UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
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incorporation or organization) | Identification No.) | |
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Securities registered pursuant to Section 12(b) of the Act:
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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.
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As of April 15, 2022, the Registrant had
Stride, Inc.
Form 10-Q
For the Quarterly Period Ended March 31, 2022
Index
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 41 | |
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51 |
2
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
STRIDE, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, | June 30, | |||||
| 2022 |
| 2021 | |||
(audited) | ||||||
(In thousands except share and per share data) | ||||||
ASSETS | ||||||
Current assets | ||||||
Cash and cash equivalents | $ | | $ | | ||
Accounts receivable, net of allowance of $ | | | ||||
Inventories, net | | | ||||
Prepaid expenses | | | ||||
Other current assets | | | ||||
Total current assets | | | ||||
Operating lease right-of-use assets, net | | | ||||
Property and equipment, net | | | ||||
Capitalized software, net | | | ||||
Capitalized curriculum development costs, net | | | ||||
Intangible assets, net | | | ||||
Goodwill | | | ||||
Deposits and other assets | | | ||||
Total assets | $ | | $ | | ||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||
Current liabilities | ||||||
Accounts payable | $ | | $ | | ||
Accrued liabilities | | | ||||
Accrued compensation and benefits | | | ||||
Deferred revenue | | | ||||
Current portion of finance lease liability | | | ||||
Current portion of operating lease liability | | | ||||
Total current liabilities | | | ||||
Long-term finance lease liability | | | ||||
Long-term operating lease liability | | | ||||
Long-term debt | | | ||||
Deferred tax liability | | | ||||
Other long-term liabilities | | | ||||
Total liabilities | | | ||||
Commitments and contingencies | ||||||
Stockholders’ equity | ||||||
Preferred stock, par value $ | ||||||
Common stock, par value $ | | | ||||
Additional paid-in capital | | | ||||
Accumulated other comprehensive income (loss) | ( | ( | ||||
Retained earnings | | | ||||
Treasury stock of | ( | ( | ||||
Total stockholders’ equity | | | ||||
Total liabilities and stockholders' equity | $ | | $ | | ||
See accompanying notes to unaudited condensed consolidated financial statements.
3
STRIDE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
(In thousands except share and per share data) | |||||||||||||
Revenues | $ | | $ | | $ | | $ | | |||||
Instructional costs and services | | | | | |||||||||
Gross margin | | | | | |||||||||
Selling, general, and administrative expenses | | | | | |||||||||
Income from operations | | | | | |||||||||
Interest expense, net | ( | ( | ( | ( | |||||||||
Other income, net | | | | | |||||||||
Income before income taxes and income from equity method investments | | | | | |||||||||
Income tax expense | ( | ( | ( | ( | |||||||||
Income from equity method investments | | | | | |||||||||
Net income attributable to common stockholders | $ | | $ | | $ | | $ | | |||||
Net income attributable to common stockholders per share: | |||||||||||||
Basic | $ | | $ | | $ | | $ | | |||||
Diluted | $ | | $ | | $ | | $ | | |||||
Weighted average shares used in computing per share amounts: | |||||||||||||
Basic | | | | | |||||||||
Diluted | | | | |
See accompanying notes to unaudited condensed consolidated financial statements.
4
STRIDE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
(In thousands) | |||||||||||||
Net income | $ | | $ | | $ | | $ | | |||||
Other comprehensive income (loss), net of tax: | |||||||||||||
Foreign currency translation adjustment | | ( | | ( | |||||||||
Comprehensive income attributable to common stockholders | $ | | $ | | $ | | $ | |
See accompanying notes to unaudited condensed consolidated financial statements.
5
STRIDE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Stride, Inc. Stockholders' Equity | ||||||||||||||||||||||
(In thousands except share data) | Common Stock | Additional | Accumulated Other | Retained | Treasury Stock | |||||||||||||||||
| Shares |
| Amount |
| Capital |
| Income (Loss) |
| Earnings |
| Shares |
| Amount |
| Total | |||||||
Balance, June 30, 2021 | | $ | | $ | | $ | ( | $ | | ( | $ | ( | $ | | ||||||||
Adjustment related to new convertible debt guidance | — | — | ( | — | | — | — | ( | ||||||||||||||
Net loss | — | — | — | — | ( | — | — | ( | ||||||||||||||
Foreign currency translation adjustment | — | — | — | | — | — | — | | ||||||||||||||
Stock-based compensation expense | — | — | | — | — | — | — | | ||||||||||||||
Exercise of stock options | | — | | — | — | — | — | | ||||||||||||||
Issuance of restricted stock awards | | — | — | — | — | — | — | — | ||||||||||||||
Forfeiture of restricted stock awards | ( | — | — | — | — | — | — | — | ||||||||||||||
Repurchase of restricted stock for tax withholding | ( | — | ( | — | — | — | — | ( | ||||||||||||||
Balance, September 30, 2021 | | $ | | $ | | $ | ( | $ | | ( | $ | ( | $ | | ||||||||
Net income | — | — | — | — | | — | — | | ||||||||||||||
Foreign currency translation adjustment | — | — | — | ( | — | — | — | ( | ||||||||||||||
Stock-based compensation expense | — | — | | — | — | — | — | | ||||||||||||||
Exercise of stock options | — | — | — | — | — | — | — | — | ||||||||||||||
Vesting of performance share units, net of tax withholding | | — | — | — | — | — | — | — | ||||||||||||||
Issuance of restricted stock awards | | — | — | — | — | — | — | — | ||||||||||||||
Forfeiture of restricted stock awards | ( | — | — | — | — | — | — | — | ||||||||||||||
Repurchase of restricted stock for tax withholding | ( | — | ( | — | — | — | — | ( | ||||||||||||||
Balance, December 31, 2021 | | $ | | $ | | $ | ( | $ | | ( | $ | ( | $ | | ||||||||
Net income | — | — | — | — | | — | — | | ||||||||||||||
Foreign currency translation adjustment | — | — | — | | — | — | — | | ||||||||||||||
Stock-based compensation expense | — | — | | — | — | — | — | | ||||||||||||||
Exercise of stock options | | — | | — | — | — | — | | ||||||||||||||
Vesting of deferred stock units | | — | ||||||||||||||||||||
Issuance of restricted stock awards | | — | — | — | — | — | — | — | ||||||||||||||
Forfeiture of restricted stock awards | ( | — | — | — | — | — | — | — | ||||||||||||||
Repurchase of restricted stock for tax withholding | ( | — | ( | — | — | — | — | ( | ||||||||||||||
Balance, March 31, 2022 | | $ | | $ | | $ | ( | $ | | ( | $ | ( | $ | |
6
Stride, Inc. Stockholders' Equity | ||||||||||||||||||||||
(In thousands except share data) | Common Stock | Additional | Accumulated Other | Retained Earnings (Accumulated | Treasury Stock | |||||||||||||||||
| Shares |
| Amount |
| Capital |
| Income (Loss) |
| Deficit) |
| Shares |
| Amount |
| Total | |||||||
Balance, June 30, 2020 | | $ | | $ | | $ | | $ | | ( | $ | ( | $ | | ||||||||
Adjustment related to new credit losses guidance | — | — | — | — | ( | — | — | ( | ||||||||||||||
Net income | — | — | — | — | | — | — | | ||||||||||||||
Foreign currency translation adjustment | — | — | — | ( | — | — | — | ( | ||||||||||||||
Stock-based compensation expense | — | — | | — | — | — | — | | ||||||||||||||
Exercise of stock options | | — | | — | — | — | — | | ||||||||||||||
Withholding of stock options for tax withholding | ( | — | ( | — | — | — | — | ( | ||||||||||||||
Equity component of convertible senior notes, net of issuance costs and taxes | — | — | | — | — | — | — | | ||||||||||||||
Purchases of capped calls in connection with convertible senior notes | — | — | ( | — | — | — | — | ( | ||||||||||||||
Issuance of restricted stock awards | | — | — | — | — | — | — | — | ||||||||||||||
Forfeiture of restricted stock awards | ( | — | — | — | — | — | — | — | ||||||||||||||
Repurchase of restricted stock for tax withholding | ( | — | ( | — | — | — | — | ( | ||||||||||||||
Balance, September 30, 2020 | | $ | | $ | | $ | ( | $ | | ( | $ | ( | $ | | ||||||||
Net income | — | — | — | — | | — | — | | ||||||||||||||
Foreign currency translation adjustment | — | — | — | ( | — | — | — | ( | ||||||||||||||
Stock-based compensation expense | — | — | | — | — | — | — | | ||||||||||||||
Exercise of stock options | | — | | — | — | — | — | | ||||||||||||||
Equity component of convertible senior notes, net of issuance costs and taxes | — | — | | — | — | — | — | | ||||||||||||||
Issuance of restricted stock awards | | — | — | — | — | — | — | — | ||||||||||||||
Forfeiture of restricted stock awards | ( | — | — | — | — | — | — | — | ||||||||||||||
Repurchase of restricted stock for tax withholding | ( | — | ( | — | — | — | — | ( | ||||||||||||||
Balance, December 31, 2020 | | $ | | $ | | $ | ( | $ | | ( | $ | ( | $ | | ||||||||
Net income | — | — | — | — | | — | — | | ||||||||||||||
Foreign currency translation adjustment | — | — | — | ( | — | — | — | ( | ||||||||||||||
Stock-based compensation expense | — | — | | — | — | — | — | | ||||||||||||||
Exercise of stock options | | — | | — | — | — | — | | ||||||||||||||
Issuance of restricted stock awards | | — | — | — | — | — | — | — | ||||||||||||||
Forfeiture of restricted stock awards | ( | — | — | — | — | — | — | — | ||||||||||||||
Repurchase of restricted stock for tax withholding | ( | — | ( | — | — | — | — | ( | ||||||||||||||
Balance, March 31, 2021 | | $ | | $ | | $ | ( | $ | | ( | $ | ( | $ | |
See accompanying notes to unaudited condensed consolidated financial statements.
7
STRIDE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended March 31, | ||||||
| 2022 |
| 2021 | |||
(In thousands) | ||||||
Cash flows from operating activities | ||||||
Net income | $ | | $ | | ||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||
Depreciation and amortization expense | | | ||||
Stock-based compensation expense | | | ||||
Deferred income taxes | | | ||||
Provision for doubtful accounts | | | ||||
Amortization of discount and fees on debt | | | ||||
Noncash operating lease expense | | | ||||
Other | | | ||||
Changes in assets and liabilities: | ||||||
Accounts receivable | ( | ( | ||||
Inventories, prepaid expenses, deposits and other current and long-term assets | | ( | ||||
Accounts payable | ( | ( | ||||
Accrued liabilities | ( | | ||||
Accrued compensation and benefits | ( | | ||||
Operating lease liability | ( | ( | ||||
Deferred revenue and other liabilities | | | ||||
Net cash provided by operating activities | | | ||||
Cash flows from investing activities | ||||||
Purchase of property and equipment | ( | ( | ||||
Capitalized software development costs | ( | ( | ||||
Capitalized curriculum development costs | ( | ( | ||||
Sale of long-lived assets | — | | ||||
Sale of other investments | | — | ||||
Acquisition of MedCerts, LLC, net of cash acquired | — | ( | ||||
Acquisition of Tech Elevator, Inc., net of cash acquired | — | ( | ||||
Other acquisitions, loans and investments, net of distributions | ( | ( | ||||
Proceeds from the maturity of marketable securities | | — | ||||
Purchases of marketable securities | ( | — | ||||
Net cash used in investing activities | ( | ( | ||||
Cash flows from financing activities | ||||||
Repayments on finance lease obligations | ( | ( | ||||
Repayments on credit facility | — | ( | ||||
Issuance of convertible senior notes, net of issuance costs | — | | ||||
Purchases of capped calls in connection with convertible senior notes | — | ( | ||||
Payments of deferred purchase consideration | ( | — | ||||
Proceeds from exercise of stock options | | | ||||
Withholding of stock options for tax withholding | — | ( | ||||
Repurchase of restricted stock for income tax withholding | ( | ( | ||||
Net cash provided by (used in) financing activities | ( | | ||||
Net change in cash, cash equivalents and restricted cash | ( | | ||||
Cash, cash equivalents and restricted cash, beginning of period | | | ||||
Cash, cash equivalents and restricted cash, end of period | $ | | $ | | ||
Reconciliation of cash, cash equivalents and restricted cash to balance sheet as of March 31st: | ||||||
Cash and cash equivalents | $ | | $ | | ||
Other current assets (restricted cash) | — | | ||||
Deposits and other assets (restricted cash) | — | | ||||
Total cash, cash equivalents and restricted cash | $ | | $ | | ||
See accompanying notes to unaudited condensed consolidated financial statements.
8
1. Description of the Business
Stride, Inc., together with its subsidiaries (“Stride” or the “Company”) is an education services company providing virtual and blended learning. On December 16, 2020, the Company changed its name from K12 Inc. to Stride, Inc. The brand reflects the Company’s continued growth into lifelong learning, regardless of a student’s age or location. The Company’s technology-based products and services enable its clients to attract, enroll, educate, track progress, and support students. These products and services, spanning curriculum, systems, instruction, and support services are designed to help learners of all ages reach their full potential through inspired teaching and personalized learning. The Company’s clients are primarily public and private schools, school districts, and charter boards. Additionally, it offers solutions to employers, government agencies and consumers. These products and services are provided through
● | Products and services for the General Education market are predominantly focused on core subjects, including math, English, science and history, for kindergarten through twelfth grade students to help build a common foundation of knowledge. Programs utilizing General Education products and services are for students that are not specializing in any particular curriculum or course of study. These programs provide an alternative to traditional school options and address a range of student needs including, safety concerns, increased academic support, scheduling flexibility, physical/health restrictions or advanced learning. Products and services are sold as a comprehensive school-as-a-service offering or à la carte. |
● | 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, health care and general business. The Company provides middle and high school students with Career Learning programs that complement their core general education coursework in math, English, science and history. Stride offers multiple career pathways supported by a diverse catalog of Career Learning courses. The middle school program exposes students to a variety of career options and introduces career skill development. In high school, students may engage in industry content pathway courses, project-based learning in virtual teams, and career development services. High school students also have the opportunity to progress toward certifications, connect with industry professionals, earn college credits while in high school, and participate in job shadowing and/or work-based learning experiences that are required to succeed in today’s digital, tech-enabled economy. A student enrolled in a school that offers Stride’s General Education program may elect to take Career Learning courses, but that student and the associated revenue is not reported as a Career Learning enrollment or Career Learning revenue. However, a student and the associated revenue is counted as a Career Learning enrollment or Career Learning revenue if the student is enrolled in a Career Learning program. Like General Education products and services, the products and services for the Career Learning market are sold as a comprehensive school-as-a-service offering or à la carte. The Company also offers focused post-secondary career learning programs to adult learners, through its Galvanize, Inc. (“Galvanize”), Tech Elevator, Inc. (“Tech Elevator”), and MedCerts, LLC (“MedCerts”) brands. These include skills training in the data science, software engineering, healthcare, and medical fields, as well as providing staffing and talent development services to employers. These programs are offered directly to consumers, as well as to employers and government agencies. |
2. Basis of Presentation
The accompanying condensed consolidated balance sheet as of March 31, 2022, the condensed consolidated statements of operations and comprehensive income for the three and nine months ended March 31, 2022 and 2021, the condensed consolidated statements of cash flows for the nine months ended March 31, 2022 and 2021, and the condensed consolidated statements of stockholders’ equity for the three and nine months ended March 31, 2022 and 2021 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, 2022 are not necessarily indicative of the results to be expected for the year ending June 30, 2022, for any other interim period or for any other future fiscal year. The condensed consolidated balance sheet as of June 30, 2021 has been derived from the audited consolidated financial statements at that date.
9
STRIDE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
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 11, 2021, which contains the Company’s audited financial statements for the fiscal year ended June 30, 2021.
The Company operates in
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 (see Note 6, “Debt”). 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 to the consolidated balance sheet were the following: (1) increase of $
During the second quarter of fiscal year 2022, the Company early adopted ASU 2021-08, Business Combinations (Topic 805)—Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”) which, among other things, simplifies the accounting for deferred revenue (a contract liability) that is measured and recognized as part of a business combination. ASU 2021-08 requires that deferred revenue be measured as if the acquirer had originated the contracts, which, for the most part, results in no change to the value of deferred revenue when measured in purchase accounting. The Company was required to adopt ASU 2021-08 on a retrospective basis for any acquisitions that occurred since July 1, 2021, and prospectively to future acquisitions. The adoption of this standard did not have a material impact to the condensed consolidated financial statements and there were no acquisitions from July 1, 2021 to adoption.
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 is tentatively planned for the end of calendar year 2022. The ASU permits an entity to consider contract modifications due to reference rate reform to be an event that does not require contract remeasurement. This ASU will be effective for the Company as of March 12, 2020 through December 31, 2022 and adoption is permitted at any time during the period on a prospective basis. The Company is currently evaluating the impact of this ASU on its condensed consolidated financial statements.
10
STRIDE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
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
11
STRIDE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
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 nine months ended March 31, 2022 and 2021.
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 March 31, 2022 and 2021, the Company’s revenues included a reduction for net school operating losses at the schools of $
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
12
STRIDE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
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 March 31, 2022 and 2021, approximately
The following table presents the Company’s revenues disaggregated based on its
Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||
2022 |
| 2021 | 2022 |
| 2021 | |||||||
(In thousands) | ||||||||||||
General Education | $ | | $ | | $ | | $ | | ||||
Career Learning | ||||||||||||
Middle - High School | | | | | ||||||||
Adult | | | | | ||||||||
Total Career Learning | | | | | ||||||||
Total Revenues | $ | | $ | | $ | | $ | |
Concentration of Customers
During the three and nine months ended March 31, 2022, the Company had
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 condensed 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.
13
STRIDE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
The opening and closing balance of the Company’s accounts receivable, unbilled receivables and deferred revenue are as follows:
| March 31, | June 30, | |||||
2022 |
| 2021 | |||||
(In thousands) | |||||||
Accounts receivable | $ | | $ | | |||
Unbilled receivables (included in accounts receivable) | | | |||||
Deferred revenue | | | |||||
Deferred revenue, long-term (included in other long-term liabilities) | | |
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 March 31, 2022 and 2021 that was included in the previous January 1st deferred revenue balance was $
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
or net , but can vary depending on the customer or when the school receives its funding from the state.The Company has elected, as a practical expedient, not to report the value of unsatisfied performance obligations for contracts with customers that have an expected duration of one year or less. The amount of unsatisfied performance obligations for contracts with customers which extend beyond
Significant Judgments
The Company determined that the majority of its contracts with customers contain one performance obligation. The Company markets the products and services as an integrated package building off its curriculum offerings. It does not market distinct products or services to be sold independently from the curriculum offering. The Company provides the significant service of integrating the goods and services into the operation of the school and education of its students, for which the customer has contracted.
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.
The Company determined that the expected value method is the most appropriate method to account for variable consideration and the Company’s forecasting method is an estimation process that uses probability to determine expected funding. On a monthly basis, the Company estimates the total funds each school will receive in a particular school year
14
STRIDE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
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 condensed consolidated balance sheets. Revenues do not include sales tax as the Company considers itself a pass-through conduit for collecting and remitting sales tax.
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 (“ASC 326”). Any decline in fair value related to a credit loss is recognized in the condensed consolidated statements of operations, with the amount of the loss limited to the difference between fair value and amortized cost. As of March 31, 2022 and June 30, 2021, the allowance for credit losses related to held-to-maturity debt securities was
As of March 31, 2022, the Company’s marketable securities consisted of investments in corporate bonds and U.S. treasury notes. The short-term and long-term portions were $
Allowance for | Net Carrying | Gross Unrealized | ||||||||||||
Amortized Cost | Credit Losses | Amount | Gains (Losses) | Fair Value | ||||||||||
Corporate Bonds | $ | | $ | - | $ | | $ | ( | $ | | ||||
U.S. Treasury Notes | | - | | ( | | |||||||||
Commercial Paper | | - | | | | |||||||||
Total | $ | | $ | - | $ | | $ | ( | $ | |
As of June 30, 2021, the Company’s marketable securities consisted of investments in corporate bonds and U.S. treasury notes. The short-term and long-term portions were $
15
STRIDE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
Allowance for | Net Carrying | Gross Unrealized | ||||||||||||
Amortized Cost | Credit Losses | Amount | Gains (Losses) | Fair Value | ||||||||||
Corporate Bonds | $ | | $ | - | $ | | $ | ( | $ | | ||||
U.S. Treasury Notes | | - | | - | | |||||||||
Commercial Paper | | - | | - | | |||||||||
Total | $ | | $ | - | $ | | $ | ( | $ | |
Allowance for Doubtful Accounts
The Company maintains an allowance for uncollectible accounts primarily for estimated losses resulting from the inability or failure of individual customers to make required payments. The Company analyzes accounts receivable, historical percentages of uncollectible accounts, and changes in payment history when evaluating the adequacy of the allowance for uncollectible accounts. The Company maintains an allowance under ASC 326 based on historical losses, customer-specific information, current economic conditions, and reasonable and supportable forecasts of future economic conditions. The allowance under ASC 326 is updated as additional losses are incurred or information becomes available related to the customer or economic conditions.
The Company 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 March 31, 2022 and June 30, 2021, $
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.”
16
STRIDE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
Property and equipment are depreciated over the following useful lives:
| Useful Life | |
Student and state testing computers | ||
Computer hardware | ||
Computer software | ||
Web site development | ||
Office equipment | ||
Furniture and fixtures | ||
Leasehold improvements | Shorter of useful life or term of the lease |
The Company makes an estimate of unreturned student computers based on an analysis of recent trends of returns. The Company recorded accelerated depreciation of $
Depreciation expense, including accelerated depreciation, related to computers provided to students reflected in instructional costs and services for the three months ended March 31, 2022 and 2021 was $
The Company fully expenses computer peripheral equipment (e.g., keyboards, mouses) upon purchase as recovery has been determined to be uneconomical. These expenses totaled $
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
Capitalized software additions totaled $
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
17
STRIDE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
Total capitalized curriculum development additions were $
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
Operating Leases
The Company enters into agreements for facilities that serve as offices for its headquarters, sales and enrollment teams, and school operations. Initial lease terms vary between
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
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
18
STRIDE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
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 March 31, 2022 and 2021 was $
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
During the three and nine months ended March 31, 2022, there were no events or changes in circumstances that would indicate that the carrying amount of the goodwill was impaired.
During the three and nine months ended March 31, 2021 the Company qualitatively assessed its goodwill and intangible assets for impairment. It identified Coronavirus disease 2019 (“COVID-19”) as a triggering event, however there were no indicators that the fair value of the reporting unit may be less than its carrying amount, and as a result, the Company determined that no impairment was required.
The following table represents the balance of the Company’s intangible assets as of March 31, 2022 and June 30, 2021:
March 31, 2022 | June 30, 2021 | |||||||||||||||||
($ in millions) |
| Gross |
| Accumulated |
| Net |
| Gross |
| Accumulated |
| Net | ||||||
Trade names |
| $ | |
| $ | ( |
| $ | | $ | | $ | ( | $ | | |||
Customer and distributor relationships | | ( | | | ( | | ||||||||||||
Developed technology | | ( | | | ( | | ||||||||||||
Other | | ( | | | ( | | ||||||||||||
Total | $ | | $ | ( | $ | | $ | |
| $ | ( | $ | |
19
STRIDE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
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 nine months ended March 31, 2022, there were no events or changes in circumstances that may indicate that the carrying amount of the long-lived assets may not be recoverable. During the three and nine months ended March 31, 2021, the Company identified COVID-19 as a triggering event, however based on its assessment, the Company determined that COVID-19 did not impact the recoverability of its long-lived assets.
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 contingent consideration and Tallo, Inc. convertible note are discussed in more detail in Note 11, “Acquisitions and Investments.” As of March 31, 2022, the estimated fair value of the long-term debt was $
20
STRIDE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
The following table summarizes certain fair value information at March 31, 2022 for assets or liabilities measured at fair value on a recurring basis:
| Fair Value Measurements Using: | |||||||||||
|
| Quoted Prices | ||||||||||
|
| in Active | Significant |
| ||||||||
|
| Markets for | Other | Significant | ||||||||
|
| Identical | Observable | Unobservable | ||||||||
|
| Assets | Input | Inputs | ||||||||
Description |
| Fair Value |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||
(In thousands) | ||||||||||||
Contingent consideration associated with acquisitions | $ | | $ | — | $ | — | $ | | ||||
Convertible note received in acquisition | | — | — | |
The following table summarizes certain fair value information at June 30, 2021 for assets or liabilities measured at fair value on a recurring basis:
| Fair Value Measurements Using: | |||||||||||
|
| Quoted Prices | ||||||||||
|
| in Active | Significant |
| ||||||||
|
| Markets for | Other | Significant | ||||||||
|
| Identical | Observable | Unobservable | ||||||||
|
| Assets | Input | Inputs | ||||||||
Description |
| Fair Value |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||
(In thousands) | ||||||||||||
Contingent consideration associated with acquisitions | $ | | $ | — | $ | — | $ | | ||||
Convertible note received in acquisition | $ | | $ | — | $ | — | $ | |
The following table presents activity related to the Company’s fair value measurements categorized as Level 3 in the valuation hierarchy, valued on a recurring basis, for the three and nine months ended March 31, 2022 and 2021:
| Three Months Ended March 31, 2022 | |||||||||||
|
| Purchases, |
| |||||||||
| Fair Value | Issuances, | Unrealized | Fair Value | ||||||||
Description |
| December 31, 2021 |
| and Settlements |
| Gains/(Losses) |
| March 31, 2022 | ||||
(In thousands) | ||||||||||||
Contingent consideration associated with acquisitions | $ | | $ | — | $ | ( | $ | | ||||
Convertible note received in acquisition | | — | ( | |
Three Months Ended March 31, 2021 | ||||||||||||
|
| Purchases, |
| |||||||||
| Fair Value | Issuances, | Unrealized | Fair Value | ||||||||
Description |
| December 31, 2020 |
| and Settlements |
| Gains/(Losses) |
| March 31, 2021 | ||||
(In thousands) | ||||||||||||
Contingent consideration associated with acquisitions | $ | | $ | — | $ | — | $ | | ||||
Convertible note received in acquisition | $ | | $ | — | $ | — | $ | |
| Nine Months Ended March 31, 2022 | |||||||||||
|
| Purchases, |
| |||||||||
| Fair Value | Issuances, | Unrealized | Fair Value | ||||||||
Description |
| June 30, 2021 |
| and Settlements |
| Gains (Losses) |
| March 31, 2022 | ||||
(In thousands) | ||||||||||||
Contingent consideration associated with acquisitions | $ | | $ | — | $ | | $ | | ||||
Convertible note received in acquisition | | — | ( | |
21
STRIDE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
| Nine Months Ended March 31, 2021 | |||||||||||
|
| Purchases, |
| |||||||||
| Fair Value | Issuances, | Unrealized | Fair Value | ||||||||
Description |
| June 30, 2020 |
| and Settlements |
| Gains (Losses) |
| March 31, 2021 | ||||
(In thousands) | ||||||||||||
Contingent consideration associated with acquisitions | $ | — | $ | | $ | — | $ | | ||||
Convertible note received in acquisition | $ | | $ | — | $ | — | $ | |
Net Income (Loss) Per Common Share
Basic net income (loss) per common share is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during the reporting period. The weighted average number of shares of common stock outstanding includes vested restricted stock awards. Diluted net income (loss) per share (“EPS”) reflects the potential dilution that could occur assuming conversion or exercise of all dilutive unexercised stock options and vesting of all dilutive unvested restricted stock awards. The dilutive effect of stock options and restricted stock awards was determined using the treasury stock method. Under the treasury stock method, the proceeds received from the exercise of stock options and restricted stock awards, the amount of compensation cost for future service not yet recognized by the Company and the amount of tax benefits that would be recorded as income tax expense when the stock options become deductible for income tax purposes are all assumed to be used to repurchase shares of the Company’s common stock. Stock options and restricted stock awards are not included in the computation of diluted net income (loss) per share when they are antidilutive. Common stock outstanding reflected in the Company’s condensed consolidated balance sheets includes restricted stock awards outstanding. The dilutive effect of the Company’s convertible debt is determined using the if-converted method when the Company’s stock is trading above the conversion price. However, based on the structure of the instrument and how it is settled upon conversion, it would produce a similar result as the previously applied treasury stock method.
The following schedule presents the calculation of basic and diluted net income (loss) per share:
| Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
(In thousands except share and per share data) | |||||||||||||
Basic net income per share computation: | |||||||||||||
Net income attributable to common stockholders | $ | | $ | | $ | | $ | | |||||
Weighted average common shares — basic | | | | | |||||||||
Basic net income per share | $ | | $ | | $ | | $ | | |||||
Diluted net income per share computation: | |||||||||||||
Net income attributable to common stockholders | $ | | $ | | $ | | $ | | |||||
Share computation: | |||||||||||||
Weighted average common shares — basic | | | | | |||||||||
Effect of dilutive stock options and restricted stock awards | | | | | |||||||||
Weighted average common shares — diluted | | | | | |||||||||
Diluted net income per share | $ | | $ | | $ | | $ | |
For the three months ended March 31, 2022 and 2021,
22
STRIDE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
Reclassifications
Certain previous year amounts have been reclassified to conform with current year presentations, as related to the condensed consolidated statement of cash flows.
4. Income Taxes
The provision for income taxes is based on earnings reported in the condensed consolidated financial statements. A deferred income tax asset or liability is determined by applying currently enacted tax laws and rates to the expected reversal of the cumulative temporary differences between the carrying value of assets and liabilities for financial statement and income tax purposes. Deferred income tax expense or benefit is measured by the change in the deferred income tax asset or liability during the period. For the three months ended March 31, 2022 and 2021, the Company’s effective income tax rate was
5. Finance and Operating Leases
Finance Leases
The Company is a lessee under finance leases for student computers and peripherals under agreements with Banc of America Leasing & Capital, LLC (“BALC”). As of March 31, 2022 and June 30, 2021, the finance lease liability was $
The Company entered into an agreement with BALC in April 2020 for $
23
STRIDE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
The following is a summary, as of March 31, 2022 and June 30, 2021, respectively, of the present value of the net minimum lease payments under the Company’s finance leases:
| March 31, 2022 |
| June 30, 2021 | ||||
| (in thousands) | ||||||
2022 | $ | | $ | | |||
2023 | | | |||||
2024 | | | |||||
2025 | | — | |||||
Total minimum payments | | | |||||
Less: imputed interest | ( | ( | |||||
Finance lease liability | | | |||||
Less: current portion of finance lease liability | ( | ( | |||||
Long-term finance lease liability | $ | | $ | |
Operating Leases
The Company is a lessee under operating leases for various facilities to support the Company’s operations. As of March 31, 2022 and June 30, 2021, the operating lease liability was $
Individual operating leases range in terms of
24
STRIDE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
The following is a summary as of March 31, 2022 and June 30, 2021, respectively, of the present value of the minimum lease payments under the Company’s operating leases:
| |||||||
| |||||||
| March 31, 2022 |
| June 30, 2021 | ||||
(in thousands) | |||||||
2022 | $ | | $ | | |||
2023 | | | |||||
2024 | | | |||||
2025 | | | |||||
2026 | | | |||||
Thereafter | | | |||||
Total minimum payments | | | |||||
Less: imputed interest | ( | ( | |||||
Operating lease liability | | | |||||
Less: current portion of operating lease liability | ( | ( | |||||
Long-term operating lease liability | $ | | $ | |
The Company is subleasing
| |||||||
| |||||||
| March 31, 2022 |
| June 30, 2021 | ||||
(in thousands) | |||||||
2022 | $ | | $ | | |||
2023 | | | |||||
2024 | | | |||||
2025 | | — | |||||
Total sublease income | $ | | $ | |
The following is a summary of the Company’s lease cost, weighted-average remaining lease term, weighted-average discount rate and certain other cash flows as it relates to its operating leases for the three and nine months ended March 31, 2022 and 2021:
25
STRIDE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
Three Months Ended March 31, | Nine Months Ended March 31, | ||||||||||||
2022 |
| 2021 | 2022 |
| 2021 | ||||||||
(in thousands) | |||||||||||||
Lease cost | |||||||||||||
Finance lease cost: | |||||||||||||
Amortization of right-of-use assets | $ | | $ | | $ | | $ | | |||||
Interest on lease liabilities | | | | | |||||||||
Instructional costs and services: | |||||||||||||
Operating lease cost | | | | | |||||||||
Short-term lease cost | | | | | |||||||||
Sublease income | ( | ( | ( | ( | |||||||||
Selling, general, and administrative expenses: | |||||||||||||
Operating lease cost | | | | | |||||||||
Short-term lease cost | | | | | |||||||||
Sublease income | ( | ( | ( | ( | |||||||||
Total lease cost | $ | | $ | | $ | | $ | | |||||
Other information | |||||||||||||
Cash paid for amounts included in the measurement of lease liabilities | |||||||||||||
Operating cash flows from operating leases | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Financing cash flows from finance leases | ( | ( | ( | ( | |||||||||
Right-of-use assets obtained in exchange for new finance lease liabilities | | | | | |||||||||
Right-of-use assets obtained in exchange for new operating lease liabilities | | | | | |||||||||
Weighted-average remaining lease term - finance leases | yrs. | yrs. | |||||||||||
Weighted-average remaining lease term - operating leases | yrs. | yrs. | |||||||||||
Weighted-average discount rate - finance leases | | % | | % | |||||||||
Weighted-average discount rate - operating leases | | % | | % |
6. Debt
The following is a summary, as of March 31, 2022 and June 30, 2021, respectively, of the components of the Company’s outstanding long-term debt:
| ||||||
| March 31, 2022 | June 30, 2021 | ||||
(in thousands) | ||||||
Convertible Senior Notes due 2027 | $ | | $ | | ||
Less: unamortized discount | — | ( | ||||
Less: unamortized debt issuance costs | ( | ( | ||||
Total debt | | | ||||
Less: current portion of debt | — | — | ||||
Long-term debt | $ | | $ | |
26
STRIDE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
Convertible Senior Notes due 2027
In August and September 2020, the Company issued $
The Notes bear interest at a rate of
Prior to the adoption of ASU 2020-06, the Company separated the Notes into liability and equity components. The initial carrying amount of the liability component was $
The Company incurred debt issuance costs of $
Before June 1, 2027, noteholders will have the right to convert their Notes only upon the occurrence of certain events. After June 1, 2027, noteholders may convert their Notes at any time at their election until
In connection with the Notes, the Company entered into privately negotiated capped call transactions (the “Capped Call Transactions”) with certain counterparties. The Capped Call Transactions are expected to cover the aggregate number of shares of the Company’s common stock that initially underlie the Notes, and are expected to reduce potential dilution to the Company’s common stock upon any conversion of Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted Notes. The upper strike price of the Capped Call Transactions is $
7. Credit Facility
On January 27, 2020, the Company entered into a $
27
STRIDE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
Company repaid its $
8. Equity Incentive Plan
On December 15, 2016 (the “Effective Date”), the Company’s stockholders approved the 2016 Incentive Award Plan (the “Plan”). The Plan is designed to attract, retain and motivate employees who make important contributions to the Company by providing such individuals with equity ownership opportunities. Awards granted under the Plan may include stock options, stock appreciation rights, restricted stock, restricted stock units, and other stock-based awards. Under the Plan, the following types of shares go back into the pool of shares available for issuance:
● | unissued shares related to forfeited or cancelled restricted stock and stock options from Plan awards and Prior Plan awards (that were outstanding as of the Effective Date), and; |
● | shares tendered to satisfy the tax withholding obligation related to the vesting of restricted stock (but not stock options). |
Unlike the Company’s 2007 Equity Incentive Award Plan (the “Prior Plan”), the Plan has no evergreen provision to increase the shares available for issuance; any new shares would require stockholder approval. The Prior Plan expired in October 2017, and the Company no longer awards equity from the Prior Plan. As of March 31, 2022, the remaining aggregate number of shares of the Company’s common stock authorized for future issuance under the Plan was
Compensation expense for all equity-based compensation awards is based on the grant-date fair value. The Company recognizes these compensation costs on a straight-line basis over the requisite service period, which is generally the vesting period of the award. For awards subject to service and performance-based vesting conditions, the Company recognizes stock-based compensation expense retroactively through a cumulative catch-up adjustment when it is probable that the performance condition will be achieved. Performance-based awards are typically granted at threshold, target and outperform levels and final payout percentages can vary depending on the performance of the award. Stock-based compensation expense is recorded within selling, general, and administrative expenses on the consolidated statements of operations.
Stock Options
Each stock option is exercisable pursuant to the vesting schedule set forth in the stock option agreement granting such stock option, generally over
Stock option activity including stand-alone agreements during the nine months ended March 31, 2022 was as follows:
|
|
| Weighted |
|
| ||||||
Weighted | Average |
| |||||||||
Average | Remaining | Aggregate |
| ||||||||
Exercise | Contractual | Intrinsic |
| ||||||||
Shares | Price | Life (Years) | Value |
| |||||||
Outstanding, June 30, 2021 | | $ | | $ | | ||||||
Granted | — | — | |||||||||
Exercised | ( | | |||||||||
Forfeited or canceled | ( | | |||||||||
Outstanding and exercisable, March 31, 2022 | | $ | | $ | |
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last day of the period and the exercise price, multiplied by the number of in-the-
28
STRIDE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
money options) that would have been received by the option holders had all option holders exercised their options on March 31, 2022. The amount of aggregate intrinsic value will change based on the fair market value of the Company’s stock. The total intrinsic value of options exercised during the nine months ended March 31, 2022 and 2021 was $
As of March 31, 2022, there was
Restricted Stock Awards
The Company has approved grants of restricted stock awards (“RSA”) pursuant to the Plan and Prior Plan. Under the Plan and Prior Plan, employees, outside directors and independent contractors are able to participate in the Company’s future performance through the awards of restricted stock. Each RSA vests pursuant to the vesting schedule set forth in the restricted stock agreement granting such RSAs, generally over
Restricted stock award activity during the nine months ended March 31, 2022 was as follows:
|
| Weighted |
| |||
Average |
| |||||
Grant-Date | ||||||
Shares | Fair Value |
| ||||
Nonvested, June 30, 2021 | | $ | | |||
Granted | | | ||||
Vested | ( | | ||||
Canceled | ( | | ||||
Nonvested, March 31, 2022 | | $ | |
Performance-Based Restricted Stock Awards (included above)
During the nine months ended March 31, 2022,
During fiscal year 2021, the Company granted
During fiscal year 2021, the Company granted
During fiscal year 2020, the Company granted
29
STRIDE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
be met. The free cash flow metric was not met for fiscal year 2020, however, the Company believes that it will be met in aggregate, and therefore is amortizing the first tranche over a
Service-Based Restricted Stock Awards (included above)
During the nine months ended March 31, 2022,
Summary of All Restricted Stock Awards
As of March 31, 2022, there was $
Performance Share Units (“PSU”)
The Company has approved grants of performance share units (“PSU”) pursuant to the Plan. Each PSU is earned through the achievement of a performance-based metric, combined with the continuation of employee service over a defined period. The level of performance determines the number of PSUs earned, and is generally measured against threshold, target and outperform achievement levels of the award. Each PSU represents the right to receive
In addition to the performance conditions of the PSUs, there is a service vesting condition which is dependent upon continuing service by the grantee as an employee of the Company, unless the grantee is eligible for earlier vesting upon a change in control and qualifying termination, as defined by the PSU agreement. PSUs are generally subject to graduated vesting schedules and stock-based compensation expense is computed by tranche and recognized on a straight-line basis over the tranches’ applicable vesting period based on the expected achievement level.
Performance share unit activity (excluding liability-classified awards) during the nine months ended March 31, 2022 was as follows:
Weighted | |||||
Average | |||||
Grant-Date | |||||
| Shares |
| Fair Value | ||
Nonvested, June 30, 2021 | | $ | | ||
Granted | | | |||
Vested | ( | | |||
Canceled | ( | | |||
Nonvested, March 31, 2022 | | $ | |
30
STRIDE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
Fiscal Year 2022 LTIP
During the nine months ended March 31, 2022, the Company granted
Fiscal Year 2021 Tech Elevator MIP
During fiscal year 2021, the Company granted to the executive team of Tech Elevator a time-based award with a value of $
Fiscal Year 2021 LTIP
During fiscal year 2021, the Company granted
Fiscal Year 2021 Career Learning PSUs
During fiscal year 2021, the Company granted
● |
● |
● |
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STRIDE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
The level of performance will determine the number of PSUs earned as measured against threshold, target and outperform achievement levels. In all cases, vesting is dependent upon continuing service by the grantee as an employee of the Company. The fiscal year 2021 Career Learning PSUs are equity-classified awards. In August 2021, the Company determined the performance condition of fiscal year 2021 revenues were not achieved resulting in a forfeiture of those shares. Additionally, in October 2021, the two remaining tranches were forfeited as the grantee of the PSUs separated from the Company.
Fiscal Year 2020 Galvanize TRIP
During fiscal year 2020, the Company granted to the executive team of Galvanize a target level of $
Fiscal Year 2019 LTIP
During fiscal year 2019, the Company granted
Fiscal Year 2019 SPP
During fiscal year 2019, the Company adopted a new long-term shareholder performance plan (“2019 SPP”) that provides for incentive award opportunities to its key senior executives. The awards were granted in the form of PSUs and will be earned based on the Company’s market capitalization growth over a completed
During fiscal year 2019, the Company granted
32
STRIDE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
In October 2021, the Company certified achievement of the 2019 SPP based upon the
Summary of All Performance Share Units
As of March 31, 2022, there was $
Deferred Stock Units (“DSU”)
The DSUs vest on the grant-date anniversary and are settled in the form of shares of common stock issued to the holder upon separation from the Company. DSUs are specific only to board members.
Deferred stock unit activity during the nine months ended March 31, 2022 was as follows:
Weighted | |||||
Average | |||||
Grant-Date | |||||
| Shares |
| Fair Value | ||
Nonvested, June 30, 2021 | | $ | | ||
Granted | | | |||
Vested | ( | | |||
Canceled | — | — | |||
Nonvested, March 31, 2022 | | $ | |
Summary of All Deferred Stock Units
As of March 31, 2022, there was $
9. Related Party Transactions
The Company contributed to Future of School, a charity focused on access to quality education. Future of School is a related party as an executive officer of the Company serves on its Board of Directors. For the three months ended March 31, 2022 and 2021, contributions made by the Company to Future of School were $
33
STRIDE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
10. Commitments and Contingencies
Litigation
In the ordinary conduct of the Company’s business, the Company is subject to lawsuits, arbitrations and administrative proceedings from time to time. The Company vigorously defends these claims; however, no assurances can be given as to the outcome of any pending legal proceedings. The Company believes, based on currently available information, that the outcome of any existing or known threatened proceedings, even if determined adversely, should not have a material adverse effect on its business, financial condition, liquidity or results of operations.
Georgia Cyber Academy Arbitration
On May 10, 2019, K12 Virtual Schools LLC filed a demand for arbitration with the American Arbitration Association (“AAA”), Case No. 01-19-001-4778, naming Georgia Cyber Academy, Inc. (“GCA”) as the respondent. The demand asserted claims for GCA’s breach and anticipatory breach of the Educational Products and Services Agreement between GCA and K12 Virtual Schools LLC, as amended on January 4, 2019, based on GCA’s engagement of other educational products and service providers for the school year 2019-2020. On May 29, 2019, GCA filed counterclaims against K12 Virtual Schools, LLC for breach of contract, fraud, breach of the duty of good faith and fair dealing, and negligent misrepresentation. The AAA appointed an arbitrator on June 12, 2019, and the parties presented evidence in support of their respective claims during merits hearings in March and June 2020. On July 8, 2020, the parties executed an agreement, effective June 30, 2020, to resolve all of their claims. Under the terms of the settlement agreement, GCA was scheduled to pay the Company $
Securities Litigation
On November 19 and December 11, 2020, respectively,
34
STRIDE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
On December 21, 2020 and April 30, 2021, respectively, related derivative lawsuits captioned Larry Shemen, et al v. Aida M. Alvarez, et al, Case No. 1:20-cv-01731 (the “Shemen Case”), and Wajid Ahmed v. Aida M. Alvarez, et al, Case No. 1:21-cv-00618 (the “Ahmed Case) were filed by
We intend to continue defending vigorously against each and every allegation and asserted claim in these matters.
Employment Agreements
The Company has entered into employment agreements with certain executive officers that provide for severance payments and, in some cases other benefits, upon certain terminations of employment. Except for the agreement with the Company’s Executive Chairman with an amended extended term to September 30, 2022, all other agreements provide for employment on an “at-will” basis. If the employee resigns for “good reason” or is terminated without cause, the employee is entitled to salary continuation, and in some cases benefit continuation, for varying periods depending on the agreement.
Off-Balance Sheet Arrangements
As of March 31, 2022, the Company provided guarantees of approximately $
In addition, the Company contractually guarantees that certain schools under the Company’s management will not have annual operating deficits and the Company’s management fees from these schools may be reduced accordingly to cover any school operating deficits.
Other than these lease and operating deficit guarantees, the Company did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Risks and Uncertainties
Impacts of COVID-19 on Stride’s Business
While the long-term impact of the global emergence of COVID-19 is not estimable or determinable, in late fiscal year 2020, the Company experienced an increase in demand for its products and services.
The Company continues to conduct business as usual with some modifications to employee travel, employee work locations, and cancellation of certain events. The Company will continue to actively monitor the situation and may take further actions that alter its business operations as may be required by federal, state or local authorities or that it determines is in the best interests of its employees, customers, partners, suppliers and stockholders. It is not clear what the potential effects any such alterations or modifications may have on the Company’s business, including the effects on its customers and prospects, or on its long-term financial results.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted and signed into law. The Company has evaluated the business provisions in the CARES Act and adopted the deferral of the employer portion of the social security payroll tax (
35
STRIDE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
deferred payroll taxes due on December 31, 2022 are recorded within accrued compensation and benefits on the condensed consolidated balance sheets.
11. Acquisitions and Investments
Acquisition of MedCerts, LLC
On November 30, 2020, the Company acquired
The acquisition has been accounted for as a business combination under the acquisition method of accounting, which results in acquired assets and assumed liabilities being measured at their fair values as of November 30, 2020, the acquisition date. As of the acquisition date, goodwill was measured as the excess of consideration transferred over the fair values of the assets acquired and liabilities assumed.
Based on management’s valuation of the fair value of tangible and intangible assets acquired and liabilities assumed, the purchase price was allocated as follows (in thousands):
Allocation of Purchase Price | |||
Cash | $ | | |
Current assets, excluding cash | | ||
Property and equipment, net | | ||
Intangible assets, net | | ||
Goodwill | | ||
Current liabilities | ( | ||
Deferred revenue | ( | ||
Deferred tax asset (liability) | | ||
Total consideration | $ | | |
The fair value of the identified intangible assets was determined primarily using an income-based approach of either the multi-period excess earnings method or relief from royalty method, as appropriate. Intangible assets are amortized on a straight-line basis over the amortization periods noted below.
Intangible Assets | |||||||
Estimated | |||||||
Intangible Assets | Amount | Useful Life | |||||
(In thousands) | (In years) | ||||||
Customer relationships | $ | | |||||
Developed technology | | ||||||
Trade names | | ||||||
$ | | ||||||
The contingent consideration represents the fair value of additional consideration payable to the seller, estimated using a Monte Carlo simulation model. The amount of consideration to be distributed on the
36
STRIDE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
amortization (“EBITDA”) for the period December 2021 – May 2022. This multiplier is applied to the annualized trailing EBITDA for the period March 2022 – May 2022 to calculate an enterprise value of MedCerts as of May 2022. The payment, if any, will equal
Subsequent to the acquisition date, the Company is required to reassess its estimate of the fair value of contingent consideration, and record any changes in earnings when the estimate is based on information not known as of the acquisition date. During fiscal year 2021, the Company recorded an expense of $
Goodwill represents the excess of the purchase price of an acquired business over the fair value of the tangible and intangible assets acquired and liabilities assumed. Goodwill will not be amortized but instead will be tested for impairment at least annually (or more frequently if indicators of impairment arise). In the event that management determines that the goodwill has become impaired, the Company will incur an accounting charge for the amount of the impairment during the fiscal quarter in which the determination is made. Goodwill is deductible for tax purposes.
Included in the Company’s condensed consolidated results of operations for the three and nine months ended March 31, 2022 are revenues of $
Acquisition of Tech Elevator, Inc.
On November 30, 2020, the Company acquired
The acquisition has been accounted for as a business combination under the acquisition method of accounting, which results in acquired assets and assumed liabilities being measured at their fair values as of November 30, 2020, the acquisition date. As of the acquisition date, goodwill was measured as the excess of consideration transferred over the fair values of the assets acquired and liabilities assumed.
37
STRIDE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
Based on management’s valuation of the fair value of tangible and intangible assets acquired and liabilities assumed, the purchase price was allocated as follows (in thousands):
Allocation of Purchase Price | |||
Cash | $ | | |
Current assets, excluding cash | | ||
Property and equipment, net | | ||
Operating lease right-of-use assets, net | | ||
Intangible assets, net | | ||
Goodwill | | ||
Other assets | | ||
Current liabilities | ( | ||
Deferred revenue | ( | ||
Deferred tax liability | ( | ||
Current operating lease liability | ( | ||
Long-term operating lease liability | ( | ||
Total consideration | $ | | |
The fair value of the identified intangible assets was determined primarily using an income-based approach of either the multi-period excess earnings method or relief from royalty method, as appropriate. Intangible assets are amortized on a straight-line basis over the amortization periods noted below.
Intangible Assets | |||||||
Estimated | |||||||
Intangible Assets | Amount | Useful Life | |||||
(In thousands) | (In years) | ||||||
Customer relationships | $ | | |||||
Developed technology | | ||||||
Trade names | | ||||||
$ | | ||||||
Goodwill represents the excess of the purchase price of an acquired business over the fair value of the tangible and intangible assets acquired and liabilities assumed. Goodwill will not be amortized but instead will be tested for impairment at least annually (or more frequently if indicators of impairment arise). In the event that management determines that the goodwill has become impaired, the Company will incur an accounting charge for the amount of the impairment during the fiscal quarter in which the determination is made. Goodwill is not deductible for tax purposes.
Included in the Company’s condensed consolidated results of operations for the three and nine months ended March 31, 2022 are revenues of $
Pro Forma Combined Results of Operations
The following unaudited pro forma combined results of operations give effect to the acquisition of MedCerts and Tech Elevator as if they had occurred on July 1, 2019. The unaudited pro forma combined results of operations are provided for informational purposes only and do not purport to represent the Company’s actual consolidated results of operations had the acquisitions occurred on the dates assumed, nor are these financial statements necessarily indicative of the Company’s future consolidated results of operations. The unaudited pro forma combined results of operations do not reflect the costs of any integration activities or any benefits that may result from operating efficiencies or revenue synergies.
38
STRIDE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
Nine Months Ended | |||
(In thousands) | March 31, 2021 | ||
Revenues | $ | | |
Income from operations | | ||
Net income | |
Investments in Limited Partnerships
During fiscal year 2019, the Company invested in
Investment in Tallo, Inc.
In August 2018, the Company made an initial investment of $
During the third quarter of fiscal year 2022, the Company recorded a credit loss expense of $
39
STRIDE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
12. Supplemental Disclosure of Cash Flow Information
| Nine Months Ended March 31, | ||||||
|
| 2022 |
| 2021 | |||
(In thousands) | |||||||
Cash paid for interest | $ | |
| $ | | ||
Cash paid for taxes | $ | |
| $ | | ||
Supplemental disclosure of non-cash financing activities: | |||||||
Right-of-use assets obtained from acquisitions | — |
| | ||||
Right-of-use assets obtained in exchange for new finance lease liabilities | |
| | ||||
Supplemental disclosure of non-cash investing activities: | |||||||
Stock-based compensation expense capitalized on software development | $ | |
| $ | | ||
Stock-based compensation expense capitalized on curriculum development | |
| | ||||
Non-cash purchase price related to business combinations | | — | |||||
Business combinations: | |||||||
Acquired assets | $ | | $ | | |||
Intangible assets | | | |||||
Goodwill | | | |||||
Assumed liabilities | ( | ( | |||||
Deferred revenue | ( | ( | |||||
40
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Certain statements in Management’s Discussion and Analysis or MD&A, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Historical results may not indicate future performance. Our forward-looking statements reflect our current views about future events, are based on assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those contemplated by these statements. Factors that may cause differences between actual results and those contemplated by forward-looking statements include, but are not limited to, those discussed in “Risk Factors” in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended June 30, 2021, which we refer to as our Annual Report, and in Part II, Item 1A of this Quarterly Report. We undertake no obligation to publicly update or revise any forward-looking statements, including any changes that might result from any facts, events or circumstances after the date hereof that may bear upon forward-looking statements. Furthermore, we cannot guarantee future results, events, levels of activity, performance or achievements.
This MD&A is intended to assist in understanding and assessing the trends and significant changes in our results of operations and financial condition. As used in this MD&A, the words, “we,” “our” and “us” refer to Stride, Inc. and its consolidated subsidiaries. This MD&A should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this report, as well as the consolidated financial statements and MD&A of our Annual Report. The following overview provides a summary of the sections included in our MD&A:
● | Executive Summary — a general description of our business and key highlights of the three and nine months ended March 31, 2022. |
● | Critical Accounting Policies and Estimates — a discussion of critical accounting policies requiring judgments and estimates. |
● | Results of Operations — an analysis of our results of operations in our condensed consolidated financial statements. |
● | Liquidity and Capital Resources — an analysis of cash flows, sources and uses of cash, commitments and contingencies, and quantitative and qualitative disclosures about market risk. |
Executive Summary
We are an education services company providing virtual and blended learning. Our technology-based products and services enable our clients to attract, enroll, educate, track progress, and support students. These products and services, spanning curriculum, systems, instruction, and support services are designed to help learners of all ages reach their full potential through inspired teaching and personalized learning.
Our clients are primarily public and private schools, school districts, and charter boards. Additionally, we offer solutions to employers, government agencies and consumers.
We offer a wide range of individual products and services, as well as customized solutions, such as our most comprehensive school-as-a-service offering which supports our clients in operating full-time virtual or blended schools. More than three million students have attended schools powered by Stride curriculum and services since our inception. In our most recent academic year ended June 30, 2021, we graduated 11,587 high school students.
Our solutions address two growing markets: General Education and Career Learning.
41
General Education |
| Career Learning |
|
| ||
● School-as-a-service | ● Stride Career Prep school-as-a-service | |||||
● Stride Private Schools | ● Learning Solutions Career Learning software and services sales | |||||
● Learning Solutions software and services sales | ● Adult Learning |
Products and services for the General Education market are predominantly focused on core subjects including math, English, science and history, for kindergarten through twelfth grade students to help build a common foundation of knowledge. Programs utilizing General Education products and services are for students that are not specializing in any particular curriculum or course of study. These programs provide an alternative to traditional school options and address a range of student needs including safety concerns, increased academic support, scheduling flexibility, physical/health restrictions or advanced learning. Products and services are sold as a comprehensive school-as-a-service offering or à la carte.
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, health care and general business. We provide middle and high school students with Career Learning programs that complement their core general education coursework in math, English, science and history. Stride offers multiple career pathways supported by a diverse catalog of Career Learning courses. The middle school program exposes students to a variety of career options and introduces career skill development. In high school, students may engage in industry content pathway courses, project-based learning in virtual teams, and career development services. High school students also have the opportunity to progress toward certifications, connect with industry professionals, earn college credits while in high school, and participate in job shadowing and/or work-based learning experiences that are required to succeed in today’s digital, tech-enabled economy. A student enrolled in a school that offers Stride’s General Education program may elect to take Career Learning courses, but that student and the associated revenue is not reported as a Career Learning enrollment or Career Learning revenue. However, a student and the associated revenue is counted as a Career Learning enrollment or Career Learning revenue if the student is enrolled in a Career Learning program. Like General Education products and services, the products and services for the Career Learning market are sold as a comprehensive school-as-a-service offering or à la carte. We also offer focused post-secondary career learning programs to adult learners, through our Galvanize, Inc. (“Galvanize”), Tech Elevator, Inc. (“Tech Elevator”), and MedCerts, LLC (“MedCerts”) brands. These include skills training in the data science, software engineering, healthcare, and medical fields, as well as providing staffing and talent development services to employers. These programs are offered directly to consumers, as well as to employers and government agencies.
For both the General Education and Career Learning markets, the majority of revenue is derived from our comprehensive school-as-a-service offering which includes an integrated package of curriculum, technology systems, instruction, and support services that we administer on behalf of our customers. The average duration of the agreements for our school-as-a-service offering is greater than five years, and most provide for automatic renewals absent a customer notification within a negotiated time frame. During any fiscal year, we may enter into new agreements, receive non-automatic renewal notices, negotiate replacement agreements, terminate such agreements or receive notices of termination, or customers may transition a school to a different offering. For the 2021-2022 school year, we provide our school-as-a-service offering for 80 schools in 30 states and the District of Columbia in the General Education market, and 42 schools or programs in 24 states in the Career Learning market.
We generate a significant portion of our revenues from the sale of curriculum, administration support and technology services to virtual and blended public schools. The amount of revenue generated from these contracts is impacted largely by the number of enrollments, the mix of enrollments across grades and states, state or district per student funding levels and attendance requirement, among other items. The average duration of the agreements for our school-as-a-service offering is greater than five years, and most provide for automatic renewals absent a customer notification within a
42
negotiated time frame.
The two key financial metrics that we use to assess financial performance are revenues and operating income. For the nine months ended March 31, 2022, revenues increased to $1,231.5 million from $1,139.3 million in the prior year, an increase of 8.1%. Over the same period, operating income increased to $110.5 million from $89.1 million in the prior year, an increase of 24.0%. Our gross margin percentage is generally static so increases to our operating income are driven by revenue growth or a reduction in selling, general, and administrative expenses. Additionally, we use the non-financial metric of total enrollments to assess performance, as enrollment is a key driver of our revenues. Total enrollments for the nine months ended March 31, 2022 were 187.0 thousand, a decrease of 2.4 thousand, or 1.3%, over the prior year.
While the long-term impact of the global emergence of COVID-19 is not estimable or determinable, in late fiscal year 2020, we experienced an increase in demand for our products and services.
Environmental, Social and Governance
As overseers of risk and stewards of long-term enterprise value, Stride’s Board of Directors plays a vital role in assessing our organization’s environmental and social impacts. They are also responsible for understanding the potential impact and related risks of environmental, social and governance (“ESG”) issues on the organization’s operating model. Our Board and management are committed to identifying those ESG issues most likely to impact business operations and growth. We craft policies that are appropriate for our industry and that are of concern to our employees, investors, customers and other key stakeholders. Our Board ensures that the Company’s leaders have ample opportunity to leverage ESG for the long-term good of the organization, its stakeholders, and society. Each Committee of the Board monitors ESG efforts in their respective areas, with the Nominating and Governance Committee coordinating across all Committees.
Since our inception twenty years ago, we have removed barriers that impact academic equity. We provide high-quality education for anyone—particularly those in underserved communities—as a means to foster economic empowerment and address societal inequities from kindergarten all the way through college and career readiness. We recently reinforced our commitment in this area by launching several initiatives including initially offering scholarships to advance education and career opportunities for black students, expanding career pathways in socially responsible law enforcement and increasing employment of black teachers at Stride-powered schools. We are also developing interactive, modular courses focused on racial equity and social justice that are being made available for free to every public school.
Among the many ESG issues we support within the Company, we endeavor to promote diversity and inclusion across every aspect of the organization. We sponsor employee resource groups to provide support for female, minority, differently abled, LGBTQ+, and veteran employees and support employee volunteer efforts. Our commitment is evident in the make-up of our leadership team. We have more minorities in executive management and more women in executive management than the representative population. Importantly, our Board of Directors is also diverse with female, Hispanic, and African American members.
Our commitment to ESG initiatives is an endeavor both the Board and management undertake for the general betterment of those both inside and outside of our Company.
The nature of our business supports environmental sustainability. Most of our employees work from home and most students at Stride-powered schools attend virtual classes, even prior to the COVID-19 crisis, reducing the carbon output from commuting in cars or buses. Our online curriculum reduces the need for paper. Our meetings are most often held virtually using digital first presentations rather than paper.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires us to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and any such differences may be material to our consolidated financial statements. Critical accounting policies and estimates are disclosed in our Annual Report. There have been no significant updates to our critical accounting policies disclosed in our Annual Report.
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Results of Operations
Impacts of COVID-19 on Stride’s Business
While the long-term impact of the global emergence of COVID-19 is not estimable or determinable, in late fiscal year 2020, we experienced an increase in demand for our products and services.
We continue to conduct business as usual with some modifications to employee travel, employee work locations, and cancellation of certain events. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, partners, suppliers and stockholders. It is not clear what the potential effects any such alterations or modifications may have on our business, including the effects on our customers and prospects, or on our long-term financial results.
Lines of Revenue
We operate 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. The Chief Operating Decision Maker evaluates profitability based on consolidated results. We have two lines of revenue: (i) General Education and (ii) Career Learning.
Enrollment Data
The following table sets forth total enrollment data for students in our General Education and Career Learning lines of revenue. Enrollments for General Education and Career Learning only include those students in full service public or private programs where Stride provides a combination of curriculum, technology, instructional and support services inclusive of administrative support. No enrollments are included in Career Learning for Galvanize, Tech Elevator or MedCerts. This data includes enrollments for which Stride receives no public funding or revenue.
If the mix of enrollments changes, our revenues will be impacted to the extent the average revenue per enrollment is significantly different. We do not award or permit incentive compensation to be paid to our public school program enrollment staff or contractors based on the number of students enrolled.
The following represents our current enrollment for each of the periods indicated:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
March 31, | 2022 / 2021 | March 31, | 2022 / 2021 | |||||||||||||||||||||
| 2022 |
| 2021 |
| Change |
| Change % |
| 2022 |
| 2021 |
| Change |
| Change % | |||||||||
(In thousands, except percentages) | ||||||||||||||||||||||||
General Education (1) | 143.8 | 155.8 | (12.0) | (7.7%) | 145.1 | 159.4 | (14.3) | (9.0)% | ||||||||||||||||
Career Learning (1) (2) | 42.0 | 29.5 | 12.5 | 42.4% | 41.9 | 30.0 | 11.9 | 39.7% | ||||||||||||||||
Total Enrollment | 185.8 | 185.3 | 0.5 | 0.3% | 187.0 | 189.4 | (2.4) | (1.3%) | ||||||||||||||||
(1) | Enrollments reported for the first quarter are equal to the official count date number, which was September 30, 2021 for the first quarter of fiscal year 2022 and October 1, 2020 for the first quarter of fiscal year 2021. |
(2) | No enrollments are included in Career Learning for Galvanize, Tech Elevator or MedCerts. |
Revenue Data
Revenues are captured by market based on the underlying customer contractual agreements. Where customers purchase products and services for both General Education and Career Learning markets we allocate revenues based on the program each student selects for enrollment. All kindergarten through fifth grade students are considered General Education students. Periodically, a middle school or high school student enrollment may change line of revenue classification.
The following represents our current revenues for each of the periods indicated:
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Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
March 31, | Change 2022 / 2021 | March 31, | Change 2022 / 2021 | |||||||||||||||||||||
| 2022 |
| 2021 |
| $ |
| % |
| 2022 |
| 2021 |
| $ |
| % | |||||||||
(In thousands, except percentages) | ||||||||||||||||||||||||
General Education | $ | 315,858 | $ | 322,304 | $ | (6,446) | (2.0%) | $ | 935,440 | $ | 950,142 | $ | (14,702) | (1.5%) | ||||||||||
Career Learning | ||||||||||||||||||||||||
Middle - High School | 83,238 | 52,382 | 30,856 | 58.9% | 229,937 | 152,529 | 77,408 | 50.7% | ||||||||||||||||
Adult | 22,626 | 17,459 | 5,167 | 29.6% | 66,078 | 36,579 | 29,499 | 80.6% | ||||||||||||||||
Total Career Learning | 105,864 | 69,841 | 36,023 | 51.6% | 296,015 | 189,108 | 106,907 | 56.5% | ||||||||||||||||
Total Revenues | $ | 421,722 | $ | 392,145 | $ | 29,577 | 7.5% | $ | 1,231,455 | $ | 1,139,250 | $ | 92,205 | 8.1% |
Products and Services
Stride has invested over $500 million in the last twenty years to develop curriculum, systems, instructional practices and support services that enable us to support hundreds of thousands of students. The following describes the various products and services that we provide to customers. Products and services are provided on an individual basis as well as customized solutions, such as our most comprehensive school-as-a-service offering which supports our clients in operating full-time virtual or blended schools. Stride is continuously innovating to remain at the forefront of effective educational techniques to meet students’ needs. It continues to expand upon its personalized learning model, improve the user experience of its products, and develop tools and partnerships to more effectively engage and serve students, teachers, and administrators.
Curriculum and Content – Stride has one of the largest digital research-based curriculum portfolios for the K-12 online education industry that includes some of the best in class content available in the market. Our customers can select from hundreds of high-quality, engaging, online coursework and content, as well as many state customized versions of those courses, electives, and instructional supports. Since our inception, we have built core courses on a foundation of rigorous standards, following the guidance and recommendations of leading educational organizations at the national and state levels. State standards are continually evolving, and we continually invest in our curriculum to meet these changing requirements. Through our subsidiaries Galvanize, Tech Elevator and MedCerts, we have added high-quality, engaging, online coursework and content in software engineering, data science, healthcare, and medical fields.
Systems – We have established a secure and reliable technology platform, which integrates proprietary and third-party systems, to provide a high-quality educational environment and gives us the capability to grow our customer programs and enrollment. Our end-to-end platform includes single-sign on capability for our content management, learning management, student information, data reporting and analytics, and various support systems that allow customers to provide a high-quality and personalized educational experience for students. A la carte offerings can provide curriculum and content hosting on customers’ learning management systems, or integration with customers’ student information systems.
Instructional Services – We offer a broad range of instructional services that includes customer support for instructional teams, including recruitment of state certified teachers, training in research-based online instruction methods and Stride systems, oversight and evaluation services, and ongoing professional development. Stride also provides training options to support teachers and parents to meet students’ learning needs. Stride’s range of training options are designed to enhance skills needed to teach using an online learning platform, and include hands-on training, on-demand courses, and support materials.
Support Services – We offer a broad range of support services, including marketing and enrollment, supporting prospective students through the admission process, assessment management, administrative support (e.g., budget proposals, financial reporting, and student data reporting), and technology and materials support (e.g., provisioning of student computers, offline learning kits, internet access and technology support services).
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Financial Information
The following table sets forth statements of operations data and the amounts as a percentage of revenues for each of the periods indicated:
| Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||||||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||
Revenues | $ | 421,722 |
| 100.0 | % | $ | 392,145 |
| 100.0 | % | $ | 1,231,455 |
| 100.0 | % | $ | 1,139,250 |
| 100.0 | % |
| ||
Instructional costs and services | 266,883 | 63.3 | 253,128 | 64.5 | 802,657 | 65.2 | 740,951 | 65.0 | |||||||||||||||
Gross margin | 154,839 | 36.7 | 139,017 | 35.5 | 428,798 | 34.8 | 398,299 | 35.0 | |||||||||||||||
Selling, general, and administrative expenses | 94,245 | 22.3 | 100,464 | 25.6 | 318,266 | 25.8 | 309,230 | 27.1 | |||||||||||||||
Income from operations | 60,594 | 14.4 | 38,553 | 9.8 | 110,532 | 9.0 | 89,069 | 7.8 | |||||||||||||||
Interest expense, net | (2,373) | (0.6) | (5,371) | (1.4) | (6,241) | (0.5) | (12,502) | (1.1) | |||||||||||||||
Other income, net | 496 | 0.1 | 486 | 0.1 | 4,291 | 0.3 | 2,276 | 0.2 | |||||||||||||||
Income before income taxes and income from equity method investments | 58,717 | 13.9 | 33,668 | 8.6 | 108,582 | 8.8 | 78,843 | 6.9 | |||||||||||||||
Income tax expense | (16,716) | (4.0) | (10,275) | (2.6) | (29,751) | (2.4) | (18,541) | (1.6) | |||||||||||||||
Income from equity method investments | 918 | 0.2 | 396 | 0.1 | 209 | 0.0 | 654 | 0.1 | |||||||||||||||
Net income attributable to common stockholders | $ | 42,919 | 10.2 | % | $ | 23,789 | 6.1 | % | $ | 79,040 | 6.4 | % | $ | 60,956 | 5.4 | % |
Comparison of the Three Months Ended March 31, 2022 and 2021
Revenues. Our revenues for the three months ended March 31, 2022 were $421.7 million, representing an increase of $29.6 million, or 7.5%, from $392.1 million for the same period in the prior year. General Education revenues decreased $6.4 million, or 2.0%, year over year. The decrease in General Education revenues was primarily due to the 7.7% decrease in enrollments, school mix (distribution of enrollments by school), and other factors. Career Learning revenues increased $36.0 million, or 51.6%, primarily due to a 42.4% increase in enrollments, school mix.
Instructional costs and services expenses. Instructional costs and services expenses for the three months ended March 31, 2022 were $266.9 million, representing an increase of $13.8 million, or 5.5%, from $253.1 million for the same period in the prior year. This increase in expense was due to continued hiring of personnel in growth states and salary increases in some states. Instructional costs and services expenses were 63.3% of revenues during the three months ended March 31, 2022, a decrease from 64.5% for the three months ended March 31, 2021.
Selling, general, and administrative expenses. Selling, general, and administrative expenses for the three months ended March 31, 2022 were $94.2 million, representing a decrease of $6.3 million, or 6.3% from $100.5 million for the same period in the prior year. The decrease was primarily due to a decrease of $4.4 million in professional services and marketing expenses, and $4.1 million in personnel and related benefit costs, including stock-based compensation, partially
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offset by a $1.9 million increase in licensing fees. Selling, general, and administrative expenses were 22.3% of revenues during the three months ended March 31, 2022, a decrease from 25.6% for the three months ended March 31, 2021.
Income tax expense. Income tax expense was $16.7 million for the three months ended March 31, 2022, or 28.0% of income before income taxes, as compared to an expense of $10.3 million, or 30.2% of income before income taxes for the same period in the prior year. The decrease in the effective tax rate for the three months ended March 31, 2022 was primarily due to the impact of non-deductible compensation.
Comparison of the Nine Months Ended March 31, 2022 and 2021
Revenues. Our revenues for the nine months ended March 31, 2022 were $1,231.5 million, representing an increase of $92.2 million, or 8.1%, from $1,139.3 million for the same period in the prior year. General Education revenues decreased $14.7 million, or 1.5%, year over year. The decrease in General Education revenues was primarily due to the 9.0% decrease in enrollments, school mix (distribution of enrollments by school), and other factors. Career Learning revenues increased $106.9 million, or 56.5%, primarily due to a 39.7% increase in enrollments, school mix, as well as from the acquisition of MedCerts and Tech Elevator.
Instructional costs and services expenses. Instructional costs and services expenses for the nine months ended March 31, 2022 were $802.7 million, representing an increase of $61.7 million, or 8.3%, from $741.0 million for the same period in the prior year. This increase in expense was due to continued hiring of personnel in growth states and salary increases in some states. Instructional costs and services expenses were 65.2% of revenues during the nine months ended March 31, 2022, an increase from 65.0% for the nine months ended March 31, 2021.
Selling, general, and administrative expenses. Selling, general, and administrative expenses for the nine months ended March 31, 2022 were $318.3 million, representing an increase of $9.1 million, or 2.9% from $309.2 million for the same period in the prior year. The increase was primarily due to an increase of $9.1 million in licensing fees, and $1.9 million in professional services and marketing expenses, partially offset by a $3.1 million decrease in personnel and related benefit costs, including stock-based compensation. Selling, general, and administrative expenses were 25.8% of revenues during the nine months ended March 31, 2022, a decrease from 27.1% for the nine months ended March 31, 2021.
Income tax expense. Income tax expense was $29.8 million for the nine months ended March 31, 2022, or 27.3% of income before income taxes, as compared to an expense of $18.5 million, or 23.3% of income before income taxes for the same period in the prior year. The increase in the effective tax rate for the nine months ended March 31, 2022 was primarily due to the impact of non-deductible compensation and the excess tax benefit from stock-based compensation.
Liquidity and Capital Resources
As of March 31, 2022, we had net working capital, or current assets minus current liabilities, of $621.4 million. Our working capital includes cash and cash equivalents of $308.6 million and accounts receivable of $422.6 million. Our working capital provides a significant source of liquidity for our normal operating needs. Our accounts receivable balance fluctuates throughout the fiscal year based on the timing of customer billings and collections and tends to be highest in our first fiscal quarter as we begin billing for students. In addition, our cash and accounts receivable were significantly in excess of our accounts payable and short-term accrued liabilities at March 31, 2022.
During the first quarter of fiscal year 2021, we issued $420.0 million aggregate principal amount of 1.125% Convertible Senior Notes due 2027 (“Notes”). The Notes are governed by an indenture (the “Indenture”) between us and U.S. Bank National Association, as trustee. The net proceeds from the offering of the Notes were approximately $408.6 million after deducting the underwriting fees and other expenses paid by the Company. The Notes bear interest at a rate of 1.125% per annum, payable semi-annually in arrears on March 1st and September 1st of each year, beginning on March 1, 2021. The Notes will mature on September 1, 2027. In connection with the Notes, we entered into privately negotiated capped call transactions (the “Capped Call Transactions”) with certain counterparties. The Capped Call Transactions are expected to cover the aggregate number of shares of the Company’s common stock that initially underlie the Notes, and are expected to reduce potential dilution to the Company’s common stock upon any conversion of Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted Notes. The upper strike price of the Capped Call Transactions is $86.174 per share. The cost of the Capped Call Transactions was $60.4 million and was recorded within additional paid-in capital.
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Before June 1, 2027, noteholders will have the right to convert their Notes only upon the occurrence of certain events. After June 1, 2027, noteholders may convert their Notes at any time at their election until two days prior to the maturity date. We will settle conversions by paying cash up to the outstanding principal amount, and at our election, will settle the conversion spread by paying or delivering cash or shares of our common stock, or a combination of cash and shares of our common stock. The initial conversion rate is 18.9109 shares of common stock per $1,000 principal amount of Notes, which represents an initial conversion price of approximately $52.88 per share of common stock. The Notes will be redeemable at our option at any time after September 6, 2024 at a cash redemption price equal to the principal amount of the Notes, plus accrued and unpaid interest, subject to certain stock price hurdles as discussed in the Indenture.
On January 27, 2020, we entered into a $100.0 million senior secured revolving credit facility (“Credit Facility”) to be used for general corporate operating purposes with PNC Capital Markets LLC. The Credit Facility has a five-year term and incorporates customary financial and other covenants, including but not limited to a maximum leverage ratio and a minimum interest coverage ratio. The majority of our borrowings under the Credit Facility were at LIBOR plus an additional rate ranging from 0.875% - 1.50% based on our leverage ratio as defined in the agreement. The Credit Facility is secured by our assets. The Credit Facility agreement allows for an amendment to establish a new benchmark interest rate when LIBOR is discontinued during the five-year term. As of March 31, 2022, we were in compliance with the financial covenants. As part of the proceeds received from the Notes, we repaid our $100.0 million outstanding balance and as of March 31, 2022, we had no amounts outstanding on the Credit Facility. The Credit Facility also includes a $200.0 million accordion feature.
We are a lessee under finance lease obligations for student computers and peripherals under loan agreements with Banc of America Leasing & Capital, LLC (“BALC”). As of March 31, 2022 and June 30, 2021, the finance lease liability was $74.6 million and $68.9 million, respectively, with lease interest rates ranging from 1.52% to 3.65%.
We entered into an agreement with BALC in April 2020 for $25.0 million (increased to $41.0 million in July 2020) to provide financing for our leases through March 2021 at varying rates. We entered into additional agreements during fiscal year 2021 to provide financing of $54.0 million for our student computers and peripherals leases through October 2022 at varying rates. Individual leases with BALC include 36 month payment terms, fixed rates ranging from 1.52% to 3.65%, and a $1 purchase option at the end of each lease term. We pledged the assets financed to secure the outstanding leases.
Our cash requirements consist primarily of day-to-day operating expenses, capital expenditures and contractual obligations with respect to interest on our Notes, office facility leases, capital equipment leases and other operating leases. We expect to make future payments on existing leases from cash generated from operations. We believe that the combination of funds to be generated from operations, borrowing on our Credit Facility and net working capital on hand will be adequate to finance our ongoing operations for the foreseeable future. In addition, we continue to explore acquisitions, strategic investments and joint ventures related to our business that we may acquire using cash, stock, debt, contribution of assets or a combination thereof.
Operating Activities
Net cash provided by operating activities for the nine months ended March 31, 2022 was $81.4 million compared to $11.1 million for the nine months ended March 31, 2021. The increase of $70.3 million was primarily due to a lower increase in accounts receivable, partially offset by a decrease in accrued compensation and benefits and deferred revenue and other liabilities.
Investing Activities
Net cash used in investing activities for the nine months ended March 31, 2022 was $90.6 million compared to $106.5 million for the nine months ended March 31, 2021, a decrease of $15.9 million. The decrease was primarily due to the acquisitions of MedCerts and Tech Elevator for $70.8 million in fiscal year 2021, partially offset by net purchases of marketable securities of $44.2 million and an increase in capital expenditures year over year of $13.0 million.
Financing Activities
Net cash used in financing activities for the nine months ended March 31, 2022 was $68.8 million compared to net cash provided by financing activities of $212.1 million during the nine months ended March 31, 2021, a decrease of $280.9
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million. The decrease was primarily due to the net proceeds from the issuance of our Notes of $408.6 million, partially offset by capped call purchases related to the Notes of $60.4 million, the repayment on our Credit Facility of $100.0 million in fiscal year 2021 and an increase in the repurchase of restricted stock for income tax withholding of $28.6 million.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
As of March 31, 2022 and June 30, 2021, we had cash and cash equivalents totaling $308.6 million and $386.1 million, respectively. Our excess cash has been invested in money market funds, government securities, corporate debt securities and similar investments. At March 31, 2022, a 1% gross increase in interest rates for our variable-interest instruments would result in a $3.1 million annualized increase in interest income. Additionally, the fair value of our investment portfolio is subject to changes in market interest rates.
Our short-term debt obligations under our Credit Facility are subject to interest rate exposure. At March 31, 2022, we had no outstanding balance on our Credit Facility.
Foreign Currency Exchange Risk
We currently operate in several foreign countries, but we do not transact a material amount of business in a foreign currency. If we enter into any material transactions in a foreign currency or establish or acquire any subsidiaries that measure and record their financial condition and results of operations in a foreign currency, we will be exposed to currency transaction risk and/or currency translation risk. Exchange rates between U.S. dollars and many foreign currencies have fluctuated significantly over the last few years and may continue to do so in the future. Accordingly, we may decide in the future to undertake hedging strategies to minimize the effect of currency fluctuations on our financial condition and results of operations.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures.
We carried out an evaluation, required by paragraph (b) of Rule 13a-15 or Rule 15d-15 under the Exchange Act, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this review, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2022.
Changes to Internal Control over Financial Reporting
There have been no changes in our internal controls over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
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Part II. Other Information
Item 1. Legal Proceedings.
See Item 1 of Part I, “Financial Statements – Note 10 – Commitments and Contingencies - Litigation.”
Item 1A. Risk Factors.
There have been no material changes to the risk factors disclosed in “Risk Factors” in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended June 30, 2021, as filed with the SEC on August 11, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
(a) Exhibits.
Number |
| Description |
10.1 | ||
31.1 | ||
31.2 | ||
32.1 | ||
32.2 | ||
101 | The following financial statements and footnotes from the Stride, Inc. Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2022, formatted in Inline XBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets (unaudited), (ii) Condensed Consolidated Statements of Operations (unaudited), (iii) Condensed Consolidated Statements of Comprehensive Income, (iv) Condensed Consolidated Statement of Equity (unaudited), (v) Condensed Consolidated Statements of Cash Flows (unaudited), and (vi) Notes to Condensed Consolidated Financial Statements (unaudited). | |
104 | The cover page from this Quarterly Report on Form 10-Q, formatted in Inline XBRL (contained in Exhibit 101). |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Stride, Inc. | ||
/s/ TIMOTHY J. MEDINA | ||
Name: | Timothy J. Medina | |
Title: | Chief Financial Officer, Principal Accounting Officer and Authorized Signatory | |
Date: April 20, 2022
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