| Summary of Significant Accounting Policies | 3. Summary of Significant Accounting Policies Recent Accounting Pronouncements Accounting Standards Not Yet Adopted In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-04, Reference Rate Reform 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 three and six months ended December 31, 2022 and 2021. Historically, aggregate funding estimates differed from actual reimbursements by less than 2% of annual revenue, which may vary from quarter to quarter. 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 three months ended December 31, 2022 and 2021, the Company’s revenues included a reduction for net school operating losses at the schools of $6.4 million and $12.3 million, respectively, and $16.6 million and $25.2 million for the six months ended December 31, 2022 and 2021, 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 condensed consolidated statements of operations. Amounts recorded as revenues and expenses for the three months ended December 31, 2022 and 2021 were $123.0 million and $117.7 million, respectively, and for the six months ended December 31, 2022 and 2021 were $248.3 million and 231.6 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 three months ended December 31, 2022 and 2021, approximately 90% and 88%, respectively, of the Company’s General Education revenues, and 100% and 99%, respectively, of the Company’s Middle – High School Career Learning revenues, were from funding-based contracts. During the six months ended December 31, 2022 and 2021, approximately 90% and 89%, respectively, of the Company’s General Education revenues, and 99% 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 revenue for the three and six months ended December 31, 2022 and 2021: Three Months Ended December 31, Six Months Ended December 31, 2022 2021 2022 2021 (In thousands) General Education $ 274,764 $ 313,241 $ 546,422 $ 619,582 Career Learning Middle - High School 153,795 75,287 279,330 146,699 Adult 29,876 20,979 57,833 43,452 Total Career Learning 183,671 96,266 337,163 190,151 Total Revenues $ 458,435 $ 409,507 $ 883,585 $ 809,733 Concentration of Customers During the three and six months ended December 31, 2022 and 2021, the Company had no contracts that represented greater than 10% of total revenues. Contract Balances The opening and closing balance of the Company’s accounts receivable, unbilled receivables and deferred revenue are as follows: December 31, June 30, 2022 2022 (In thousands) Accounts receivable $ 442,166 $ 418,558 Unbilled receivables (included in accounts receivable) 15,997 19,702 Deferred revenue 83,799 53,630 Deferred revenue, long-term (included in other long-term liabilities) 2,565 3,099 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 three months ended December 31, 2022 and 2021 that was included in the previous October 1 st st Performance Obligations 30 45 one 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. Sales Taxes Consolidation The condensed consolidated financial statements include the accounts of the Company, the wholly-owned and affiliated companies that the Company owns, directly or indirectly, and all controlled subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. 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 condensed 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 condensed consolidated balance sheets. Held-to-maturity securities are recorded at their amortized cost. Interest income and dividends are recorded within the condensed 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 Accounting Standards Codification (“ASC”) Topic 326, Financial Instruments – Credit Losses As of December 31, 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 $82.9 million and $21.0 million, respectively. The maturities of the Company’s long-term marketable debt securities range from one two Allowance for Net Carrying Gross Unrealized Amortized Cost Credit Losses Amount Gains (Losses) Fair Value Corporate Bonds $ 57,820 $ - $ 57,820 $ (687) $ 57,133 U.S. Treasury Notes 26,256 - 26,256 (174) 26,082 Commercial Paper 19,811 - 19,811 - 19,811 Total $ 103,887 $ - $ 103,887 $ (861) $ 103,026 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 to two years. The 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 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 maintains an allowance under ASC 326 based on historical losses, changes in payment history, 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. 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 December 31, 2022 and June 30, 2022, $10.8 million and $11.2 million, respectively, of inventory, net of reserves, was deemed long-term and included in deposits and other assets on the condensed 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 $7.5 million and $6.5 million at December 31, 2022 and June 30, 2022, 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 and printers 3 - 5 years Computer hardware 3 - 7 years Computer software 3 - 5 years 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 and printers based on an analysis of recent trends of returns. The Company recorded accelerated depreciation of $1.4 million and $1.3 million for the three months ended December 31, 2022 and 2021, respectively, and $3.1 million and $1.9 million for the six months ended December 31, 2022 and 2021, respectively, related to unreturned student computers and printers. Depreciation expense, including accelerated depreciation, related to computers and printers provided to students reflected in instructional costs and services for the three months ended December 31, 2022 and 2021 was $10.3 million and $9.8 million, respectively, and $20.6 million and $17.9 million, respectively, during the six months ended December 31, 2022 and 2021. Depreciation expense related to property and equipment reflected in selling, general, and administrative expenses for the three months ended December 31, 2022 and 2021 was $1.0 million and $1.2 million, respectively and $2.6 million and $2.3 million, respectively, during the six months ended December 31, 2022 and 2021. The Company fully expenses computer peripheral equipment (e.g., keyboards, mouses) upon purchase as recovery has been determined to be uneconomical. These expenses totaled $0.6 million and $2.5 million for the three months ended December 31, 2022 and 2021, respectively, and $1.8 million and $7.3 million for the six months ended December 31, 2022 and 2021, 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 $21.4 million and $19.3 million for the six months ended December 31, 2022 and 2021, respectively. The Company recorded amortization expense related to capitalized software of $7.4 million and $5.9 million during the three months ended December 31, 2022 and 2021, respectively, and $13.1 million and $12.1 million during the six months ended December 31, 2022 and 2021, respectively, within instructional costs and services. Amortization expense related to capitalized software reflected in selling, general, and administrative expenses during the three months ended December 31, 2022 and 2021 was $1.3 million and $1.3 million, respectively and $2.7 million and $2.6 million, respectively, during the six months ended December 31, 2022 and 2021. 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 $9.5 million and $7.5 million for the six months ended December 31, 2022 and 2021, respectively. These amounts are recorded on the condensed consolidated balance sheets net of amortization charges. Amortization expense for the three months ended December 31, 2022 and 2021 was $4.1 million and $3.8 million, respectively, and $8.2 million and $8.0 million for the six months ended December 31, 2022 and 2021, respectively, and is recorded in instructional costs and services. 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 3-year payment terms, at varying rates. 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 and school operations. Lease terms vary between 1 as well as termination rights. The Company performs an evaluation of each lease to determine if the lease payments included in the renewal option should be included in the initial measurement of the lease liability. 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 4.42% 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. Income Taxes 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. The net deferred tax asset is 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. 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 December 31, 2022 and 2021 was $3.3 million and $3.2 million, respectively, and $6.6 million and $6.4 million for the six months ended December 31, 2022 and 2021, respectively, and is included within selling, general, and administrative expenses in the condensed consolidated statements of operations. Future amortization of intangible assets is expected to be $6.5 million, $12.1 million, $10.9 million, $9.7 million, and $8.1 million in the fiscal years ending June 30, 2023 through June 30, 2027, respectively, and $35.9 million thereafter. The Company reviews its finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. If the total of the expected undiscounted future cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between fair value and the carrying value of the asset. The Company has one reporting unit. The process for testing goodwill and intangible assets with indefinite lives for impairment is performed annually, as well as when an event triggering impairment may have occurred. Companies are also allowed to qualitatively assess goodwill impairment through a screening process which would permit companies to forgo the quantitative impairment test as part of their annual goodwill impairment process. The Company performs its annual assessment on May 31 st th During the three and six months ended December 31, 2022 and 2021, there were no events or changes in circumstances that would indicate that the carrying amount of the goodwill was impaired. The following table represents the balance of the Company’s intangible assets as of December 31, 2022 and June 30, 2022: December 31, 2022 June 30, 2022 ($ in millions) Gross Carrying Amount Accumulated Amortization Net Carrying Value Gross Carrying Amount Accumulated Amortization Net Carrying Value Trade names $ 85.1 $ (25.9) $ 59.2 $ 85.1 $ (23.1) $ 62.0 Customer and distributor relationships 39.8 (27.4) 12.4 38.9 (25.3) 13.6 Developed technology 22.0 (10.5) 11.5 21.7 (8.9) 12.8 Other 1.4 (1.1) 0.3 1.4 (1.1) 0.3 Total $ 148.3 $ (64.9) $ 83.4 $ 147.1 $ (58.4) $ 88.7 Impairment of Long-Lived Assets Long-lived assets include property, equipment, right-of-use assets, capitalized curriculum and software developed or obtained for internal use. 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, 2022 and 2021, there were no events or changes in circumstances that may indicate that the carrying amount of the long-lived assets may not be recoverable. Fair Value Measurements Fair value is 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. Measurements are described in 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. The three levels of inputs used to measure fair value are: 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 condensed consolidated balance sheets for cash and cash equivalents, receivables, and short-term debt approximate their fair values, as they are largely short-term in nature. The Tallo, Inc. convertible note is discussed in more detail in Note 11, “Acquisitions and Investments.” As of December 31, 2022, the estimated fair value of the long-term debt was $377.2 million. The Company estimated the fair value based on the quoted market prices in an inactive market on the last day of the reporting period (Level 2). The long-term debt, comprised of the Company’s convertible senior notes due 2027, is recorded at face value less the unamortized debt issuance costs on its condensed consolidated balance sheet, and is discussed in more detail in Note 6, “Debt.” As of December 31, 2022, the estimated fair value of the Company’s marketable securities was $103.0 million. The Company estimated the fair value based on the quoted market prices in an inactive market on the last day of the reporting period (Level 2). The marketable securities are discussed in more detail in Note 3, “Summary of Significant Accounting Policies - Investments in Marketable Securities.” On November 30, 2020, the Company acquired 100% of MedCerts in exchange for $70.0 million and estimated contingent consideration of $10.8 million. During fiscal year 2021 and 2022, the Company recorded an aggregate expense of $0.5 million to adjust its estimate of the fair value of the contingent consideration to $11.3 million. During the three months ended September 30, 2022, the Company paid $7.0 million to settle the contingent consideration and recorded a gain of $4.3 million. |
