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 September 30, 2018
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 every Interactive Data File required to be submitted 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 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
   
¨
      
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 October 26, 2018 was 47,300,262.





TABLE OF CONTENTS
 
 
 
 
Page
PART I
 
FINANCIAL INFORMATION
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
PART II
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
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 September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net revenues
$
44,734

 
$
43,523

 
$
122,337

 
$
119,855

Cost of revenues:
 

 
 

 
 

 
 

Cost of revenues
7,801

 
7,928

 
20,902

 
21,328

Amortization expense
4,200

 
4,676

 
12,147

 
13,094

Total cost of revenues
12,001

 
12,604

 
33,049

 
34,422

Research and development expense
4,059

 
3,352

 
11,678

 
9,744

Sales and marketing expense
12,283

 
12,771

 
37,803

 
37,871

General and administrative expense
5,962

 
5,457

 
17,378

 
15,240

Shipping and handling costs
323

 
414

 
630

 
727

Depreciation and amortization expense
721

 
670

 
2,156

 
2,020

Total costs and expenses
35,349

 
35,268

 
102,694

 
100,024

Income before interest and income taxes
9,385

 
8,255

 
19,643

 
19,831

Net interest expense
(897
)
 
(1,271
)
 
(2,654
)
 
(3,834
)
Other income (expense), net
(103
)
 
(108
)
 
(88
)
 
(325
)
Income before income taxes
8,385

 
6,876

 
16,901

 
15,672

Income tax expense
(2,508
)
 
(399
)
 
(3,982
)
 
(873
)
Net income
$
5,877

 
$
6,477

 
$
12,919

 
$
14,799

Other comprehensive income:
 

 
 

 
 

 
 

Amortization of net pension loss
36

 
23

 
107

 
69

Comprehensive income
$
5,913

 
$
6,500

 
$
13,026

 
$
14,868

Net income per common share:
 

 
 

 
 

 
 

Basic
$
0.12

 
$
0.14

 
$
0.27

 
$
0.32

Diluted
$
0.12

 
$
0.14

 
$
0.27

 
$
0.31

Average number of common shares and equivalents outstanding:
 

 
 

 
 

 
 

Basic
47,273

 
46,460

 
47,116

 
46,316

Diluted
48,503

 
47,629

 
48,351

 
47,522

 
 
 
 
 
 
 
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)
 
September 30, 2018
 
December 31, 2017
 
(Unaudited)
 
 
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
26,255

 
$
8,493

Accounts receivable, net
26,327

 
12,937

Inventory
1,704

 
2,382

Restricted assets, current
961

 
961

Other current assets
13,167

 
11,193

Total current assets
68,414

 
35,966

Property, equipment and software at cost
63,720

 
65,250

Accumulated depreciation and amortization
(43,440
)
 
(43,164
)
Property, equipment and software, net
20,280

 
22,086

Goodwill
43,518

 
43,518

Other intangible assets, net
2,858

 
3,607

Pre-publication costs, net
18,071

 
17,758

Restricted assets, less current portion
615

 
1,293

Deferred tax assets
27,497

 
30,614

Other assets
4,040

 
3,712

Total assets
$
185,293

 
$
158,554

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
2,344

 
$
2,388

Accrued expenses
16,302

 
12,121

Current portion of long-term debt
6,776

 
5,958

Deferred revenue, current
96,468

 
86,913

Total current liabilities
121,890

 
107,380

Long-term liabilities:
 

 
 

Long-term debt
36,781

 
41,841

Deferred revenue, less current portion
17,751

 
13,995

Other liabilities
9,072

 
9,630

Total long-term liabilities
63,604

 
65,466

 Commitments and contingencies (See Note 13)


 


Stockholders' equity (deficit):
 

 
 

Preferred stock ($.001 par value, 15,000 shares authorized, zero shares issued and outstanding at September 30, 2018 and December 31, 2017)

 

Common stock ($.001 par value, 150,000 shares authorized, 53,832 and 53,333 shares issued, and 47,300 and 46,800 shares outstanding at September 30, 2018 and December 31, 2017, respectively)
54

 
53

Capital surplus
290,837

 
289,022

Accumulated deficit
(276,322
)
 
(288,490
)
Treasury stock at cost (6,532 shares at September 30, 2018 and December 31, 2017)
(12,784
)
 
(12,784
)
Accumulated other comprehensive loss:


 
 

Pension and postretirement plans
(1,986
)
 
(2,093
)
Accumulated other comprehensive loss
(1,986
)
 
(2,093
)
Total stockholders' equity (deficit)
(201
)
 
(14,292
)
Total liabilities and stockholders' equity (deficit)
$
185,293

 
$
158,554

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) 
 
 
 
Nine Months Ended September 30,
 
 
2018
 
2017
Operating activities:
 
 
 
 
Net income
 
$
12,919

 
$
14,799

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization expense
 
14,303

 
15,114

Deferred income taxes
 
3,318

 

Amortization of note discount and deferred financing costs
 
405

 
607

Stock-based compensation and expense
 
728

 
641

Other
 
(5
)
 
14

Changes in operating assets and liabilities:
 
 

 
 

Accounts receivable, net
 
(13,459
)
 
(17,311
)
Inventory
 
687

 
375

Other current assets
 
(2,528
)
 
(277
)
Other assets
 
(463
)
 
(786
)
Restricted assets
 
678

 
776

Accounts payable
 
(44
)
 
945

Accrued expenses
 
4,267

 
3,595

Deferred revenue
 
12,887

 
7,646

Other long-term liabilities
 
(451
)
 
(568
)
Net cash provided by operating activities
 
33,242

 
25,570

Investing activities:
 
 

 
 

Expenditures for property, equipment, software and pre-publication costs
 
(12,056
)
 
(13,912
)
Net cash used in investing activities
 
(12,056
)
 
(13,912
)
Financing activities:
 
 

 
 

Repayment of debt
 
(4,512
)
 
(5,261
)
Borrowings under revolving credit facility
 
11,000

 
16,000

Payments of revolving credit facility
 
(11,000
)
 
(16,000
)
Proceeds from exercise of stock options
 
1,088

 
766

Net cash used in financing activities
 
(3,424
)
 
(4,495
)
Change in cash and cash equivalents
 
17,762

 
7,163

Cash and cash equivalents, beginning of period
 
8,493

 
4,930

Cash and cash equivalents, end of period
 
$
26,255

 
$
12,093

 
 

 
  


 

  
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, 2017 has been derived from audited financial statements. All intercompany transactions have been eliminated.
As permitted under the Securities and Exchange Commission ("SEC") requirements for interim reporting, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") have been omitted. The Company believes that these financial statements include all necessary and recurring adjustments for the fair presentation of the interim period results. These financial statements should be read in conjunction with the Consolidated Financial Statements and related notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2017. Due to seasonality, the results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for any future interim period or for the year ending December 31, 2018.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Subsequent actual results may differ from those estimates.
As of January 1, 2018, the Company adopted Accounting Standards Update No. 2017-07, Compensation-Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, and accordingly presented the other components of net benefit costs separately from the service cost component and outside of operating profit, presented as "Other income (expense)" in the consolidated statement of operations. Prior period non-service components of pension and post-retirement costs of $0.1 million and $0.3 million for the three and nine months ended September 30, 2017, respectively, were recast from "General and administration expense" to "Other income (expense)" on the Company's condensed consolidated statements of operations.
Nature of Operations
The Company is an award-winning educational technology solutions leader dedicated to helping all students reach their full potential through individualized and differentiated instruction. Using a research-based, personalized approach, Cambium Learning Group delivers software as a service (SaaS) resources and instructional products that engage students and support teachers in fun, positive, safe and scalable environments. These solutions are provided through Learning A-Z® (online differentiated instruction for elementary school reading, writing and science), ExploreLearning® (online interactive math and science simulations and a math fact fluency solution), and Voyager Sopris Learning® (blended solutions that accelerate struggling learners to achieve in literacy and math and professional development for teachers). Cambium Learning Group believes that every student has unlimited potential, that teachers matter, and that data, instruction, and practice are the keys to success in the classroom and beyond.
The Company has three reportable segments with separate management teams and infrastructures that offer various products and services. See Note 15 – Segment Reporting for further information on the Company's segment reporting structure.

Note 2 — Accounts Receivable
Accounts receivable are stated net of allowances for doubtful accounts and estimated sales returns. The allowance for doubtful accounts and estimated sales returns totaled $0.2 million and $0.1 million at September 30, 2018 and December 31, 2017, 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,

6



conversion stock options, conversion stock appreciation rights, and other stock or cash awards. The Incentive Plan is administered by the board of directors which has the authority to establish the terms and conditions of awards granted under the Incentive Plan.
Stock-Based Compensation and Expense
The following table presents stock-based compensation expense resulting from stock options that are recorded in the condensed consolidated statements of operations and comprehensive income for the periods presented:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
2018
 
2017
 
2018
 
2017
Cost of revenues
$
10

 
$
14

 
$
33

 
$
41

Research and development expense
50

 
38

 
150

 
113

Sales and marketing expense
71

 
51

 
204

 
148

General and administrative expense
118

 
114

 
341

 
339

Total
$
249

 
$
217

 
$
728

 
$
641

 
2018 Grants
In the first quarter 2018, the Company granted 250,000 options under the Incentive Plan with an exercise price of $9.16. The options vest in equal monthly installments on the last day of the month over a four-year period, with an initial vesting date of March 31, 2018. As of September 30, 2018, the Company had 2,084,621 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 249,755 and 185,815 for the three and nine months ended September 30, 2018, and 692,509 and 629,989 for the three and nine months ended September 30, 2017, respectively, were excluded from the 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 September 30,
 
Nine Months Ended September 30,
(in thousands, except per share data)
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 

 
 

 
 

 
 

Net income
 
$
5,877

 
$
6,477

 
$
12,919

 
$
14,799

Denominator:
 
 

 
 

 
 

 
 

Basic:
 
 

 
 

 
 

 
 

Weighted-average common shares used in computing basic net income per share
 
47,273

 
46,460

 
47,116

 
46,316

Diluted:
 
 

 
 

 
 

 
 

Add weighted-average effect of dilutive securities:
 
 

 
 

 
 

 
 

Stock options and restricted stock awards
 
1,230

 
1,169

 
1,235

 
1,206

Weighted-average common shares used in computing diluted net income per share
 
48,503

 
47,629

 
48,351

 
47,522

Net income per common share:
 
 
 
 
 
 
 
 
Basic
 
$
0.12

 
$
0.14

 
$
0.27

 
$
0.32

Diluted
 
$
0.12

 
$
0.14

 
$
0.27

 
$
0.31

 

7



Note 5 — Revenue Recognition
On January 1, 2018, the Company adopted the new revenue guidance Revenue from Contracts with Customers ("ASC 606") and applied it to all contracts using the modified retrospective method. The Company recognized the cumulative effect of initially applying ASC 606 as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company expects the impact of the adoption of ASC 606 to continue to be immaterial to net income on an ongoing basis.
The cumulative effect of the changes made to the consolidated January 1, 2018 balance sheet for the adoption of the new revenue standard was as follows:
(in thousands)
As Reported December 31, 2017
 
Adjustments due to ASC 606
 
As Adjusted January 1, 2018
Accounts receivable
$
12,937

 
$
(69
)
 
$
12,868

Inventory
2,382

 
10

 
2,392

Other current assets
11,193

 
(554
)
 
10,639

Deferred tax assets
30,614

 
201

 
30,815

 
 
 
 
 
 
Accrued expenses
12,121

 
(85
)
 
12,036

Deferred revenue
86,913

 
424

 
87,337

Accumulated deficit
(288,490
)
 
(751
)
 
(289,241
)
Learning A-Z and ExploreLearning Segments
The Learning A-Z and ExploreLearning segments derive revenue from sales of online subscriptions to their literacy, math and science websites and related training and professional development. The subscription service represents two performance obligations: the obligation to provide access to the on-line educational content and functionality, and the stand-ready obligation to provide post-sale customer support. The stand-ready obligation may include customer support, online or on-site trainings, rostering or single sign-on support, or other technology or curriculum related inquiries. Typically, the subscriptions are for a twelve month period (although they can be for longer periods) and the revenue for both performance obligations is recognized ratably over the period the online access is available to the customer.
Voyager Sopris Learning Segment
Revenues for the Voyager Sopris Learning segment are derived from sales of literacy and math educational solutions and services to school districts. Sales include printed materials, subscription interactive web-based programs and online educational content, training and implementation services, and professional development. Revenue from the sale of printed materials is recognized when the product is received by the customer, as the Company typically has control of the shipping arrangements. Revenue for interactive web-based programs and online educational content, which may be sold separately or included with printed curriculum materials, is recognized ratably over the subscription or contractual period, typically a school year. The Company allocates a portion of the online subscription and printed material revenue to a stand-ready performance obligation which may include customer support, online or on-site trainings, rostering or single sign-on support or other technology or curriculum related inquiries. The stand-ready performance obligation is recognized ratably over the period the online access is available or the expected usage term of the printed material, typically over the school year.
Contracts to provide professional services such as training, implementation, and professional development are considered a single performance obligation and the related revenues are recognized as delivered.
For all reportable segments, the Company may enter into agreements to license or sell certain publishing rights and content. The Company recognizes the revenue from these agreements when either the license period, if applicable, has commenced or the transfer of content, if applicable, has occurred.
Costs to Acquire Contracts
Under the new revenue recognition standard, incremental costs incurred to obtain a contract, as well as costs to fulfill a contract, must be deferred and amortized over the expected period that the related performance obligation is satisfied. The Company has historically deferred costs incurred to obtain and fulfill contracts with a customer, including commissions paid to the Company's inside and field salesforce. The Company has elected to apply this standard to all contracts and did not elect the practical expedient to expense contract acquisition costs as incurred for contracts less than one year. The cumulative effect adjustment to "Other current assets" reflects the change to deferred costs commensurate with the related change in the deferred revenue balance.

8




The following table presents the Company's disaggregated revenue by segment and geography. See Note 15 – Segment Reporting for more information on the Company's reportable segments.
 
Three Months Ended September 30, 2018
(in thousands)
Learning A-Z
 
ExploreLearning
 
Voyager Sopris
Learning
 
Consolidated
United States
$
17,124

 
$
7,616

 
$
15,407

 
$
40,147

International
2,849

 
336

 
1,402

 
4,587

Total Revenue
$
19,973

 
$
7,952

 
$
16,809

 
$
44,734

 
Three Months Ended September 30, 2017
(in thousands)
Learning A-Z
 
ExploreLearning
 
Voyager Sopris
Learning
 
Consolidated
United States
$
16,012

 
$
6,766

 
$
17,601

 
$
40,379

International
2,499

 
373

 
272

 
3,144

Total Revenue
$
18,511

 
$
7,139

 
$
17,873

 
$
43,523

 
Nine Months Ended September 30, 2018
(in thousands)
Learning
A-Z
 
Explore
Learning
 
Voyager Sopris
Learning
 
Consolidated
United States
$
50,483

 
$
22,059

 
$
37,581

 
$
110,123

International
9,061

 
1,129

 
2,024

 
12,214

Total Revenue
$
59,544

 
$
23,188

 
$
39,605

 
$
122,337

 
Nine Months Ended September 30, 2017
(in thousands)
Learning
A-Z
 
Explore
Learning
 
Voyager Sopris
Learning
 
Consolidated
United States
$
47,569

 
$
19,540

 
$
42,578

 
$
109,687

International
7,777

 
1,112

 
1,279

 
10,168

Total Revenue
$
55,346

 
$
20,652

 
$
43,857

 
$
119,855

The Company elected to continue to record revenue net of applicable taxes on the related transactions.

Note 6 — Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability (exit price), in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques are based on observable or unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's market assumptions. These two types of inputs have created the following fair value hierarchy:
Level 1 — Quoted prices for identical instruments in active markets.
Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant value drivers are observable.
Level 3 — Valuations derived from valuation techniques in which significant value drivers are unobservable. 
Applicable guidance requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
At September 30, 2018, financial instruments include $26.3 million of cash and cash equivalents, restricted assets of $1.6 million, collateral investments of $1.1 million, and Senior Secured Credit Facility term loans, net of discount and deferred financing costs, of $43.6 million. At December 31, 2017, financial instruments include $8.5 million of cash and cash

9



equivalents, restricted assets of $2.3 million, collateral investments of $1.1 million, and Senior Secured Credit Facility term loans, net of discount and deferred financing costs, of $47.8 million. The fair market values of cash equivalents, restricted assets, and collateral investments are equal to their carrying value, as these investments are recorded based on quoted market prices and/or other market data for the same or comparable instruments and transactions as of the end of the applicable reporting period. See Note 14 – Debt for additional information regarding the Company's term loans and Revolving Credit Facility.
At September 30, 2018 and December 31, 2017, the carrying value of the Company's Senior Secured Credit Facility term loans and Revolving Credit Facility borrowings approximates the fair value, as the borrowings are tied to the London Interbank Offered Rate ("LIBOR") and are market sensitive.
Assets and liabilities measured at fair value on a recurring basis are as follows:
 
(in thousands)
 
 
 
Fair Value at Reporting Date Using
Description
 
September 30, 2018
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Restricted Assets:
 
 

 
 

 
 

 
 

Money Market
 
$
1,576

 
$
1,576

 
$

 
$

Collateral Investments:
 
 

 
 

 
 

 
 

Money Market
 
911

 
911

 

 

Certificates of Deposit
 
226

 
226

 

 

  
(in thousands)
 
 
 
Fair Value at Reporting Date Using
Description
 
December 31, 2017
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Restricted Assets:
 
 
 
 
 
 
 
 
Money Market
 
$
2,254

 
$
2,254

 
$

 
$

Collateral Investments:
 
 
 
 

 
 
 
 
Money Market
 
908

 
908

 

 

Certificates of Deposit
 
226

 
226

 

 

 
(in thousands)
 
Total Gains (Losses) for the Nine Months Ended September 30,
Description
 
2018
 
2017
Restricted Assets:
 
 
 
 
Money Market
 
$

 
$

Collateral Investments:
 
 
 
 
Money Market
 

 

Certificates of Deposit
 

 

Assets and liabilities measured at fair value on a non-recurring basis are listed below at their carrying values as of each reporting date:  
 

10



(in thousands)
 
 
 
Fair Value at Reporting Date Using
Description
 
September 30, 2018
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Goodwill
 
$
43,518

 
$

 
$

 
$
43,518

Property, equipment and software, net
 
20,280

 

 

 
20,280

Pre-publication costs, net
 
18,071

 

 

 
18,071

Other intangible assets, net
 
2,858

 

 

 
2,858

 
(in thousands)
 
 
 
Fair Value at Reporting Date Using
Description
 
December 31, 2017
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Goodwill
 
$
43,518

 
$

 
$

 
$
43,518

Property, equipment and software, net
 
22,086

 

 

 
22,086

Pre-publication costs, net
 
17,758

 

 

 
17,758

Other intangible assets, net
 
3,607

 

 

 
3,607

 
(in thousands)
 
Total Gains (Losses) for the Nine Months Ended September 30,
Description
 
2018
 
2017
Goodwill
 
$

 
$

Property, equipment and software, net
 

 

Pre-publication costs, net
 

 

Other intangible assets, net
 

 

 
There were no significant remeasurements of these assets during the nine months ended September 30, 2018 or 2017.
 
Note 7 — Other Current Assets
Other current assets at September 30, 2018 and December 31, 2017 consisted of the following:
(in thousands)
 
September 30, 2018
 
December 31, 2017
Deferred costs
 
$
10,021

 
$
9,246

Prepaid expenses
 
2,675

 
1,762

Other
 
471

 
185

Other current assets
 
$
13,167

 
$
11,193


Note 8 — Other Assets
Other assets at September 30, 2018 and December 31, 2017 consisted of the following:
(in thousands)
 
September 30, 2018
 
December 31, 2017
Deferred costs, less current portion
 
$
2,171

 
$
1,745

Collateral investments
 
1,137

 
1,134

Deferred financing costs – revolving credit facility
 
395

 
530

Other
 
337

 
303

Other assets
 
$
4,040

 
$
3,712



11



Deferred Financing Costs
Deferred financing costs relate to costs incurred with the issuance in December 2015 of the Company's $30.0 million Revolving Credit Facility. See Note 14 – Debt for additional information regarding the Company's Revolving Credit Facility and the related deferred financing costs.
Collateral Investments
The Company maintains certificates of deposit to collateralize its outstanding letters of credit associated with workers' compensation activity. At September 30, 2018 and December 31, 2017, the Company had $0.2 million in certificates of deposit serving as collateral for its outstanding letters of credit.
Additionally, the Company maintains a money market fund investment to serve as collateral for a travel card program. The balance of the money market fund investment was $0.9 million at September 30, 2018 and December 31, 2017. 

Note 9 — Accrued Expenses
Accrued expenses at September 30, 2018 and December 31, 2017 consisted of the following: 
(in thousands)
 
September 30, 2018
 
December 31, 2017
Salaries, bonuses and benefits
 
$
10,903

 
$
8,550

Pension and post-retirement benefit plans
 
950

 
950

Accrued royalties
 
669

 
830

Other
 
3,780

 
1,791

Accrued expenses
 
$
16,302

 
$
12,121

 
Note 10 — Other Liabilities
Other liabilities at September 30, 2018 and December 31, 2017 consisted of the following:
(in thousands)
 
September 30, 2018
 
December 31, 2017
Pension and post-retirement benefit plans, long-term portion
 
$
7,803

 
$
8,285

Deferred rent
 
501

 
587

Long-term income tax payable
 
486

 
470

Long-term deferred compensation
 
282

 
288

Other liabilities
 
$
9,072

 
$
9,630

 
Note 11 — Pension Plan
The net pension costs of the Company's defined benefit pension plan were comprised primarily of interest costs and totaled $0.1 million and $0.3 million for the three and nine months ended September 30, 2018, and $0.1 million and $0.3 million for the three and nine months ended September 30, 2017, respectively. The net pension costs included the amortization of accumulated net loss of $29 thousand and $86 thousand for the three and nine months ended September 30, 2018, and $23 thousand and $69 thousand for the three and nine months ended September 30, 2017, respectively.

Note 12 — Uncertain Tax Positions and Income Taxes
The Company recognizes the financial statement impact of a tax return position when it is more likely than not, based on technical merits, that the position will ultimately be sustained. For tax positions that meet this recognition threshold, the Company applies judgment, taking into account applicable tax laws, experience managing tax audits, and relevant GAAP, to determine the amount of tax benefits to recognize in its financial statements. For each position, the difference between the benefit realized on the Company's tax return and the benefit reflected in its financial statements is recorded to Other Liabilities in the Condensed Consolidated Balance Sheets as an unrecognized tax benefit ("UTB"). The Company updates its UTBs at each financial statement date to reflect the impacts of audit settlements and other resolution of audit issues, expiration of statutes of limitation, developments in tax law, and ongoing discussions with tax authorities.
The balance of UTBs was $2.6 million at September 30, 2018 and December 31, 2017. Included in the balance of unrecognized tax benefits at September 30, 2018 are approximately $0.5 million of tax benefits that, if recognized, would affect the effective tax rate. The recognition of the remaining uncertain tax positions would not affect the effective tax rate, but would instead increase or would have increased available tax attributes. However, the recognition of the tax attribute would be offset by an increase in the deferred tax asset valuation allowance resulting in no net impact to the effective tax rate.

12



The Company recognizes interest accrued related to its UTBs and penalties as income tax expense. Related to the UTBs noted above, the Company recognized no penalties (gross) and an immaterial amount of interest during the nine months ended September 30, 2018. At September 30, 2018 and December 31, 2017, the Company had liabilities of $0.1 million for penalties (gross) and $0.1 million for interest (gross).
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. All U.S. tax years prior to 2008 related to the Voyager Learning Company acquired entities have been audited by the Internal Revenue Service. Cambium and its subsidiaries have been examined by the Internal Revenue Service through the end of 2006. The Company has been audited by the various state tax authorities through 2007.
 
Note 13 — Commitments and Contingencies
Legal Proceedings
The Company is involved in various legal proceedings incidental to its business. Management believes that the outcome of these proceedings will not have a material adverse effect upon the Company's consolidated operations or financial condition and the Company has recognized appropriate liabilities as necessary based on facts and circumstances known to management. The Company expenses legal costs related to legal contingencies as incurred.
Letters of Credit
The Company had letters of credit outstanding at September 30, 2018 in the amount of $0.4 million to support workers' compensation activity. The Company maintains certificates of deposit of $0.2 million as collateral for the letters of credit. The Company also maintains a $0.9 million money market fund investment as collateral for a travel card program. The certificates of deposit and money market fund investment are included in Collateral Investments in Note 8 – Other Assets.

Note 14 — Debt
Debt at September 30, 2018 and December 31, 2017 consisted of the following: 
(in thousands)
 
September 30, 2018
 
December 31, 2017
Senior secured credit facility term loans maturing December 10, 2020
 
$
43,988

 
$
48,500

Less: Unamortized discount
 
(234
)
 
(380
)
Less: Unamortized deferred financing costs
 
(197
)
 
(321
)
Term loans, net of discount and deferred costs
 
43,557

 
47,799

Less: Current portion of long-term debt
 
6,776

 
5,958

Long-term debt
 
$
36,781

 
$
41,841

The Company had no outstanding borrowings under the Revolving Credit Facility at September 30, 2018 and December 31, 2017.
 Senior Secured Credit Facility
On December 10, 2015, Cambium Learning, Inc. (the "Borrower"), a wholly-owned subsidiary of Cambium Learning Group, Inc., entered into a $135.0 million Senior Secured Credit Agreement (the "Credit Agreement") among the Borrower, the Company, Webster Bank, N.A., as Administrative Agent, L/C Issuer and a Lender, and the other Lenders party thereto, with Webster Bank, N.A., as Joint Lead Arranger, the Governor and Company of the Bank of Ireland, as Joint Lead Arranger and Syndication Agent, and Capital One National Association, and Babson Capital Finance, LLC, as Co-Documentation Agents (the "Senior Secured Credit Facility"). The Senior Secured Credit Facility consists of a term loan A which had an initial principal amount of $70.0 million ("Term Loan A"), a term loan B which had an initial principal amount of $35.0 million ("Term Loan B") and a $30.0 million revolving credit facility (the "Revolving Credit Facility"), secured by a lien on substantially all assets and capital stock of the Company, the Borrower and the Borrower's subsidiaries (collectively, the "Loan Parties"). The Senior Secured Credit Facility matures on December 10, 2020. In 2017, the Company repaid the remaining principal amount outstanding of the Term Loan B.
Borrowings under the Senior Secured Credit Facility bear interest equal to either a Base Rate, as defined in the Credit Agreement, or LIBOR (subject to a 1.0% floor), at the Borrower's option, plus an applicable margin. The applicable margin for the Term Loan A and Revolving Credit Facility ranges between 2.75% and 3.50% for Base Rate loans and 3.75% and 4.50% for LIBOR loans. The applicable margin for the Term Loan A and Revolving Credit Facility is based on a leverage calculation. As of September 30, 2018, the lowest tier of the applicable margins were in effect, and the interest rate for the Term Loan A was 6.08%. 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.

13



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 September 30, 2018, the Company was in compliance with all covenants related to the Senior Secured Credit Facility.  
The principal balances of the Senior Secured Credit Facility were issued at a discount, representing fees paid to lenders, which are amortized over the life of the debt using the effective interest rate method. Unamortized discount at September 30, 2018 and December 31, 2017 was $0.2 million and $0.4 million, respectively.
The Company incurred debt issuance costs associated with the Senior Secured Credit Facility, which were deferred and are amortized over the term of the related debt using the effective interest method. Unamortized deferred financing costs related to the Term Loan A totaled $0.2 million at September 30, 2018 and $0.3 million at December 31, 2017, and are presented as a reduction to Long-term Debt in the Condensed Consolidated Balance Sheets. Unamortized deferred financing costs related to the Revolving Credit Facility totaled $0.4 million at September 30, 2018 and $0.5 million at December 31, 2017, and are classified as Other Assets in the Condensed Consolidated Balance Sheets.
At September 30, 2018, the Company had outstanding principal balances of $44.0 million under Term Loan A, no outstanding borrowings under the Revolving Credit Facility, and had $29.8 million borrowing availability under the Revolving Credit Facility. During 2017, the Company voluntarily prepaid the remaining principal amount outstanding on the Term Loan B of the Senior Secured Credit Facility.
In February 2016, the Company paid $0.1 million to enter into interest rate cap agreements for approximately half of its outstanding Term Loan A and Term Loan B loans, less required amortization, for a three-year period. Under the interest rate cap agreements, the Company will receive payments for any period that the three-month LIBOR rate exceeds 2.5%.
 
Note 15 — Segment Reporting
The Company operates in three reportable segments with separate management teams and infrastructures that offer various products and services.
Learning A-Z Segment
Learning A-Z is a literacy-focused PreK-6 educational provider of technology-enabled learning resources. Founded in 2002, Learning A-Z's resources are now used by more than 7 million students in more than 170 countries. Learning A-Z provides a blend of traditional teacher-led instruction with technology-enabled resources to make teaching more effective and efficient, practice more accessible and personalized, assessment more strategic and automated, and learning more informed and proactive. With a comprehensive and blended approach, Learning A-Z delivers the tools students need without limiting a teacher's ability to differentiate instruction as they see fit. Learning A-Z's approach to literacy emphasizes knowledge and individual potential by recognizing that while reading and writing remain essential to attaining academic success, they are dynamic and dependent on real-world application and the incorporation of many other 21st century skills. Students today must read and write well, and they must also be able to think critically and analyze what they learn, solve problems, innovate and apply creativity, utilize advancing technology, communicate effectively orally and in writing, and collaborate with their peers. With a robust library of incredibly effective and flexible curriculum resources, Learning A-Z provides the tools teachers need to deliver personalized instruction for a wide range of student needs.
Learning A-Z operates the following subscription-based websites: Reading A-Z®, Raz-Kids®, Headsprout®, Science A-Z®, Writing A-Z™, Vocabulary A-Z™, and ReadyTest A-Z™. These websites can be purchased stand-alone or in collections, for a comprehensive solution that provides online supplemental books, lessons, assessments and other instructional resources for individual classrooms, schools, and districts. Learning A-Z's premier offering is an integration of teacher centric Reading A-Z with student centric Raz-Kids in a bundled product marketed as Raz-Plus™.
ExploreLearning Segment
ExploreLearning makes online solutions that help students succeed in math and science. ExploreLearning combines research-proven instructional methods with innovative technology to create new pathways for learning. Founded in 1999, ExploreLearning solutions are now used in every U.S. state and over 50 countries worldwide. ExploreLearning offers two products that supplement core instruction in the classroom: Gizmos® for grades 3-12 and Reflex® for grades 2-8. Gizmos is a library of over 400 inquiry-based math and science simulations that help students make connections and draw conclusions through interaction, visualization and "what-if" exploration. Reflex is a highly-effective, game-based math fact fluency system

14



that helps students of all ability levels succeed by continually adapting to students' instructional needs and providing motivational rewards for their effort.
Voyager Sopris Learning Segment
Voyager Sopris Learning is a leading provider of technology, materials, and professional development for educators to ensure all students graduate prepared for college, career, and satisfaction in life after K-12. It has built a nearly 40-year legacy on research and data-based curriculum development, while remaining nimble and responsive to the shifts and changes required by new standards, more demanding and rigorous content, new and competitive technological capabilities, and the needs of educators today. On a daily basis, Voyager Sopris Learning listens to the challenges of teachers and students, and its products are designed to respond to the need for exciting intervention and supplemental curricula that engage students, while remaining 100% purpose- and data-driven in their delivery. Voyager Sopris Learning programs are steeped in research and evidence, but they are also built with a deep consideration and understanding of the realities and struggles of education today. The Voyager Sopris Learning segment also includes Kurzweil Education brand solutions.
Voyager Sopris Learning solutions include LANGUAGE!® Live, Language Essentials for Teachers of Reading and Spelling (LETRS®), Step Up to Writing®, TransMath®, Vmath, Kurzweil 3000®, and Velocity™, among other instructional resources.
Other
Other consists of unallocated shared services, such as accounting, legal, human resources and corporate related items, as well as depreciation and amortization expense, interest income and expense, and income taxes. The Company does not allocate any of these costs to its segments, and the chief operating decision maker evaluates performance of operating segments excluding these items.
The following tables present the net revenues, operating expenses, income from operations, and capital expenditures which are used by the Company's chief operating decision maker to measure the segments' operating performance. The Company does not track assets directly by segment and the chief operating decision maker does not use assets to measure a segment's operating performance, and therefore this information is not presented.
 
Three Months Ended September 30, 2018
(in thousands)
Learning
A-Z
 
Explore
Learning
 
Voyager Sopris
Learning
 
Other
 
Consolidated
Net revenues
$
19,973

 
$
7,952

 
$
16,809

 
$

 
$
44,734

Cost of revenues
1,138

 
1,203

 
5,460

 

 
7,801

Amortization expense

 

 

 
4,200

 
4,200

Total cost of revenues
1,138

 
1,203

 
5,460

 
4,200

 
12,001

Other operating expenses
9,216

 
3,774

 
5,401

 
4,236

 
22,627

Depreciation and amortization expense

 

 

 
721

 
721

Total costs and expenses
10,354

 
4,977

 
10,861

 
9,157

 
35,349

Income before interest and income taxes
9,619

 
2,975

 
5,948

 
(9,157
)
 
9,385

Net interest expense

 

 

 
(897
)
 
(897
)
Other income (expense), net

 

 

 
(103
)
 
(103
)
Income tax expense

 

 

 
(2,508
)
 
(2,508
)
Segment net income
$
9,619

 
$
2,975

 
$
5,948

 
$
(12,665
)
 
$
5,877

Expenditures for property, equipment,
    software and pre-publication costs
$
2,266

 
$
1,112

 
$
665

 
$
25

 
$
4,068

 

15



 
Three Months Ended September 30, 2017
(in thousands)
Learning
A-Z
 
Explore
Learning
 
Voyager Sopris
Learning
 
Other
 
Consolidated
Net revenues
$
18,511

 
$
7,139

 
$
17,873

 
$

 
$
43,523

Cost of revenues
888

 
980

 
6,060

 

 
7,928

Amortization expense

 

 

 
4,676

 
4,676

Total cost of revenues
888

 
980

 
6,060

 
4,676

 
12,604

Other operating expenses
8,454

 
3,283

 
6,627

 
3,630

 
21,994

Depreciation and amortization expense

 

 

 
670

 
670

Total costs and expenses
9,342

 
4,263

 
12,687

 
8,976

 
35,268

Income before interest and income taxes
9,169

 
2,876

 
5,186

 
(8,976
)
 
8,255

Net interest expense

 

 

 
(1,271
)
 
(1,271
)
Other income (expense), net

 

 

 
(108
)
 
(108
)
Income tax expense

 

 

 
(399
)
 
(399
)
Segment net income
$
9,169

 
$
2,876

 
$
5,186

 
$
(10,754
)
 
$
6,477

Expenditures for property, equipment,
    software and pre-publication costs
$
2,657

 
$
869

 
$
1,351

 
$
219

 
$
5,096


 
Nine Months Ended September 30, 2018
(in thousands)
Learning
A-Z
 
Explore
Learning
 
Voyager Sopris
Learning
 
Other
 
Consolidated
Net revenues
$
59,544

 
$
23,188

 
$
39,605

 
$

 
$
122,337

Cost of revenues
3,433

 
3,225

 
14,244

 

 
20,902

Amortization expense

 

 

 
12,147

 
12,147

Total cost of revenues
3,433

 
3,225

 
14,244

 
12,147

 
33,049

Other operating expenses
27,715

 
11,641

 
15,623

 
12,510

 
67,489

Depreciation and amortization expense

 

 

 
2,156

 
2,156

Total costs and expenses
31,148

 
14,866

 
29,867

 
26,813

 
102,694

Income before interest and income taxes
28,396

 
8,322

 
9,738

 
(26,813
)
 
19,643

Net interest expense

 

 

 
(2,654
)
 
(2,654
)
Other income (expense), net

 

 

 
(88
)
 
(88
)
Income tax expense

 

 

 
(3,982
)
 
(3,982
)
Segment net income
$
28,396

 
$
8,322

 
$
9,738

 
$
(33,537
)
 
$
12,919

Expenditures for property, equipment,
    software and pre-publication costs
$
6,716

 
$
3,309

 
$
1,975

 
$
56

 
$
12,056



16



 
Nine Months Ended September 30, 2017
(in thousands)
Learning
A-Z
 
Explore
Learning
 
Voyager Sopris
Learning
 
Other
 
Consolidated
Net revenues
$
55,346

 
$
20,652

 
$
43,857

 
$

 
$
119,855

Cost of revenues
2,701

 
2,659

 
15,968

 

 
21,328

Amortization expense

 

 

 
13,094

 
13,094

Total cost of revenues
2,701

 
2,659

 
15,968

 
13,094

 
34,422

Other operating expenses
24,920

 
9,627

 
18,660

 
10,375

 
63,582

Depreciation and amortization expense

 

 

 
2,020

 
2,020

Total costs and expenses
27,621

 
12,286

 
34,628

 
25,489

 
100,024

Income before interest and income taxes
27,725

 
8,366

 
9,229

 
(25,489
)
 
19,831

Net interest expense

 

 

 
(3,834
)
 
(3,834
)
Other income (expense), net

 

 

 
(325
)
 
(325
)
Income tax expense

 

 

 
(873
)
 
(873
)
Segment net income
$
27,725

 
$
8,366

 
$
9,229

 
$
(30,521
)
 
$
14,799

Expenditures for property, equipment,
    software and pre-publication costs
$
6,848

 
$
2,517

 
$
4,275

 
$
272

 
$
13,912



Note 16 — Subsequent Events
On October 12, 2018, the Company entered into a definitive merger agreement (the "Merger Agreement") with certain affiliates of Veritas Capital, a private equity investment firm, for the acquisition of the Company.
Pursuant to the terms of the Merger Agreement, the holders of common stock of the Company outstanding immediately prior to the effective time of the merger are entitled to receive $14.50 in cash per share at the closing. The transaction was unanimously approved by the board of directors of the Company. Following the execution of the Merger Agreement, the stockholder representing a majority of the issued and outstanding common stock delivered a written consent approving and adopting the Merger Agreement and the transaction. The Company's outstanding credit facility will be repaid at closing. Subject to customary closing conditions and regulatory approvals, the Company expects the transaction to close in the fourth quarter of 2018 or the first quarter of 2019.
Immediately prior to the closing, the Company will close its previously announced acquisition of VKIDZ Holdings Inc. ("VKidz"), a Florida-based edtech company. Under the terms of the agreement, the purchase price will include issuance of 6.7 million shares of Cambium Learning Group common stock to the sellers, plus payment of outstanding debt of VKidz on the consummation date of the transaction. In 2017, VKidz had Bookings of approximately $21.1 million and Cash Income of approximately $5.7 million. At September 30, 2018, VKidz had debt principal outstanding of $19.8 million and cash of $3.3 million. For each share of Company common stock issued in connection with the Company's acquisition of VKidz, holders are entitled to receive $11.50 in cash.

17



Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
This section should be read in conjunction with the audited Consolidated Financial Statements of Cambium Learning Group, Inc. and its subsidiaries (the "Company," "we," "us," or "our") and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017.
Cautionary Note Regarding Forward-looking Statements
This report contains forward-looking statements within the meaning of the federal securities laws that involve risks and uncertainties, and which are based on beliefs, expectations, estimates, projections, forecasts, plans, anticipations, targets, outlooks, initiatives, visions, objectives, strategies, opportunities, drivers and intents of our management. Such statements are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in this report, including statements regarding our future financial condition, economic performance and results of operations, as well as our business strategy, objectives of management for future operations, and the information set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as non-historical statements regarding our proposed transaction with certain affiliates of Veritas Capital (the “Proposed Transaction”), 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, conditions to the closing of the Proposed Transaction, including the obtaining of required regulatory approvals, may not be satisfied; risks associated with the financing of the transaction; the Proposed Transaction may involve unexpected costs, liabilities or delays; the business of the Company may suffer as a result of uncertainty surrounding the Proposed Transaction; the outcome of any legal proceedings related to the Proposed Transaction; the Company may be adversely affected by other economic, business and/or competitive factors; the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement; the ability to recognize benefits of the Proposed Transaction; risks that the Proposed Transaction disrupts current plans and operations and the potential difficulties in employee retention as a result of the Proposed Transaction; other risks to consummation of the Proposed Transaction, including the risk that the Proposed Transaction will not be consummated within the expected time period or at all, and those described in "Risk Factors" in Part II, Item 1A and elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2017, and those described from time to time in our future reports filed with the SEC. Unless otherwise required by law, we also disclaim any obligation to update our view of any such risks or uncertainties or to announce publicly the results of any revisions to the forward-looking statements made in this report.
Overview
Cambium Learning® Group, Inc., a Delaware corporation, is an award-winning educational technology solutions leader dedicated to helping all students reach their full potential through individualized and differentiated instruction. Using a research-based, personalized approach, Cambium Learning Group delivers software as a service (SaaS) resources and instructional products that engage students and support teachers in fun, positive, safe and scalable environments. These solutions are provided through Learning A-Z® (online differentiated instruction for elementary school reading, writing and science), ExploreLearning® (online interactive math and science simulations and a math fact fluency solution), and Voyager Sopris Learning® (blended solutions that accelerate struggling learners to achieve in literacy and math and professional development for teachers). We believe that every student has unlimited potential, that teachers matter, and that data, instruction, and practice are the keys to success in the classroom and beyond.
During 2018, our products have continued to receive awards and accolades from industry publications.

18



2018 Tech & Learning's "Best of Show" Award at TCEA
In February 2018, Tech & Learning named ExploreLearning's Gizmos® as one of the "Best of Show" products at TCEA 2018. The judges during the conference identified the technology that "will have the most impact in the classroom." All of the products were rated for "quality and effectiveness, ease of use and creative use of technology." Gizmos is a library of interactive online simulations for math and science education in grades 3-12.
The 24th Annual Best Educational Software Awards ("BESSIE") presented by The ComputED Gazette
In April 2018, Learning A-Z and ExploreLearning each received BESSIE Awards. The BESSIE Awards target innovative and content-rich programs and websites that provide parents and teachers with technology to foster educational excellence and are awarded to titles submitted by publishers worldwide. We won BESSIE Awards in the following categories:
Early Learning, Reading Website: Headsprout® by Learning A-Z
Early Elementary, Science Website: Science A-Z® by Learning A-Z
Early Elementary, Reading Skills: Headsprout® by Learning A-Z
Early Elementary, Critical Thinking Skills Website: Raz-Plus™ by Learning A-Z
Upper Elementary, Math Fluency Website: Reflex® by ExploreLearning
Upper Elementary, Science & Literacy Website: Science A-Z® by Learning A-Z
Upper Elementary, Writing Website: Writing A-Z by Learning A-Z
Upper Elementary, ELL Website: Raz-Plus by Learning A-Z
Multilevel, Math & Science Online Simulations: Gizmos by ExploreLearning
Teacher Tools, ELL Reading Website: Raz-Plus ELL Edition by Learning A-Z
2018 CODiE Awards
In June 2018, we received a 2018 CODiE Award for Best Science Instructional Solution: Science A-Z by Learning A-Z, as well as a 2018 CODiE Award for Best Solution for Special Needs Students: Raz-Plus by Learning A-Z, representing the 7th consecutive year the Company has received at least one CODiE Award. Since 1986, the Software and Information Industry Association (SIIA) CODiE Awards have recognized software and information companies for achievement and vision. It is the only peer-reviewed program in the content, education, and software industry.
The 22nd Annual Education Software Review Awards ("EDDIE") presented by The ComputED Gazette
In October 2018, the Company was awarded 14 EDDIE Awards from ComputED Gazette. The EDDIE Awards recognize innovative and content-rich programs and websites that augment the classroom curriculum and improve teacher productivity, providing parents and teachers with the technology to foster educational excellence. We won EDDIE Awards in the following categories:
Early Learning, Language Arts/eBooks Website: Raz-Plus by Learning A-Z
Early Learning, Reading Website: Headsprout by Learning A-Z
Early Elementary, Critical Thinking Skills Website: Raz-Plus by Learning A-Z
Early Elementary, Science Website: Science A-Z by Learning A-Z
Early Elementary, Reading Skills Website: Headsprout by Learning A-Z
Upper Elementary, Math Fluency Website: Reflex by ExploreLearning

19



Upper Elementary, Science & Literacy Website: Science A-Z by Learning A-Z
Upper Elementary, Reading Skills Website: Headsprout by Learning A-Z
Upper Elementary, ELL Website: Raz-Plus by Learning A-Z
Multilevel, Math & Science Online Simulations: Gizmos by ExploreLearning
Multilevel, Reading Website: Headsprout by Learning A-Z
Multilevel, Science Website: Science A-Z by Learning A-Z
Multilevel, Language Arts/eBook Website: Raz-Plus by Learning A-Z
Teacher Tools, Online Blended Reading Platform: Raz-Plus by Learning A-Z
Segment Information
We have three reportable segments with separate management teams and infrastructures that offer various products and services: Learning A-Z, ExploreLearning, and Voyager Sopris Learning. Segment results of operations also include Other, which consists of unallocated shared services, such as accounting, legal, human resources and corporate related items, as well as depreciation and amortization expense, interest income and expense, and income taxes. We do not allocate any of these costs to our segments, and our chief operating decision maker evaluates performance of operating segments excluding these items.
Learning A-Z Segment
Learning A-Z is a literacy-focused PreK-6 educational provider of technology-enabled learning resources. Founded in 2002, Learning A-Z's resources are now used by more than 7 million students in more than 170 countries. Learning A-Z provides a blend of traditional teacher-led instruction with technology-enabled resources to make teaching more effective and efficient, practice more accessible and personalized, assessment more strategic and automated, and learning more informed and proactive. With a comprehensive and blended approach, Learning A-Z delivers the tools students need without limiting a teacher's ability to differentiate instruction as they see fit. Learning A-Z's approach to literacy emphasizes knowledge and individual potential by recognizing that while reading and writing remain essential to attaining academic success, they are dynamic and dependent on real-world application and the incorporation of many other 21st century skills. Students today must read and write well, and they must also be able to think critically and analyze what they learn, solve problems, innovate and apply creativity, utilize advancing technology, communicate effectively orally and in writing, and collaborate with their peers. With a robust library of incredibly effective and flexible curriculum resources, Learning A-Z provides the tools teachers need to deliver personalized instruction for a wide range of student needs.
Learning A-Z operates the following subscription-based websites: Reading A-Z®, Raz-Kids®, Headsprout®, Science A-Z®, Writing A-Z™, Vocabulary A-Z™, and ReadyTest A-Z™. These websites can be purchased stand-alone or in collections, for a comprehensive solution that provides online supplemental books, lessons, assessments and other instructional resources for individual classrooms, schools, and districts. Learning A-Z's premier offering is an integration of teacher centric Reading A-Z with student centric Raz-Kids in a bundled product marketed as Raz-Plus™.
ExploreLearning Segment
ExploreLearning makes online solutions that help students succeed in math and science. ExploreLearning combines research-proven instructional methods with innovative technology to create new pathways for learning. Founded in 1999, ExploreLearning solutions are now used in every U.S. state and over 50 countries worldwide. ExploreLearning offers two products that supplement core instruction in the classroom: Gizmos for grades 3-12 and Reflex for grades 2-8. Gizmos is a library of over 400 inquiry-based math and science simulations that help students make connections and draw conclusions through interaction, visualization and "what-if" exploration. Reflex is a highly-effective, game-based math fact fluency system that helps students of all ability levels succeed by continually adapting to students' instructional needs and providing motivational rewards for their effort.

20



Voyager Sopris Learning Segment
Voyager Sopris Learning is a leading provider of technology, materials, and professional development for educators to ensure all students graduate prepared for college, career, and satisfaction in life after K-12. It has built a nearly 40-year legacy on research and data-based curriculum development, while remaining nimble and responsive to the shifts and changes required by new standards, more demanding and rigorous content, new and competitive technological capabilities, and the needs of educators today. On a daily basis, Voyager Sopris Learning listens to the challenges of teachers and students, and its products are designed to respond to the need for exciting intervention and supplemental curricula that engage students, while remaining 100% purpose- and data-driven in their delivery. Voyager Sopris Learning programs are steeped in research and evidence, but they are also built with a deep consideration and understanding of the realities and struggles of education today. The Voyager Sopris Learning segment also includes Kurzweil Education brand solutions.
Voyager Sopris Learning solutions include LANGUAGE!® Live, Language Essentials for Teachers of Reading and Spelling (LETRS®), Step Up to Writing®, TransMath®, Vmath, Kurzweil 3000®, and Velocity™, among other instructional resources.
Merger Agreement and VKIDZ Transaction
On October 12, 2018, the Company entered into a definitive merger agreement (the "Merger Agreement") with certain affiliates of Veritas Capital, a leading private equity investment firm, for the acquisition of the Company.
Pursuant to the terms of the Merger Agreement, the holders of common stock of the Company outstanding immediately prior to the effective time of the merger are entitled to receive $14.50 in cash per share at the closing. The transaction was unanimously approved by the board of directors of the Company. Following the execution of the Merger Agreement, the stockholder representing a majority of the issued and outstanding common stock delivered a written consent approving and adopting the Merger Agreement and the transaction. The Company's outstanding credit facility will be repaid at closing. Subject to customary closing conditions and regulatory approvals, the Company expects the transaction to close in the fourth quarter of 2018 or first quarter of 2019.
Immediately prior to the closing, the Company will close its previously announced acquisition of VKIDZ Holdings Inc. ("VKidz"), an award winning Florida-based edtech company dedicated to helping deliver the best education to students using digital solutions. Under the terms of the agreement, the purchase price will include issuance of 6.7 million shares of Cambium Learning Group common stock to the sellers, plus payment of outstanding debt of VKidz on the consummation date of the transaction. In 2017, VKidz had Bookings of approximately $21.1 million and Cash Income of approximately $5.7 million. At September 30, 2018, VKidz had debt principal outstanding of $19.8 million and cash of $3.3 million. For each share of Company common stock issued in connection with the Company's acquisition of VKidz, holders are entitled to receive $11.50 in cash.
Results of Operations
Bookings
During the nine months ended September 30, 2018, consolidated Bookings increased $8.5 million to $135.8 million, compared to $127.4 million during the nine months ended September 30, 2017. Bookings by segment for the nine months ended September 30, 2018 and the percentage change from the same period of 2017 were as follows:
Learning A-Z: $65.0 million, increased 8.9% in the first nine months of the year compared to the prior year period, continuing its historical growth performance.
ExploreLearning: $28.0 million, increased 24.3% in the first nine months of the year compared to the prior year period.
Voyager Sopris Learning: $42.9 million, decreased 5.1% in the first nine months of the year compared to the prior year period.

21



Three Months Ended September 30, 2018 Compared to the Three Months Ended September 30, 2017
 
Three Months Ended
 
Year-Over-Year Change
 
September 30, 2018
 
September 30, 2017
 
Favorable/(Unfavorable)
(in thousands)
Amount
 
% of Net
Revenues
 
Amount
 
% of Net
Revenues
 
$
 
%
Net revenues:
 

 
 

 
 

 
 

 
 

 
 

Learning A-Z
$
19,973

 
44.6
 %
 
$
18,511

 
42.5
 %
 
$
1,462

 
7.9
 %
ExploreLearning
7,952

 
17.8
 %
 
7,139

 
16.4
 %
 
813

 
11.4
 %
Voyager Sopris Learning
16,809

 
37.6
 %
 
17,873

 
41.1
 %
 
(1,064
)
 
(6.0
)%
Total net revenues
44,734

 
100.0
 %
 
43,523

 
100.0
 %
 
1,211

 
2.8
 %
Cost of revenues:
 

 
 

 
 

 
 

 
 

 
 

Learning A-Z
1,138

 
2.5
 %
 
888

 
2.0
 %
 
(250
)
 
(28.2
)%
ExploreLearning
1,203

 
2.7
 %
 
980

 
2.3
 %
 
(223
)
 
(22.8
)%
Voyager Sopris Learning
5,460

 
12.2
 %
 
6,060

 
13.9
 %
 
600

 
9.9
 %
Amortization expense
4,200

 
9.4
 %
 
4,676

 
10.7
 %
 
476

 
10.2
 %
Total cost of revenues
12,001

 
26.8
 %
 
12,604

 
29.0
 %
 
603

 
4.8
 %
Research and development expense
4,059

 
9.1
 %
 
3,352

 
7.7
 %
 
(707
)
 
(21.1
)%
Sales and marketing expense
12,283

 
27.5
 %
 
12,771

 
29.3
 %
 
488

 
3.8
 %
General and administrative expense
5,962

 
13.3
 %
 
5,457

 
12.5
 %
 
(505
)
 
(9.3
)%
Shipping and handling costs
323

 
0.7
 %
 
414

 
1.0
 %
 
91

 
22.0
 %
Depreciation and amortization expense
721

 
1.6
 %
 
670

 
1.5
 %
 
(51
)
 
(7.6
)%
Income before interest and income taxes
9,385

 
21.0
 %
 
8,255

 
19.0
 %
 
1,130

 
13.7
 %
Net interest expense
(897
)
 
(2.0
)%
 
(1,271
)
 
(2.9
)%
 
374

 
29.4
 %
Other income (expense), net
(103
)
 
(0.2
)%
 
(108
)
 
(0.2
)%
 
5

 
4.6
 %
Income tax expense
(2,508
)
 
(5.6
)%
 
(399
)
 
(0.9
)%
 
(2,109
)
 
(528.6
)%
Net income
$
5,877

 
13.1
 %
 
$
6,477

 
14.9
 %
 
$
(600
)
 
(9.3
)%
Net revenues
Net revenues increased during the three months ended September 30, 2018 by 2.8% to $44.7 million, compared to $43.5 million during the same period of 2017. Increased net revenues in Learning A-Z and ExploreLearning offset lower net revenues in Voyager Sopris Learning. Net revenues by segment were as follows:
Learning A-Z's net revenues were $20.0 million, increasing $1.5 million, or 7.9%, in the quarter ended September 30, 2018 compared to the same period of 2017. The year-over-year increase in revenue is driven by Learning A-Z's ongoing strong Bookings trend.
ExploreLearning's net revenues were $8.0 million, increasing $0.8 million, or 11.4%, during the quarter ended September 30, 2018 compared to the same period of 2017. The increase in net revenues is due to ExploreLearning's continued strong Bookings performance.
Voyager Sopris Learning's net revenues were $16.8 million, decreasing $1.1 million, or 6.0%, during the quarter ended September 30, 2018 compared to the same period of 2017, commensurate with its decline in Bookings.
Cost of revenues
Cost of revenues primarily includes print and royalty costs, and expenses to purchase, handle and warehouse product, and to provide services and support to customers. Cost of revenues, excluding amortization, decreased $0.1 million, or 1.6%, to $7.8 million in the third quarter of 2018 compared to $7.9 million in the same period of 2017. Cost of revenues benefited year-over-year from the increasing contribution from higher-margin technology-enabled solutions. The Learning A-Z and ExploreLearning segments, which are delivered on-line and have no royalty costs, comprised 62.4% of net revenues in the third quarter of 2018 compared to 58.9% of net revenues in the third quarter of 2017. Cost of revenues by segment were as follows:
Learning A-Z's cost of revenues increased by $0.3 million, to $1.1 million due to the higher volume of subscriptions as well as increased customer support initiatives.

22



ExploreLearning's cost of revenues increased by $0.2 million to $1.2 million in the quarter ended September 30, 2018 compared to the same period of 2017. The increased costs were related to implementation and training due to the segment's increased level of customer support.
Voyager Sopris Learning's cost of revenues decreased $0.6 million or 9.9%, to $5.5 million in the quarter ended September 30, 2018 compared to $6.1 million in the third quarter of 2017. The decrease in cost of revenues was due to the year-over-year decline in revenue, as well as cost savings from restructuring in late 2017.
Amortization expense in cost of revenues includes amortization for acquired pre-publication costs and technology, acquired publishing rights, and developed pre-publication and technology product development. Amortization expense was $4.2 million in the third quarter of 2018, a decrease of $0.5 million compared to the same period of 2017, due to lower capex in 2018 compared to the prior year.
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 $4.1 million in the third quarter of 2018, an increase of $0.7 million compared to the same period of 2017. The increase is due to planned investments to support growth initiatives at Learning A-Z and ExploreLearning. The increase for ExploreLearning includes $0.1 million of expense related to the ongoing integration of content from IS3D, LLC, which was acquired in the fourth quarter of 2017.
Sales and marketing expense
Sales and marketing expense includes all costs to maintain our various sales channels, including the salaries and commissions paid to our sales force, and costs related to our advertising and marketing efforts. Sales and marketing expense for the third quarter of 2018 decreased $0.5 million to $12.3 million compared to $12.8 million for the third quarter of 2017. The decrease is due to decreases at Voyager Sopris Learning, including cost savings from the restructuring activities in late 2017, which were partially offset by planned investments to support growth initiatives at Learning A-Z and ExploreLearning.
General and administrative expense
General and administrative expenses in the third quarter of 2018 were $6.0 million, an increase of $0.5 million, or 9.3%, from the third quarter of 2017. The increase was driven by $1.0 million of Shared Services expenses incurred related to the agreement to acquire VKidz and the review of strategic alternatives and the subsequent Merger Agreement, partially offset by cost savings at Voyager Sopris Learning, due to the restructuring activities in late 2017.
Shipping and handling costs
Shipping and handling costs for the quarter ended September 30, 2018 decreased slightly to $0.3 million, from $0.4 million in the third quarter of 2017, commensurate with lower print revenues.
Depreciation and amortization expense
Depreciation and amortization expense was $0.7 million for the three months ended September 30, 2018, consistent with the same period of 2017.
Other income (expense)
Other income (expense) was $(0.1) million for the quarter ended September 30, 2018, consistent with the same period in 2017, and includes expense related to a frozen defined benefit pension plan of $(0.1) million in both periods.
Net interest expense
Net interest expense decreased by $0.4 million, or 29.4%, to $0.9 million in the third quarter of 2018 compared to the same period in 2017 as a result of the scheduled debt amortization payments and voluntary prepayments made during 2017.
Income tax expense
We recorded an income tax expense of $2.5 million for the third quarter of 2018, an increase of $2.1 million compared to the same period of 2017. In December 2017, we released most of the valuation allowance against our deferred tax assets. The release of the valuation allowance results in changes in our deferred taxes being included in income tax expense as opposed to prior year periods in which changes in our deferred taxes were offset by corresponding changes in the valuation allowance.

23



Nine Months Ended September 30, 2018 Compared to the Nine Months Ended September 30, 2017
 
Nine Months Ended
 
Year Over Year Change
 
September 30, 2018
 
September 30, 2017
 
Favorable/(Unfavorable)
(in thousands)
Amount
 
% of Net Revenues
 
Amount
 
% of Net Revenues
 
$
 
%
Net revenues:
 

 
 

 
 

 
 

 
 

 
 

Learning A-Z
$
59,544

 
48.7
 %
 
$
55,346

 
46.2
 %
 
$
4,198

 
7.6
 %
ExploreLearning
23,188

 
19.0
 %
 
20,652

 
17.2
 %
 
2,536

 
12.3
 %
Voyager Sopris Learning
39,605

 
32.4
 %
 
43,857

 
36.6
 %
 
(4,252
)
 
(9.7
)%
Total net revenues
122,337

 
100.0
 %
 
119,855

 
100.0
 %
 
2,482

 
2.1
 %
Cost of revenues:
 

 
 

 
 

 
 

 
 

 
 

Learning A-Z
3,433

 
2.8
 %
 
2,701

 
2.3
 %
 
(732
)
 
(27.1
)%
ExploreLearning
3,225

 
2.6
 %
 
2,659

 
2.2
 %
 
(566
)
 
(21.3
)%
Voyager Sopris Learning
14,244

 
11.6
 %
 
15,968

 
13.3
 %
 
1,724

 
10.8
 %
Amortization expense
12,147

 
9.9
 %
 
13,094

 
10.9
 %
 
947

 
7.2
 %
Total cost of revenues
33,049

 
27.0
 %
 
34,422

 
28.7
 %
 
1,373

 
4.0