Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________
FORM 10-Q
_____________________________________________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                 to                 .
Commission File Number: 001-34575 
_____________________________________________
Cambium Learning Group, Inc.
(Exact name of registrant as specified in its charter)
_____________________________________________
Delaware
   
27-0587428
(State or Other Jurisdiction of
Incorporation or Organization)
   
(I.R.S. Employer
Identification No.)
   
   
   
17855 Dallas Parkway, Suite 400, Dallas, Texas
   
75287
(Address of Principal Executive Offices)
   
(Zip Code)
Registrant’s telephone number, including area code: (888) 399-1995
_____________________________________________
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý      No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý      No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
   
¨
      
Accelerated filer
   
¨
 
 
 
 
 
 
 
Non-accelerated filer
   
¨ (Do not check if a smaller reporting company)
      
Smaller reporting company
   
ý
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨      No  ý
The number of shares of the registrant’s common stock, $0.001 par value per share, outstanding as of August 2, 2017 was 46,370,200.





TABLE OF CONTENTS
 
 
 
 
Page
PART I
 
FINANCIAL INFORMATION
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
PART II
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 5.
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 


2




Item 1. Financial Statements.
Cambium Learning Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Income
(In thousands, except per share data)
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Net revenues
$
40,362

 
$
39,084

 
$
76,332

 
$
72,758

Cost of revenues:
 

 
 

 
 

 
 

Cost of revenues
7,215

 
7,732

 
13,400

 
14,739

Amortization expense
4,328

 
4,475

 
8,418

 
8,125

Total cost of revenues
11,543

 
12,207

 
21,818

 
22,864

Research and development expense
3,294

 
3,019

 
6,392

 
6,139

Sales and marketing expense
12,190

 
11,846

 
25,100

 
24,157

General and administrative expense
5,009

 
5,102

 
10,000

 
10,104

Shipping and handling costs
195

 
221

 
313

 
380

Depreciation and amortization expense
669

 
856

 
1,350

 
1,697

Total costs and expenses
32,900

 
33,251

 
64,973

 
65,341

Income before interest and income taxes
7,462

 
5,833

 
11,359

 
7,417

Net interest expense
(1,336
)
 
(1,958
)
 
(2,563
)
 
(3,722
)
Income before income taxes
6,126

 
3,875

 
8,796

 
3,695

Income tax expense
(334
)
 
(111
)
 
(474
)
 
(33
)
Net income
$
5,792

 
$
3,764

 
$
8,322

 
$
3,662

Other comprehensive income:
 

 
 

 
 

 
 

Amortization of net pension loss
23

 
37

 
46

 
74

Comprehensive income
$
5,815

 
$
3,801

 
$
8,368

 
$
3,736

Net income per common share:
 

 
 

 
 

 
 

Basic
$
0.13

 
$
0.08

 
$
0.18

 
$
0.08

Diluted
$
0.12

 
$
0.08

 
$
0.18

 
$
0.08

Average number of common shares and equivalents outstanding:
 

 
 

 
 

 
 

Basic
46,283

 
45,764

 
46,243

 
45,752

Diluted
47,476

 
47,116

 
47,460

 
47,082

 
 
 
 
 
 
 
The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.


3



Cambium Learning Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except per share data)
 
 
June 30, 2017
 
December 31, 2016
 
 
(Unaudited)
 
 
ASSETS
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
4,646

 
$
4,930

Accounts receivable, net
 
12,384

 
13,378

Inventory
 
2,835

 
2,864

Restricted assets, current
 
978

 
988

Other current assets
 
8,695

 
11,235

Total current assets
 
29,538

 
33,395

Property, equipment and software at cost
 
65,002

 
62,885

Accumulated depreciation and amortization
 
(42,109
)
 
(39,378
)
Property, equipment and software, net
 
22,893

 
23,507

Goodwill
 
47,842

 
47,842

Acquired curriculum and technology intangibles, net
 
1,010

 
1,266

Acquired publishing rights, net
 
293

 
585

Other intangible assets, net
 
1,936

 
2,150

Pre-publication costs, net
 
17,808

 
17,397

Restricted assets, less current portion
 
1,748

 
2,278

Other assets
 
3,440

 
3,520

Total assets
 
$
126,508

 
$
131,940

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
2,452

 
$
2,172

Accrued expenses
 
11,946

 
11,720

Revolving credit facility
 
16,000

 

Current portion of long-term debt
 
7,084

 
7,350

Deferred revenue, current
 
55,715

 
83,318

Total current liabilities
 
93,197

 
104,560

Long-term liabilities:
 
 

 
 

Long-term debt
 
64,214

 
67,130

Deferred revenue, less current portion
 
11,579

 
11,395

Other liabilities
 
9,666

 
10,117

Total long-term liabilities
 
85,459

 
88,642

 Commitments and contingencies (See Note 12)
 


 


Stockholders' equity (deficit):
 
 

 
 

Preferred stock ($.001 par value, 15,000 shares authorized, zero shares issued and outstanding at June 30, 2017 and December 31, 2016)
 

 

Common stock ($.001 par value, 150,000 shares authorized, 52,902 and 52,738 shares issued, and 46,370 and 46,206 shares outstanding at June 30, 2017 and December 31, 2016, respectively)
 
53

 
53

Capital surplus
 
287,689

 
286,943

Accumulated deficit
 
(325,223
)
 
(333,545
)
Treasury stock at cost (6,532 shares at June 30, 2017 and December 31, 2016)
 
(12,784
)
 
(12,784
)
Accumulated other comprehensive loss:
 


 
 

Pension and postretirement plans
 
(1,883
)
 
(1,929
)
Accumulated other comprehensive loss
 
(1,883
)
 
(1,929
)
Total stockholders' equity (deficit)
 
(52,148
)
 
(61,262
)
Total liabilities and stockholders' equity (deficit)
 
$
126,508

 
$
131,940

The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.

4



Cambium Learning Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited) 
 
 
 
Six Months Ended June 30,
 
 
2017
 
2016
Operating activities:
 
 
 
 
Net income
 
$
8,322

 
$
3,662

Adjustments to reconcile net income to net cash used in operating activities:
 
 

 
 

Depreciation and amortization expense
 
9,768

 
9,822

Amortization of note discount and deferred financing costs
 
408

 
557

Stock-based compensation and expense
 
424

 
447

Other
 
13

 
2

Changes in operating assets and liabilities:
 
 

 
 

Accounts receivable, net
 
994

 
1,825

Inventory
 
29

 
837

Other current assets
 
2,540

 
1,397

Other assets
 
(10
)
 
56

Restricted assets
 
540

 
571

Accounts payable
 
280

 
1,899

Accrued expenses
 
226

 
(2,017
)
Deferred revenue
 
(27,419
)
 
(19,943
)
Other long-term liabilities
 
(405
)
 
(788
)
Net cash used in operating activities
 
(4,290
)
 
(1,673
)
Investing activities:
 
 

 
 

Expenditures for property, equipment, software and pre-publication costs
 
(8,816
)
 
(10,766
)
Net cash used in investing activities
 
(8,816
)
 
(10,766
)
Financing activities:
 
 

 
 

Repayment of debt
 
(3,500
)
 
(1,925
)
Borrowings under revolving credit facility
 
16,000

 
15,000

Payment of revolving credit facility
 

 
(4,500
)
Proceeds from exercise of stock options
 
322

 
87

Net cash provided by financing activities
 
12,822

 
8,662

Change in cash and cash equivalents
 
(284
)
 
(3,777
)
Cash and cash equivalents, beginning of period
 
4,930

 
8,645

Cash and cash equivalents, end of period
 
$
4,646

 
$
4,868

 
 

 
 
 



 

  
The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.

5



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, 2016 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, 2016. Due to seasonality, the results of operations for the three and six months ended June 30, 2017 are not necessarily indicative of the results to be expected for any future interim period or for the year ending December 31, 2017.
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.
Nature of Operations
The Company is a leading educational solutions and services company that is committed to helping all students reach their full potential. Cambium Learning accomplishes this goal by providing evidence-based solutions and expert professional services to empower educators and raise the achievement levels of all students. The Company’s award-winning brands include: Learning A-Z®, ExploreLearning®, Voyager Sopris Learning®, and Kurzweil Education®, which provide breakthrough technology solutions for students and teachers—including best-in-class intervention and supplemental instructional programs; gold-standard professional development; valid and reliable assessments; and products that enable access to learning for all students.
These brands comprise three reportable segments with separate management teams and infrastructures that offer various products and services. See Note 14 – 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 and $0.2 million at June 30, 2017 and December 31, 2016, respectively. 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.

6



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)
 
2017
 
2016
 
2017
 
2016
Cost of revenues
 
$
14

 
$
14

 
$
27

 
$
29

Research and development expense
 
40

 
45

 
75

 
86

Sales and marketing expense
 
51

 
52

 
97

 
100

General and administrative expense
 
119

 
128

 
225

 
232

Total
 
$
224

 
$
239

 
$
424

 
$
447

 
2017 Grants
In the first quarter 2017, the Company granted 250,000 options under the Incentive Plan with an exercise price of $5.00. 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, 2017. As of June 30, 2017, the Company had 2,697,764 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 821,730 and 718,211 for the three and six months ended June 30, 2017, and 532,407 and 436,226 for the three and six months ended June 30, 2016, 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)
 
2017
 
2016
 
2017
 
2016
Numerator:
 
 

 
 

 
 

 
 

Net income
 
$
5,792

 
$
3,764

 
$
8,322

 
$
3,662

Denominator:
 
 

 
 

 
 

 
 

Basic:
 
 

 
 

 
 

 
 

Weighted-average common shares used in computing basic net income per share
 
46,283

 
45,764

 
46,243

 
45,752

Diluted:
 
 

 
 

 
 

 
 

Add weighted-average effect of dilutive securities:
 
 

 
 

 
 

 
 

Stock options and restricted stock awards
 
1,193

 
1,352

 
1,217

 
1,330

Weighted-average common shares used in computing diluted net income per share
 
47,476

 
47,116

 
47,460

 
47,082

Net income per common share:
 
 
 
 
 
 
 
 
Basic
 
$
0.13

 
$
0.08

 
$
0.18

 
$
0.08

Diluted
 
$
0.12

 
$
0.08

 
$
0.18

 
$
0.08

 
Note 5 — 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

7



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, 2017, financial instruments include $4.6 million of cash and cash equivalents, restricted assets of $2.7 million, collateral investments of $1.1 million, Revolving Credit Facility borrowings of $16.0 million, and Senior Secured Credit Facility term loans, net of discount and deferred financing costs, of $71.3 million. At December 31, 2016, financial instruments include $4.9 million of cash and cash equivalents, restricted assets of $3.3 million, collateral investments of $1.1 million, and Senior Secured Credit Facility term loans, net of discount and deferred financing costs, of $74.5 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 13 – Debt for additional information regarding the Company’s term loans and Revolving Credit Facility.
At June 30, 2017 and December 31, 2016, 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, 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
 
$
2,726

 
$
2,726

 
$

 
$

Collateral Investments:
 
 

 
 

 
 

 
 

Money Market
 
907

 
907

 

 

Certificates of Deposit
 
226

 
226

 

 

  
(in thousands)
 
 
 
Fair Value at Reporting Date Using
Description
 
December 31, 2016
 
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
 
$
3,266

 
$
3,266

 
$

 
$

Collateral Investments:
 
 
 
 

 
 
 
 
Money Market
 
906

 
906

 

 

Certificates of Deposit
 
226

 
226

 

 

 

8



(in thousands)
 
Total Gains (Losses) for the Six Months Ended June 30,
Description
 
2017
 
2016
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, 2017
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Goodwill
 
$
47,842

 
$

 
$

 
$
47,842

Property, equipment and software, net
 
22,893

 

 

 
22,893

Pre-publication costs, net
 
17,808

 

 

 
17,808

Acquired curriculum and technology intangibles, net
 
1,010

 

 

 
1,010

Acquired publishing rights, net
 
293

 

 

 
293

Other intangible assets, net
 
1,936

 

 

 
1,936

 
(in thousands)
 
 
 
Fair Value at Reporting Date Using
Description
 
December 31, 2016
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Goodwill
 
$
47,842

 
$

 
$

 
$
47,842

Property, equipment and software, net
 
23,507

 

 

 
23,507

Pre-publication costs, net
 
17,397

 

 

 
17,397

Acquired curriculum and technology intangibles, net
 
1,266

 

 

 
1,266

Acquired publishing rights, net
 
585

 

 

 
585

Other intangible assets, net
 
2,150

 

 

 
2,150

 
(in thousands)
 
Total Gains (Losses) for the Six Months Ended June 30,
Description
 
2017
 
2016
Goodwill
 
$

 
$

Property, equipment and software, net
 

 

Pre-publication costs, net
 

 

Acquired curriculum and technology intangibles, net
 

 

Acquired publishing rights, net
 

 

Other intangible assets, net
 

 

 
There were no significant remeasurements of these assets during the six months ended June 30, 2017 or 2016.
 

9



Note 6 — Other Current Assets
Other current assets at June 30, 2017 and December 31, 2016 consisted of the following:
(in thousands)
 
June 30, 2017
 
December 31, 2016
Deferred costs
 
$
5,962

 
$
8,650

Prepaid expenses
 
2,302

 
1,533

Other
 
431

 
1,052

Other current assets
 
$
8,695

 
$
11,235


Note 7 — Other Assets
Other assets at June 30, 2017 and December 31, 2016 consisted of the following:
(in thousands)
 
June 30, 2017
 
December 31, 2016
Deferred costs, less current portion
 
$
1,362

 
$
1,405

Collateral investments
 
1,133

 
1,132

Deferred financing costs - revolving credit facility
 
621

 
711

Other
 
324

 
272

Other assets
 
$
3,440

 
$
3,520


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 13 – 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, 2017 and December 31, 2016, 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, 2017 and December 31, 2016. 

Note 8 — Accrued Expenses
Accrued expenses at June 30, 2017 and December 31, 2016 consisted of the following: 
(in thousands)
 
June 30, 2017
 
December 31, 2016
Salaries, bonuses and benefits
 
$
7,701

 
$
7,820

Pension and post-retirement benefit plans
 
967

 
967

Accrued royalties
 
880

 
1,006

Accrued interest
 
365

 

Other
 
2,033

 
1,927

Accrued expenses
 
$
11,946

 
$
11,720

 
Note 9 — Other Liabilities
Other liabilities at June 30, 2017 and December 31, 2016 consisted of the following:
(in thousands)
 
June 30, 2017
 
December 31, 2016
Pension and post-retirement benefit plans, long-term portion
 
$
8,326

 
$
8,642

Deferred rent
 
594

 
688

Long-term income tax payable
 
461

 
454

Long-term deferred compensation
 
285

 
333

Other liabilities
 
$
9,666

 
$
10,117

 

10



Note 10 — 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, 2017, and $0.1 million and $0.3 million for the three and six months ended June 30, 2016, respectively. The net pension costs included the amortization of accumulated net loss of $23 thousand and $46 thousand for the three and six months ended June 30, 2017, and $37 thousand and $74 thousand for the three and six months ended June 30, 2016, respectively.
 

Note 11 — 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 $5.9 million at June 30, 2017 and December 31, 2016. Included in the balance of unrecognized tax benefits at June 30, 2017 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 and immaterial interest during the six months ended June 30, 2017. At June 30, 2017, the Company has 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 12 — 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.
Purchase Commitments
From time to time, the Company may enter into firm purchase commitments for printed inventory materials which the Company expects to use in the ordinary course of business. These commitments are typically for terms less than one year and require the Company to buy minimum quantities of materials with specific delivery dates at a fixed price over the term. These open purchase commitments totaled $0.6 million as of June 30, 2017.
Letters of Credit
The Company has letters of credit outstanding at June 30, 2017 in the amount of $0.4 million to support credit collections and 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 7 – Other Assets.


11



Note 13 — Debt
Debt at June 30, 2017 and December 31, 2016 consisted of the following: 
(in thousands)
 
June 30, 2017
 
December 31, 2016
Senior secured credit facility term loans maturing December 10, 2020
 
$
72,650

 
$
76,150

Less: Unamortized discount
 
(748
)
 
(923
)
Less: Unamortized deferred financing costs
 
(604
)
 
(747
)
Term loans, net of discount and deferred costs
 
71,298

 
74,480

Less: Current portion of long-term debt
 
7,084

 
7,350

Long-term debt
 
$
64,214

 
$
67,130

The Company had outstanding borrowings under the Revolving Credit Facility of $16.0 million at June 30, 2017 and no outstanding borrowings under the Revolving Credit Facility at December 31, 2016.
 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.
Borrowings under the Senior Secured Credit Facility bear interest equal to either a Base Rate, as defined in the Credit Agreement, or the LIBOR rate (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.  The applicable margin for the Term Loan B is 4.25% for Base Rate loans and 5.25% for LIBOR loans.  As of June 30, 2017, the lowest tier of the applicable margins were in effect, and the interest rate for the Term Loan A was 4.87%, and the interest rate for the Term Loan B was 6.37%. As of June 30, 2017, the weighted average interest rate for the Revolving Credit Facility was 4.90%. 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, 2017, the Company was in compliance with all covenants related to the 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, 2017 and December 31, 2016 was $0.7 million and $0.9 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 both Term Loan A and Term Loan B totaled $0.6 million at June 30, 2017 and $0.7 million at December 31, 2016, 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 $0.6 million at June 30, 2017 and $0.7 million at December 31, 2016, and are classified as Other Assets in the Condensed Consolidated Balance Sheets.
At June 30, 2017, the Company had outstanding principal balances of $63.0 million under Term Loan A, $9.7 million under Term Loan B, and $16.0 million under the Revolving Credit Facility, and had $13.8 million borrowing availability under the Revolving Credit Facility.

12



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 14 — 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 PreK-6 education technology provider of digitally delivered resources and tools that support instruction and student growth in reading, writing, and science. Founded in 2002, Learning A-Z's resources are now used by more than 5 million students in more than 175 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
The Voyager Sopris Learning segment includes the Company’s Voyager Sopris Learning and Kurzweil Education brands.
Voyager Sopris Learning Brand
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.
Voyager Sopris Learning solutions include LANGUAGE!® Live, Language Essentials for Teachers of Reading and Spelling (LETRS®), Step Up to Writing®, Transmath®, and Velocity™, among other instructional resources.
Kurzweil Education Brand
Kurzweil Education offers proven, research-based solutions that enable students to address their own unique learning

13



challenges and build the skillsand the confidenceto succeed. With the support of Kurzweil programs, students become independent, confident learners who can achieve rigorous academic goals. When learners are able to understand text on demand, use organizational and content management tools to jumpstart their written work, and demonstrate their knowledge, they can demonstrate their true potential. Kurzweil Education's Universal Design for Learning (UDL) technologies enable striving learners to read, comprehend, synthesize, apply, and demonstrate their knowledge. Students who benefit from Kurzweil technologies include students with dyslexia and dysgraphia, English Language Learners (ELLs), students in Special Education, Veterans, and the blind or visually impaired
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, 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

 
3,451

 
20,688

Depreciation and amortization expense

 

 

 
669

 
669

Total costs and expenses
8,962

 
3,921

 
11,569

 
8,448

 
32,900

Income before interest and income taxes
9,688

 
2,814

 
3,408

 
(8,448
)
 
7,462

Net interest expense

 

 

 
(1,336
)
 
(1,336
)
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

 
 
Three Months Ended June 30, 2016
(in thousands)
Learning
A-Z
 
Explore
Learning
 
Voyager Sopris
Learning
 
Other
 
Consolidated
Net revenues
$
15,881

 
$
5,753

 
$
17,450

 
$

 
$
39,084

Cost of revenues
583

 
786

 
6,363

 

 
7,732

Amortization expense

 

 

 
4,475

 
4,475

Total cost of revenues
583

 
786

 
6,363

 
4,475

 
12,207

Other operating expenses
7,098

 
2,684

 
6,639

 
3,767

 
20,188

Depreciation and amortization expense

 

 

 
856

 
856

Total costs and expenses
7,681

 
3,470

 
13,002

 
9,098

 
33,251

Income before interest and income taxes
8,200

 
2,283

 
4,448

 
(9,098
)
 
5,833

Net interest expense

 

 

 
(1,958
)
 
(1,958
)
Income tax expense

 

 

 
(111
)
 
(111
)
Segment net income
$
8,200

 
$
2,283

 
$
4,448

 
$
(11,167
)
 
$
3,764

Expenditures for property, equipment,
    software and pre-publication costs
$
2,184

 
$
745

 
$
2,308

 
$
539

 
$
5,776

 

14



 
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

 
6,962

 
41,805

Depreciation and amortization expense

 

 

 
1,350

 
1,350

Total costs and expenses
18,279

 
8,023

 
21,941

 
16,730

 
64,973

Income before interest and income taxes
18,556

 
5,490

 
4,043

 
(16,730
)
 
11,359

Net interest expense

 

 

 
(2,563
)
 
(2,563
)
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

 
Six Months Ended June 30, 2016
(in thousands)
Learning
A-Z
 
Explore
Learning
 
Voyager Sopris
Learning
 
Other
 
Consolidated
Net revenues
$
31,609

 
$
11,363

 
$
29,786

 
$

 
$
72,758

Cost of revenues
1,218

 
1,799

 
11,722

 

 
14,739

Amortization expense

 

 

 
8,125

 
8,125

Total cost of revenues
1,218

 
1,799

 
11,722

 
8,125

 
22,864

Other operating expenses
14,266

 
5,456

 
13,665

 
7,393

 
40,780

Depreciation and amortization expense

 

 

 
1,697

 
1,697

Total costs and expenses
15,484

 
7,255

 
25,387

 
17,215

 
65,341

Income before interest and income taxes
16,125

 
4,108

 
4,399

 
(17,215
)
 
7,417

Net interest expense

 

 

 
(3,722
)
 
(3,722
)
Income tax expense

 

 

 
(33
)
 
(33
)
Segment net income
$
16,125

 
$
4,108

 
$
4,399

 
$
(20,970
)
 
$
3,662

Expenditures for property, equipment,
    software and pre-publication costs
$
4,279

 
$
1,355

 
$
4,467

 
$
665

 
$
10,766



15



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, 2016.
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, 2016, 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 a leading educational solutions and services company that is committed to helping all students reach their full potential. Cambium Learning accomplishes this goal by providing evidence-based solutions and expert professional services to empower educators and raise the achievement levels of all students. The Company’s award-winning brands include: Learning A-Z® (www.learninga-z.com), ExploreLearning® (www.explorelearning.com), Kurzweil Education® (www.kurzweiledu.com), and Voyager Sopris Learning® (www.voyagersopris.com), which provide breakthrough technology solutions for students and teachers—including best-in-class intervention and supplemental instructional programs; gold-standard professional development; valid and reliable assessments; and products that enable access to learning for all students.
During 2017, our products have continued to receive awards and accolades from industry publications.
2017 REVERE Award presented by the PreK-12 Learning Group of the Association of American Publishers
In March 2017, ExploreLearning received a 2017 REVERE Award for the Gizmos® product in the “best supplemental resource for science” category. Gizmos is a library of interactive online simulations for math and science education in grades 3-12. The REVERE Awards are presented by the PreK-12 Learning Group of the Association of American Publishers to identify and honor excellence in educational materials.
The 23rd Annual Best Educational Software Awards (“BESSIE”) presented by The ComputED Gazette
In April 2017, Learning A-Z, ExploreLearning, and Kurzweil Education 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:

16



Early Learning, Reading Website: Headsprout® by Learning A-Z
Early Elementary, Writing Website: Writing A-Z™ by Learning A-Z
Early Elementary, Science Website: Science A-Z® by Learning A-Z
Early Elementary, Critical Thinking Skills Website: Raz-Plus™ by Learning A-Z
Upper Elementary, Science Website: Science A-Z by Learning A-Z
Upper Elementary, Test Skills Website: ReadyTest A-Z™ by Learning A-Z
Upper Elementary, Critical Thinking Skills Website: Raz-Plus by Learning A-Z
Upper Elementary, Writing Website: Writing A-Z by Learning A-Z
Multilevel, Critical Thinking Skills Website: Raz-Plus by Learning A-Z
Multilevel, Elementary Science Website: Science A-Z by Learning A-Z
Teacher Tools, Reading Resource Website: Reading A-Z® by Learning A-Z
Early Elementary, Math Fluency Website: Reflex® by ExploreLearning
Multilevel, Math and Science Online Simulations: Gizmos by ExploreLearning
Upper Elementary, Literacy Website: Kurzweil 3000® by Kurzweil Education
2017 CODiE Awards
In July 2017, we received a 2017 CODiE Award for Best Reading / English Language Arts Instructional Solution: Headsprout by Learning A-Z, representing the 6th 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 PreK-6 education technology provider of digitally delivered resources and tools that support instruction and student growth in reading, writing, and science. Founded in 2002, Learning A-Z's resources are now used by more than 5 million students in more than 175 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.

17



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
The Voyager Sopris Learning segment includes our Voyager Sopris Learning and Kurzweil Education brands.
Voyager Sopris Learning Brand
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.
Voyager Sopris Learning solutions include LANGUAGE!® Live, Language Essentials for Teachers of Reading and Spelling (LETRS®), Step Up to Writing®, Transmath®, and Velocity™, among other instructional resources.
Kurzweil Education Brand
Kurzweil Education offers proven, research-based solutions that enable students to address their own unique learning challenges and build the skillsand the confidenceto succeed. With the support of Kurzweil programs, students become independent, confident learners who can achieve rigorous academic goals. When learners are able to understand text on demand, use organizational and content management tools to jumpstart their written work, and demonstrate their knowledge, they can demonstrate their true potential. Kurzweil Education's Universal Design for Learning (UDL) technologies enable striving learners to read, comprehend, synthesize, apply, and demonstrate their knowledge. Students who benefit from Kurzweil technologies include students with dyslexia and dysgraphia, English Language Learners (ELLs), students in Special Education, Veterans, and the blind or visually impaired.
Results of Operations
Bookings
During the six months ended June 30, 2017, consolidated Bookings decreased $4.1 million to $48.9 million, compared to $52.9 million during the six months ended June 30, 2016. Our business is highly seasonal; the third quarter represented 46% of 2016 Bookings. We expect Bookings improvement in the more seasonally significant second half of the year, with overall Bookings growth for full-year 2017 compared to 2016. Bookings by segment for the six months ended June 30, 2017 and the percentage change from the same period of 2016 were as follows:
Learning A-Z: $21.6 million, increased 7.6% in the first half of the year compared to the prior year period, continuing its historical growth performance with strong subscription renewal rates and expanding new business.
ExploreLearning: $8.8 million, increased 19.0% in the first half of the year compared to the prior year period. This segment has seen strong momentum both in Reflex and in the Gizmos simulations, which were upgraded to HTML5 in early 2016.
Voyager Sopris Learning: $18.5 million, decreased 27.4% in the first half of the year compared to the prior year period, with a decline in both print and transactional solutions as well as technology-enabled solutions.

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We continue to execute our strategy to shift resources to subscription and technology-enabled products, which generally have higher margins than print and transactional products. For the six months ended June 30, 2017, technology-enabled products represented approximately 71% of Bookings versus 62% for the same period of 2016. For purposes of this metric, technology-enabled products are defined as those products that are sold primarily as a technology-based solution or that could be used solely via a digital platform. For the Voyager Sopris Learning segment, several products classified as technology-enabled include supplemental print materials.
Three Months Ended June 30, 2017 Compared to the Three Months Ended June 30, 2016
 
Three Months Ended
 
Year-Over-Year Change
 
June 30, 2017
 
June 30, 2016
 
Favorable/(Unfavorable)
(in thousands)
Amount
 
% of Net
Revenues
 
Amount
 
% of Net
Revenues
 
$
 
%
Net revenues:
 

 
 

 
 

 
 

 
 

 
 

Learning A-Z
$
18,650

 
46.2
 %
 
$
15,881

 
40.6
 %
 
$
2,769

 
17.4
 %
ExploreLearning
6,735

 
16.7
 %
 
5,753

 
14.7
 %
 
982

 
17.1
 %
Voyager Sopris Learning
14,977

 
37.1
 %
 
17,450

 
44.6
 %
 
(2,473
)
 
(14.2
)%
Total net revenues
40,362

 
100.0
 %
 
39,084

 
100.0
 %
 
1,278

 
3.3
 %
Cost of revenues:
 

 
 

 
 

 
 

 
 

 
 

Learning A-Z
942

 
2.3
 %
 
583

 
1.5
 %
 
(359
)
 
(61.6
)%
ExploreLearning
808

 
2.0
 %
 
786

 
2.0
 %
 
(22
)
 
(2.8
)%
Voyager Sopris Learning
5,465

 
13.5
 %
 
6,363

 
16.3
 %
 
898

 
14.1
 %
Amortization expense
4,328

 
10.7
 %
 
4,475

 
11.4
 %
 
147

 
3.3
 %
Total cost of revenues
11,543

 
28.6
 %
 
12,207

 
31.2
 %
 
664

 
5.4
 %
Research and development expense
3,294

 
8.2
 %
 
3,019

 
7.7
 %
 
(275
)
 
(9.1
)%
Sales and marketing expense
12,190

 
30.2
 %
 
11,846

 
30.3
 %
 
(344
)
 
(2.9
)%
General and administrative expense
5,009

 
12.4
 %
 
5,102

 
13.1
 %
 
93

 
1.8
 %
Shipping and handling costs
195

 
0.5
 %
 
221

 
0.6
 %
 
26

 
11.8
 %
Depreciation and amortization expense
669

 
1.7
 %
 
856

 
2.2
 %
 
187

 
21.8
 %
Income before interest and income taxes
7,462

 
18.5
 %
 
5,833

 
14.9
 %
 
1,629

 
27.9
 %
Net interest expense
(1,336
)
 
(3.3
)%
 
(1,958
)
 
(5.0
)%
 
622

 
31.8
 %
Income tax expense
(334
)
 
(0.8
)%
 
(111
)
 
(0.3
)%
 
(223
)
 
(200.9
)%
Net income
$
5,792

 
14.4
 %
 
$
3,764

 
9.6
 %
 
$
2,028

 
53.9
 %
Net revenues
Net revenues increased during the three months ended June 30, 2017 by 3.3% to $40.4 million, compared to $39.1 million during the same period of 2016. 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 $18.7 million, increasing $2.8 million, or 17.4%, in the quarter ended June 30, 2017 compared to the same period of 2016. The year-over-year growth in net revenues is the result of Learning A-Z’s ongoing strong Bookings trend, with much of the net revenue recognition related to prior period Bookings, which are recognized pro rata over the applicable subscription periods.
ExploreLearning’s net revenues were $6.7 million, increasing $1.0 million, or 17.1%, during the quarter ended June 30, 2017 compared to the same period of 2016. The increase in net revenues is a lower percentage than the increase in Bookings of 23.5% due to the deferral of current period Bookings, which are recognized pro rata over the applicable subscription periods.
Voyager Sopris Learning’s net revenues were $15.0 million, decreasing $2.5 million, or 14.2%, during the quarter ended June 30, 2017 compared to the same period of 2016. The year-over-year decline in revenues is the result of Voyager Sopris Learning’s Bookings decline. The decline in net revenues was less than the Bookings decline of 18.6% due to the recognition of prior period Bookings for technology deliverables, which are recognized pro rata over the applicable subscription periods.

19



Cost of revenues
Cost of revenues primarily include 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 $0.5 million, or 6.7%, to $7.2 million in the second quarter of 2017 compared to $7.7 million in the same period of 2016. 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 62.9% of net revenues in the second quarter of 2017 compared to 55.4% of net revenues in the second quarter of 2016. Cost of revenues by segment were as follows:
Learning A-Z’s cost of revenues increased by $0.4 million, to $0.9 million commensurate with the higher volume of subscriptions, in the quarter ended June 30, 2017 compared to $0.6 million in the same period of 2016.
ExploreLearning’s cost of revenues were consistent at $0.8 million in the quarter ended June 30, 2017 compared to the same period of 2016.
Voyager Sopris Learning’s cost of revenues decreased $0.9 million, to $5.5 million in the quarter ended June 30, 2017 compared to $6.4 million in the second quarter of 2016. The decrease in cost of revenues was due to the year-over-year decline in revenue, coupled with savings from careful expense management and the cost right-sizing activities completed in 2016.
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 $4.3 million in the second quarter of 2017, a decrease of $0.1 million compared to the same period of 2016. The change was due to a decrease in amortization of acquired publishing rights and curriculum of $0.3 million, partially offset by an increase in amortization of developed pre-publication and technology product development of $0.2 million.
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 $3.3 million in the second quarter of 2017, an increase of $0.3 million compared to the same period of 2016. The increase is due to planned investments to support growth initiatives, primarily at Learning A-Z, which were partially offset by decreases at Voyager Sopris Learning.
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 2017 increased $0.3 million to $12.2 million compared to $11.8 million for the second quarter of 2016. The increase is due to planned investments to support growth initiatives at Learning A-Z and ExploreLearning.
General and administrative expense
General and administrative expenses in the second quarter of 2017 were $5.0 million, a decrease of $0.1 million or 1.8%, from the second quarter of 2016.
Shipping and handling costs
Shipping and handling costs for the quarter ended June 30, 2017 decreased slightly to $0.2 million, commensurate with lower print revenues.
Depreciation and amortization expense
Depreciation and amortization expense decreased $0.2 million, or 21.8%, to $0.7 million for the three months ended June 30, 2017, due to a decrease in amortization of acquired trade names and customer lists.
Net interest expense
Net interest expense decreased by $0.6 million, or 31.8%, to $1.3 million in the second quarter of 2017 compared to the same period in 2016 as a result of the scheduled debt amortization payments and voluntary prepayments made during 2016.
Income tax expense
We recorded an income tax expense of $0.3 million for the second quarter of 2017. We continue to maintain a valuation allowance against our deferred tax assets, which eliminates any non-current tax benefit generated.

20



Six Months Ended June 30, 2017 Compared to the Six Months Ended June 30, 2016
 
Six Months Ended
 
Year Over Year Change
 
June 30, 2017
 
June 30, 2016
 
Favorable/(Unfavorable)
(in thousands)
Amount
 
% of Net Revenues
 
Amount
 
% of Net Revenues
 
$
 
%
Net revenues:
 

 
 

 
 

 
 

 
 

 
 

Learning A-Z
$
36,835

 
48.3
 %
 
$
31,609

 
43.4
 %
 
$
5,226

 
16.5
 %
ExploreLearning
13,513

 
17.7
 %
 
11,363

 
15.6
 %
 
2,150

 
18.9
 %
Voyager Sopris Learning
25,984

 
34.0
 %
 
29,786

 
40.9
 %
 
(3,802
)
 
(12.8
)%
Total net revenues
76,332

 
100.0
 %
 
72,758

 
100.0
 %
 
3,574

 
4.9
 %
Cost of revenues:
 

 
 

 
 

 
 

 
 

 
 

Learning A-Z
1,813

 
2.4
 %
 
1,218

 
1.7
 %
 
(595
)
 
(48.9
)%
ExploreLearning
1,679

 
2.2
 %
 
1,799

 
2.5
 %
 
120

 
6.7
 %
Voyager Sopris Learning
9,908

 
13.0
 %
 
11,722

 
16.1
 %
 
1,814

 
15.5
 %
Amortization expense
8,418

 
11.0
 %
 
8,125

 
11.2
 %
 
(293
)
 
(3.6
)%
Total cost of revenues
21,818

 
28.6
 %
 
22,864

 
31.4
 %
 
1,046

 
4.6
 %
Research and development expense
6,392

 
8.4
 %
 
6,139

 
8.4
 %
 
(253
)
 
(4.1
)%
Sales and marketing expense
25,100

 
32.9
 %
 
24,157

 
33.2
 %
 
(943
)
 
(3.9
)%
General and administrative expense
10,000

 
13.1
 %
 
10,104

 
13.9
 %
 
104

 
1.0
 %
Shipping and handling costs
313

 
0.4
 %
 
380

 
0.5
 %
 
67

 
17.6
 %
Depreciation and amortization expense
1,350

 
1.8
 %
 
1,697

 
2.3
 %
 
347

 
20.4
 %
Income before interest and income taxes
11,359

 
14.9
 %
 
7,417

 
10.2
 %
 
3,942

 
53.1
 %
Net interest expense
(2,563
)
 
(3.4
)%
 
(3,722
)
 
(5.1
)%
 
1,159

 
31.1
 %
Income tax expense
(474
)
 
(0.6
)%
 
(33
)
 
 %
 
(441
)
 
(1,336.4
)%
Net income
$
8,322

 
10.9
 %
 
$
3,662

 
5.0
 %
 
$
4,660

 
127.3
 %
Net revenues
Net revenues increased during the six months ended June 30, 2017 by 4.9% to $76.3 million, compared to $72.8 million during the same period of 2016. 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 $36.8 million, increasing $5.2 million, or 16.5%, in the six months ended June 30, 2017 compared to the same period of 2016. The year-over-year growth in net revenues is the result of Learning A-Z’s ongoing strong Bookings trend, with much of the net revenue recognition related to prior period Bookings, which are recognized pro rata over the applicable subscription periods.
ExploreLearning’s net revenues were $13.5 million, increasing $2.2 million, or 18.9%, during the six months ended June 30, 2017 compared to the same period of 2016. The increase in net revenues is a due to ExploreLearning's continued strong Bookings performance.
Voyager Sopris Learning’s net revenues were $26.0 million, decreasing $3.8 million, or 12.8%, during the six months ended June 30, 2017 compared to the same period of 2016. The year-over-year decline in revenues is the result of Voyager Sopris Learning’s Bookings decline. The decline in net revenues was less than the Bookings decline of 27.4% due to the recognition of prior period Bookings for technology deliverables, which are recognized pro rata over the applicable subscription periods.
Cost of revenues
Cost of revenues primarily include 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 $1.3 million, or 9.1%, to $13.4 million in the first half of 2017 compared to $14.7 million in the same period of 2016. 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 66.0% of net revenues in the first half of 2017 compared to 59.1% of net revenues in the first half of 2016. Cost of revenues by segment were as follows:

21



Learning A-Z’s cost of revenues increased $0.6 million, to $1.8 million commensurate with the higher volume of subscriptions, in the six months ended June 30, 2017 compared to $1.2 million in the same period of 2016.
ExploreLearning’s cost of revenues decreased slightly to $1.7 million in the six months ended June 30, 2017 compared to the same period of 2016.
Voyager Sopris Learning’s cost of revenues decreased $1.8 million, to $9.9 million in the six months ended June 30, 2017 compared to $11.7 million in the first half of 2016. The decrease in cost of revenues was due to the year-over-year decline in revenue, coupled with savings from careful expense management and the cost right-sizing activities completed in 2016.
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 $8.4 million in the first half of 2017, an increase of $0.3 million compared to the same period of 2016. The change was due to an increase in amortization of developed pre-publication and technology product development of $0.9 million, partially offset by a decrease in amortization of acquired publishing rights and curriculum of $0.6 million.
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 $6.4 million in the first half of 2017, an increase of $0.3 million compared to the same period of 2016. The increase is due to planned investments to support growth initiatives, primarily at Learning A-Z, which were partially offset by decreases at Voyager Sopris Learning.
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 2017 increased $0.9 million to $25.1 million compared to $24.2 million for the first half of 2016. The increase is due to planned investments to support growth initiatives at Learning A-Z and ExploreLearning.
General and administrative expense
General and administrative expenses in the first half of 2017 were $10.0 million, a decrease of $0.1 million or 1.0%, from the same period of 2016.
Shipping and handling costs
Shipping and handling costs for the six months ended June 30, 2017 decreased slightly to $0.3 million, commensurate with lower print revenues.
Depreciation and amortization expense
Depreciation and amortization expense decreased $0.3 million, or 20.4%, to $1.4 million for the six months ended June 30, 2017, due to a decrease in amortization of acquired trade names and customer lists.
Net interest expense
Net interest expense decreased by $1.2 million, or 31.1%, to $2.6 million in the first half of 2017 compared to the same period in 2016 as a result of the scheduled debt amortization payments and voluntary prepayments made during 2016.
Income tax expense
We recorded an income tax expense of $0.5 million for the six months ended June 30, 2017. We continue to maintain a valuation allowance against our deferred tax assets, which eliminates any non-current tax benefit generated.
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, as described below. 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, 2017, our cash balances were $4.6 million, our net accounts receivable were $12.4 million, our borrowings under the Revolving Credit Facility were $16.0 million, and we had $13.8 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

22



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.
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. The applicable margin for the Term Loan B is 4.25% for Base Rate loans and 5.25% for LIBOR loans. As of June 30, 2017, we qualified for the lowest applicable margin, and the interest rate for the Term Loan A was 4.87%, and the interest rate for the Term Loan B was 6.37%. As of June 30, 2017, the weighted average interest rate for the Revolving Credit Facility was 4.90%. 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, 2017, 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)
 
2017
 
2016
Operating activities
 
$
(4,290
)
 
$
(1,673
)
Investing activities
 
(8,816
)
 
(10,766
)
Financing activities
 
12,822