Business context and reporting period
The supplied filing is K12 Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2018 (the first quarter of fiscal 2019), not a filing under the name Stride, Inc. K12 provides K–12 curriculum, software, and education services through Managed Public School Programs, Institutional, and Private Pay Schools and Other. Managed Public School Programs generated about 88% of quarterly revenue.
Financial performance and liquidity
| Metric | Quarter ended September 30, 2018 | Prior-year quarter |
|---|---|---|
| Revenue | $251.3 million | $228.8 million |
| Operating loss | $13.8 million | $17.8 million |
| Net loss attributable to common stockholders | $8.3 million; $0.22 per share | $8.1 million; $0.21 per share |
| Net cash used in operating activities | $49.1 million | $58.4 million |
Operating margin improved to negative 5.5% from negative 7.8%. Instructional costs were 63.3% of revenue versus 64.4%; selling, administrative, and other operating expenses were 40.8% versus 42.1%.
At September 30, cash and cash equivalents were $143.0 million; working capital was $326.9 million. Accounts receivable was $283.8 million, up from $176.3 million at June 30, reflecting seasonal billing and collection timing. Cash, cash equivalents, and restricted cash totaled $145.0 million, including $2.0 million of restricted cash. Capital lease obligations were $37.7 million, up from $26.0 million at June 30. The company had no borrowings on its $100 million Bank of America line of credit and reported compliance with its covenants.
Material changes versus the prior comparable period
- Revenue increased 9.8%, driven by Managed Public School Programs, up 17.0%, and managed enrollment growth of 6.9% to 118,800 students.
- Institutional revenue fell 26.5% to $22.5 million; Private Pay Schools and Other revenue fell 14.4% to $8.3 million.
- Operating loss narrowed by $4.0 million, but net loss attributable to common stockholders increased by $0.2 million.
- Operating cash use declined by $9.3 million year over year; investing cash use increased to $29.4 million from $15.5 million, including the STEM Premier investment.
- K12 adopted ASC 606 using the modified retrospective method, reducing opening retained earnings by $1.3 million. Prior-year results were not restated. For the current quarter, ASC 606 reduced revenue by $3.1 million and made operating and net loss $3.2 million greater than they would have been under ASC 605.
Outlook, risks, contingencies, and unusual items
Management said operating cash, working capital, and access to the credit line should fund operations for the foreseeable future; the filing provides no specific earnings or revenue guidance. It notes results are seasonal and the quarter is not necessarily indicative of full-year results. Revenue depends in part on estimates of student counts, school funding, attendance, and school operating losses; K12 generally absorbs operating deficits at certain managed schools, which can reduce revenue and collections. One contract represented 11% of revenue in both periods.
In August 2018, K12 invested $6.7 million for a 39.5% interest in STEM Premier and provided a $5.0 million convertible note. A proposed settlement of a securities class action would be funded by insurers’ $3.5 million payment and remained subject to documentation and court approval. K12 also disclosed approximately $1.9 million of school lease guarantees and guarantees against operating deficits at certain managed schools. It was evaluating new lease accounting standards expected to take effect in fiscal 2020.
The $100 million unsecured credit line had a five-year term from January 2014; the filing reports no outstanding borrowings but does not state whether the facility was renewed. Management reported effective disclosure controls and no material changes to internal control over financial reporting.
Investor verification priorities
- Confirm the issuer and period: the provided document identifies K12 Inc. and fiscal Q1 2019, not Stride, Inc. or calendar 2018 Q1.
- Assess revenue comparability after ASC 606 adoption and the effect of school-funding and operating-loss estimates.
- Track receivable collections, seasonal operating cash use, and the increase in capital lease obligations.
- Verify the credit-line renewal status and the final court approval and insurance funding of the proposed settlement.
- Monitor performance and accounting treatment of the STEM Premier investment and convertible note.