information, current economic conditions, and reasonable and supportable forecasts of future economic conditions. The allowance under ASC 326 is updated as additional losses are incurred or information becomes available related to the customer or economic conditions. The Company’s allowance for doubtful accounts increased from $21.4 million as of June 30, 2021 to $27.0 million as of June 30, 2022. The increase of $5.6 million is comprised of an $8.6 million provision, less $3.0 million of amounts recovered. The Company’s allowance for doubtful accounts increased from $6.8 million as of June 30, 2020 to $21.4 million as of June 30, 2021. The increase of $14.6 million is comprised of a $6.6 million provision, $8.5 million related to the initial adoption of ASC 326, less $0.5 million of amounts recovered. 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. Actual write-offs might differ from the recorded allowance. Inventories Inventories consist primarily of textbooks and curriculum materials, a majority of which are supplied to virtual 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, 2022 and 2021, $11.2 million and $8.8 million, respectively, of inventory, net of reserves, 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. The excess and obsolete inventory reserve was $6.5 million and $5.6 million at June 30, 2022 and 2021, 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. Additionally, other current assets include short-term marketable securities. 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 the finance lease). Amortization of assets capitalized under finance 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 determination of the lease term is discussed below under “Leases.” Property and equipment are depreciated over the following useful lives: Useful Life Student and state testing computers 3 Computer hardware 3 - 7 years Computer software 3 Web site development 3 years Office equipment 5 years Furniture and fixtures 7 years Leasehold improvements Shorter of useful life or term of the lease The Company makes an estimate of unreturned student computers based on an analysis of recent trends of returns. The Company recorded accelerated depreciation of $3.8 million, $3.2 million and $2.4 million for the years ended June 30, 2022, 2021 and 2020, respectively, related to 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 $8.6 million, $6.3 million and $3.8 million for the years ended June 30, 2022, 2021 and 2020, 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. 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 $42.2 million, $31.3 million and $24.0 million for the years ended June 30, 2022, 2021 and 2020, respectively. There were no material write-downs of capitalized software projects for the years ended June 30, 2022, 2021 and 2020. 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, as well as 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 $15.7 million, $17.4 million and $19.3 million for the years ended June 30, 2022, 2021 and 2020, 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, 2022, 2021 and 2020. Leases The Company’s principal leasing activities include student computers and peripherals, classified as finance leases, and facilities, classified as operating leases. Leases are classified as operating leases unless they meet any of the criteria below to be classified as a finance lease: ● the lease transfers ownership of the asset at the end of the lease; ● the lease grants an option to purchase the asset which the lessee is expected to exercise; ● the lease term reflects a major part of the asset’s economic life; ● the present value of the lease payments equals or exceeds the fair value of the asset; or ● the asset is specialized with no alternative use to the lessor at the end of the term. Finance Leases The Company enters into agreements to finance the purchase of student computers and peripherals provided to students of its schools. Individual leases typically include 1 to 3-year payment terms, at varying rates, with a $1 purchase option at the end of each lease term. The Company pledges the assets financed to secure the outstanding leases. Operating Leases The Company enters into agreements for facilities that serve as offices for its headquarters, sales and enrollment teams, and school operations. Initial lease terms vary between 1 Discount Rate The present value of the lease payments is calculated using either the rate implicit in the lease, or the lessee’s incremental borrowing rate, over the lease term. For the Company’s finance leases, the stated rate is defined within the lease terms; while for the Company’s operating leases, the rate is not implicit. For operating leases, the Company uses its incremental borrowing rate as the discount rate; determined as the Company’s borrowing rate on a collateralized basis for a similar term and amount to the term and amount of the lease. The Company’s current incremental borrowing rate of 3.50% is based upon its agreements used for its finance leases. The incremental borrowing rate is subsequently reassessed upon modification of its leasing arrangements or with the execution of a new lease agreement. Policy Elections Short-term Leases The Company has elected as an on-going accounting policy election not to record a right-of-use asset or lease liability on its short-term facility leases of 12 months or less and will expense its lease payments on a straight-line basis over the lease term. The accounting policy election is made by class of underlying asset to which the right of use relates. The Company has elected to apply the accounting policy election only to operating leases. 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, 2022, 2021 and 2020 was $13.0 million, $11.6 million and $6.1 million, respectively, and is included within selling, general, and administrative expenses in the consolidated statements of operations. Future amortization of intangible assets is expected to be $12.9 million, $11.9 million, $10.7 million, $9.6 million and $7.9 million in the fiscal years ending June 30, 2023 through June 30, 2027, respectively and $35.4 million thereafter. 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. The Company has one reporting unit. The process for testing goodwill and intangible assets with indefinite lives for impairment is performed annually, as well as when an event triggering impairment may have occurred. Companies are also allowed to qualitatively assess goodwill impairment through a screening process which would permit companies to forgo the quantitative impairment test as part of their annual goodwill impairment process. The Company performs its annual assessment on May 31st, which is then updated for any changes in condition as of June 30 th During the year ended June 30, 2022, there were no events or changes in circumstances that would indicate that the carrying amount of the goodwill was impaired. During the year ended June 30, 2021 , the Company qualitatively assessed its goodwill and intangible assets for impairment. It identified Coronavirus disease 2019 (“COVID-19”) as a triggering event, however there were no indicators 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 November 30, 2020, the Company acquired 100% of MedCerts in exchange for $70.0 million and estimated contingent consideration of $10.8 million; and 100% of Tech Elevator in exchange for $23.5 million, plus working capital of $2.2 million. The Company’s acquisitions are discussed in more detail in Note 12, “Acquisitions and Investments.” The following table represents goodwill additions/reductions resulting from the acquisitions mentioned above during the years ended June 30, 2022, 2021 and 2020: ($ in millions) Amount Goodwill Balance as of June 30, 2020 $ 174.9 Acquisition of MedCerts, LLC 51.1 Acquisition of Tech Elevator, Inc. 17.9 Adjustments related to Galvanize, Inc. (3.5) Balance as of June 30, 2021 $ 240.4 Acquisition of Modern Teacher LLC 0.6 Balance as of June 30, 2022 $ 241.0 June 30, 2022 June 30, 2021 ($ in millions) Gross Carrying Amount Accumulated Amortization Net Carrying Value Gross Carrying Amount Accumulated Amortization Net Carrying Value Trade names $ 85.1 $ (23.1) $ 62.0 $ 84.5 $ (17.4) $ 67.1 Customer and distributor relationships 38.9 (25.3) 13.6 37.7 (21.2) 16.5 Developed technology 21.7 (8.9) 12.8 21.3 (5.7) 15.6 Other 1.4 (1.1) 0.3 1.4 (1.1) 0.3 Total $ 147.1 $ (58.4) $ 88.7 $ 144.9 $ (45.4) $ 99.5 Impairment of Long-Lived Assets Long-lived assets include property, equipment, right-of-use assets, capitalized curriculum and software de |
