lrn_Current_Folio 10Q

Table of Contents

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2019

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from          to          

 

Commission File Number: 001-33883

 

K12 Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

95-4774688

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

2300 Corporate Park Drive

 

 

Herndon, VA

 

20171

(Address of Principal Executive Offices)

 

(Zip Code)

 

(703) 483-7000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes   No 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   No 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

(Do not check if a smaller reporting company)

Smaller reporting company 

Emerging growth company 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No 

 

As of April 19, 2019, the Registrant had 40,201,223 shares of common stock, $0.0001 par value per share outstanding.

 

 


 

Table of Contents

K12 Inc.

Form 10-Q

For the Quarterly Period Ended March 31, 2019

Index

 

 

 

Page

 

 

Number

 

 

 

PART I. 

Financial Information

 

Item 1. 

Financial Statements (Unaudited)

3

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

30

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

39

Item 4. 

Controls and Procedures

39

 

 

 

PART II. 

Other Information

 

Item 1. 

Legal Proceedings

41

Item 1A. 

Risk Factors

41

Item 2. 

Issuer Purchases of Equity Securities

41

Item 3. 

Defaults Upon Senior Securities

41

Item 4. 

Mine Safety Disclosures

41

Item 5. 

Other Information

41

Item 6. 

Exhibits

42

 

 

 

Signatures 

43

 

 

2


 

Table of Contents

PART I — FINANCIAL INFORMATION

 

Item 1.    Financial Statements (Unaudited).

 

K12 INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

March 31, 

 

June 30,

 

    

2019

    

2018

 

 

 

 

 

 

(audited)

 

 

(In thousands except share and per share data)

ASSETS

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

234,025

 

$

231,113

Accounts receivable, net of allowance of $9,008 and $12,384 at March 31, 2019 and June 30, 2018, respectively

 

 

238,614

 

 

176,319

Inventories, net

 

 

17,195

 

 

31,134

Prepaid expenses

 

 

17,958

 

 

10,278

Other current assets

 

 

14,181

 

 

10,388

Total current assets 

 

 

521,973

 

 

459,232

Property and equipment, net

 

 

32,778

 

 

28,868

Capitalized software, net

 

 

51,693

 

 

55,488

Capitalized curriculum development costs, net

 

 

51,160

 

 

53,558

Intangible assets, net

 

 

15,723

 

 

17,951

Goodwill

 

 

90,197

 

 

90,197

Deposits and other assets

 

 

45,486

 

 

36,669

Total assets 

 

$

809,010

 

$

741,963

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Current portion of capital lease obligations

 

$

24,499

 

$

13,353

Accounts payable

 

 

23,208

 

 

29,362

Accrued liabilities

 

 

17,706

 

 

14,345

Accrued compensation and benefits

 

 

30,549

 

 

36,050

Deferred revenue

 

 

52,827

 

 

23,114

Total current liabilities 

 

 

148,789

 

 

116,224

Capital lease obligations, net of current portion

 

 

6,698

 

 

12,665

Deferred rent, net of current portion

 

 

2,524

 

 

3,270

Deferred tax liability

 

 

18,211

 

 

12,577

Other long-term liabilities

 

 

8,048

 

 

10,038

Total liabilities 

 

 

184,270

 

 

154,774

Commitments and contingencies

 

 

 —

 

 

 —

Stockholders’ equity

 

 

 

 

 

 

Common stock, par value $0.0001; 100,000,000 shares authorized; 45,542,026 and 44,902,567 shares issued; and 40,207,283 and 39,567,824 shares outstanding at March 31, 2019 and June 30, 2018, respectively

 

 

 4

 

 

 4

Additional paid-in capital

 

 

708,269

 

 

703,351

Accumulated other comprehensive loss

 

 

(181)

 

 

(252)

Retained earnings (accumulated deficit)

 

 

19,130

 

 

(13,432)

Treasury stock of 5,334,743 shares at cost at March 31, 2019 and June 30, 2018

 

 

(102,482)

 

 

(102,482)

Total stockholders’ equity 

 

 

624,740

 

 

587,189

Total liabilities and stockholders' equity 

 

$

809,010

 

$

741,963

 

See accompanying notes to unaudited condensed consolidated financial statements.

3


 

Table of Contents

K12 INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

Nine Months Ended March 31, 

 

 

    

2019

    

2018

    

2019

    

2018

    

 

 

 

(In thousands except share and per share data)

 

Revenues 

 

$

253,252

 

$

232,864

 

$

759,438

 

$

678,860

 

Cost and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Instructional costs and services

 

 

168,260

 

 

148,878

 

 

487,574

 

 

435,408

 

Selling, administrative, and other operating expenses

 

 

59,382

 

 

62,267

 

 

222,143

 

 

220,507

 

Product development expenses

 

 

2,343

 

 

2,002

 

 

6,916

 

 

7,276

 

Total costs and expenses 

 

 

229,985

 

 

213,147

 

 

716,633

 

 

663,191

 

Income from operations 

 

 

23,267

 

 

19,717

 

 

42,805

 

 

15,669

 

Interest income, net

 

 

754

 

 

261

 

 

1,547

 

 

535

 

Other income (expense), net

 

 

556

 

 

 —

 

 

(40)

 

 

 —

 

Income before income taxes, loss from equity method investments and noncontrolling interest 

 

 

24,577

 

 

19,978

 

 

44,312

 

 

16,204

 

Income tax benefit (expense)

 

 

(5,842)

 

 

(6,935)

 

 

(9,858)

 

 

1,869

 

Loss from equity method investments

 

 

(273)

 

 

 —

 

 

(562)

 

 

 —

 

Net income

 

 

18,462

 

 

13,043

 

 

33,892

 

 

18,073

 

Add net loss attributable to noncontrolling interest

 

 

 —

 

 

27

 

 

 —

 

 

200

 

Net income attributable to common stockholders

 

$

18,462

 

$

13,070

 

$

33,892

 

$

18,273

 

Net income attributable to common stockholders per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.47

 

$

0.33

 

$

0.87

 

$

0.46

 

Diluted

 

$

0.44

 

$

0.32

 

$

0.84

 

$

0.45

 

Weighted average shares used in computing per share amounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

39,008,990

 

 

39,644,074

 

 

38,753,236

 

 

39,366,497

 

Diluted

 

 

41,753,323

 

 

40,766,203

 

 

40,548,959

 

 

40,771,437

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4


 

Table of Contents

K12 INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

March 31, 

 

March 31, 

 

 

    

2019

    

2018

    

2019

    

2018

 

 

 

 

(In thousands)

 

Net income

 

$

18,462

 

$

13,043

 

$

33,892

 

$

18,073

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(122)

 

 

(198)

 

 

71

 

 

(392)

 

Total other comprehensive income, net of tax

 

 

18,340

 

 

12,845

 

 

33,963

 

 

17,681

 

Comprehensive loss attributable to noncontrolling interest

 

 

 —

 

 

27

 

 

 —

 

 

200

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to common stockholders

 

$

18,340

 

$

12,872

 

$

33,963

 

$

17,881

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5


 

Table of Contents

K12 INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

K12 Inc. Stockholders' Equity

(In thousands except share data)

 

Common Stock

 

Additional 
Paid-in

 

Accumulated Other
Comprehensive

 

Retained
Earnings
(Accumulated

 

Treasury Stock

 

 

 

 

    

Shares

    

Amount

    

Capital

    

Loss

    

Deficit)

    

Shares

    

Amount

    

Total

Balance, June 30, 2018

 

44,902,567

 

$

 4

 

$

703,351

 

$

(252)

 

$

(13,432)

 

(5,334,743)

 

$

(102,482)

 

$

587,189

Adjustment related to new revenue recognition guidance

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,330)

 

 —

 

 

 —

 

 

(1,330)

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(8,282)

 

 —

 

 

 —

 

 

(8,282)

Foreign currency translation adjustment

 

 —

 

 

 —

 

 

 —

 

 

72

 

 

 —

 

 —

 

 

 —

 

 

72

Stock-based compensation expense

 

 —

 

 

 —

 

 

4,109

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

4,109

Exercise of stock options

 

687

 

 

 —

 

 

10

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

10

Vesting of performance share units, net of tax withholding

 

258,263

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

Issuance of restricted stock awards

 

722,809

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

Forfeiture of restricted stock awards

 

(122,242)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

Repurchase of restricted stock for tax withholding

 

(188,804)

 

 

 —

 

 

(6,072)

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(6,072)

Balance, September 30, 2018

 

45,573,280

 

$

 4

 

$

701,398

 

$

(180)

 

$

(23,044)

 

(5,334,743)

 

$

(102,482)

 

$

575,696

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

23,712

 

 —

 

 

 —

 

 

23,712

Foreign currency translation adjustment

 

 —

 

 

 —

 

 

 —

 

 

121

 

 

 —

 

 —

 

 

 —

 

 

121

Stock-based compensation expense

 

 —

 

 

 —

 

 

4,235

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

4,235

Exercise of stock options

 

51,050

 

 

 —

 

 

1,025

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

1,025

Issuance of restricted stock awards

 

26,000

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

Forfeiture of restricted stock awards

 

(54,054)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

Repurchase of restricted stock for tax withholding

 

(45,960)

 

 

 —

 

 

(833)

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(833)

Balance, December 31, 2018

 

45,550,316

 

$

 4

 

$

705,825

 

$

(59)

 

$

668

 

(5,334,743)

 

$

(102,482)

 

$

603,956

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

18,462

 

 —

 

 

 —

 

 

18,462

Foreign currency translation adjustment

 

 —

 

 

 —

 

 

 —

 

 

(122)

 

 

 —

 

 —

 

 

 —

 

 

(122)

Stock-based compensation expense

 

 —

 

 

 —

 

 

4,047

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

4,047

Exercise of stock options

 

54,753

 

 

 —

 

 

1,148

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

1,148

Issuance of restricted stock awards

 

73,524

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

Forfeiture of restricted stock awards

 

(51,435)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

Repurchase of restricted stock for tax withholding

 

(85,132)

 

 

 —

 

 

(2,751)

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(2,751)

Balance, March 31, 2019

 

45,542,026

 

$

 4

 

$

708,269

 

$

(181)

 

$

19,130

 

(5,334,743)

 

$

(102,482)

 

$

624,740

 

See accompanying notes to unaudited condensed consolidated financial statements.

6


 

Table of Contents

K12 INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

K12 Inc. Stockholders' Equity

(In thousands except share data)

 

Common Stock

 

Additional 
Paid-in

 

Other
Accumulated
Comprehensive

 

Accumulated

 

Treasury Stock

 

 

 

 

    

Shares

    

Amount

    

Capital

    

Loss

    

Deficit

    

Shares

    

Amount

    

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2017

 

44,325,772

 

$

 4

 

$

690,488

 

$

(170)

 

$

(40,976)

 

(3,502,598)

 

$

(75,000)

 

$

574,346

Adjustment related to new stock-based compensation guidance

 

 —

 

 

 —

 

 

112

 

 

 —

 

 

(69)

 

 —

 

 

 —

 

 

43

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(8,056)

 

 —

 

 

 —

 

 

(8,056)

Foreign currency translation adjustment

 

 —

 

 

 —

 

 

 —

 

 

(155)

 

 

 —

 

 —

 

 

 —

 

 

(155)

Stock-based compensation expense

 

 —

 

 

 —

 

 

4,832

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

4,832

Exercise of stock options

 

3,350

 

 

 —

 

 

58

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

58

Issuance of restricted stock awards

 

867,388

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

Forfeiture of restricted stock awards

 

(129,286)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

Adjustment to redeemable noncontrolling interest to estimated redemption value

 

 —

 

 

 —

 

 

(103)

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(103)

Repurchase of restricted stock for tax withholding

 

(230,158)

 

 

 —

 

 

(4,093)

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(4,093)

Balance, September 30, 2017

 

44,837,066

 

$

 4

 

$

691,294

 

$

(325)

 

$

(49,101)

 

(3,502,598)

 

$

(75,000)

 

$

566,872

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

13,259

 

 —

 

 

 —

 

 

13,259

Foreign currency translation adjustment

 

 —

 

 

 —

 

 

 —

 

 

(39)

 

 

 —

 

 —

 

 

 —

 

 

(39)

Stock-based compensation expense

 

 —

 

 

 —

 

 

7,284

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

7,284

Vesting of performance share units, net of tax withholding

 

60,324

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

Issuance of restricted stock awards

 

88,924

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

Forfeiture of restricted stock awards

 

(28,438)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

Adjustment to redeemable noncontrolling interest to estimated redemption value

 

 —

 

 

 —

 

 

130

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

130

Repurchase of restricted stock for tax withholding

 

(59,446)

 

 

 —

 

 

(1,664)

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(1,664)

Balance, December 31, 2017

 

44,898,430

 

$

 4

 

$

697,044

 

$

(364)

 

$

(35,842)

 

(3,502,598)

 

$

(75,000)

 

$

585,842

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

13,070

 

 —

 

 

 —

 

 

13,070

Foreign currency translation adjustment

 

 —

 

 

 —

 

 

 —

 

 

(198)

 

 

 —

 

 —

 

 

 —

 

 

(198)

Stock-based compensation expense

 

 —

 

 

 —

 

 

4,625

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

4,625

Exercise of stock options

 

10,250

 

 

 —

 

 

126

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

126

Vesting of performance share units, net of tax withholding

 

89,352

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

Issuance of restricted stock awards

 

55,293

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

Forfeiture of restricted stock awards

 

(173,539)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

Adjustment to redeemable noncontrolling interest to estimated redemption value

 

 —

 

 

 —

 

 

(27)

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(27)

Repurchase of restricted stock for tax withholding

 

(214,988)

 

 

 —

 

 

(4,006)

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(4,006)

Balance, March 31, 2018

 

44,664,798

 

$

 4

 

$

697,762

 

$

(562)

 

$

(22,772)

 

(3,502,598)

 

$

(75,000)

 

$

599,432

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

 

7


 

Table of Contents

K12 INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

 

 

 

 

Nine Months Ended March 31, 

 

    

2019

    

2018

 

 

(In thousands)

Cash flows from operating activities

 

 

 

 

 

 

Net income

 

$

33,892

 

$

18,073

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization expense

 

 

53,259

 

 

57,612

Stock-based compensation expense

 

 

12,114

 

 

14,853

Deferred income taxes

 

 

5,327

 

 

(4,978)

Provision for doubtful accounts

 

 

2,854

 

 

605

Other

 

 

5,291

 

 

4,757

Changes in assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(65,147)

 

 

(16,220)

Inventories, prepaid expenses, deposits and other current and long-term assets

 

 

4,620

 

 

(24,138)

Accounts payable

 

 

(3,134)

 

 

(9,215)

Accrued liabilities

 

 

5,211

 

 

(7,364)

Accrued compensation and benefits

 

 

(5,501)

 

 

111

Deferred revenue, rent and other liabilities

 

 

24,510

 

 

21,134

Net cash provided by operating activities 

 

 

73,296

 

 

55,230

Cash flows from investing activities

 

 

 

 

 

 

Purchase of property and equipment

 

 

(2,397)

 

 

(6,580)

Capitalized software development costs

 

 

(20,580)

 

 

(18,852)

Capitalized curriculum development costs

 

 

(13,746)

 

 

(7,770)

Sale of long-lived assets

 

 

389

 

 

 —

Acquisitions and investments

 

 

(11,652)

 

 

(3,274)

Net cash used in investing activities 

 

 

(47,986)

 

 

(36,476)

Cash flows from financing activities

 

 

 

 

 

 

Repayments on capital lease obligations

 

 

(13,898)

 

 

(10,313)

Payments of contingent consideration

 

 

(1,027)

 

 

(1,819)

Proceeds from exercise of stock options

 

 

2,183

 

 

184

Repurchase of restricted stock for income tax withholding

 

 

(9,656)

 

 

(9,763)

Net cash used in financing activities 

 

 

(22,398)

 

 

(21,711)

Net change in cash, cash equivalents and restricted cash

 

 

2,912

 

 

(2,957)

Cash, cash equivalents and restricted cash, beginning of period

 

 

233,113

 

 

230,864

Cash, cash equivalents and restricted cash, end of period

 

$

236,025

 

$

227,907

 

 

 

 

 

 

 

Reconciliation of cash, cash equivalents and restricted cash to balance sheet as of March 31st:

 

 

 

 

 

 

Cash and cash equivalents

 

$

234,025

 

$

227,907

Deposits and other assets (restricted cash)

 

 

2,000

 

 

 —

Total cash, cash equivalents and restricted cash

 

$

236,025

 

$

227,907

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

8


 

Table of Contents 

K12 INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.   Description of the Business

 

K12 Inc., together with its subsidiaries (“K12” or the “Company”), is a technology-based education company. The Company offers proprietary and third party curriculum, software systems and educational services designed to facilitate individualized learning for students primarily in kindergarten through 12th grade, or K-12. The Company’s learning systems combine curriculum, instruction, and related support services to create an individualized learning approach well-suited for virtual and blended public schools, school districts, charter schools, and private schools that utilize varying degrees of online and traditional classroom instruction, and other educational applications. These products and services are provided through three lines of business:

 

·

Managed Public School Programs (programs which offer an integrated package of systems, services, products, and professional expertise that K12 manages in order to support an online or blended public school, including administrative support, information technology, academic support services, online curriculum, learning system platforms, and instructional services);

·

Institutional (Non-managed Public School Programs – programs which provide instruction, curriculum, supplemental courses, marketing, enrollment and other educational services where K12 does not provide primary administrative support services, and Institutional Software and Services – educational software and services provided to school districts, public schools and other educational institutions); and

·

Private Pay Schools and Other (private schools for which the Company charges student tuition and makes direct consumer sales).

 

The Company works closely as a partner with public schools, school districts, charter schools, and private schools, enabling them to offer their students an array of solutions, including full-time virtual programs, semester courses and supplemental solutions. In addition to curriculum, systems and programs, the Company provides teacher training, teaching services, and other academic and technology support services.

 

2.   Basis of Presentation

 

The accompanying condensed consolidated balance sheet as of March 31, 2019, the condensed consolidated statements of operations and comprehensive income for the three and nine months ended March 31, 2019 and 2018, the condensed consolidated statements of cash flows for the nine months ended March 31, 2019 and 2018, and the condensed consolidated statements of stockholders’ equity for the three and nine months ended March 31, 2019 and 2018 are unaudited. The unaudited interim financial statements have been prepared on the same basis as the annual financial statements, and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position and results of operations for the periods presented. The results for the three and nine months ended March 31, 2019 are not necessarily indicative of the results to be expected for the year ending June 30, 2019, for any other interim period or for any other future fiscal year. The condensed consolidated balance sheet as of June 30, 2018 has been derived from the audited consolidated financial statements at that date.

 

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Accordingly, the Company does not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, these statements include all adjustments (consisting of normal recurring adjustments) considered necessary to present a fair statement of the Company’s condensed consolidated results of operations, financial position and cash flows. Preparation of the Company’s financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and footnotes. Actual results could differ from those estimates. This quarterly report on Form 10-Q should be read in conjunction with the financial statements and the notes thereto included in the Company’s latest annual report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on August 8, 2018, which contains the Company’s audited financial statements for the fiscal year ended June 30, 2018.

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Table of Contents 

K12 INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

 

 

The Company operates in one operating and reportable business segment as a technology-based education company providing proprietary and third party curriculum, software systems and educational services designed to facilitate individualized learning for students primarily in kindergarten through 12th grade. The Chief Operating Decision Maker evaluates profitability based on consolidated results.

 

3.   Summary of Significant Accounting Policies

 

Recent Accounting Pronouncements

 

Accounting Standards Adopted

 

In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-15, Statement of Cash Flows (Topic 230) (“ASU 2016-15”) to establish the classification of certain cash receipts and disbursements into the appropriate operating, investing, or financing categories; where there was diversity in practice previously. The Company has evaluated the standard and determined that the classification of contingent consideration payments should be moved from operating activities to financing activities. The Company retrospectively adopted this standard during the first quarter of fiscal year 2019. The adoption required the restatement of $1.8 million from cash flows from operations to cash flows from financing activities in fiscal year 2018.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), also known as Accounting Standards Codification Topic 606 (“ASC 606”), which supersedes most existing revenue recognition guidance under ASC Topic 605 (“ASC 605”). The core principal of ASC 606 is to recognize revenues when contracted goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASC 606 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than were required under previous GAAP.

 

The Company performed a detailed review of each of its revenue streams by comparing historical accounting policies and practices to the new standard. The majority of the Company’s business is based on contracts where annual revenue is recognized within each fiscal year, mirroring the school year.

 

The Company adopted this standard during the first quarter of fiscal year 2019 using the modified retrospective approach. Under this method, the Company applied ASC 606 to those contracts whose terms extend beyond July 1, 2018. The comparative information for prior periods has not been restated and continues to be reported under the accounting standards in effect for those periods. The adoption of ASC 606 resulted in an adjustment to decrease retained earnings by $1.3 million.

 

The key impact of ASC 606 was to streamline the recognition of all revenues from the Company’s lines of businesses over the service period, including:

 

·

Revenues that had been previously recognized over a 10-month school year;

·

Revenues from materials, supplies and professional services that had been previously recognized upon delivery; and

·

Revenues in which the Company is the primary obligor, and were recognized when expenses were incurred.

In addition, the adoption of ASC 606 impacted how the Company accounts for its sales commissions. See “Costs to Obtain a Contract with a Customer” section below.

 

10


 

Table of Contents 

K12 INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

 

The impact of adoption on the Company’s condensed consolidated statements of operations for the three and nine months ended March 31, 2019 was as follows: