| 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) (“ASU 2020-06”) which, among other things, simplifies the accounting for convertible instruments by eliminating the requirement to separate conversion features from the host contract. Consequently, a convertible debt instrument is accounted for as a single liability measured at its amortized cost and interest expense will be recognized at the coupon rate. The adoption resulted in the elimination of the debt discount (and related deferred tax liability) that had been recorded within equity. The net impact of the adjustments was recorded to the opening balance of retained earnings, as presented in the statement of stockholders’ equity. The impacts of adoption were the following: (1) increase of $110.6 million to long-term debt, (2) decrease of $89.5 million to additional paid-in capital, (3) decrease of $29.3 million to deferred tax liability, and (4) increase to retained earnings of $8.2 million. Accounting Standards Not Yet Adopted In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020 04”) which provides relief to companies that will be impacted by the cessation of reference rate reform, e.g. LIBOR, that was tentatively planned for the end of fiscal year 2023. The ASU permitted an entity to consider contract modifications due to reference rate reform to be an event that did not require contract remeasurement. This ASU was applicable from March 12, 2020 through December 31, 2022 and adoption was permitted at any time during the period on a prospective basis. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which extends the provisions of Topic 848 to December 31, 2024. The Company’s senior secured revolving credit facility includes the use of alternate rates when LIBOR is not available. The Company does not expect the change from LIBOR to an alternate rate will have a material impact to the consolidated financial statements and, to the extent it enters into modifications of agreements that are impacted by the LIBOR phase-out, the Company will apply such guidance to those contract modifications. In November 2023, the FASB issued ASU 2023-07, Segment Reporting In December 2023, the FASB issued ASU 2023-09, Income Taxes Improvements to Income Tax Disclosures 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 credit losses, 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, healthcare and general business, 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 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. Historically, aggregate funding estimates have differed from actual reimbursements, generally in the range of 2% of annual revenue or less, which may vary from year to year. For the years ended June 30, 2023, 2022 and 2021, the Company’s aggregate funding estimates differed from actual reimbursements impacting total reported revenue by approximately 2.8%, 1.6%, and 1.4%, 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, 2024, 2023 and 2022, the Company’s revenues included a reduction for net school operating losses at the schools of $17.0 million, $23.8 million, and $36.3 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, 2024, 2023 and 2022, were $576.4 million, $503.2 million and $460.5 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, 2024, 2023 and 2022, approximately 93%, 90%, and 89%, respectively, of the Company’s General Education revenues, and 100%, 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 years ended June 30, 2024, 2023 and 2022: Years Ended June 30, 2024 2023 2022 (In thousands) General Education $ 1,289,193 $ 1,131,391 $ 1,273,783 Career Learning Middle - High School 651,191 586,770 321,416 Adult 99,685 119,197 91,467 Total Career Learning 750,876 705,967 412,883 Total Revenues $ 2,040,069 $ 1,837,358 $ 1,686,666 Concentration of Customers During the years ended June 30, 2024, 2023 and 2022, the Company had no contracts that represented greater than 10% of total 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, 2024 2023 2022 (In thousands) Accounts receivable $ 472,754 $ 463,722 $ 418,558 Unbilled receivables (included in accounts receivable) 19,499 20,647 19,702 Deferred revenue 35,742 76,159 53,630 Deferred revenue, long-term (included in other long-term liabilities) 1,097 2,061 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, as well as changes in the estimates of variable consideration. 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, 2024, 2023 and 2022, 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. and the amount of full-year school revenues and operating expenses to determine the amount of revenue the Company will 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 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 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 $16.7 million, $15.5 million and $7.5 million for the years ended June 30, 2024, 2023 and 2022, 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. 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 marketable securities 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. The Company recorded interest income of $25.6 million, $13.6 million and $0.4 million for the years ended June 30, 2024, 2023 and 2022, respectively. This activity is recorded within other income (expense) 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 Accounting Standards Codification (“ASC”) Topic 326, Financial Instruments – Credit Losses As of June 30, 2024, 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 $191.7 million and $21.9 million, respectively. The maturities of the Company’s long-term marketable debt securities range from one two 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 $ 45,752 $ - $ 45,752 $ (95) $ 45,657 U.S. Treasury Notes 46,760 - 46,760 (71) 46,689 Commercial Paper 121,077 - 121,077 2 121,079 Total $ 213,589 $ - $ 213,589 $ (164) $ 213,425 one two Allowance for Net Carrying Gross Unrealized Amortized Cost Credit Losses Amount Gains (Losses) Fair Value Corporate Bonds $ 52,567 $ - $ 52,567 $ (460) $ 52,107 U.S. Treasury Notes 46,156 - 46,156 (228) 45,928 Commercial Paper 35,949 - 35,949 - 35,949 Total $ 134,672 $ - $ 134,672 $ (688) $ 133,984 Allowance for Credit Losses The Company maintains an allowance for credit losses 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. The Company’s allowance for credit losses increased from $30.0 million as of June 30, 2023 to $31.3 million as of June 30, 2024. The increase of $1.3 million is due primarily to a $22.8 million current year provision, less $21.6 million in amounts written off. The Company’s allowance for credit losses increased from $27.0 million as of June 30, 2022 to $30.0 million as of June 30, 2023. The increase of $3.0 million is comprised of an $8.0 million provision, less $5.0 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, 2024 and 2023, $12.5 million and $13.2 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 $5.9 million and $4.1 million at June 30, 2024 and 2023, respectively. Other Current Assets Other current assets primarily include textbooks, curriculum materials and other supplies which are expected to be returned upon the completion of the school year. Materials not returned are expensed as part of instructional costs and services. Property and Equipment Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expense is calculated using the straight-line method over the estimated useful life of the asset (or the lesser of the term of the lease and the estimated useful life of the asset under 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 Computer hardware 3 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 and printers based on an analysis of recent trends of returns. The Company recorded accelerated depreciation of $4.0 million, $5.6 million and $3.8 million for the years ended June 30, 2024, 2023 and 2022, respectively, related to unreturned student computers and printers. The Company fully expenses computer peripheral equipment (e.g., keyboards, mouses) upon purchase as recovery has been determined to be uneconomical. These expenses totaled $4.0 million, $3.1 million and $8.6 million for the years ended June 30, 2024, 2023 and 2022, 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 $40.7 million, $45.0 million and $42.2 million for the years ended June 30, 2024, 2023 and 2022, respectively. There were no material write-downs of capitalized software projects for the years ended June 30, 2024, 2023 and 2022. 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 $18.7 million, $17.2 million and $15.7 million for the years ended June 30, 2024, 2023 and 2022, respectively. These amounts are recorded on the consolidated balance sheets, net of amortization charges. There were no material write-downs of capitalized curriculum development costs for the years ended June 30, 2024, 2023 and 2022. 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. 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 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 majority of the Company’s finance and operating leases, the stated rate is not defined within the lease terms. Therefore, the Company uses its incremental borrowing rate as the discount rate. The incremental borrowing rate is defined as the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment and is calculated using comparative credit ratings. 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, 2024, 2023 and 2022 was $12.9 million, $15.2 million and $13.0 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 $9.9 million, $8.7 million, $7.1 million, $5.3 million and $4.5 million in the fiscal years ending June 30, 2025 through June 30, 2029, respectively and $24.6 million thereafter. The Company reviews its finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. If the total of the expected undiscounted future cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between fair value and the carrying value of the asset. The Company has one reporting unit. The process for testing goodwill and intangible assets with indefinite lives for impairment is performed annually, as well as when an event triggering impairment may have occurred. Companies are also allowed to qualitatively assess goodwill impairment through a screening process which would permit companies to forgo the quantitative impairment test as part of their annual goodwill impairment process. The Company performs its annual assessment on May 31 st th During the years ended June 30, 2024, 2023 and 2022, there were no events or changes in circumstances that would indicate that the carrying amount of the goodwill was impaired. The following table represents the balance of the Company’s goodwill for the years ended June 30, 2024, 2023 and 2022: ($ in millions) Amount Goodwill Balance as of June 30, 2022 $ 241.0 Acquisition of Tallo Assets 5.7 Balance as of June 30, 2023 $ 246.7 — Balance as of June 30, 2024 $ 246.7 |
