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Acquisitions and Investments

9 Months Ended

Mar. 31, 2021

11. Acquisitions and Investments

Acquisition of MedCerts, LLC

On November 30, 2020, the Company acquired 100% of MedCerts in exchange for $70.0 million and estimated contingent consideration of $10.8 million. The purchase price is payable in two tranches; $55.0 million was paid at closing, and $15.0 million plus the final contingent consideration will be paid on the 18-month anniversary of the closing. MedCerts students participate in online, hands-on career training courses in the healthcare and medical fields as they prepare for more than a dozen national healthcare certifications. The acquisition of MedCerts further expands the Company’s post-secondary skills training in the healthcare and medical fields. The Company also plans to use MedCerts’ curriculum to create appropriate content to offer high school students.

the acquisition date. As of the acquisition date, goodwill was measured as the excess of consideration transferred over the fair values of the assets acquired and liabilities assumed.

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


Allocation of Purchase Price

Cash	$	205
Current assets, excluding cash		5,074
Property and equipment, net		1,896
Intangible assets, net		26,607
Goodwill		50,814
Current liabilities		(2,201)
Deferred revenue		(1,562)
Total consideration	$	80,833

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 estimated fair values for deferred revenue, contingent consideration and the intangible assets are considered preliminary and are subject to change based on final purchase price valuation amounts. The purchase price valuation is still under review.

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


Intangible Assets
			Estimated
Intangible Assets		Amount	Useful Life
		(In thousands)	(In years)
Customer relationships	$	12,072	5.84
Developed technology		11,970	7.00
Trade names		2,565	5.00
	$	26,607

The contingent consideration represents the fair value of additional consideration payable to the seller, estimated using a Monte Carlo simulation model. The amount of consideration to be distributed on the 18-month anniversary of the closing is based on a multiplier calculated using the annualized earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the period December 2021 – May 2022. This multiplier is applied to the annualized trailing EBITDA for the period March 2022 – May 2022 to calculate an enterprise value of MedCerts as of May 2022. The payment, if any, will equal 49% of the enterprise value less 49% of original purchase price of $70.0 million ($34.3 million).

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

Included in the Company’s condensed consolidated results of operations for the three and nine months ended March 31, 2021 are revenues of $5.3 million and $6.4 million, respectively, and a loss from operations of $2.1 million and $3.3 million, related to MedCerts.

Acquisition of Tech Elevator, Inc.

On November 30, 2020, the Company acquired 100% of Tech Elevator in exchange for $23.5 million, plus working capital of $2.2 million. Like Galvanize, Tech Elevator provides talent development for individuals and enterprises in information technology fields. The acquisition of Tech Elevator expands Galvanize’s student demographic profile, geographic footprint, and hiring partner portfolio; as well as provides additional 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 November 30, 2020, the acquisition date. As of the acquisition date, goodwill was measured as the excess of consideration transferred over the fair values of the assets acquired and liabilities assumed.


Allocation of Purchase Price

Cash	$	1,813
Current assets, excluding cash		518
Property and equipment, net		513
Operating lease right-of-use assets, net		724
Intangible assets, net		7,105
Goodwill		18,014
Other assets		377
Current liabilities		(461)
Deferred revenue		(534)
Deferred tax liability		(1,650)
Current operating lease liability		(420)
Long-term operating lease liability		(304)
Total consideration	$	25,695

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 estimated fair values for deferred revenue and the intangible assets are considered preliminary and are subject to change based on final purchase price valuation amounts. The purchase price valuation is still under review.


Intangible Assets
			Estimated
Intangible Assets		Amount	Useful Life
		(In thousands)	(In years)
Customer relationships	$	311	3.92
Developed technology		2,796	5.00
Trade names		3,998	15.00
	$	7,105

Included in the Company’s condensed consolidated results of operations for the three and nine months ended March 31, 2021 are revenues of $3.4 million and $4.0 million, respectively, and income from operations of $0.3 million and $0.0 million, respectively.

Acquisition of Galvanize, Inc.

On January 27, 2020, the Company acquired 100% of Galvanize in exchange for $165.0 million, plus working capital of $9.2 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 fair values as of January 27, 2020, the acquisition date. As of the acquisition date, goodwill was measured as the excess of consideration transferred over the fair values of the assets acquired and liabilities assumed.

Based on management’s valuation of the fair value of tangible and intangible assets acquired and liabilities assumed, the purchase price was allocated as follows (in thousands):


Allocation of Purchase Price

Cash	$	9,232
Current assets, excluding cash		8,888
Property and equipment, net		11,270
Operating lease right-of-use assets, net		100,232
Intangible assets, net		68,483
Goodwill		81,225
Other assets		1,802
Current liabilities		(4,370)
Deferred revenue		(3,374)
Deferred tax asset (liability)		2,372
Current operating lease liability		(11,620)
Long-term operating lease liability		(89,782)
Other long-term liabilities		(130)
Total consideration	$	174,228

The Company made several adjustments to its fiscal year 2020 allocation of the preliminary purchase price during fiscal year 2021.

●

The value of the operating lease right-of-use assets, net increased from $99.7 million to $100.2 million. Lease expense in fiscal year 2021 was not significantly impacted by the updated balance as of the acquisition date.

●

The Company and the sellers finalized its working capital calculation resulting in an adjustment to the purchase price of $3.0 million.

●

Goodwill decreased from $84.7 million to $81.2 million as a result of the adjustments above.

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

Included in the Company’s condensed consolidated results of operations for the three and nine months ended March 31, 2021 are revenues of $8.7 million and $26.2 million, respectively, and loss from operations of $11.2 million and $30.9 million, respectively, related to Galvanize. Included in the Company’s condensed consolidated results of operations for the three and nine months ended March 31, 2020 are revenues of $3.2 million and loss from operations of $8.1 million.

Pro Forma Combined Results of Operations

The following unaudited pro forma combined results of operations give effect to the acquisition of MedCerts, Tech Elevator and Galvanize as if they had occurred on July 1, 2019. The unaudited pro forma combined results of operations are provided for informational purposes only and do not purport to represent the Company’s actual consolidated results of operations had the acquisitions occurred on the dates assumed, nor are these financial statements necessarily indicative of the Company’s future consolidated results of operations. The unaudited pro forma combined results of operations do not reflect the costs of any integration activities or any benefits that may result from operating efficiencies or revenue synergies.


		Three Months Ended March 31,				Nine Months Ended March 31,
(In thousands)		2021		2020		2021		2020
Revenues	$	392,145	$	267,398	$	1,154,663	$	810,621
Income (loss) from operations		38,553		(4,706)		89,900		(9,557)
Net income (loss)		23,789		(10,360)		61,948		(13,447)

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 Stride, and to simultaneously achieve a reasonable return on investment. As of March 31, 2021, the Company has contributed an aggregate $6.2 million to these funds: $1.9 million is an investment in New Markets and is recorded at cost and will be adjusted, as necessary, for impairment; and $4.3 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 condensed consolidated balance sheets.

Investment in Tallo, Inc.

In August 2018, the Company made an initial investment of $6.7 million for a 39.5% minority interest in Tallo, Inc. (“Tallo”). In August 2020, the Company invested an additional $2.3 million which increased its minority interest to 46.1%. These investments in preferred stock contain additional rights over common stock and have no readily determinable fair value, were 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 53% if exercised. The Company’s investment in Tallo is included in deposits and other assets on the condensed consolidated balance sheets.