Cambium Learning Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
|
(Unaudited)
|
|
|
ASSETS
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
4,680
|
|
|
$
|
8,493
|
|
Accounts receivable, net
|
13,277
|
|
|
12,937
|
|
Inventory
|
1,813
|
|
|
2,382
|
|
Restricted assets, current
|
961
|
|
|
961
|
|
Other current assets
|
9,731
|
|
|
11,193
|
|
Total current assets
|
30,462
|
|
|
35,966
|
|
Property, equipment and software at cost
|
62,966
|
|
|
65,250
|
|
Accumulated depreciation and amortization
|
(42,006
|
)
|
|
(43,164
|
)
|
Property, equipment and software, net
|
20,960
|
|
|
22,086
|
|
Goodwill
|
43,518
|
|
|
43,518
|
|
Other intangible assets, net
|
3,108
|
|
|
3,607
|
|
Pre-publication costs, net
|
17,986
|
|
|
17,758
|
|
Restricted assets, less current portion
|
839
|
|
|
1,293
|
|
Deferred tax assets
|
30,020
|
|
|
30,614
|
|
Other assets
|
3,372
|
|
|
3,712
|
|
Total assets
|
$
|
150,265
|
|
|
$
|
158,554
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
$
|
2,075
|
|
|
$
|
2,388
|
|
Accrued expenses
|
13,770
|
|
|
12,121
|
|
Revolving credit facility
|
10,000
|
|
|
—
|
|
Current portion of long-term debt
|
6,651
|
|
|
5,958
|
|
Deferred revenue, current
|
61,286
|
|
|
86,913
|
|
Total current liabilities
|
93,782
|
|
|
107,380
|
|
Long-term liabilities:
|
|
|
|
|
|
Long-term debt
|
38,477
|
|
|
41,841
|
|
Deferred revenue, less current portion
|
15,232
|
|
|
13,995
|
|
Other liabilities
|
9,257
|
|
|
9,630
|
|
Total long-term liabilities
|
62,966
|
|
|
65,466
|
|
Commitments and contingencies (See Note 13)
|
|
|
|
|
|
Stockholders' equity (deficit):
|
|
|
|
|
|
Preferred stock ($.001 par value, 15,000 shares authorized, zero shares issued and outstanding at June 30, 2018 and December 31, 2017)
|
—
|
|
|
—
|
|
Common stock ($.001 par value, 150,000 shares authorized, 53,789 and 53,333 shares issued, and 47,257 and 46,800 shares outstanding at June 30, 2018 and December 31, 2017, respectively)
|
54
|
|
|
53
|
|
Capital surplus
|
290,468
|
|
|
289,022
|
|
Accumulated deficit
|
(282,199
|
)
|
|
(288,490
|
)
|
Treasury stock at cost (6,532 shares at June 30, 2018 and December 31, 2017)
|
(12,784
|
)
|
|
(12,784
|
)
|
Accumulated other comprehensive loss:
|
|
|
|
|
|
Pension and postretirement plans
|
(2,022
|
)
|
|
(2,093
|
)
|
Accumulated other comprehensive loss
|
(2,022
|
)
|
|
(2,093
|
)
|
Total stockholders' equity (deficit)
|
(6,483
|
)
|
|
(14,292
|
)
|
Total liabilities and stockholders' equity (deficit)
|
$
|
150,265
|
|
|
$
|
158,554
|
|
The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.
Cambium Learning Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2018
|
|
2017
|
Operating activities:
|
|
|
|
|
Net income
|
|
$
|
7,042
|
|
|
$
|
8,322
|
|
Adjustments to reconcile net income to net cash used in operating activities:
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
9,382
|
|
|
9,768
|
|
Deferred income taxes
|
|
795
|
|
|
—
|
|
Amortization of note discount and deferred financing costs
|
|
271
|
|
|
408
|
|
Stock-based compensation and expense
|
|
479
|
|
|
424
|
|
Other
|
|
3
|
|
|
13
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
Accounts receivable, net
|
|
(409
|
)
|
|
994
|
|
Inventory
|
|
578
|
|
|
29
|
|
Other current assets
|
|
908
|
|
|
2,540
|
|
Other assets
|
|
251
|
|
|
(10
|
)
|
Restricted assets
|
|
454
|
|
|
540
|
|
Accounts payable
|
|
(313
|
)
|
|
280
|
|
Accrued expenses
|
|
1,735
|
|
|
226
|
|
Deferred revenue
|
|
(24,814
|
)
|
|
(27,419
|
)
|
Other long-term liabilities
|
|
(302
|
)
|
|
(405
|
)
|
Net cash used in operating activities
|
|
(3,940
|
)
|
|
(4,290
|
)
|
Investing activities:
|
|
|
|
|
|
|
Expenditures for property, equipment, software and pre-publication costs
|
|
(7,988
|
)
|
|
(8,816
|
)
|
Net cash used in investing activities
|
|
(7,988
|
)
|
|
(8,816
|
)
|
Financing activities:
|
|
|
|
|
|
|
Repayment of debt
|
|
(2,853
|
)
|
|
(3,500
|
)
|
Borrowings under revolving credit facility
|
|
10,000
|
|
|
16,000
|
|
Proceeds from exercise of stock options
|
|
968
|
|
|
322
|
|
Net cash provided by financing activities
|
|
8,115
|
|
|
12,822
|
|
Change in cash and cash equivalents
|
|
(3,813
|
)
|
|
(284
|
)
|
Cash and cash equivalents, beginning of period
|
|
8,493
|
|
|
4,930
|
|
Cash and cash equivalents, end of period
|
|
$
|
4,680
|
|
|
$
|
4,646
|
|
The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.
Cambium Learning Group, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Note 1 — Basis of Presentation
Presentation
The Condensed Consolidated Financial Statements include the accounts of Cambium Learning
®
Group, Inc. and its subsidiaries (the "Company") and are unaudited. The condensed consolidated balance sheet as of
December 31, 2017
has been derived from audited financial statements. All intercompany transactions have been eliminated.
As permitted under the Securities and Exchange Commission ("SEC") requirements for interim reporting, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") have been omitted. The Company believes that these financial statements include all necessary and recurring adjustments for the fair presentation of the interim period results. These financial statements should be read in conjunction with the Consolidated Financial Statements and related notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2017
. Due to seasonality, the results of operations for the
three and six
months ended
June 30, 2018
are not necessarily indicative of the results to be expected for any future interim period or for the year ending December 31,
2018
.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Subsequent actual results may differ from those estimates.
As of January 1, 2018, the Company adopted Accounting Standards Update No. 2017-07,
Compensation-Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
, and accordingly presented the other components of net benefit costs separately from the service cost component and outside of operating profit, presented as "Other income (expense)" in the consolidated statement of operations. Prior period non-service components of pension and post-retirement costs of
$0.1 million
and
$0.2 million
for the
three and six
months ended
June 30, 2017
, respectively, were recast from "General and administration expense" to "Other income (expense)" on the Company's condensed consolidated statements of operations.
Nature of Operations
The Company is an award-winning educational technology solutions leader dedicated to helping all students reach their potential through individualized and differentiated instruction. Using a research-based, personalized approach, Cambium Learning Group delivers software as a service (SaaS) resources and instructional products that engage students and support teachers in fun, positive, safe and scalable environments. These solutions are provided through
Learning A-Z
®
(online differentiated instruction for elementary school reading, writing and science),
ExploreLearning
®
(online interactive math and science simulations and a math fact fluency solution), and
Voyager Sopris Learning
®
(blended solutions that accelerate struggling learners to achieve in literacy and math and professional development for teachers). Cambium Learning Group believes that every student has unlimited potential, that teachers matter, and that data, instruction, and practice are the keys to success in the classroom and beyond.
The Company has
three
reportable segments with separate management teams and infrastructures that offer various products and services. See Note 15 –
Segment Reporting
for further information on the Company's segment reporting structure.
Note 2 — Accounts Receivable
Accounts receivable are stated net of allowances for doubtful accounts and estimated sales returns. The allowance for doubtful accounts and estimated sales returns totaled
$0.1 million
at
June 30, 2018
and December 31,
2017
. The allowance for doubtful accounts is based on a review of outstanding balances and historical collection experience. The reserve for sales returns is based on historical rates of return as well as other factors that in the Company's judgment, could reasonably be expected to cause sales returns to differ from historical experience.
Note 3 — Stock-Based Compensation and Expense
Cambium Learning Group, Inc. 2009 Equity Incentive Plan
In 2009, the Company adopted the Cambium Learning Group, Inc. 2009 Equity Incentive Plan ("Incentive Plan"). Under the Incentive Plan,
5,000,000
shares of common stock were reserved for issuance of awards which may be granted in the form of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units,
conversion stock options, conversion stock appreciation rights, and other stock or cash awards. The Incentive Plan is administered by the board of directors which has the authority to establish the terms and conditions of awards granted under the Incentive Plan.
Stock-Based Compensation and Expense
The following table presents stock-based compensation expense resulting from stock options that are recorded in the condensed consolidated statements of operations and comprehensive income for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(in thousands)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Cost of revenues
|
$
|
10
|
|
|
$
|
14
|
|
|
$
|
23
|
|
|
$
|
27
|
|
Research and development expense
|
51
|
|
|
40
|
|
|
100
|
|
|
75
|
|
Sales and marketing expense
|
72
|
|
|
51
|
|
|
133
|
|
|
97
|
|
General and administrative expense
|
119
|
|
|
119
|
|
|
223
|
|
|
225
|
|
Total
|
$
|
252
|
|
|
$
|
224
|
|
|
$
|
479
|
|
|
$
|
424
|
|
2018 Grants
In the first quarter 2018, the Company granted
250,000
options under the Incentive Plan with an exercise price of
$9.16
. The options vest in equal monthly installments on the last day of the month over a
four
-year period, with an initial vesting date of
March 31, 2018
. As of
June 30, 2018
, the Company had
2,135,571
stock options outstanding.
Note 4 — Net Income per Common Share
Basic net income per common share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted net income per common share is computed by dividing net income by the weighted-average number of common shares outstanding during the period, including potential dilutive shares of common stock assuming the dilutive effect of outstanding stock options and restricted stock awards using the treasury stock method. Weighted-average shares from common share equivalents in the amount of
250,000
and
258,315
for the
three and six
months ended
June 30, 2018
, and
821,730
and
718,211
for the
three and six
months ended
June 30, 2017
, respectively, were excluded from the respective dilutive shares outstanding because their effect was anti-dilutive.
The following table presents the calculation of basic and diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(in thousands, except per share data)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,435
|
|
|
$
|
5,792
|
|
|
$
|
7,042
|
|
|
$
|
8,322
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares used in computing basic net income per share
|
|
47,172
|
|
|
46,283
|
|
|
47,036
|
|
|
46,243
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Add weighted-average effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and restricted stock awards
|
|
1,213
|
|
|
1,193
|
|
|
1,214
|
|
|
1,217
|
|
Weighted-average common shares used in computing diluted net income per share
|
|
48,385
|
|
|
47,476
|
|
|
48,250
|
|
|
47,460
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.09
|
|
|
$
|
0.13
|
|
|
$
|
0.15
|
|
|
$
|
0.18
|
|
Diluted
|
|
$
|
0.09
|
|
|
$
|
0.12
|
|
|
$
|
0.15
|
|
|
$
|
0.18
|
|
Note 5 — Revenue Recognition
On January 1, 2018, the Company adopted the new revenue guidance
Revenue from Contracts with Customers
("ASC 606") and applied it to all contracts using the modified retrospective method. The Company recognized the cumulative effect of initially applying ASC 606 as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company expects the impact of the adoption of ASC 606 to be immaterial to net income on an ongoing basis.
The cumulative effect of the changes made to the consolidated January 1, 2018 balance sheet for the adoption of the new revenue standard was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
As Reported December 31, 2017
|
|
Adjustments due to ASC 606
|
|
As Adjusted January 1, 2018
|
Accounts receivable
|
$
|
12,937
|
|
|
$
|
(69
|
)
|
|
$
|
12,868
|
|
Inventory
|
2,382
|
|
|
10
|
|
|
2,392
|
|
Other current assets
|
11,193
|
|
|
(554
|
)
|
|
10,639
|
|
Deferred tax assets
|
30,614
|
|
|
201
|
|
|
30,815
|
|
|
|
|
|
|
|
Accrued expenses
|
12,121
|
|
|
(85
|
)
|
|
12,036
|
|
Deferred revenue
|
86,913
|
|
|
424
|
|
|
87,337
|
|
Accumulated deficit
|
(288,490
|
)
|
|
(751
|
)
|
|
(289,241
|
)
|
Learning A-Z and ExploreLearning Segments
The Learning A-Z and ExploreLearning segments derive revenue from sales of online subscriptions to their literacy, math and science websites and related training and professional development. The subscription service represents two performance obligations: the obligation to provide access to the on-line educational content and functionality, and the stand-ready obligation to provide post-sale customer support. The stand-ready obligation may include customer support, online or on-site trainings, rostering or single sign-on support, or other technology or curriculum related inquiries. Typically, the subscriptions are for a
twelve
month period (although they can be for longer periods) and the revenue for both performance obligations is recognized ratably over the period the online access is available to the customer.
Voyager Sopris Learning Segment
Revenues for the Voyager Sopris Learning segment are derived from sales of literacy and math educational solutions and services to school districts. Sales include printed materials, subscription interactive web-based programs and online educational content, training and implementation services, and professional development. Revenue from the sale of printed materials is recognized when the product is received by the customer, as the Company typically has control of the shipping arrangements. Revenue for interactive web-based programs and online educational content, which may be sold separately or included with printed curriculum materials, is recognized ratably over the subscription or contractual period, typically a school year. The Company allocates a portion of the online subscription and printed material revenue to a stand-ready performance obligation which may include customer support, online or on-site trainings, rostering or single sign-on support or other technology or curriculum related inquiries. The stand-ready performance obligation is recognized ratably over the period the online access is available or the expected usage term of the printed material, typically over the school year.
Contracts to provide professional services such as training, implementation, and professional development are considered a single performance obligation and the related revenues are recognized as delivered.
For all reportable segments, the Company may enter into agreements to license or sell certain publishing rights and content. The Company recognizes the revenue from these agreements when either the license period, if applicable, has commenced or the transfer of content, if applicable, has occurred.
Costs to Acquire Contracts
Under the new revenue recognition standard, incremental costs incurred to obtain a contract, as well as costs to fulfill a contract, must be deferred and amortized over the expected period that the related performance obligation is satisfied. The Company has historically deferred costs incurred to obtain and fulfill contracts with a customer, including commissions paid to the Company's inside and field salesforce. The Company has elected to apply this standard to all contracts and did not elect the practical expedient to expense contract acquisition costs as incurred for contracts less than one year. The cumulative effect adjustment to "Other current assets" reflects the change to deferred costs commensurate with the related change in the deferred revenue balance.
The following table presents the Company's disaggregated revenue by segment and geography. See Note 15 –
Segment Reporting
for more information on the Company's reportable segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2018
|
(in thousands)
|
Learning A-Z
|
|
ExploreLearning
|
|
Voyager Sopris
Learning
|
|
Consolidated
|
United States
|
$
|
17,166
|
|
|
$
|
7,324
|
|
|
$
|
12,609
|
|
|
$
|
37,099
|
|
International
|
3,269
|
|
|
408
|
|
|
220
|
|
|
3,897
|
|
Total Revenue
|
$
|
20,435
|
|
|
$
|
7,732
|
|
|
$
|
12,829
|
|
|
$
|
40,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2017
|
(in thousands)
|
Learning A-Z
|
|
ExploreLearning
|
|
Voyager Sopris
Learning
|
|
Consolidated
|
United States
|
$
|
15,979
|
|
|
$
|
6,355
|
|
|
$
|
14,560
|
|
|
$
|
36,894
|
|
International
|
2,671
|
|
|
380
|
|
|
417
|
|
|
3,468
|
|
Total Revenue
|
$
|
18,650
|
|
|
$
|
6,735
|
|
|
$
|
14,977
|
|
|
$
|
40,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2018
|
(in thousands)
|
Learning
A-Z
|
|
Explore
Learning
|
|
Voyager Sopris
Learning
|
|
Consolidated
|
United States
|
$
|
33,359
|
|
|
$
|
14,443
|
|
|
$
|
22,174
|
|
|
$
|
69,976
|
|
International
|
6,212
|
|
|
793
|
|
|
622
|
|
|
7,627
|
|
Total Revenue
|
$
|
39,571
|
|
|
$
|
15,236
|
|
|
$
|
22,796
|
|
|
$
|
77,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2017
|
(in thousands)
|
Learning
A-Z
|
|
Explore
Learning
|
|
Voyager Sopris
Learning
|
|
Consolidated
|
United States
|
$
|
31,557
|
|
|
$
|
12,774
|
|
|
$
|
24,977
|
|
|
$
|
69,308
|
|
International
|
5,278
|
|
|
739
|
|
|
1,007
|
|
|
7,024
|
|
Total Revenue
|
$
|
36,835
|
|
|
$
|
13,513
|
|
|
$
|
25,984
|
|
|
$
|
76,332
|
|
The Company elected to continue to record revenue net of applicable taxes on the related transactions.
Note 6 — Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability (exit price), in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques are based on observable or unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's market assumptions. These two types of inputs have created the following fair value hierarchy:
|
|
•
|
Level 1 — Quoted prices for identical instruments in active markets.
|
|
|
•
|
Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant value drivers are observable.
|
|
|
•
|
Level 3 — Valuations derived from valuation techniques in which significant value drivers are unobservable.
|
Applicable guidance requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
At
June 30, 2018
, financial instruments include
$4.7 million
of cash and cash equivalents, restricted assets of
$1.8 million
, collateral investments of
$1.1 million
, revolving credit facility borrowings of
$10.0 million
, and Senior Secured Credit Facility term loans, net of discount and deferred financing costs, of
$45.1 million
. At
December 31, 2017
, financial instruments
include
$8.5 million
of cash and cash equivalents, restricted assets of
$2.3 million
, collateral investments of
$1.1 million
, and Senior Secured Credit Facility term loans, net of discount and deferred financing costs, of
$47.8 million
. The fair market values of cash equivalents, restricted assets, and collateral investments are equal to their carrying value, as these investments are recorded based on quoted market prices and/or other market data for the same or comparable instruments and transactions as of the end of the applicable reporting period. See Note 14 –
Debt
for additional information regarding the Company's term loans and Revolving Credit Facility.
At
June 30, 2018
and
December 31, 2017
, the carrying value of the Company's Senior Secured Credit Facility term loans and Revolving Credit Facility borrowings approximates the fair value, as the borrowings are tied to the London Interbank Offered Rate ("LIBOR") and are market sensitive.
Assets and liabilities measured at fair value on a recurring basis are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
Fair Value at Reporting Date Using
|
Description
|
|
June 30, 2018
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Restricted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market
|
|
$
|
1,800
|
|
|
$
|
1,800
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Collateral Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market
|
|
910
|
|
|
910
|
|
|
—
|
|
|
—
|
|
Certificates of Deposit
|
|
226
|
|
|
226
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
Fair Value at Reporting Date Using
|
Description
|
|
December 31, 2017
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Restricted Assets:
|
|
|
|
|
|
|
|
|
Money Market
|
|
$
|
2,254
|
|
|
$
|
2,254
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Collateral Investments:
|
|
|
|
|
|
|
|
|
|
Money Market
|
|
908
|
|
|
908
|
|
|
—
|
|
|
—
|
|
Certificates of Deposit
|
|
226
|
|
|
226
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Total Gains (Losses) for the Six Months Ended June 30,
|
Description
|
|
2018
|
|
2017
|
Restricted Assets:
|
|
|
|
|
Money Market
|
|
$
|
—
|
|
|
$
|
—
|
|
Collateral Investments:
|
|
|
|
|
Money Market
|
|
—
|
|
|
—
|
|
Certificates of Deposit
|
|
—
|
|
|
—
|
|
Assets and liabilities measured at fair value on a non-recurring basis are listed below at their carrying values as of each reporting date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
Fair Value at Reporting Date Using
|
Description
|
|
June 30, 2018
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Goodwill
|
|
$
|
43,518
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
43,518
|
|
Property, equipment and software, net
|
|
20,960
|
|
|
—
|
|
|
—
|
|
|
20,960
|
|
Pre-publication costs, net
|
|
17,986
|
|
|
—
|
|
|
—
|
|
|
17,986
|
|
Other intangible assets, net
|
|
3,108
|
|
|
—
|
|
|
—
|
|
|
3,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
Fair Value at Reporting Date Using
|
Description
|
|
December 31, 2017
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Goodwill
|
|
$
|
43,518
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
43,518
|
|
Property, equipment and software, net
|
|
22,086
|
|
|
—
|
|
|
—
|
|
|
22,086
|
|
Pre-publication costs, net
|
|
17,758
|
|
|
—
|
|
|
—
|
|
|
17,758
|
|
Other intangible assets, net
|
|
3,607
|
|
|
—
|
|
|
—
|
|
|
3,607
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Total Gains (Losses) for the Six Months Ended June 30,
|
Description
|
|
2018
|
|
2017
|
Goodwill
|
|
$
|
—
|
|
|
$
|
—
|
|
Property, equipment and software, net
|
|
—
|
|
|
—
|
|
Pre-publication costs, net
|
|
—
|
|
|
—
|
|
Other intangible assets, net
|
|
—
|
|
|
—
|
|
There were
no
significant remeasurements of these assets during the
six
months ended
June 30, 2018
or
2017
.
Note 7 — Other Current Assets
Other current assets at
June 30, 2018
and
December 31, 2017
consisted of the following:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
June 30, 2018
|
|
December 31, 2017
|
Deferred costs
|
|
$
|
6,426
|
|
|
$
|
9,246
|
|
Prepaid expenses
|
|
2,695
|
|
|
1,762
|
|
Other
|
|
610
|
|
|
185
|
|
Other current assets
|
|
$
|
9,731
|
|
|
$
|
11,193
|
|
Note 8 — Other Assets
Other assets at
June 30, 2018
and
December 31, 2017
consisted of the following:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
June 30, 2018
|
|
December 31, 2017
|
Deferred costs, less current portion
|
|
$
|
1,422
|
|
|
$
|
1,745
|
|
Collateral investments
|
|
1,136
|
|
|
1,134
|
|
Deferred financing costs – revolving credit facility
|
|
441
|
|
|
530
|
|
Other
|
|
373
|
|
|
303
|
|
Other assets
|
|
$
|
3,372
|
|
|
$
|
3,712
|
|
Deferred Financing Costs
Deferred financing costs relate to costs incurred with the issuance in December 2015 of the Company's
$30.0 million
Revolving Credit Facility. See Note 14 –
Debt
for additional information regarding the Company's Revolving Credit Facility and the related deferred financing costs.
Collateral Investments
The Company maintains certificates of deposit to collateralize its outstanding letters of credit associated with workers' compensation activity. At
June 30, 2018
and
December 31, 2017
, the Company had
$0.2 million
in certificates of deposit serving as collateral for its outstanding letters of credit.
Additionally, the Company maintains a money market fund investment to serve as collateral for a travel card program. The balance of the money market fund investment was
$0.9 million
at
June 30, 2018
and
December 31, 2017
.
Note 9 — Accrued Expenses
Accrued expenses at
June 30, 2018
and
December 31, 2017
consisted of the following:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
June 30, 2018
|
|
December 31, 2017
|
Salaries, bonuses and benefits
|
|
$
|
8,869
|
|
|
$
|
8,550
|
|
Pension and post-retirement benefit plans
|
|
950
|
|
|
950
|
|
Accrued royalties
|
|
901
|
|
|
830
|
|
Other
|
|
3,050
|
|
|
1,791
|
|
Accrued expenses
|
|
$
|
13,770
|
|
|
$
|
12,121
|
|
Note 10 — Other Liabilities
Other liabilities at
June 30, 2018
and
December 31, 2017
consisted of the following:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
June 30, 2018
|
|
December 31, 2017
|
Pension and post-retirement benefit plans, long-term portion
|
|
$
|
7,960
|
|
|
$
|
8,285
|
|
Deferred rent
|
|
535
|
|
|
587
|
|
Long-term income tax payable
|
|
481
|
|
|
470
|
|
Long-term deferred compensation
|
|
281
|
|
|
288
|
|
Other liabilities
|
|
$
|
9,257
|
|
|
$
|
9,630
|
|
Note 11 — Pension Plan
The net pension costs of the Company's defined benefit pension plan were comprised primarily of interest costs and totaled
$0.1 million
and
$0.2 million
for the
three and six
months ended
June 30, 2018
and
2017
. The net pension costs included the amortization of accumulated net loss of
$29 thousand
and
$57 thousand
for the
three and six
months ended
June 30, 2018
, and
$23 thousand
and
$46 thousand
for the
three and six
months ended
June 30, 2017
, respectively.
Note 12 — Uncertain Tax Positions and Income Taxes
The Company recognizes the financial statement impact of a tax return position when it is more likely than not, based on technical merits, that the position will ultimately be sustained. For tax positions that meet this recognition threshold, the Company applies judgment, taking into account applicable tax laws, experience managing tax audits, and relevant GAAP, to determine the amount of tax benefits to recognize in its financial statements. For each position, the difference between the benefit realized on the Company's tax return and the benefit reflected in its financial statements is recorded to Other Liabilities in the Condensed Consolidated Balance Sheets as an unrecognized tax benefit ("UTB"). The Company updates its UTBs at each financial statement date to reflect the impacts of audit settlements and other resolution of audit issues, expiration of statutes of limitation, developments in tax law, and ongoing discussions with tax authorities.
The balance of UTBs was
$2.6 million
at
June 30, 2018
and
December 31, 2017
. Included in the balance of unrecognized tax benefits at
June 30, 2018
are approximately
$0.5 million
of tax benefits that, if recognized, would affect the effective tax rate. The recognition of the remaining uncertain tax positions would not affect the effective tax rate, but would instead increase or would have increased available tax attributes. However, the recognition of the tax attribute would be offset by an increase in the deferred tax asset valuation allowance resulting in no net impact to the effective tax rate.
The Company recognizes interest accrued related to its UTBs and penalties as income tax expense. Related to the UTBs noted above, the Company recognized
no
penalties (gross) and an immaterial amount of interest during the
six
months ended
June 30, 2018
. At
June 30, 2018
and
December 31, 2017
, the Company had liabilities of
$0.1 million
for penalties (gross) and
$0.1 million
for interest (gross).
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. All U.S. tax years prior to 2008 related to the Voyager Learning Company acquired entities have been audited by the Internal Revenue Service. Cambium and its subsidiaries have been examined by the Internal Revenue Service through the end of 2006. The Company has been audited by the various state tax authorities through 2007.
Note 13 — Commitments and Contingencies
Legal Proceedings
The Company is involved in various legal proceedings incidental to its business. Management believes that the outcome of these proceedings will not have a material adverse effect upon the Company's consolidated operations or financial condition and the Company has recognized appropriate liabilities as necessary based on facts and circumstances known to management. The Company expenses legal costs related to legal contingencies as incurred.
Letters of Credit
The Company had letters of credit outstanding at
June 30, 2018
in the amount of
$0.4 million
to support workers' compensation activity. The Company maintains certificates of deposit of
$0.2 million
as collateral for the letters of credit. The Company also maintains a
$0.9 million
money market fund investment as collateral for a travel card program. The certificates of deposit and money market fund investment are included in Collateral Investments in Note 8 –
Other Assets.
Note 14 — Debt
Debt at
June 30, 2018
and
December 31, 2017
consisted of the following:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
June 30, 2018
|
|
December 31, 2017
|
Senior secured credit facility term loans maturing December 10, 2020
|
|
$
|
45,647
|
|
|
$
|
48,500
|
|
Less: Unamortized discount
|
|
(281
|
)
|
|
(380
|
)
|
Less: Unamortized deferred financing costs
|
|
(238
|
)
|
|
(321
|
)
|
Term loans, net of discount and deferred costs
|
|
45,128
|
|
|
47,799
|
|
Less: Current portion of long-term debt
|
|
6,651
|
|
|
5,958
|
|
Long-term debt
|
|
$
|
38,477
|
|
|
$
|
41,841
|
|
The Company had outstanding borrowings under the Revolving Credit Facility of
$10.0 million
at
June 30, 2018
and
no
outstanding borrowings under the Revolving Credit Facility at
December 31, 2017
.
Senior Secured Credit Facility
On December 10, 2015, Cambium Learning, Inc. (the "Borrower"), a wholly-owned subsidiary of Cambium Learning Group, Inc., entered into a
$135.0 million
Senior Secured Credit Agreement (the "Credit Agreement") among the Borrower, the Company, Webster Bank, N.A., as Administrative Agent, L/C Issuer and a Lender, and the other Lenders party thereto, with Webster Bank, N.A., as Joint Lead Arranger, the Governor and Company of the Bank of Ireland, as Joint Lead Arranger and Syndication Agent, and Capital One National Association, and Babson Capital Finance, LLC, as Co-Documentation Agents (the "Senior Secured Credit Facility"). The Senior Secured Credit Facility consists of a term loan A which had an initial principal amount of
$70.0 million
("Term Loan A"), a term loan B which had an initial principal amount of
$35.0 million
("Term Loan B") and a
$30.0 million
revolving credit facility (the "Revolving Credit Facility"), secured by a lien on substantially all assets and capital stock of the Company, the Borrower and the Borrower's subsidiaries (collectively, the "Loan Parties"). The Senior Secured Credit Facility matures on
December 10, 2020
. In 2017, the Company repaid the remaining principal amount outstanding of the Term Loan B.
Borrowings under the Senior Secured Credit Facility bear interest equal to either a Base Rate, as defined in the Credit Agreement, or LIBOR (subject to a
1.0%
floor), at the Borrower's option, plus an applicable margin. The applicable margin for the Term Loan A and Revolving Credit Facility ranges between
2.75%
and
3.50%
for Base Rate loans and
3.75%
and
4.50%
for LIBOR loans. The applicable margin for the Term Loan A and Revolving Credit Facility is based on a leverage calculation. As of
June 30, 2018
, the lowest tier of the applicable margins were in effect, and the interest rate for the Term Loan A was
5.73%
. Additionally, unused borrowing capacity under the Revolving Credit Facility is subject to a commitment fee of
0.5%
. Interest is payable in arrears every three months or less, based on the selected LIBOR interest period.
The Credit Agreement contains affirmative, negative and financial covenants customary for financings of this type, including, among other things, limits on the creation of liens, limits on the incurrence of indebtedness, restrictions on investments and dispositions, limitations on fundamental changes to the Loan Parties, a maximum consolidated net leverage ratio, and minimum fixed charge coverage ratio. Upon an event of default, and after any applicable cure period, the Administrative Agent can accelerate the maturity of the loan. Events of default include customary items, such as failure to pay principal and interest in a timely manner and breach of covenants. At
June 30, 2018
, the Company was in compliance with all covenants related to the Senior Secured Credit Facility.
The principal balances of the Senior Secured Credit Facility were issued at a discount, representing fees paid to lenders, which are amortized over the life of the debt using the effective interest rate method. Unamortized discount at
June 30, 2018
and
December 31, 2017
was
$0.3 million
and
$0.4 million
, respectively.
The Company incurred debt issuance costs associated with the Senior Secured Credit Facility, which were deferred and are amortized over the term of the related debt using the effective interest method. Unamortized deferred financing costs related to the Term Loan A totaled
$0.2 million
at
June 30, 2018
and
$0.3 million
at
December 31, 2017
, and are presented as a reduction to Long-term Debt in the Condensed Consolidated Balance Sheets. Unamortized deferred financing costs related to the Revolving Credit Facility totaled
$0.4 million
at
June 30, 2018
and
$0.5 million
at
December 31, 2017
, and are classified as Other Assets in the Condensed Consolidated Balance Sheets.
At
June 30, 2018
, the Company had outstanding principal balances of
$45.6 million
under Term Loan A,
$10.0 million
outstanding borrowings under the Revolving Credit Facility, and had
$19.8 million
borrowing availability under the Revolving Credit Facility. During 2017, the Company voluntarily prepaid the remaining principal amount outstanding on the Term Loan B of the Senior Secured Credit Facility.
In February 2016, the Company paid
$0.1 million
to enter into interest rate cap agreements for approximately half of its outstanding Term Loan A and Term Loan B loans, less required amortization, for a
three
-year period. Under the interest rate cap agreements, the Company will receive payments for any period that the three-month LIBOR rate exceeds
2.5%
.
Note 15 — Segment Reporting
The Company operates in
three
reportable segments with separate management teams and infrastructures that offer various products and services.
Learning A-Z Segment
Learning A-Z is a literacy-focused PreK-6 educational provider of technology-enabled learning resources. Founded in 2002, Learning A-Z's resources are now used by more than
7 million
students in more than
170
countries. Learning A-Z provides a blend of traditional teacher-led instruction with technology-enabled resources to make teaching more effective and efficient, practice more accessible and personalized, assessment more strategic and automated, and learning more informed and proactive. With a comprehensive and blended approach, Learning A-Z delivers the tools students need without limiting a teacher's ability to differentiate instruction as they see fit. Learning A-Z's approach to literacy emphasizes knowledge and individual potential by recognizing that while reading and writing remain essential to attaining academic success, they are dynamic and dependent on real-world application and the incorporation of many other 21st century skills. Students today must read and write well, and they must also be able to think critically and analyze what they learn, solve problems, innovate and apply creativity, utilize advancing technology, communicate effectively orally and in writing, and collaborate with their peers. With a robust library of incredibly effective and flexible curriculum resources, Learning A-Z provides the tools teachers need to deliver personalized instruction for a wide range of student needs.
Learning A-Z operates the following subscription-based websites:
Reading A-Z
®
, Raz-Kids
®
, Headsprout
®
, Science A-Z
®
, Writing A-Z™, Vocabulary A-Z™
, and
ReadyTest A-Z™.
These websites can be purchased stand-alone or in collections, for a comprehensive solution that provides online supplemental books, lessons, assessments and other instructional resources for individual classrooms, schools, and districts. Learning A-Z's premier offering is an integration of teacher centric
Reading A-Z
with student centric
Raz-Kids
in a bundled product marketed as
Raz-Plus
™.
ExploreLearning Segment
ExploreLearning makes online solutions that help students succeed in math and science. ExploreLearning combines research-proven instructional methods with innovative technology to create new pathways for learning. Founded in 1999, ExploreLearning solutions are now used in every U.S. state and over
50
countries worldwide. ExploreLearning offers
two
products that supplement core instruction in the classroom:
Gizmos
®
for grades 3-12 and
Reflex
®
for grades 2-8.
Gizmos
is a library of over
400
inquiry-based math and science simulations that help students make connections and draw conclusions through interaction, visualization and "what-if" exploration.
Reflex
is a highly-effective, game-based math fact fluency system
that helps students of all ability levels succeed by continually adapting to students' instructional needs and providing motivational rewards for their effort.
Voyager Sopris Learning Segment
Voyager Sopris Learning is a leading provider of technology, materials, and professional development for educators to ensure all students graduate prepared for college, career, and satisfaction in life after K-12. It has built a nearly
40
-year legacy on research and data-based curriculum development, while remaining nimble and responsive to the shifts and changes required by new standards, more demanding and rigorous content, new and competitive technological capabilities, and the needs of educators today. On a daily basis, Voyager Sopris Learning listens to the challenges of teachers and students, and its products are designed to respond to the need for exciting intervention and supplemental curricula that engage students, while remaining 100% purpose- and data-driven in their delivery. Voyager Sopris Learning programs are steeped in research and evidence, but they are also built with a deep consideration and understanding of the realities and struggles of education today. The Voyager Sopris Learning segment also includes Kurzweil Education brand solutions.
Voyager Sopris Learning solutions include
LANGUAGE!
®
Live,
Language Essentials for Teachers of Reading and Spelling (LETRS
®
), Step Up to Writing
®
, TransMath
®
, Vmath, Kurzweil 3000
®
, and
Velocity™,
among other instructional resources.
Other
Other consists of unallocated shared services, such as accounting, legal, human resources and corporate related items, as well as depreciation and amortization expense, interest income and expense, and income taxes. The Company does not allocate any of these costs to its segments, and the chief operating decision maker evaluates performance of operating segments excluding these items.
The following tables present the net revenues, operating expenses, income from operations, and capital expenditures which are used by the Company's chief operating decision maker to measure the segments' operating performance. The Company does not track assets directly by segment and the chief operating decision maker does not use assets to measure a segment's operating performance, and therefore this information is not presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2018
|
(in thousands)
|
Learning
A-Z
|
|
Explore
Learning
|
|
Voyager Sopris
Learning
|
|
Other
|
|
Consolidated
|
Net revenues
|
$
|
20,435
|
|
|
$
|
7,732
|
|
|
$
|
12,829
|
|
|
$
|
—
|
|
|
$
|
40,996
|
|
Cost of revenues
|
1,263
|
|
|
999
|
|
|
4,776
|
|
|
—
|
|
|
7,038
|
|
Amortization expense
|
—
|
|
|
—
|
|
|
—
|
|
|
4,043
|
|
|
4,043
|
|
Total cost of revenues
|
1,263
|
|
|
999
|
|
|
4,776
|
|
|
4,043
|
|
|
11,081
|
|
Other operating expenses
|
9,284
|
|
|
3,957
|
|
|
5,116
|
|
|
4,574
|
|
|
22,931
|
|
Depreciation and amortization expense
|
—
|
|
|
—
|
|
|
—
|
|
|
718
|
|
|
718
|
|
Total costs and expenses
|
10,547
|
|
|
4,956
|
|
|
9,892
|
|
|
9,335
|
|
|
34,730
|
|
Income before interest and income taxes
|
9,888
|
|
|
2,776
|
|
|
2,937
|
|
|
(9,335
|
)
|
|
6,266
|
|
Net interest expense
|
—
|
|
|
—
|
|
|
—
|
|
|
(927
|
)
|
|
(927
|
)
|
Other income (expense), net
|
—
|
|
|
—
|
|
|
—
|
|
|
118
|
|
|
118
|
|
Income tax expense
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,022
|
)
|
|
(1,022
|
)
|
Segment net income
|
$
|
9,888
|
|
|
$
|
2,776
|
|
|
$
|
2,937
|
|
|
$
|
(11,166
|
)
|
|
$
|
4,435
|
|
Expenditures for property, equipment,
software and pre-publication costs
|
$
|
2,324
|
|
|
$
|
1,082
|
|
|
$
|
557
|
|
|
$
|
17
|
|
|
$
|
3,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2017
|
(in thousands)
|
Learning
A-Z
|
|
Explore
Learning
|
|
Voyager Sopris
Learning
|
|
Other
|
|
Consolidated
|
Net revenues
|
$
|
18,650
|
|
|
$
|
6,735
|
|
|
$
|
14,977
|
|
|
$
|
—
|
|
|
$
|
40,362
|
|
Cost of revenues
|
942
|
|
|
808
|
|
|
5,465
|
|
|
—
|
|
|
7,215
|
|
Amortization expense
|
—
|
|
|
—
|
|
|
—
|
|
|
4,328
|
|
|
4,328
|
|
Total cost of revenues
|
942
|
|
|
808
|
|
|
5,465
|
|
|
4,328
|
|
|
11,543
|
|
Other operating expenses
|
8,020
|
|
|
3,113
|
|
|
6,104
|
|
|
3,342
|
|
|
20,579
|
|
Depreciation and amortization expense
|
—
|
|
|
—
|
|
|
—
|
|
|
669
|
|
|
669
|
|
Total costs and expenses
|
8,962
|
|
|
3,921
|
|
|
11,569
|
|
|
8,339
|
|
|
32,791
|
|
Income before interest and income taxes
|
9,688
|
|
|
2,814
|
|
|
3,408
|
|
|
(8,339
|
)
|
|
7,571
|
|
Net interest expense
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,336
|
)
|
|
(1,336
|
)
|
Other income (expense), net
|
—
|
|
|
—
|
|
|
—
|
|
|
(109
|
)
|
|
(109
|
)
|
Income tax expense
|
—
|
|
|
—
|
|
|
—
|
|
|
(334
|
)
|
|
(334
|
)
|
Segment net income
|
$
|
9,688
|
|
|
$
|
2,814
|
|
|
$
|
3,408
|
|
|
$
|
(10,118
|
)
|
|
$
|
5,792
|
|
Expenditures for property, equipment,
software and pre-publication costs
|
$
|
2,089
|
|
|
$
|
798
|
|
|
$
|
1,361
|
|
|
$
|
36
|
|
|
$
|
4,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2018
|
(in thousands)
|
Learning
A-Z
|
|
Explore
Learning
|
|
Voyager Sopris
Learning
|
|
Other
|
|
Consolidated
|
Net revenues
|
$
|
39,571
|
|
|
$
|
15,236
|
|
|
$
|
22,796
|
|
|
$
|
—
|
|
|
$
|
77,603
|
|
Cost of revenues
|
2,295
|
|
|
2,022
|
|
|
8,784
|
|
|
—
|
|
|
13,101
|
|
Amortization expense
|
—
|
|
|
—
|
|
|
—
|
|
|
7,947
|
|
|
7,947
|
|
Total cost of revenues
|
2,295
|
|
|
2,022
|
|
|
8,784
|
|
|
7,947
|
|
|
21,048
|
|
Other operating expenses
|
18,499
|
|
|
7,867
|
|
|
10,222
|
|
|
8,274
|
|
|
44,862
|
|
Depreciation and amortization expense
|
—
|
|
|
—
|
|
|
—
|
|
|
1,435
|
|
|
1,435
|
|
Total costs and expenses
|
20,794
|
|
|
9,889
|
|
|
19,006
|
|
|
17,656
|
|
|
67,345
|
|
Income before interest and income taxes
|
18,777
|
|
|
5,347
|
|
|
3,790
|
|
|
(17,656
|
)
|
|
10,258
|
|
Net interest expense
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,757
|
)
|
|
(1,757
|
)
|
Other income (expense), net
|
—
|
|
|
—
|
|
|
—
|
|
|
15
|
|
|
15
|
|
Income tax expense
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,474
|
)
|
|
(1,474
|
)
|
Segment net income
|
$
|
18,777
|
|
|
$
|
5,347
|
|
|
$
|
3,790
|
|
|
$
|
(20,872
|
)
|
|
$
|
7,042
|
|
Expenditures for property, equipment,
software and pre-publication costs
|
$
|
4,450
|
|
|
$
|
2,197
|
|
|
$
|
1,310
|
|
|
$
|
31
|
|
|
$
|
7,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2017
|
(in thousands)
|
Learning
A-Z
|
|
Explore
Learning
|
|
Voyager Sopris
Learning
|
|
Other
|
|
Consolidated
|
Net revenues
|
$
|
36,835
|
|
|
$
|
13,513
|
|
|
$
|
25,984
|
|
|
$
|
—
|
|
|
$
|
76,332
|
|
Cost of revenues
|
1,813
|
|
|
1,679
|
|
|
9,908
|
|
|
—
|
|
|
13,400
|
|
Amortization expense
|
—
|
|
|
—
|
|
|
—
|
|
|
8,418
|
|
|
8,418
|
|
Total cost of revenues
|
1,813
|
|
|
1,679
|
|
|
9,908
|
|
|
8,418
|
|
|
21,818
|
|
Other operating expenses
|
16,466
|
|
|
6,344
|
|
|
12,033
|
|
|
6,745
|
|
|
41,588
|
|
Depreciation and amortization expense
|
—
|
|
|
—
|
|
|
—
|
|
|
1,350
|
|
|
1,350
|
|
Total costs and expenses
|
18,279
|
|
|
8,023
|
|
|
21,941
|
|
|
16,513
|
|
|
64,756
|
|
Income before interest and income taxes
|
18,556
|
|
|
5,490
|
|
|
4,043
|
|
|
(16,513
|
)
|
|
11,576
|
|
Net interest expense
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,563
|
)
|
|
(2,563
|
)
|
Other income (expense), net
|
—
|
|
|
—
|
|
|
—
|
|
|
(217
|
)
|
|
(217
|
)
|
Income tax expense
|
—
|
|
|
—
|
|
|
—
|
|
|
(474
|
)
|
|
(474
|
)
|
Segment net income
|
$
|
18,556
|
|
|
$
|
5,490
|
|
|
$
|
4,043
|
|
|
$
|
(19,767
|
)
|
|
$
|
8,322
|
|
Expenditures for property, equipment,
software and pre-publication costs
|
$
|
4,191
|
|
|
$
|
1,648
|
|
|
$
|
2,924
|
|
|
$
|
53
|
|
|
$
|
8,816
|
|
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
This section should be read in conjunction with the audited Consolidated Financial Statements of Cambium Learning Group, Inc. and its subsidiaries (the "Company," "we," "us," or "our") and the notes thereto included in our Annual Report on Form 10-K for the year ended
December 31, 2017
.
Cautionary Note Regarding Forward-looking Statements
This report contains forward-looking statements within the meaning of the federal securities laws that involve risks and uncertainties, and which are based on beliefs, expectations, estimates, projections, forecasts, plans, anticipations, targets, outlooks, initiatives, visions, objectives, strategies, opportunities, drivers and intents of our management. Such statements are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in this report, including statements regarding our future financial condition, economic performance and results of operations, as well as our business strategy, objectives of management for future operations, and the information set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations," are forward-looking statements.
Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements can, in some cases, be identified by, among other things, the use of forward-looking language, such as "believes," "expects," "estimates,\" "projects," "forecasts," "plans," "anticipates," "targets," "outlooks," "initiatives," "visions," "objectives," "strategies," "opportunities," "drivers," "intends," "scheduled to," "seeks," "may," "will," or "should," or the negative of those terms, or other variations of those terms or comparable language, or by discussions of strategy, plans, targets, models or intentions. Forward-looking statements speak only as of the date they are made, and except for our ongoing obligations under the federal securities laws, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements. Accordingly, you are cautioned that any such forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Although we believe that the expectations reflected in such forward-looking statements are reasonable as of the date made, expectations may prove to have been materially different from the results expressed or implied by such forward-looking statements, as it is impossible for us to anticipate all factors that could affect our actual results. These risks and uncertainties include, but are not limited to, those described in "Risk Factors" in Part II, Item 1A and elsewhere in this report and in our Annual Report on Form 10-K for the year ended
December 31, 2017
, and those described from time to time in our future reports filed with the SEC. Unless otherwise required by law, we also disclaim any obligation to update our view of any such risks or uncertainties or to announce publicly the results of any revisions to the forward-looking statements made in this report.
Overview
Cambium Learning
®
Group, Inc., a Delaware corporation, is an award-winning educational technology solutions leader dedicated to helping all students reach their potential through individualized and differentiated instruction. Using a research-based, personalized approach, Cambium Learning Group delivers software as a service (SaaS) resources and instructional products that engage students and support teachers in fun, positive, safe and scalable environments. These solutions are provided through Learning A-Z
®
(online differentiated instruction for elementary school reading, writing and science), ExploreLearning
®
(online interactive math and science simulations and a math fact fluency solution), and Voyager Sopris Learning
®
(blended solutions that accelerate struggling learners to achieve in literacy and math and professional development for teachers). We believe that every student has unlimited potential, that teachers matter, and that data, instruction, and practice are the keys to success in the classroom and beyond.
During 2018, our products have continued to receive awards and accolades from industry publications.
2018 Tech & Learning's "Best of Show" Award at TCEA
In February 2018, Tech & Learning named ExploreLearning's
Gizmos
®
as one of the "Best of Show" products at TCEA 2018. The judges during the conference identified the technology that "will have the most impact in the classroom." All of the products were rated for "quality and effectiveness, ease of use and creative use of technology."
Gizmos
is a library of interactive online simulations for math and science education in grades 3-12.
The 24
th
Annual Best Educational Software Awards ("BESSIE") presented by The ComputED Gazette
In April 2018, Learning A-Z and ExploreLearning each received BESSIE Awards. The BESSIE Awards target innovative and content-rich programs and websites that provide parents and teachers with technology to foster educational excellence and are awarded to titles submitted by publishers worldwide. We won BESSIE Awards in the following categories:
Early Learning, Reading Website
:
Headsprout
®
by Learning A-Z
Early Elementary, Science Website: Science A-Z
®
by Learning A-Z
Early Elementary, Reading Skills: Headsprout
®
by Learning A-Z
Early Elementary, Critical Thinking Skills Website: Raz-Plus™
by Learning A-Z
Upper Elementary, Math Fluency Website: Reflex
®
by ExploreLearning
Upper Elementary, Science & Literacy Website: Science A-Z
®
by Learning A-Z
Upper Elementary, Writing Website: Writing A-Z
by Learning A-Z
Upper Elementary, ELL Website: Raz-Plus
by Learning A-Z
Multilevel, Math & Science Online Simulations: Gizmos
by ExploreLearning
Teacher Tools, ELL Reading Website: Raz-Plus ELL Edition
by Learning A-Z
2018 CODiE Awards
In June 2018, we received a 2018 CODiE Award for
Best Science Instructional Solution: Science A-Z
by Learning A-Z, as well as a 2018 CODiE Award for
Best Solution for Special Needs Students: Raz-Plus
by Learning A-Z, representing the 7th consecutive year the Company has received at least one CODiE Award. Since 1986, the Software and Information Industry Association (SIIA) CODiE Awards have recognized software and information companies for achievement and vision. It is the only peer-reviewed program in the content, education, and software industry.
Segment Information
We have three reportable segments with separate management teams and infrastructures that offer various products and services: Learning A-Z, ExploreLearning, and Voyager Sopris Learning. Segment results of operations also include Other, which consists of unallocated shared services, such as accounting, legal, human resources and corporate related items, as well as depreciation and amortization expense, interest income and expense, and income taxes. We do not allocate any of these costs to our segments, and our chief operating decision maker evaluates performance of operating segments excluding these items.
Learning A-Z Segment
Learning A-Z is a literacy-focused PreK-6 educational provider of technology-enabled learning resources. Founded in 2002, Learning A-Z's resources are now used by more than 7 million students in more than 170 countries. Learning A-Z provides a blend of traditional teacher-led instruction with technology-enabled resources to make teaching more effective and efficient, practice more accessible and personalized, assessment more strategic and automated, and learning more informed and proactive. With a comprehensive and blended approach, Learning A-Z delivers the tools students need without limiting a teacher's ability to differentiate instruction as they see fit. Learning A-Z's approach to literacy emphasizes knowledge and individual potential by recognizing that while reading and writing remain essential to attaining academic success, they are dynamic and dependent on real-world application and the incorporation of many other 21st century skills. Students today must read and write well, and they must also be able to think critically and analyze what they learn, solve problems, innovate and apply creativity, utilize advancing technology, communicate effectively orally and in writing, and collaborate with their peers. With a robust library of incredibly effective and flexible curriculum resources, Learning A-Z provides the tools teachers need to deliver personalized instruction for a wide range of student needs.
Learning A-Z operates the following subscription-based websites:
Reading A-Z
®
, Raz-Kids
®
, Headsprout
®
, Science A-Z
®
, Writing A-Z™, Vocabulary A-Z™
, and
ReadyTest A-Z™.
These websites can be purchased stand-alone or in collections, for a comprehensive solution that provides online supplemental books, lessons, assessments and other instructional resources for individual classrooms, schools, and districts. Learning A-Z's premier offering is an integration of teacher centric
Reading A-Z
with student centric
Raz-Kids
in a bundled product marketed as
Raz-Plus
™.
ExploreLearning Segment
ExploreLearning makes online solutions that help students succeed in math and science. ExploreLearning combines research-proven instructional methods with innovative technology to create new pathways for learning. Founded in 1999,
ExploreLearning solutions are now used in every U.S. state and over 50 countries worldwide. ExploreLearning offers two products that supplement core instruction in the classroom:
Gizmos
for grades 3-12 and
Reflex
for grades 2-8.
Gizmos
is a library of over 400 inquiry-based math and science simulations that help students make connections and draw conclusions through interaction, visualization and "what-if" exploration.
Reflex
is a highly-effective, game-based math fact fluency system that helps students of all ability levels succeed by continually adapting to students' instructional needs and providing motivational rewards for their effort.
Voyager Sopris Learning Segment
Voyager Sopris Learning is a leading provider of technology, materials, and professional development for educators to ensure all students graduate prepared for college, career, and satisfaction in life after K-12. It has built a nearly 40-year legacy on research and data-based curriculum development, while remaining nimble and responsive to the shifts and changes required by new standards, more demanding and rigorous content, new and competitive technological capabilities, and the needs of educators today. On a daily basis, Voyager Sopris Learning listens to the challenges of teachers and students, and its products are designed to respond to the need for exciting intervention and supplemental curricula that engage students, while remaining 100% purpose- and data-driven in their delivery. Voyager Sopris Learning programs are steeped in research and evidence, but they are also built with a deep consideration and understanding of the realities and struggles of education today. The Voyager Sopris Learning segment also includes Kurzweil Education brand solutions.
Voyager Sopris Learning solutions include
LANGUAGE!
®
Live,
Language Essentials for Teachers of Reading and Spelling (LETRS
®
), Step Up to Writing
®
, TransMath
®
, Vmath, Kurzweil 3000
®,
and
Velocity™,
among other instructional resources.
Review of Strategic Alternatives
The Company announced in May 2018 that it has initiated a review of strategic alternatives to maximize shareholder value. Such strategic alternatives could include a sale of the Company or a sale of a division or divisions thereof, a strategic merger, a business combination or continuing as a standalone entity executing on its business plan. The Company has engaged Macquarie Capital as financial advisor and Lowenstein Sandler LLP as legal advisor to assist in its review.
The Company has not set a definitive timetable for completion of its review of strategic alternatives, nor has it made any decisions related to any such strategic alternative at this time, and there can be no assurances that the process will result in any transaction being announced or completed in the future. The Company does not intend to make any further announcements related to its review unless and until its Board of Directors has approved a specific transaction or otherwise determined that further disclosure is appropriate.
Agreement to Acquire VKidz
On May 13, 2018, the Company entered into a definitive agreement to acquire VKIDZ Holdings Inc. ("VKidz"), an award winning Florida-based edtech company dedicated to helping deliver the best education to students using digital solutions. Organized in two business units, VKidz serves both school systems and homeschooling families with 100% digital, 100% subscription, innovative, research-based educational products. The Company believes VKidz is an exceptional fit with its current operations because it will provide attractive cross selling opportunities and expand Cambium's total addressable market. The acquisition is another step in Cambium's strategy of being the leading provider of state of the art digital subscription solutions that make a difference in the lives of students.
Under the terms of the agreement, the purchase price will include issuance of 6.7 million shares of Cambium Learning Group common stock to the sellers, plus payment of outstanding debt of VKidz on the consummation date of the transaction. In 2017, VKidz had Bookings of approximately $21.1 million and Cash Income of approximately $5.7 million. At June 30, 2018, VKidz had debt principal outstanding of $20.0 million and cash of $0.9 million. The Company expects the acquisition to be immediately accretive.
The acquisition is expected to be consummated, subject to all applicable approvals, after completion of the Company's review of strategic alternatives and the Company has the right to terminate the agreement prior to consummation.
VKidz is currently owned by founder John Edelson and a fund managed by Veronis Suhler Stevenson, which owns a majority of the equity interests of VSS-Cambium Holdings III, LLC, which holds approximately 68% of the Company's outstanding stock. Therefore, the Company's Board of Directors formed a special committee of independent and disinterested directors to analyze and negotiate the transaction on behalf of the Company and deliver a recommendation to the Company's Board of Directors with respect to the transaction. The Company's special committee was advised by Needham & Company, LLC as financial advisor and Paul Hastings LLP as legal advisor.
Results of Operations
Bookings
During the
six
months ended
June 30, 2018
, consolidated Bookings increased
$4.1 million
to
$53.0 million
, compared to
$48.9 million
during the
six
months ended
June 30, 2017
. Bookings by segment for the
six
months ended
June 30, 2018
and the percentage change from the same period of
2017
were as follows:
|
|
•
|
Learning A-Z:
$24.3 million
, increased
12.6%
in the first
six
months of the year compared to the prior year period, continuing its historical growth performance.
|
|
|
•
|
ExploreLearning:
$10.0 million
, increased
13.8%
in the first
six
months of the year compared to the prior year period with continued strong momentum for the
Reflex
math product and the
Gizmos
math and science simulations.
|
|
|
•
|
Voyager Sopris Learning:
$18.7 million
, increased
1.0%
in the first
six
months of the year compared to the prior year period. The Bookings increase came primarily from the segment's technology-enabled solutions, which increased 9% compared to the prior year.
|
Three Months Ended
June 30, 2018
Compared to the Three Months Ended
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Year-Over-Year Change
|
|
June 30, 2018
|
|
June 30, 2017
|
|
Favorable/(Unfavorable)
|
(in thousands)
|
Amount
|
|
% of Net
Revenues
|
|
Amount
|
|
% of Net
Revenues
|
|
$
|
|
%
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Learning A-Z
|
$
|
20,435
|
|
|
49.8
|
%
|
|
$
|
18,650
|
|
|
46.2
|
%
|
|
$
|
1,785
|
|
|
9.6
|
%
|
ExploreLearning
|
7,732
|
|
|
18.9
|
%
|
|
6,735
|
|
|
16.7
|
%
|
|
997
|
|
|
14.8
|
%
|
Voyager Sopris Learning
|
12,829
|
|
|
31.3
|
%
|
|
14,977
|
|
|
37.1
|
%
|
|
(2,148
|
)
|
|
(14.3
|
)%
|
Total net revenues
|
40,996
|
|
|
100.0
|
%
|
|
40,362
|
|
|
100.0
|
%
|
|
634
|
|
|
1.6
|
%
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Learning A-Z
|
1,263
|
|
|
3.1
|
%
|
|
942
|
|
|
2.3
|
%
|
|
(321
|
)
|
|
(34.1
|
)%
|
ExploreLearning
|
999
|
|
|
2.4
|
%
|
|
808
|
|
|
2.0
|
%
|
|
(191
|
)
|
|
(23.6
|
)%
|
Voyager Sopris Learning
|
4,776
|
|
|
11.6
|
%
|
|
5,465
|
|
|
13.5
|
%
|
|
689
|
|
|
12.6
|
%
|
Amortization expense
|
4,043
|
|
|
9.9
|
%
|
|
4,328
|
|
|
10.7
|
%
|
|
285
|
|
|
6.6
|
%
|
Total cost of revenues
|
11,081
|
|
|
27.0
|
%
|
|
11,543
|
|
|
28.6
|
%
|
|
462
|
|
|
4.0
|
%
|
Research and development expense
|
3,893
|
|
|
9.5
|
%
|
|
3,294
|
|
|
8.2
|
%
|
|
(599
|
)
|
|
(18.2
|
)%
|
Sales and marketing expense
|
12,717
|
|
|
31.0
|
%
|
|
12,190
|
|
|
30.2
|
%
|
|
(527
|
)
|
|
(4.3
|
)%
|
General and administrative expense
|
6,135
|
|
|
15.0
|
%
|
|
4,900
|
|
|
12.1
|
%
|
|
(1,235
|
)
|
|
(25.2
|
)%
|
Shipping and handling costs
|
186
|
|
|
0.5
|
%
|
|
195
|
|
|
0.5
|
%
|
|
9
|
|
|
4.6
|
%
|
Depreciation and amortization expense
|
718
|
|
|
1.8
|
%
|
|
669
|
|
|
1.7
|
%
|
|
(49
|
)
|
|
(7.3
|
)%
|
Income before interest and income taxes
|
6,266
|
|
|
15.3
|
%
|
|
7,571
|
|
|
18.8
|
%
|
|
(1,305
|
)
|
|
(17.2
|
)%
|
Net interest expense
|
(927
|
)
|
|
(2.3
|
)%
|
|
(1,336
|
)
|
|
(3.3
|
)%
|
|
409
|
|
|
30.6
|
%
|
Other income (expense), net
|
118
|
|
|
0.3
|
%
|
|
(109
|
)
|
|
(0.3
|
)%
|
|
227
|
|
|
208.3
|
%
|
Income tax expense
|
(1,022
|
)
|
|
(2.5
|
)%
|
|
(334
|
)
|
|
(0.8
|
)%
|
|
(688
|
)
|
|
(206.0
|
)%
|
Net income
|
$
|
4,435
|
|
|
10.8
|
%
|
|
$
|
5,792
|
|
|
14.4
|
%
|
|
$
|
(1,357
|
)
|
|
(23.4
|
)%
|
Net revenues
Net revenues increased during the three months ended
June 30, 2018
by
1.6%
to
$41.0 million
, compared to
$40.4 million
during the same period of
2017
. Increased net revenues in Learning A-Z and ExploreLearning offset lower net revenues in Voyager Sopris Learning. Net revenues by segment were as follows:
|
|
•
|
Learning A-Z's net revenues were
$20.4 million
, increasing
$1.8 million
, or
9.6%
, in the quarter ended
June 30, 2018
compared to the same period of
2017
. The year-over-year increase in revenue is driven by Learning A-Z's ongoing strong Bookings trend.
|
|
|
•
|
ExploreLearning's net revenues were
$7.7 million
, increasing
$1.0 million
, or
14.8%
, during the quarter ended
June 30, 2018
compared to the same period of
2017
. The increase in net revenues is due to ExploreLearning's continued strong Bookings performance.
|
|
|
•
|
Voyager Sopris Learning's net revenues were
$12.8 million
, decreasing
$2.1 million
, or
14.3%
, during the quarter ended
June 30, 2018
compared to the same period of
2017
. GAAP net revenues include a significant amount of revenue recognition generated from prior period Bookings.
|
Cost of revenues
Cost of revenues primarily includes print and royalty costs, and expenses to purchase, handle and warehouse product, and to provide services and support to customers. Cost of revenues, excluding amortization, decreased
$0.2 million
, or
2.5%
, to
$7.0 million
in the
second
quarter of
2018
compared to
$7.2 million
in the same period of
2017
. Cost of revenues benefited year-over-year from the increasing contribution from higher-margin technology-enabled solutions. The Learning A-Z and ExploreLearning segments, which are delivered on-line and have no royalty costs, comprised
68.7%
of net revenues in the
second
quarter of
2018
compared to
62.9%
of net revenues in the
second
quarter of
2017
. Cost of revenues by segment were as follows:
|
|
•
|
Learning A-Z's cost of revenues increased by
$0.3 million
, to
$1.3 million
due to the higher volume of subscriptions as well as increased customer support initiatives.
|
|
|
•
|
ExploreLearning's cost of revenues increased by
$0.2 million
to
$1.0 million
in the quarter ended
June 30, 2018
compared to the same period of
2017
. The increased costs were related to implementation and training due to the segment's increased level of customer support.
|
|
|
•
|
Voyager Sopris Learning's cost of revenues decreased
$0.7 million
or
12.6%
, to
$4.8 million
in the quarter ended
June 30, 2018
compared to
$5.5 million
in the
second
quarter of
2017
. The decrease in cost of revenues was due to the year-over-year decline in revenue, as well as cost savings from restructuring in late 2017.
|
Amortization expense in cost of revenues includes amortization for acquired pre-publication costs and technology, acquired publishing rights, and developed pre-publication and technology product development. Amortization expense was
$4.0 million
in the
second
quarter of
2018
, a decrease of
$0.3 million
compared to the same period of
2017
.
Research and development expense
Research and development expense includes costs to research, evaluate and develop educational products, net of capitalization. Research and development expense was
$3.9 million
in the
second
quarter of
2018
, an increase of
$0.6 million
compared to the same period of
2017
. The increase is due to planned investments to support growth initiatives at Learning A-Z and ExploreLearning. The increase for ExploreLearning includes $0.1 million of expense related to the ongoing integration of content from IS3D, LLC, which was acquired in the fourth quarter of 2017.
Sales and marketing expense
Sales and marketing expense includes all costs to maintain our various sales channels, including the salaries and commissions paid to our sales force, and costs related to our advertising and marketing efforts. Sales and marketing expense for the
second
quarter of
2018
increased
$0.5 million
to
$12.7 million
compared to
$12.2 million
for the
second
quarter of
2017
. The increase is due to planned investments to support growth initiatives at Learning A-Z and ExploreLearning, which were partially offset by decreases at Voyager Sopris Learning, including cost savings from the restructuring activities in late 2017.
General and administrative expense
General and administrative expenses in the
second
quarter of
2018
were
$6.1 million
, an increase of
$1.2 million
, or
25.2%
, from the
second
quarter of
2017
. The increase was driven by $1.1 million of Shared Services expenses incurred related to the Company's definitive agreement to acquire VKIDZ Holdings Inc. and its review of strategic alternatives. The remaining increase was due to growth commensurate with Bookings at Learning A-Z and ExploreLearning, partially offset by cost savings at Voyager Sopris Learning.
Shipping and handling costs
Shipping and handling costs for the quarter ended
June 30, 2018
were
$0.2 million
, consistent with the
second
quarter of
2017
.
Depreciation and amortization expense
Depreciation and amortization expense was
$0.7 million
for the three months ended
June 30, 2018
, consistent with the same period of 2017.
Other income (expense)
Other income (expense) was
$0.1 million
for the quarter ended
June 30, 2018
, compared to
$(0.1) million
in the same period in
2017
, and includes expense related to a frozen defined benefit pension plan of $(0.1) million in both periods. Pension expense in the second quarter of 2018 was offset by income resulting from the sale of excess state tax research and development credits of $0.2 million.
Net interest expense
Net interest expense decreased by
$0.4 million
, or
30.6%
, to
$0.9 million
in the
second
quarter of
2018
compared to the same period in
2017
as a result of the scheduled debt amortization payments and voluntary prepayments made during 2017.
Income tax expense
We recorded an income tax expense of
$1.0 million
for the
second
quarter of
2018
, an increase of
$0.7 million
compared to the same period of 2017. In December 2017, we released most of the valuation allowance against our deferred tax assets. The release of the valuation allowance results in changes in our deferred taxes being included in income tax expense as opposed to prior year periods in which changes in our deferred taxes were offset by corresponding changes in the valuation allowance.
Six Months Ended
June 30, 2018
Compared to the Six Months Ended
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
Year Over Year Change
|
|
June 30, 2018
|
|
June 30, 2017
|
|
Favorable/(Unfavorable)
|
(in thousands)
|
Amount
|
|
% of Net Revenues
|
|
Amount
|
|
% of Net Revenues
|
|
$
|
|
%
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Learning A-Z
|
$
|
39,571
|
|
|
51.0
|
%
|
|
$
|
36,835
|
|
|
48.3
|
%
|
|
$
|
2,736
|
|
|
7.4
|
%
|
ExploreLearning
|
15,236
|
|
|
19.6
|
%
|
|
13,513
|
|
|
17.7
|
%
|
|
1,723
|
|
|
12.8
|
%
|
Voyager Sopris Learning
|
22,796
|
|
|
29.4
|
%
|
|
25,984
|
|
|
34.0
|
%
|
|
(3,188
|
)
|
|
(12.3
|
)%
|
Total net revenues
|
77,603
|
|
|
100.0
|
%
|
|
76,332
|
|
|
100.0
|
%
|
|
1,271
|
|
|
1.7
|
%
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Learning A-Z
|
2,295
|
|
|
3.0
|
%
|
|
1,813
|
|
|
2.4
|
%
|
|
(482
|
)
|
|
(26.6
|
)%
|
ExploreLearning
|
2,022
|
|
|
2.6
|
%
|
|
1,679
|
|
|
2.2
|
%
|
|
(343
|
)
|
|
(20.4
|
)%
|
Voyager Sopris Learning
|
8,784
|
|
|
11.3
|
%
|
|
9,908
|
|
|
13.0
|
%
|
|
1,124
|
|
|
11.3
|
%
|
Amortization expense
|
7,947
|
|
|
10.2
|
%
|
|
8,418
|
|
|
11.0
|
%
|
|
471
|
|
|
5.6
|
%
|
Total cost of revenues
|
21,048
|
|
|
27.1
|
%
|
|
21,818
|
|
|
28.6
|
%
|
|
770
|
|
|
3.5
|
%
|
Research and development expense
|
7,619
|
|
|
9.8
|
%
|
|
6,392
|
|
|
8.4
|
%
|
|
(1,227
|
)
|
|
(19.2
|
)%
|
Sales and marketing expense
|
25,520
|
|
|
32.9
|
%
|
|
25,100
|
|
|
32.9
|
%
|
|
(420
|
)
|
|
(1.7
|
)%
|
General and administrative expense
|
11,416
|
|
|
14.7
|
%
|
|
9,783
|
|
|
12.8
|
%
|
|
(1,633
|
)
|
|
(16.7
|
)%
|
Shipping and handling costs
|
307
|
|
|
0.4
|
%
|
|
313
|
|
|
0.4
|
%
|
|
6
|
|
|
1.9
|
%
|
Depreciation and amortization expense
|
1,435
|
|
|
1.8
|
%
|
|
1,350
|
|
|
1.8
|
%
|
|
(85
|
)
|
|
(6.3
|
)%
|
Income before interest and income taxes
|
10,258
|
|
|
13.2
|
%
|
|
11,576
|
|
|
15.2
|
%
|
|
(1,318
|
)
|
|
(11.4
|
)%
|
Net interest expense
|
(1,757
|
)
|
|
(2.3
|
)%
|
|
(2,563
|
)
|
|
(3.4
|
)%
|
|
806
|
|
|
31.4
|
%
|
Other income (expense), net
|
15
|
|
|
—
|
%
|
|
(217
|
)
|
|
(0.3
|
)%
|
|
232
|
|
|
106.9
|
%
|
Income tax expense
|
(1,474
|
)
|
|
(1.9
|
)%
|
|
(474
|
)
|
|
(0.6
|
)%
|
|
(1,000
|
)
|
|
(211.0
|
)%
|
Net income
|
$
|
7,042
|
|
|
9.1
|
%
|
|
$
|
8,322
|
|
|
10.9
|
%
|
|
$
|
(1,280
|
)
|
|
(15.4
|
)%
|
Net revenues
Net revenues increased during the
six
months ended
June 30, 2018
by
1.7%
to
$77.6 million
, compared to
$76.3 million
during the same period of
2017
. Increased net revenues in Learning A-Z and ExploreLearning offset lower net revenues in Voyager Sopris Learning. Net revenues by segment were as follows:
|
|
•
|
Learning A-Z's net revenues were
$39.6 million
, increasing
$2.7 million
, or
7.4%
, in the
six
months ended
June 30, 2018
compared to the same period of
2017
. The year-over-year increase in revenue is driven by Learning A-Z's ongoing strong Bookings trend.
|
|
|
•
|
ExploreLearning's net revenues were
$15.2 million
, increasing
$1.7 million
, or
12.8%
, during the
six
months ended
June 30, 2018
compared to the same period of
2017
. The increase in net revenues is due to ExploreLearning's continued strong Bookings performance.
|
|
|
•
|
Voyager Sopris Learning's net revenues were
$22.8 million
, decreasing
$3.2 million
, or
12.3%
, during the
six
months ended
June 30, 2018
compared to the same period of
2017
. Although Bookings increased slightly in the
six
months ended
June 30, 2018
, GAAP net revenues include a significant amount of revenue recognition generated from prior period Bookings.
|
Cost of revenues
Cost of revenues primarily includes print and royalty costs, and expenses to purchase, handle and warehouse product, and to provide services and support to customers. Cost of revenues, excluding amortization, decreased
$0.3 million
, or
2.2%
, to
$13.1 million
in the first half of
2018
compared to
$13.4 million
in the same period of
2017
. Cost of revenues benefited year-over-year from the increasing contribution from higher-margin technology-enabled solutions. The Learning A-Z and ExploreLearning segments, which are delivered on-line and have no royalty costs, comprised
70.6%
of net revenues in the first half of
2018
compared to
66.0%
of net revenues in the first half of
2017
. Cost of revenues by segment were as follows:
|
|
•
|
Learning A-Z's cost of revenues increased by
$0.5 million
, to
$2.3 million
, in the
six
months ended
June 30, 2018
compared to
$1.8 million
in the same period of
2017
due to higher volume of subscriptions as well as increased customer support initiatives.
|
|
|
•
|
ExploreLearning's cost of revenues increased by
$0.3 million
to
$2.0 million
in the
six
months ended
June 30, 2018
compared to the same period of
2017
. The increased costs were related to implementation and training due to the segment's increased level of customer support.
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|
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•
|
Voyager Sopris Learning's cost of revenues decreased
$1.1 million
or
11.3%
, to
$8.8 million
in the
six
months ended
June 30, 2018
compared to
$9.9 million
in the first half of
2017
. The decrease in cost of revenues was due to the year-over-year decline in revenue, as well as cost savings from restructuring in late 2017.
|
Amortization expense in cost of revenues includes amortization for acquired pre-publication costs and technology, acquired publishing rights, and developed pre-publication and technology product development. Amortization expense was
$7.9 million
in the first half of
2018
, a decrease of
$0.5 million
compared to the same period of
2017
.
Research and development expense
Research and development expense includes costs to research, evaluate and develop educational products, net of capitalization. Research and development expense was
$7.6 million
in the first half of
2018
, an increase of
$1.2 million
compared to the same period of
2017
. The increase is due to planned investments to support growth initiatives at Learning A-Z and ExploreLearning. The increase for ExploreLearning includes $0.2 million of expense related to the ongoing integration of content from IS3D, LLC, which was acquired in the fourth quarter of 2017.
Sales and marketing expense
Sales and marketing expense includes all costs to maintain our various sales channels, including the salaries and commissions paid to our sales force, and costs related to our advertising and marketing efforts. Sales and marketing expense for the first half of
2018
increased
$0.4 million
to
$25.5 million
compared to
$25.1 million
for the first half of
2017
. The increase is due to planned investments to support growth initiatives at Learning A-Z and ExploreLearning, which were partially offset by decreases at Voyager Sopris Learning, including cost savings from the restructuring activities in late 2017.
General and administrative expense
General and administrative expenses in the first half of
2018
were
$11.4 million
, an increase of
$1.6 million
, or
16.7%
, from the same period of
2017
. The increase was driven by $1.1 million of Shared Services expenses incurred related to the Company's definitive agreement to acquire VKIDZ Holdings Inc. and its review of strategic alternatives. The remaining increase was due to growth commensurate with Bookings at Learning A-Z and ExploreLearning, partially offset by cost savings at Voyager Sopris Learning.
Shipping and handling costs
Shipping and handling costs for the
six
months ended
June 30, 2018
were
$0.3 million
, consistent with the same period of 2017.
Depreciation and amortization expense
Depreciation and amortization expense was
$1.4 million
for the
six
months ended
June 30, 2018
, an increase of
$0.1 million
compared to the first half of 2017.
Other income (expense)
Other income (expense) was
$15 thousand
and
$(0.2) million
for the
six
months ended
June 30, 2018
and June 30, 2017, respectively, and includes expense related to a frozen defined benefit pension plan of $(0.2) million in both periods. Pension expense in the first half of 2018 was offset by income resulting from the sale of excess state tax research and development credits of $0.2 million.
Net interest expense
Net interest expense decreased by
$0.8 million
, or
31.4%
, to
$1.8 million
in the first half of
2018
compared to the same period in
2017
as a result of the scheduled debt amortization payments and voluntary prepayments made during 2017.
Income tax expense
We recorded an income tax expense of
$1.5 million
for the
six
months ended
June 30, 2018
. In December 2017, we released most of the valuation allowance against our deferred tax assets. The release of the valuation allowance results in changes in our deferred taxes being included in income tax expense as opposed to prior year periods in which changes in our deferred taxes were offset by corresponding changes in the valuation allowance.
Liquidity and Capital Resources
Our primary sources of liquidity are cash balances, cash flow from operations, and the Revolving Credit Facility that we entered into in December 2015. Sales seasonality attributable to the buying cycle of school districts, which generally starts at the beginning of each new school year in the fall, affects our operating cash flow. As a result of this inherent seasonality, we normally incur a net cash deficit from all of our activities in the first and second quarters of the year and we normally generate cash in the third and fourth quarters of the year. We expect borrowings under the Revolving Credit Facility to vary according to this seasonality, and accounts receivable balances are normally at their highest at the end of the third quarter. At
June 30, 2018
, our cash balances were
$4.7 million
, our net accounts receivable were
$13.3 million
, our borrowings under the Revolving Credit Facility were
$10.0 million
, and we had
$19.8 million
of availability under the Revolving Credit Facility.
Based on current and anticipated levels of operating performance and cash flow from operations, combined with our existing cash balances and availability under the Revolving Credit Facility, we believe that we will be able to make required principal and interest payments on our debt and fund our working capital, operational and capital expenditure requirements for the next 12 months.
Senior Secured Credit Facility
On December 10, 2015, we entered into a $135.0 million Senior Secured Credit Agreement (the "Credit Agreement") which provided for a term loan A which had an initial principal amount of $70.0 million ("Term Loan A"), a term loan B which had an initial principal amount of $35.0 million ("Term Loan B"), and a $30.0 million revolving credit facility (the "Revolving Credit Facility") (together, the "Senior Secured Credit Facility"), secured by a lien on substantially all of our assets. The Senior Secured Credit Facility matures on December 10, 2020. In 2017, we repaid the entire principal amount outstanding of the Term Loan B.
Borrowings under the Senior Secured Credit Facility bear interest equal to either a Base Rate, as defined in the Credit Agreement, or LIBOR (subject to a 1.0% floor), at our option, plus an applicable margin. The applicable margin for the Term Loan A and Revolving Credit Facility ranges between 2.75% and 3.50% for Base Rate loans and 3.75% and 4.50% for LIBOR loans. The applicable margin for the Term Loan A and Revolving Credit Facility is based on a leverage calculation. As of
June 30, 2018
, we qualified for the lowest applicable margin, and the interest rate for the Term Loan A was
5.73%
. Additionally, unused borrowing capacity under the Revolving Credit Facility is subject to a commitment fee of 0.5%. Interest is payable in arrears every three months or less, based on the selected LIBOR interest period.
The Credit Agreement contains affirmative, negative and financial covenants customary for financings of this type, including, among other things, limits on the creation of liens, limits on the incurrence of indebtedness, restrictions on investments and dispositions, and limitations on fundamental changes. A maximum consolidated net leverage ratio and minimum fixed charge coverage ratio were effective beginning in the first quarter of 2016. Upon an event of default, and after any applicable cure period, the Administrative Agent could elect to accelerate the maturity of the loan. Events of default include customary items, such as failure to pay principal and interest in a timely manner and breach of covenants. At
June 30, 2018
, the Company was in compliance with all covenants related to the Senior Secured Credit Facility.
Summary of Cash flows
Cash provided by (used in) our operating, investing and financing activities is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
(in thousands)
|
|
2018
|
|
2017
|
Operating activities
|
|
$
|
(3,940
|
)
|
|
$
|
(4,290
|
)
|
Investing activities
|
|
(7,988
|
)
|
|
(8,816
|
)
|
Financing activities
|
|
8,115
|
|
|
12,822
|
|
Operating activities
. Cash used in operating activities was
$3.9 million
and
$4.3 million
for the
six
months ended
June 30, 2018
and
2017
, respectively. Cash flows from operating activities were impacted favorably during 2018 by higher Bookings and lower cash interest payments of $0.3 million, partially offset by the return of $0.7 million of cash from a certificate of deposit collateralizing a letter of credit in first half 2017.
Investing activities
. Cash used in investing activities was related to capital expenditures, and was
$8.0 million
for the
six
months ended
June 30, 2018
compared to
$8.8 million
during the same period of
2017
, declining by
$0.8 million
, as a result of lower spend at the Voyager Sopris Learning segment. Capital expenditures in 2018 for the ExploreLearning segment include $0.6 million related to the ongoing integration of content from IS3D, LLC, which was acquired in the fourth quarter of 2017.
Financing activities.
Cash provided by financing activities was
$8.1 million
for the
six
months ended
June 30, 2018
compared to
$12.8 million
for the
six
months ended
June 30, 2017
. Cash inflows for the
six
months ended
June 30, 2018
included borrowings under the Revolving Credit Facility of
$10.0 million
and
$1.0 million
of proceeds from the exercise of stock options. Cash outflows for the
six
months ended
June 30, 2018
included scheduled principal payments on the
Senior Secured Credit Facility of
$2.9 million
. Cash inflows for the
six
months ended
June 30, 2017
included borrowings under the Revolving Credit Facility of
$16.0 million
and
$0.3 million
of proceeds from the exercise of stock options. Financing outflows for the
six
months ended
June 30, 2017
included scheduled principal payments of the Senior Secured Credit Facility of
$3.5 million
.
Non-GAAP Measures
The Company uses the EBITDA, Adjusted EBITDA, and Cash Income non-GAAP financial measures to monitor and evaluate the operating performance of the Company and as a basis to set and measure progress towards performance targets.
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|
•
|
EBITDA
is earnings from operations before interest, income taxes, and depreciation and amortization.
|
|
|
•
|
Adjusted EBITDA
is EBITDA excluding non-operational and non-cash items. Examples of items excluded from Adjusted EBITDA include stock-based compensation, merger, acquisition and disposition activities, certain impairment charges, and restructuring charges.
|
|
|
•
|
Cash Income
reduces Adjusted EBITDA for capital expenditures and removes the timing differences for recognition of deferred revenues and related deferred costs.
|
EBITDA, Adjusted EBITDA, and Cash Income are not prepared in accordance with GAAP and may be different from similarly named, non-GAAP financial measures used by other companies. Non-GAAP financial measures should not be considered a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. The Company believes these non-GAAP measures provide useful information to investors because they reflect the underlying performance of the ongoing operations of the Company and provide investors with a view of the Company's operations from management's perspective. Adjusted EBITDA and Cash Income remove significant restructuring, non-operational, or certain non-cash items from earnings. The Company uses Adjusted EBITDA and Cash Income to monitor and evaluate the operating performance of the Company and as the basis to set and measure progress toward performance targets. Further, the Cash Income measure directly affects compensation for employees and executives. The Company generally uses these non-GAAP measures as measures of operating performance and not as measures of the Company's liquidity. The Company's presentation of EBITDA, Adjusted EBITDA, and Cash Income should not be construed as an indication that our future results will be unaffected by unusual, non-operational, or non-cash items.
Reconciliations of Operational and Non-GAAP Measures
Bookings is an internal, operational metric that measures the total dollar value of customer orders in a period, regardless of the timing of the related revenue recognition. We consider Bookings a leading indicator of revenues. Below are reconciliations of Bookings to Net Revenues and of Net Income to EBITDA, Adjusted EBITDA, and Cash Income for the
three and six
months ended
June 30, 2018
and
2017
:
Reconciliation of Bookings to Net Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(in thousands)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Bookings
|
$
|
33,116
|
|
|
$
|
29,741
|
|
|
$
|
52,969
|
|
|
$
|
48,853
|
|
Change in deferred revenues
|
7,900
|
|
|
10,576
|
|
|
24,814
|
|
|
27,419
|
|
Other
(a)
|
(20
|
)
|
|
45
|
|
|
(180
|
)
|
|
60
|
|
Net revenues
|
$
|
40,996
|
|
|
$
|
40,362
|
|
|
$
|
77,603
|
|
|
$
|
76,332
|
|
Reconciliation of Net Income to EBITDA, Adjusted EBITDA and Cash Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(in thousands)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net income
|
$
|
4,435
|
|
|
$
|
5,792
|
|
|
$
|
7,042
|
|
|
$
|
8,322
|
|
Reconciling items between net income and EBITDA:
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
4,761
|
|
|
4,997
|
|
|
9,382
|
|
|
9,768
|
|
Net interest expense
|
927
|
|
|
1,336
|
|
|
1,757
|
|
|
2,563
|
|
Income tax expense
|
1,022
|
|
|
334
|
|
|
1,474
|
|
|
474
|
|
Income from operations before interest, income taxes, and depreciation and amortization (EBITDA)
|
11,145
|
|
|
12,459
|
|
|
19,655
|
|
|
21,127
|
|
Non-operational or non-cash costs included in EBITDA but excluded from Adjusted EBITDA:
|
|
|
|
|
|
|
|
Income from sale of excess state tax credits
(b)
|
(222
|
)
|
|
—
|
|
|
(222
|
)
|
|
—
|
|
Merger, acquisition and disposition activities
(c)
|
1,499
|
|
|
212
|
|
|
1,621
|
|
|
339
|
|
Stock-based compensation and expense
(d)
|
252
|
|
|
224
|
|
|
479
|
|
|
424
|
|
Adjusted EBITDA
|
12,674
|
|
|
12,895
|
|
|
21,533
|
|
|
21,890
|
|
Change in deferred revenues
|
(7,900
|
)
|
|
(10,576
|
)
|
|
(24,814
|
)
|
|
(27,419
|
)
|
Change in deferred costs
|
1,132
|
|
|
1,168
|
|
|
2,589
|
|
|
2,731
|
|
Capital expenditures
|
(3,980
|
)
|
|
(4,284
|
)
|
|
(7,988
|
)
|
|
(8,816
|
)
|
Cash income
|
$
|
1,926
|
|
|
$
|
(797
|
)
|
|
$
|
(8,680
|
)
|
|
$
|
(11,614
|
)
|