Stride, Inc. [LRN] Filings

10-Q 1 lrn-20220930x10q.htm 10-Q

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

☒

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

For the quarterly period ended September 30, 2022

☐

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

For the transition period from to

Commission file number: 001-33883

Stride, Inc.

(Exact name of registrant as specified in its charter)


Delaware		95-4774688
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

11720 Plaza America 9^th Floor
Reston, VA 20190		(703) 483-7000
(Address of Principal Executive Offices)		(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $0.0001 par value	LRN	New York Stock Exchange (NYSE)

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻

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

Large accelerated filer ⌧

Accelerated filer ◻

Non-accelerated filer ◻

Smaller reporting company ☐

Emerging growth company ☐

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

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

As of October 21, 2022, the Registrant had 43,031,568 shares of common stock, $0.0001 par value per share outstanding.

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Stride, Inc.

Form 10-Q

For the Quarterly Period Ended September 30, 2022

Index

		Page
		Number

PART I.	Financial Information
Item 1.	Financial Statements (Unaudited)	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41
Item 4.	Controls and Procedures	42

PART II.	Other Information
Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3.	Defaults Upon Senior Securities	43
Item 4.	Mine Safety Disclosures	43
Item 5.	Other Information	43
Item 6.	Exhibits	43

Signatures		44

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited).

STRIDE, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS


	September 30,		June 30,
	2022		2022
				(audited)
	(In thousands except share and per share data)
ASSETS
Current assets
Cash and cash equivalents	$	194,524	$	389,398
Accounts receivable, net of allowance of $28,623 and $26,993		543,705		418,558
Inventories, net		27,919		36,003
Prepaid expenses		71,149		25,974
Other current assets		93,840		80,601
Total current assets		931,137		950,534
Operating lease right-of-use assets, net		79,327		85,457
Property and equipment, net		72,307		61,537
Capitalized software, net		74,748		71,800
Capitalized curriculum development costs, net		51,430		50,580
Intangible assets, net		86,690		88,669
Goodwill		246,238		241,022
Deposits and other assets		80,221		93,946
Total assets	$	1,622,098	$	1,643,545
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	68,956	$	61,997
Accrued liabilities		42,540		63,200
Accrued compensation and benefits		40,084		73,027
Deferred revenue		80,682		53,630
Current portion of finance lease liability		43,627		37,389
Current portion of operating lease liability		13,356		12,830
Total current liabilities		289,245		302,073
Long-term finance lease liability		34,401		28,888
Long-term operating lease liability		69,113		75,127
Long-term debt		411,848		411,438
Deferred tax liability		20,182		3,205
Other long-term liabilities		10,486		10,233
Total liabilities		835,275		830,964
Commitments and contingencies
Stockholders’ equity
Preferred stock, par value $0.0001; 10,000,000 shares authorized; zero shares issued or outstanding		—		—
Common stock, par value $0.0001; 100,000,000 shares authorized; 48,386,472 and 48,112,664 shares issued; and 43,051,729 and 42,777,921 shares outstanding, respectively		4		4
Additional paid-in capital		683,993		687,454
Accumulated other comprehensive income (loss)		518		143
Retained earnings		204,790		227,462
Treasury stock of 5,334,743 shares at cost		(102,482)		(102,482)
Total stockholders’ equity		786,823		812,581
Total liabilities and stockholders' equity	$	1,622,098	$	1,643,545

See accompanying notes to unaudited condensed consolidated financial statements.

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STRIDE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


	Three Months Ended September 30,
	2022		2021

	(In thousands except share and per share data)
Revenues	$	425,150	$	400,226
Instructional costs and services		295,501		273,824
Gross margin		129,649		126,402
Selling, general, and administrative expenses		158,368		133,379
Loss from operations		(28,719)		(6,977)
Interest expense, net		(2,046)		(1,993)
Other income (expense), net		1,037		(89)
Loss before income taxes and income (loss) from equity method investments		(29,728)		(9,059)
Income tax benefit		7,507		2,893
Income (loss) from equity method investments		(451)		283
Net loss attributable to common stockholders	$	(22,672)	$	(5,883)
Net loss attributable to common stockholders per share:
Basic	$	(0.54)	$	(0.15)
Diluted	$	(0.54)	$	(0.15)
Weighted average shares used in computing per share amounts:
Basic		42,076,628		40,559,066
Diluted		42,076,628		40,559,066

See accompanying notes to unaudited condensed consolidated financial statements.

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STRIDE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


	Three Months Ended September 30,
	2022		2021

		(In thousands)
Net loss	$	(22,672)	$	(5,883)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment		375		144

Comprehensive loss attributable to common stockholders	$	(22,297)	$	(5,739)

See accompanying notes to unaudited condensed consolidated financial statements.

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STRIDE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


	Stride, Inc. Stockholders' Equity
(In thousands except share data)	Common Stock			Additional Paid-in		Accumulated Other Comprehensive		Retained		Treasury Stock
	Shares	Amount		Capital		Income (Loss)		Earnings		Shares	Amount		Total
Balance, June 30, 2022	48,112,664	$	4	$	687,454	$	143	$	227,462	(5,334,743)	$	(102,482)	$	812,581
Net loss	—		—		—		—		(22,672)	—		—		(22,672)
Foreign currency translation adjustment	—		—		—		375		—	—		—		375
Stock-based compensation expense	—		—		5,295		—		—	—		—		5,295
Exercise of stock options	675		—		10		—		—	—		—		10
Vesting of performance share units, net of tax withholding	48,916		—		—		—		—	—		—		—
Issuance of restricted stock awards	460,411		—		—		—		—	—		—		—
Forfeiture of restricted stock awards	(27,184)		—		—		—		—	—		—		—
Repurchase of restricted stock for tax withholding	(209,010)		—		(8,766)		—		—	—		—		(8,766)
Balance, September 30, 2022	48,386,472	$	4	$	683,993	$	518	$	204,790	(5,334,743)	$	(102,482)	$	786,823


	Stride, Inc. Stockholders' Equity
(In thousands except share data)	Common Stock			Additional Paid-in		Accumulated Other Comprehensive		Retained Earnings (Accumulated		Treasury Stock
	Shares	Amount		Capital		Income (Loss)		Deficit)		Shares	Amount		Total

Balance, June 30, 2021	46,911,527	$	4	$	795,449	$	(474)	$	112,151	(5,334,743)	$	(102,482)	$	804,648
Adjustment related to new convertible debt guidance	—		—		(89,460)		—		8,181	—		—		(81,279)
Net loss	—		—		—		—		(5,883)	—		—		(5,883)
Foreign currency translation adjustment	—		—		—		144		—	—		—		144
Stock-based compensation expense	—		—		8,050		—		—	—		—		8,050
Exercise of stock options	15,025		—		246		—		—	—		—		246
Vesting of performance share units, net of tax withholding	—		—		—		—		—	—		—		—
Issuance of restricted stock awards	398,943		—		—		—		—	—		—		—
Forfeiture of restricted stock awards	(34,740)		—		—		—		—	—		—		—
Repurchase of restricted stock for tax withholding	(179,151)		—		(6,020)		—		—	—		—		(6,020)
Balance, September 30, 2021	47,111,604	$	4	$	708,265	$	(330)	$	114,449	(5,334,743)	$	(102,482)	$	719,906

See accompanying notes to unaudited condensed consolidated financial statements.

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STRIDE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Three Months Ended September 30,
	2022		2021

	(In thousands)
Cash flows from operating activities
Net loss	$	(22,672)	$	(5,883)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense		26,251		24,147
Stock-based compensation expense		5,510		8,286
Deferred income taxes		17,223		5,484
Provision for doubtful accounts		1,503		152
Amortization of fees on debt		410		404
Noncash operating lease expense		3,866		5,005
Other		(3,918)		4,325
Changes in assets and liabilities:
Accounts receivable		(126,521)		(150,263)
Inventories, prepaid expenses, deposits and other current and long-term assets		(34,695)		1,260
Accounts payable		8,425		(1,256)
Accrued liabilities		(9,971)		(2,464)
Accrued compensation and benefits		(32,805)		(44,395)
Operating lease liability		(2,605)		(5,321)
Deferred revenue and other liabilities		26,853		29,009
Net cash used in operating activities		(143,146)		(131,510)
Cash flows from investing activities
Purchase of property and equipment		(913)		(1,278)
Capitalized software development costs		(9,793)		(9,690)
Capitalized curriculum development costs		(6,145)		(4,376)
Sale of other investments		60		—
Acquisition of assets		(1,409)		—
Other acquisitions, loans and investments, net of distributions		(213)		(192)
Proceeds from the maturity of marketable securities		12,044		1,501
Purchases of marketable securities		(20,126)		(9,196)
Net cash used in investing activities		(26,495)		(23,231)
Cash flows from financing activities
Repayments on finance lease obligations		(9,314)		(7,020)
Payments of contingent consideration		(7,024)		—
Proceeds from exercise of stock options		10		246
Repurchase of restricted stock for income tax withholding		(8,905)		(6,043)
Net cash used in financing activities		(25,233)		(12,817)
Net change in cash, cash equivalents and restricted cash		(194,874)		(167,558)
Cash, cash equivalents and restricted cash, beginning of period		389,398		386,582
Cash, cash equivalents and restricted cash, end of period	$	194,524	$	219,024

Reconciliation of cash, cash equivalents and restricted cash to balance sheet as of September 30th:
Cash and cash equivalents	$	194,524	$	218,519
Other current assets (restricted cash)		—		505
Total cash, cash equivalents and restricted cash	$	194,524	$	219,024

See accompanying notes to unaudited condensed consolidated financial statements.

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STRIDE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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. 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 two lines of revenue:

●

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. 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 facilitate success 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 reported as a General Education enrollment and General Education revenue. A student and the associated revenue is counted as a Career Learning enrollment or Career Learning revenue only if the student is enrolled in a Career Learning program or school. 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 Galvanize, Inc. (“Galvanize”), Tech Elevator, Inc. (“Tech Elevator”), and MedCerts, LLC (“MedCerts”). These include skills training in the 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 September 30, 2022, the condensed consolidated statements of operations and comprehensive income for the three months ended September 30, 2022 and 2021, the condensed consolidated statements of cash flows for the three months ended September 30, 2022 and 2021, and the condensed consolidated statements of stockholders’ equity for the three months ended September 30, 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 months ended September 30, 2022 are not necessarily indicative of the results to be expected for the year ending June 30, 2023, for any other interim period or for any other future fiscal year. The condensed consolidated balance sheet as of June 30, 2022 has been derived from the audited consolidated financial statements at that date.

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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 10, 2022, which contains the Company’s audited financial statements for the fiscal year ended June 30, 2022.

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

3. Summary of Significant Accounting Policies

Recent Accounting Pronouncements

Accounting Standards Not Yet Adopted

In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-04, Reference Rate Reform (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 is applicable from March 12, 2020 through December 31, 2022 and adoption is permitted at any time during the period on a prospective basis. The Company’s senior secured revolving credit facility includes the use of alternate rates when LIBOR is not available. The Company does not expect the change from LIBOR to an alternate rate will have a material impact to its consolidated financial statements and, to the extent it enters into modifications of agreements that are impacted by the LIBOR phase-out, the Company will apply such guidance to those contract modifications.

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.

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STRIDE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

The majority of the Company’s contracts are with the following types of customers:

●

a virtual or blended school whereby the amount of revenue is primarily determined by funding the school receives;

●

a school or individual who licenses certain curriculum on a subscription or course-by-course basis; or

●

an enterprise who contracts with the Company to provide job training.

Funding-based Contracts

The Company provides an integrated package of systems, services, products, and professional expertise that is administered together to support a virtual or blended public school. Contractual agreements generally span multiple years with performance obligations being isolated to annual periods which generally coincide with the Company’s fiscal year. Customers of these programs can obtain administrative support, information technology, academic support services, online curriculum, learning systems platforms and instructional services under the terms of a negotiated service agreement. The schools receive funding on a per student basis from the state in which the public school or school district is located. Shipments of materials for schools that occur in the fourth fiscal quarter and for the upcoming school year are recorded in deferred revenue.

The Company generates revenues under contracts with virtual and blended public schools and include the following components, where required:

●

providing each of a school’s students with access to the Company’s online school and lessons;

●

offline learning kits, which include books and materials to supplement the online lessons;

●

the use of a personal computer and associated reclamation services;

●

internet access and technology support services;

●

instruction by a state-certified teacher; and

●

management and technology services necessary to support a virtual or blended school. In certain contracts, revenues are determined directly by per enrollment funding.

To determine the pro rata amount of revenue to recognize in a fiscal quarter, the Company estimates the total expected funds each school will receive in a particular school year. Total funds for a school are primarily a function of the number of students enrolled in the school and established per enrollment funding levels, which are generally published on an annual basis by the state or school district. The Company reviews its estimates of funding periodically, and updates as necessary, by adjusting its year-to-date earned revenues to be proportional to the total expected revenues to be earned during the fiscal year. Actual school funding may vary from these estimates and the impact of these differences could impact the Company’s results of operations. Since the end of the school year coincides with the end of the Company’s fiscal year, annual revenues are generally based on actual school funding and actual costs incurred (including costs for the Company’s services to the schools plus other costs the schools may incur). The Company’s schools’ reported results are subject to annual school district financial audits, which incorporate enrollment counts, funding and other routine financial audit considerations. The results of these audits are incorporated into the Company’s monthly funding estimates for the three months ended September 30, 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

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STRIDE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

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 September 30, 2022 and 2021, the Company’s revenues included a reduction for net school operating losses at the schools of $10.1 million and $12.9 million, respectively. Because the Company has agreed to absorb any operating losses of the schools, the Company records the expenses incurred by the school as both revenue and expenses in the condensed consolidated statements of operations. Amounts recorded as revenues and expenses for the three months ended September 30, 2022 and 2021 were $125.3 million and $113.9 million, respectively.

Subscription-based Contracts

The Company provides certain online curriculum and services to schools and school districts under subscription agreements. Revenues from the licensing of curriculum under subscription arrangements are recognized on a ratable basis over the subscription period. Revenues from professional consulting, training and support services are deferred and recognized ratably over the service period.

In addition, the Company contracts with individual customers who have access for one to two years to company-provided online curriculum and generally prepay for services to be received. Adult learners enroll in courses that provide specialized training in a specific industry. Each of these contracts are considered to be one performance obligation. The Company recognizes these revenues pro rata over the maximum term of the customer contract based on the defined contract price.

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 September 30, 2022 and 2021, approximately 90%

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STRIDE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

and 90%, respectively, of the Company’s General Education revenues, and 99% and 99%, respectively, of the Company’s Middle – High School Career Learning revenues, were from funding-based contracts.

The following table presents the Company’s revenues disaggregated based on its two lines of revenue for the three months ended September 30, 2022 and 2021:


	Three Months Ended September 30,
	2022		2021

	(In thousands)

General Education	$	271,658	$	306,341
Career Learning
Middle - High School		125,535		71,411
Adult		27,957		22,474
Total Career Learning		153,492		93,885
Total Revenues	$	425,150	$	400,226

Concentration of Customers

During the three months ended September 30, 2022 and 2021, the Company had no contracts that represented greater than 10% of total revenues.

Contract Balances

The timing of revenue recognition, invoicing, and cash collection results in accounts receivable, unbilled receivables (a contract asset) and deferred revenue (a contract liability) in the 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.

The opening and closing balance of the Company’s accounts receivable, unbilled receivables and deferred revenue are as follows:


	September 30,		June 30,
	2022		2022

	(In thousands)

Accounts receivable	$	543,705	$	418,558
Unbilled receivables (included in accounts receivable)		23,729		19,702
Deferred revenue		80,682		53,630
Deferred revenue, long-term (included in other long-term liabilities)		2,911		3,099

The difference between the opening and closing balance of the accounts receivable and unbilled receivables relates to the timing of the Company’s billing in relation to month end and contractual agreements. The difference between the opening and closing balance of the deferred revenue relates to the timing difference between billings to customers and the service periods under the contract. Typically, each of these balances are at their highest during the first quarter of the fiscal year and lowest at the end of the fiscal year. The amount of revenue recognized during the three months ended September 30, 2022 and 2021 that was included in the previous July 1^st deferred revenue balance was $27.8 million and $25.2 million, respectively. During the three months ended September 30, 2022 and 2021, the Company recorded revenues of ($0.6) million and $2.3 million, respectively, related to performance obligations satisfied in prior periods.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. For the majority of its contracts, the Company’s performance obligations are satisfied over time, as the Company delivers, and the customer receives the services, over the service period of the contract. The Company’s payment terms are generally net 30 or net 45, but can vary depending on the customer or when the school receives its funding from the state.

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 one year as of September 30, 2022 was $2.9 million.

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 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

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

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 September 30, 2022 and June 30, 2022, the allowance for credit losses related to held-to-maturity debt securities was zero.

As of September 30, 2022, the Company’s marketable securities consisted of investments in corporate bonds, U.S. treasury notes and commercial paper. The short-term and long-term portions were $75.1 million and $17.6 million, respectively. The maturities of the Company’s long-term marketable debt securities range from one to two years. The following table summarizes the amortized cost, net carrying amount, and fair value disaggregated by class of instrument (in thousands).


				Allowance for		Net Carrying		Gross Unrealized
		Amortized Cost		Credit Losses		Amount		Gains (Losses)		Fair Value
Corporate Bonds	$	49,242	$	-	$	49,242	$	(898)	$	48,344
U.S. Treasury Notes		16,374		-		16,374		(224)		16,150
Commercial Paper		27,073		-		27,073		-		27,073
Total	$	92,689	$	-	$	92,689	$	(1,122)	$	91,567

As of June 30, 2022, the Company’s marketable securities consisted of investments in corporate bonds, U.S. treasury notes and commercial paper. The short-term and long-term portions were $63.0 million and $21.7 million, respectively. The maturities of the Company’s long-term marketable debt securities range from one to two years. The following table summarizes the amortized cost, net carrying amount, and fair value disaggregated by class of instrument (in thousands).


				Allowance for		Net Carrying		Gross Unrealized
		Amortized Cost		Credit Losses		Amount		Gains (Losses)		Fair Value
Corporate Bonds	$	50,067	$	-	$	50,067	$	(691)	$	49,376
U.S. Treasury Notes		16,399		-		16,399		(199)		16,200
Commercial Paper		18,186		-		18,186		-		18,186
Total	$	84,652	$	-	$	84,652	$	(890)	$	83,762

Allowance for Doubtful Accounts

The Company maintains an allowance for uncollectible accounts primarily for estimated losses resulting from the inability or failure of individual customers to make required payments. The Company maintains an allowance under ASC 326 based on historical losses, changes in payment history, customer-specific information, current economic conditions, and reasonable and supportable forecasts of future economic conditions. The allowance under ASC 326 is updated as additional losses are incurred or information becomes available related to the customer or economic conditions.

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 September 30, 2022 and June 30, 2022, $9.1 million and $11.2

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

million, respectively, of inventory, net of reserves, was deemed long-term and included in deposits and other assets on the condensed consolidated balance sheets. The provision for excess and obsolete inventory is established based upon the evaluation of the quantity on hand relative to demand. The excess and obsolete inventory reserve was $6.5 million and $6.5 million at September 30, 2022 and June 30, 2022, respectively.

Other Current Assets

Other current assets consist primarily of textbooks, curriculum materials and other supplies which are expected to be returned upon the completion of the school year. Materials not returned are expensed as part of instructional costs and services. Additionally, other current assets include short-term marketable securities.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expense is calculated using the straight-line method over the estimated useful life of the asset (or the lesser of the term of the lease and the estimated useful life of the asset under the finance lease). Amortization of assets capitalized under finance lease arrangements is included in depreciation expense. Leasehold improvements are amortized over the lesser of the lease term or the estimated useful life of the asset. The determination of the lease term is discussed below under “Leases.”

Property and equipment are depreciated over the following useful lives:


		Useful Life
Student and state testing computers and printers		3 - 5 years
Computer hardware		3 - 7 years
Computer software		3 - 5 years
Web site development		3 years
Office equipment		5 years
Furniture and fixtures		7 years
Leasehold improvements		Shorter of useful life or term of the lease

The Company makes an estimate of unreturned student computers and printers based on an analysis of recent trends of returns. The Company recorded accelerated depreciation of $1.6 million and $0.6 million for the three months ended September 30, 2022 and 2021, respectively, related to unreturned student computers.

Depreciation expense, including accelerated depreciation, related to computers and printers provided to students reflected in instructional costs and services for the three months ended September 30, 2022 and 2021 was $10.3 million and $8.1 million, respectively. Depreciation expense related to property and equipment reflected in selling, general, and administrative expenses for the three months ended September 30, 2022 and 2021 was $1.6 million and $1.2 million, respectively.

The Company fully expenses computer peripheral equipment (e.g., keyboards, mouses) upon purchase as recovery has been determined to be uneconomical. These expenses totaled $1.2 million and $4.7 million for the three months ended September 30, 2022 and 2021, respectively, and are recorded as instructional costs and services.

Capitalized Software Costs

The Company develops software for internal use. Software development costs incurred during the application development stage are capitalized. The Company amortizes these costs over the estimated useful life of the software, which is generally three years. Capitalized software development costs are stated at cost less accumulated amortization.

Capitalized software additions totaled $9.8 million and $9.7 million for the three months ended September 30, 2022 and 2021, respectively. The Company recorded amortization expense related to capitalized software of $5.7 million and $6.2 million during the three months ended September 30, 2022 and 2021, respectively, within instructional costs and

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

services. Amortization expense related to capitalized software reflected in selling, general, and administrative expenses during the three months ended September 30, 2022 and 2021 was $1.3 million and $1.3 million, respectively.

Capitalized Curriculum Development Costs

The Company internally develops curriculum, which is primarily provided as online content and accessed via the Internet. The Company also creates textbooks and other materials that are complementary to online content.

The Company capitalizes curriculum development costs incurred during the application development stage, as well as the design and deployment phases of the project. As a result, a significant portion of the Company’s courseware development costs qualify for capitalization due to the concentration of its development efforts on the content of the courseware. Capitalization ends when a course is available for general release to its customers, at which time amortization of the capitalized costs begins. The period of time over which these development costs are amortized is generally five years.

Total capitalized curriculum development additions were $6.1 million and $4.4 million for the three months ended September 30, 2022 and 2021, respectively. These amounts are recorded on the condensed consolidated balance sheets net of amortization charges. Amortization expense for the three months ended September 30, 2022 and 2021 was $4.0 million and $4.2 million, respectively, and is recorded in instructional costs and services.

Leases

The Company’s principal leasing activities include student computers and peripherals, classified as finance leases, and facilities, classified as operating leases.

Leases are classified as operating leases unless they meet any of the criteria below to be classified as a finance lease:

●

the lease transfers ownership of the asset at the end of the lease;

●

the lease grants an option to purchase the asset which the lessee is expected to exercise;

●

the lease term reflects a major part of the asset’s economic life;

●

the present value of the lease payments equals or exceeds the fair value of the asset; or

●

the asset is specialized with no alternative use to the lessor at the end of the term.

Finance Leases

The Company enters into agreements to finance the purchase of student computers and peripherals provided to students of its schools. Individual leases typically include 3-year payment terms, at varying rates. The Company pledges the assets financed to secure the outstanding leases.

Operating Leases

The Company enters into agreements for facilities that serve as offices for its headquarters and school operations. Lease terms vary between 1 and 11 years. Certain leases include renewal options, usually based upon current market rates, as well as termination rights. The Company performs an evaluation of each lease to determine if the lease payments included in the renewal option should be included in the initial measurement of the lease liability.

Discount Rate

The present value of the lease payments is calculated using either the rate implicit in the lease, or the lessee’s incremental borrowing rate, over the lease term. For the Company’s finance leases, the stated rate is defined within the lease terms; while for the Company’s operating leases, the rate is not implicit. For operating leases, the Company uses its incremental borrowing rate as the discount rate; determined as the Company’s borrowing rate on a collateralized basis for a similar term and amount to the term and amount of the lease. The Company’s current incremental borrowing rate of

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

4.42% is based upon its agreements used for its finance leases. The incremental borrowing rate is subsequently reassessed upon modification of its leasing arrangements or with the execution of a new lease agreement.

Policy Elections

Short-term Leases

The Company has elected as an on-going accounting policy election not to record a right-of-use asset or lease liability on its short-term facility leases of 12 months or less, and will expense its lease payments on a straight-line basis over the lease term. The accounting policy election is made by class of underlying asset to which the right of use relates. The Company has elected to apply the accounting policy election only to operating leases.

Income Taxes

Deferred tax assets and liabilities are computed based on the difference between the financial reporting and income tax bases of assets and liabilities using the enacted marginal tax rate. The net deferred tax asset is reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the net deferred tax asset will not be realized.

Goodwill and Intangible Assets

The Company records as goodwill the excess of the purchase price over the fair value of the identifiable net assets acquired. Finite-lived intangible assets acquired in business combinations subject to amortization are recorded at their fair value. Finite-lived intangible assets include trade names, acquired customers and distributors, developed technology and non-compete agreements. Such intangible assets are amortized on a straight-line basis over their estimated useful lives. Amortization expense for the three months ended September 30, 2022 and 2021 was $3.3 million and $3.2 million, respectively, and is included within selling, general, and administrative expenses in the condensed consolidated statements of operations. Future amortization of intangible assets is expected to be $9.8 million, $12.1 million, $10.9 million, $9.7 million, and $8.1 million in the fiscal years ending June 30, 2023 through June 30, 2027, respectively, and $35.9 million thereafter.

The Company reviews its finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. If the total of the expected undiscounted future cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between fair value and the carrying value of the asset.

The Company has one reporting unit. The process for testing goodwill and intangible assets with indefinite lives for impairment is performed annually, as well as when an event triggering impairment may have occurred. Companies are also allowed to qualitatively assess goodwill impairment through a screening process which would permit companies to forgo the quantitative impairment test as part of their annual goodwill impairment process. The Company performs its annual assessment on May 31^st which is then updated for any changes in condition as of June 30^th.

During the three months ended September 30, 2022, there were no events or changes in circumstances that would indicate that the carrying amount of the goodwill was impaired.

During the three months ended September 30, 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.

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STRIDE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

The following table represents the balance of the Company’s intangible assets as of September 30, 2022 and June 30, 2022:


	September 30, 2022						June 30, 2022
($ in millions)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Value		Gross Carrying Amount		Accumulated Amortization		Net Carrying Value
Trade names	$	85.1	$	(24.5)	$	60.6	$	85.1	$	(23.1)	$	62.0
Customer and distributor relationships		39.8		(26.3)		13.5		38.9		(25.3)		13.6
Developed technology		22.0		(9.7)		12.3		21.7		(8.9)		12.8
Other		1.4		(1.1)		0.3		1.4		(1.1)		0.3
Total	$	148.3	$	(61.6)	$	86.7	$	147.1	$	(58.4)	$	88.7

Impairment of Long-Lived Assets

Long-lived assets include property, equipment, right-of-use assets, capitalized curriculum and software developed or obtained for internal use. Management reviews the Company’s recorded long-lived assets for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. The Company determines the extent to which an asset may be impaired based upon its expectation of the asset’s future usability as well as on a reasonable assurance that the future cash flows associated with the asset will be in excess of its carrying amount. If the total of the expected undiscounted future cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between fair value and the carrying value of the asset. During the three months ended September 30, 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 months ended September 30, 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 Tallo, Inc. convertible note is discussed in more detail in Note 11, “Acquisitions and Investments.” As of September 30, 2022, the estimated fair value of the long-term debt was $415.8 million. The Company estimated the fair value based on the quoted market prices in an inactive market on the last day of the reporting period (Level 2). The long-term debt, comprised of the Company’s convertible senior notes due 2027, is recorded at face value less the unamortized debt issuance costs on its condensed consolidated balance sheet, and is discussed in more detail in Note 6, “Debt.” As of September 30, 2022, the estimated

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

fair value of the Company’s marketable securities was $91.6 million. The Company estimated the fair value based on the quoted market prices in an inactive market on the last day of the reporting period (Level 2). The marketable securities are discussed in more detail in Note 3, “Summary of Significant Accounting Policies - Investments in Marketable Securities.”

On November 30, 2020, the Company acquired 100% of MedCerts in exchange for $70.0 million and estimated contingent consideration of $10.8 million. During fiscal year 2021 and 2022, the Company recorded an aggregate expense of $0.5 million to adjust its estimate of the fair value of the contingent consideration to $11.3 million. During the three months ended September 30, 2022, the Company paid $7.0 million to settle the contingent consideration and recorded a gain of $4.3 million. The gain is recorded within selling, general, and administrative expenses on the condensed consolidated statements of operations.

There were no assets or liabilities measured at fair value on a recurring basis as of September 30, 2022.

The following table summarizes certain fair value information at June 30, 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	$	11,290	$	—	$	—	$	11,290
Convertible note received in acquisition	$	889	$	—	$	—	$	889

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 months ended September 30, 2022 and 2021:


	Three Months Ended September 30, 2022
			Purchases,
	Fair Value		Issuances,		Realized		Fair Value
Description	June 30, 2022		and Settlements		Gains/(Losses)		September 30, 2022

		(In thousands)
Contingent consideration associated with acquisitions	$	11,290	$	(7,024)	$	(4,266)	$	—
Convertible note received in acquisition	$	889	$	(889)	$	—	$	—

Three Months Ended September 30, 2021