Edgar Filing: K12 INC

lrn_Current_Folio 10Q

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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

☐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.

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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

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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.

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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.

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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.

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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.

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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.

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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.

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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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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.

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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:

Three Months Ended March 31, 2019

Nine Months Ended March 31, 2019