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Acquisitions and Investments

12 Months Ended

Jun. 30, 2020

14. Acquisitions and Investments

Acquisition of Galvanize, Inc.

On January 27, 2020, the Company acquired 100% of Galvanize in exchange for $165.0 million, plus working capital of $12.2 million. Galvanize provides talent development for individuals and enterprises in information technology fields. The acquisition of Galvanize expands the Company’s offerings to include post-secondary skills training in data science and software engineering, technology staffing and developing talent and capabilities for companies. The Company also plans to use Galvanize’s curriculum to create appropriate content to offer high school students.

The acquisition has been accounted for as a business combination under the acquisition method of accounting, which results in acquired assets and assumed liabilities being measured at their estimated fair values as of January 27, 2020, the acquisition date. As of the acquisition date, goodwill is measured as the excess of consideration transferred and the fair values of the assets acquired and liabilities assumed.

Based on management’s preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on estimates and assumptions that are subject to change, the preliminary estimated purchase price is allocated as follows (in thousands):


Allocation of Purchase Price

Cash	$	9,232
Current assets, excluding cash		8,888
Property and equipment, net		11,270
Operating lease right-of-use assets, net		99,676
Intangible assets, net		68,483
Goodwill		84,741
Other assets		1,802
Current liabilities		(4,370)
Deferred revenue		(3,374)
Deferred tax asset (liability)		2,412
Current operating lease liability		(11,620)
Long-term operating lease liability		(89,782)
Other long-term liabilities		(130)
Total consideration	$	177,228

The final purchase price allocation will be completed within one year of the acquisition date (“measurement period”). If information becomes available which would indicate material adjustments are required to the purchase price allocation, such adjustments will be included in the purchase price allocation retrospectively.

The Company made several adjustments to its third quarter allocation of the preliminary purchase price during the fourth quarter of fiscal year 2020.

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The value of the trade names increased from $24.0 million to $60.3 million and the estimated useful life decreased from 18 years to 15 years. Amortization expense during the fourth quarter of fiscal year 2020 included an adjustment of $0.4 million to reflect the updated balance and estimated useful life as of the acquisition date.

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The value of the operating lease right-of-use assets, net increased from $90.7 million to $99.7 million. Lease expense during the fourth quarter of fiscal year 2020 included an adjustment of $0.1 million to reflect the updated balance as of the acquisition date.

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The deferred tax liability decreased from $17.4 million to $2.4 million, mostly as a result of the change to the trade names and changes to the preliminary Section 382 analysis.

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Goodwill decreased from $107.6 million to $84.7 million, mostly as a result of the transactions above.

Section 382 of the Internal Revenue Code could limit the Company’s ability to utilize Galvanize’s net operating losses and the Company believes the analysis of Section 382 has been substantially completed. The Company has made a preliminary assessment of its unfavorable/favorable leases as it relates to the value assigned to its operating lease right-of-use assets. The Section 382 and unfavorable/favorable leases analyses are still under review. The Company expects to complete these analyses within the measurement period.

The fair value of the identified intangible assets was determined primarily using an income-based approach of either the multi-period excess earnings method or relief from royalty method, as well as the replacement cost approach, as appropriate. Intangible assets are amortized on a straight-line basis over the amortization periods noted below.


Intangible Assets
			Estimated
Intangible Assets		Amount	Useful Life
		(In thousands)	(In years)
Customer relationships	$	4,785	4.22
Developed technology		3,357	4.00
Trade names		60,341	15.00
	$	68,483

Goodwill represents the excess of the purchase price of an acquired business over the fair value of the tangible and intangible assets acquired and liabilities assumed. Goodwill will not be amortized, but instead will be tested for impairment at least annually (or more frequently if indicators of impairment arise). In the event that management determines that the goodwill has become impaired, the Company will incur an accounting charge for the amount of the impairment during the fiscal quarter in which the determination is made. Goodwill is not deductible for tax purposes.

Included in the Company’s consolidated results of operations are revenues of $11.0 million and loss from operations of $18.1 million, related to Galvanize. The following unaudited pro forma combined results of operations give effect to the acquisition of Galvanize as if it had occurred on July 1, 2018. The unaudited pro forma combined results of operations are provided for informational purposes only and do not purport to represent the Company’s actual consolidated results of operations had the acquisition occurred on the dates assumed, nor are these financial statements necessarily indicative of the Company’s future consolidated results of operations. The unaudited pro forma combined results of operations do not reflect the costs of any integration activities or any benefits that may result from operating efficiencies or revenue synergies. Pro forma results include non-recurring transaction costs of $1.0 million, which are included in selling, general and administrative expenses.



		Year Ended June 30,
(In thousands)		2020	2019
Revenues	$	1,066,547	$	1,066,304
Income (loss) from operations		6,574		23,148
Net income (loss)		(1,519)		13,729

Investments in Limited Partnerships

During fiscal year 2019, the Company invested in two early stage funds focused on career education with a total commitment of $13.0 million. The Company invested in Rethink Education III, LP (“Rethink”) and New Markets Education Partners II, L.P. (“New Markets”) to support the development of new technologies that will advance online learning, to find early opportunities to adopt those new technologies at K12, and to simultaneously achieve a reasonable return on investment. As of June 30, 2020, the Company has contributed an aggregate $4.2 million to these funds: $1.7 million is an investment in New Markets and is recorded at cost and will be adjusted, as necessary, for impairment; and $2.5 million is an investment in Rethink and is recorded under the equity method of accounting. The Company’s investments in these funds are included in deposits and other assets on the consolidated balance sheet.

Investment in Tallo, Inc.

In August 2018, the Company invested $6.7 million for a 39.5% minority interest in Tallo, Inc. (“Tallo”). This investment in preferred stock that contains additional rights over common stock and has no readily determinable fair value, was recorded at cost and will be adjusted, as necessary, for impairment. In the event Tallo issues equity at a materially different price than what the Company paid, the Company would also assess changing the carrying value. Tallo also issued a convertible note to the Company for $5.0 million that will be accounted for as an available-for-sale debt security and adjusted to fair value quarterly. The note bears interest at the mid-term Applicable Federal Rate plus 25 bps per annum with a maturity of 48 months. The note is convertible at the Company’s option into 3.67 million Series D Preferred Shares that would give the Company an effective ownership of 56% if exercised. The Company’s investment in Tallo is included in deposits and other assets on the consolidated balance sheets.