Summary of Significant Accounting Policies

9 Months Ended

Mar. 31, 2020

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

3.   Summary of Significant Accounting Policies

Recent Accounting Pronouncements

Accounting Standards Adopted

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“ASU 2016-02”), also known as Accounting Standards Codification Topic 842 (“ASC 842”), which supersedes most existing lease guidance under ASC Topic 840 (“ASC 840”). The core principal of ASC 842 establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of operations.

The most significant impact to the Company was its accounting for operating leases, which under ASC 840, were not recorded on the balance sheet. The Company reviewed its rent expense to ensure all leases were captured. The Company concluded that these leases were operating leases under ASC 842. Additionally, the Company’s capital leases under ASC 840 were reviewed and determined to be finance leases under ASC 842.

The Company adopted this standard during the first quarter of fiscal year 2020 using the modified retrospective approach. Under this method, the Company applied ASC 842 to existing leases that had commenced as of July 1, 2019. The comparative information for prior periods has not been restated and continues to be reported under ASC 840. The Company has provided the required disclosures under ASC 840 for the comparative periods. The Company elected to apply the package of practical expedients that was available upon adoption of ASC 842 to not reassess (1) whether any expired or existing contracts contain a lease, (2) the lease classification of any expired or existing lease, and (3) the initial direct costs for existing leases. The adoption of ASC 842 resulted in the recognition of a new lease liability for its operating leases of $22.7 million and a right-of-use asset of $17.7 million (net of existing deferred rent and lease impairment liabilities) on July 1, 2019.

In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40) (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). It requires an entity in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. ASU 2018-15 is effective for the Company’s fiscal year beginning July 1, 2020; however, the Company early adopted this standard in the first quarter of fiscal year 2020. As a result of the adoption, during the three and nine months ended March 31, 2020, the Company capitalized $3.2 million and $7.0 million, respectively, of implementation costs that would have been expensed previously. These costs are included in deposits and other assets in the condensed consolidated balance sheets.

Accounting Standards Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) (“ASU 2016-13”) related to the methodology for recognizing credit losses. The new standard revises the accounting requirements related to the measurement of credit losses and will require organizations to measure all expected credit losses for financial assets based on historical experience, current conditions and reasonable and supportable forecasts about collectability. Assets must be presented in the financial statements at the net amount expected to be collected. This ASU will be effective for

the Company in the first quarter of fiscal year 2021, and early adoption is permitted. The Company is currently evaluating the impact of this ASU on its condensed consolidated financial statements and will evaluate whether to increase the allowance for doubtful accounts at the time of adoption.

Contracts with Customers

Revenues are principally earned from contractual agreements to provide online curriculum, books, materials, computers and management services to virtual and blended schools, traditional public schools, school districts, and private schools through its three lines of business; Managed Public School Programs, Institutional, and Private Pay Schools and Other.

Under ASC 606, revenue is recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration it expects to be entitled to in exchange for those goods or services using the following steps:

● identify the contract, or contracts, with a customer;

● identify the performance obligations in the contract;

● determine the transaction price;

● allocate the transaction price to the performance obligations in the contract; and

● recognize revenue when, or as, the Company satisfies a performance obligation.

Revenue Recognition

Managed Public School Programs

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

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

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

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

● the use of a personal computer and associated reclamation services;

● internet access and technology support services;

● instruction by a state-certified teacher; and

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

To determine the pro rata amount of revenue to recognize in a fiscal quarter, the Company estimates the total funds each school will receive in a particular school year. Total funds for a school are primarily a function of the number of students enrolled in the school and established per enrollment funding levels, which are generally published on an annual basis by the state or school district. The Company reviews its estimates of funding periodically, and revises as necessary, amortizing any adjustments to earned revenues over the remaining portion of the fiscal year. Actual school funding may vary from these estimates and the impact of these differences could impact the Company’s results of operations. Since the end of the school year coincides with the end of the Company’s fiscal year, annual revenues are generally based on actual school funding and actual costs incurred (including costs for the Company’s services to the schools plus other costs the schools may incur) in the calculation of school operating losses. The Company’s schools’ reported results are subject to

annual school district financial audits, which incorporate enrollment counts, funding and other routine financial audit considerations. The results of these audits are incorporated into the Company’s monthly funding estimates for the three and nine months ended March 31, 2020 and 2019.

Each state and/or school district has variations in the school funding formulas and methodologies that it uses to estimate funding for revenue recognition at its respective schools. As the Company estimates funding for each school, it takes into account the state definition for count dates on which reported enrollment numbers will be used for per pupil funding. The parameters the Company considers in estimating funding for revenue recognition purposes include school district count definitions, withdrawal rates, average daily attendance, special needs enrollment, student demographics, academic progress and historical completion, student location, funding caps and other state specified categorical program funding.

Under the contracts where the Company provides services to schools, the Company has generally agreed to absorb any operating losses of the schools in a given school year. These school operating losses represent the excess of costs incurred over revenues earned by the virtual or blended public school as reflected on its respective financial statements, including Company charges to the schools. To the extent a school does not receive funding for each student enrolled in the school, the school would still incur costs associated with serving the unfunded enrollment. If losses due to unfunded enrollments result in a net operating loss for the year that loss is reflected as a reduction in the revenues and net receivables that the Company collects from the school. A school net operating loss in one year does not necessarily mean the Company anticipates losing money on the entire contract with the school. However, a school operating loss may reduce the Company’s ability to collect its management fees in full and recognized revenues are reduced accordingly to reflect the expected cash collections from such schools. The Company amortizes the estimated school operating loss against revenues based upon the percentage of actual revenues in the period to total estimated revenues for the fiscal year.

Management periodically reviews its estimates of full-year school revenues and operating expenses, and amortizes the net impact of any changes to these estimates over the remainder of the fiscal year. Actual school operating losses may vary from these estimates or revisions, and the impact of these differences could have a material impact on results of operations. For the three months ended March 31, 2020 and 2019, the Company’s revenues included a reduction for these school operating losses of $11.0 million and $9.2 million, respectively, and $38.5 million and $43.2 million for the nine months ended March 31, 2020 and 2019, respectively.

The Company has certain contracts where it is responsible for substantially all of the expenses incurred by the school. For these contracts, the Company records both revenue and expenses incurred by the schools. Amounts recorded as revenues for the three months ended March 31, 2020 and 2019 were $78.3 million and $85.8 million, respectively, and for the nine months ended March 31, 2020 and 2019 were $247.7 million and $259.9 million, respectively.

Institutional

The products and services delivered to the Company’s Institutional customers include curriculum and technology for full-time virtual and blended programs, as well as instruction, curriculum and associated materials, supplemental courses, marketing, enrollment and other educational services. Each of these contracts are considered to be one performance obligation under ASC 606.

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

Private Pay Schools and Other

Private Pay Schools and Other revenues are generated from individual customers who prepay and have access for one to two years to company-provided online curriculum. The majority of Galvanize’s customers are individuals or corporations that enter into agreements for Galvanize to provide course instruction or job training over a specified contract

period. Each of these contracts are considered to be one performance obligation under ASC 606. The Company recognizes these revenues pro rata over the maximum term of the customer contract.

Disaggregated Revenues

The following table presents the Company’s revenues disaggregated based on its three lines of business for the three and nine months ended March 31, 2020 and 2019:

	Three Months Ended March 31,				Nine Months Ended March 31,
	2020		2019		2020		2019
		(In thousands)
Managed Public School Programs	$	228,335	$	222,645	$	685,446	$	665,981
Institutional
Non-managed Public School Programs		8,173		12,776		26,792		37,398
Institutional Software & Services		8,580		8,530		30,246		29,515
Total Institutional		16,753		21,306		57,038		66,913
Private Pay Schools and Other		12,066		9,301		29,350		26,544
Total Revenues	$	257,154	$	253,252	$	771,834	$	759,438

Concentration of Customers

During the three and nine months ended March 31, 2020, the Company had no contracts that represented greater than 10% of total revenues. For the three and nine months ended March 31, 2019, the Company had one contract that represented greater than 10% of total revenues.

Contract Balances

The timing of revenue recognition, invoicing, and cash collection results in accounts receivable, unbilled receivables (a contract asset) and deferred revenue (a contract liability) in the condensed consolidated balance sheets. Accounts receivable are recorded when there is an executed customer contract and the customer is billed. The collectability of outstanding receivables is evaluated regularly by the Company and an allowance is recorded to reflect probable losses. Unbilled receivables are created when revenue is earned prior to the customer being billed. Deferred revenue is recorded when customers are billed in advance of services being provided.

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

	March 31,		June 30,
	2020		2019
	(In thousands)
Accounts receivable	$	284,326	$	191,639
Unbilled receivables (included in accounts receivable)		17,323		16,189
Deferred revenue		39,618		22,828
Deferred revenue, long-term (included in other long-term liabilities)		2,155		—

The difference between the opening and closing balance of the accounts receivable and unbilled receivables relates to the timing of the Company’s billing in relation to month end and contractual agreements. The difference between the opening and closing balance of the deferred revenue relates to the timing difference between billings to customers and the service periods under the contract. Typically, each of these balances are at their highest during the first quarter of the fiscal year and lowest at the end of the fiscal year. The amount of revenue recognized during the three months ended March 31, 2020 and 2019 that was included in the previous January 1^st deferred revenue balance was $29.6 million and

$24.9 million, respectively. The amount of revenue recognized during the nine months ended March 31, 2020 and 2019 that was included in the previous July 1^st deferred revenue balance was $19.2 million and $21.5 million, respectively.

During the three months ended March 31, 2020 and 2019, the Company recorded revenues of $1.5 million and $3.2 million, respectively, and $4.3 million and $3.7 million, respectively, during the nine months ended March 31, 2020 and 2019, related to performance obligations satisfied in prior periods.

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. For the majority of its contracts, the Company’s performance obligations are satisfied over time, as the Company delivers, and the customer receives the services, over the service period of the contract. The Company’s payment terms are generally net 30 or net 45, but can vary depending on when the school receives its funding from the state.

The Company has elected, as a practical expedient, not to report the value of unsatisfied performance obligations for contracts with customers that have an expected duration of one year or less. The amount of unsatisfied performance obligations for contracts with customers which extend beyond one year as of March 31, 2020 was $2.2 million.

Significant Judgments

The Company determined that the majority of its contracts with customers contain one performance obligation. The Company markets the products and services as an integrated package building off its curriculum offerings. It does not market distinct products or services to be sold independently from the curriculum offering.

The Company has determined that the time elapsed method as described under ASC 606 is the most appropriate measure of progress towards the satisfaction of the performance obligation. The Company delivers the integrated products and services package related to its Managed Public School Programs largely over the course of the Company’s fiscal year. This package includes enrollment, marketing, teacher training, etc. in addition to the core curriculum and instruction. All of these activities are necessary and contribute to the overall education of its students, which occurs evenly throughout the year. Accordingly, the Company will recognize revenue on a straight-line basis.

As discussed above, the Company estimates the total funds each school will receive in a particular school year and the amount of full-year school revenues and operating expenses to determine the amount of revenue the Company will receive. Enrollment is a key input to this estimate. To the extent the estimates change during the year, the cumulative impact of the change is recognized over the remaining service period.

Sales Taxes

Sales tax collected from customers is excluded from revenues. Collected but unremitted sales tax is included as part of accrued liabilities in the accompanying consolidated balance sheets. Revenues do not include sales tax as the Company considers itself a pass-through conduit for collecting and remitting sales tax.

Consolidation

The condensed consolidated financial statements include the accounts of the Company, the wholly-owned and affiliated companies that the Company owns, directly or indirectly, and all controlled subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

Inventories

Inventories consist primarily of textbooks and curriculum materials, a majority of which are supplied to virtual public schools and blended public schools, and utilized directly by students. Inventories represent items that are purchased and

held for sale and are recorded at the lower of cost (first-in, first-out method) or net realizable value. The Company classifies its inventory as current or long-term based on the holding period. As of March 31, 2020 and June 30, 2019, $3.8 million and $4.1 million, respectively, of inventory, net of reserves, was deemed long-term and included in deposits and other assets on the condensed consolidated balance sheets. The provision for excess and obsolete inventory is established based upon the evaluation of the quantity on hand relative to demand. The excess and obsolete inventory reserve was $4.7 million and $4.1 million at March 31, 2020 and June 30, 2019, respectively.

Other Current Assets

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

Property and Equipment

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

Property and equipment are depreciated over the following useful lives:

	Useful Life
Student and state testing computers	3 - 5 years
Computer hardware	3 years
Computer software	3 - 5 years
Web site development	3 years
Office equipment	5 years
Furniture and fixtures	7 years
Leasehold improvements	3 - 12 years

The Company makes an estimate of unreturned student computers based on an analysis of recent trends of returns.  The Company recorded accelerated depreciation of $0.5 million and $0.5 million for the three months ended March 31, 2020 and 2019, respectively, and $1.8 million and $1.6 million for the nine months ended March 31, 2020 and 2019, respectively, related to unreturned student computers. Depreciation expense for property and equipment, including accelerated depreciation, for the three months ended March 31, 2020 and 2019 was $5.7 million and $4.9 million, respectively, and $16.2 million and $15.2 million for the nine months ended March 31, 2020 and 2019, respectively.

The Company fully expenses computer peripheral equipment (e.g. keyboards, mouses) upon purchase as recovery has been determined to be uneconomical. These expenses totaled $0.7 million and $0.7 million for the three months ended March 31, 2020 and 2019, respectively, and $3.9 million and $4.0 million for the nine months ended March 31, 2020 and 2019, respectively, and are recorded as instructional costs and services.

Capitalized Software Costs

The Company develops software for internal use. Software development costs incurred during the application development stage are capitalized in accordance with ASC 350, Intangibles – Goodwill and Other (“ASC 350”). The Company amortizes these costs over the estimated useful life of the software, which is generally three years. Capitalized software development costs are stated at cost less accumulated amortization.

Capitalized software additions totaled $18.8 million and $20.6 million for the nine months ended March 31, 2020 and 2019, respectively. Amortization expense for the three months ended March 31, 2020 and 2019 was $6.4 million and $7.0

million, respectively, and $20.0 million and $22.4 million for the nine months ended March 31, 2020 and 2019, respectively.

Capitalized Curriculum Development Costs

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

The Company capitalizes curriculum development costs incurred during the application development stage in accordance with ASC 350. The Company capitalizes curriculum development costs during the design and deployment phases of the project. As a result, a significant portion of the Company’s courseware development costs qualify for capitalization due to the concentration of its development efforts on the content of the courseware. Capitalization ends when a course is available for general release to its customers, at which time amortization of the capitalized costs begins. The period of time over which these development costs are amortized is generally five years.

Total capitalized curriculum development additions were $15.5 million and $13.7 million for the nine months ended March 31, 2020 and 2019, respectively. These amounts are recorded on the accompanying condensed consolidated balance sheets net of amortization charges. Amortization is recorded in instructional costs and services on the accompanying condensed consolidated statements of operations. Amortization expense for the three months ended March 31, 2020 and 2019 was $4.5 million and $4.5 million, respectively, and $13.3 million and $13.5 million for the nine months ended March 31, 2020 and 2019, respectively.

Leases

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

Under ASC 842, for a lessee, leases are classified as operating leases unless they meet any of the criteria below to be classified as a finance lease:

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

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

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

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

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

Finance Leases

The Company enters into agreements to finance the purchase of student computers and peripherals provided to students of its schools. Individual leases typically include 1 to 3 year payment terms, at varying rates, with a $1 purchase option at the end of each lease term. The Company pledges the assets financed to secure the outstanding leases.

Operating Leases

The Company enters into agreements for facilities that serve as offices for its headquarters, sales and enrollment teams, and school operations. Initial lease terms vary between 1 and 15 years. Certain leases include renewal options, usually based upon current market rates, as well as termination rights. The Company performs an evaluation of each lease to determine if the lease payments included in the renewal option should be included in the initial measurement of the

lease liability. As of the adoption date, the remaining lease terms varied between 1 and 5 years and the Company concluded that renewal options on the existing leases would be excluded from the determination of the initial lease liability.

Discount Rate

Under ASC 842, the present value of the lease payments is calculated using either the rate implicit in the lease, or the lessee’s incremental borrowing rate, over the lease term. For the Company’s finance leases, the stated rate is defined within the lease terms; while for the Company’s operating leases, the rate is not implicit. For operating leases, the Company uses its incremental borrowing rate as the discount rate; determined as the Company’s borrowing rate on a collateralized basis for a similar term and amount to the term and amount of the lease.

For its adoption of ASC 842, the Company utilized its agreements used for its finance leases as the basis for calculating its incremental borrowing rate. The rate was collateralized and its term reflected a similar term of the remaining lease payments of the Company’s largest operating lease. As of the adoption date, the incremental borrowing rate was 3.86%.  Upon the execution of its senior secured revolving credit facility (see Note 6, “Credit Facility”), the Company has reassessed its incremental borrowing rate as 2.55%. The incremental borrowing rate is subsequently reassessed upon modification of its leasing arrangements or with the execution of a new lease agreement.

Policy Elections

Short-term Leases

The Company has elected as an on-going accounting policy election not to apply ASC 842 to short-term facility leases of 12 months or less. By making this election, the Company will not record a right-of-use asset or lease liability at the commencement of the lease, and will continue to expense its lease payments on a straight-line basis over the lease term. The accounting policy election is made by class of underlying asset to which the right of use relates. The Company has elected to apply the accounting policy election only to operating leases.

Income Taxes

The Company accounts for income taxes in accordance with ASC 740, Income Taxes (“ASC 740”). Under ASC 740, deferred tax assets and liabilities are computed based on the difference between the financial reporting and income tax bases of assets and liabilities using the enacted marginal tax rate. ASC 740 requires that the net deferred tax asset be reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the net deferred tax asset will not be realized.

Goodwill and Intangible Assets

The Company records as goodwill the excess of the purchase price over the fair value of the identifiable net assets acquired. Finite-lived intangible assets acquired in business combinations subject to amortization are recorded at their fair value. Finite-lived intangible assets include trade names, acquired customers and distributors, developed technology and non-compete agreements. Such intangible assets are amortized on a straight-line basis over their estimated useful lives. Amortization expense for the three months ended March 31, 2020 and 2019 was $1.8 million and $0.7 million, respectively, and for the nine months ended March 31, 2020 and 2019 was $3.3 million and $2.2 million, respectively. Future amortization of intangible assets is expected to be $1.6 million, $5.4 million, $5.2 million, $5.0 million, and $4.0 million in the fiscal years ending June 30, 2020 through June 30, 2024, respectively and $22.4 million thereafter. At March 31, 2020 and June 30, 2019, the goodwill balance was $197.8 million and $90.2 million, respectively.

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

ASC 350 prescribes a two-step process for impairment testing of goodwill and intangible assets with indefinite lives, which is performed annually, as well as when an event triggering impairment may have occurred based on one reporting unit. ASC 350 also allows preparers to qualitatively assess goodwill impairment through a screening process which would permit companies to forgo Step 1 of their annual goodwill impairment process. This qualitative screening process will hereinafter be referred to as “Step 0”. The Company performs its annual assessment on May 31st. During the year ended June 30, 2019, the Company performed “Step 0” of the impairment test and determined that there were no facts and circumstances that indicated that the fair value of the reporting unit may be less than its carrying amount, and as a result, the Company determined that no impairment was required.

The Company performed a qualitative assessment of Coronavirus disease (“COVID-19”) as a triggering event related to the value of its goodwill and intangible assets and concluded that there were no indicators of impairment during the three and nine months ended March 31, 2020.

The following table represents the balance of the Company’s intangible assets as of March 31, 2020 and June 30, 2019:

	March 31, 2020						June 30, 2019
($ in millions)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Value		Gross Carrying Amount		Accumulated Amortization		Net Carrying Value
Trade names	$	41.6	$	(10.3)	$	31.3	$	17.6	$	(9.4)	$	8.2
Customer and distributor relationships		25.3		(16.4)		8.9		20.5		(14.7)		5.8
Developed technology		6.6		(3.3)		3.3		3.2		(2.8)		0.4
Other		1.4		(1.0)		0.4		1.4		(0.8)		0.6
Total	$	74.9	$	(31.0)	$	43.9	$	42.7	$	(27.7)	$	15.0

Impairment of Long-Lived Assets

Long-lived assets include property, equipment, right-of-use assets, capitalized curriculum and software developed or obtained for internal use. In accordance with ASC 360, Property, Plant and Equipment (“ASC 360”), management reviews the Company’s recorded long-lived assets for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. The Company determines the extent to which an asset may be impaired based upon its expectation of the asset’s future usability as well as on a reasonable assurance that the future cash flows associated with the asset will be in excess of its carrying amount. If the total of the expected undiscounted future cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between fair value and the carrying value of the asset. The Company performed a qualitative assessment of COVID-19 as a triggering event related to the value of its long-lived assets and concluded that there were no indicators of impairment during the three and nine months ended March 31, 2020.

Fair Value Measurements

ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value as the price that would be received to sell an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

ASC 820 describes three levels of inputs that may be used to measure fair value:

Level 1:   Inputs based on quoted market prices for identical assets or liabilities in active markets at the measurement date.

Level 2:   Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets

that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3:   Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument’s valuation.

The carrying values reflected in the accompanying condensed consolidated balance sheets for cash and cash equivalents, receivables, and short and long term debt approximate their fair values, as they are largely short-term in nature. The lease exit liability is discussed in more detail in Note 10, “Restructuring.” The Tallo, Inc. convertible note is discussed in more detail in Note 11, “Acquisitions and Investments.”

There were no assets or liabilities measured at fair value on a nonrecurring basis at March 31, 2020 – see Note 10, “Restructuring.”

The following table summarizes certain fair value information at June 30, 2019 for assets or liabilities measured at fair value on a nonrecurring basis:

	Fair Value Measurements Using:
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Input		Inputs
Description	Fair Value		(Level 1)		(Level 2)		(Level 3)
		(In thousands)
Lease exit liability	$	1,779	$	—	$	—	$	1,779

The following table summarizes certain fair value information at March 31, 2020 for assets or liabilities measured at fair value on a recurring basis:

	Fair Value Measurements Using:
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Input		Inputs
Description	Fair Value		(Level 1)		(Level 2)		(Level 3)
		(In thousands)
Convertible note received in acquisition	$	5,006		—		—		5,006

The following table summarizes certain fair value information at June 30, 2019 for assets or liabilities measured at fair value on a recurring basis:

	Fair Value Measurements Using:
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Input		Inputs
Description	Fair Value		(Level 1)		(Level 2)		(Level 3)
		(In thousands)
Convertible note received in acquisition	$	5,006	$	—	$	—	$	5,006

The following table presents activity related to the Company’s fair value measurements categorized as Level 3 of the valuation hierarchy, valued on a recurring basis, for the three and nine months ended March 31, 2020 and 2019:

	Three Months Ended March 31, 2020
			Purchases,
	Fair Value		Issuances,		Unrealized		Fair Value
Description	December 31, 2019		and Settlements		Gains/(Losses)		March 31, 2020
		(In thousands)
Convertible note received in acquisition		5,006		—		—		5,006

	Three Months Ended March 31, 2019
			Purchases,
	Fair Value		Issuances,		Unrealized		Fair Value
Description	December 31, 2018		and Settlements		Gains/(Losses)		March 31, 2019
	(In thousands)
Contingent consideration associated with acquisitions	$	40	$	(40)	$	—	$	—
Convertible note received in acquisition		5,006		—		—		5,006

		Nine Months Ended March 31, 2020
			Purchases,
	Fair Value		Issuances,		Unrealized		Fair Value
Description	June 30, 2019		and Settlements		Gains (Losses)		March 31, 2020
	(In thousands)
Convertible note received in acquisition		5,006		—		—		5,006

		Nine Months Ended March 31, 2019
			Purchases,
	Fair Value		Issuances,		Unrealized		Fair Value
Description	June 30, 2018		and Settlements		Gains (Losses)		March 31, 2019
	(In thousands)
Contingent consideration associated with acquisitions	$	1,345	$	(1,347)	$	2	$	—
Convertible note received in acquisition		—		5,006		—		5,006

Net Income (Loss) Per Common Share

The Company calculates net income (loss) per share in accordance with ASC 260, Earnings Per Share (“ASC 260”). Under ASC 260, basic net income (loss) per common share is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during the reporting period. The weighted average number of shares of common stock outstanding includes vested restricted stock awards. Diluted net income (loss) per share (“EPS”) reflects the potential dilution that could occur assuming conversion or exercise of all dilutive unexercised stock options and vesting of all dilutive unvested restricted stock awards. The dilutive effect of stock options and restricted stock awards was determined using the treasury stock method. Under the treasury stock method, the proceeds received from the exercise of stock options and restricted stock awards, the amount of compensation cost for future service not yet recognized by the Company and the amount of tax benefits that would be recorded as income tax expense when the stock options become

deductible for income tax purposes are all assumed to be used to repurchase shares of the Company’s common stock. Stock options and restricted stock awards are not included in the computation of diluted net income (loss) per share when they are antidilutive. Common stock outstanding reflected in the Company’s condensed consolidated balance sheets includes restricted stock awards outstanding.

The following schedule presents the calculation of basic and diluted net income per share:

	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2020		2019		2020		2019
		(In thousands except share and per share data)
Basic net income per share computation:
Net income attributable to common stockholders	$	8,754	$	18,462	$	19,618	$	33,892
Weighted average common shares  — basic		39,539,791		39,008,990		39,426,121		38,753,236
Basic net income per share	$	0.22	$	0.47	$	0.50	$	0.87
Diluted net income per share computation:
Net income attributable to common stockholders	$	8,754	$	18,462	$	19,618	$	33,892
Share computation:
Weighted average common shares  — basic		39,539,791		39,008,990		39,426,121		38,753,236
Effect of dilutive stock options and restricted stock awards		399,107		2,744,333		1,035,169		1,795,723
Weighted average common shares  — diluted		39,938,898		41,753,323		40,461,290		40,548,959
Diluted net income per share	$	0.22	$	0.44	$	0.48	$	0.84

For the three months ended March 31, 2020 and 2019, 1,429,479 and 119,343 shares issuable in connection with stock options and restricted stock were excluded from the diluted income per share calculation because the effect would have been antidilutive.  For the nine months ended March 31, 2020 and 2019, 855,110 and 148,355 shares were excluded, respectively. As of March 31, 2020, the Company had 46,274,270 shares issued and 40,939,527 shares outstanding.

Revision to Previously Issued Financial Statements

The Company has corrected the unaudited condensed consolidated statements of cash flows for the three, six, and nine month periods previously disclosed in the 2019 Form 10-Q’s to correct cash flows resulting from changes in accounts receivable and deferred revenue and other liabilities. The revisions are a result of an adjustment to the unaudited condensed consolidated balance sheets as of September 30, 2018, December 31, 2018, and March 31, 2019 to correct the overstatement of accounts receivable and deferred revenue as of each respective date. The adjustments had no impact on the consolidated balance sheet as of June 30, 2019, the consolidated statement of cash flows for the year ended June 30, 2019 or any consolidated statements of operations (audited or unaudited) reported in fiscal year 2019.

	Three Months Ended September 30, 2018						Six Months Ended December 31, 2018						Nine Months Ended March 31, 2019						Year Ended June 30, 2019
	As Previously				As Currently		As Previously				As Currently		As Previously				As Currently
	Reported		Adjustment		Reported		Reported		Adjustment		Reported		Reported		Adjustment		Reported		Adjustment
	(In thousands)
Changes in assets and liabilities:
Accounts receivable	$	(107,930)	$	15,346	$	(92,584)	$	(64,116)	$	11,942	$	(52,174)	$	(65,147)	$	6,421	$	(58,726)	$	—
Deferred revenue and other liabilities		42,837		(15,346)		27,491		24,795		(11,942)		12,853		24,510		(6,421)		18,089		—

Additionally, certain previous year amounts have been reclassified to conform with current year presentations, as related to the impact of the adoption of ASC 842 and the Company’s presentation of deferred rent as a separate line item on the condensed consolidated balance sheet as of June 30, 2019. Deferred rent is now included in other long-term liabilities.