2 0 1 7 A N N U A L R E P O R T
2 0 1 7 A N N U A L R E P O R T
STUART J. UDELL
Chief Executive Officer
NATHANIEL A. DAVIS
Executive Chairman
O U R S T R O N G Y E A R W O U L D N O T H A V E B E E N
P O S S I B L E W I T H O U T T H E U N W A V E R I N G
C O M M I T M E N T O F T H O U S A N D S O F
E M P L O Y E E S A N D E D U C A T O R S , W H O E V E R Y
D A Y D E M O N S T R A T E T H E K 1 2 C O R E V A L U E S
O F P A S S I O N , A C C O U N T A B I L I T Y, C O U R A G E ,
A N D T R U S T .
O U R M I S S I O N
I S T O T R A N S F O R M
L E A R N I N G
F O R E V E R Y S T U D E N T
W E S E R V E
To Our Fellow Shareholders:
The heartfelt messages showcased within the pages of this year’s
Annual Report represent far more than testimonial quotes. Behind
each short statement from a student or parent is a truly inspirational
story of the transformation of a family’s learning journey.
Every day, students come to us with a diverse set of education
needs. And every day, through the power of personalized learning,
the innate qualities that make these students uniquely brilliant are
unlocked and their true learning potential is maximized.
This year, to further our vision to be the trusted leader in
education innovation, K12 examined where we’ve been, where
we’re headed, and the optimal routes to reach unprecedented
new heights. These four pillars form the basis of our plan to
achieve our business goals: Academic Excellence, Product
Innovation, Operational Efficiency, and Market Expansion.
I
MEET
AJ
“ TECHNOLOGY IS DEFINING
THIS GENERATION.”
AJ Bailey
Destinations Career Academy of Colorado student, 2017
21st-CENTURY SKILLS
When high school senior AJ Bailey graduates from Destinations Career Academy of
Colorado, he’ll leave with a lot more than a diploma—he’ll have earned college credits,
honed his interview skills, and have his résumé in hand. Through Destinations, he’s found
more than just a love of computer programming; he’s made connections and joined clubs
that teach practical strategies for success. In a recent state leadership competition, his
school team earned the SkillsUSA Chapter of Excellence award. With his early start on
developing career skills, he feels ready for a 21st-century workplace.
I I
K 1 2 2 0 1 7 A N N U A L R E P O R T
ACADEMIC
EXCELLENCE
Improving school academics has to occur with the urgency of
a sprint and the endurance of a marathon. This year, we raced
forward and continued our multi-year efforts to create more
student and family friendly processes, and institute new programs
with one goal in mind: improving student academic outcomes.
To begin, we completed a two-year, nationwide rollout of our
Students First suite of programs, encompassing the entire
student experience—from onboarding through graduation.
From personalized outreach to support services for struggling
students, the Students First portfolio is now scaled to the
majority of our Managed Public Schools.
We created a roadmap for each partner school to develop a
comprehensive academic plan to support improved student
outcomes. This Academic Excellence Framework, rooted in
research-based best practices from high-performing schools,
creates a set of high standards, a common language, and a
consistent set of expectations across all schools. When adopted
by our school boards’ customers, we believe a best practices
approach to data-driven instruction, assessment, leadership,
staffing, observation and feedback, professional development,
and school culture will drive academic gains over the long term.
What’s more, this common framework will empower K12 to more
cost-effectively support an ever-expanding family of school
partners across the nation.
We stepped up our investment in a more robust teacher
professional development and Learning Coach infrastructure.
We have dramatically expanded our Instructional Coaching
program, which includes observation and feedback sessions to
support teacher effectiveness training. Our Instructional Coaching
team observed over 2,200 teachers in more than 33,000
classroom sessions this year. Feedback from teachers has been
excellent, and short-term plans include the rollout of this program
to the remainder of our partner schools.
We also created an integrated set of Learning Coach support
strategies to help families successfully transition to online
learning, and to proactively monitor student assignments.
Students perform best with both strong teacher and Learning
Coach support. These enhancements have been well-received.
I I I
MEET
ANDREW
“ K12 IS AMAZING.
I FEEL LIKE A NORMAL KID.”
Andrew Rusk
Hoosier Academy student, 2017
EDUCATION ON HIS TERMS
Andrew Rusk is an ambitious young man—one who won’t let a terminal diagnosis of
mitochondrial myopathy stand in his way. When it became clear that a brick-and-mortar
school setting couldn’t fit his needs, his family began looking for a better option.
Though video conferencing in to his traditional classroom might have worked in theory,
Andrew recalls, “It was very hard being the only one attending class like that.” Fortunately,
Andrew found Hoosier Academy, powered by K12. Now, though he is medically limited to
half-time attendance, he is on track to earn his diploma by age 22. “It may take me longer,”
Andrew says, “but I am going to do it.”
I V
K 1 2 2 0 1 7 A N N U A L R E P O R T
A recent survey points to a more than ten percent jump in
Learning Coach satisfaction over the past year.
Our Students First initiative this year also included the
introduction of a customizable graduation planning tool to
keep students on-track for commencement. The tool features
a centralized repository with complete course credit history to
help schools thoughtfully manage each student’s personalized
graduation roadmap. Characterized by a handy dashboard and
data analytics capabilities, the tool identifies credit gaps so that
educators can step in and provide assistance exactly when it’s
needed, as opposed to after it’s too late.
Specifically, more than 35,000 students this year were identified
as in need of incremental support services and received
outreach, mitigating the risk of withdrawal and boosting the
likelihood of long-term retention and graduation.
Look for our overall investment in the Students First portfolio
to continue to have an impact on the student experience in the
coming years. We believe our unwavering focus on academics,
paramount to our role as a leading K–12 online education services
provider, will support growth and profitability for the business over
the long term.
Great technology has the capacity to enable great instruction.
Over the past year, key elements of the K12 technology platform
and curricula were enhanced to accelerate learning in the online
classroom and to differentiate K12 in the education marketplace.
Specifically, we completed the migration of our middle school
programs to a more rich and engaging learning management
platform. The new user experience now includes planning
features to both empower students to stay on top of their course
work and to help teachers tailor curriculum to best meet the
unique needs of each student. Initial feedback has been highly
positive from teachers and students, both groups citing a more
seamless and connected user experience. We believe this
transition will not only translate into higher student engagement
and retention over the long term, but will also help K12 deliver
V
PRODUCT
INNOVATION
MEET
BROOKE & GRACELYN
“VOLUNTEERING IS A LIFESTYLE.”
Gracelyn Leath
Georgia Cyber Academy student, 2017
EMPOWERING POSITIVE ACTION
Brooke and Gracelyn Leath don’t just volunteer—they founded a nonprofit organization
that enables volunteering around the world. In just five years, Teens Help Other People,
or TeenHOP, has gained more than 50 chapters in their home state of Georgia, more
around the country, and a handful of groups as far-flung as Australia. The sisters cite
the flexibility of online education and the social clubs at Georgia Cyber Academy as
contributing factors in their success. Both students plan to continue their work with
TeenHOP through college and beyond. “When it’s your passion,” says Gracelyn, “you
can’t just let it fade away.”
V I
K 1 2 2 0 1 7 A N N U A L R E P O R T
2017 HIGHLIGHTS
the best possible student experience at the lowest cost in
years ahead.
R E V E N U E
.
M
5
8
8
8
$
.
M
7
2
7
8
$
M
3
.
8
4
9
$
2017
2016
2015
ADJUSTED OPERATING
INCOME1, 2, 3, 4
M
4
.
6
4
$
.
M
6
9
3
$
M
1
.
2
6
$
2017
2016
2015
ADJUSTED EBITDA1, 2, 3, 5
M
3
.
9
1
1
$
.
M
8
7
0
1
$
M
1
.
2
3
1
$
2017
2016
2015
F R E E C A S H F LOW 6
M
5
.
0
4
$
.
M
9
8
5
$
M
3
.
8
5
$
2017
2016
2015
A reconciliation of Adjusted Operating Income,
Adjusted EBITDA, and Free Cash Flow metrics to
GAAP results can be found on page 128.
As one can expect, an initiative of this size is often not without
challenges, and our initial rollout contributed to some in-year
impact on student retention. That said, we’ve worked throughout
the year to mitigate these issues and are on track to drive for
higher retention levels as the migration is complete.
With regard to our curriculum, our online and blended Career
Technical Education (CTE) offerings are delivering highly
relevant courses aligned to in-demand career pathways.
This year, we surveyed Americans for insights into their
traditional high school learning experiences, compared to the
skill sets required for success in today’s job market. Notably,
respondents overwhelmingly indicated that their traditional high
school failed to equip them adequately for a relevant career.
To help bridge today’s stubborn “skills gap,” K12 is offering full-
time online CTE options in a half dozen of our Managed Public
Schools through our Destinations Career Academies, and CTE
courses in more than 70 school districts through Fuel Education.
In developing our CTE curriculum, we carefully analyzed
workforce needs to create 24 specific learning pathways and
115-course options for students to obtain the skills needed for
high-demand occupations—and they can work toward obtaining
any of 45 industry certifications following high school graduation.
Fields of study include Business Administration, Information
Technology, Health Science, Manufacturing, Agriculture, and
Hospitality and Tourism. High-quality, flexible and engaging CTE
programs answer the call from legislators and employers across
the nation to better prepare students to work in today’s complex
global marketplace.
1 In 2015, the Company incurred charges related to end-of-life products, software and inventory, reserves, and severance costs that totaled $28.4 million. Adjusted Operating
Income and Adjusted EBITDA for 2015 are shown excluding these charges, where applicable to the calculation. The $28.4 million charge includes $2.8 million of stock-based
compensation and $3.2 million of impairment on our investment in Web International.
2 In the fourth quarter of fiscal year 2016, K12 announced that it had reached a settlement with the State of California resolving all claims related to an Attorney General inquiry
with no admission of liability or wrongdoing, and no fines or penalties. K12 took a net charge related to this settlement of $7.1 million. Adjusted Operating Income and Adjusted
EBITDA are shown excluding this cost.
3 In the third quarter of fiscal year 2017, the Company incurred $11.4 million in charges relating to reducing real estate exposure, lowering human resources costs, and recording
additional reserves for receivables. Adjusted Operating Income and Adjusted EBITDA for 2017 are shown excluding these charges, where applicable to the calculation. Included
in the $11.4 million charge is $0.8 million of stock-based compensation expense.
4 Adjusted Operating Income (Loss) is defined as income (loss) from operations as adjusted for stock-based compensation expense.
5 Adjusted EBITDA is defined as net income (loss) attributable to common stockholders as adjusted for interest income (expense), net; impairment of investment in Web
International Education Group, Ltd.; income tax benefit (expense); noncontrolling interest; stock-based compensation expense; and depreciation and amortization. Interest
expense primarily consists of interest expense for capital leases and on customer receivables.
6 Free Cash Flow is defined as net cash provided by operating activities less purchases of property and equipment, and capitalized software and curriculum development costs.
V I I
MEET
THE GOODRICH FAMILY
“ K12 ALLOWED US TO FIT
SCHOOL INTO OUR LIFE.”
Jacqueline Goodrich
Virginia Virtual Academy parent, 2017
FOCUSING ON FAMILY
Military families know life doesn’t always go according to plan. When U.S. Army Sgt.
Timothy Goodrich was wounded in combat five years ago, life changed—not just for him
and his wife, Jacqueline, but for their young children as well. Online schooling has been
integral to the healing process, as it allows them to support one another. This year, as Lucy
enters 3rd grade and Tag begins kindergarten with Virginia Virtual Academy, they will do
so in a special place—a schoolroom in their new house, built through Operation Finally
Home. This fall, Tim will share Learning Coach duties as he pursues an online degree.
Says Jacqueline, “It’ll be a whole family experience!”
V I I I
OPERATIONAL
EFFICIENCY
K 1 2 2 0 1 7 A N N U A L R E P O R T
Also on the curriculum side, we are excited about the upgrades
of our Math and English Language courses into our new Summit
curriculum platform. We’ve received very positive feedback from
the initial rollout of courses.
After investing capital at a high level for many years into
programs and products, a rock solid foundation is now in place
that supports an optimum learning environment. More than ever
before, we are well positioned to meet the diverse needs of all
students we serve.
At K12, we know strong starts are imperative, as changing
schools and learning models can be a challenge for students
and families. To that end, over the past year, we’ve worked hard
to ensure the student and family transition from brick-and-mortar
to online school is as seamless as possible. Streamlining and
enhancing our operations, we simplified the student registration
process. Enhanced self-service functionality was deployed, and
our compliance document submission process was simplified.
These enhancements significantly reduced the time it took
families to enroll, and provided a better family experience while
reducing costs.
We also improved the customer login experience, shortened
delivery time for computers and materials, expanded the use of
family texting and chat functionalities, and created new ‘open
hours’ sessions where families can more frequently engage with
teachers and customer care representatives.
Our efforts to create more family friendly processes are producing
results. K12’s most recent Net Promoter Score7 has risen for the
second year in a row across most grade levels for both K12’s
curriculum and the school experience. We believe our continued
focus on an improved user experience will drive stronger student
engagement, motivation, retention, and academic outcomes over
the long term. At the same time, these enhancements will help
scale our business operations more effectively and cost-efficiently.
7 The Net Promoter Score is an index that measures the willingness of customers to recommend a company’s products or services to others. It is used as a proxy for gauging the
customer’s overall satisfaction with a company’s product or service and the customer’s loyalty to the brand.
I X
MEET
ISABELLE
“ CLASSES ARE CHALLENGING.
THAT’S WHAT I LIKE ABOUT THEM!”
Isabelle Olivas-Lowell
iQ Academy of California-Los Angeles student, 2017
THE DRIVE TO EXCEL
Isabelle Olivas-Lowell of Monrovia, California, loves a challenge. Talent and hard work have
brought her success in the classroom and beyond. But in 5th grade, when her goals outgrew
a brick-and-mortar school setting, she researched online options for a better fit. With her
dad’s help, she enrolled in iQ Academy of California-Los Angeles, where she has been an
A student ever since. What’s more, online school allows the flexibility she needs to pursue her
professional golf ambitions, keep up a rigorous competitive volleyball schedule, and connect
with peers in K12’s photography club. Now, her personalized learning fits her to a tee.
X
MARKET
EXPANSION
K 1 2 2 0 1 7 A N N U A L R E P O R T
The groundwork has been laid. After a number of years in
which K12 faced stiff environmental headwinds, we believe the
2016 election, at both the federal and state level, may support
increased opportunity for school choice and long-term growth
across all of our lines of business.
This fiscal year, we continued to focus heavily on strengthening
and extending partnerships with our existing school boards.
At the same time, court rulings and new legislative actions in
several key states have opened up growth opportunities in which
we can work with partners to expand the number of K12 powered
schools and reach more students over the coming years.
Specifically, in Pennsylvania, the Pennsylvania Department of
Education recently authorized a new online charter school that
will be powered by K12. The Insight Pennsylvania Cyber Charter
School will serve students in grades K through 10 in fiscal 2018.
In Florida, the legislature passed an education bill which clarifies
that the requirement for student transfer options put in place last
year also applies to online schools, not just traditional brick-and-
mortar schools. The result is that students may now enroll in an
online district program or charter school regardless of where
they reside in the state—in effect, it’s the first state-wide open
enrollment for online programs.
We’re also excited about legislation in West Virginia that will
allow school districts for the first time to implement an online
model within their district borders. This model will allow K12 to
establish partnerships with school districts in West Virginia to
provide curriculum, technology, and a menu of services such as
instructors, program management, and professional development.
We look forward to working with these new school partners to
provide online school options for families. We believe that school
choice and online education headwinds continue to look favorable
and will translate into long-term growth for the company.
X I
MEET
JULIA
“ I’M ABLE TO GET A GOOD
EDUCATION AND WORK ON MY ART.”
Julia Chon
iCademy student, 2017
AN ARTFUL BALANCE
Julia Chon is an artist to watch. Not only do her commissioned paintings hang in trendy
Washington, D.C. eateries, visitors to the city’s NoMa neighborhood can gaze on the
whimsical mural she created for this year’s art festival. More projects are in the works for
this gifted iCademy senior, who’s also slated to serve on the Freer/Sackler Museum’s Teen
Council. How does she balance a budding art career with college prep courses? “I chose
online high school,” she says. “It’s just made my life so much easier.” She appreciates that,
with K12, she can work anywhere. We can’t wait to see where life—and her art—will take her!
X I I
FINANCIAL
RESULTS
KEY GROWTH
AREAS
K 1 2 2 0 1 7 A N N U A L R E P O R T
For fiscal year 2017, we delivered $888.5 million in revenues,
growing 1.8 percent year-over-year, which was driven by an
increased adoption of online education and an improved funding
environment for online schools. Specifically, Managed Public
School enrollments jumped nearly four percent 8 and we saw
increased enrollments in nearly 65 percent of schools, greater
than the past two years.
Operating income, as reported, was $13.1 million. Adjusting for
specific charges9 in both fiscal 2016 and 2017, operating income
increased from $21.0 million to $28.4 million. The increase was
a result of higher revenue levels and a general focus on driving
operating efficiencies across our business.
In a move that benefits our Institutional, Managed Public Schools,
and Private Pay businesses, Middlebury Interactive Languages
is now fully owned by K12. As the academic leader in digital
language learning for K–12 students, Middlebury Interactive
Languages has long been a key part of K12’s value proposition to
schools, districts, and families. The move more strongly positions
K12 in the world language sector, provides more flexibility
and operational control, and offers a more nimble governance
structure to help schools, districts, and families prepare students
for college and careers.
With considerable investments made to our programs and products
in years prior, this year we were able to significantly taper capital
spending. We believe we can stabilize long-term capital outlays
in the $40 to $50 million range, with a corresponding increase in
free cash flow over the long term.
Our strategic vision points to K12’s Institutional and Private Pay
businesses as key growth drivers over the long term. Our district
partners have an increasing need for digital curriculum solutions
knit together with support services to solve an array of complex
education problems. What’s more, school districts nationwide
seek to consolidate their digital offerings from multiple service
providers to a select few providers, or even a single partner.
Fuel Education’s extensive course catalog, service capabilities,
and Peak platform, well position us to win key opportunities.
8 Fiscal year 2017 compared to fiscal year 2016 for the period ending September 30.
9 In the fourth quarter of fiscal year 2016, K12 announced that it had reached a settlement with the State of California resolving all claims related to an Attorney General inquiry
with no admission of liability or wrongdoing, and no fines or penalties. K12 took a net charge related to this settlement of $7.1 million. In the third quarter of fiscal year 2017, the
Company incurred $11.4 million in charges relating to reducing real estate exposure, lowering human resources costs, and recording additional reserves for receivables. Included
in the $11.4 million charge is $0.8 million of stock-based compensation expense. During fiscal year 2017 the Company also recorded $3.8 million in additional performance-based
stock compensation expense related to its long-term incentive plan. Adjusting for these specific charges in both fiscal 2016 and 2017, operating income would have been $21.0
million and $28.4 million respectively.
X I I I
MEET
CHARLES
“ MY STUDY SKILLS WERE HONED
BY INDEPENDENT LEARNING.”
Charles Heminway
Insight School of Kansas graduate, 2017
DUAL ENROLLMENT: A PATH TO ACCELERATED LEARNING
Recent Insight School of Kansas graduate Charles Heminway is used to balancing rigorous
academics and community-minded service. Online schooling gave him access to AP® and
college courses, and afforded him time for meaningful volunteering. Dual high school and
college enrollment in his junior and senior years prepared him for Kansas University’s
accelerated law degree program, which he will begin as a Chancellor scholar this fall.
“I want to be an advocate for the fair and equitable application of justice,” Charles says.
We’ve no doubt he will succeed.
X I V
K 1 2 2 0 1 7 A N N U A L R E P O R T
This year, Fuel Education’s go-to-market approach has been
refined, emphasizing our portfolio strengths in Language Literacy,
Career Readiness, Credit Recovery, Digital Curriculum, and Full-
Time Schools.
Within our Private Pay business too, we are building a robust
pipeline of interesting opportunities, both domestically and
abroad. We launched online options specifically tailored for adult
learners, are expanding our brand affiliations, and are positioned
to drive partnership growth across the Asia Pacific region.
We are bullish on long-term prospects within the Institutional and
Private Pay markets thanks to these developments. The growth
potential for these segments of our business is expansive.
OUR PEOPLE,
OUR VALUES
Our strong year would not have been possible without the
unwavering commitment of thousands of employees and
educators, who every day demonstrate the K12 core values of
passion, accountability, courage, and trust.
Our team displays an intense passion to put students first and
transform learning for every student we serve.
They exhibit accountability to students, parents, school districts,
and shareholders, with a relentless focus on ensuring a K12-
powered education is synonymous with excellence.
They demonstrate courage. Education innovation requires
both making sound research-based decisions and pushing the
envelope on best-in-class technologies in order to drive strong
academic outcomes.
They earn the trust of our extended ecosystem of stakeholders,
ensuring every student is set up on a personalized pathway
toward academic success.
X V
LOOKING AHEAD
Mindful of our core values and building upon our foundational
pillars of Academic Excellence, Product Innovation, Operational
Efficiency, and Market Expansion, we are poised as we exit
fiscal 2017 to reach new milestones. We are eager to empower
greater numbers of students for success in the 21st-century
workforce through the power of personalized learning. We are
ready to fulfill and solidify our status as the trusted leader in
education innovation, and in the process, deliver real value for
our shareholders.
Thank you for your continued support.
Nate Davis
Executive Chairman
Stuart Udell
Chief Executive Officer
Some of the Postsecondary Schools Where K12 Graduates Have Been Accepted*
Ball State University
Baylor University
Berklee College of Music
Brigham Young University
Colorado State University
Dartmouth College
Georgia Institute of
Technology
Indiana University–
Bloomington
University of California–
Berkeley
Northwestern University
University of Illinois–Urbana
Pennsylvania State University
University of Michigan
Pomona College
San Diego State University
Temple University
Texas A&M University
University of Nevada–
Las Vegas
University of South Carolina
Virginia Polytechnic and
State University
* National Student Clearinghouse Student Tracker Report School Year 2015–2016
X V I
FORM 10–K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2017
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 001-33883
K12 Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
2300 Corporate Park Drive
Herndon, VA 20171
(Address of Principal Executive Offices)
95-4774688
(I.R.S. Employer
Identification No.)
(703) 483-7000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.0001 par value
Name of each exchange on which registered
New York Stock Exchange (NYSE)
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
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
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 No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange
Act.
Large accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
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 Act). Yes No
The aggregate market value of the registrant’s voting and non-voting stock held by non-affiliates of the registrant as of December 31, 2016 was $483,320,529. Aggregate
market value excludes an aggregate of approximately 12,508,951 shares of common stock held by officers and directors and by each person known by the registrant to own
5% or more of the outstanding common stock on such date. Exclusion of shares held by any of these persons should not be construed to indicate that such person possesses the
power, direct or indirect, to direct or cause the direction of the management or policies of the registrant, or that such person is controlled by or under common control with the
registrant.
The number of shares of the registrant’s common stock outstanding as of July 31, 2017 was 40,771,548.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant’s definitive proxy statement for its 2017 annual meeting of stockholders to be filed pursuant to Regulation 14A with the Securities and Exchange
Commission not later than 120 days after the registrant’s fiscal year ended June 30, 2017, are incorporated by reference into Part III of this Form 10-K.
TABLE OF CONTENTS
PART I
ITEM 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 2.
ITEM 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 4 Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 6.
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . .
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 8.
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure . . .
ITEM 9.
ITEM 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 12. Security Ownership of Certain Beneficial Owners, Management and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 13. Certain Relationships, Related Transactions and Director Independence . . . . . . . . . . . . . . . . . .
ITEM 14. Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV
ITEM 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 16. Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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CERTAIN DEFINITIONS
Unless the context requires otherwise, all references in this Annual Report on Form 10-K (the “Annual Report”)
to “K12,” “Company,” “we,” “our” and “us” refer to K12 Inc. and its consolidated subsidiaries.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995 that involve substantial risks and uncertainties. All statements other than statements of historical facts
contained in this Annual Report on Form 10-K are forward-looking statements. We have tried, whenever possible, to
identify these forward-looking statements using words such as “anticipates,” “believes,” “estimates,” “continues,”
“likely,” “may,” “opportunity,” “potential,” “projects,” “will,” “expects,” “plans,” “intends” and similar expressions to
identify forward-looking statements, whether in the negative or the affirmative. These statements reflect our current beliefs
and are based upon information currently available to us. Accordingly, such forward-looking statements involve known
and unknown risks, uncertainties and other factors which could cause our actual results, performance or achievements to
differ materially from those expressed in, or implied by, such statements. These risks, uncertainties, factors and
contingencies include, but are not limited to:
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reduction of per pupil funding amounts at the schools we serve;
inability to achieve a sufficient level of new enrollments to sustain our business model;
failure to enter into new managed school contracts or renew existing contracts, in part or in their entirety;
failure of the schools we serve or us to comply with federal, state and local regulations, resulting in a loss of
funding, an obligation to repay funds previously received, or contractual remedies;
governmental investigations that could result in fines, penalties, settlements, or injunctive relief;
declines or variations in academic performance outcomes of the students and schools we serve as curriculum
and testing standards evolve;
harm to our reputation resulting from poor performance or misconduct by operators or us in any school in
our industry and/or in any school in which we operate;
legal and regulatory challenges from opponents of virtual public education or for-profit education companies;
discrepancies in interpretation of legislation by regulatory agencies that may lead to payment or funding
disputes;
termination of our contracts with schools due to a loss of authorizing charter;
entry of new competitors with superior technologies and lower prices;
unsuccessful integration of mergers, acquisitions and joint ventures;
failure to further develop, maintain and enhance our technology, products, services and brands;
inadequate recruiting, training and retention of effective teachers and employees;
infringement of our intellectual property; and
disruptions to our Internet-based learning and delivery systems resulting from cyber-attacks.
3
Forward-looking statements reflect our management’s expectations or predictions of future conditions, events or
results based on various assumptions and management’s estimates of trends and economic factors in the markets in which
we are active, as well as our business plans. They are not guarantees of future performance. By their nature,
forward-looking statements are subject to risks and uncertainties. Our actual results and financial condition may differ,
possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements.
There are a number of factors that could cause actual conditions, events or results to differ materially from those described
in the forward-looking statements contained in this Annual Report. A discussion of factors that could cause actual
conditions, events or results to differ materially from those expressed in any forward-looking statements appears in
“Part 1—Item 1A—Risk Factors.”
Readers are cautioned not to place undue reliance on forward-looking statements in this Annual Report or that
we make from time to time, and to consider carefully the factors discussed in “Part 1—Item 1A—Risk Factors” of this
Annual Report in evaluating these forward-looking statements. These forward-looking statements are representative only
as of the date they are made, and we undertake no obligation to update any forward-looking statement as a result of new
information, future events or otherwise.
PART I
ITEM 1. BUSINESS
Company Overview
We are a technology-based education company and offer online curriculum, software systems and educational
services designed to facilitate individualized learning for students primarily in kindergarten through 12th grade, or K-12.
We provide a continuum of technology-based educational products and solutions to public school districts, public schools,
virtual charter schools, private schools and consumers as we strive to transform a student’s learning experience into one
that delivers individualized education. We are accredited by AdvancEd, a non-profit international accreditation agency for
schools, districts, education service agencies, postsecondary institutions, and corporations.
As an innovator in K-12 online education, we believe we have attained distinctive core competencies that allow
us to meet the varied needs of our school customers and students. These core competencies include our ability to create
engaging curriculum, train teachers in effective online instruction, provide turn-key management services to online
schools, customize online learning programs for school districts, develop innovative new offerings, and assist legislators
and policy makers in understanding the many dynamics of virtual and blended learning that can complement and transform
traditional schools. These factors enable us to provide products and services to three lines of business that share many
common attributes, including curriculum, learning systems, management expertise, logistical systems and marketing.
These lines of business are: Managed Public School Programs, which is comprised of virtual and blended public schools
(as more fully described below), Institutional business (educational products and services sold to school districts, public
schools and other educational institutions that we do not manage), and Private Pay Schools and Other (private schools,
including international, for which we charge student tuition and direct consumer sales).
Managed Public School Programs
• Virtual public schools
public
Institutional
• Non-managed Public School
• Blended public schools
• Institutional software and services
Programs
Private Pay Schools and Other
• Managed private schools
—K12 International Academy
—George Washington University
Online High School
—The Keystone School
We continue to make significant capital investments intended to improve student academic outcomes, including
the: (i) ongoing development and enhancement of our current and next generation curriculum and software; (ii)
implementation of a new learning management platform for our middle and high school students; (iii) strengthening the
corporate and school infrastructure to improve scalability, increase data security, and protect student privacy; (iv)
procurement and delivery of student computers; and (v) conversion of interactive instructional products to enable delivery
through tablets and mobile devices.
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• Managed Public School Programs
Our Managed Public School Programs business includes both virtual and blended public schools where a district
or independent charter board contracts with K12 for a full-time program of educational products and services. The
Managed Public School Programs are programs in which K12 provides substantially all of the administrative management
(e.g., budget proposals, financial reporting and staff recruitment), information technology, academic support services,
curriculum, learning systems and instructional services. In contrast, Non-managed Public School Programs do not provide
primary administrative functions. In fiscal year 2017, our Managed Public School Programs accounted for approximately
83% of our revenue.
Virtual Public Schools. In full-time virtual public schools, students receive online lessons over the Internet,
utilize offline learning materials that we supply, and receive instruction from state certified teachers. In addition to
providing our courses, course materials and, in certain cases, student computers, we also offer these schools a variety of
administrative management, technology and academic support services. The majority of our revenue is derived from
long-term service agreements with the governing authorities of these virtual public schools.
Blended Public Schools. Blended public schools combine online learning and face-to-face instruction in a
physical learning center.
For both virtual and blended Managed Public School Programs, the governing authority that exercises ultimate
control over the schools negotiates contractual terms with us for all aspects of the management of the schools, including
the creation and implementation of the academic plan, monitoring academic achievement, teacher recruitment, supervision,
and training, student enrollment and marketing, compensation recommendations for school personnel, implementation of
student support services, financial and regulatory compliance support, procurement of curriculum, computers and other
required services and equipment. The scope of services we provide may also vary in accordance with applicable state
regulations and each governing authority’s policies. Funding is provided primarily by state governments. For the 2016-17
school year, we provided these turn key management services to Managed Public Schools Programs in 33 states and the
District of Columbia, which consisted of 77 Managed Public School Programs. In earlier years, we grew primarily by
entering into fully-managed service agreements with schools that offered statewide programs in new states and reported
that growth by citing the number of states having these programs and by enrollments. Our Managed Public School
Programs now involve the opening of multiple schools within the same state, as well as closures that can occur with
contract terminations, non-renewals or charter revocations. Accordingly, we believe a metric based on the number of
schools served by our Managed Public School Programs rather than by the number of states will more accurately reflect
the status of this business going forward.
• Institutional
We work closely as a partner with a growing number of school districts and individual schools, enabling them to
offer their students an array of online education solutions, including full-time virtual and blended programs, semester
courses and supplemental educational products. Institutional business includes Non-managed Public School Programs and
Institutional software and services where K12 provides curriculum and technology, and the school has an option to contract
for instruction or other software and services we provide; however, the Institutional business offerings do not include
primary administrative oversight to these programs. In addition to curriculum, systems and programs, we provide teacher
training, teaching services and other support services. Our Institutional business customers include public school districts,
private schools, charter schools, early childhood learning centers and corporate partners. Additionally, we operate
Middlebury Interactive Languages LLC (“MIL”), which was formerly a joint venture with Middlebury College to develop
and market online foreign language courses (see Notes to Consolidated Financial Statements, Note 10). On December 27,
2016, we consummated the acquisition of the remaining 40% noncontrolling interest for $9.1 million in cash. As part of
that transaction, we retained the right to use the MIL name in its products through April 2028. In addition, we secured the
right to use the MIL name in marketing materials through December 2019. For the 2016-17 school year, we served school
districts or individual schools in all 50 states and the District of Columbia, including those where the regulatory
environment restricts or prohibits statewide online programs.
• Private Pay Schools and Other
We operate three online private schools: The K12 International Academy, the George Washington University
Online High School and the Keystone School. We also have entered into agreements which enable us to distribute our
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products and services to students from more than 100 countries. We pursue international opportunities where we believe
there is significant demand for quality online education. Our principal customers are U.S. students, including those who
reside in states where the online public school option is not available, as well as expatriate families with students who seek
to continue their studies in English and foreign students who may seek admission into a U.S. college or university.
Additionally, our curriculum is sold to end user customers who desire to educate their children outside of the traditional
school system or to supplement their child’s traditional education.
Our History
We were founded in 2000 to utilize advances in technology to provide children with access to a high-quality
public school education regardless of their geographic location or socioeconomic background. Given the geographic
flexibility of technology-based education, we believed we could help address the growing concerns regarding the
regionalized disparity in the quality of public school education, both in the United States and abroad. The convergence of
these factors and rapid advances in Internet networks created the opportunity to make a significant impact by deploying
online learning software and systems on a flexible, online platform.
In September 2001, we introduced our kindergarten through 2nd grade offering in Pennsylvania and Colorado,
serving approximately 900 students in the two states combined. We subsequently added new grades and new schools in
additional states. We also launched blended public schools that combine face-to-face time in the classroom with online
instruction and opened an online private school to reach students worldwide. In school year 2016-17, our customers for
Managed Public School Programs consisted of 77 schools throughout the United States. We also serve schools in all 50
states through our Institutional business.
Our Market
The U.S. market for K-12 education is large and online learning is gaining greater acceptance. For example:
• According to the most recently available data from the 2015 Keeping Pace with K-12 Digital Learning report
(“Keeping Pace”), over 50 million students attend K-12 public schools, and nearly five million students are
enrolled in private schools. Five states mandate the completion of an online course prior to high school
graduation. Full-time virtual charter schools served an estimated 275,000 students who took approximately
3.3 million semester equivalent courses online. Fourteen states have enacted online course choice laws. K12
is a sponsor of Keeping Pace along with 14 other educational organizations, including iNACOL.
• The 2015 Keeping Pace report further states that 47% of students in grades 9-12 pursue online learning to
access courses not offered at the school, and 43% choose to take courses online to be able to work at their
own pace. In addition, 2.2 million K-12 students participated in a formal online learning program.
• Additionally, according to a 2016 report by the National Home Education Research Institute, there are
approximately 2.3 million home-educated students in the United States, which has grown at an estimated 2%
to 8% per annum over the past few years. Many of these students took an online course and a small percentage
enrolled in a full-time online program.
Many parents and educators are seeking alternatives to traditional classroom-based education for a variety of
reasons. Demand for these alternatives is evident in the expanding number of choices available to parents and students.
• According to the National Alliance for Public Charter Schools, enrollment at public charter schools has
nearly tripled over the past 10 years, and there were approximately 6,900 public charter schools operating
nationwide during the 2016-2017 school year, with an estimated enrollment of approximately 3.1 million
students.
• The 2015 Keeping Pace report indicates that the acceptance of online learning initiatives, including not only
virtual and blended public schools, but also online courses, credit recovery, remediation, testing and
Internet-based professional development, has continued to grow. Districts are also rapidly adopting online
learning to expand course offerings, provide schedule flexibility, increase graduation rates and lower the cost
of delivering education.
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Demand for Education Alternatives: The Market Opportunity and the K12 Solutions
As evidenced by the rapid evolution of education technology and varying educational options being offered to
K-12 students, no single learning model has been found that works equally well for every student. Children today utilize
technology in all aspects of their lives, and we expect this reality to extend to their education. Our business has been built
on the premise that every student, regardless of geographic location or socioeconomic background, is entitled to a high
quality education that is individualized and adaptable based on the student’s unique needs. We also believe all students
can benefit from more engaging technology-enriched educational content.
We anticipate that full-time online public schools will meet the needs of a small percentage of the overall K-12
student population, but that segment will still represent a large and growing opportunity for us in absolute terms. Across
our educational programs, students come from a broad range of social, economic and academic backgrounds, and parents
share the desire for individualized instruction to maximize their children’s potential. Examples of students for whom this
solution may fit include, but are not limited to, families with: (i) students seeking to learn in a way that better
accommodates their individual needs; (ii) safety, social and health concerns about their local school, including students
who are being bullied or are subjected to discrimination; (iii) students with disabilities who are seeking alternatives to
traditional classrooms; (iv) students for whom the local public school is not meeting their needs; (v) students who seek or
need greater flexibility than other alternatives, such as student-athletes and performers who are not able to attend
regularly-scheduled classes; (vi) college-bound students who want to bolster their college readiness and application appeal
by taking additional Advanced Placement (“AP”), honors and/or elective courses; (vii) students seeking career and
technical skills; (viii) high school dropouts who have decided to re-enroll in school to earn a diploma; and (ix) students of
military families who desire high quality, consistent education as they relocate to new locations. Our individualized
learning approach allows students to optimize their educational experience and, therefore, their chances of achieving their
goals.
For the foreseeable future, most students in the United States will continue to be educated in traditional school
buildings and classrooms. However, we believe that certain student segments will benefit from the availability of a choice
for an online public education (including blended learning models), and that states and districts will seek to incorporate
online and blended solutions into their school-based programs. Our Managed Public School Programs offer a full service,
integrated program, and a complete solution for districts and schools that desire a turn-key option. For public school
customers who need less than a full service offering, our Institutional business provides online curriculum and services on
a solutions-oriented, customized basis. We believe these choices create the opportunity for us to serve the majority of
students who will learn within school buildings. Therefore, we continue to invest significant resources, organically and
through licensing or acquisitions, in developing product offerings that afford us the flexibility to serve different types of
customers with varying value propositions and price points that are adaptable to an institution’s capabilities and needs.
Moreover, we have and will continue to pursue selected markets outside the United States where we believe our products
and services can address local foreign market needs.
We believe that our core competencies, coupled with the substantial investments we have made in our
infrastructure and our prior strategic acquisitions and partnerships, position us to offer educational resources for all types
of students. Our products and services offer students expanded educational opportunities regardless of whether a student
chooses to remain in a classroom or seeks an alternative educational setting, attends public or private school, lives in the
United States or abroad, wants to take online classes on a full or part-time basis, requires supplemental educational
products, seeks career or technical training or is an advanced or remedial student.
Our Business Lines
Managed Public School Programs
As previously discussed, in our Managed Public School Programs we typically provide substantially all of the
administrative management, technology and academic support services in addition to curriculum, learning systems and
instructional services under the terms of a negotiated service agreement. We provide our Managed Public School Programs
to both virtual and blended public school customers.
We believe that the acceptance of online education in grades K-12 continues to grow, and anticipate that this will
translate into increased demand for our Managed Public School Programs. The independent governing authorities of the
virtual charter schools that contract with us are also taking different approaches to virtual education depending upon their
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own charter school goals. This is reflected in the nature of the agreements we have with those boards and the level of
management services that meet their needs. For example, due to our experience and expertise in the integration of all the
components necessary to operate a Managed Public School Program, such turnkey arrangements are attractive to many
charter school boards. Conversely, a school board may decide at renewal to transition to a self-managed model. While
these schools continue to purchase our curriculum and some of our management and technology services, they assume
more of the operational and academic accountability obligations. In some Managed Public School Programs, full
responsibility for academic performance resides with the governing authority or school board which employs the Head of
School.
Virtual Public Schools
The majority of our revenue is derived from long-term service agreements with the governing authorities of the
virtual public schools we serve. In addition to providing a comprehensive course catalog, related books and physical
materials, a learning management system for online learning, and, in certain cases, student computers, we also offer these
schools a variety of administrative management, technology and academic support services. Full-time virtual public school
students access online lessons over the Internet and utilize offline learning materials we provide. Students receive
assignments, complete lessons, take assessments, and are instructed by certified teachers with whom they interact via
email, telephonically, in synchronous virtual classroom environments, and sometimes face-to-face (in a non-managed
virtual public school, the level of instructional and/or academic support management, technology services, and academic
support services varies or may not be provided depending on the needs of the school). In either case, for parents who
believe their child is not thriving in their current school or for students and families who require time or location flexibility
in their schooling, virtual and blended public schools can provide a compelling choice. Virtual public school students are
also provided the opportunity to participate in a wide variety of school activities, including field trips, service learning
opportunities, honor societies, and clubs. In addition to school-level activities, we sponsor a wide variety of extracurricular
activities on a national basis, such as clubs, contests and college and career planning sessions.
Virtual public schools managed by K12 serve K-12 students, principally utilize the K12 core curriculum and
attract both mainstream and other types of learners. These virtual public schools operate under different brands including
Virtual Academies (our original full-time Managed Public School Program), Insight schools (which tend to focus on
particular student segments, such as only middle and high school grade levels, at-risk students and career readiness
programs), and iQ Academies (which are typically only partially-managed by us, with responsibility for academic program
and regulatory compliance resting with the host school or school district). We also manage career and technical
education-focused online high schools designed to give students a head start on their career goals by earning college credits
and workplace experiences.
Blended Public Schools
In addition to our full-time virtual public schools, we offer a variety of management and support services and sell
our products to blended public schools, which are public schools that combine online and face-to-face instruction for
students in a variety of ways with varying amounts of time spent by students in a physical learning center.
In contrast to a typical brick and mortar public school, blended public schools can provide a greater selection of
available courses, increased opportunities for self-paced, individualized instruction and greater scheduling flexibility. Our
blended schools bring students and teachers physically together more often than a purely online program.
In some blended schools we manage, such as the Chicago Virtual Charter School, students attend a learning center
on a part-time basis, where they receive face-to-face instruction, in addition to their online virtual curriculum and
instruction.
Institutional
Our Institutional business consists of: (i) Non-managed Public School Programs; and (ii) Institutional software
and services. Public schools and school districts are increasingly adopting these online solutions to launch new learning
models, cost-effectively expand course offerings, provide schedule flexibility, improve student engagement, increase
graduation rates, replace textbooks and retain students. State education funds traditionally allocated for textbook and print
materials are now also being authorized for the purchase of digital content, including online courses, and in some cases
mandated for access to online courses. To address these growing needs, our Institutional business provides curriculum and
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technology solutions, packaged in a portfolio of flexible learning and delivery models mapped to specific student and/or
district needs. This portfolio provides a continuum of delivery models, from full-time Non-managed Public School
Programs to individual course sales and other options that can be used in traditional classrooms to differentiate instruction.
The goal of the Institutional business is to partner primarily with U.S.-based public schools and school districts to provide
more options and better tools to empower teachers to improve student achievement through personalized learning. Our
FuelEd suite of offerings has grown and includes K12 curriculum, FuelEd Online Courses, FuelEd Anywhere Learning
Systems, Middlebury Interactive Languages, LTS Education Systems, LearnBop and Career Pathways curriculum. Our
extensive catalog of online curricula can address specific student needs, including AP, honors programs, world languages,
remediation, credit recovery, alternative education, career and technology electives and college readiness. In connection
with these solutions, we also offer state-certified teachers, training for school personnel in online instruction methods, and
professional development and other support services as needed by our customers.
In addition to our extensive curricula catalog, our Institutional business offers the PEAK platform and PEAK
Library. PEAK is a proprietary software system designed to centrally manage in a single-user interface, multiple,
independent online solutions. Schools can enroll students, assign courses and teachers, and then manage the learning
experience with easy to use reporting and analytics on student progress. The PEAK Library currently supports the K12
curriculum portfolio and teachers can build and modify assignments, assessments and courses to augment classroom
instruction and develop lessons for sharing across the school district. PEAK also has the capability to support other
third-party solutions, open educational resources and district and teacher-created content. For students, teachers and
administrators, PEAK eliminates the complexity of managing multiple accounts and roles and provides a consistent online
environment for full-time, credit recovery, world languages or blended classroom programs. We believe increasing
ease-of-use for administrators and teachers is a critical factor in improving student support and therefore, improving
student outcomes. PEAK addresses this need by serving all of the online instructional needs of a school or district in an
integrated, data-driven manner.
For the 2016-17 school year, we served school districts or individual schools in all 50 states and the District of
Columbia through our Institutional business. Based upon school districts’ and academic administrators’ growing
acceptance of online learning and desire for cost efficient, integrated and flexible educational solutions, we believe that
the direct-to-district distribution channel offers further significant growth potential.
Private Pay Schools and Other
International and Private Pay Schools
We operate three different private schools that meet the needs of students ranging from correspondence courses
to college preparatory programs. Beyond our business in the United States, we are pursuing international opportunities
where we believe there is significant demand for a quality online education. Our international customers are typically
expatriate families who wish to study in English and foreign students who desire a U.S. high school diploma. For the
2016-17 school year, we served students in more than 100 countries. In addition, we have entered into agreements that
enable us to distribute our products and services to our international school partners who use our courses to provide broad
elective offerings and dual diploma programs.
We operate the K12 International Academy, an online private school that serves students in both the United States
and overseas. Through the K12 International Academy, students may study in a full-time academic program that ultimately
leads to an accredited U.S. high school diploma. Students may also enroll in individual courses on a part-time basis. The
K12 International Academy utilizes the same curriculum, systems and teaching practices that we provide to the virtual
public schools we manage in the United States. In addition, this school provides a unique international community
including online clubs and events that enrich the student experience by allowing students to interact with peers in other
countries. The school is accredited by AdvancED, and is recognized by the Commonwealth of Virginia as a degree granting
institution of secondary learning.
The Keystone School (“Keystone”) is a private school that has been providing home-based education and distance
learning for over 35 years. Students attend Keystone for middle and high school on a full or part-time basis. It serves
students through online courses with teacher support as well as print correspondence course programs. Keystone primarily
uses our FuelEd curriculum and offers a lower-cost option to families than either of our other two private schools. Keystone
is accredited by the Middle States Association—Commission on Elementary and Secondary Schools and AdvancED.
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The George Washington University Online High School is operated in cooperation with the George Washington
University. The program, which launched in the 2011-12 school year, offers K12’s college preparatory curriculum and is
designed for high school students who are seeking a challenging academic experience and aspire to attend top colleges
and universities. The school also provides extensive counseling throughout the high school years to help students make
academic and extracurricular choices and maximize their future potential. The school is accredited by the Middle States
Association—Commission on Elementary and Secondary Schools.
Consumer Sales
We also sell individual K-8 online courses and supplemental educational products directly to families. These
purchasers desire to educate their children as homeschoolers, outside of the traditional school system or to supplement
their child’s existing public or private school education without the aid of an online teacher. Customers of our consumer
products have the option of purchasing a complete grade-level curriculum for grades K-8, individual courses, or a variety
of other supplemental products, covering various subjects depending on their child’s needs. Typical applications include
summer school course work, home schooling and educational supplements.
Our Business Strategy
We are committed to maximizing every child’s potential by personalizing their educational experience, delivering
a quality education to schools and their students, and supporting our customers in their quest to improve academic
outcomes and prepare them for college and career readiness. In furtherance of those objectives, we plan to continue
investing in our curriculum and learning systems. These investments include initiatives to create and deploy a next
generation curriculum and learning platform, improve the effectiveness of our school workforce, develop new instructional
approaches to increase student and parental engagement, and improve our systems and security architecture. This strategy
consists of the following key elements:
Deliver better student outcomes. We are committed to improving student outcomes for every student in the
schools we serve. To achieve this goal we will: (i) invest in training and professional development for teachers and school
leaders; (ii) develop programs and initiatives designed to improve the learning experience, such as our interactive media
projects, virtual science labs, AP test prep, specialized cohort academies and Family Academic Support Team (“FAST”)
initiatives; (iii) enhance our curriculum to make it more engaging, adaptive and available to all students anywhere; and
(iv) update our content as state standards and state assessments change. We will also focus our marketing and enrollment
efforts on helping students and families understand the unique demands and challenges of the online learning environment.
We believe a better understanding by parents and students will better prepare students for the work and improve their
chance at academic success.
Improve student retention in our virtual schools. To ensure the best outcomes for students, we have partnered
with the school boards we serve to make a concerted effort to enroll and retain students who are truly engaged and ready
to learn. Research shows that students who remain in the same school setting longer generally perform better academically,
and retention is especially challenging with virtual schools because families have the option of enrolling their children in
a brick and mortar school or another virtual school. We therefore continue to refine our marketing programs to attract
students who are most likely to succeed in a non-classroom based environment with the expectation of increasing academic
success and student retention, recognizing that all students are eligible to enroll consistent with state requirements
(e.g. enrollment caps, prior public school student). Once students are enrolled, programs such as Strong Start and FAST
implement early intervention and focused engagement and retention strategies, which strive to help students stay on track,
improve engagement and ultimately give students a better chance at academic success.
Introduce New and Improved Products and Services. We intend to continue to expand our product line and
offerings, both internally and through licensing or strategic acquisitions of products that address gaps in our current
portfolio, including pursuing development and greater use of curriculum and platforms accessible from tablet and mobile
devices and leveraging adaptive learning technologies and solutions. In addition, we are endeavoring to serve new charter
schools that attract students who are seeking career and technical education.
Increase Enrollments at Existing Virtual and Blended Public Schools. Some state regulations and school
governing authorities and districts limit or cap student enrollment or enrollment growth. At the direction of our school
board and school district customers, we will seek to provide an opportunity for more students to attend these schools, and
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support their efforts to work with legislators, state departments of education, educators and parents to remove those
enrollment caps.
Expand Virtual and Blended Public School Presence into Additional States and Cities. As laws change and
opportunities arise, we work with states and school districts to authorize and establish new virtual and blended public
schools and to contract with them to provide our curriculum, online learning platform, management services, and other
related offerings.
Accelerate Institutional Business. The breadth of our FuelEd catalog, now ranging from pre-K to 12th grade, our
instructional capabilities and our capacity to simplify a school district’s management of multiple digital programs and
vendors through our PEAK technology platform, are the key drivers for Institutional business growth. We will continue
to work to accelerate the market adoption of these solutions and services as school districts partner with us to address a
variety of academic needs and personalized learning for their students. We will continue to seek acquisitions of businesses
that expand FuelEd’s distribution and product portfolio, improve our platform and capabilities, and allow us to enter new
markets to serve every child who is interested in the benefits of digital learning.
Add Enrollments in Our Private Schools. We currently operate three online private schools that we believe appeal
to a broad range of students and families. We look to drive increased enrollments in these schools by increasing awareness,
through targeted marketing programs and by solicitation of partnerships with traditional brick and mortar private schools.
Pursue International Opportunities to Offer Our Learning Systems. We believe there is strong worldwide
demand for high-quality, online education from U.S. families living abroad, foreign students who seek a U.S.-style of
education and the schools and school systems that serve them in their local market. Our ability to operate virtually is not
constrained by the need for a physical classroom or local teachers, which makes our learning systems ideal for use
internationally.
Develop Additional Channels through Which to Deliver Our Learning Systems. We plan to evaluate other
delivery channels on a routine basis and to pursue opportunities where we believe there is likely to be significant demand
for our offering, such as direct classroom instruction, blended classroom models, career and technical education,
supplemental educational products and individual products packaged and sold directly to consumers.
Pursue Strategic Partnerships and Acquisitions. We may pursue selective acquisitions that complement our
existing educational offerings and business capabilities, and that are natural extensions of our core competencies. We may
also pursue opportunities with highly-respected institutions where we can be a valued-added partner or contribute our
expertise in curriculum development and educational services to serve more students.
Products and Services
Educational Philosophy
A primary focus of our educational philosophy is to make the academic performance of students our first priority.
We are committed to continuously improving the quality of our curriculum and academic programs, including alignment
to all state adopted standards and assessments (tests which are designed to measure specific elements of learning) and with
states that have adopted the Common Core State Standards (“CCSS”) and the Common Core Assessments. We also
continue to evaluate and use innovative technologies to deliver engaging and effective learning experiences for all students.
We seek to leverage our product portfolios across our educational solutions and distribution channels and to invest in our
content portfolio to ensure our students receive a meaningful learning experience that is individualized, engaging,
accessible and effective.
The design, development and delivery of our products and services are grounded in the following set of guiding
principles:
• To deliver learning systems that are designed to help drive academic success and student engagement. Our
programs include a wide variety of curriculum and course options, onboarding programs to support our
families and schools, as well as tools to support the overall engagement and student management.
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• Employ Technology Appropriately for Learning. All of our courses are delivered primarily through an online
platform and generally include a significant amount of online content. We employ technology where it is
appropriate and can enhance the learning process, with the amount of online content increasing at higher
grades. In addition to online content, our curriculum includes a rich mix of courses with and without
materials. Furthermore, teachers utilize a variety of collaboration and communication tools to help support
student and family communication. We believe our balanced use of technology and more traditional
approaches helps to maximize the effectiveness of our learning systems.
• Assess Objectives to Ensure Mastery. Ongoing assessments are the most effective way to evaluate a student’s
mastery of a lesson or concept. To facilitate effective assessment, our curriculum states clear objectives for
each lesson. Throughout a course, every student’s progress is assessed at a point when each objective is
expected to be mastered, providing direction for appropriate pacing. These periodic and well-timed
assessments reinforce learning and promote mastery of a topic before a student moves to the next lesson or
course.
•
Individualized Learning. We seek to create engaging curriculum content to capture a student’s attention to
make learning more interesting and effective. It is our fundamental belief that each student learns in a highly
individualized manner. Our instructional system allows students to learn from a curriculum that caters to
their unique learning style and offers a high degree of program flexibility. Certain adaptive learning features
are being integrated into some curricular products, which can individualize lessons based on the level of
student comprehension.
• Prioritize Important, Rigorous Objectives. Our content experts have developed a clear understanding of
those subjects and concepts that are difficult for students, from both historical and cognitive points of view.
Greater instructional effort is focused on the most important and most challenging concepts (as revealed by
experience and research). We use existing research, feedback from parents and students, and experienced
teacher judgments to determine these priorities, to modify our learning systems to guide the allocation of
each student’s time and effort, and to align with evolving state curriculum and testing blueprints.
• Facilitate Flexibility to Accommodate Variations in Ability. We believe that each student should have access
to a variety of instructional solutions that help challenge each student appropriately. Generally, meaningful
progress for most students is to complete one academic year’s curriculum within a traditional school year.
Our learning systems are designed to facilitate this flexibility to motivate and challenge each student to
master each lesson.
• Ensure Fundamental Content Soundness. Our highly credentialed subject matter experts or “Content
Specialists” bring their own scholarly and teaching backgrounds to course design and development and are
required to maintain relationships with and awareness of guidelines from over 65 national and international
subject-area associations.
•
Integrate Curriculum, Teachers and Technology to Maximize Student Learning. We believe students learn
better not just with great curriculum, but also great teachers and technology that allows them to access the
content and teachers in a way that makes learning more engaging and effective.
Academic Performance
Our fundamental goal for every child who enrolls in a virtual public or private school managed by us, or a
program offered through a school district or a Non-managed school, is to improve his or her academic performance. In
fiscal year 2017, we published our 2016 K12 Annual Academic Report (“2016 Academic Report”) which is available at
http://k12.com/academic-report. The 2016 Academic Report was expanded to include all Managed Public School
Programs with reported state test results as well as additional results from key high school assessments. By analyzing
and communicating the results of our efforts, we aim to provide data for school boards and parents as they exercise
school choice options, and to help educators working to improve academic achievement for every child in our
increasingly diverse schools. The test results included in our 2016 Academic Report that were aligned to new state
standards and based on different definitions of proficiency cannot be compared to scores on state tests from previous
years. To provide a more meaningful report, we only included year-over-year results for schools that had not
experienced a testing program change over the prior year, we organized our analyses into groups according to test type
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and we reported data in context by comparing performance at school and state levels. We believe that none of our
competitors serving virtual public schools publishes this volume or depth of academic performance data and analytics.
Each of the jurisdictions in which we manage virtual public schools measures academic performance using
different state accountability methods. A number of states have adopted the Common Core State Standards for curriculum
content and one of the two online assessment methods aligned to those standards, the Smarter Balanced Assessment
Consortium (“SBAC”) or the Partnership for Assessment of Readiness for College and Careers (“PARCC”). However, as
of school year 2016-17, a majority of the states in which we operate rely on their own state-developed standards and
assessments or commercially available assessments. Some states use a combination of a state-developed test and either the
PARCC or SBAC test, while other states in which we operate never adopted the CCSS, including Virginia and Texas.
In the 2014-2015 school year, many states changed their required assessments. Across all K12 public school
programs, only eight states did not change their state required tests in 2014-2015: Iowa, Minnesota, Oklahoma, Tennessee,
Texas, Utah, Virginia, and Wyoming. The changes in state tests were in part a consequence of the Common Core State
Standards, initially released in 2010. In that year, most states began the process of adopting the Common Core standards,
encouraged by the federal grant program called Race to the Top, which favored applicants that agreed to adopt Common
Core. The new content standards required new assessments, so to develop assessments aligned to the Common Core, the
federal government funded two testing consortia, the PARCC and the SBAC. At one time, 24 states and the District of
Columbia were signed on to administer the PARCC assessments. However, in the 2014-2015 school year, only the District
of Columbia and 10 states fully administered the PARCC assessments. The Education Commission of the States notes that
in 2015-2016, only six states and the District of Columbia used the PARCC assessments. While the SBAC consortium has
experienced fewer withdrawals, its members decreased to 15 states that administered the full SBAC assessment in the
2015-2016 school year. For the 2016-17 school year, 7 states administered the PARCC assessment and 14 states
administered the SBAC assessment. Fewer states changed their state-developed assessments from the 2015-16 to 2016-17
school year than the previous year.
We share the view taken by many states that assessing a student’s academic performance by his or her learning
growth is a more accurate measure of a school’s effectiveness than attaining a static proficiency score. Most of our schools
administer nationally-recognized interim and/or benchmark assessments to measure student growth during the school year,
to prepare students for state assessments and to guide instruction. To ensure all schools are utilizing best practices learned
from the successful schools we manage and from other high performing schools across the country, we have implemented
a standardized academic framework across all of the Managed Public School Programs that addresses teacher preparation,
delivery of instruction, and student assessment. Effective instruction is informed by and evaluated based on student-level
data. As part of the academic framework, schools implement plans to collect student-level data throughout the year from
three types of assessments: diagnostic, formative interim, and summative. Baseline assessments are used to determine a
student’s academic strengths and weaknesses and are administered at the beginning of the school year or when a student
enrolls. Formative interim assessments are administered throughout the year to assess student mastery of the state standards
and objectives. Summative assessments measure student learning at culminating points in a student’s academic career,
such as the end of the semester or the end of the school year. In most cases, state tests serve as the summative assessment
for schools. We provide recommendations for benchmark and interim formative assessments based on state standards and
state assessments. In several cases charter authorizers, district partners or departments of education require specific
assessments.
In addition to the complexities involved in measuring academic performance of students, we believe the virtual
public schools we serve face unique challenges impacting academic success not necessarily encountered to the same extent
by traditional brick and mortar schools. These challenges include students who enter behind grade level or under-credited,
high student mobility, lack of control over the student learning environment and higher than average percentages of
students eligible for free or reduced-price lunch in many states. With rare exceptions, the data shows that students identified
as eligible for free lunch had lower percentages at or above proficiency levels than students eligible for reduced-price
lunch, and both groups usually underperformed students identified as not eligible for subsidized meals. In addition, for
decades, educational research has shown that persistence—remaining and proceeding at pace in the same school setting—
can benefit academic performance, while mobility—moving from one school setting to another—can have a destabilizing
influence, causing students to struggle and lapse in academic performance.
While measuring academic performance is necessary, taking meaningful steps to improve student outcomes is an
integral part of our mission. Accordingly, we continually strive to achieve that objective by undertaking new initiatives
and improving existing programs, such as Strong Start and FAST. To monitor student learning progress during the school
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year, we are using multiple equivalent assessments at the lesson, unit and semester level to ensure that our measurement
of mastery is reliable and valid, introducing more synchronous sessions for at risk students, and using data driven
instruction that provides for targeted teacher intervention to assist students with lesson challenges.
In furtherance of our goal to improve academic performance, in fiscal year 2014 we established an Academic
Committee of the K12 Board of Directors comprised of three members. The primary role of the Academic Committee is
to make recommendations and assist management in discharging its responsibility to ensure continuous improvement in
academic outcomes for the public and private schools served by K12. With input and oversight from the Academic
Committee, the education experts who are members of our K12 Educational Advisory Committee (“EAC”), formed in
2013, will further improve our focus on academic achievement and growth goals as well as advising us on specific tactics
to be successful in these areas. The EAC met 3 times in fiscal year 2017. The members of our EAC are:
• Dr. David Driscoll, former Commissioner of Education, Commonwealth of Massachusetts
• Ms. Millie Fornell, former Chief of Staff, Miami-Dade School District
• Ms. Ann Foster, former Senior Vice President Strategy, Business Development and Connected Learning for
Harcourt Education Group
• Dr. Beverly Hutton, Executive Director of the National Association of Secondary School Principals
• Dr. Andrew Porter, former Dean of the Graduate School of Education, University of Pennsylvania
• Dr. Elanna Yalow, CEO of Knowledge Universe Early Learning Programs
• Dr. Anne Mendenhall, chair of the Nevada Virtual Academy board
Our Products
Our product approach is to continue investing in curriculum and technology to educate students more effectively
and efficiently. Much of our investment has been in the development of K-12 online courses and management systems.
We are planning specialized courses and programs designed to remediate the rapidly increasing number of students who
are enrolling in schools behind grade level. Specifically, we are making, licensing or acquiring more individualized
learning programs for students using adaptive learning technology, which requires a significant financial commitment to
license or acquire, integrate and develop a specialized curriculum and a complex database.
As school districts confront the same issues that we are experiencing in managed public schools, we believe that
our products could have applicability across a broader range of schools. We are continuing to develop new courses and
materials aimed at engaging a broad spectrum of learners.
In addition, our PEAK system provides school districts and administrators a better way to manage their online
education programs and content. In 2014, we entered into an agreement to transition our high school learning management
system (“LMS”) to Desire2Learn, a pioneer in next-generation digital education systems. During school year 2015-16, we
migrated the virtual high schools we manage to this new platform, and it is anticipated that the migration for middle school
will be completed in time for school year 2017-2018. The new online high school and middle school LMS was designed
to empower, engage, and help students achieve better academic results. The new user experience includes planning
features that help students advance through their schoolwork, as well as course management tools that allow teachers to
tailor a curriculum that best meets the unique needs of their students, and a host of other features.
Just as we pioneered the development of virtual schools, we are resolved to address the most challenging
educational needs facing schools and districts. Our goal is to assist teachers, schools and districts in implementing
individualized education programs to better serve their students. This can take a variety of forms including turn-key
solutions, partnerships, vendor relationships, enterprise licenses, and purchases of curriculum and services.
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Curriculum
K12 has one of the largest digital curriculum portfolios for the K-12 online education industry. The K12
curriculum consists of a variety of online lessons and resources, offline instructional kits and materials and lesson guides.
A single year-long K12 course generally consists of 120 to 180 unique instructional lessons. Each lesson is designed to
last approximately 45 to 60 minutes, although students are able to work at their own pace. We have a broad-based
curriculum that includes courses across kindergarten, elementary, middle and high school, including world languages.
Since our inception, we have built core courses in English language arts, mathematics, science and history on a
foundation of rigorous standards, following the guidance and recommendations of leading educational organizations at the
national and state levels. For this reason, our K12 curriculum was well positioned to satisfy the requirements of the CCSS
when they were published in June 2010. As the CCSS landscape is continually changing, we will monitor the decisions
that states are making with regard to CCSS adoption and the associated assessments of the CCSS or other standards the
states may adopt, which in turn may require further adjustments. We have and will continue to invest in and update our
curriculum to stay current with emerging and developing standards like CCSS.
Online Lessons. For school year 2016-17, our K12 online lessons were accessed by K-5 students through a
proprietary learning management platform, which we call our Online School (“OLS”). Lessons are accessed through a
third-party platform by high school students, as well as a number of other common industry platforms for students who
access our FuelEd Online Courses. Each online lesson provides the roadmap for the entire lesson, including direction to
specific online and offline materials, summaries of major objectives for the lesson and the actual lesson content with
assessments. Digital versions of documents, readings, labs and other activities may also be included. Lessons utilize a
combination of innovative technologies, including animations, demonstrations, audio, video and other graphic/digital
interactivity, educational games and individualized feedback, all coordinated with offline textbooks and hands-on
materials, to create an engaging, responsive and highly-effective curriculum. The formative and periodic summative,
online assessments help ensure that students have mastered the material and are ready to proceed to the next lesson,
allowing them to work at their own pace. Pronunciation guides for key words and references to suggested additional
resources, specific to each lesson and each student’s assignments and assessments, are also included.
Learning Kits. Many of our courses utilize learning kits in conjunction with the online lessons to maximize the
effectiveness of our learning systems. In addition to receiving access to our online lessons through the Internet, each K-8
student receives a shipment of materials, including textbooks, art supplies, laboratory supplies (e.g., microscopes, scales,
science specimens) and other reference materials which are referred to and incorporated in instruction throughout our
curriculum. This approach is consistent with our guiding principle to utilize technology where appropriate for our learning
systems, and combine it with other effective instructional methods. We have also created and/or converted additional K12
textbooks and resources used across our courses into an electronic format, enabling us to offer options to enhance the
student experience without physical books.
Lesson Guides. Our courses are generally paired with a lesson guide and/or teacher resources. These resources
are designed to work in coordination with the online lessons and include the following: overview information for learning
coaches, lesson objectives, lesson outlines and activities, answer keys to student exercises and suggestions for explaining
difficult concepts to students.
Pre-K and K-8 Courses
From pre-kindergarten through 8th grade, our courses are generally categorized into seven major subject areas:
English language arts, mathematics, science, history, art, music and world languages. Our online curriculum includes all
of the courses that students need to complete their core kindergarten through 8th grade education; our pre-K offering,
which we refer to as EmbarK12, introduces students to core subjects through cross-curricular thematic units, building initial
and fundamental relationships among concepts. Courses focus on developing fundamental skills and teaching the key
knowledge building blocks or schemas—the “big ideas” that each student will need to master the major subject areas, meet
state standards, including those formulated as the CCSS, and complete more advanced coursework. Unlike a traditional
classroom education, and in conjunction with school teachers and counselors, our learning systems offer the flexibility for
each student to take courses at different grade levels in a single academic year, providing flexibility for students to progress
at their own level and pace within each subject area.
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Our K12 elementary language arts program is designed to deliver increased interactivity and make instruction
even more engaging and efficient while integrating rewards, interactive practice and a virtual world. These courses support
students at various skill levels via targeted, timely remediation, embody CCSS and include significant media integration.
In addition, the flexibility of our learning systems allows us to tailor our curriculum to state specific requirements. For
example, we have developed a large catalog of courses specifically created for the public school standards in 20 states; we
are aligning our courses to the CCSS and the Common Core Assessments; and in addition to the ongoing evolution of our
K-5 Math+ program, we have also created custom Math+ sequences to serve specific state needs.
High School Courses
The curriculum available to high school students is much broader and varies from student to student, largely as a
result of the increased flexibility in course selection available to high school students. Students also are able to select from
a wide range of electives. We have augmented our lab program for lab science courses with the creation of alternate kit-free
science labs as an augmentation or alternative for our formerly kit-based high school science labs in order to provide a
more flexible and robust lab program across our physical science, earth science, biology, chemistry and physics courses.
Our overall lab program now includes traditional kit-based labs based on either shipped-in or household materials, virtual
labs, video-based labs, data-collection and data-manipulation labs, and field studies. This array provides schools with
additional materials flexibility, and integrates diverse modalities directly into our science curriculum to promote
conceptual mastery. Across all subject areas, the K12 proprietary core curriculum accounts for more than three quarters of
our high school course enrollments. As standards change, we align our courses to the CCSS and the Common Core
Assessments as well as various evolving state standards. We have already released over 40 new courses to help support
our focus on career and technical education, and we are planning to launch another 46 courses for school year 2017-2018.
FuelEd Online Courses. We also offer curriculum to schools and school districts marketed as our FuelEd Online
Courses product line. Most FuelEd Online Courses are aligned to state and national standards, including many to the
CCSS, and include a large number of courses for middle and high school students, featuring core, AP, elective and credit
recovery courses. FuelEd’s Online Courses are developed by subject matter experts, designed by multimedia teams and
may be taught by Company-provided instructors at the customers’ option. FuelEd classes are primarily delivered over the
Internet in a classroom or virtual setting, and use a variety of interactive elements to keep students engaged. A deep
understanding of K-12 pedagogy, as well as the human factors associated with online technology, is integrated into
FuelEd’s courses. New to the FuelEd offerings this year are adaptive credit recovery courses in math, English, physical
education, health, and world languages.
Middlebury Interactive Languages. We offer digital world language courses and residential summer language
academies through MIL, which became a wholly-owned subsidiary in FY 2017 through our purchase of Middlebury
College’s interest in the joint venture. As part of that transaction, we retained the right to use the MIL name in its products
through April 2028. In addition, we secured the right to use the MIL name in marketing materials through December 2019.
These offerings include immersive language courses for K-12 students based on Middlebury College’s pedagogy to help
students gain a stronger base of comprehension and accelerate language acquisition. The age-appropriate language courses,
which can be implemented fully online, in a blended learning environment or as supplemental material, use instructional
tools such as animation, music, videos and other authentic materials to immerse students in the language and culture of
study. We offer Chinese, French, German and Spanish courses for elementary, middle and high school students. In
addition, MIL has developed a summer English language learner (“ELL”) curriculum and new, digital, supplemental ELL
courses for middle and high school students to be used in a blended environment. MIL also operates summer residential
language academies, an immersive program for middle and high school students. Academy students live in language by
taking the Language Pledge, a promise to communicate solely in their language of study for four weeks. Instruction is
offered in Arabic, Chinese, French, German and Spanish at multiple college campuses in Vermont, as well as in France,
Spain and China in their respective local languages.
Innovative Learning Applications
In order to continue to enhance the user experience and instructional methods of our learning systems, we strive
to leverage new technologies to adapt our curriculum to new devices and platforms while developing algorithms and
models to build an adaptive curriculum.
• Mobile Device Learning: We offer mobile applications that create the ability for a student to learn
“on-the-go,” allowing for more continuous learning, engagement and mastery of content. In addition, we
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rolled out our first fully mobile-enabled courseware in the fall of 2014 and have developed a core mobile
catalog of courses.
•
Interactive Games: An active educational games initiative is delivering new methods for engagement,
practice and review of K-12 concepts, including: narrative/immersive styles, rewards, persistent data, and
complex algorithms. In fiscal year 2016, we acquired a game-based learning system that is designed to help
students accelerate learning and practice on state standards. These games make use of extensive research and
educational best practices and address targeted learning objectives.
• Virtual Labs: We have delivered alternatives for our educational partners who desire materials-free
curriculum. This includes converting many of our existing materials-based high school science labs into
highly interactive virtual labs and video lab simulations that meet state standards and still maintain teaching
the original learning objectives. For example, in high school chemistry we have developed a virtual
laboratory on chromatography, in which students separate a number of inks into their component pigments.
This laboratory is performed at a virtual lab bench with all the materials and with the same procedures high
school students would use in a physical chemistry laboratory.
•
eBook and Digital Book Distribution: Through fiscal year 2017, we have created or converted additional
K12 textbooks used across our courses into an electronic format, including textbooks, reference guides,
literature readers and lab manuals. This digital delivery ability enables us to offer options to our customers
via interactive online books that enhance the student’s reading experience, reinforce the student’s learning
approach and create a new method for delivering book and print materials. Each offline book is converted
into an electronic book format with a custom user interface to be viewed via a standard web browser or a
commercially available electronic reader (e.g. Kindle, Nook).
• Adaptive Learning: We offer certain courses that are adaptive, which enable individualized learning
experiences as the course “adapts” at key points to student behavior and input. Based on assessment results
or individual activity, these courses can automatically route students to an alternate explanation, additional
practice or remediation on a prerequisite skill or crucial concept. In addition to remediation, the capability
allows students to accelerate past previously mastered concepts, giving skillful students time for more
challenging work. Our new Summit curriculum provides differentiated paths to our students depending on
the mastery of specific objectives within the curriculum. Our MARK12 reading remediation product captures
individual students’ successes and challenges as they practice phonemic awareness, alphabetic principles,
accuracy and fluency, vocabulary and comprehension. The program serves the individual student more
exercises, practice and review in areas of difficulty. Adaptation in this way tailors the instruction
automatically for each student, making learning experiences more efficient and effective by building into the
course the logic an expert teacher or tutor uses to differentiate instruction.
• Engaging Videos: We continue to explore opportunities to enhance student engagement through strategic
use of relevant multimedia. For example, we introduce concepts in our Summit math curriculum with a 60
second video that illustrates the application of a specific math concept in practical applications to provide
context for students.
Learning Management Systems
For our K12 curriculum users in grades K-5 in school year 2016-17, we provided a proprietary learning
management system, our OLS platform. The OLS platform is a significant part of our ongoing effort to provide a
productive learning experience for students. The OLS platform is a web-based software platform that provides access to
our online lessons, our lesson planning and scheduling tools, and our progress tracking tool which serves a key role in
assisting parents and teachers in managing each student’s progress. The OLS platform is also the central system through
which students, parents, teachers and administrators interact using an integrated email solution and Class Connect (our
integrated synchronous session scheduler).
• Lesson Planning and Scheduling Tools. During a school year, a typical full-time K-5 student will complete
hundreds of lessons across six or more subject areas. In the OLS platform, our lesson planning and scheduling
tools enable teachers and parents to establish an individualized plan for each student to complete his or her
lessons. These tools are designed to dynamically update the lesson plan as a student progresses through each
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lesson and course, allowing flexibility to increase or decrease the pace at which the student advances through
the curriculum while ensuring that the student progresses towards completion in the desired time frame.
Moreover, changes can be made to the schedule at any point during the school year and the remainder of the
student’s schedule will automatically be adjusted in the OLS platform. Unlike a traditional classroom
education, our learning systems offer the flexibility for each student to take courses at different grade levels
in a single academic year, providing flexibility for students to progress at their own level and pace within
each subject area. The curriculum includes assessments built into every lesson to guide and tailor the pace of
progress to each child’s needs.
• Progress Tracking Tools. Once a schedule has been established, the OLS platform delivers lessons based
upon the specified parameters of the school and the teacher. Each day, a student is initially directed to a home
page listing the schedule for that particular day and begins the school day by selecting one of the listed
lessons. As each lesson is completed, the student returns to the day’s schedule to proceed to the next subject.
If a student does not complete a lesson by the end of the day on which it was originally scheduled, the lesson
will be rescheduled to the next day and will resume at the point where the student left off. Our progress
tracking tool allows students, parents, learning coaches and teachers to monitor student progress. In addition,
information collected by our tracking tool regarding attendance and other pertinent data are transferred to
our proprietary TotalView system for use in providing administrative support services. This instructional
program includes several processes and educational techniques that embrace proactive intervention. As a
result, we can provide high quality instruction and intervention aligned to student needs.
In fiscal year 2014, we entered into a strategic license agreement with Desire2Learn, a pioneer in next-generation
digital education systems and learning platforms. At the beginning of school year 2015-16, we implemented this new
virtual learning platform at the high schools we serve and we extended the platform to the middle schools we serve in
school year 2016-17. Similar to our OLS platform, this new platform enables lesson planning, scheduling, tracking student
progress and conducting assessments. The platform is used by over 50 K-12 organizations, and provides an
industry-leading student experience which should help us improve student engagement, retention and outcomes for the
Managed Public School Programs we serve.
The new platform helps us deliver a more personalized experience to our students and teachers. The intuitive
experience enables students to access pertinent information more easily. This platform also includes an assessment tracking
tool that enables teachers to easily view assessment data for their students so that they can proactively provide additional
instruction to students as needed. Our assessment tools help us improve learning programs by providing information on
the effectiveness of instructional activities and curriculum. Furthermore, our learning programs make use of a variety of
formative and summative assessment instruments:
• Lesson assessments that verify mastery of the objectives for that lesson and help determine whether further
study of the lesson is necessary.
• Unit assessments that show whether or not the student has retained key learning objectives for the unit, and
identify specific objectives students may need to review before progressing.
• Semester assessments that verify student mastery of key learning objectives for the semester.
The platform also provides additional tools and reports that enable teachers to have better insights into students’
progress and enable students to manage their day more effectively.
TotalView
TotalView is our proprietary student information system. TotalView is integrated with the OLS, the Desire2Learn
system, and several other proprietary systems including our online enrollment system that allows parents to complete
school enrollment forms online and our Order Management System that generates orders for learning kits and computers
to be delivered to students. TotalView stores student specific data and is used for a variety of functions, including enrolling
students in courses, assigning progress marks and grades, tracking student demographic data, and generating student
transcripts. The TotalView suite of online applications provides administrators, teachers, parents and students a unified
view of student attendance, communications, and learning kit shipment tracking.
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TotalView also includes an enrollment processing and tracking tool that allows us to closely monitor and manage
the enrollment process for new students. Over the past several years, we have enhanced TotalView with additional
functionality to better support the operation of the virtual and blended public schools.
PEAK
Institutional business offers an innovative platform called PEAK and the PEAK Library. PEAK is a proprietary
software system designed to centrally manage in a single-user interface multiple, independent online school-based
functions. Schools can enroll and activate students, assign courses and teachers, and then manage the learning experience
with easy to use reporting and analytics on student progress. In addition, through the PEAK Library, teachers can build
and modify assignments, assessments and courses and can augment classroom instruction and develop lessons for sharing
across the school district. PEAK also has the capability to support other third-party solutions, open educational resources
and district and teacher-created content. In fiscal year 2017, PEAK served nearly 900 school districts and school partners
and nearly 400,000 students. As more districts adopt online learning, they are demanding more control and flexibility in
managing their programs. PEAK provides extensive capabilities for districts wanting to operate multiple solutions or
catalogs from a single application and offers rich personalization features that can be managed at the district, school or
teacher level.
Our Services
We offer a comprehensive suite of services to students and their families as well as directly to virtual and blended
public schools, traditional schools and school districts. Our services can be categorized broadly into: academic support
services; and management and technology services.
Academic Support Services
Teachers and Related Services. Teachers are critical to students’ educational success. Many teachers in the virtual
and blended public schools that we manage are employed by the school, with the ultimate authority over these teachers
residing with the school’s governing body, including final hiring and termination decisions. As part of our service
agreements, we typically are engaged to recruit, train and provide management support for these school-employed
teachers. For our Institutional business customers, we provide instructors as needed using our staff of state-certified
teachers and trainers.
We use a rigorous evaluation process for making teacher hiring recommendations to the schools we manage. We
generally recruit teachers who, at a minimum, are state certified and meet each state’s requirements for designation as a
“Highly Qualified Teacher.” We also seek to recruit teachers who have the skill set necessary to be successful in a virtual
environment. Teaching in a virtual or blended public school is characterized by enhanced one-on-one student-teacher and
parent-teacher interaction, so these teachers must have strong interpersonal communications skills. Additionally, a virtual
or blended public school teacher must be creative in finding ways to effectively connect with their students and integrate
themselves into the daily lives of the students’ families. We assess these teacher characteristics by requiring teachers to
deliver and record a sample lesson on our online platform and answer questions both via video and essay as part of the
hiring screening process. Throughout a teacher’s employment in a managed program, we provide tools for teacher
management and evaluation. In most managed public schools, we are also piloting an instructional coaching program,
where experienced teachers provide coaching to other teachers to help improve the quality of instruction in the schools.
New teachers participate in our comprehensive training program during which, among other things, they are
introduced to our educational philosophy, our curriculum and technology applications, and are provided strategies for
communicating and connecting with students and their families in a virtual environment. We also provide ongoing
professional development opportunities for teachers so that they may stay abreast of changing educational standards, key
learning trends, and sound pedagogical strategies which we believe enhance their teaching abilities and effectiveness.
Advanced and Special Education Services. We believe that our learning systems can be appropriate to address
the educational needs of both advanced and special education students because they employ flexible teaching methods and
students can use them at their own pace. For students requiring special attention, we employ a national director who is an
expert on the delivery of special education services in a virtual or blended public school environment and who supports
the special education programs at the schools we serve. While compliance with federal and state special education laws
resides primarily with our managed public school customers, we periodically review and, in cooperation with the schools,
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may assist and facilitate the development and implementation of Individualized Education Plans for students with special
needs and for English Language Learners (“ELL”). Each student with special needs is assigned a certified special education
teacher and the school arranges for any required ancillary services, including speech and occupational therapy, and any
required assistive technologies, such as special computer displays or speech recognition software. We support advanced
and talented students through our advanced learner program.
Supporting Academically At-Risk Learners. Our objective is to narrow the achievement gap for those students
who enter our virtual or blended public schools behind their same-age peers. To that end, students are given both formative
and summative assessments during the course of the school year in order to identify those students needing specific
remedial support and measure the effectiveness of the support. We also offer a program designed for academically at-risk
students, particularly those who have previously dropped out of high school, and which includes more counseling and
support services.
Student Support Services. We provide students attending virtual or blended public schools that we manage and
their families with a variety of support services as a means to help them meet their educational needs and goals, and to
address any questions or concerns that students and their parents have during the course of their education. We plan and
coordinate social events to offer students opportunities to meet and socialize with their school peers where practical.
Finally, in connection with our high school offering, each student is assigned a homeroom teacher, and/or an advisor and
a guidance counselor who assists them with academic issues, college and career planning and other support as needed.
During school year 2016-17, we completed our two-year nationwide rollout of Students First. Students First is a
series of programs that encompass the entire student experience, from on-boarding to personalized outreach to academic
and support services for struggling students and surveys for gauging satisfaction and adapting support services.
We are also making substantial investments in our service offerings to improve student outcomes. For example,
as part of our Strong Start student onboarding program, we offered a diagnostic assessment tool that a number of Managed
Public School Programs have utilized to develop targeted instructional plans for new students who often start school with
us before their academic records arrive. In addition, we offer the FAST program in many of the Managed Public School
Programs. The purpose of FAST is to help students prepare for their online learning experience by assisting them with
non-academic barriers.
Management and Technology Services
Turn-key Services. For most Managed Public School Programs, we provide a turn-key suite of services whereby
we take responsibility for all aspects of the management of the schools, including the provision of online curriculum and
lesson materials, monitoring academic achievement, teacher hiring recommendations and training, financial management
and regulatory compliance, marketing and enrollment support, and provision of computers and other required products
and services.
Accreditation. In 2013, AdvancED renewed our corporate accreditation for another five years. AdvancED is a
non-profit organization that serves more than 30,000 public and private schools and districts across the United States. It
was created by the merger of the preK-12 divisions of the North Central Accreditation Association Commission on
Accreditation and School Improvement and the Southern Association of Colleges and Schools Council on Accreditation
and School Improvement, and the subsequent addition of the Northwest Accreditation Commission. Many of the schools
we manage also maintain school accreditation through AdvancED and also through regional accreditations with other
accrediting associations.
Compliance and Tracking Services. Operating a virtual or blended public school entails many of the compliance
and regulatory requirements of a traditional public school, as well as applicable charter provisions or other requirements
specifically adopted for online public schools. We have developed management systems and processes designed to track
compliance with those requirements, including tracking appropriate student information and meeting various state and
federal reporting, record keeping and privacy requirements for the schools we serve. For example, we collect enrollment
related information, monitor attendance and administer proctored state tests. Further, as we have expanded into new states,
our processes have grown increasingly robust. In fiscal year 2014, we created the position of Chief School Compliance
Officer (“CSCO”) to supplement and oversee school compliance. Among other responsibilities, our CSCO complements
our corporate compliance and ethics function and reviews and advises our managed public schools on applicable regulatory
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policies, practices and procedures. The CSCO provides a school compliance report semi-annually to the Audit Committee,
or more frequently on various matters as requested by the Committee.
Financial Management Services. For the schools we manage, we oversee the preparation of the annual budget
and coordinate with the school’s governing body to determine its annual objectives. In addition, we implement an internal
control framework, develop policies and procedures, provide accounting services and payroll administration, oversee all
federal entitlement programs, and arrange for external audits and support state and local financial compliance reporting by
the schools.
Facility, Operations and Technology Support Services. We generally operate administrative offices and all other
facilities on behalf of the schools we manage. We provide these schools with technology infrastructure. In addition, we
provide a comprehensive help desk solution for students and school staff to address their computer or other technical
issues.
Human Resources Support Services. We are actively involved in recruiting virtual and blended public school
administrators, teachers and staff, through a thorough interview and orientation process. To better facilitate the hiring
process, we review and analyze the profiles of teachers that have been highly effective in our managed public and blended
schools learning systems to identify the attributes desired in future new hires. While many schools employ teachers
directly, we also help negotiate and secure employment benefits and payroll services for school staff on behalf of the
schools and administer employee benefit plans for school employees. Additionally, we assist the schools we serve in
drafting and implementing administrative policies and procedures.
Competition
As a general matter, we face varying degrees of competition from a variety of education companies because the
scope of our offerings and the customers we serve encompass many separate and distinct segments of the education
business. We compete primarily with companies that provide online curriculum and school support services to K-12 virtual
and blended public schools, and school districts. These companies include Pearson PLC (Connections Academy and
Advanced Academics), Lincoln Learning Solutions, Inspire Charter Schools, and Charter Schools USA, among others.
We also face competition from online and print curriculum developers. The online curriculum providers include Apex
Learning Inc., Curriculum Associates, Achieve 3000, Edgenuity Inc., Glynlyon, Inc., Edmentum Inc., Renaissance
Learning, Inc., Rosetta Stone Inc. and traditional textbook publishers including Houghton Mifflin Harcourt, McGraw-Hill
Companies and Pearson PLC. Other competing online curriculum providers, including Khan Academy, Duolingo, IXL
Learning, Inc. and LearnZillion, Inc., offer a “freemium” model which provides curriculum at no charge but charges for
additional products or services and certain other providers. We also compete with institutions such as The Laurel Springs
School (Nobel Learning Communities, Inc.) and Penn Foster Inc. for online private school students. Additionally, we
compete with state-administered online programs such as Florida Virtual School.
We believe that the primary factors on which we compete are:
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extensive experience in, and understanding of, K-12 virtual schooling;
track record of student academic gains and customer satisfaction;
quality of integrated curriculum and materials with an online delivery platform;
qualifications, experience and training teachers for online instruction;
comprehensiveness of school management and student support services;
platform designed to allow school district partners to centrally manage multiple online solutions;
integrated K-12 solutions, with components designed and built to work together;
ability to scale across our lines of business; and
sophisticated government affairs knowledge and experience in virtual school regulatory environments.
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Broadly speaking, we participate in the market for K-12 education. In states where we enter into long-term service
agreements to manage virtual and blended public schools, we believe that we generally serve less than 1% of the public
school students in that state. The customers for Institutional business are schools and school districts seeking individual
courses to supplement their course catalogs or school districts seeking to offer an online education program to serve the
needs of a small subset of their overall student population. Defining a more precise relevant market upon which to base a
share estimate would not be meaningful due to significant limitations on the comparability of data among jurisdictions.
For example, some providers to K-12 virtual public schools serve only high school students; others serve the elementary
and middle school students, and some serve both. There are also providers of online virtual K-12 education that operate
solely within individual states or geographic regions rather than globally as we do. Furthermore, some school districts
offer their own virtual programs with which we compete. Parents in search of an alternative to their local public school
have a number of alternatives beyond virtual and blended public schools, including private schools, public charter schools
and home schooling. In our International and Private Pay schools, we compete for students seeking an English-based K-12
education worldwide, and we currently draw students from more than 100 countries. In addition, our integrated learning
systems consist of components that face competition from many different types of education companies, such as traditional
textbook publishers, test and assessment firms and private education management companies. Finally, our learning systems
are designed to operate domestically and internationally over the Internet, and thus the geographic market for many of our
products and services is global and indeterminate in size.
Key Functional Areas
Public Affairs, School Development, Student Recruitment and Marketing
We seek to increase public awareness of the educational and fiscal benefits of our online learning options through
full-time virtual and blended instructional models as well as supplementary course options. We receive numerous inquiries
from school districts, legislators, public charter school boards, community leaders, state departments of education,
educators and parents who express the desire to have a choice in public school options. Our public affairs and school
development teams work together with these interested parties to identify and pursue opportunities to expand the use of
our products and services in new and existing jurisdictions.
Our student recruitment and marketing team is focused on promoting the K-12 online education category and
generating enrollments for the Company’s virtual school customers within that category. This is achieved by creating
awareness among families with K-12 students through integrated marketing campaigns that include offline and digital
media, as well as web assets. These campaigns are continuously optimized using data analytics and market research. In
addition, the marketing team assists in enhancing the onboarding experience of new students to online schooling.
Operations
The physical learning kits that accompany our online lessons are an essential component of many of our courses.
A student enrolling in one of our courses may receive multiple textbooks, art supplies, laboratory supplies
(e.g. microscopes and scales) and other reference materials designed to enhance the learning experience. We package these
books and materials into course-specific learning kits. Because each student’s curriculum is customized, the combination
of kits for each student must also be customized.
Over our 17 years of operation, we believe that we have gained significant experience in the sourcing, assembly
and delivery of school supplies and materials. We have developed strong relationships with partners allowing us to source
goods at favorable price, quality and service levels. Our fulfillment partner stores our inventory, assembles our learning
kits and ships the kits to students. We have invested in systems, including our Order Management System, to automatically
translate the curriculum selected by each enrolled student into an order to build the corresponding individualized learning
kit. As a result, we believe we have an end-to-end warehousing and fulfillment operation that will cost-effectively scale
as the business grows in scope and complexity.
For many of our virtual and blended public school customers, we attempt to reclaim any materials that could be
cost-effectively re-utilized in the next school year. These items, once returned to our fulfillment centers, are refurbished
and included in future learning kits. This reclamation process allows us to maintain lower materials costs. Our fulfillment
activities are highly seasonal, and are centered on the start of school in August or September. Accordingly, approximately
77% of our annual materials inventory is received between March and June and approximately 73% of shipments to
customers occur between June and September. In order to ensure that students in virtual and blended public schools have
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access to our OLS, we often provide students with a computer, where applicable or required and all necessary support. We
source computers and ship them to students when they enroll and reclaim the computers upon termination of their
enrollment or withdrawal from the school in which they are enrolled.
Technology
Our online learning systems, along with our back office support systems, are built on our proprietary Service
Oriented Architecture (“SOA”) to ensure high availability and redundancy. The flexibility and security enabled by our
SOA are the core principles of our systems’ foundation.
Service Oriented Architecture. All of our systems leverage our SOA that is built on top of proven Enterprise
Technologies. The SOA allows us to develop iterative solutions expeditiously to meet both present and future market
needs. Our high availability and scalability are also facilitated by this architecture. The SOA also enables integration with
third-party solutions in our platform with ease and efficiency.
Availability and Redundancy. Our SOA allows for primary and secondary equipment to be utilized at all network
and application tiers. Each application layer is load balanced across multiple servers, which, along with our network
management capabilities, allows for additional hardware to be inserted into our network providing us with optimal
scalability and availability as evidenced by our typically greater than 99% uptime over a growing user base. We regularly
backup critical data and store this backup data at an offsite location.
Cybersecurity. Our cybersecurity measures and policies include dividing application layers into multiple zones
controlled by firewall technology. Sensitive communications are encrypted between client and server and our
server-to-server accessibility is strictly controlled and monitored. We also have engaged an outside firm to assist with
traffic that may target our services and systems. We protect sensitive information and meet regulatory and contractual
commitments through policy and control governance that is validated on a semi-annual basis. We maintain a layered
security architecture and regularly retain third parties to test our networks, servers and applications for vulnerabilities. We
manage a business-centric information security program that is tailored for our constantly changing IT compliance and
information security threat landscape.
Physical Infrastructure. We utilize leading vendors to provide a foundation for our SOA. Our systems are housed
offsite in data centers that provide a robust, redundant network backbone, power and geographically separated disaster
recovery. Our second data center, geographically separated from our primary center, operates as a ready business
continuity site with secured, near-real time data replication from our primary data center. We routinely monitor our
physical infrastructure for security, availability and performance.
Other Information
Intellectual Property
We continue to invest in our intellectual property as we develop more courses for new grades and expand into
adjacent education markets, both in the United States and overseas. Through acquisitions, we have also acquired
curriculum, patents and trademarks that expand our portfolio of educational products and services. We continue to add
features and tools to our proprietary learning platform and support systems to assist teachers and students and improve
educational outcomes, such as adaptive learning technologies. These intellectual property assets are critical to our success
and we avail ourselves of the full protections provided under the patent, copyright, trademark and trade secrets laws. We
also routinely utilize confidentiality and licensing agreements with our employees, the virtual and blended public schools,
traditional schools, school districts and private schools that we serve, individual consumers, contractors and other
businesses and persons with which we have commercial relationships.
Our patent portfolio includes issued patents and pending applications directed towards various aspects of our
educational products and offerings. In particular, the first family of patent applications we filed in the U.S. and in foreign
countries was directed towards the first generation of our system and method of virtual schooling and includes two issued
patents. Further, two U.S. patents were issued for our systems and methods of online foreign language instruction. We
have been issued patents in the United States and in a foreign country for aspects of the second generation of our virtual
school application.
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We own and register the copyrights to the lessons contained in the courses that comprise our proprietary
curriculum. We also have obtained federal and state registrations for numerous trademarks that are related to our offerings
and we have applied to the U.S. Patent and Trademark Office to register certain new trademarks. As a result of the
acquisitions we have made, we also own U.S. and foreign trademarks and a portfolio of domain names.
We grant licenses to individuals to use our software and access our online learning systems. Similarly, schools
are granted licenses to utilize our online learning systems and to access TotalView and our other systems. These licenses
are intended to protect our ownership and the confidentiality of the embedded information and technology contained in
our software and systems. We also own many of the trademarks and service marks that we use as part of the student
recruitment and branding services we provide to schools. Those marks are licensed to the schools for use during the term
of the products and services agreements.
Our employees, contractors and other parties with access to our confidential information sign agreements that
prohibit the unauthorized use or disclosure of our proprietary rights, information and technology.
Employees
As of June 30, 2017, we had approximately 4,750 employees, including approximately 2,500 teachers.
Substantially all of these employees are located in the United States. In addition, there are approximately 2,200 teachers
who are employed by virtual or blended public schools that we manage under turn-key solution contracts with those schools
but are not direct employees of K12. None of our employees are represented by a labor union or covered by a collective
bargaining agreement; however, certain managed public schools we serve employ unionized teachers. We believe that our
employee relations are good.
Corporate Information
Our principal executive office is located at 2300 Corporate Park Drive, Herndon, Virginia 20171 and our
telephone number is (703) 483-7000. Our website address is www.K12.com.
Available Information
We make available, free of charge through our website, our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments to those reports filed pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), promptly after they are electronically filed with the
Securities and Exchange Commission (the “SEC”). Our earnings conference calls are web cast live via our website. In
addition to visiting our website, you may read and copy public reports we file with the SEC at the SEC’s Public Reference
Room at 100 F Street, N.E., Washington D.C. 20549, or at www.sec.gov. You may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. Information contained on our website is expressly not
incorporated by reference into this Annual Report.
REGULATION
We and the virtual and blended public schools that we serve are subject to regulation by and laws of each of the
states in which we operate. The state laws and regulations that impact our business are primarily those that authorize or
restrict our ability to operate these schools, as well as the applicable funding mechanisms for the schools. To the extent
these schools receive federal funds, such as through a grant program or financial support dedicated for the education of
low-income families, these schools also become subject to additional federal regulation.
State Laws Authorizing or Restricting Virtual and Blended Public Schools. The authority to operate a virtual or
blended public school is dependent on the laws and regulations of each state. Laws and regulations vary significantly from
one state to the next and are constantly evolving. In states that have implemented specific legislation to support virtual and
blended public schools, the schools are able to operate under these statutes. Other states provide for virtual and blended
public schools under existing public charter school legislation or provide that school districts and/or state education
agencies may authorize them. Some states do not currently have legislation that provides for virtual and blended public
schools or have requirements that effectively prohibit such schools and, as a result, may require new legislation before
virtual and blended public schools can open in the state.
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Obtaining new legislation in the remaining states where we do not have virtual and blended public schools can
be a protracted and uncertain process. When determining whether to pursue expansion into new states in which the laws
are ambiguous, we research the relevant legislation and policy climate and then make an assessment of the perceived
likelihood of success before deciding to commit resources. Specifically, we take into account numerous factors including,
but not limited to, the regulations of the state educational authorities, whether the overall policy environment is amenable
to school choice, whether current funding levels for virtual school and blended schools enrollments are adequate and
accessible, and the presence of non-profit and for-profit competitors in the state.
State Laws and Regulations Applicable to Virtual and Blended Public Schools. Virtual and blended public
schools that purchase our curriculum and management services are often governed and overseen by a non-profit or a local
or state education agency, such as an independent public charter school board, local school district or state education
authority. We generally receive funds for products and services rendered to operate virtual public schools or blended
schools under detailed service agreements with that governing authority. Virtual and blended public schools are typically
funded by state or local governments on a per student basis. A virtual or blended public school that fails to comply with
the state laws and regulations applicable to it may be required to repay these funds and could become ineligible for receipt
of future state funds.
To be eligible for state funding, some states require that virtual and blended public schools be organized as
not-for-profit charters exempt from taxation under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended
(the “Code”). The schools must then be organized exclusively for charitable educational purposes, and not for the benefit
of private, for-profit management companies. The board or governing authority of the not-for-profit virtual or blended
public school must retain ultimate accountability and control for the school’s operations to retain its tax-exempt status. It
may not delegate its responsibility and accountability for the school’s operations. Our service agreements with these virtual
and blended public schools are therefore structured to ensure the full independence of the not-for-profit board and preserve
its arms-length ability to exercise its fiduciary obligations to operate a virtual or blended public school.
Laws and regulations affect many aspects of operating a virtual or blended public school. They can dictate the
content and sequence of the curriculum, the methods for counting student enrollments for funding purposes, graduation
requirements, use of approved textbooks, the length of the school year and the school day, the accessibility of curriculum
and technology to students with disabilities, teacher to student ratios, specific credentialing of teachers and administrators,
the assessment of student performance and any accountability requirements. In addition, a virtual or blended public school
may be obligated to comply with states’ requirements to offer programs for specific populations, such as students at risk
of dropping out of school, advanced and talented students, non-English speaking students, pre-kindergarten students and
students with disabilities. Tutoring services and the use of technology may also be regulated. Other state laws and
regulations may affect the school’s compulsory attendance requirements, treatment of absences and make-up work, and
access by parents to student records and teaching and testing materials.
In addition to federal laws protecting the privacy of student education records, a growing number of states are
enacting laws to protect the privacy of student data and to guard against its misuse. As a general matter these laws are
designed to prevent third-party vendors to schools from using student data for non-educational purposes and ensuring the
security of personally identifiable information. In addition, virtual or blended public schools may have to comply with
state requirements that school campuses report various types of data as performance indicators of the success of the
program.
States have laws and regulations concerning certification, training, experience and continued professional
development of teachers and staff with which a virtual or blended public school may be required to comply. There are also
numerous laws pertaining to employee salaries and benefits, statewide teacher retirement systems, workers’ compensation,
unemployment benefits and matters related to employment agreements and procedures for termination of school
employees. A virtual or blended public school must also comply with requirements for performing criminal background
checks on school staff, reporting criminal activity by school staff and reporting suspected child abuse.
As with any public school, virtual and blended public schools must comply with state laws and regulations
applicable to governmental entities, such as open meetings or sunshine laws, which may require the board of trustees of a
virtual or blended public school to provide advance public notice of and hold its meetings open to the public unless an
exception in the law allows an executive session. Failure to comply with these requirements may lead to personal civil
and/or criminal penalties for board members or officers or the invalidation of actions taken during meetings that were not
properly noticed and open to the public. Virtual and blended public schools must also comply with public information or
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open records laws, which require them to make school records available for public inspection, review and copying unless
a specific exemption in the law applies. Additionally, laws pertaining to records privacy and retention and to standards for
maintenance of records apply to virtual and blended public schools.
Other types of regulation applicable to virtual and blended public schools include restrictions on the use of public
funds, the types of investments made with public funds, the collection of and use of student fees, accounting and financial
management, and marketing practices.
There remains uncertainty about the extent to which virtual and blended public schools we serve may be required
to comply with state laws and regulations applicable to traditional public schools because the concept of virtual and blended
public schools is still evolving, especially as technology advances. Although we receive state funds indirectly, according
to the terms of each service agreement with the local public school entity, our receipt of state funds subjects us to extensive
state regulation and scrutiny. States routinely conduct audits of these schools, to verify enrollment, attendance, information
technology security, fiscal accountability, special education services and other regulatory issues. While we may believe
that a virtual public school or blended school we serve is compliant with state law, an agency’s different interpretation of
law in a particular state, or the application of facts to such law, could result in findings of non-compliance, potentially
affecting future funding or repayment of past funding.
Regulations Restricting Virtual and Blended Public School Growth and Funding. As a public schooling
alternative, some state and regulatory authorities have elected to proceed cautiously with virtual and blended public schools
while providing opportunities for families seeking this alternative. Statutes, regulations or policies that control the growth
of virtual and blended public schools range from setting caps on statewide student enrollments, to prescribing the number
of schools in a state, to limiting the percentage of time students may receive instruction online. Funding regulations can
also have this effect.
Statutes or regulations that hinder our ability to serve certain jurisdictions include: restrictions on student
eligibility, such as mandating attendance at a traditional public school prior to enrolling in a virtual or blended public
school; caps on the total number of students in a virtual or blended public school; restrictions on grade levels served;
geographic limitations on enrollments; fixing the percentage of per pupil funding that must be paid to teachers;
state-specific curriculum requirements; and limits on the number of charters that can be granted in a state.
Funding regulations for virtual public schools and blended schools can take a variety of forms. These regulations
include: (i) attendance—some state daily attendance rules were designed for traditional classroom procedures, and
applying them to track daily attendance and truancy in an online setting can cause disputes to arise over interpretation and
funding; (ii) enrollment eligibility—some states place restrictions on the students seeking to enroll in virtual and blended
public schools, resulting in lower aggregate funding levels; (iii) teacher contact time—some states have regulations that
specify minimum levels of teacher-student face-to-face time; and (iv) completion of course work. These regulations can
create logistical challenges for statewide virtual and blended public schools, reduce funding and eliminate some of the
economic, academic and technological advantages of virtual learning.
Federal and State Grants. We have worked with some entities to secure public and grant funding that flows to
virtual and blended public schools that we serve. These grants are awarded to the not-for-profit entity that holds the charter
of the virtual or blended public school on a competitive basis in some instances and on an entitlement basis in other
instances. Grants awarded to public schools and programs—whether by a federal or state agency or nongovernmental
organization—often include reporting requirements, procedures and obligations.
Foreign Laws and Regulations. Schools we operate in other countries are subject to local laws and regulations.
We oversee and rely on the administrators in each school on a continuous basis and seek the advice of local legal and
regulatory experts as-needed.
Federal Laws Applicable to Virtual Public Schools and Blended Schools
Five primary federal laws are directly applicable to the day-to-day provision of educational services we provide
to virtual and blended public schools:
Every Student Succeeds Act (“ESSA”). The Every Student Succeeds Act, which took effect on August 2, 2016
and is authorized through 2020, represents a major change in federal education law by shifting education policy decision
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making back to the states and by providing most funding through block grants. Of particular significance to the Company
is that the states will now have the discretion to develop and design their own accountability systems. In addition, states
have been given the authority to adopt different types of annual accountability frameworks for school performance,
including proficiency and growth standards for all students and subgroups. The ESSA makes clear that the U.S.
Department of Education has a more limited role to impose federal mandates, direction or control over the authority given
to the states. Finally, there are provisions that provide significant grants to support the start-up of new charter schools with
priority to states that serve at-risk students through dropout prevention and recovery and other grants to support language
instruction for English language learners and immigrant students. Notwithstanding these federal limitations, states are still
required under ESSA to test students in reading or language arts and math annually in grades 3-8 and once in grades 10-
12, and in science once in each of the following grade spans: 3-5, 6-9 and 10-12. States have until September 2017 to
submit plans to the U.S. Department of Education to demonstrate compliance with ESSA.
Individuals with Disabilities Education Act (“IDEA”). The IDEA is implemented through regulations governing
every aspect of the special education of a child with one or more of the specific disabilities listed in the Act. The IDEA
created a responsibility on the part of a school to identify students who may qualify under the IDEA and to perform periodic
assessments to determine the students’ needs for services. A student who qualifies for services under the IDEA must have
in place an individual education plan, which must be updated at least annually, created by a team consisting of school
personnel, the student, and the parent. This plan must be implemented in a setting where the child with a disability is
educated with non-disabled peers to the maximum extent appropriate. The Act provides the student and parents with
numerous due process rights relating to the student’s program and education, including the right to seek mediation of
disputes and make complaints to the state education agency. The schools we manage are responsible for ensuring the
requirements of this Act are met. The virtual public schools and blended schools are required to comply with certain
requirements in the Act concerning teacher certification and training. We, the virtual public school or the blended school
could be required to provide additional staff, related services and supplemental aids and services at our own cost to comply
with the requirement to provide a free appropriate public education to each child covered under the IDEA. If we fail to
meet this requirement, we, the virtual public school or blended school could lose federal funding and could be liable for
compensatory educational services, reimbursement to the parent for educational service the parent provided and payment
of the parent’s attorney’s fees.
The Rehabilitation Act of 1973 and the Americans with Disabilities Act. A virtual public school or blended school
receiving federal funds is subject to Section 504 of the Rehabilitation Act of 1973 (“Section 504”) insofar as the regulations
implementing the Act govern the education of students with disabilities as well as personnel and parents. Section 504
prohibits discrimination against a person on the basis of disability in any program receiving federal financial assistance if
the person is otherwise qualified to participate in or receive benefit from the program. Students with disabilities not
specifically listed in the IDEA may be entitled to specialized instruction or related services pursuant to Section 504 if their
disability substantially limits a major life activity. Beginning in 2011, the Office of Civil Rights (“OCR”) of the United
States Department of Education interpreted both Section 504 and Title II of the Americans with Disabilities Act to apply
to elementary and secondary schools and to require that students with disabilities be afforded substantially equivalent ease
of use as students without disabilities. As applied to online public schools, such “web accessibility” requires technical
capabilities similar to those applied to procurements of information technology by the federal government under
Section 508 of the Rehabilitation Act of 1973 (“Section 508”) or standards adopted by the world-wide web consortium. If
a school fails to comply with the requirements and the procedural safeguards of Section 504, it may lose federal funds
even though these funds flow indirectly to the school through a local board. In the case of bad faith or intentional
wrongdoing, some courts have awarded monetary damages to prevailing parties in Section 504 lawsuits. In May 2016, the
U.S. Department of Justice issued a supplemental notice of proposed rulemaking soliciting additional public comments on
the appropriate standard for determining Web accessibility compliance under Section 508 and Title II of the ADA and
allowed two years for covered entities to come into full compliance after issuance of its final rules.
Family Educational Rights and Privacy Act. Virtual public schools and blended schools are also subject to the
Family Educational Rights and Privacy Act (“FERPA”) which protects the privacy of a student’s educational records and
generally prohibits a school from disclosing a student’s records to a third party without the parent’s prior consent. The law
also gives parents certain procedural rights with respect to their minor children’s education records. A school’s failure to
comply with this law may result in termination of its eligibility to receive federal education funds.
Communications Decency Act. The Communications Decency Act of 1996 (“CDA”) provides protection for
online service providers against legal action being taken against them because of certain actions of others. For example,
the CDA states that no provider or user of an interactive computer service shall be treated as the publisher or speaker of
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any data given by another provider of information content. Further, Section 230 of the CDA grants interactive online
services of all types, broad immunity from tort liability so long as the information at issue is provided or posted by a third
party. As part of our technology services offering, we provide an online school platform on which teachers and students
may communicate. We also conduct live classroom sessions using Internet-based collaboration software and we may offer
certain online community platforms for students and parents. While the CDA affords us with some protection from liability
associated with the interactive online services we offer, there are exceptions to the CDA that could result in successful
actions against us that give rise to financial liability.
Other Federal Laws. Other federal laws also apply to virtual managed schools, in some cases depending on the
demographics associated with a school. For example, Title VI of the Civil Rights Act of 1964 has been deemed to apply
to ELL Students, as further defined in the joint guidance issued by the U.S. Departments of Justice and Education in
January 2015. Title IX of the Education Amendments of 1972 also applies, which prohibits discrimination on the basis of
gender in education programs, activities and employment, applies to all schools that receive federal funds. There are also
other federal laws and regulations that affect other aspects of our business such as the identify theft rules adopted by the
Federal Trade Commission and for which we have adopted policies to ensure compliance. The Children’s Internet
Protection Act requires that school districts that receive certain types of federal funding must ensure that they have
technology which blocks or filters certain material from being accessed through the Internet. We have developed
procedures by which computers that we ship to students meet this requirement. If we fail to comply with these and other
federal laws, we could be determined ineligible to receive funds from federal programs or face penalties.
ITEM 1A. RISK FACTORS
Risks Related to Government Funding and Regulation of Public Education
The majority of our revenues come from Managed Public School Programs and depend on per pupil funding amounts
and payment formulas remaining near the levels existing at the time we execute service agreements with the managed
public schools we serve. If those funding levels or formulas are materially reduced or modified due to economic
conditions or political opposition, new restrictions adopted or payments delayed, our business, financial condition,
results of operations and cash flows could be adversely affected.
The public schools we contract with are financed with government funding from federal, state and local taxpayers.
Our business is primarily dependent upon those funds. Budget appropriations for education at all levels of government
are determined through a legislative process, which may be affected by negative views of for-profit education companies
or conditions in the economy at large, such as the recessionary climate in the United States which led to budgetary
pressures on state and local governments from 2008-13 and significant declines in public school funding. The results of
federal and state elections can also result in shifts in education policy and the amount of funding available for various
education programs.
The political process and potential variability in general economic conditions create a number of risks that could
have an adverse effect on our business including the following:
• Legislative proposals can and have resulted in budget or program cuts for public education, including the
virtual and blended public schools and school districts we serve, and therefore have reduced and could
potentially limit or eliminate the products and services those schools purchase from us, causing our revenues
to decline. From time to time, proposals are introduced in state legislatures that single out virtual and blended
public schools for disparate treatment.
• Economic conditions could reduce state education funding for all public schools, the effects of which could
be disproportionate for the managed public schools we serve. Our annual revenue growth is impacted by
changes in federal, state and district per pupil funding levels. For example, due to the budgetary problems
arising from the recession, many states reduced per pupil funding for public education affecting many of the
public schools we serve, including even abrupt mid-year cuts in certain states, which in some cases were
retroactively applied to the start of the school year as a result of formulaic adjustments. In addition, as we
enter into service agreements with multiple managed public schools in a single state, the aggregate impact
of funding reductions applicable to those schools could be material. We have management agreements with
14 schools in California, for example, and while each school is independent with its own governing authority
and no single school in California accounts for more than 10% of our revenue, regulatory actions that affect
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the level or timing of payments for all similarly situated schools in that state could adversely affect our
financial condition. The specific level of federal, state and local funding for the coming years is not yet
known for specific states and, when taken as a whole, it is reasonable to believe that a number of the public
schools we serve could experience lower per pupil enrollment funding, while others may increase funding,
as economic conditions or political conditions change.
• As a public company, we are required to file periodic financial and other disclosure reports with the SEC.
This information may be referenced in the legislative process, including budgetary considerations, related to
the funding of alternative public school options, including virtual public schools and blended schools. The
disclosure of this information by a for-profit education company, regardless of parent satisfaction and student
performance, may nonetheless be used by opponents of virtual and blended public schools to propose funding
reductions or restrictions.
• From time to time, government funding to schools and school districts is not provided when due, which
sometimes causes the affected schools to delay payments to us for our products and services. These payment
delays have occurred in the past and can deprive us of significant working capital until the matter is resolved,
which could hinder our ability to implement our growth strategies and conduct our business. For example,
in fiscal year 2016, the Commonwealth of Pennsylvania was unable to approve a budget, including funding
for public school education, by its deadline of June 30, 2015, and thus the Agora Cyber Charter School
received no funds and could not make timely contractual payments to the Company for our products and
services, even though we continued to incur the costs to keep the school operating. The Commonwealth’s
budget impasse was resolved in March of 2016, resulting in a settlement agreement executed in June 2016,
which provided for the payment of overdue invoices in installments.
Failure to comply with regulatory requirements, poor academic performance, or misconduct by us or operators of other
virtual public schools could tarnish the reputation of all the school operators in our industry, which could have a
negative impact on our business or lead to punitive legislation.
As a non-traditional form of public education, online public school operators will be subject to scrutiny, perhaps
even greater than that applied to traditional brick and mortar public schools or public charter schools. Not all virtual public
schools will have successful academic programs or operate efficiently, and new entrants may not perform well either. Such
underperformance could create the impression that virtual schooling is not an effective way to educate students, whether
or not our learning systems achieve satisfactory performance. Consistently poor academic performance, or the perception
of poor performance, could also lead to termination of an approved provider status in some jurisdictions, or to passage of
legislation empowering the state to restructure or close low-performing schools, such as legislation enacted in Tennessee
in 2013 with academic performance criteria applying only to virtual schools.
Beyond academic performance issues, some virtual school operators, including us, have been subject to
governmental investigations alleging, among other things, false attendance reporting, the misuse of public funds or failures
in regulatory compliance. These allegations have attracted significant adverse media coverage and have prompted
legislative hearings and regulatory responses. Investigations have focused on specific companies and individuals, or even
entire industries, such as the industry-wide investigation of for-profit virtual schools initiated by the Attorney General of
California in 2015. The precise impact of these governmental investigations on our current and future business is difficult
to discern, in part because of the number of states in which we operate, the range of purported malfeasance or performance
issues involved, or interest by state regulatory authorities. If these situations, or any additional alleged misconduct, cause
all virtual public schools to be viewed by the public and/or policymakers unfavorably, we may find it difficult to expand
into new states or renew our contracts to manage these schools.
Opponents of virtual and blended public charter schools have sought to challenge the establishment and expansion of
such schools through the judicial process. If these interests prevail, it could damage our ability to sustain or grow our
current business or expand in certain jurisdictions.
We have been, and will likely continue to be, subject to public policy lawsuits filed against virtual and blended
charter schools by those who do not share our belief in the value of this form of public education or the involvement of
for-profit education management companies. Whether or not we are a named party to these lawsuits, legal claims have
involved challenges to the constitutionality of authorizing statutes, methods of instructional delivery, funding provisions
and the respective roles of parents and teachers. Although stayed by court order in 2017, for example, the Louisiana
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Association of Educators, the state affiliate of a national teachers union, successfully challenged the constitutionality of
state funding to certain types of charter schools.
Should we fail to comply with the laws and regulations applicable to our Managed Public School Programs and
Institutional business, such failures could result in a loss of public funding and an obligation to repay funds previously
received, which could adversely affect our business, financial condition and results of operations.
Once authorized by law, virtual and blended public schools are generally subject to extensive regulation, as are
the school districts served by our Institutional business. These regulations cover specific program standards and financial
requirements including, but not limited to: (i) student eligibility standards; (ii) numeric and geographic limitations or caps
on enrollments; (iii) state-specific curriculum requirements and standards; (iv) restrictions on open-enrollment policies by
and among districts; (v) prescribed teacher to student ratios and teacher funding allocations from per pupil funding; and
(vi) teacher certification and reporting requirements. State and federal funding authorities conduct regular program and
financial audits of the public schools we serve to ensure compliance with applicable regulations. If a final determination
of non-compliance is made, additional funds may be withheld which could impair that school’s ability to pay us for services
in a timely manner, or the school could be required to repay funds received during the period of non-compliance.
Additionally, the indemnity provisions in our standard service agreements with virtual and blended public schools and
school districts may require us to return any contested funds on behalf of the school.
As an emerging form of public education with unique attributes, enabling legislation for online public schools is often
ambiguous and subject to discrepancies in interpretation by regulatory authorities, which may lead to disputes over our
ability to invoice and receive payments for services rendered.
Statutory language providing for virtual and blended public schools is sometimes interpreted by regulatory
authorities in ways that may vary from year to year making compliance subject to uncertainty. More issues normally arise
during our first few school years of doing business in a state because such state’s enabling legislation often does not
address specific issues, such as what constitutes proper documentation for enrollment eligibility or attendance reporting in
a virtual or blended school. From time to time there are changes to the regulators’ approach to determining the eligibility
of students for funding purposes. Another issue may be differing interpretations on what constitutes a student’s substantial
completion of a semester in a public school or daily attendance requirements. These regulatory uncertainties may lead to
disputes over our ability to invoice and receive payments for services rendered or to disputes with auditors of managed
public schools, which could adversely affect our business, financial condition and results of operations.
The operation of virtual and blended public charter schools depends on the maintenance of the authorizing charter
and compliance with applicable laws. If these charters are not renewed, our contracts with these schools would be
terminated.
In many cases, virtual and blended public schools operate under a charter that is granted by a state or local
authorizer to the charter holder, such as a community group or an established not-for-profit corporation, which typically
is required by state law to qualify for student funding. In fiscal year 2017, approximately 83% of our revenue was derived
from Managed Public School Programs, the majority of which were virtual and blended public schools operating under a
charter. The service agreement for these schools is with the charter holder or the charter board. Non-profit public charter
schools qualifying for exemption from federal taxation under Code Section 501(c)(3) as charitable organizations must also
operate on an arms-length basis in accordance with Internal Revenue Service rules and policies to maintain that status and
their funding eligibility. In addition, all state public charter school statutes require periodic reauthorization. If a virtual or
blended public school we manage fails to maintain its tax-exempt status and funding eligibility, fails to renew its charter,
or if its charter is revoked for non-performance or other reasons that may be due to actions of the independent charter
board completely outside of our control, our contract with that school would be terminated. For example, in fiscal year
2017, the State of New Jersey revoked the charter for the Newark Preparatory Charter School, and school boards in Florida
decided to close the Florida Cyber Charter Academy at Hillsborough and the Florida Cyber Charter Academy at Pinellas.
Actual or alleged misconduct by our senior management and directors or officials could make it more difficult for us
to enter into new contracts or renew existing contracts.
If we or any of our current or former directors, officers, key employees or officials are accused or found to be
guilty of serious crimes or civil violations, including the mismanagement or improper accounting of public funds, or
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violations of the federal securities laws, the schools we serve could be barred or discouraged from entering into or renewing
service agreements with us. As a result, our business and revenues would be adversely affected.
New laws or regulations not currently applicable to for-profit education companies in the K-12 sector could be enacted
and negatively impact our operations and financial results.
As the provision of online K-12 public education matures, policy or business practice issues may arise that could
lead to the enactment of new laws or regulations similar to, or in addition to, laws or regulations applicable to other
education industry sectors. For example, for-profit education companies that own and operate post-secondary colleges
depend in significant respect on student loans provided by the federal government to cover tuition expenses, and federal
laws prohibit incentive compensation for success in securing enrollments or financial aid to any person engaged in student
recruiting or admission activities. In contrast, while students in virtual or blended public K-12 schools are entitled to a
public education with no federal or state loans necessary for tuition, laws could be enacted that make for-profit
management companies serving such schools subject to similar recruitment or other restrictions.
Risks Related to Our Business and Our Industry
The schools we contract with and serve are governed by independent governing bodies that may shift their priorities or
change objectives in ways adverse to us, or react negatively to acquisitions or other transactions.
We contract with and provide a majority of our products and services to virtual and blended public schools
governed by independent boards or similar governing bodies. While we typically share a common objective at the outset
of our business relationship, over time our interests could diverge resulting in changes adverse to our business. For
example, in fiscal year 2014, the Agora Cyber Charter School expressed its intention to assume management of the school
beginning in the 2014-15 school year while continuing to purchase curriculum and other services from us. In late fiscal
year 2016, the Agora board determined to reinstate portions of the management contract it had outsourced to other vendors
the prior year. As these independent boards shift their priorities or change objectives, reduce or modify the scope of
services and products we provide, or terminate their relationship with us, our ability to generate revenues consistently over
time would be adversely affected.
Our contracts with the managed public schools we serve are subject to periodic renewal, and each year some of these
agreements are set to expire. If we are unable to renew several such contracts or if a single significant contract expires
during a given year, our business, financial condition, results of operations and cash flow could be adversely affected.
In fiscal year 2017, we had contracts to provide our full range of products and services to 77 schools throughout
the United States under our Managed Public School Programs. A portion of these Managed Public School contracts are
scheduled to expire in any given year and may not be renewed or may be renewed on terms much less favorable to us.
Most of these contracts include auto renewal provisions having significant advance notice deadlines. The advance notice
provisions are intended to allow sufficient time to engage in renewal negotiations before and during the final year of these
contracts. A renewed contract could involve a restructuring of our services and management arrangements that could lower
our revenue or even change how revenue and expenses are recognized. When the customer prefers the existing contract
terms to be extended, it can elect to disregard the advance notice provision and have the contract automatically renew. If
we are unable to renew contracts or if contract renewals have significantly less favorable terms or unbundle previously
provided services, our business, financial condition, results of operations and cash flow could be adversely affected.
If the schools we serve fail to enroll or reenroll a sufficient number of students, our business, financial condition and
results of operations will be adversely affected.
Our revenues are a direct function of how many students are enrolled in our Managed Public School Programs,
the number of school districts and students who subscribe to the programs offered in our Institutional business, and the
enrollments in our three international and private pay schools.
Because families have alternative choices both within and outside the public school system for educating their
children, it is typical during each school year that some students withdraw from schools using our online education services
and switch to their traditional local public schools, other charter school alternatives or private schools. While many of our
Managed Public School Programs also accept new student enrollment throughout the year where permitted, generally our
average student enrollment declines as the school year progresses such that we serve on average fewer students at the end
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of any given school year than at the beginning of the year. If our Managed Public School Programs experience higher
withdrawal rates during the year and/or enroll fewer new students as the year progresses than we have experienced in the
past, our revenues, result of operations and financial condition would be adversely affected.
Similarly, at the start of each new school year students who had remained enrolled through the end of the previous
year may have graduated from eighth or twelfth grade or have left our Managed Public School Programs for any number
of reasons. To the extent our Managed Public School Programs do not retain previously enrolled students from the prior
year, they must attract new students at the start of the year to sustain their average student enrollment year over year, as
well as to grow their enrollment each year, based upon enrollment objectives determined by the governing authority of
those schools. If the schools we serve in the aggregate are able only to sustain prior year enrollment levels, our revenues
may not grow from the prior year, absent improved revenue capture or the addition of new schools. More fundamentally,
if average student enrollment at the schools we serve declines from one year to the next, our revenues, results of operations
and financial condition will be adversely affected.
We also contract with virtual public schools and schools districts to provide marketing and enrollment services,
and we provide similar services directly to our international and private pay schools. However, many of our customers
with Non-managed Public School Programs are responsible for their own marketing and enrollment activities. Efforts on
our part to sustain or increase enrollments in the face of higher student withdrawals or fewer returning students at the start
of a school year may lead to higher costs for us, and may adversely affect our operating margin. If we or our Non-managed
Program partners are unsuccessful in marketing plans or enrollment processes for the schools, the average student
enrollment at the schools may not grow or could even decline, and adversely affect our revenues, results of operations and
financial condition.
Because the independent governing authorities of our customers may shift priorities or incur new obligations which
have financial consequences, we may be exposed to the risk of loss resulting from the nonpayment or nonperformance
by our customers and our financial condition, results of operations and cash flows could suffer.
If our customers were to cause or be subjected to situations that lead to a weakened financial condition, dispute
our invoices, withhold payments, or file for bankruptcy, we could experience difficulty and prolonged delays in collecting
receivables, if at all. Any nonpayment or nonperformance by our customers could adversely affect our business, financial
condition, results of operations and cash flows. For example, in fiscal year 2017, as the Agora Cyber Charter School
continued to operate as a self-managed charter school, it delayed its payments to us and our accounts receivable from the
school have grown significantly.
As we continue to refine our marketing efforts, and support the enrollment activities for our Managed Public School
Programs, changes in our marketing efforts and enrollment activities could lead to decline in overall enrollment at the
schools we serve.
As parents evaluate public school choices for their children, we are segmenting our marketing efforts to better
attract students who are most likely to benefit from and succeed in virtual education programs and who are likely to remain
enrolled with a virtual school over several years. Our research leads us to believe that students with parents who are active
and regularly engaged in their education are more likely to be successful in a virtual school, although there is no formula
that can predict the success of any particular student. Our more segmented marketing efforts, therefore, may not be wholly
successful, and could lead to an overall decline in enrollment for our Managed Public School Programs, thus adversely
affecting our revenue and results of operations.
The student demographics of the schools we serve can lead to higher costs and affect our ability to sustain or grow our
operating income.
The schools we serve are publicly funded and are generally obligated to accept all students meeting state or
district criteria for enrollment. Because an online education environment may offer a better educational opportunity for
students falling behind grade level, our Managed Public School Programs have experienced in recent years a higher
academically at-risk student population, requiring supplemental student and family support services and closer one-on-one
involvement by teachers and school personnel, leading to higher costs to us in providing full management and curriculum
services to the schools. We consider students academically at-risk if they were not proficient on the previous year’s state
assessment, are credit-deficient, have previously dropped out, have failed courses, or score lower than average on
diagnostic or benchmark assessments. Some states have additional or different indicators to determine students who are at
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risk. These factors are used by the state to identify at-risk students in several states and have been found through research
to impact future student performance. Recent studies have documented that full-time online charter school students are
eligible for free/reduced lunch at higher rates than traditional charter schools and students in online charter schools scored
lower on state assessments prior to enrolling in the online school. The schools we serve also enroll a significant percentage
of special needs students with learning and/or physical disabilities, which also add to the total costs incurred by the schools.
Education of high school students is generally more costly than K-8 as more teachers with subject matter expertise
(e.g. chemistry, calculus) must be hired to support an expansive curriculum, electives, and counseling services. As the
relative percentage of high school students increases as part of the total average enrollment in our Managed Public School
Programs, our costs are likely to increase.
As our cost structure evolves due to the demographics, educational profile and mix of the students enrolled in our
Managed Public School Programs, our profit margins may decline, and we may have increasing difficulty in sustaining or
growing our operating income commensurate with our revenues.
If student performance falls, state accountability standards are not achieved, teachers or administrators tamper with
state test scoring, or parent and student satisfaction declines, a significant number of students may not remain enrolled
in a virtual or blended public school that we serve, or charters may not be renewed or enrollment caps could be put in
place, or enrollment practices could be limited and our business, financial condition and results of operations will be
adversely affected.
The success of our business depends in part on the choice of a family to have their child begin or continue his or
her education in a virtual or blended public school that we serve. This decision is based on many factors, including student
performance and parent and student satisfaction. Students may perform significantly below state averages or the virtual or
blended public school may fail to meet state accountability standards. Like many traditional brick and mortar public
schools, not all of the managed public schools we serve meet the requirements of their applicable accountability
frameworks, as large numbers of new enrollments from students underperforming in traditional schools can decrease
overall results or the underperformance of any one subgroup can lead to the entire school failing to meet accountability
expectations and potentially lead to the school’s closure. For example, in Tennessee, the Commissioner of Education has
statutory authority to close a virtual school if an accountability trigger is met. In addition, although serving academically
at-risk students is an important aspect of our obligation to educate any child regardless of circumstance, the performance
of these students can adversely affect a school’s standing under applicable accountability standards. We expect that, as our
enrollments increase and the portion of students that have not used our learning systems for multiple years increases, the
average performance of all students using our learning systems may decrease, even if the individual performance of other
students improves over time. This effect may also be exacerbated if students enrolled in schools that we provide services
to or acquire are predominately below state proficiency standards or experience low graduation rates. Moreover, under
ESSA, state authorities may change their accountability frameworks in ways that negatively impact the schools we serve.
Students in the managed public schools we serve are required to periodically complete standardized state testing
and the results of this testing may have an impact on school funding. More recently, the significant growth of testing
undertaken at the state level has led some parents to opt out of state testing, thereby resulting in an incomplete and
potentially inaccurate assessment of school and student performance. To avoid the consequences of failing to meet
applicable required proficiency, growth or accountability standards, teachers or school administrators may engage in
improperly altering student test scores, especially if teacher performance and compensation are evaluated on these results.
Finally, parent and student satisfaction may decline as not all parents and students are able to devote the substantial time
and effort necessary to complete our curriculum. A student’s satisfaction may also suffer if his or her relationship with the
virtual or blended public school teacher does not meet expectations. If student performance or satisfaction declines,
students may decide not to remain enrolled in a virtual or blended public school that we serve and our business, financial
condition and results of operations could be adversely affected.
The changing nature of state curriculum standards and new state assessments could result in a decline in state test
scores that might adversely affect our enrollment and financial condition, and cause academic performance to decline.
A number of states adopted the CCSS in math and English Language Arts, but are not choosing to use the
assessments developed by two national testing consortia that align with the CCSS. Instead, these states are electing to use
existing or new state-developed or commercially-available assessments to evaluate student performance. As a result,
teachers are teaching to new standards and students are tested with new assessments which may make initial test results
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lower than in previous years and require additional investments. As the managed public schools we serve undertake these
transitions, and given the growing number of at-risk students enrolling in these schools, academic performance could
temporarily or permanently suffer such that these schools may become a less attractive alternative, enrollments could
decline, and our financial condition and results of operations could be negatively impacted.
Mergers, acquisitions and joint ventures present many risks, and we may not realize the financial and strategic goals
that formed the basis for the transaction.
When strategic opportunities arise to expand our business, we may acquire or invest in other companies using
cash, stock, debt, asset contributions or any combination thereof. We may face risks in connection with these or other
future transactions, including the possibility that we may not realize the anticipated cost and revenue synergies or further
the strategic purpose of any acquisition if our forecasts do not materialize. The pursuit of acquisitions may divert the
resources that could otherwise be used to support and grow our existing lines of business. Acquisitions may also create
multiple and overlapping product lines that are offered, priced and supported differently, which could cause customer
confusion and delays in service. Customers may decline to renew their contracts or the contracts of acquired businesses
might not allow us to recognize revenues on the same basis. These transactions may also divert our management’s attention
and our ongoing business may be disrupted by acquisition, transition or integration activities. In addition, we may have
difficulty separating, transitioning and integrating an acquired company’s systems and the associated costs in doing so
may be higher than we anticipate.
There may also be other adverse effects on our business, operating results or financial condition associated with
the expansion of our business through acquisitions. We may fail to identify or assess the magnitude of certain liabilities,
shortcomings or other circumstances prior to acquiring a company or technology, which could result in unexpected
operating expenses, unexpected accounting treatment, unexpected increases in taxes due or a loss of anticipated tax
benefits. Our use of cash to pay for acquisitions may limit other potential uses of our cash, including investment in other
areas of our business, stock repurchases, dividend payments and retirement of outstanding indebtedness. If we issue a
significant amount of equity for future acquisitions, existing stockholders may be diluted and earnings per share may
decrease. We may pay more than the acquired company or assets are ultimately worth and we may have underestimated
our costs in continuing the support and development of an acquired company’s products. Our operating results may be
adversely impacted by liabilities resulting from a stock or asset acquisition, which may be costly, disruptive to our business,
or lead to litigation.
We may be unable to obtain required approvals from governmental authorities on a timely basis, if it all, which
could, among other things, delay or prevent us from completing a transaction, otherwise restrict our ability to realize the
expected financial or strategic goals of an acquisition or have other adverse effects on our current business and operations.
We may face contingencies related to intellectual property, financial disclosures, and accounting practices or internal
controls. Finally, we may not be able to retain key executives of an acquired company.
The occurrence of any of these risks could have a material adverse effect on our business, results of operations,
financial condition or cash flows, particularly in the case of a larger acquisition or several concurrent acquisitions.
Our business could be negatively affected as a result of actions by activist stockholders, and such activism could impact
the trading value of our securities.
Responding to actions by activist stockholders can be costly and time-consuming, disrupting our operations and
diverting the attention of management and our employees. If activist stockholders were to emerge, their activities could
interfere with our ability to execute our strategic plan. In addition, a proxy contest for the election of directors at our annual
meeting would require us to incur significant legal fees and proxy solicitation expenses and require significant time and
attention of management and our Board of Directors. Any perceived uncertainties as to our future direction also could
affect the market price and volatility of our securities.
If market demand for online options in public schooling does not increase or continue or if additional states do not
authorize or adequately fund virtual or blended public schools, our business, financial condition and results of
operations could be adversely affected.
Over the previous five fiscal years, we entered into service agreements for managed virtual public schools and
blended schools in many new states and served 77 schools in fiscal year 2017 under our Managed Public School Programs
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throughout the United States. Without adding additional states, our Managed Public School Program revenues may become
increasingly dependent on serving more virtual schools in existing states. We also may not be able to fill available
enrollment slots as forecasted. If the market demand for virtual and blended public schools does not increase or declines,
if the remaining states are hesitant to authorize virtual or blended public schools, if enrollment caps are not removed or
raised, or if the funding of such schools is inadequate, our opportunities for growth and our ability to sustain our revenues,
results of operations and financial condition would be adversely affected.
Increasing competition in the education industry sectors that we serve could lead to pricing pressures, reduced
operating margins, loss of market share, departure of key employees and increased capital expenditures.
As a general matter, we face varying degrees of competition from a variety of education providers because our
learning systems integrate all the elements of the education development and delivery process, including curriculum
development, textbook publishing, teacher training and support, lesson planning, testing and assessment and school
performance and compliance management. In both our Managed Public School Programs and Institutional businesses, we
compete with companies that provide online curriculum and support services. We also compete with public school districts
and state departments of education that offer K-12 online programs of their own or in partnership with other online
curriculum vendors. We anticipate intensifying competition from such competitors and by new entrants. Our competitors
may adopt superior curriculum delivery, school support and marketing approaches, with different pricing and service
packages that may have greater appeal than our offerings. For example, price competition in the Institutional business is
vigorous. In addition, some of our Managed Public School Programs could seek to transition to a self-administered school
by inviting competitive alternatives to portions of the products and services now provided entirely by us under our
integrated fully managed service agreements. If we are unable to successfully compete for new business, win and renew
contracts, including fully managed public school contracts, or students fail to realize sufficient gains in academic
performance, our revenues, opportunities for growth and operating margins may decline. Price competition from our
current and future competitors could also result in reduced revenues, reduced margins or the failure of our product and
service offerings to achieve or maintain more widespread market acceptance.
We may also face competition from publishers of traditional educational materials that are substantially larger
than we are and have significantly greater financial, technical and marketing resources, and may enter the field through
acquisitions and mergers. Many of these traditional publishers have developed their own online curriculum products and
teaching materials that compete directly with our Institutional business products. As a result, they may be able to devote
more resources and move quickly to develop products and services that are superior to our platform and technologies. We
may not have the resources necessary to acquire or compete with technologies being developed by our competitors, which
may render our online delivery format less competitive or obsolete. These new and well-funded entrants may also seek to
attract our key executives as employees based on their acquired expertise in virtual education where such specialized skills
are not widely available.
Our future success will depend in large part on our ability to maintain a competitive position with our curriculum
and our technology, as well as our ability to increase capital expenditures to sustain the competitive position of our product
and retain our talent base. We cannot assure that we will have the financial resources, technical expertise, marketing,
distribution or support capabilities to compete effectively.
Regulatory frameworks on the accessibility of technology and curriculum are continually evolving due to legislative
and administrative developments and the rapid evolution of technology, which could result in increased product
development costs and compliance risks.
Our online curriculum is made available to students through websites, computers and other display devices
connected to the Internet. The website platforms and online curriculum include a combination of software applications
that include graphics, pictures, videos, animations, sounds and interactive content that may present challenges to
individuals with disabilities. A number of states and federal authorities have considered or are considering how web-based
information should be made accessible to persons with such disabilities. To the extent they enact or interpret laws and
regulations to require greater accessibility than we currently provide, we may have to modify our offerings to satisfy those
requirements. In May 2016, the U.S. Department of Justice issued a supplemental notice of proposed rulemaking
soliciting additional public comments on the appropriate standard for determining Web accessibility compliance under
Title II of the Americans With Disabilities Act (“ADA”) and extended by two years the deadline for covered entities to
come into full compliance after issuance of its final rules, which it anticipated adopting in 2018. In addition, Section 504
of the Rehabilitation Act of 1973 is designed to ensure that students with disabilities have an equal opportunity to access
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each school’s website and online learning environment. To the extent that we enter into federal government contracts,
different standards of compliance could be imposed on us under Section 508 of the Rehabilitation Act, or by states who
apply these federal standards under Section 508 to education providers, which standards also recently changed under the
Section 508 refresh process. Beyond the significant product development costs associated with these evolving regulations,
a failure to meet such requirements could also result in loss or termination of material contracts or in potential legal
liability.
Our Managed Public School Programs business revenues are based in part on our estimate of the total funds each
school will receive in a particular school year and our estimate of the full year expenses to be incurred by each school.
As a result, differences between our quarterly estimates and the actual funds received and expenses incurred could
have an adverse impact on our results of operations and cash flows.
We recognize revenues ratably from certain of our fees charged to Managed Public School Programs over the
course of our fiscal year. To determine the pro rata amount of revenues to recognize in a fiscal quarter, we estimate the
total funds each school will receive in a particular school year. Additionally, we take responsibility for any operating
deficits incurred at most of the Managed Public School Programs we serve. Because this may impair our ability to collect
the full amount invoiced in a period and therefore collection cannot reasonably be assured, we reduce revenues by the
estimated pro rata amount of the school’s operating loss. We review our estimates of total funds and operating expenses
periodically, and we revise as necessary, amortizing any adjustments over the remaining portion of the fiscal year. Actual
school funding received and school operating expenses incurred may vary from our estimates or revisions and could
adversely impact our revenues, results of operations and cash flows.
Our business is subject to seasonal fluctuations, which may cause our operating results to fluctuate from
quarter-to-quarter and adversely impact our working capital and liquidity throughout the year.
Our revenues and operating results normally fluctuate as a result of seasonal variations in our business, principally
due to the number of months in a fiscal quarter that our school customers are fully operational and serving students. In the
typical academic year, our first and fourth fiscal quarters have fewer than three full months of operations, whereas our
second and third fiscal quarters will have three complete months of operations. We ship learning kits to students in the
beginning of the school year, our first fiscal quarter, generally resulting in higher learning kit revenues and margins in the
first fiscal quarter relative to the other quarters. In aggregate, the seasonality of our revenues has generally produced higher
revenues in the first quarter of our fiscal year.
Our operating expenses are also seasonal. Instructional costs and services increase in the first fiscal quarter
primarily due to the costs incurred to ship learning kits at the beginning of the school year. These instructional costs may
increase significantly quarter-to-quarter as school operating expenses increase. The majority of our selling and marketing
expenses are incurred in the first and fourth fiscal quarters, as our primary enrollment season is April through September.
We expect quarterly fluctuations in our revenues and operating results to continue. These fluctuations could result
in volatility and adversely affect our cash flow. As our business grows, these seasonal fluctuations may become more
pronounced. As a result, we believe that sequential quarterly comparisons of our financial results may not provide an
accurate assessment of our financial position.
Risks Related to Our Operations
We plan to continue to create new products, expand distribution channels and pilot innovative educational programs
to enhance academic performance. If we are unable to effectively manage these initiatives or they fail to gain
acceptance, our business, financial condition, results of operations and cash flows would be adversely affected.
As we create and acquire new products, expand our existing customer base and pilot new educational programs,
we expect to face challenges distinct from those we currently encounter, including:
•
the rollout of our next generation curriculum and transition to third party educational platforms could create
certain challenges, including customer dissatisfaction, early withdrawals and declines in re-registrations, and
potentially harm our reputation; the acquisition or opening of additional managed public schools in states
where we already have a contract with such schools can potentially create customer confusion, complicating
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the school selection process for prospective parents, and present marketing differentiation challenges
depending on the facts and circumstances in that state;
our development of public blended schools has produced different operational challenges than those we
previously encountered. In addition to the online component, these schools sometimes require us to lease
facilities for classrooms, staff classrooms with teachers, provide meals and kitchen facilities, adhere to local
safety and fire codes, purchase additional insurance and fulfill many other responsibilities;
operating in international markets may require us to conduct our business differently than we do in the United
States or in existing countries. Additionally, we may have difficulty training and retaining qualified teachers
or generating sufficient demand for our products and services in international markets. International
opportunities will also present us with different legal, operational, tax and currency challenges;
the use of our curriculum in classrooms will produce challenges with respect to adapting our curriculum for
effective use in a traditional classroom setting;
our online private school business is dependent on a tuition-based financial model and may not be able to
enroll a sufficient number of students over time to achieve long-run profitability or deliver a high level of
customer satisfaction;
our participation in summer foreign language instruction camps through MIL could generate new legal
liabilities and financial consequences associated with our responsibility for students housed on leased college
campuses on a 24-hour basis over the duration of the camp; and
our continual efforts to innovate and pilot new programs to enhance student learning may not always succeed
or may encounter unanticipated opposition.
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Our failure to manage these business expansion programs, or any new business expansion program or new
distribution channel we pursue, may have an adverse effect on our business, financial condition, results of operations and
cash flows.
High quality teachers are critical to the success of our learning systems. If we are not able to continue to recruit, train
and retain quality certified teachers, our curriculum might not be effectively delivered to students, compromising their
academic performance and our reputation. As a result, our brand, business and operating results may be adversely
affected.
High quality teachers are critical to maintaining the value of our learning systems and assisting students with their
daily lessons. In addition, teachers in the public schools we manage or who provide instruction in connection with the
online programs we offer to school districts, must be state certified (with limited exceptions or temporary waiver provisions
in various states), and we must implement effective internal controls in each jurisdiction to ensure valid teacher
certifications, as well as the proper matching of certifications with student grade levels and subjects to be taught. Teachers
must also possess strong interpersonal communications skills to be able to effectively instruct students in a virtual school
setting, and the technical skills to use our technology-based learning systems. There is a limited pool of teachers with these
specialized attributes and the managed public schools and school districts we serve must provide competitive benefits
packages to attract and retain such qualified teachers.
The teachers in many managed public schools we serve are not our employees and the ultimate authority relating
to those teachers resides with an independent not-for-profit governing body, which oversees the schools. However, under
many of our service agreements with virtual and blended public schools, we have responsibility to recruit, train and manage
these teachers. The teacher recruitment and student assignment procedures and processes for our Managed Public School
Programs must also comply with individual state certification and reporting requirements. We must also provide
continuous training to virtual and blended public school teachers so they can stay abreast of changes in student demands,
academic standards and other key trends necessary to teach online effectively, including measures of effectiveness. We
may not be able to recruit, train and retain enough qualified teachers to keep pace with school demand while maintaining
consistent teaching quality in the various managed public schools we serve. Shortages of qualified teachers, failures to
ensure proper teacher certifications in each state, or decreases in the quality of our instruction, whether actual or perceived,
could have an adverse effect on our Managed Public School Programs and Institutional businesses.
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School teachers are subject to union organizing campaigns, and if the teachers employed by us or at the managed
public schools we serve join a union, collective bargaining agreements negotiated with union representatives could
result in higher operating expenses and the loss of management flexibility and innovation for which charter schools
were created.
If the teachers at any one of the public schools we serve were to unionize, we or the school authority would
become subject to a collective bargaining agreement with union representatives. A collective bargaining agreement could
impact teacher salaries, benefits, work rules, restrictions on the teaching work-day and the time devoted to online
instruction delivery or communications with students, teacher tenure, and limitations on our flexibility to reassign or
remove teachers for inadequate performance. This could result in higher expenses for school operations and could impede
the sustainability of or any growth in enrollment at the school due to the loss of management flexibility and innovation.
This could result in higher costs to us in providing management and curriculum services to the school, and adversely affect
our operating margins, overall revenues and academic performance results. For example, in June 2016, the California
Teachers Association was recognized by the California Public Employee Relations Board to be the exclusive representative
for all of the teachers employed by the California Virtual Academies to negotiate a collective bargaining agreement with
the governing authorities of those schools.
We rely on third-party service providers to host some of our solutions and any interruptions or delays in services from
these third parties could impair the delivery of our products and harm our business.
We currently outsource some of our hosting services to third parties. We do not control the operation of any third
party facilities. These facilities are vulnerable to damage or interruption from natural disasters, fires, power loss,
telecommunications failures and similar events. They are also subject to break-ins, computer viruses, sabotage, intentional
acts of vandalism and other misconduct. The occurrence of any of these disasters or other unanticipated problems could
result in lengthy interruptions in our service. Furthermore, the availability of our proprietary and third-party LMSs could
be interrupted by a number of additional factors, including our customers’ inability to access the Internet, the failure of
our network or software systems due to human or other error, security breaches or ability of the infrastructure to handle
spikes in customer usage. Interruptions in our service may reduce our revenue, cause us to issue credits or pay penalties,
cause customers to terminate their subscriptions and adversely affect our renewal rates and our ability to attract new
customers. Our business will also be harmed if our customers and potential customers believe our service is unreliable.
We operate a complex company-wide enterprise resource planning (“ERP”) system and if it were to experience
significant operating problems, it could adversely affect our business and results of operations.
We operate a complex company-wide, integrated ERP system to handle various business, operating and financial
processes which handles a variety of important functions, such as order entry, invoicing, accounts receivable, accounts
payable, financial consolidation and internal and external financial and management reporting matters. If the ERP system
experiences significant problems, it could result in operational issues including delayed billing and accounting errors and
other operational issues which could adversely affect our business and results of operations. System delays or
malfunctioning could also disrupt our ability to timely and accurately process and report results of our operations, financial
position and cash flows, which could impact our ability to timely complete important business processes.
The continued development of our product and service brands is important to our business. If we are not able to
maintain and enhance these brands, our business and operating results may suffer.
Enhancing brand awareness is critical to attracting and retaining students, and for serving additional virtual and
blended public schools, school districts and online private schools and we intend to spend significant resources to
accomplish that objective. These efforts include sales and marketing directed to targeted locations as well as the national
marketplace, discrete student populations, the educational community at large, key policy groups, image-makers and the
media. As we continue to seek to increase enrollments and extend our geographic reach and product and service offerings,
maintaining quality and consistency across all our services and products may become more difficult to achieve, and any
significant and well-publicized failure to maintain this quality and consistency will have a detrimental effect on our brands.
We cannot provide assurances that our new sales and marketing efforts will be successful in further promoting our brands
in a competitive and cost-effective manner. If we are unable to further enhance our brand recognition and increase
awareness of our products and services, or if we incur excessive sales and marketing expenses, our business and results of
operations could be adversely affected.
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Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products,
services and brand.
Our patent, trademarks, trade secrets, copyrights, domain names and other intellectual property rights are
important assets. For example, we have been granted five patents relating to the hardware and network infrastructure of
our OLS, including the system components for creating and administering assessment tests and our lesson progress tracker
and two patents related to foreign language instruction. Additionally, we are the copyright owner of the courses comprising
our proprietary curriculum.
Various events outside of our control pose a threat to our intellectual property rights. For instance, effective
intellectual property protection may not be available in every country in which our products and services are distributed
or made available through the Internet. Also, the efforts we have taken to protect our proprietary rights may not be
sufficient or effective. Any significant impairment of our intellectual property rights could harm our business or our ability
to compete. Also, protecting our intellectual property rights is costly and time consuming. Any unauthorized use of our
intellectual property could make it more expensive to do business and harm our operating results.
It is possible that we may not be able to sufficiently protect our innovations. In addition, given the costs of
obtaining patent protection, we may choose not to protect certain innovations that later turn out to be important. Further,
there is always the possibility that the scope of the protection gained will be insufficient or that an issued patent be deemed
invalid or unenforceable.
We also seek to maintain certain intellectual property as trade secrets. This secrecy could be compromised by
outside parties, whether through breach of our network security or otherwise, or by our employees or former employees,
intentionally or accidentally, which would cause us to lose the competitive advantage resulting from these trade secrets.
Third parties may acquire domain names that are substantially similar to our domain names leading to a decrease in the
value of our domain names and trademarks and other proprietary rights.
Lawsuits against us alleging infringement of the intellectual property rights of others and such actions would be costly
to defend, could require us to pay damages or royalty payments and could limit our ability or increase our costs to use
certain technologies in the future.
Companies in the Internet, software, technology, education, curriculum and media industries own large numbers
of patents, copyrights, trademarks and trade secrets and frequently enter into litigation based on allegations of infringement
or other violations of intellectual property rights. Regardless of the merits, intellectual property claims are time-consuming
and expensive to litigate or settle. For example, a non-practicing entity sued us alleging that our proprietary learning
systems infringed three of its patents although its lawsuit was ultimately dismissed on the merits in 2014. In addition, to
the extent claims against us are successful, we may have to pay substantial monetary damages or discontinue certain
products, services or practices that are found to be in violation of another party’s rights. We also may have to seek a license
and make royalty payments to continue offering our products and services or following such practices, which may
significantly increase our operating expenses.
We may be subject to legal liability resulting from the actions of third parties, including independent contractors,
business partners, or teachers, which could cause us to incur substantial costs and damage our reputation.
We may be subject, directly or indirectly, to legal claims associated with the actions of or filed by our independent
contractors, business partners, or teachers. In the event of accidents or injuries or other harm to students, we could face
claims alleging that we were negligent, provided inadequate supervision or were otherwise liable for their injuries and our
insurance may not cover the expenses of litigation or settlement amounts. Additionally, we could face claims alleging that
our independent curriculum contractors or teachers infringed the intellectual property rights of third parties. A liability
claim against us or any of our independent contractors, business partners, or teachers could adversely affect our reputation,
enrollment and revenues. Even if unsuccessful, such a claim could create unfavorable publicity, cause us to incur
substantial expenses and divert the time and attention of management.
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We operate in markets that are dependent on Information Technology (IT) systems and technological change. Failure
to maintain and support customer facing services, systems, and platforms, including addressing quality issues and
execution on time of new products and enhancements, could negatively impact our revenues and reputation.
We use complex IT systems and products to support our businesses activities, including customer-facing systems,
back-office processing and infrastructure. We face several technological risks associated with online product service
delivery, information technology security (including virus and cyber-attacks), e-commerce and enterprise resource
planning system implementation and upgrades. From time to time we have experienced verifiable attacks on our system
by unauthorized parties, and our plans and procedures to reduce such risks may not be successful. Thus, our businesses
could be adversely affected if our systems and infrastructure experience a significant failure or interruption in the event of
future attacks on our system by unauthorized parties.
Failure to prevent or detect a malicious cyber-attack on our systems and databases could result in a misappropriation
of confidential information or access to highly sensitive information.
Cyber-attacks are becoming more sophisticated and pervasive. Across our business we hold large volumes of
personally identifiable information including that of employees, customers, students and parents and legal guardians.
Individuals may try to gain unauthorized access to our data in order to misappropriate such information for potentially
fraudulent purposes, and our security measures may fail to prevent such authorized access. A significant breach could
result in a devastating impact on our reputation, financial condition or student experience. In addition, if we were unable
to prove that our systems are properly designed to detect an intrusion, we could be subject to severe penalties and loss of
existing or future business.
We rely on the Internet to enroll students and to deliver our products and services to children, which exposes us to a
growing number of legal risks and increasing regulation.
We collect information regarding students during the online enrollment process and a significant amount of our
curriculum content is delivered over the Internet. As a result, specific federal and state laws that could have an impact on
our business include the following:
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the Children’s Online Privacy Protection Act, as implemented by regulations of the Federal Trade
Commission (revised July 2013), imposes restrictions on the ability of online companies to collect and use
personal information from children under the age of 13;
the FERPA, which imposes parental or student consent requirements for specified disclosures of student
information to third parties, and emerging state student data privacy laws;
the CDA, which provides website operators immunity from most claims arising from the publication of
third-party content;
numerous state cyberbullying laws which require schools to adopt policies on harassment through the Internet
or other electronic communications;
rapidly emerging state student data privacy laws which require schools to adopt privacy policies are
applicable to virtual schools and can significantly vary from one state to another; and
federal and state laws that govern schools’ obligations to ELL students and students with disabilities.
In addition, the laws applicable to the Internet are still developing. These laws impact pricing, advertising,
taxation, consumer protection, quality of products and services, and are in a state of change. New or amended laws may
also be enacted, which could increase the costs of regulatory compliance for us or force us to change our business practices.
As a result, we may be exposed to substantial liability, including significant expenses necessary to comply with such laws
and regulations and indemnification of schools we operate for liabilities resulting from a school’s failure to comply with
such laws and regulations.
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Failure to comply with data privacy regulations could result in reputational damage to our brands and adversely affect
our business, financial condition and results of operations.
Any perceived or actual unauthorized disclosure of personally identifiable information, whether through breach
of our network by an unauthorized party, employee theft, misuse or error or otherwise, could harm our reputation, impair
our ability to attract and retain our customers, or subject us to claims or litigation arising from damages suffered by
individuals. Failure to adequately protect personally identifiable information could potentially lead to penalties, significant
remediation costs, reputational damage, the cancellation of existing contracts and difficulty in competing for future
business. In addition, we could incur significant costs in complying with relevant laws and regulations regarding the
unauthorized disclosure of personal information, which may be affected by any changes to data privacy legislation at both
the federal and state levels.
We utilize a single logistics vendor for the management, receiving, assembly and shipping of all of our learning kits
and printed educational materials. In addition, we utilize the same vendor at a second location for the reclamation and
redeployment of our student computers. This partnership depends upon execution on the part of us and the vendor.
Any material failure to execute properly for any reason, including damage or disruption to any of the vendor’s facilities
would have an adverse effect on our business, financial condition and results of operations.
Substantially all of the inventory for our learning kits and printed materials is located in one warehouse facility,
which is operated by a third-party logistics vendor that handles receipt, assembly and shipping of all physical learning
materials. If this logistics vendor were to fail to meet its obligations to deliver learning materials to students in a timely
manner, or if a material number of such shipments are incomplete or contain assembly errors, our business and results of
operations could be adversely affected. In addition, we provide computers for a substantial number of our students.
Execution or merger integration failures which interfere with the reclamation or redeployment of computers may result in
additional costs. Furthermore, a natural disaster, fire, power interruption, work stoppage or other unanticipated catastrophic
event, especially during the period from April through June when we are awaiting receipt of most of the curriculum
materials for the school year and have not yet shipped such materials to students, could significantly disrupt our ability to
deliver our products and operate our business. If any of our material inventory items were to experience any significant
damage, we would be unable to meet our contractual obligations and our business would suffer.
Any significant interruption in the operation of our data centers could cause a loss of data and disrupt our ability to
manage our network hardware and software and technological infrastructure.
We host our products and serve all of our students from third-party data center facilities. As part of our risk
mitigation plan, we opened a second data center in a different geographic location. Even with such redundancy, we may
not be able to prevent a significant interruption in the operation of these facilities or the loss of school and operational data
due to a natural disaster, fire, power interruption, act of terrorism or other unanticipated catastrophic event. Any significant
interruption in the operation of these facilities, including an interruption caused by our failure to successfully expand or
upgrade our systems or manage our transition to utilizing the expansions or upgrades, could reduce our ability to manage
our network and technological infrastructure, which could result in lost sales, enrollment terminations and impact our
brand reputation.
Additionally, we do not control the operation of these facilities and must rely on another party to provide the
physical security, facilities management and communications infrastructure services related to our data centers and our
reliance on a single vendor exposes us to risks outside of our control. If this vendor encounters financial difficulty such as
bankruptcy or other events beyond our control that causes it to fail to secure adequately and maintain its hosting facilities
or provide the required data communications capacity, students of the schools we serve may experience interruptions in
our service or the loss or theft of important customer data.
Any significant interruption in the operation of our enrollment centers could disrupt our ability to recommend
educational options to parents, respond to service requests and process enrollments.
Our primary enrollment center operations are housed in our corporate headquarters and in a facility located in
Knoxville, Tennessee. We are able to reroute calls to the other facility if one facility is unable to temporarily service calls.
Rerouting of calls may not be able to prevent a significant interruption in the operation of any of the facilities due to natural
disasters, accidents, failures of our fulfillment provider. Any significant interruption in the operation of any primary
facility, including an interruption caused by our failure to successfully expand or upgrade our systems or to manage these
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expansions or upgrades, could reduce our ability to respond to service requests, receive and process orders and provide
products and services, which could result in lost and cancelled sales, and damage to our brand reputation.
Capacity limits on some of our technology, transaction processing systems and network hardware and software may be
difficult to project and we may not be able to expand and upgrade our systems in a timely manner to meet significant
unexpected increased demand.
As the number of schools we serve increases and our student base grows, the traffic on our transaction processing
systems and network hardware and software will rise. We may be unable to accurately project the rate of increase in the
use of our transaction processing systems and network hardware and software. In addition, we may not be able to expand
and upgrade our systems and network hardware and software capabilities to accommodate significant unexpected
increased or peak use. If we are unable to appropriately upgrade our systems and network hardware and software in a
timely manner, our operations and processes may be temporarily disrupted.
Our efforts to expand capacity may not produce the operational and financial results for which those investments were
intended.
As we have grown to serve more schools, students and families in an increasing number of states and countries,
we have invested in infrastructure systems and technology to keep pace such as new communication systems, enterprise
hardware and software systems, and enrollment centers. In the absence of compatible business processes, adequate
employee training, integration with other dependent systems, and sufficient staffing, this expanded capacity alone may not
result in improved performance or outcomes.
We may be unable to keep pace with changes in our industry and advancements in technology as our business and
market strategy evolves.
As changes in our industry occur or macroeconomic conditions fluctuate we may need to adjust our business
strategies or find it necessary to restructure our operations or businesses, which could lead to changes in our cost structure,
the need to write down the value of assets, or impact our profitability. We also make investments in existing or new
businesses, including investments in technology and expansion of our business lines. These investments may have
short-term returns that are negative or less than expected and the ultimate business prospects of the business may be
uncertain.
As our business and market strategy evolves, we also will need to respond to technological advances and emerging
industry standards in a cost-effective and timely manner in order to remain competitive, such as the ubiquitous use of
tablets for public school applications, adaptive learning technologies, and web accessibility standards. The need to respond
to technological changes may require us to make substantial, unanticipated expenditures. There can be no assurance that
we will be able to respond successfully to technological change.
We may be unable to attract and retain skilled employees.
Our success depends in large part on continued employment of senior management and key personnel who can
effectively operate our business, which is necessary in the highly regulated public education sector involving a
publicly-traded for-profit company. This complexity requires us to attract and retain management and employees with
specialized skills and knowledge across many disciplines. If any of these employees leave us and we fail to effectively
manage a transition to new personnel, or if we fail to attract and retain qualified and experienced professionals on
acceptable terms, our business, financial condition and results of operations could be adversely affected.
Our success also depends on our having highly trained financial, technical, recruiting, sales and marketing
personnel. We will need to continue to hire additional personnel as our business grows. A shortage in the number of people
with these skills or our failure to attract them to our Company could impede our ability to increase revenues from our
existing products and services, ensure full compliance with federal and state regulations, launch new product offerings,
and would have an adverse effect on our business and financial results.
In addition, we are subject to the Fair Labor Standards Act and other state and federal employment laws. These
laws govern such matters as minimum wage, overtime and other working conditions that can increase our labor costs or
subject us to liabilities to our employees. Regulatory changes that increase the number of workers eligible for overtime
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based on salary levels and other labor costs may increase in the future which could have a material adverse effect on our
business, financial condition and results of operations.
Healthcare reform legislation could have a negative impact on our business, financial condition and results of
operations.
The Patient Protection and Affordable Care Act, which was adopted in 2010, may significantly affect the
provision of both healthcare services and benefits in the U.S. and its current status is in flux. We continually monitor the
impact on our business and the steps necessary to mitigate such impact, including potential further modifications to our
current benefit plans and operational changes to minimize the effect of the legislation on our cost structure. If we cannot
effectively modify our programs and operations in response to these mandates, our business, financial condition and results
of operations may be adversely impacted.
We partially self-insure our group health insurance program and actual claims may differ from our estimates, which
could materially impact our results of operations.
Effective January 1, 2016, we modified our group health insurance program and now self-insure all eligible
employees and their family members subject to a stop loss insurance policy with a per person limit of $500,000 ($550,000
as of January 1, 2017) and an aggregate limit of 125% of expected claims based on a formulaic determination of the
expected claims. Liabilities associated with the risks that are retained by the Company are estimated, in part, by considering
historical claims experience, demographic factors, severity factors and other actuarial assumptions. Our results could be
materially impacted by claims and other expenses related to our group health insurance program if future occurrences and
claims differ from these assumptions and historical trends and exceed the limitations of liability under the stop loss
insurance policy.
We may need additional capital in the future, but there is no assurance that funds will be available on acceptable terms.
We may need to raise additional funds in order to achieve growth or fund other business initiatives. This financing
may not be available in sufficient amounts or on terms acceptable to us and may be dilutive to existing stockholders.
Additionally, any securities issued to raise funds may have rights, preferences or privileges senior to those of existing
stockholders. If adequate funds are not available or are not available on acceptable terms, our ability to expand, develop
or enhance services or products, or respond to competitive pressures will be limited.
Our curriculum and approach to instruction may not satisfy certain state standards, which would limit our growth and
profitability.
With the passage of the ESSA, each state will have the authority to adopt its own assessments tied to its curriculum
standards. As a result, the acceptance and adoption of the CCSS grade level standards by individual states is uncertain,
and assessments for measuring student performance also could vary from state to state. At this time we cannot predict the
impact of these varying standards, which may require us to make additional investment, or could impede our ability to
expand our product offerings into new states in an expeditious manner. In addition, changes to existing state curriculum
standards, or our inability to meet existing or new state curriculum standards, could materially and adversely affect our
growth, business and results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our headquarters are located in approximately 129,000 square feet of office space in Herndon, Virginia. The
facilities are under leases that expire in May 2022. In addition, we lease approximately 317,000 square feet in multiple
locations throughout the United States under individual leases that expire between July 2017 and October 2022.
43
ITEM 3. LEGAL PROCEEDINGS
In the ordinary conduct of our business, we are subject to lawsuits, arbitrations and administrative proceedings
from time to time. We vigorously defend these claims; however, no assurances can be given as to the outcome of any
pending legal proceedings. We believe, based on currently available information, that the outcome of any existing or
known threatened proceedings, even if determined adversely, should not have a material adverse effect on our business,
financial condition, liquidity or results of operations.
On July 20, 2016, a securities class action lawsuit captioned Babulal Tarapara v. K12 Inc. et al was filed against
the Company, two of its officers and one of its former officers in the United States District Court for the Northern District
of California, Case No. 3:16-cv-04069 (“Tarapara Case”). The plaintiff purports to represent a class of persons who
purchased or otherwise acquired the Company’s common stock between November 7, 2013 and October 27, 2015,
inclusive, and alleges violations by the Company and the individual defendants of Section 10(b) of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated under the Exchange Act, and violations by
the individual defendants of Section 20(a) of the Exchange Act. The complaint sought unspecified monetary damages and
other relief. Additionally, on September 15, 2016, a second securities class action lawsuit captioned Gil Tuinenburg v.
K12 Inc. et al was filed against the Company, two of its officers and one of its former officers in the United States District
Court for the Northern District of California, Case No. 3:16-cv-05305 (“Tuinenburg Case”). On October 6, 2016, the Court
consolidated the Tarapara Case and the Tuinenburg Case, appointed Babul Tarapara and Mark Beadle as lead plaintiffs,
and recaptioned the matter as In Re K12 Inc. Securities Litigation. On December 2, 2016, the lead plaintiffs filed an
amended complaint against us. The amended complaint named an additional former officer as a defendant and specified a
class period start date of October 10, 2013. The amended complaint alleges materially false or misleading statements and
omissions regarding the decision of the Agora Cyber Charter School not to renew its managed public school agreement
with us, student academic and Scantron results, and other statements regarding student academic performance and K12’s
academic services and offerings. On January 30, 2017, the Company filed its motion to dismiss the amended
complaint. The lead plaintiffs filed an opposition to the motion to dismiss the amended complaint on March 1, 2017. On
March 31, 2017, the Company filed its response to the lead plaintiffs’ opposition to the motion to dismiss. A hearing on
the motion to dismiss the amended complaint was held on April 19, 2017 and a decision is pending. The Company intends
to continue to defend vigorously against each and every allegation and claim set forth in the amended complaint.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
44
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock, par value $0.0001 per share, is traded on the New York Stock Exchange (the “NYSE”) under
the symbol “LRN.” Set forth below are the high and low sales prices for our common stock, as reported on the NYSE. As
of July 31, 2017, there were 31 registered holders of our common stock.
Quarter ended:
June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21.18 $ 17.16
16.16
March 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.17
December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.67
September 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20.67
17.84
14.41
High
Low
June 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
March 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12.91
11.19
14.45
14.95
9.16
7.11
8.80
12.15
Stock Performance Graph
The graph below compares the cumulative return of holders of K12 Inc.’s common stock with the cumulative
returns of the S&P 500 index, the NASDAQ Composite Index, the Russell 2000 Index and our Peer Group Index, which
is composed of American Public Education Inc., Apollo Group Inc., Bridgepoint Education Inc., Capella Education
Company, Devry Inc., Grand Canyon Education Inc., ITT Educational Services, Inc., Pearson PLC, Rosetta Stone Inc.,
Scholastic Corporation, Strayer Education Inc. and Universal Technical Institute. The graph assumes that the value of the
investment in our common stock, in each index (including reinvestment of dividends) was $100 on June 30, 2012 and
tracks it through June 30, 2017. All prices reflect closing prices on the last day of trading at the end of each calendar
quarter.
45
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN(1)(2)
Among K12 Inc., S&P 500 Index, NASDAQ Composite Index, Russell 2000 Index and Peer Group Index
Total Return June 2012 - June 2017
200.00
LRN
Peer Group Index
175.00
S&P 500
Nasdaq Composite
Russell 2000
150.00
r
a
l
l
O
D
125.00
100.00
75.00
50.00
6/30/2012
6/30/2013
6/30/2014
6/30/2015
6/30/2016
6/30/2017
LRN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Peer Group Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
S&P 500 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Russell 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nasdaq Composite . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30-Jun-12 30-Jun-13 30-Jun-14 30-Jun-15 30-Jun-16 30-Jun-17
114
141
160
178
161
75
93
145
153
140
67
107
143
155
148
113
116
138
143
142
115
100
117
115
121
100
100
100
100
100
(1) The information presented above in the stock performance graph shall not be deemed “soliciting material” or to be
“filed” with the SEC or subject to Regulation 14A or 14C, except to the extent that we subsequently specifically
request that such information be treated as soliciting material or specifically incorporate it by reference into a filing
under the Securities Act of 1933, as amended (the “Securities Act”), or a filing under the Exchange Act.
(2) The stock price performance shown on the graph is not necessarily indicative of future price performance. Information
used in the graph was obtained from a source we believe to be reliable, but we do not assume responsibility for any
errors or omissions in such information.
Dividend Policy
We have never declared or paid any cash dividends on our common stock and we currently do not anticipate
paying any cash dividends for the foreseeable future. Instead, we anticipate that all of our earnings on our common stock
will be used to provide working capital, to support our operations, and to finance the growth and development of our
business, including potentially the acquisition of, or investment in, businesses, technologies or products that complement
our existing business. Any future determination relating to dividend policy will be made at the discretion of our Board of
Directors and will depend on a number of factors, including, but not limited to, our future earnings, capital requirements,
financial condition, future prospects, and applicable Delaware law, which provides that dividends are only payable out of
surplus or current net profits and other factors our Board of Directors might deem relevant.
46
Stock-based Incentive Plan Information
The following table provides certain information as of June 30, 2017, with respect to our equity compensation
plans under which common stock is authorized for issuance:
Equity Compensation Plan Information
As of June 30, 2017
Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options
Number of Securities
Remaining Available for
Future Issuance under
Equity Compensation
Plans (Excluding Securities
Outstanding Options Reflected in First Column)
Weighted-Average
Exercise Price of
Equity compensation plans approved by security holders
1,356,528 (1) $
20.19
4,384,718 (2)
(1) Includes shares under the 2016 Incentive Award Plan (“2016 Plan”) and the 2007 Equity Incentive Award
Plan (“2007 Plan”).
(2) The 2016 Plan, which became effective upon its approval by the stockholders on December 15, 2016,
authorizes the issuance of up to 9,768,550 shares as of the effective date.
Issuer Purchases of Equity Securities
On November 4, 2013, the Board of Directors authorized the repurchase of up to $75.0 million of our outstanding
common stock over a two year period. Any purchases under the buyback were dependent upon business and market
conditions and other factors. The stock purchases were made from time to time and through a variety of methods including
open market purchases and trading plans that were adopted in accordance with the Rule 10b-18 of the Exchange Act. For
the fiscal year ended June 30, 2015, we paid approximately $26.5 million in cash to repurchase 1,307,402 shares of
common stock at an average price of $20.23 per share. There were no repurchases of shares made during the fiscal years
ended June 30, 2017 and 2016. As of June 30, 2017 and 2016 total shares purchased under the plan were 3,502,598, at an
average cost of $21.41 per share, and there were no shares remaining to be repurchased under the plan.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our selected consolidated statement of operations, balance sheet and other data as
of the dates and for the periods indicated. You should read this data together with “Item 7—Management’s Discussion
and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related
notes, included elsewhere in this Annual Report. The selected consolidated statements of operations data for each of the
years in the three year period ended June 30, 2017, and the selected consolidated balance sheet data as of June 30, 2017
and 2016, have been derived from our audited consolidated financial statements, which are included elsewhere in this
Annual Report. The selected consolidated statements of operations data for the years ended June 30, 2014 and 2013 and
selected consolidated balance sheet data as of June 30, 2015, 2014 and 2013, have been derived from our audited
47
consolidated financial statements not included in this Annual Report. Our historical results are not necessarily indicative
of future operating results.
Consolidated Statement of Operations
Data:
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cost and expenses
Instructional costs and services . . . . . . . .
Selling, administrative and other
operating expenses . . . . . . . . . . . . . . . . . .
Product development expenses. . . . . . . . .
Total costs and expenses . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . .
Realized gain on sale of assets . . . . . . . . .
Impairment of investment in Web
International Education Group, Ltd. . . . .
Interest income (expense), net . . . . . . . . .
Income before income taxes and
noncontrolling interest . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . .
Add net loss attributable to
noncontrolling interest . . . . . . . . . . . . . . .
Net income attributable to common
stockholders, including Series A
stockholders(1) . . . . . . . . . . . . . . . . . . . . . $
2017
2016
Year Ended June 30,
2015
(In thousands)
2014
2013
888,519 $
872,700 $
948,294 $
919,553 $
848,220
557,316
546,510
607,756
569,219
498,398
305,617
12,457
875,390
13,129
—
(10,000)
1,808
4,937
(5,396)
(459)
302,205
10,071
858,786
13,914
—
—
(617)
13,297
(4,746)
8,551
307,730
14,381
929,867
18,427
—
(3,200)
(91)
15,136
(5,810)
9,326
313,258
14,220
896,697
22,856
6,404
—
(69)
283,032
21,084
802,514
45,706
—
—
851
29,191
(11,075)
18,116
46,557
(20,023)
26,534
910
484
1,662
1,484
1,577
451 $
9,035 $
10,988 $
19,600 $
28,111
Net income attributable to common
stockholders, including Series A
stockholders, per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted(1) . . . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted average shares used in
computing per share amounts:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted(1) . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Data:
Net cash provided by operating activities $
Depreciation and amortization . . . . . . . . . $
Stock-based compensation expense . . . . . $
EBITDA(2) . . . . . . . . . . . . . . . . . . . . . . . . $
Capital Expenditures:
Capitalized curriculum development
costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Purchases of property, equipment and
capitalized software development costs . . $
New capital lease obligations(3) . . . . . . . $
Total capital expenditures . . . . . . . . . . . . . $
2017
Year Ended June 30,
2015
(In thousands except share and per share data)
2016
2014
2013
0.01 $
0.01 $
0.24 $
0.23 $
0.29 $
0.29 $
0.50 $
0.50 $
0.72
0.72
38,298,581
39,500,934
37,613,782
38,850,388
37,330,569
37,625,425
38,987,470
39,230,516
36,267,345
39,017,345
88,728 $
74,280 $
22,598 $
87,409 $
121,778 $
68,225 $
18,617 $
82,139 $
120,085 $
83,801 $
21,299 $
102,228 $
122,873 $
86,267 $
22,828 $
115,527 $
94,387
65,737
14,374
111,443
19,132 $
21,627 $
18,057 $
15,411 $
18,560
29,092 $
14,469 $
62,693 $
41,273 $
10,878 $
73,778 $
43,683 $
14,654 $
76,394 $
33,958 $
24,132 $
73,501 $
31,785
24,703
75,048
48
Consolidated Balance Sheet Data:
Cash and cash equivalents . . . . . . . . . . . . $
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $
Current portion of capital lease
obligations . . . . . . . . . . . . . . . . . . . . . . . . . $
Capital lease obligations, net of current
portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total K12 Inc. stockholders’ equity . . . . . $
Working capital(4) . . . . . . . . . . . . . . . . . . $
2017
2016
As of June 30,
2015
(In thousands)
2014
2013
230,864 $
735,284 $
213,989 $
734,055 $
195,852 $
708,599 $
196,109 $
711,667 $
181,480
718,896
11,880 $
13,210 $
16,635 $
20,492 $
19,785
10,025 $
574,346 $
355,831 $
9,922 $
558,720 $
322,843 $
13,022 $
536,938 $
348,306 $
16,447 $
528,930 $
351,441 $
16,107
530,162
348,762
(1) For the year ended June 30, 2013, diluted net income per common share reflects pro rata net income allocated to the
2,750,000 non-voting shares of the Series A Special Stock issued in the acquisition of KCDL in July 2010. These
shares were converted into common stock on September 3, 2013 and no Series A Special stock remains outstanding
as of June 30, 2017.
(2) EBITDA is defined as net income (loss) attributable to common stockholders, including Series A stockholders, as
adjusted for interest income (expense), net; impairment of investment in Web International Education Group, Ltd.;
income tax benefit (expense); noncontrolling interest; and depreciation and amortization. Interest income (expense),
net primarily consists of interest expense for capital leases, long-term and short-term borrowings. We use EBITDA
in addition to income (loss) from operations and net income (loss) as a measure of operating performance. However,
EBITDA is not a recognized measurement under U.S. generally accepted accounting principles, or GAAP, and when
analyzing our operating performance, investors should use EBITDA in addition to, and not as an alternative for, net
income (loss) as determined in accordance with GAAP. Because not all companies use identical calculations, our
presentation of EBITDA may not be comparable to similarly titled measures of other companies. Furthermore,
EBITDA is not intended to be a measure of free cash flow for our management’s discretionary use, as it does not
consider certain cash requirements such as capital expenditures, tax payments, interest payments, or other working
capital.
We believe EBITDA is useful to an investor in evaluating our operating performance because it is widely used to
measure a company’s operating performance without regard to items such as depreciation and amortization, which
can vary depending upon accounting methods and the book value of assets, and to present a meaningful measure of
corporate performance exclusive of our capital structure and the method by which assets were acquired. Our
management uses EBITDA:
•
•
as an additional measurement of operating performance because it assists us in comparing our performance
on a consistent basis; and
in presentations to the members of our Board of Directors to enable our Board to have the same measurement
basis of operating performance as is used by management to compare our current operating results with
corresponding prior periods and with the results of other companies in our industry.
(3) New capital lease obligations are primarily for student computers and related equipment.
49
The following table provides a reconciliation of net income attributable to common stockholders, including Series
A stockholders, to EBITDA:
2017
2016
2015
2014
2013
Year Ended June 30,
(In thousands)
451 $ 9,035 $ 10,988 $ 19,600 $ 28,111
(851)
91
Net income attributable to common
stockholders, including Series A
stockholders . . . . . . . . . . . . . . . . . . . $
Interest (income) expense, net . . . .
Impairment of investment in Web
International Education Group,
—
Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . .
20,023
Income tax (benefit) expense . . . . .
65,737
Depreciation and amortization(5) .
(1,577)
Noncontrolling interest . . . . . . . . . .
EBITDA . . . . . . . . . . . . . . . . . . . . . . $ 87,409 $ 82,139 $ 102,228 $ 115,527 $ 111,443
—
11,075
86,267
(1,484)
3,200
5,810
83,801
(1,662)
10,000
5,396
74,280
(910)
—
4,746
68,225
(484)
(1,808)
617
69
(4) Working capital is calculated by subtracting current liabilities from current assets.
(5) For fiscal year 2015, depreciation and amortization includes $13.9 million of expense related to accelerated
depreciation and amortization for certain curriculum, learning systems and other fixed assets that will no longer be
used or developed, computer peripherals that will not be reclaimed, and the write-off of capitalized software that will
be abandoned. For fiscal year 2014, depreciation and amortization includes approximately $18.6 million for certain
curriculum, learning systems and other fixed assets that will no longer be used or developed, computers that we
estimate will not be returned and additional provisions for the decision to discontinue certain products and for excess
inventory relative to anticipated demand.
50
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)
contains certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. Historical results may not indicate future performance. Our forward-looking statements reflect our current
views about future events, are based on assumptions, and are subject to known and unknown risks and uncertainties that
could cause actual results to differ materially from those contemplated by these statements. Factors that may cause
differences between actual results and those contemplated by forward-looking statements include, but are not limited to,
those discussed in “Risk Factors” in Part I, Item 1A, of this Annual Report. We undertake no obligation to publicly update
or revise any forward-looking statements, including any changes that might result from any facts, events, or circumstances
after the date hereof that may bear upon forward-looking statements. Furthermore, we cannot guarantee future results,
events, levels of activity, performance, or achievements.
This MD&A is intended to assist in understanding and assessing the trends and significant changes in our results
of operations and financial condition. As used in this MD&A, the words, “we,” “our” and “us” refer to K12 Inc. and its
consolidated subsidiaries. This MD&A should be read in conjunction with our consolidated financial statements and
related notes included elsewhere in this Annual Report. The following overview provides a summary of the sections
included in our MD&A:
• Executive Summary—a general description of our business and key highlights of the year ended
June 30, 2017.
• Key Aspects and Trends of Our Operations—a discussion of items and trends that may impact our business
in the upcoming year.
• Critical Accounting Policies and Estimates—a discussion of critical accounting policies requiring critical
judgments and estimates.
• Results of Operations—an analysis of our results of operations in our consolidated financial statements.
• Liquidity and Capital Resources—an analysis of cash flows, sources and uses of cash, commitments and
contingencies, seasonality in the results of our operations, the impact of inflation, and quantitative and
qualitative disclosures about market risk.
Executive Summary
We are a technology-based education company and offer online curriculum, software systems and educational
services designed to facilitate individualized learning for students primarily in kindergarten through 12th grade, or K-12.
Our learning systems combine curriculum, instruction and related support services to create an individualized learning
approach well-suited for virtual and blended public schools, school districts, charter schools and private schools that utilize
varying degrees of online and traditional classroom instruction, and other educational applications. These products and
services are provided to three lines of business: Managed Public School Programs (curriculum and services sold to
managed public schools), Institutional (curriculum, technology and services provided to school districts, public schools
and other educational institutions that we do not manage), and Private Pay Schools and Other (private schools for which
we charge student tuition and make direct consumer sales).
Managed Public School Programs accounted for approximately 83% of our revenues in the year ended
June 30, 2017. A Managed Public School Program provides substantially all of the administrative functions, technology
and academic support services, online curriculum, learning systems and instructional services. These arrangements are
negotiated with and approved by the governing authorities of our customers, which are mostly virtual and blended public
charter schools. For the year ended June 30, 2017, we provided our Managed Public School Programs to 77 schools in a
majority of states throughout the United States.
With our Institutional business, we do not assume primary management responsibilities for the schools. Rather,
the Institutional business sells online curriculum programs and technology (full time and part time), courses, teacher
instruction, and various support tools and platforms (see description of PEAK below) to schools and school districts. Our
51
Institutional business consists of both Non-managed Public School Programs and Institutional Software and
Services. Non-managed Public School Programs include schools where K12 provides the curriculum and technology for
full-time virtual and blended programs, and the school can also contract for instruction, marketing, enrollment or other
educational services. Non-managed Public School Programs do not offer primary administrative oversight. The
Institutional Software and Services offerings provide an array of online educational products and support services to meet
the specific needs of the school or school district and its students. In addition to curriculum, systems and programs, the
support services we provide to these customers are designed to assist them in launching their own online and blended
learning programs tailored to their own requirements and may include teacher training programs, administrator support
and our PEAK management system. PEAK is a platform designed to centrally manage multiple online solutions across a
school or district through one application. With our services, schools and districts can offer programs that allow students
to participate part-time, supplementing their education with core courses, electives, credit recovery options, remediation
and supplemental content options.
Our Private Pay Schools and Other include three accredited online private schools that we operate in which
parents can enroll students on a tuition basis for a full-time online education or individual courses to supplement their
children’s traditional instruction. These schools are: (1) K12 International Academy, an online private school that enables
us to offer students worldwide the same full-time education programs and curriculum that we provide to the virtual and
blended public schools, (2) The Keystone School, a private school that offers online and correspondence courses, and
(3) the George Washington University Online High School, a school that offers a college preparatory program and is
designed for middle and high school students who are seeking a challenging academic experience.
We believe that the acceptance of online education in grades K-12 continues to grow, and anticipate that increased
overall demand for virtual options in education will translate into increased demand for both our Non-managed Public
School Programs and our Institutional Sales business (sold under the brand names Fuel Education or FuelEd). The results
of federal and state elections can also result in shifts in education policy and the amount of funding available for various
education programs.
For the year ended June 30, 2017, revenues increased to $888.5 million from $872.7 million for the year ended
June 30, 2016, an increase of 1.8% primarily due to our Managed Public School Programs. Over the same period, operating
income decreased to $13.1 million from $13.9 million for the year ended June 30, 2016, a decrease of 5.8%; net income
attributable to common stockholders decreased to $0.5 million from $9.0 million in the year ended June 30, 2016, a
decrease of 94.4%; and EBITDA, a non-GAAP measure (see reconciliation of net income to EBITDA in “Item 6—
Selected Financial Data”), increased to $87.4 million from $82.1 million in the year ended June 30, 2016, an increase of
6.5%. The operating income for the year ended June 30, 2016 included charges of $7.1 million related to the Settlement
Agreement with the State of California.
Financial Statement Overview
Student enrollment in our Managed Public School Programs experienced a shift in the mix of students with an
increased level of high school students. The continued expansion of our Institutional and our Private Pay Schools and
Other also shifts the mix of our revenues and associated costs of providing services for our Institutional business. We may
continue to experience changes in our enrollment, revenues and cost mix as we continue to expand into markets different
than our traditional Managed Public School Programs.
Key Aspects and Trends of Our Operations
Revenues—Overview
We generate a significant portion of our revenues from the sale of curriculum, management and technology
services to managed virtual and blended public schools, where we provide turn-key management services. Approximately
83% of our revenues were derived from this source in the year ended June 30, 2017. We anticipate that these revenues will
continue to represent the majority of our total revenues over the next several years. However we also expect revenues in
other aspects of our business to increase as we execute on our growth strategy. Our growth strategy includes increasing
revenues in other distribution channels, adding enrollments in our private schools and expanding our Institutional business,
and pursuing international opportunities to offer our learning systems. Combined revenues from these other sectors were
significantly smaller than that from the Managed Public School Programs in the year ended June 30, 2017. Our success in
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executing our strategies will impact future growth. We provide products and services primarily to three lines of business:
Managed Public School Programs, Institutional and Private Pay Schools and Other.
Factors affecting our revenues include:
(i)
the number of enrollments;
(ii)
the mix of enrollments across grades and states;
(iii)
management services provided to the schools and school districts;
(iv)
state or district per student funding levels and attendance requirements;
(v)
prices for our products and services;
(vi)
growth in our other customer types; and
(vii)
revenues from new initiatives, mergers and acquisitions.
Managed Public School Programs
We define an enrollment as any student enrolled in a virtual or blended public school which qualifies as a Public
School Program. Generally, students will take four to six courses, except for some kindergarten students who may
participate in half-day programs. We count each half-day kindergarten student as an enrollment. School sessions generally
begin in August or September and end in May or June. To ensure that all schools are reflected in our measure of
enrollments, we consider the number of students on the first Wednesday of October to be our opening enrollment level,
and the number of students enrolled on the last day of May to be our ending enrollment level. For each period, average
enrollments represent the average of the month-end enrollment levels for each school month in the period. We continually
evaluate our enrollment levels by state, by school and by grade. We track new student enrollments and withdrawals
throughout the year.
We believe that our revenue growth from enrollments depends upon the following:
•
•
•
•
•
•
•
•
•
the number of states and school districts in which we operate;
the mix of students served;
the restrictive terms of local laws or regulations, including enrollment caps;
the appeal of our curriculum and instructional model to students and families;
the specific school or school district requirements including credit recovery or special needs;
the effectiveness of our program in delivering favorable academic outcomes;
the quality of the teachers working in the schools we serve;
the effectiveness of our marketing and recruiting programs to attract new enrollments; and
retention of students through successive grade levels.
In fiscal year 2017, total average student enrollments in Managed Public School Programs increased by 759 or
0.7%, to 103,694 as compared to total average student enrollments of 102,935 in fiscal year 2016. We continually evaluate
our trends in revenues by monitoring the number of student enrollments in total, by state, by school and by grade, assessing
the impact of changes in school funding levels and the pricing of our curriculum and educational services. In fiscal years
2017 and 2016, the growth rate of our revenues exceeded the growth in our managed school average student enrollments
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primarily due to increases in the per-pupil rate of achieved state funding in certain states, school mix (distribution of
enrollments by school) and other factors, including changes in state funding rates and higher utilization in federal and state
restricted funding per managed student. During the year ended June 30, 2017, we had no contracts that represented 10%
or more of total revenues.
Enrollments in Managed Public School Programs on average generate substantially more revenues than
enrollments served through our Institutional business where we provide limited or no management services. Similarly,
revenues earned per pupil across our private school programs vary. As we continue to build our Institutional business and
increase enrollment in Private Pay Schools and Other, enrollment mix is expected to shift and may impact growth in
revenues relative to the growth in enrollments.
During the years ended June 30, 2017, 2016 and 2015, we had a contract with Agora Cyber Charter School
(“Agora”) that represented approximately $28.7 million, $18.5 million and $129.8 million of revenues, respectively.
In fiscal year 2015, Agora renegotiated its service agreement and entered into a three year contract with us to
purchase our curriculum and certain technology services, while the school board assumed daily operational
responsibilities, including its charter renewal process and marketing and enrollment activities. This assumption of
responsibilities caused the classification of Agora to change from a Managed Public School Program to a non-managed
school within the Institutional business. The net impact of this event on the fiscal year 2016 revenues attributable to the
loss of the management component of the Agora contract was approximately $111 million. Renegotiation and renewal of
our fully integrated Managed Public School Program contracts by independent school boards occurs as well. On July 12,
2017, for example, we disclosed on a Form 8-K that the Ohio Virtual Academy renewed a fully managed program
agreement with us for a five (5) year term commencing at the start of fiscal year 2018. Although this contract may not
generate 10% or more of our total revenues in fiscal year 2018 or in future years, we are filing it with this report as Exhibit
99.1 for informational purposes.
Institutional
While Managed Public School Programs constitute the majority of our revenues, there is increasing demand by
public school districts, public schools and other educational institutions for more limited components of our online services
and products than are used in Managed Public School Programs. Sales to those entities are conducted through our
Institutional business organization. While we expect long-term growth opportunities in our Institutional business, the
sector continues to experience significant competitive pricing pressures.
The Institutional business portfolio contains an array of curriculum and technology solutions packaged in a
portfolio of flexible learning and delivery models mapped to specific student, school and district needs. This portfolio
provides a continuum of delivery models, from full and part-time virtual to blended learning and other options that can be
used in traditional classrooms to differentiate instruction. The Institutional business course catalog is comprehensive and
enables districts to offer their students educational opportunities that otherwise might not be financially justifiable, such
as Advanced Placement (“AP”), honors, world languages, remediation, credit recovery, alternative education, career and
technology electives and college readiness. In connection with these solutions, we also offer state-certified teachers,
professional development and other support services as needed by our customers.
Given the variables discussed in further detail below, we believe that the best performance metric for the
Institutional business is revenues. The customers served by the Institutional business organizations purchase curriculum
in a variety of ways, making consistent comparisons on the basis of enrollments less relevant. For example, we serve not
only full-time students, but also students taking semester-long courses, students who recover credits through concentrated
four to eighteen-week programs, students who are using our curricula as a supplemental enhancement to their traditional
textbook, and teachers who may present our lessons on an interactive whiteboard as either the core of their instruction or
as an engaging supplement to their lecture. Given all these variables, it is therefore difficult to identify a single metric
(such as a full time equivalent or “FTE”), or combination of metrics (such as course enrollments or programs sold), that
can accurately capture the Institutional business. Therefore, our efforts to do so led us to the conclusion that at this time,
revenues are the best performance metric for the Institutional business.
Sales opportunities in the Institutional business are driven by a number of factors in a diverse customer population,
which determine the deliverable and price. These factors include:
• Type of Customer—A customer can be a U.S.-based public school district, private school, charter school,
early childhood learning center or corporate partner.
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• Curriculum Needs—We sell our curriculum solutions based on the scope of the customer need, and a solution
is generally purchased as end-user access to a complete catalog, individual course or supplemental content
title.
• License Options—Depending on the scope of the solution, a license can be purchased for individual course
enrollments, annual seat, school or district-wide site licenses or a perpetual license (a prepaid lifetime
license). We may charge incrementally if we are hosting the solution.
• Hosting—Customers may host curricula themselves or license our hosted solution. We are able to track all
students for customers who use our hosted solution. However, more often in large-scale, district-wide
implementations, a customer may choose to host the curriculum, and in that case we have no visibility of
individual student usage for counting enrollments.
•
Services Menu—Instructional services may be provided and priced per-enrollment or bundled in the overall
price of the solution. Additional services, including professional development, title maintenance and support
may also be provided and are priced based on the scope of services.
On June 9, 2016, Agora signed a new service agreement with us that extends through 2019 and included additional
services including curriculum and certain technology services while the school board retained daily operational
responsibilities. The agreement also calls for payment terms of outstanding receivables to be paid over an approximate
two-year period resulting in reclassification of a portion to long-term assets (Deposits and other assets).
Private Pay Schools and Other
Private schools are managed schools where tuition is paid directly by the family of the student. We receive no
public funds for students in our private schools. We operate three private online schools at differing price points and
service levels. Our revenues are derived from tuition receipts that are a function of course enrollments and program price.
In some circumstances, a third-party school may elect to enroll one of its students in a K12 private school course as a
supplement to the student’s regular on-campus instruction. In such cases, the third-party school may pay the K12 private
school tuition.
We believe our revenue growth depends primarily on the recruitment of students into our programs through
effective marketing and word-of-mouth referral based on the quality of our service. In addition, through high service
quality, we seek to retain existing students and increase the total number of courses each student takes with us. In some
cases, students return each summer and take only one course. In other cases, students choose a K12 private school as their
principal form of education and may stay for many years. The flexibility of our programs, the quality of our curriculum
and teaching, and the student community features lead to customer satisfaction and therefore, retention.
We have entered into agreements which enable us to distribute our products and services to our international
school partners throughout the world who use our courses as a supplement to their on-campus academic programs. These
courses provide students with additional electives, AP courses, and sometimes include dual-degree programs that the
school cannot offer on its own.
We sometimes offer additional teacher assistance, counseling, clubs and other additive services to our basic
course offerings.
Instructional Costs and Services Expenses
Instructional costs and services expenses include expenses directly attributable to the educational products and
services we provide. The public schools we manage are the primary drivers of these costs, including teacher and
administrator salaries and benefits and expenses of related support services. We also employ teachers and administrators
for instruction and oversight in our Institutional business and Private Pay Schools and Other business. Instructional costs
also include fulfillment costs of student textbooks and materials, depreciation and reclamation costs of computers provided
for student use, the cost of any third-party online courses and the amortization of capitalized curriculum and related
systems. Our instructional costs are variable and are based directly on our number of schools and enrollments.
Our high school offering requires increased instructional costs as a percentage of revenues compared to our
kindergarten to 8th grade offering. This is due to the following: (i) generally lower student-to-teacher ratios; (ii) higher
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compensation costs for some teaching positions requiring subject-matter expertise; (iii) ancillary costs for required student
support services, including college placement, SAT preparation and guidance counseling; (iv) use of third-party courses
to augment our proprietary curriculum; and (v) use of a third-party learning management system to service high school
students. Over time, we may partially offset these factors by obtaining productivity gains in our high school instructional
model, replacing third-party high school courses with proprietary content, replacing our third-party learning management
system with another third-party system, leveraging our school infrastructure and obtaining purchasing economies of scale.
We have deployed and are continuing to develop new delivery models, including blended schools, where students
receive limited face-to-face instruction in a learning center to complement their online instruction, and other programs that
utilize brick and mortar facilities. The maintenance, management and operations of these facilities necessitate additional
costs, which are generally not required to operate typical virtual public schools. We are pursuing expansion into new states
for both virtual public and other specialized charter schools. If we are successful, we will incur start-up costs and other
expenses associated with the initial launch of a school, including the funding of building leases and leasehold
improvements.
Selling, Administrative and Other Operating Expenses
Selling, administrative and other operating expenses include the salaries and benefits of employees engaged in
business development, public affairs, sales and marketing, and administrative functions, and transaction and due diligence
expenses related to mergers and acquisitions.
Product Development Expenses
Product development expenses include research and development costs and overhead costs associated with the
management of both our curriculum development and internal systems development teams. In addition, product
development expenses include the amortization of internal systems. We measure and track our product development
expenditures on a per course or project basis to measure and assess our development efficiency. In addition, we monitor
employee utilization rates to evaluate our workforce efficiency. We plan to continue to invest in additional curriculum
development and related software in the future. We capitalize selected costs incurred to develop our curriculum, beginning
with application development, through production and testing into capitalized curriculum development costs. We
capitalize certain costs incurred to develop internal systems into capitalized software development costs.
Expense Management
We are constantly searching for ways to deliver more value at a lower cost for our customers and we take pride
in our ability to deliver highly-individualized, effective education solutions at significant savings to taxpayers. We have
sought to increase efficiencies whenever possible without affecting educational quality. We believe our scale and
infrastructure investment positions us for greater efficiency in future periods while allowing us to deliver more value for
students.
Critical Accounting Policies and Estimates
The discussion of our financial condition and results of operations is based upon our consolidated financial
statements, which have been prepared in accordance with U.S. GAAP. In the preparation of our consolidated financial
statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses, as well as the related disclosures of contingent assets and liabilities. We base our estimates on
historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The
results of our analysis form the basis for making assumptions about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these estimates under different assumptions or
conditions, and the impact of such differences may be material to our consolidated financial statements. Our critical
accounting policies have been discussed with the Audit Committee of our Board of Directors. We believe that the following
critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated
financial statements:
Revenue Recognition
In accordance with Accounting Standards Codification (“ASC”) 605, Revenue Recognition (“ASC 605”), we
recognize revenues when the following conditions are met: (1) persuasive evidence of an arrangement exists; (2) delivery
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of physical goods or rendering of services is complete; (3) the seller’s price to the buyer is fixed or determinable; and
(4) collection is reasonably assured.
We have determined that the separate elements of our multiple element contracts with managed schools do not
have standalone value. Accordingly, we account for revenues received under multiple element arrangements with managed
schools as a single unit of accounting and recognize the entire arrangement over the term of the contractual service period.
While we have concluded that the elements of our contracts do not have standalone value, we invoice schools in accordance
with the established contractual terms and rates. Generally, this means that for each enrolled student, we invoice their
school on a per student basis for the following items: (1) access to our online school and online curriculum; (2) learning
kits; and (3) student computers. We also invoice for management and technology services. We apply ASC 605 to each of
these items as follows:
• Access to the Online School and Online Curriculum. Our proprietary learning management system (“OLS”)
revenues are generally earned on a per course basis from schools and school districts. Students enrolled
through a school are provided access to the OLS and online curriculum. Revenues are earned ratably over
the school year, typically 10 months, or over the semester depending on the length of the course.
• Learning Kits. The lessons in our online school are often accompanied with selected printed materials,
workbooks, laboratory materials and other manipulative items which we provide to students. We generally
ship all learning kits to a student when their enrollment is approved. Once materials have been shipped, our
efforts are substantially complete. Therefore, we recognize revenues upon shipment. Shipments to schools
that occur in the fourth fiscal quarter that are for the following school year are recorded in deferred revenues.
We also earn reclamation fee income when we reclaim materials for schools at the end of the school year or
when a student withdraws from the school.
•
Student Computers. We provide many enrolled students with the use of a personal computer and complete
technical support through our call center. Revenues are generally earned ratably over the school year and we
also earn revenues for reclamation services when a student withdraws from a school and returns the computer
which may occur in a subsequent school year.
• Management, Technology and Educational Services. Under most of our statewide virtual public and blended
school contracts, we provide the boards of managed schools with turn-key management and technology
services. We recognize these revenues ratably over our fiscal year as administrative offices of the school
remain open for the entire year. Our management and technology service fees are generally a contracted
percentage of yearly school funding. To determine the pro rata amount of revenues to recognize in a fiscal
quarter, we estimate the total funds each school will receive in a particular school year. Total funds for a
school are primarily a function of the number of students enrolled in the school and established per enrollment
funding levels, which are generally published on an annual basis by the state or school district.
To determine the pro rata amount of revenues to recognize in a fiscal quarter, we estimate the total funds each
school will receive in a particular school year. Total funds for a school are primarily a function of the number of students
enrolled in the school and established per enrollment funding levels, which are generally published on an annual basis by
the state or school district. We review our estimates of funding periodically, and revise as necessary, amortizing any
adjustments to earned revenues over the remaining portion of the fiscal year. Actual school funding may vary from these
estimates, and the impact of these differences could impact our results of operations. Since the end of the school year
coincides with the end of our fiscal year, annual revenues are generally based on actual school funding and actual costs
incurred (including costs for our services to the schools plus other costs the schools may incur) in the calculation of school
operating losses. Our schools’ reported results are subject to annual school district financial audits, which incorporate
enrollment counts, funding and other routine financial audit considerations. The results of these audits are incorporated
into our monthly funding estimates and for the years ended June 30, 2017, 2016 and 2015 our aggregate funding estimates
differed from actual reimbursements impacting total reported revenues by approximately (0.1)%, 0.4% and (0.1)%,
respectively.
Under the contracts where we provide turnkey management services to schools, we have generally agreed to
absorb any operating losses of the schools in a given school year. These school operating losses represent the excess of
costs incurred over revenues earned by the virtual or blended public school as reflected on its respective financial
statements, including our charges to the schools. To the extent a school does not receive funding for each student enrolled
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in the school, the school would still incur costs associated with serving the unfunded enrollment. If losses due to unfunded
enrollments result in a net operating loss for the year that loss is reflected as a reduction in the revenues and net receivables
that we collect from the school. A school net operating loss in one year does not necessarily mean we anticipate losing
money on the entire contract with the school. However, a school operating loss may reduce our ability to collect its
management fees in full and recognized revenues are reduced accordingly to reflect the expected cash collections from
such schools. We amortize the estimated school operating loss against revenues based upon the percentage of actual
revenues in the period to total estimated revenues for the fiscal year.
For turnkey service contract revenues, a school operating loss may reduce our ability to collect our management
fees in full, though as noted it does not necessarily mean that we incur a loss during the period with respect to our services
to that school. We recognize revenues, net of our estimated portion of school operating losses, to reflect the expected cash
collections from such schools. Revenues are recognized based on our performance of services under the contract, which
we believe is proportionate to our incurrence of costs. We incur costs directly related to the delivery of services. Most of
these costs are recognized throughout the year; however, certain costs related to upfront delivery of printed materials,
workbooks, laboratory materials and other items are provided at the beginning of the school year and are recognized as
expenses when shipped.
Each state or school district has variations in the school funding formulas and methodologies that we use to
estimate funding for revenue recognition at our respective schools. As we build the funding estimates for each school, we
are mindful of the state definition for count dates on which reported enrollment numbers will be used for per pupil funding.
The parameters we consider in estimating funding for revenue recognition purposes include school district count
definitions, withdrawal rates, average daily attendance, special needs enrollment, student demographics, academic
progress and historical completion, student location, funding caps and other state specified categorical program funding.
Management periodically reviews its estimates of full-year school revenues and operating expenses and amortizes
the net impact of any changes to these estimates over the remainder of the fiscal year. Actual school operating losses may
vary from these estimates or revisions, and the impact of these differences could have a material impact on results of
operations. Since the end of the school year coincides with the end of our fiscal year, annual revenues are generally based
on actual school funding and actual costs incurred (including costs for our services to the schools plus other costs the
schools may incur) in the calculation of school operating losses. For the years ended June 30, 2017, 2016 and 2015, our
revenues included a reduction for these school operating losses of $61.0 million, $57.1 million, and $65.2 million,
respectively.
A school operating loss may result from a combination of cost increases or funding reductions attributable to the
following:
•
•
•
•
•
•
•
•
costs associated with opening new schools, including the initial hiring of teachers, administrators and the
establishment of school infrastructure;
school requirements to establish contingency reserves;
one-time costs, such as legal claims;
funding reductions due to the inability to qualify specific students for funding;
regulatory or academic performance thresholds that may restrict the ability of a school to fund all expenses;
inadequate school funding in particular states;
providing services without receiving state funding when enrollments occur after enrollment count dates; and
burdensome regulations creating excessive costs.
We generate a small percentage of our revenues from the sale of perpetual licenses of curriculum and ongoing
support to schools. We account for the license and support of separate units of accounting and recognize revenues
associated with the license up front and ongoing maintenance and support over the performance period. We also generate
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a small percentage of our revenues through the sale of our online courses and learning kits directly to consumers, as well
as providing hosting services to certain customers. We record revenue for consumer services over the term of the course
subscription.
For the year ended June 30, 2017, special education students comprised approximately 20% of estimated funding
for revenue recognition purposes at our schools. We compute revenues at the school level not based on the type of student
served; therefore, we are unable to determine the revenues and profitability by student type. For each student enrolled, we
receive basic per pupil funds determined by state funding and count definitions, and policies which vary from state-to-state.
Additionally, based on the needs of the student population, we may receive supplemental special education state funding
grants and federal funding under the Individuals with Disabilities Education Act. While we do not track profitability at the
student level, these supplemental funding programs are intended to offset part of the costs of the education needs of
children with learning disabilities through reimbursement of qualifying costs under the programs.
Allowance for Doubtful Accounts
We maintain an allowance for uncollectible accounts primarily for estimated losses resulting from the inability
or failure of individual customers to make required payments. We analyze accounts receivable, historical percentages of
uncollectible accounts, and changes in payment history when evaluating the adequacy of the allowance for uncollectible
accounts. We write-off accounts receivable based on the age of the receivable and the facts and circumstances surrounding
the customer and reasons for non-payment. We record an allowance for estimated uncollectible accounts in an amount
approximating anticipated losses. Actual write-offs might exceed the recorded allowance.
Capitalized Curriculum Development Costs
Our curriculum is primarily developed by our employees and, to a lesser extent, by independent contractors.
Generally, our courses cover traditional subjects and utilize examples and references designed to remain relevant for long
periods of time. The online nature of our curriculum allows us to incorporate user feedback rapidly and make ongoing
corrections and improvements. For these reasons, we believe that our courses, once developed, have an extended useful
life, similar to computer software. We also publish textbooks and other offline materials. Our curriculum is integral to our
learning systems. Our customers generally do not acquire our curriculum or future rights to it.
Due to the similarity in development stages and long economic life of curriculum to computer software, we
capitalize curriculum development costs incurred during the application development stage in accordance with
ASC 350, Intangibles -- Goodwill and Other (“ASC 350”), Intangibles—Goodwill and Other. ASC 350 provides guidance
for the treatment of costs associated with computer software development and defines those costs to be capitalized and
those to be expensed. Costs that qualify for capitalization are external direct costs, payroll and payroll-related costs. Costs
related to general and administrative functions are not capitalizable and are expensed as incurred. We capitalize curriculum
development costs during the design, development and deployment phases of the project. Many of our new courses
leverage off of proven delivery platforms and are primarily content, which has no technological hurdles. As a result, a
significant portion of our courseware development costs qualify for capitalization due to the concentration of our
development efforts on the content of the courseware. Capitalization ends when a course is available for general release
to our customers, at which time amortization of the capitalized costs begins. Capitalized costs are recorded in capitalized
curriculum development costs. The period of time over which these development costs will be amortized is generally five
years. This is consistent with the capitalization period used by others in our industry and corresponds with our product
development lifecycle.
Software Developed or Obtained for Internal Use
We develop our own proprietary computer software programs to provide specific functionality to support both
our unique education offerings and the student and school management services. These programs enable us to develop
courses, process student enrollments, meet state documentation requirements, track student academic progress, deliver
online courses to students, coordinate and track the delivery of course-specific materials to students and provide teacher
support and training. These applications are integral to our learning systems and we continue to enhance existing
applications and create new applications. Our customers do not acquire our software or future rights to it. We capitalize
software development costs incurred during development in accordance with ASC 350. These capitalized development
costs are included in capitalized software development costs and are generally amortized over three years.
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Impairment of Long-lived Assets
Long-lived assets include property, equipment, capitalized curriculum and software developed or obtained for
internal use. In accordance with ASC 360, Property, Plant and Equipment (“ASC 360”), we review our recorded
long-lived assets for impairment annually or whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be fully recoverable. We determine the extent to which an asset may be impaired based upon
our expectation of the asset’s future usability as well as on a reasonable assurance that the future cash flows associated
with the asset will be in excess of its carrying amount. If the total of the expected undiscounted future cash flows is less
than the carrying amount of the asset, a loss is recognized for the difference between fair value and the carrying value of
the asset.
• We wrote down approximately $2.6 million of capitalized curriculum development costs due to our decision
to discontinue certain curriculum during the year ended June 30, 2015. There were no material write-downs
of capitalized curriculum development costs for the years ended June 30, 2017 and 2016.
• We wrote down approximately $0.5 million and $4.8 million, respectively, of capitalized software projects
after determining the assets either had no future use or are being sunset during the years ended June 30, 2016
and 2015. There were no material write-downs of capitalized software projects for the year ended June 30,
2017.
• We wrote down approximately $6.5 million of property and equipment, primarily related to computer
peripherals shipped to students and for which no reclamation will be processed during the year ended June
30, 2015. There were no material write-downs of computer peripherals for the years ended June 30, 2017
and 2016.
Income Taxes
We account for income taxes in accordance with ASC 740, Income Taxes (“ASC 740”). ASC 740 prescribes the
use of the asset and liability method to compute the differences between the tax bases of assets and liabilities and the
related financial amounts, using currently enacted tax laws. If necessary, a valuation allowance is established, based on
the weight of available evidence, to reduce deferred tax assets to the amount that is more likely than not to be realized.
Realization of the deferred tax assets, net of deferred tax liabilities, is principally dependent upon achievement of sufficient
future taxable income. We exercise significant judgment in determining our provisions for income taxes, our deferred tax
assets and liabilities and our future taxable income for purposes of assessing our ability to utilize any future tax benefit
from our deferred tax assets.
Although we believe that our tax estimates are reasonable, the ultimate tax determination involves significant
judgments that could become subject to examination by tax authorities in the ordinary course of business. We periodically
assess the likelihood of adverse outcomes resulting from these examinations to determine the impact on our deferred taxes
and income tax liabilities and the adequacy of our provision for income taxes. Changes in income tax legislation, statutory
income tax rates or future taxable income levels, among other things, could materially impact our valuation of income tax
assets and liabilities and could cause our income tax provision to vary significantly among financial reporting periods.
We have a valuation allowance on net deferred tax assets of $7.2 million and $4.3 million as of June 30, 2017
and 2016, respectively, for the amount that more likely than not will not be realized.
Stock-based Compensation
We recognize stock-based compensation expense under the provisions of ASC 718, Compensation—Stock
Compensation (“ASC 718”). We use the Black-Scholes option pricing model to calculate the fair value of stock options
at their respective grant date. The use of option valuation models requires the input of highly subjective assumptions,
including the expected stock price volatility and the expected term of the option. The fair value of restricted stock awards
is the fair market value on the date of grant. We recognize these compensation costs on a straight-line basis over the
requisite service period, which is generally the vesting period of the award. During the fiscal year 2015 through the fiscal
year 2017, we granted more restricted stock awards than stock options, resulting in increased stock-based compensation
that will be recognized over the required service periods. In addition, the vesting period is generally three years for
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restricted stock compared to four years for stock options. The increase in restricted stock awards and the shorter vesting
period has increased our stock-based compensation costs, and this increased cost is expected to continue in future periods.
Goodwill and Other Intangible Assets
We record as goodwill the excess of purchase price over the fair value of the identifiable net assets acquired.
Finite-lived intangible assets acquired in business combinations subject to amortization are recorded at their fair value.
Finite-lived intangible assets include the trade names, acquired customers and non-compete agreements. Such intangible
assets are amortized on a straight-line basis over their estimated useful lives. We periodically evaluate the remaining useful
lives of intangible assets and adjust our amortization period if it is determined that such intangible assets have a shorter
useful life. We evaluate the recoverability of our recorded goodwill and other intangible assets annually, or whenever a
triggering event of impairment may occur. We currently have one reporting unit. In the prior fiscal year, we had two
reporting units, which included Middlebury. The Middlebury reporting unit was merged into the K12 reporting unit during
the fourth quarter of fiscal year 2017. As a result of our purchase of the remaining 40% interest in the joint venture,
Middlebury Interactive Language, we began a process of integration. This integration included the accounting function,
as well as the operations and management of remaining MIL employees. MIL no longer had a separate segment manager
that reviewed results and reported into the Chief Operating Decision Maker (the “CODM”).
ASC 350 prescribes a two-step process for impairment testing of goodwill and intangibles with indefinite lives,
which is performed annually, as well as when an event triggering impairment may have occurred. ASC 350 also allows
preparers to qualitatively assess goodwill impairment through a screening process which would permit companies to forgo
Step 1 of their annual goodwill impairment process. This qualitative screening process is referred to as “Step 0”. We
perform our annual assessment on May 31st. Under the two-step process, the first step tests for potential impairment by
comparing the fair value of reporting units with reporting units’ net asset values. If the fair value of a reporting unit exceeds
the carrying value of the reporting unit’s net assets, then goodwill is not impaired and no further testing is required. If the
fair value of reporting unit is below the reporting unit’s carrying value, then the second step is required to measure the
amount of potential impairment. The second step requires an assignment of the reporting unit’s fair value to the reporting
unit’s assets and liabilities, using the initial acquisition accounting guidance related to business combinations, to determine
the implied fair value of the reporting unit’s goodwill. The implied fair value of the reporting unit’s goodwill is then
compared with the carrying amount of the reporting unit’s goodwill to determine the goodwill impairment loss to be
recognized, if any. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, an impairment loss
equal to the difference is recorded.
Redeemable Noncontrolling Interest
Earnings or losses attributable to minority shareholders of a consolidated affiliated company are classified
separately as “noncontrolling interest” in our consolidated statements of operations. Noncontrolling interests in
subsidiaries that are redeemable outside of our control for cash or other assets are classified outside of permanent equity
at redeemable value, which approximates fair value. If the redemption amount is other than fair value (e.g. fixed or
variable), the redeemable noncontrolling interest is accounted for at the fixed or variable redeemable value. The
redeemable noncontrolling interests are adjusted to their redeemable value at each balance sheet date. The resulting
increases or decreases in the estimated redemption amount are affected by corresponding charges against retained earnings,
or in the absence of retained earnings, additional paid-in-capital.
Results of Operations
We operate in one operating and reportable business segment as a technology-based education company
providing online curriculum, software systems and educational services designed to facilitate individualized learning for
students primarily in kindergarten through 12th grade. The Chief Operating Decision Maker evaluates profitability based
on consolidated results. We have three lines of business: Managed Public School Programs, Institutional (educational
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products and services provided to school districts, public schools and other educational institutions that we do not manage),
and Private Pay Schools and Other (private schools for which we charge student tuition and make direct consumer sales).
Managed Public School Programs
• Virtual public schools
Institutional
• Non-managed
Programs
Public
School
• Blended public schools
• Institutional software and services
Private Pay Schools and Other
• Managed private schools
—K12 International Academy
—George Washington University
Online High School
—The Keystone School
Consolidation of Noncontrolling Interest
Our consolidated financial statements reflect the results of operations of our Middlebury Interactive Languages
(“MIL”) and LearnBop joint ventures. On December 27, 2016, we consummated the acquisition of the remaining 40%
noncontrolling interest of MIL. Earnings or losses attributable to our partners are classified as “net loss attributable to
noncontrolling interest” in the accompanying consolidated statements of operations. Net income or net loss attributable to
noncontrolling interest adjusts our consolidated net results of operations to reflect only our share of the after-tax earnings
or losses of an affiliated company.
Enrollment Data
The following table sets forth total enrollment data for students in our Managed Public School Programs and
Non-managed Public School Programs. Managed Public School Programs include schools where K12 provides
substantially all of the management, technology and academic support services in addition to curriculum, learning systems
and instructional services. Non-managed Public School Programs include schools where K12 provides curriculum and
technology, and the school can also contract for instruction or other educational services. Non-managed Public School
Programs, however, do not offer primary administrative oversight services.
Year Ended June 30,
2017 / 2016
2016 / 2015
2017
2016
2015
Change Change % Change Change %
(In thousands, except percentages)
Managed Public School Programs (1)(2) . . .
Non-managed Public School Programs (1) .
103.7
28.9
102.9
27.0
114.6
20.1
0.8
1.9
0.8%
7.0%
(11.7)
6.9
(10.2%)
34.5%
(1) If a school changes from a Managed to a Non-managed Program, the corresponding enrollment classification would
change in the period in which the contract arrangement changed.
(2) Managed Public School Programs include enrollments for which K12 receives no public funding or revenue.
Revenue by Business Lines
Revenue is captured by business line based on the underlying customer contractual agreements. Periodically, a
customer may change business line classification. For example, a district that purchases a single course (Institutional
business customer) may decide to convert to a full-time virtual school program (Managed Public School customer).
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Changes in business line classification occur at the time the contractual agreement is modified. The following represents
our revenue for each of the periods indicated:
Year Ended June 30,
2017 / 2016
2016 / 2015
2017
2016
Change
%
(In thousands, except percentages)
Change $
2015
Change $
Change
%
Managed Public School Programs . $ 733,690 $ 717,059 $ 813,677 $ 16,631
Institutional
2.3% $ (96,618)
(11.9%)
Non-managed Public School
Programs . . . . . . . . . . . . . . . . .
Institutional Software & Services
9,761
65,362
719
53,709
10,480
Total Institutional . . . . . . . . . . . . . . 119,071
Private Pay Schools and Other . . . .
(11,292)
35,758
Total . . . . . . . . . . . . . . . . . . . . . . . . . $ 888,519 $ 872,700 $ 948,294 $ 15,819
55,601
52,990
108,591
47,050
39,321
48,770
88,091
46,526
17.6%
1.4%
9.7%
(24.0%)
16,280
4,220
20,500
524
1.8% $ (75,594)
41.4%
8.7%
23.3%
1.1%
(8.0%)
Beginning in fiscal year 2016, we presented revenue from Non-managed Public School Programs as part of the
Institutional line of business, along with the Institutional Software and Services, which together constitute total
Institutional revenue. In the prior year these revenues were presented as part of the Public School Programs line of business,
which included both managed and non-managed public school programs. We believe this revised presentation clarifies
and better aligns the disclosure of Non-Managed Program revenues with our operational and sales structure.
The following table sets forth statements of operations data and the amounts as a percentage of revenues for each
of the periods indicated:
2017
Year Ended June 30,
2016
(Dollars in thousands)
2015
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . $ 888,519 100.0 % $ 872,700 100.0 % $ 948,294 100.0 %
Cost and expenses
Instructional costs and services . . . . . . .
Selling, administrative, and other
operating expenses . . . . . . . . . . . . . . . . .
Product development expenses . . . . . . .
Total costs and expenses . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . .
Impairment of investment in Web
International Education Group, Ltd. . . . .
Interest income (expense), net . . . . . . . . .
Income before income taxes and
noncontrolling interest . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . .
Add net loss attributable to
noncontrolling interest . . . . . . . . . . . . . . .
Net income attributable to common
stockholders . . . . . . . . . . . . . . . . . . . . . . . .
557,316
62.7
546,510
62.6
607,756
64.1
305,617
12,457
875,390
13,129
(10,000)
1,808
4,937
(5,396)
(459)
34.4
1.4
98.5
1.5
(1.1)
0.2
0.6
(0.6)
(0.1)
302,205
10,071
858,786
13,914
—
(617)
13,297
(4,746)
8,551
34.6
1.2
98.4
1.6
—
(0.1)
1.5
(0.5)
1.0
307,730
14,381
929,867
18,427
(3,200)
(91)
15,136
(5,810)
9,326
32.5
1.5
98.1
1.9
(0.3)
(0.0)
1.6
(0.6)
1.0
910
0.1
484
0.1
1,662
0.2
451
0.1 %
9,035
1.1 %
10,988
1.2 %
Comparison of the Years Ended June 30, 2017 and 2016
Revenues. Our revenues for the year ended June 30, 2017 were $888.5 million, representing an increase of
$15.8 million, or 1.8%, from $872.7 million for the year ended June 30, 2016. Managed Public School Program revenues
increased $16.6 million, or 2.3%, year over year. The increase in Managed Public School Program revenues was primarily
due to the 0.8% increase in enrollments in both new and existing schools and increases in the per-pupil rate of achieved
state funding in certain states, school mix (distribution of enrollments by school), and other factors.
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Total Institutional revenues increased $10.5 million, or 9.7%, primarily due to the additional revenues from
expanded services in key accounts and growth from our acquired digital game-based learning solutions company. Private
Pay Schools and Other revenues decreased $11.3 million, or 24.0%, over the prior year due to the closure of programs in
the United Kingdom.
Enrollments in Managed Public School Programs on average generate more revenues than enrollments served
through our Institutional business where we provide limited or no management services. As we continue to build our
Institutional business and the Managed Public School Programs business continues to mature, enrollment mix may shift
and impact growth in revenues relative to the growth in enrollments.
Instructional costs and services expenses. Instructional costs and services expenses for year ended June 30, 2017
were $557.3 million, representing an increase of $10.8 million, or 2.0%, from $546.5 million for the year ended
June 30, 2016. This increase in expense was primarily due to the incremental personnel and related benefit costs.
Instructional costs and services expenses were 62.7% of revenues during the year ended June 30, 2017, an increase from
62.6% for the year ended June 30, 2016.
Selling, administrative, and other operating expenses. Selling, administrative, and other operating expenses for
the year ended June 30, 2017 were $305.6 million, representing an increase of $3.4 million, or 1.1% from $302.2 million
for the year ended June 30, 2016. This increase was primarily due to increases in severance and related accelerated stock-
based compensation associated with reductions in headcount, restructuring charges associated with the consolidation of
facilities, and advertising expense, partially offset by a decrease in professional fees during the year ended June 30, 2016.
Selling, administrative, and other operating expenses were 34.4% of revenues during the year ended June 30, 2017, a
decrease from 34.6% for the year ended June 30, 2016.
Product development expenses. Product development expenses for the year ended June 30, 2017 were
$12.5 million, representing an increase of $2.4 million, or 23.8% from $10.1 million for the year ended June 30, 2016. The
increase was primarily due to an increase in salaries and benefits and professional fees, as well as an increase in severance
associated with reductions in headcount. As a percentage of revenues, product development expenses increased to 1.4%
for the year ended June 30, 2017, as compared to 1.2% for the year ended June 30, 2016.
Interest income (expense), net. Net interest income for the year ended June 30, 2017 was $1.8 million as
compared to $(0.6) million in the year ended June 30, 2016. The increase in net interest income was primarily associated
with interest income on certain accounts receivable and lower interest expense associated with capital leases during the
year ended June 30, 2017, as compared to the year ended June 30, 2016.
Impairment of investment in Web International Education Group, Ltd. Impairment of investment in Web
International Education Group, Ltd. (“Web”) for the year ended June 30, 2017 was $10.0 million as compared to zero for
the year ended June 30, 2016. We continue to work with Web on the repayment of our investment, and to the extent we
collect in a subsequent period, we will record the amount collected in other income in the period received.
Income tax expense. We had an income tax expense of $5.4 million for the year ended June 30, 2017, or 109.3%
of income before taxes, as compared to $4.7 million, or 35.7% of income before taxes for the year ended June 30, 2016.
The increase in the effective tax rate for the year ended June 30, 2017 was primarily due to the Web impairment which
resulted in substantial foreign losses with no tax benefit due to the full valuation allowance against these losses.
Net income (loss). Net loss was $(0.5) million for the year ended June 30, 2017, compared to net income of
$8.6 million for the year ended June 30, 2016, representing a decrease of $9.1 million, primarily due to the Web
impairment.
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Noncontrolling interest loss. Net loss attributable to noncontrolling interest for the year ended June 30, 2017 was
$0.9 million as compared to net loss attributable to noncontrolling interest of $0.5 million for the year ended June 30, 2016.
The increase is primarily due to larger losses at MIL during the year ended June 30, 2017, as compared to the year ended
June 30, 2016. Noncontrolling interest reflects the after-tax income attributable to minority interest owners in our
investments, and fluctuates in proportion to the operating results of the investments.
Comparison of the Years Ended June 30, 2016 and 2015
Revenues. Our revenues for the year ended June 30, 2016 were $872.7 million, representing a decrease of
$75.6 million, or 8.0%, from $948.3 million for the year ended June 30, 2015. Managed Public School Program revenues
decreased $96.6 million, or 11.9%, year over year. The decline in Managed Public School Programs revenues was
primarily due to the 10.2% decline in enrollments, largely resulting from the loss of the management component of the
Agora contract, offset in part by increases in the per pupil rate of achieved state funding in certain states. The full fiscal
year net impact of the Agora program transition to a non-managed program resulting in an approximate decrease of
$111 million of total revenues from the prior year.
We provide the schools and school boards we serve with academic programs sufficiently rigorous to yield strong
academic results. These challenging performance expectations for students in a virtual public school can result in parents
opting to withdraw their students from a managed public school and enroll in other school options. We have also seen
some of our virtual public schools transition from Managed Public School Programs to self-administered schools by
seeking competitive alternatives to portions of the products and services now entirely provided by us. While any one of
these factors alone is not necessarily indicative of a material trend in the growth rate in enrollments, continuing to
experience a combination of these factors could negatively impact enrollment growth, revenues and operating income.
There also is increasing competition from several sources including online or blended offerings by traditional public
schools that are recognizing the value of online study and curriculum delivery.
Institutional revenues increased $20.5 million, or 23.3% from the prior year primarily due to transition of the
Agora contract from a managed to non-managed programs.
Instructional costs and services expenses. Instructional costs and services expenses for the year ended
June 30, 2016 were $546.5 million, representing a decrease of $61.3 million, or 10.1%, from $607.8 million for the year
ended June 30, 2015. This decrease in expense was primarily due to the transition of the Agora contract from managed to
non-managed programs. Additionally, during the year ended June 30, 2015, there was $9.6 million of expense related to
accelerated depreciation and amortization for certain curriculum, learning systems and other fixed assets that will no longer
be used or developed, computers that we estimated would not be returned and additional provisions for the decision to
discontinue certain products and for excess inventory relative to anticipated demand. Instructional costs and services
expenses were 62.6% of revenues during the year ended June 30, 2016, a decrease from 64.1% for the year ended
June 30, 2015. Excluding the impact of the charges noted above, instructional costs and services were 62.6% and 63.1%
of revenues for the years ended June 30, 2016 and 2015.
Selling, administrative, and other operating expenses. Selling, administrative, and other operating expenses for
the year ended June 30, 2016 were $302.2 million, representing a decrease of $5.5 million, or 1.8%, from $307.7 million
for the year ended June 30, 2015. Included in expenses for the year ended June 30, 2016 was $7.1 million of expense
related to the settlement agreement with the state of California. Included in expenses for the year ended June 30, 2015 was
$7.5 million of expense related to uncollectible receivables, as well as $4.8 million for the write-off of capitalized software
that will no longer be developed. Selling, administrative, and other operating expenses were 34.6% of revenues during the
year ended June 30, 2016, an increase from 32.5% for the year ended June 30, 2015. This increase of expenses as a
percentage to revenues was primarily due to the legal settlement described above.
Product development expenses. Product development expenses for the year ended June 30, 2016 were
$10.1 million, representing a decrease of $4.3 million, or 29.9% from $14.4 million for the year ended June 30, 2015. As
a percentage of revenues product development expenses decreased to 1.2% for the year ended June 30, 2016, as compared
to 1.5% for the year ended June 30, 2015.
Interest income (expense), net. Net interest expense and other for the year ended June 30, 2016 was $(0.6) million
as compared to $(0.1) million in the year ended June 30, 2015, a decrease of $0.5 million.
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Impairment of investment in Web International Education Group, Ltd. Impairment of investment in Web was
zero for the year ended June 30, 2016, as compared to $3.2 million for the year ended June 30, 2015 as we wrote off
interest income associated with our investment.
Income tax expense. We had an income tax expense of $4.7 million for the year ended June 30, 2016, or 35.7%
of income before taxes, as compared to income tax expense of $5.8 million, or 38.4% of our income before taxes for the
year ended June 30, 2015. Our overall effective tax rate decreased from the prior year primarily due to decreases in
unrecognized tax benefits primarily resulting from audit resolution in a certain foreign jurisdiction, additional tax benefits
related to our research activities, and provision true ups.
Net income (loss). Net income was $8.6 million for the year ended June 30, 2016, compared to net income of
$9.3 million for the year ended June 30, 2015, a decrease of $0.7 million, due to the factors noted above.
Noncontrolling interest loss. Net loss attributable to noncontrolling interest for the year ended June 30, 2016 was
$0.5 million as compared to net loss attributable to noncontrolling interest of $1.7 million for the year ended June 30, 2015.
Noncontrolling interest reflects the after-tax losses attributable to minority interest owners in our investments.
Discussion of Seasonality of Financial Condition
Certain accounts in our balance sheet are subject to seasonal fluctuations. As our enrollments and revenues grow,
we expect these seasonal trends to be amplified. The bulk of our materials are shipped to students prior to the beginning
of the school year, usually in July or August. In order to prepare for the upcoming school year, we generally build up
inventories during the fourth quarter of our fiscal year. Therefore, inventories tend to be at the highest levels at the end of
our fiscal year. In the first quarter of our fiscal year, inventories tend to decline significantly as materials are shipped to
students. In our fourth quarter, inventory purchases and the extent to which we utilize early payment discounts will impact
the level of accounts payable.
Accounts receivable balances tend to be at the highest levels in the first quarter of our fiscal year as we begin
billing for all enrolled students and our billing arrangements include upfront fees for many of the elements of our offering.
These upfront fees result in seasonal fluctuations to our deferred revenue balances. We routinely monitor state legislative
activity and regulatory proceedings that might impact the funding received by the schools we serve and to the extent
possible, factor potential outcomes into our business planning decisions.
Generally, deferred revenue balances related to the schools tend to be highest in the first quarter, when the
majority of students enroll. Since the deferred revenue is amortized over the course of the school year, which typically
ends in May or June, the balance is normally at its lowest at the end of our fiscal year. Generally, deferred revenues from
virtual and blended public schools have not been a source of liquidity as most schools receive their funding over the course
of the school year.
The deferred revenue related to our direct-to-consumer business results from advance payments for twelve month
subscriptions to our online school. These advance payments are amortized over the life of the subscription and tend to be
highest at the end of the fourth quarter and first quarter, when the majority of subscriptions are sold.
Liquidity and Capital Resources
As of June 30, 2017, we had net working capital, or current assets minus current liabilities, of $355.8 million.
Our working capital includes cash and cash equivalents of $230.9 million and accounts receivable of $192.2 million. Our
working capital provides a significant source of liquidity for our normal operating needs. Our accounts receivable balance
fluctuates throughout the fiscal year based on the timing of customer billings and collections and tends to be highest in our
first fiscal quarter as we begin billing for students. In addition, our cash and accounts receivable were significantly in
excess of our accounts payable and short-term accrued liabilities at June 30, 2017.
On January 31, 2014, we executed a $100.0 million unsecured line of credit to be used for general corporate
operating purposes with Bank of America, N.A. (“BOA”). The line has a five-year term, bears interest at the higher of the
Bank’s prime rate plus 0.25%, or the Federal Funds Rates plus 0.75%, or LIBOR plus 1.25%; and incorporates customary
financial and other covenants, including but not limited to a maximum debt leverage and a minimum fixed charge coverage
ratio. As of June 30, 2017, we were in compliance with these covenants and we had no borrowings outstanding on the line
of credit.
66
We incur capital lease obligations for student computers under a lease line of credit with PNC Equipment Finance,
LLC. As of June 30, 2017 and 2016, the outstanding balance of capital leases under the current and former lease lines of
credit was $21.9 million and $23.1 million, respectively, with lease interest rates ranging from 1.95% to 2.71%. Individual
leases under the lease line of credit include 36-month payment terms with a $1 purchase option at the end of each lease
term. We have pledged the assets financed to secure the outstanding leases.
We executed a second extension to our $35.0 million non-revolving lease line of credit during the third quarter
of fiscal year 2017 to extend the maturity date to August 15, 2018, and had remaining availability under the new lease line
of $31.9 million as of June 30, 2017. We had $11.3 million of remaining availability under the previous non-revolving
$35 million lease line of credit as of June 30, 2016. Interest on unpaid principal under the new line of credit is at a
fluctuating rate of LIBOR plus 1.2%.
On November 4, 2013, the Board of Directors authorized the repurchase of up to $75.0 million of our outstanding
common stock over a two year period. Any purchases under the buyback were dependent upon business and market
conditions and other factors. The stock purchases were made from time to time and through a variety of methods including
open market purchases and trading plans that were adopted in accordance with the Rule 10b-18 of the Exchange Act. For
the year ended June 30, 2015, we paid approximately $26.5 million in cash to repurchase 1,307,402 shares of common
stock at an average price of $20.23 per share. There were no repurchases of shares made during the fiscal years ended
June 30, 2017 and 2016. As of June 30, 2017 and 2016 total shares purchased under the plan were 3,502,598, at an average
cost of $21.41 per share, and there were no shares remaining to be repurchased under the plan.
Our cash requirements consist primarily of day-to-day operating expenses, capital expenditures and contractual
obligations with respect to office facility leases, capital equipment leases and other operating leases. We expect to make
future payments on existing leases from cash generated from operations. We believe that the combination of funds to be
generated from operations, net working capital on hand and access to our line of credit will be adequate to finance our
ongoing operations for the foreseeable future. In addition, to a lesser degree, we continue to explore acquisitions, strategic
investments and joint ventures related to our business that we may acquire using cash, stock, debt, contribution of assets
or a combination thereof.
On May 4, 2015, Middlebury College, under the joint venture agreement, exercised its right to require the
Company to purchase all of its ownership interest in the joint venture. On December 27, 2016, we consummated the
acquisition of the remaining 40% noncontrolling interest for $9.1 million in cash.
Operating Activities
Net cash provided by operating activities for the years ended June 30, 2017, 2016 and 2015 was $88.7 million,
$121.8 million and $120.1 million, respectively.
Net cash provided by operating activities for the year ended June 30, 2017 was $88.7 million compared $121.8
million for the year ended June 30, 2016. The $33.1 million decrease in cash provided by operations between periods was
primarily due to an increase in working capital of $42.0 million. The changes in working capital were primarily due to an
increase in accounts receivable from the timing of collections and revenue growth. The increase in working capital was
partially offset by an increase of $8.9 million in non-cash adjustments to net income primarily from depreciation and
amortization and stock-based compensation expense.
Net cash provided by operating activities for the year ended June 30, 2016 was $121.8 million compared to
$120.1 million for the year ended June 30, 2015. The increase of $1.7 million in cash provided by operations between
periods was primarily due to changes in working capital which increased approximately $26.7 million, offset by a decrease
in net income including non-cash adjustments which decreased net income approximately $25.0 million. These changes
in working capital were primarily due to the timing of cash payments related to accounts receivable and accounts payable
offset by increased accrued liabilities. Cash from operations is impacted by the timing of cash collections from products
and services provided and payment of operating costs to fund the continued growth and expansion of our business.
Net cash provided by operating activities for the year ended June 30, 2015 was $120.1 million compared to
$122.9 million for the year ended June 30, 2014. The decrease of $2.8 million in cash provided by operations between
periods was primarily due to net income including non-cash adjustments which increased approximately $6.1 million,
67
offset by an overall use of cash flows from changes in working capital of $8.9 million. These changes in working capital
were primarily due to the timing of cash payments related to accounts payable and decreased accrued liabilities, offset in
part by improved collections of accounts receivable. Cash from operations is impacted by the timing of cash collections
from products and services provided and payment of operating costs to fund the continued growth and expansion of our
business.
Investing Activities
Net cash used in investing activities for the years ended June 30, 2017, 2016 and 2015 was $57.2 million,
$82.9 million and $68.3 million, respectively.
Net cash used in investing activities for the year ended June 30, 2017 decreased $25.7 million from the year ended
June 30, 2016. This decrease was due primarily to the $20.0 million investment in LTS Education Systems during the year
ended June 30, 2016 and an $11.8 million decrease in software and curriculum development expenses, partially offset by
a $9.1 million payment to Middlebury College for the remaining 40% interest in Middlebury Interactive Languages.
Net cash used in investing activities for the year ended June 30, 2016 increased $14.6 million from the year ended
June 30, 2015. This increase was due primarily to the $20.0 million investment in LTS Education Systems and a
$1.1 million increase in capital expenditures for property and equipment, capitalized software and curriculum, partially
offset by the prior year investment in LearnBop for $6.5 million.
Net cash used in investing activities for the year ended June 30, 2015 increased $22.5 million from the year ended
June 30, 2014. This increase was due primarily to the $6.5 million investment in LearnBop, a $12.4 million increase in
capital expenditures for property and equipment, capitalized software and curriculum, and $5.7 million received on the
sale of assets in the year ended June 30, 2014, offset by the investment in a mortgage note to a managed school partner for
$2.1 million that was made in the prior year.
Financing Activities
Net cash used in financing activities for the years ended June 30, 2017, 2016 and 2015 was $14.6 million,
$20.8 million and $50.4 million, respectively.
For the year ended June 30, 2017, our cash used in financing activities consisted primarily of payments on capital
lease obligations incurred for the acquisition of student computers totaling $15.7 million and for the purchase of restricted
stock from employees for income tax withholdings upon vesting of $6.2 million, partially offset by proceeds from the
exercise of options of $7.0 million.
For the year ended June 30, 2016, our cash used in financing activities consisted primarily of payments on capital
lease obligations incurred for the acquisition of student computers totaling $17.4 million and for the purchase of restricted
stock from employees for income tax withholdings upon vesting of $3.4 million.
For the year ended June 30, 2015, our cash used in financing activities consisted primarily of payments made in
connection with our share repurchase program for the purchase of treasury stock of $26.5 million and payments on capital
lease obligations incurred for the acquisition of student computers totaling $21.9 million.
68
Contractual Obligations
Our contractual obligations consist primarily of leases for office space, capital leases for equipment and other
operating leases. The following summarizes our long-term contractual obligations as of June 30, 2017, which decreased
from $69.7 million as of June 30, 2016:
Contractual Obligations—Payments due by period
Total
< 1 year 1 - 3 years 3 - 5 years > 5 years
(In thousands)
Contractual obligations at June 30, 2017
Capital leases(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,430 $ 12,235 $ 10,195 $
—
150
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 62,333 $ 21,443 $ 27,193 $ 13,547 $ 150
13,547
39,903
16,998
9,208
— $
(1) Includes interest expense.
For the schools to which we provide turn-key management services, we typically take responsibility for any
school operating losses that the school may incur. These individual school operating losses, if they occur, are recorded at
the time as a reduction in revenues. Potential school operating losses are not included as a commitment or obligation in
the above table as they cannot be determined at this time and many may not even occur.
Off-Balance Sheet Arrangements
As of June 30, 2017, we provided guarantees of approximately $0.9 million related to lease commitments on the
buildings for certain of our schools. Previously, we had guaranteed two leases which are excluded from the number above,
and discussed in more detail below. During the year ended June 30, 2017, the lessee on one of the leases in which we
served as guarantor defaulted, and under the terms of the guarantee, the obligation was assigned to us. Since the default
occurred, we have taken steps to exit this facility and have entered into an agreement to sublet the space. Additionally,
during the year ended June 30, 2017, we entered into a lease buyout agreement with the landlord on another guaranteed
space to exit the lease early under the terms of the original lease.
In addition, we contractually guarantee that certain schools under our management will not have annual operating
deficits and our management fees from these schools may be reduced accordingly to cover any school operating deficits.
Other than these lease and operating deficit guarantees, we do not have any off-balance sheet arrangements that
have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Impact of Inflation
We believe that inflation has not had a material impact on our results of operations for any of the years in the
three year period ended June 30, 2017. We cannot be sure that future inflation will not have an adverse impact on our
operating results and financial condition in future periods.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which
supersedes most existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize
revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to
which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this
core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than
are required under existing GAAP. The standard is effective for annual periods beginning after December 15, 2016, and
interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the
application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a
retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption
(which includes additional footnote disclosures). On July 9, 2015, the FASB voted to defer the effective date of the new
revenue recognition standard by one year. Based on the Board’s decision, public organizations would apply the new
69
revenue standard to annual reporting periods beginning after December 15, 2017. We are currently evaluating the impact
this standard will have on our consolidated financial statements which includes performing a detailed review of each of
our revenue streams and comparing historical accounting policies and practices to the new standard. We will provide
expanded disclosures pertaining to revenue recognition in our annual and quarterly filings beginning in the first quarter of
fiscal 2019. We expect to complete our assessment of the cumulative effect of adopting ASU 2014-09 as well as the
expected impact of adoption during fiscal 2018.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). The new standard
establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance
sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with
classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal
years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective
transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning
of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are
currently evaluating this guidance, as well as the effect on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718)
(“ASU 2016-09”). This update was issued as part of the FASB’s simplification initiative and affects all entities that issue
share-based payment awards to their employees. The amendments in this update cover such areas as the recognition of
excess tax benefits and deficiencies and an accounting policy election for forfeitures. As part of the new guidance:
• Excess tax benefits or deficiencies arising from share-based awards will be reflected within the
consolidated statements of operations as a component of income tax expense rather than as a component
of stockholders’ equity. The adoption of this guidance may result in volatility within a company’s results
of operations, primarily due to changes in the stock price.
• Excess tax benefits will be presented as an operating activity on the statement of cash flows rather than
as a financing activity.
• A forfeiture election will be made to either estimate forfeitures (similar to today’s requirement) or
recognizing actual forfeitures as they occur. Entities will apply the forfeiture election provision using a
modified retrospective transition approach, with a cumulative effect adjustment recorded to retained
earnings as of the beginning of the period of adoption.
• Statutory tax withholding requirements for employers who withhold shares upon settlement of an award
on behalf of an employee to cover tax obligations are broadened to allow for a range of withholding
from the minimum to the maximum statutory allowable amounts.
We will adopt this guidance during the first quarter of fiscal 2018. As part of our adoption of ASU 2016-09, we
will make an accounting policy election to change the way in which we account for forfeitures of share-based awards.
Specifically, beginning in the first quarter of fiscal 2018, we will recognize forfeitures of share-based awards as they occur
in the period of forfeiture rather than estimating the number of awards expected to be forfeited at the grant date and
subsequently adjusting the estimate when awards are actually forfeited. We expect that the change in accounting policy
will result in an adjustment to retained earnings as of July 1, 2017. We will determine the method of adoption for the
remaining provisions during the first quarter of fiscal 2018.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326)
(“ASU 2016-13”) related to the methodology for recognizing credit losses. The new guidance revises the accounting
requirements related to the measurement of credit losses and will require organizations to measure all expected credit
losses for financial assets based on historical experience, current conditions and reasonable and supportable forecasts about
collectability. Assets must be presented in the financial statements at the net amount expected to be collected. This ASU
will be effective for us in the first quarter of fiscal 2021, and early adoption is permitted. We are currently evaluating the
impact of this ASU on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) (“ASU 2016-15”) related
to the classification of certain cash receipts and cash payments on the statement of cash flows. This ASU will be effective
for us beginning in the first quarter of fiscal 2019 on a retrospective basis, and early adoption is permitted. We are currently
evaluating the impact of this ASU on our consolidated statements of cash flows.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350)
(“ASU 2017-04”). This amendment simplifies how an entity is required to test goodwill for impairment by eliminating
70
Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value
of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, under the amendments in this update, an
entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with
its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount
exceeds the reporting unit’s fair value. The update is effective for annual or any interim goodwill impairment tests in fiscal
years beginning after December 15, 2019. An entity should apply the amendments in this update on a prospective basis.
An entity is required to disclose the nature of and reason for the change in accounting principle upon transition. Early
adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.
We are currently evaluating this guidance, as well as the effect on our consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
At June 30, 2017 and 2016, we had cash and cash equivalents totaling $230.9 million and $214.0 million,
respectively. Our excess cash has been invested primarily in U.S. Treasury money market funds although we may also
invest in money market accounts, government securities, corporate debt securities and similar investments. Future interest
and investment income is subject to the impact of interest rate changes, and we may be subject to changes in the fair value
of our investment portfolio as a result of changes in interest rates. At June 30, 2017, a 1% gross increase in interest rates
earned on cash would result in a $2.3 million annualized increase in interest income.
Our short-term debt obligations under our revolving credit facility are subject to interest rate exposure; however,
as we had no outstanding balance on this facility as of June 30, 2017, fluctuations in interest rates had no impact on our
interest expense.
Foreign Currency Exchange Risk
We currently operate in several foreign countries, but we do not transact a material amount of business in a foreign
currency. At June 30, 2017, a 1% change in exchange rates between the U.S. dollar and British pound would result in an
approximate impact of $0.1 million on our financial statements. If we enter into any material transactions in a foreign
currency or establish or acquire any subsidiaries that measure and record their financial condition and results of operation
in a foreign currency, we will be exposed to currency transaction risk and/or currency translation risk. Exchange rates
between U.S. dollars and many foreign currencies have fluctuated significantly over the last few years and may continue
to do so in the future. Accordingly, we may decide in the future to undertake hedging strategies to minimize the effect of
currency fluctuations on our financial condition and results of operations.
71
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets as of June 30, 2017 and 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for the years ended June 30, 2017, 2016 and 2015 . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income for the years ended June 30, 2017, 2016 and 2015 . . . . . . . . .
Consolidated Statements of Stockholders’ Equity for the years ended June 30, 2017, 2016 and 2015 . . . . . . . . . . .
Consolidated Statements of Cash Flows for the years ended June 30, 2017, 2016 and 2015 . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedule II—Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
73
74
75
76
77
78
79
113
72
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
K12 Inc.
Herndon, Virginia
We have audited the accompanying consolidated balance sheets of K12 Inc. and subsidiaries (the Company) as
of June 30, 2017 and 2016, and the related consolidated statements of operations, comprehensive income, stockholders’
equity, and cash flows for each of the three years in the period ended June 30, 2017. In connection with our audits of the
financial statements, we have also audited the financial statement schedules listed in the accompanying index. These
financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements and schedules.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of K12 Inc. and subsidiaries at June 30, 2017 and 2016, and the results of its operations and its cash
flows for each of the three years in the period ended June 30, 2017, in conformity with accounting principles generally
accepted in the United States of America.
Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), K12 Inc. and subsidiaries’ internal control over financial reporting as of June 30, 2017, based on criteria
established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO) and our report dated August 9, 2017 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
McLean, Virginia
August 9, 2017
73
K12 INC.
CONSOLIDATED BALANCE SHEETS
June 30,
2017
2016
(In thousands except share and
per share data)
Current assets
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 230,864 $ 213,989
Accounts receivable, net of allowance of $14,791 and $10,813 at June 30, 2017 and
2016, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized software, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized curriculum development costs, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
169,554
30,631
9,634
22,047
445,855
28,447
70,055
63,367
23,102
87,285
15,944
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 735,284 $ 734,055
192,205
30,503
8,006
12,004
473,582
26,297
62,695
59,213
20,226
87,214
6,057
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND
STOCKHOLDERS' EQUITY
Current liabilities
Current portion of capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital lease obligations, net of current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred rent, net of current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments and contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redeemable noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity
Common stock, par value $0.0001; 100,000,000 shares authorized; 44,325,772 and
43,184,068 shares issued and 40,823,174 and 39,681,470 shares outstanding at
4
June 30, 2017 and 2016, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
675,436
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(293)
Accumulated other comprehensive loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(41,427)
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(75,000)
Treasury stock of 3,502,598 shares at cost at June 30, 2017 and 2016 . . . . . . . . . . . . . . . . . .
558,720
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities, redeemable noncontrolling interest and stockholders' equity . . . . . . . $ 735,284 $ 734,055
11,880 $
30,052
21,622
29,367
24,830
117,751
10,025
4,157
16,726
11,579
160,238
—
700
13,210
25,919
26,877
31,042
25,964
123,012
9,922
6,661
18,458
9,780
167,833
—
7,502
4
690,488
(170)
(40,976)
(75,000)
574,346
See accompanying notes to consolidated financial statements.
74
K12 INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30,
2016
(In thousands except share and per share data)
2015
2017
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cost and expenses
Instructional costs and services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, administrative, and other operating expenses . . . . . . . . . . . . . .
Product development expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of investment in Web International Education Group,
Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income (expense), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes and noncontrolling interest . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add net loss attributable to noncontrolling interest . . . . . . . . . . . . . . .
Net income attributable to common stockholders . . . . . . . . . . . . . . . . . $
Net income attributable to common stockholders per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted average shares used in computing per share amounts:
888,519 $
872,700 $
948,294
557,316
305,617
12,457
875,390
13,129
546,510
302,205
10,071
858,786
13,914
(10,000)
1,808
4,937
(5,396)
(459)
910
451 $
—
(617)
13,297
(4,746)
8,551
484
9,035 $
607,756
307,730
14,381
929,867
18,427
(3,200)
(91)
15,136
(5,810)
9,326
1,662
10,988
0.01 $
0.01 $
0.24
0.23 $
0.29
0.29
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,298,581
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,500,934
37,613,782
38,850,388
37,330,569
37,625,425
See accompanying notes to consolidated financial statements.
75
K12 INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other comprehensive income, net of tax:
2017
Year Ended June 30,
2016
(In thousands)
2015
(459) $
8,551 $ 9,326
Foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other comprehensive income (loss), net of tax . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive loss attributable to noncontrolling interest . . . . . . . . . . . . . . . . . . . . .
123
(336)
910
772
9,323
484
(953)
8,373
1,662
Comprehensive income attributable to common stockholders . . . . . . . . . . . . . . . . . . . $
574 $
9,807 $ 10,035
See accompanying notes to consolidated financial statements.
76
K12 INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
Balance, June 30, 2014 . . . . . . . . . . . . . . . . . . . . . . .
Net income(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustments . . . . . . . . .
Purchase of Treasury Stock . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . . . . . . . . . .
Excess tax expense from stock-based compensation .
Issuance of restricted stock awards . . . . . . . . . . . . . .
Forfeiture of restricted stock awards . . . . . . . . . . . . .
Adjustments to redeemable noncontrolling interests to
estimated redemption value . . . . . . . . . . . . . . . . . . .
Retirement of restricted stock for tax withholding . . .
Balance, June 30, 2015 . . . . . . . . . . . . . . . . . . . . . . .
Net income(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustments . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . . . . . . . . . .
Excess tax expense from stock-based compensation .
Issuance of restricted stock awards . . . . . . . . . . . . . .
Forfeiture of restricted stock awards . . . . . . . . . . . . .
Adjustments to redeemable noncontrolling interests to
estimated redemption value . . . . . . . . . . . . . . . . . . .
Retirement of restricted stock for tax withholding . . .
Balance, June 30, 2016 . . . . . . . . . . . . . . . . . . . . . . .
Net income(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustment . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . . . . . . . . . .
Excess tax expense from stock-based compensation .
Issuance of restricted stock awards . . . . . . . . . . . . .
Forfeiture of restricted stock awards . . . . . . . . . . . .
Adjustments to redeemable noncontrolling interests to
estimated redemption value . . . . . . . . . . . . . . . . . . .
Retirement of restricted stock for tax withholding . . .
Balance, June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . .
Common Stock
Additional
Paid-in
Amount Capital
Shares
41,144,062 $
4 $ 639,036 $
4 $ 663,461 $
—
—
—
—
99,935
—
822,698
(66,480)
—
—
—
—
—
—
—
—
—
(162,321)
41,837,894 $
—
—
—
—
—
1,000
—
1,704,843
(95,980)
—
—
—
—
—
—
—
—
(263,689)
43,184,068 $
—
—
—
—
—
21,299
553
(2,793)
—
—
8,038
(2,672)
—
—
18,616
14
(4,876)
—
—
1,615
(3,394)
—
—
—
425,180
—
1,268,311
(175,008)
4 $ 675,436 $
—
—
—
—
—
—
—
—
—
22,598
6,953
(5,063)
—
—
K12 Inc. Stockholders
Accumulated
Other
Comprehensive Accumulated
Treasury Stock
Loss
Deficit
Shares
Amount Total
(112) $
—
(953)
—
—
—
—
—
—
—
—
(1,065) $
—
772
—
—
—
—
—
—
—
(293) $
—
123
—
—
—
—
—
(61,450)
10,988
—
—
—
—
—
—
—
—
—
(50,462)
9,035
—
—
—
—
—
—
—
—
(41,427)
451
—
—
—
—
—
—
(2,195,196)
—
—
(1,307,402)
—
—
—
—
—
$ (48,548) $ 528,930
10,988
(953)
(26,452)
21,299
553
(2,793)
—
—
—
—
(26,452)
—
—
—
—
—
—
—
—
—
8,038
(2,672)
(3,502,598) $ (75,000) $ 536,938
9,035
772
18,616
14
(4,876)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,615
(3,394)
(3,502,598) $ (75,000) $ 558,720
451
123
22,598
6,953
(5,063)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(376,779)
44,325,772 $
—
—
4 $ 690,488 $
(3,245)
(6,191)
—
—
(170) $
—
—
(40,976)
—
—
(3,245)
(6,191)
(3,502,598) $ (75,000) $ 574,346
—
—
(1) Net income attributable to noncontrolling interest excludes $0.9 million, $0.5 million and $1.7 million for the years ended
June 30, 2017, 2016 and 2015, respectively, due to the redeemable noncontrolling interest related to Middlebury Interactive Languages
and LearnBop, which is reported outside of permanent equity in the consolidated balance sheets (See Note 10 – “Redeemable
Noncontrolling Interest”).
See accompanying notes to consolidated financial statements.
77
K12 INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization expense . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit from stock-based compensation . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for excess and obsolete inventory . . . . . . . . . . . . . . . . . . . . .
Provision for student computer shrinkage and obsolescence . . . . . . . .
Impairment loss on other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expensed computer peripherals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of investment in Web International Education Group, Ltd.
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred rent and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . .
Cash flows from investing activities
Purchase of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized software development costs . . . . . . . . . . . . . . . . . . . . . . .
Capitalized curriculum development costs . . . . . . . . . . . . . . . . . . . . .
Purchase of noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sale of trade name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of LearnBop, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of LTS Education Systems, net of cash acquired . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from financing activities
Repayments on capital lease obligations . . . . . . . . . . . . . . . . . . . . . . .
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit from stock-based compensation . . . . . . . . . . . . . .
Repurchase of restricted stock for income tax withholding . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of foreign exchange rate changes on cash and cash
equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . .
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . . . .
2017
Year Ended June 30,
2016
(In thousands)
2015
$
(459)
$
8,551
$
9,326
74,280
22,598
(291)
(7,065)
4,512
475
246
586
3,525
10,000
(255)
(27,745)
(348)
1,628
43
10,020
5,317
(4,963)
(1,674)
(1,135)
(567)
88,728
(2,174)
(26,918)
(19,132)
(9,134)
89
—
71
(57,198)
(15,697)
—
6,953
291
(6,191)
(14,644)
68,225
18,616
(6)
(3,818)
4,610
691
(459)
200
2,625
—
—
14,463
(1,751)
1,860
2,830
(8,910)
(3,900)
15,497
4,255
636
(2,437)
121,778
(5,008)
(36,265)
(21,627)
—
—
—
(19,953)
(82,853)
(17,402)
—
14
6
(3,394)
(20,776)
(11)
16,875
213,989
230,864
$
(12)
18,137
195,852
213,989
$
$
80,282
21,299
(118)
(3,094)
9,300
1,406
(430)
—
3,519
3,200
—
(1,892)
2,853
(4,073)
(2,579)
(1,440)
(1,192)
(7,854)
9,389
621
1,562
120,085
(9,928)
(33,755)
(18,057)
—
—
(6,512)
—
(68,252)
(21,939)
(26,452)
553
118
(2,672)
(50,392)
(1,698)
(257)
196,109
195,852
See accompanying notes to consolidated financial statements.
78
K12 Inc.
Notes to Consolidated Financial Statements
1. Description of the Business
K12 Inc., together with its subsidiaries (“K12” or the “Company”), is a technology-based education company.
The Company offers online curriculum, software systems and educational services designed to facilitate individualized
learning for students primarily in kindergarten through 12th grade, or K-12. The Company’s learning systems combine
curriculum, instruction and related support services to create an individualized learning approach well-suited for virtual
and blended public schools, school districts, charter schools and private schools that utilize varying degrees of online and
traditional classroom instruction, and other educational applications. These products and services are provided primarily
to three lines of business: Managed Public School Programs (curriculum and services sold to 77 managed public schools
in a majority of states throughout the United States), Institutional (curriculum, technology and services provided to school
districts, public schools and other educational institutions that the Company does not manage), and Private Pay Schools
and Other (private schools for which the Company charges student tuition and makes direct consumer sales).
The Company works closely as a partner with public schools, school districts, charter schools and private schools,
enabling them to offer their students an array of solutions, including full-time virtual programs, semester courses and
supplemental solutions. In addition to curriculum, systems and programs, the Company provides teacher training, teaching
services, and other academic and technology support services.
2. Basis of Presentation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
The Company operates in one operating and reportable business segment as a technology-based education
company providing online curriculum, software systems and educational services designed to facilitate individualized
learning for students primarily in kindergarten through 12th grade. The Chief Operating Decision Maker evaluates
profitability based on consolidated results.
3. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United
States (“GAAP”) requires management to make estimates and assumptions affecting the reported amounts of assets and
liabilities and contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates and assumptions,
including those related to allowance for doubtful accounts, inventory reserves, amortization periods, the allocation of
purchase price to the fair value of net assets and liabilities acquired in business combinations, fair values used in asset
impairment evaluations, valuation of long-lived assets, accrual for incurred but not reported (“IBNR”) claims, fair value
of redeemable noncontrolling interest, fair value of lease exit liabilities, contingencies, income taxes and stock-based
compensation expense. The Company bases its estimates on historical experience and various assumptions that it believes
are reasonable under the circumstances. The results of the analysis form the basis for making assumptions about the
carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from
those estimates.
Revenue Recognition and Concentration of Revenues
Revenues are principally earned from long-term contractual agreements to provide online curriculum, books,
materials, computers and management services to virtual and blended charter schools, traditional public schools, school
districts, and private schools. In addition to providing the curriculum, books and materials, under most contracts, the
Company provides management services and technology to virtual and blended public schools, including monitoring
academic achievement, teacher hiring and training, compensation of school personnel, financial management, enrollment
processing and development and procurement of curriculum, equipment and required services. The schools receive funding
79
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
on a per student basis from the state in which the public school or school district is located. Shipments of materials for
schools that occur in the fourth fiscal quarter and for the upcoming school year are recorded in deferred revenue.
Where the Company has determined that it is the primary obligor for substantially all expenses under these
contracts, the Company records the associated per student revenues received by the school from its state funding school
district up to the expenses incurred in accordance with Accounting Standards Codification (“ASC”) 605, Revenue
Recognition (“ASC 605”). As a result of being the primary obligor, amounts recorded as revenues and school operating
expenses for the years ended June 30, 2017, 2016 and 2015, were $292.0 million, $294.7 million and $338.2 million,
respectively. For contracts where the Company is not the primary obligor, the Company records revenues based on its net
fees earned under the contractual agreement.
The Company generates revenues under turnkey management contracts with virtual and blended public schools
which include multiple elements. These elements include:
•
•
•
•
•
providing each of a school’s students with access to the Company’s online school and lessons;
offline learning kits, which include books and materials to supplement the online lessons, where required;
the use of a personal computer and associated reclamation services, where required;
internet access and technology support services;
instruction by a state-certified teacher, where required; and
• management and technology services necessary to operate a virtual public or blended school. In certain
managed school contracts, revenues are determined directly by per enrollment funding.
The Company has determined that the elements of its contracts are valuable to schools in combination, but do not
have standalone value. As a result, the elements within the Company’s multiple-element contracts do not qualify as
separate units of accounting. Accordingly, the Company accounts for revenues under multiple element arrangements as a
single unit of accounting and recognizes the entire arrangement based upon the approximate rate at which it incurs the
costs associated with each element. Revenues from certain managed schools are recognized ratably over the period services
are performed.
To determine the pro rata amount of revenues to recognize in a fiscal quarter, the Company estimates the total
funds each school will receive in a particular school year. Total funds for a school are primarily a function of the number
of students enrolled in the school and established per enrollment funding levels, which are generally published on an
annual basis by the state or school district. The Company reviews its estimates of funding periodically, and revises as
necessary, amortizing any adjustments to earned revenues over the remaining portion of the fiscal year. Actual school
funding may vary from these estimates and the impact of these differences could impact the Company’s results of
operations. Since the end of the school year coincides with the end of the Company’s fiscal year, annual revenues are
generally based on actual school funding and actual costs incurred (including costs for the Company’s services to the
schools plus other costs the schools may incur) in the calculation of school operating losses. The Company’s schools’
reported results are subject to annual school district financial audits, which incorporate enrollment counts, funding and
other routine financial audit considerations. The results of these audits are incorporated into the Company’s monthly
funding estimates and for the years ended June 30, 2016, 2015 and 2014, the Company’s aggregate funding estimates
differed from actual reimbursements impacting total reported revenue by approximately (0.1)%, 0.4%, and (0.1)%,
respectively.
Under the contracts where the Company provides turnkey management services to schools, the Company has
generally agreed to absorb any operating losses of the schools in a given school year. These school operating losses
represent the excess of costs incurred over revenues earned by the virtual or blended public school as reflected on its
respective financial statements, including Company charges to the schools. To the extent a school does not receive funding
80
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
for each student enrolled in the school, the school would still incur costs associated with serving the unfunded enrollment.
If losses due to unfunded enrollments result in a net operating loss for the year that loss is reflected as a reduction in the
revenues and net receivables that the Company collects from the school. A school net operating loss in one year does not
necessarily mean the Company anticipates losing money on the entire contract with the school. However, a school
operating loss may reduce the Company’s ability to collect its management fees in full and recognized revenues are reduced
accordingly to reflect the expected cash collections from such schools. The Company amortizes the estimated school
operating loss against revenues based upon the percentage of actual revenues in the period to total estimated revenues for
the fiscal year.
For turnkey service contract revenues, a school operating loss may reduce the Company’s ability to collect its
management fees in full, though as noted it does not necessarily mean that the Company incurs a loss during the period
with respect to its services to that school. The Company recognizes revenues, net of its estimated portion of school
operating losses, to reflect the expected cash collections from such schools. Revenues are recognized based on the
Company’s performance of services under the contract, which it believes is proportionate to its incurrence of costs. The
Company incurs costs directly related to the delivery of services. Most of these costs are recognized throughout the year;
however, certain costs related to upfront delivery of printed materials, workbooks, laboratory materials and other items
are provided at the beginning of the school year and are recognized as expenses when shipped.
Each state or school district has variations in the school funding formulas and methodologies that it uses to
estimate funding for revenue recognition at its respective schools. As the Company builds the funding estimates for each
school, it is mindful of the state definition for count dates on which reported enrollment numbers will be used for per pupil
funding. The parameters the Company considers in estimating funding for revenue recognition purposes include school
district count definitions, withdrawal rates, average daily attendance, special needs enrollment, student demographics,
academic progress and historical completion, student location, funding caps and other state specified categorical program
funding.
Management periodically reviews its estimates of full-year school revenues and operating expenses and amortizes
the net impact of any changes to these estimates over the remainder of the fiscal year. Actual school operating losses may
vary from these estimates or revisions, and the impact of these differences could have a material impact on results of
operations. Since the end of the school year coincides with the end of the Company’s fiscal year, annual revenues are
generally based on actual school funding and actual costs incurred (including costs for the Company’s services to the
schools plus other costs the schools may incur) in the calculation of school operating losses. For the years ended
June 30, 2017, 2016 and 2015, the Company’s revenues included a reduction for these school operating losses of
$61.0 million, $57.1 million, and $65.2 million, respectively.
The Company provides certain online curriculum and services to schools and school districts under subscription
and perpetual license agreements. Revenues under these agreements are recognized when all of the following conditions
are met: there is persuasive evidence of an arrangement; delivery has occurred or services have been rendered; the amount
of fees to be paid by the customer is fixed and determinable; and the collectability of the fee is probable. Revenues from
the licensing of curriculum under subscription arrangements are recognized on a ratable basis over the subscription period.
Revenues from the licensing of curriculum under non-cancelable perpetual arrangements are recognized when all revenue
recognition criteria have been met. Revenues from professional consulting, training and support services are deferred and
recognized ratably over the service period.
Other revenues are generated from individual customers who prepay and have access for one to two years to
company-provided online curriculum. The Company recognizes these revenues pro rata over the maximum term of the
customer contract. Revenues from associated offline learning kits are recognized upon shipment.
The Company accrues interest on its long-term receivables based on contracted terms.
During the years ended June 30, 2017, 2016 and 2015, approximately 83%, 82% and 86%, respectively, of the
Company’s revenues were recognized from schools that contracted with the Company for Managed Public School
Programs. During the year ended June 30, 2017, the Company had no such contracts that represented 10% of total
81
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
revenues. During the years ended June 30, 2016 and 2015, the Company had one contract that represented approximately
10% and 14% of total revenues, respectively. Approximately 9% of accounts receivable was attributable to that one
contract as of June 30, 2016.
In fiscal year 2015, Agora renegotiated its service agreement and entered into a three year contract with the
Company to purchase its curriculum and certain technology services, while the school board assumed daily operational
responsibilities, including its charter renewal process and marketing and enrollment activities. This assumption of
responsibilities caused the classification of Agora to change from a Managed Public School Program to a non-managed
school within the Institutional business. The net impact of this event on the fiscal year 2016 revenues attributable to the
loss of the management component of the Agora contract was approximately $111 million.
On June 9, 2016, Agora signed a new service agreement that extends through 2019 and included additional
services including curriculum and certain technology services while the school board retained daily operational
responsibilities. The agreement also calls for payment terms of outstanding receivables to be paid over an approximate
two-year period resulting in the reclassification of a portion to deposits and other assets on the consolidated balance sheets.
The Company had outstanding receivables from Agora of $25.4 million and $29.5 million as of June 30, 2017 and 2016.
Shipping and Handling Costs
Shipping and handling costs are expensed when incurred and are classified as instructional costs and services in
the accompanying consolidated statements of operations. Shipping and handling charges invoiced to a customer are
included in revenues.
Research and Development Costs
All research and development costs, including patent application costs, are expensed as incurred.
Cash and Cash Equivalents
Cash and cash equivalents generally consist of cash on hand and cash held in money market and demand deposit
accounts. The Company considers all highly liquid investments with maturities of three months or less when purchased to
be cash equivalents. The Company periodically has cash balances which exceed federally insured limits.
Allowance for Doubtful Accounts
The Company maintains an allowance for uncollectible accounts primarily for estimated losses resulting from the
inability or failure of individual customers to make required payments. The Company analyzes accounts receivable,
historical percentages of uncollectible accounts, and changes in payment history when evaluating the adequacy of the
allowance for uncollectible accounts. The Company writes-off accounts receivable based on the age of the receivable and
the facts and circumstances surrounding the customer and reasons for non-payment. The Company records an allowance
for estimated uncollectible accounts in an amount approximating anticipated losses. Actual write-offs might exceed the
recorded allowance.
Inventories
Inventories consist primarily of textbooks and curriculum materials, a majority of which are supplied to virtual
public schools and blended public schools and utilized directly by students. Inventories represent items that are purchased
and held for sale and are recorded at the lower of cost (first-in, first-out method) or market value. Provisions for excess
and obsolete inventory are established based upon the evaluation of the quantity on hand relative to demand.
During the years ended June 30, 2016 and 2015, the Company increased the provision for excess and obsolete
inventory by $0.7 million and $1.4 million primarily related to inventory in excess of anticipated demand and the decision
to discontinue certain products. The Company decreased the provision during the year ended June 30, 2017 by $0.3
82
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
million. The excess and obsolete inventory reserve at June 30, 2017 and 2016, was $2.3 million and $2.6 million,
respectively.
Other Current Assets
Other current assets consist primarily of textbooks, curriculum materials and other supplies which are expected
to be returned upon the completion of the school year. Materials not returned are expensed as part of instructional costs
and services.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation expense
is calculated using the straight-line method over the estimated useful life of the asset (or the lesser of the term of the lease
and the estimated useful life of the asset under capital lease). Amortization of assets capitalized under capital lease
arrangements is included in depreciation expense. Leasehold improvements are amortized over the lesser of the lease term
or the estimated useful life of the asset. The Company determines the lease term in accordance with ASC 840, Leases
(“ASC 840”), as the fixed non-cancelable term of the lease plus all periods for which failure to renew the lease imposes a
penalty on the lessee in an amount such that renewal appears, at the inception of the lease, to be reasonably assured.
Beginning in fiscal year 2016, the Company no longer recovers peripheral equipment as it was determined to be
uneconomical. Accordingly, the Company fully expenses peripheral equipment upon shipment as a component of
instructional costs and services. These expenses totaled $3.5 million and $2.6 million for the years ended June 30, 2017
and 2016, respectively.
In addition, during the year ended June 30, 2015, the Company wrote down $6.5 million of property and
equipment primarily related to computer peripherals and other fixed assets shipped to students, and for which no
reclamation will be processed. There were no other material write-downs for the years ended June 30, 2017 and 2016.
Property and equipment are depreciated over the following useful lives:
Useful Life
3 - 5 years
Student and state testing computers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3 years
Computer hardware . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3 - 5 years
Computer software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3 years
Web site development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5 years
Office equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7 years
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 - 12 years
The Company makes an estimate of unreturned student computers based on an analysis of recent trends of returns.
In addition during the fiscal year 2017, the Company accelerated depreciation on property and equipment associated with
the operating leases that were exited during the three months ended March 31, 2017 (see Note 12, “Restructuring and
Severance”). The Company recorded accelerated depreciation of $3.5 million, $2.8 million and $5.0 million for the years
ended June 30, 2017, 2016 and 2015, respectively, related to the leases exited and for unreturned student computers.
Capitalized Software
The Company develops software for internal use. Software development costs incurred during the application
development stage are capitalized in accordance with ASC 350, Intangibles -- Goodwill and Other (“ASC 350”). The
Company amortizes these costs over the estimated useful life of the software, which is generally three years. Capitalized
software development costs are stated at cost less accumulated amortization.
Capitalized software development additions totaled $26.9 million, $36.3 million and $33.8 million for the years
ended June 30, 2017, 2016 and 2015, respectively. The Company wrote down approximately $0.5 million and $4.8 million,
83
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
respectively, of capitalized software projects after determining the assets either had no future use or are being sunset for
the years ended June 30, 2016 and 2015. This write-down was included in selling, administrative and other operating
expenses. There were no material write-downs of capitalized software projects for the year ended June 30, 2017.
Amortization expense for the years ended June 30, 2017, 2016 and 2015, was $33.0 million, $28.9 million and
$26.8 million, respectively.
Capitalized Curriculum Development Costs
The Company internally develops curriculum, which is primarily provided as online content and accessed via
the Internet. The Company also creates textbooks and other materials that are complementary to online content.
The Company capitalizes curriculum development costs incurred during the application development stage in
accordance with ASC 350. The Company capitalizes curriculum development costs during the design and deployment
phases of the project. Many of the Company’s new courses leverage off of proven delivery platforms and are primarily
content, which has no technological hurdles. As a result, a significant portion of the Company’s courseware development
costs qualify for capitalization due to the concentration of its development efforts on the content of the courseware.
Capitalization ends when a course is available for general release to its customers, at which time amortization of the
capitalized costs begins. The period of time over which these development costs are amortized is generally five years.
Total capitalized curriculum development additions were $19.1 million, $21.6 million and $18.1 million for the
years ended June 30, 2017, 2016 and 2015, respectively. These amounts are recorded on the accompanying consolidated
balance sheets, net of amortization and impairment charges. Amortization charges are recorded in instructional costs and
services on the accompanying consolidated statements of operations. Amortization expense for the years ended
June 30, 2017, 2016 and 2015 was $19.9 million, $17.0 million and $20.1 million, respectively. The Company wrote down
approximately $2.6 million of capitalized curriculum development costs due to an assessment of recoverability of certain
curriculum during the year ended June 30, 2015. There were no material write-downs of capitalized curriculum
development costs for the years ended June 30, 2017 and 2016.
Redeemable Noncontrolling Interests
Earnings or losses attributable to minority shareholders of a consolidated affiliated company are classified
separately as “noncontrolling interest” in the Company’s consolidated statements of operations. Noncontrolling interests
in subsidiaries that are redeemable outside of the Company’s control for cash or other assets are classified outside of
permanent equity at redeemable value, which approximates fair value. If the redemption amount is other than fair value
(e.g. fixed or variable), the redeemable noncontrolling interest is accounted for at the fixed or variable redeemable value.
The redeemable noncontrolling interests are adjusted to their redeemable value at each balance sheet date. The resulting
increases or decreases in the estimated redemption amount are affected by corresponding charges against retained earnings,
or in the absence of retained earnings, additional paid-in-capital.
Goodwill and Intangible Assets
The Company records as goodwill the excess of purchase price over the fair value of the identifiable net assets
acquired. Finite-lived intangible assets acquired in business combinations subject to amortization are recorded at their fair
value. Finite-lived intangible assets include trade names, acquired customers and non-compete agreements. Such
intangible assets are amortized on a straight-line basis over their estimated useful lives. Amortization expense for the years
ended June 30, 2017, 2016 and 2015 was $2.9 million, $2.7 million and $2.6 million, respectively. Future amortization of
intangible assets is $2.9 million, $2.8 million, $2.7 million, $2.3 million and $2.2 million in the years ended June 30, 2018
through June 30, 2022, respectively and $7.1 million thereafter. As of June 30, 2017 and 2016, the goodwill balance was
$87.2 million and $87.3 million, respectively. The reduction in goodwill was the result of an adjustment to the purchase
price consideration related to the Company’s acquisition of LTS Education Systems, Inc. (see Note 13, “Acquisitions and
Investments”).
84
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
The Company reviews its recorded finite-lived intangible assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be fully recoverable. If the total of the expected
undiscounted future cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between
fair value and the carrying value of the asset. There were no such events during the year ended June 30, 2017.
Goodwill and intangible assets deemed to have an indefinite life are tested for impairment on an annual basis, or
earlier when events or changes in circumstances suggest the carrying amount may not be fully recoverable. Examples of
such events or circumstances include, but are not limited to, significant underperformance relative to historical or projected
future operating results, significant changes in the manner of use of acquired assets or the strategy for the Company’s
business, significant negative industry or economic trends, and/or a significant decline in the Company’s stock price for a
sustained period.
ASC 350 prescribes a two-step process for impairment testing of goodwill and intangibles with indefinite lives,
which is performed annually, as well as when an event triggering impairment may have occurred. ASC 350 also allows
preparers to qualitatively assess goodwill impairment through a screening process which would permit companies to forgo
Step 1 of their annual goodwill impairment process. This qualitative screening process is referred to as “Step 0”. The
Company performs its annual assessment on May 31st. Under the two-step process, the first step tests for potential
impairment by comparing the fair value of reporting units with reporting units’ net asset values. If the fair value of a
reporting unit exceeds the carrying value of the reporting unit’s net assets, then goodwill is not impaired and no further
testing is required. If the fair value of reporting unit is below the reporting unit’s carrying value, then the second step is
required to measure the amount of potential impairment. The second step requires an assignment of the reporting unit’s
fair value to the reporting unit’s assets and liabilities, using the initial acquisition accounting guidance related to business
combinations, to determine the implied fair value of the reporting unit’s goodwill. The implied fair value of the reporting
unit’s goodwill is then compared with the carrying amount of the reporting unit’s goodwill to determine the goodwill
impairment loss to be recognized, if any. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value,
an impairment loss equal to the difference is recorded.
The Company has determined it has one reporting unit. In the prior fiscal year, the Company had two reporting
units, which included Middlebury. The Middlebury reporting unit was merged into the K12 reporting unit during the fourth
quarter of fiscal year 2017. As a result of the Company’s purchase of the remaining 40% interest in the joint venture,
Middlebury Interactive Language (“MIL”) (see Note 10, “Redeemable Noncontrolling Interest”), the Company began a
process of integration. This integration included the accounting function, as well as the operations and management of
remaining MIL employees. MIL no longer had a separate segment manager that reviewed results and reported into the
Chief Operating Decision Maker (the “CODM”).
During the year ended June 30, 2017, the Company performed “Step 0” of the impairment test and determined
that there were no facts and circumstances that indicated that the fair value of the reporting unit may be less than its
carrying amount and as a result, the Company determined that no impairment was required. During the year ended June 30,
2016, the Company performed step one of the two-step impairment test. The estimated fair value of the K12 reporting unit
exceeded its carrying value by approximately 9.8% and the Middlebury reporting unit exceeded its fair value by
approximately 29.8%. Based on the goodwill impairment analysis results, the Company determined that no impairment
was required.
On July 31, 2014, the Company acquired a 51% majority interest in LearnBop, Inc. for $6.5 million in cash. On
April 21, 2016, The Company acquired 100% interest in LTS Education Systems (“LTS”), for $23.1 million in cash and
contingent consideration, see Note 13, “Acquisitions and Investments.”
85
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
The following table represents goodwill additions/reductions during the years ended June 30, 2017, 2016 and
2015:
($ in millions)
Goodwill
Amount
Acquisition of LearnBop . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of LTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of June 30, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 58.1
8.1
Balance as of June 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 66.2
21.1
Balance as of June 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 87.3
(0.1)
Balance as of June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 87.2
Adjustment to purchase price of LTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible Assets:
June 30, 2017
June 30, 2016
($ in millions)
Trade names . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17.6 $
Customer and distributor relationships . . . . . . . . . . .
Developed technology. . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 42.0 $
20.1
2.9
1.4
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Gross
Carrying
Amount
Value
(7.6) $ 10.0 $ 17.6 $
8.1
(12.0)
1.2
(1.7)
(0.5)
0.9
(21.8) $ 20.2 $ 42.0 $
20.1
2.9
1.4
Accumulated
Amortization
Net
Carrying
Value
(6.9) $ 10.7
9.5
(10.6)
1.7
(1.2)
(0.2)
1.2
(18.9) $ 23.1
Impairment of Long-Lived Assets
Long-lived assets include property, equipment, capitalized curriculum and software developed or obtained for
internal use. In accordance with ASC 360, Property, Plant and Equipment (“ASC 360”), management reviews the
Company’s recorded long-lived assets for impairment annually or whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be fully recoverable. The Company determines the extent to which an asset
may be impaired based upon its expectation of the asset’s future usability as well as on a reasonable assurance that the
future cash flows associated with the asset will be in excess of its carrying amount. If the total of the expected undiscounted
future cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between fair value
and the carrying value of the asset. There was no such impairment charge for the years ended June 30, 2017, 2016 and
2015.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740, Income Taxes (“ASC 740”). Under ASC
740, deferred tax assets and liabilities are computed based on the difference between the financial reporting and income
tax bases of assets and liabilities using the enacted marginal tax rate. ASC 740 requires that the net deferred tax asset be
reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion
or all of the net deferred tax asset will not be realized.
Sales Taxes
Sales tax collected from customers is excluded from revenues. Collected but unremitted sales tax is included as
part of accrued liabilities in the accompanying consolidated balance sheets. Revenues do not include sales tax as the
Company considers itself a pass-through conduit for collecting and remitting sales tax.
86
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
Stock-Based Compensation
The Company estimates the fair value of share-based awards on the date of grant. The fair value of stock options
is determined using the Black-Scholes option-pricing model and the fair value of restricted stock awards is based on the
closing price of the Company’s common stock on the date of grant. The determination of the fair value of the Company’s
stock option awards and restricted stock awards is based on a variety of factors including, but not limited to, the Company’s
common stock price, expected stock price volatility over the expected life of awards, and actual and projected exercise
behavior. Additionally, the Company has estimated forfeitures for share-based awards at the dates of grant based on
historical experience, adjusted for future expectation. The forfeiture estimate is revised as necessary if actual forfeitures
differ from these estimates.
Advertising and Marketing Costs
Advertising and marketing costs consist primarily of internet advertising, online marketing, direct mail, print
media and television commercials and are expensed when incurred. Advertising costs totaled $36.8 million, $31.2 million
and $29.6 million for the years ended June 30, 2017, 2016 and 2015, respectively, and are included within selling,
administrative, and other operating expenses in the consolidated statements of operations.
Net Income Per Common Share
The Company calculates net income (loss) per share in accordance with ASC 260, Earnings Per Share (“ASC
260”). Under ASC 260, basic net income (loss) per common share is calculated by dividing net income (loss) by the
weighted-average number of common shares outstanding during the reporting period. The weighted average number of
shares of common stock outstanding includes vested restricted stock awards. Diluted net income (loss) per share (“EPS”)
reflects the potential dilution that could occur assuming conversion or exercise of all dilutive unexercised stock options.
The dilutive effect of stock options and restricted stock awards was determined using the treasury stock method. Under
the treasury stock method, the proceeds received from the exercise of stock options and restricted stock awards, the amount
of compensation cost for future service not yet recognized by the Company and the amount of tax benefits that would be
recorded in additional paid-in capital when the stock options become deductible for income tax purposes are all assumed
to be used to repurchase shares of the Company’s common stock. Stock options and restricted stock awards are not included
in the computation of diluted net income (loss) per share when they are antidilutive. Common stock outstanding reflected
in the Company’s condensed consolidated balance sheets includes restricted stock awards outstanding. Securities that may
participate in undistributed net income with common stock are considered participating securities.
87
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
The following schedule presents the calculation of basic and diluted net income per share:
Year Ended June 30,
2017
2015
2016
(In thousands except share and per share data)
Basic net income per share computation:
Net income attributable to common stockholders . . . . . . . . . . . . . . . . .
Weighted average common shares — basic . . . . . . . . . . . . . . . . . . . . .
Basic net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
451
$
38,298,581
0.01
$
$
$
9,035
37,613,782
0.24
10,988
$
37,330,569
0.29
$
Diluted net income per share computation:
Net income attributable to common stockholders . . . . . . . . . . . . . . . . .
$
451
$
9,035
$
10,988
Share computation:
Weighted average common shares — basic . . . . . . . . . . . . . . . . . .
Effect of dilutive stock options and restricted stock awards . . . . . .
Weighted average common shares — diluted . . . . . . . . . . . . . . . . . .
Diluted net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
38,298,581
1,202,353
39,500,934
0.01
$
37,613,782
1,236,606
38,850,388
0.23
$
37,330,569
294,856
37,625,425
0.29
$
As of June 30, 2017, 2016 and 2015, shares of common stock issuable in connection with stock options and
restricted stock of 1,965,283 , 2,548,762 and 2,784,593 respectively, were not included in the diluted income per common
share calculation because the effect would have been antidilutive. As of June 30, 2017, the Company had 44,325,772
shares of common stock issued and 40,823,174 shares outstanding.
Fair Value Measurements
ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value as the price that would be
received to sell an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability,
in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a fair value
hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs
when measuring fair value.
ASC 820 describes three levels of inputs that may be used to measure fair value:
Level 1: Inputs based on quoted market prices for identical assets or liabilities in active markets at the
measurement date.
Level 2: Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets
and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets
that are not active; or other inputs that are observable or can be corroborated by observable market
data.
Level 3: Inputs reflect management’s best estimate of what market participants would use in pricing the asset
or liability at the measurement date. The inputs are unobservable in the market and significant to the
instrument’s valuation.
The carrying values reflected in the accompanying condensed consolidated balance sheets for cash and cash
equivalents, receivables, and short and long term debt approximate their fair values.
88
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
The following table summarizes certain fair value information at June 30, 2017 and liabilities measured at fair
value on a nonrecurring basis.
Description
Fair Value
Fair Value Measurements Using:
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Input
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Held for sale asset . . . . . . . . . . . . . . . . . . . . . . . $
Lease exit liability . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,200 $
4,841
6,041 $
(In thousands)
— $
—
— $
— $
—
— $
1,200
4,841
6,041
The following table summarizes certain fair value information at June 30, 2016 for assets and liabilities measured
at fair value on a nonrecurring basis.
Description
Fair Value
Fair Value Measurements Using:
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Input
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Held for sale asset . . . . . . . . . . . . . . . . . . . . . . . $
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,786 $
1,786 $
(In thousands)
— $
— $
— $
— $
1,786
1,786
The held for sale asset is discussed in more detail in Note 13, “Acquisitions and Investments.” The lease exit
liability is discussed in more detail in Note 12, “Restructuring and Severance.”
The following table summarizes certain fair value information at June 30, 2017 and liabilities measured at fair
value on a recurring basis.
Description
Fair Value
Fair Value Measurements Using:
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Input
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(In thousands)
Contingent consideration associated with
acquisition of LTS Education Systems . . . . . . $
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2,806 $
2,806 $
— $
— $
— $
— $
2,806
2,806
89
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
The following table summarizes certain fair value information at June 30, 2016 for assets and liabilities measured
at fair value on a recurring basis.
Description
Fair Value
Fair Value Measurements Using:
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Input
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(In thousands)
Redeemable noncontrolling interest in
Middlebury Interactive Learning . . . . . . . . . . . $
Contingent consideration associated with
acquisition of LTS Education Systems . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
6,801 $
— $
— $
6,801
2,947
9,748 $
—
— $
—
— $
2,947
9,748
The following table presents activity related to the Company’s fair value measurements categorized as Level 3
of the valuation hierarchy, valued on a recurring basis, for the year ended June 30, 2017.
Description
Redeemable Noncontrolling Interest in
Middlebury Interactive Learning . . . . . . . . . . .
Contingent consideration associated with
acquisition of LTS Education Systems . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
$
Fair Value
June 30, 2016
Purchases,
Issuances,
Unrealized
and Settlements Gains (Losses)
Fair Value
June 30, 2017
(In thousands)
6,801 $
(9,134) $
2,333 $
—
2,947
9,748 $
—
(9,134) $
(141)
2,192 $
2,806
2,806
The following table presents activity related to the Company’s fair value measurements categorized as Level 3
of the valuation hierarchy, valued on a recurring basis, for the year ended June 30, 2016.
Description
Redeemable Noncontrolling Interest in
Middlebury Interactive Learning . . . . . . . . . . .
Contingent consideration associated with
acquisition of LTS Education Systems . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
$
Fair Value
June 30, 2015
Purchases,
Issuances,
Unrealized
and Settlements Gains (Losses)
Fair Value
June 30, 2016
(In thousands)
6,801 $
— $
— $
6,801
—
6,801 $
2,942
2,942 $
5
5 $
2,947
9,748
The redeemable noncontrolling interest included the Company’s joint venture with Middlebury College. Under
the agreement, Middlebury College had an irrevocable election to sell all of its membership interest to the Company (put
right). On May 4, 2015, Middlebury College, under the joint venture agreement, exercised its right to require the Company
to purchase all of its ownership interest in the joint venture. On December 27, 2016, the Company consummated the
acquisition of the remaining 40% noncontrolling interest for $9.1 million in cash. The fair value of the redeemable
noncontrolling interest in MIL was accounted for in accordance with ASC 480-10-S99, Accounting for Redeemable Equity
Instruments. The redeemable noncontrolling interest was redeemable outside of the Company’s control and was recorded
90
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
outside of stockholders’ equity. The contingent consideration is discussed in more detail in Note 13, “Acquisitions and
Investments.”
Reclassification
Certain previous year amounts have been reclassified to conform with current year presentations, as related to the
reporting of new line items in the statements of operations and statement of cash flows.
Recent Accounting Pronouncements
Accounting Standards Adopted
In April 2015, the FASB issued ASU 2015-05, Intangibles - Goodwill and Other - Internal-Use Software
(Subtopic 350-40) Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (“ASU 2015-05”), which
provides guidance regarding whether a cloud computing arrangement includes a software license. If a cloud computing
arrangement includes a software license, then the entity should account for the software license element of the arrangement
consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software
license, the entity should account for the arrangement as a service contract. ASU 2015-05 does not change the accounting
for service contracts. ASU 2015-05 is effective for fiscal years, including interim periods within those fiscal years,
beginning after December 15, 2015. The Company adopted this guidance during the first quarter ended September 30,
2016 prospectively to all arrangements entered into or materially modified after June 30, 2016. As a result of the adoption,
during the year ended June 30, 2017, the Company expensed approximately $2.2 million of professional services fees that
would have been capitalized previously. These costs are included in the product development expenses in the condensed
consolidated statements of operations.
In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period
Adjustments (“ASU 2015-16”), which eliminates the requirement to restate prior period financial statements for
measurement period adjustments. The new guidance requires that the cumulative impact of a measurement period
adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is
identified. The new standard should be applied prospectively to measurement period adjustments that occur after the
effective date. The Company adopted this amended standard in the first quarter ended September 30, 2016. The standard
did not have a significant impact on the Company’s consolidated condensed financial statements.
Accounting Standards Not Yet Adopted
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which
supersedes most existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize
revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to
which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this
core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than
are required under existing GAAP. The standard is effective for annual periods beginning after December 15, 2016, and
interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the
application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a
retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption
(which includes additional footnote disclosures). On July 9, 2015, the FASB voted to defer the effective date of the new
revenue recognition standard by one year. Based on the Board’s decision, public organizations would apply the new
revenue standard to annual reporting periods beginning after December 15, 2017. The Company is currently evaluating
the impact this standard will have on its consolidated financial statements which includes performing a detailed review of
each of its revenue streams and comparing historical accounting policies and practices to the new standard. The Company
will provide expanded disclosures pertaining to revenue recognition in our annual and quarterly filings beginning in the
first quarter of fiscal 2019. The Company expects to complete its assessment of the cumulative effect of adopting ASU
2014-09 as well as the expected impact of adoption during fiscal 2018.
91
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). The new standard
establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance
sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with
classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal
years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective
transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning
of the earliest comparative period presented in the financial statements, with certain practical expedients available. The
Company is currently evaluating this guidance, as well as the effect on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718)
(“ASU 2016-09”). This update was issued as part of the FASB’s simplification initiative and affects all entities that issue
share-based payment awards to their employees. The amendments in this update cover such areas as the recognition of
excess tax benefits and deficiencies and an accounting policy election for forfeitures. As part of the new guidance:
• Excess tax benefits or deficiencies arising from share-based awards will be reflected within the
consolidated statements of operations as a component of income tax expense rather than as a component
of stockholders’ equity. The adoption of this guidance may result in volatility within a company’s results
of operations, primarily due to changes in the stock price.
• Excess tax benefits will be presented as an operating activity on the statement of cash flows rather than
as a financing activity.
• A forfeiture election will be made to either estimate forfeitures (similar to today’s requirement) or
recognizing actual forfeitures as they occur. Entities will apply the forfeiture election provision using a
modified retrospective transition approach, with a cumulative effect adjustment recorded to retained
earnings as of the beginning of the period of adoption.
• Statutory tax withholding requirements for employers who withhold shares upon settlement of an award
on behalf of an employee to cover tax obligations are broadened to allow for a range of withholding
from the minimum to the maximum statutory allowable amounts.
The Company will adopt this guidance during the first quarter of fiscal 2018. As part of its adoption of
ASU 2016-09, the Company will make an accounting policy election to change the way in which it accounts for forfeitures
of share-based awards. Specifically, beginning in the first quarter of fiscal 2018, the Company will recognize forfeitures
of share-based awards as they occur in the period of forfeiture rather than estimating the number of awards expected to be
forfeited at the grant date and subsequently adjusting the estimate when awards are actually forfeited. The Company
expects that the change in accounting policy will result in an adjustment to retained earnings as of July 1, 2017. The
Company will determine the method of adoption for the remaining provisions during the first quarter of fiscal 2018.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326)
(“ASU 2016-13”) related to the methodology for recognizing credit losses. The new guidance revises the accounting
requirements related to the measurement of credit losses and will require organizations to measure all expected credit
losses for financial assets based on historical experience, current conditions and reasonable and supportable forecasts about
collectability. Assets must be presented in the financial statements at the net amount expected to be collected. This ASU
will be effective for the Company in the first quarter of fiscal 2021, and early adoption is permitted. The Company is
currently evaluating the impact of this ASU on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) (“ASU 2016-15”) related
to the classification of certain cash receipts and cash payments on the statement of cash flows. This ASU will be effective
for the Company beginning in the first quarter of fiscal 2019 on a retrospective basis, and early adoption is permitted. The
Company is currently evaluating the impact of this ASU on its consolidated statements of cash flows.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350)
(“ASU 2017-04”). This amendment simplifies how an entity is required to test goodwill for impairment by eliminating
Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value
of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, under the amendments in this update, an
entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with
92
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount
exceeds the reporting unit’s fair value. The update is effective for annual or any interim goodwill impairment tests in fiscal
years beginning after December 15, 2019. An entity should apply the amendments in this update on a prospective basis.
An entity is required to disclose the nature of and reason for the change in accounting principle upon transition. Early
adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.
The Company is currently evaluating this guidance, as well as the effect on its consolidated financial statements.
4. Property and Equipment and Capitalized Software
Property and equipment consist of the following at:
June 30,
2017
2016
(In thousands)
Student computers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,867 $ 34,143
25,434
Computer software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,233
Computer hardware . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,048
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,837
State testing computers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,870
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,538
Office equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,115
Web site development costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
102,218
(73,771)
$ 26,297 $ 28,447
26,314
15,927
10,094
6,274
4,533
1,488
263
97,760
(71,463)
Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . .
The Company recorded depreciation expense related to property and equipment reflected in selling,
administrative and other operating expenses of $6.7 million, $6.4 million and $6.0 million during the years ended
June 30, 2017, 2016 and 2015, respectively. Depreciation expense of $11.2 million, $12.6 million and $27.5 million
related to computers leased to students is reflected in instructional costs and services during the years ended June 30, 2017,
2016 and 2015, respectively. There were no significant write-downs of capitalized software projects during the years ended
June 30, 2017 or 2016. During the year ended June 30, 2015, the Company wrote down approximately $4.8 million of
capitalized software projects after determining the assets either have no future use or are being sunset. Amortization
expense of $0.6 million, $0.5 million and $0.9 million related to student software costs is reflected in instructional costs
and services during the years ended June 30, 2017, 2016 and 2015, respectively.
In the course of its normal operations, the Company incurs maintenance and repair expenses, which are expensed
as incurred and amounted to $11.7 million, $11.6 million and $11.2 million for the years ended June 30, 2017, 2016 and
2015, respectively.
Capitalized software consists of the following at:
Capitalized software costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 193,252 $ 176,374
(106,319)
Less accumulated depreciation and amortization . . . . . . . . . . . . . . . .
$ 62,695 $ 70,055
(130,557)
June 30,
2017
2016
(In thousands)
The Company recorded amortization expense of $25.1 million, $23.4 million and $19.4 million related to
capitalized software development reflected in instructional costs and services and $7.9 million, $5.5 million and
$7.4 million reflected in selling, administrative and other operating expenses during the years ended June 30, 2017, 2016
and 2015, respectively.
93
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
Capitalized curriculum consists of the following at:
June 30,
2017
2016
(In thousands)
Capitalized curriculum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 171,736 $ 156,471
(93,104)
Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
63,367
59,213 $
(112,523)
$
The Company recorded amortization expense of $19.9 million, $17.0 million and $20.1 million related to
capitalized curriculum development reflected in instructional costs and services during the years ended June 30, 2017,
2016 and 2015, respectively.
5. Income Taxes
The provision for income taxes is based on earnings reported in the consolidated financial statements. A deferred
income tax asset or liability is determined by applying currently enacted tax laws and rates to the expected reversal of the
cumulative temporary differences between the carrying value of assets and liabilities for financial statement and income
tax purposes. Deferred income tax expense or benefit is measured by the change in the deferred income tax asset or liability
during the year.
94
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
Deferred tax assets and liabilities result primarily from temporary differences in book versus tax basis accounting.
Deferred tax assets and liabilities consist of the following:
June 30,
2017
2016
(In thousands)
8,033 $ 5,464
5,892
7,400
11,494
10,695
11,735
11,449
2,628
1,720
1,922
3,299
—
401
20
20
841
390
39,996
43,407
Deferred tax assets (liabilities):
Net operating loss carryforward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities
(13,821)
Capitalized curriculum development . . . . . . . . . . . . . . . . . . . . . . . . . . .
(25,435)
Capitalized software and website development costs . . . . . . . . . . . . . .
(1,931)
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(20)
Investment in Middlebury Interactive Languages . . . . . . . . . . . . . . . . .
(4,883)
Returned materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(128)
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(7,897)
Purchased intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(54,115)
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(14,119)
Net deferred tax liability before valuation allowance . . . . . . . . . . . . . . .
Valuation Allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4,339)
Net deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (16,726) $ (18,458)
Reported as:
Long-term deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(18,458)
Net deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (16,726) $ (18,458)
(15,323)
(23,288)
(2,649)
—
(4,559)
—
(7,161)
(52,980)
(9,573)
(7,153)
(16,726)
The Company maintained a valuation allowance on net noncurrent deferred tax assets of $7.2 million and $4.3
million as of June 30, 2017 and 2016, respectively, predominantly related to foreign income tax net operating losses
("NOL") and operating losses related to its tax non-consolidating entity. The Company does not believe it is more likely
than not that it will utilize these deferred tax assets.
The Company has not provided for U.S. deferred income taxes on undistributed foreign earnings because such
earnings are considered to be indefinitely reinvested. Undistributed earnings of certain consolidated foreign subsidiaries
at June 30, 2017 amounted to $22.8 million. If such earnings were not indefinitely reinvested, a U.S. deferred income tax
liability of approximately $9.1 million would have been required.
At June 30, 2017, the Company had available federal and state NOL carryforwards of $1.6 million and $0.2
million, respectively, net of valuation allowances. The federal NOLs, if unused, expire in 2020 and the state NOLs expire
on various dates.
For the years ended June 30, 2017 and 2016, the Company has evaluated whether a change in the Company's
ownership of outstanding classes of stock as defined in Internal Revenue Code Section 382 could prohibit or limit the
Company's ability to utilize its NOLs. The Company has concluded it is more likely than not that the Company will be
able to fully utilize its NOLs subject to the Section 382 limitation.
95
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
The related components of the income tax expense for the years ended June 30, 2017, 2016 and 2015 were as
follows:
Year Ended June 30,
2017
2016
(In thousands)
2015
Current:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,756 $ 4,651 $ 6,490
1,964
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
450
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,904
Deferred:
(2,291)
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,635)
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
832
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3,094)
Total deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,396 $ 4,746 $ 5,810
(6,505)
(560)
—
(7,065)
(1,648)
(97)
(2,073)
(3,818)
3,153
552
12,461
1,152
2,761
8,564
The provision for income taxes can be reconciled to the income tax that would result from applying the statutory
rate to the net income before income taxes as follows:
U.S. federal tax at statutory rates . . . . . . . . . . . . . . .
Permanent items . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lobbying . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State taxes, net of federal benefit . . . . . . . . . . . . . . .
Research and development tax credits . . . . . . . . . . .
Domestic production activities deduction . . . . . . . .
Change in valuation allowance . . . . . . . . . . . . . . . .
Effects of foreign operations . . . . . . . . . . . . . . . . . .
Reserve for unrecognized tax benefits . . . . . . . . . . .
Noncontrolling Interests . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . .
Year Ended June 30,
2016
2017
2015
35.0 %
7.1
7.2
19.5
(8.2)
(22.9)
53.3
2.6
3.3
12.5
(0.1)
109.3 %
35.0 %
4.8
5.3
3.8
(8.1)
(5.2)
2.9
(0.9)
(6.3)
4.2
0.2
35.7 %
35.0 %
2.3
5.0
1.8
(1.7)
(6.5)
5.2
(13.6)
6.1
5.5
(0.7)
38.4 %
The effective income tax rates during the years ended June 30, 2017, 2016 and 2015 were 109.3%, 35.7%, and
38.4%, respectively. The increase in the effective tax rate for the year ended June 30, 2017 was primarily due to the Web
impairment which resulted in substantial foreign losses with no tax benefit due to the full valuation allowance against these
losses.
Tax Uncertainties
The Company follows the provisions of ASC 740-10 which applies to all tax positions related to income taxes.
ASC 740-10 provides a comprehensive model for how a company should recognize, measure, present and disclose in its
financial statements uncertain tax positions that the company has taken or expects to take on a tax return. ASC 740-10
clarifies accounting for income taxes by prescribing a minimum probability threshold that a tax position must meet before
a financial statement benefit is recognized. If the probability for sustaining a tax position is greater than 50%, then the tax
position is warranted and recognition should be at the highest amount which would be expected to be realized upon ultimate
settlement.
96
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
As of June 30, 2017, 2016 and 2015, the Company had $0.1 million, $0.1 million and $0.2 million in accrued interest and
penalties, respectively.
The unrecognized tax benefits for the years ended June 30, 2017, 2016 and 2015 were as follows:
Year Ended June 30,
2017
2016
(In thousands)
2015
Balance at beginning of the year . . . . . . . . . . . . . . . . . . . . . . . . $ 2,224 $ 3,558 $ 2,555
137
Additions for prior year tax positions . . . . . . . . . . . . . . . . . . . .
989
Additions for current year tax positions . . . . . . . . . . . . . . . . . .
Reductions for prior year tax positions . . . . . . . . . . . . . . . . . . .
(123)
Balance at end of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,260 $ 2,224 $ 3,558
951
241
(1,156)
351
290
(1,975)
If recognized, all of the $2.3 million balance of unrecognized tax benefits would affect the effective tax rate. We
do not anticipate a significant increase or decrease in unrecognized tax benefits in the next twelve months.
The Company remains subject to audit by the Internal Revenue Service for federal tax purposes for tax years after
June 30, 2013. Certain state and foreign tax jurisdictions are also either currently under audit or remain open under the
statute of limitations for the tax years after June 30, 2011.
6. Lease Commitments
Capital Leases
The Company incurs capital lease obligations for student computers under a non-revolving lease line of credit
with PNC Equipment Finance, LLC. As of June 30, 2017 and 2016, the outstanding balance of capital leases under the
current and former lease lines of credit (as discussed in more detail below) was $21.9 million and $23.1 million,
respectively, with lease interest rates ranging from 1.95% to 2.71%. Individual leases under the lease lines of credit include
36-month payment terms with a $1 purchase option at the end of each lease term. The Company has pledged the assets
financed to secure the outstanding leases. The gross carrying value of leased student computers as of June 30, 2017
and 2016 was $39.1 million and $39.9 million, respectively. The accumulated depreciation of leased student computers as
of June 30, 2017 and 2016 was $25.1 million and $25.9 million, respectively.
The Company executed a second extension to its $35.0 million non-revolving lease line of credit during the third
quarter of fiscal year 2017 to extend the maturity date to August 15, 2018, and had remaining availability under the new
lease line of $31.9 million as of June 30, 2017. The Company had $11.3 million of remaining availability under the
previous non-revolving $35.0 million lease line of credit as of June 30, 2016. Interest on unpaid principal under the new
line of credit is at a fluctuating rate of LIBOR plus 1.2%.
97
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
The following is a summary as of June 30, 2017 of the present value of the net minimum lease payments on
capital leases under the Company’s commitments:
As of June 30,
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total minimum payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less amount representing interest (imputed weighted average capital lease
interest rate of 2.28%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net minimum payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Present value of minimum payments, less current portion . . . . . . . . . . . . . . . . . $
Capital Leases
(in thousands)
12,235
7,819
2,376
22,430
(525)
21,905
(11,880)
10,025
Operating Leases
The Company has fixed non-cancelable operating leases with terms expiring through 2022 for office space leases.
Office leases generally contain renewal options and certain leases provide for scheduled rate increases over the lease terms.
Rent expense was $6.3 million, $7.8 million and $8.1 million for the years ended June 30, 2017, 2016 and 2015,
respectively.
Future minimum lease payments under non-cancelable operating leases with initial terms of one year or more are
as follows:
($ in thousands)
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total future minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
June 30,
9,208
9,138
7,860
7,351
6,196
150
39,903
Year Ended
7. Line of Credit
On January 31, 2014, the Company executed a $100.0 million unsecured line of credit to be used for general
corporate operating purposes with Bank of America, N.A. (“BOA”). The line has a five-year term, bears interest at the
higher of the Bank’s prime rate plus 0.25%, or the Federal Funds Rates plus 0.75%, or LIBOR plus 1.25%; and incorporates
customary financial and other covenants, including but not limited to a maximum debt leverage and a minimum fixed
charge coverage ratio. As of June 30, 2017 and 2016, the Company was in compliance with these covenants. During the
years ended June 30, 2017 and 2016, there was no borrowing activity on this line of credit, and the Company had no
borrowings outstanding on the line of credit as of June 30, 2017 and 2016.
The BOA credit agreement contains a number of financial and other covenants that, among other things; restrict
the Company and its subsidiaries’ ability to incur additional indebtedness, grant liens or other security interests, make
certain investments, make specified restricted payments including dividends, dispose of assets or stock including the stock
of its subsidiaries, make capital expenditures above specified limits and engage in other matters customarily restricted in
senior credit facilities.
98
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
8. Equity Transactions
The Company’s Fourth Amended and Restated Certificate of Incorporation authorizes the Company to issue
100,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock. No Preferred Stock was issued or
outstanding as of June 30, 2017 or 2016.
Common Stock Repurchases
On November 4, 2013, the Board of Directors authorized the repurchase of up to $75.0 million of the Company’s
outstanding common stock over a two year period. Any purchases under the buyback are dependent upon business and
market conditions and other factors. The stock purchases are made from time to time and may be made through a variety
of methods including open market purchases and trading plans that may be adopted in accordance with the Rule 10b-18
of the Exchange Act. For fiscal year ended June 30, 2015, the Company paid approximately $26.5 million in cash to
repurchase 1,307,402 shares of common stock at an average price of $20.23 per share. As of June 30, 2017 and 2016, total
shares purchased under the plan were 3,502,598, at an average cost of $21.41 per share, and there were no shares remaining
to be repurchased under the plan. No stock purchases were made during the year ended June 30, 2017 and 2016.
9. Equity Incentive Plan
On December 15, 2016 (the “Effective Date”), the Company’s stockholders approved the 2016 Incentive Award
Plan (the “Plan”). The Plan is designed to motivate high levels of performance and align the interests of the Company’s
employees, directors and consultants with the long-term interests of its stockholders by linking compensation to Company
performance while building the long-term value of the Company. Awards granted under the Plan may include stock
options, stock appreciation rights, restricted stock, restricted stock units, and other stock-based awards. Under the Plan,
the following types of shares go back into the pool of shares available for issuance:
•
•
unissued shares related to forfeited or cancelled restricted stock and stock options from Plan awards and Prior
Plan awards (that were outstanding as of the Effective Date), and;
shares tendered to satisfy the tax withholding obligation related to the vesting of restricted stock (but not stock
options).
Unlike the Company’s 2007 Equity Incentive Award Plan (the “Prior Plan”), the Plan has no evergreen provision
to increase the shares available for issuance; any new shares would require stockholder approval. The Prior Plan was set
to expire in October 2017; however, with the approval of the Plan, the Company will no longer award equity from the
Prior Plan. At June 30, 2017, the remaining aggregate number of shares of the Company’s common stock authorized for
future issuance under the Plan was 4,384,718. At June 30, 2017, there were 4,541,177 shares of the Company’s common
stock that remain outstanding under the Plan and Prior Plan.
Each stock option is exercisable pursuant to the vesting schedule set forth in the stock option agreement granting
such stock option, generally over four years. No stock option shall be exercisable after the expiration of its option term.
The Company has granted stock options under the Prior Plan and the Company has also granted stock options to executive
officers under stand-alone agreements outside the Prior Plan.
Compensation expense for all equity-based compensation awards is based on the grant-date fair value estimated
in accordance with the provisions of ASC 718. The Company recognizes these compensation costs on a straight-line basis
over the requisite service period, which is generally the vesting period of the award.
The Company uses the Black-Scholes option pricing model method to calculate the fair value of stock options.
The use of option valuation models requires the input by management of highly subjective assumptions, including the
expected stock price volatility, the expected life of the option term and forfeiture rate. These assumptions are utilized by
the Company in determining the estimated fair value of stock options.
99
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
The fair value of the Company’s service and performance based stock options was estimated as of the date of
grant using the Black-Scholes option pricing model with the following assumptions:
Year Ended June 30,
2015
0.00%
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . 0.00%
48% to 51%
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . 54.5%
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . 1.00% 1.27% to 1.71%
Expected life of the option term (in years) . . . . 5.11
Forfeiture rate . . . . . . . . . . . . . . . . . . . . . . . . . . . 12%
4.97 to 5.11
12% to 28%
2016
There were no grants of stock options during the year ended June 30, 2017. The fair value of the options granted
for the years ended June 30, 2016 and 2015 was $3.2 million and $4.4 million, respectively. This amount will be expensed
over the required service period.
Dividend yield—The Company has never declared or paid dividends on its common stock and has no plans to do
so in the foreseeable future.
Expected volatility—Volatility is a measure of the amount by which a financial variable such as a share price has
fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period.
Risk-free interest rate—The assumed risk free rate used is a zero coupon U.S. Treasury security with a maturity
that approximates the expected term of the option.
Expected life of the option term—The period of time that the options granted are expected to remain unexercised.
Options granted during the year have a maximum term of eight years. The Company estimates the expected life of the
option term based on an average life between the dates that options become fully vested and the maximum life of options
granted.
Forfeiture rate — The estimated percentage of options granted that is expected to be forfeited or canceled before
becoming fully vested. The Company uses a forfeiture rate based on historical forfeitures of different classification levels
of employees in the Company.
100
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
Stock option activity including stand-alone agreements during the years ended June 30, 2017, 2016 and 2015 is
as follows:
Weighted
Weighted Average
Average
Exercise
Price
Remaining
Contractual
Life (Years)
Aggregate
Intrinsic
Value
42,754
4.57 $
Shares
617,985
(99,935)
(181,858)
Outstanding, June 30, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,578,401 $ 21.44
16.12
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.68
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29.85
Forfeited or canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding, June 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,914,593 $ 20.33
13.43
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13.66
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18.55
Outstanding, June 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,350,175 $ 20.20
—
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16.35
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23.12
Outstanding, June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,356,528 $ 20.19
Stock options exercisable at June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . 1,055,783 $ 21.46
—
(425,180)
(568,467)
243,112
(1,000)
(806,530)
4.05 $
88,200
3.94 $
46,573
4.46 $ 1,481,585
4.10 $ 621,708
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between
the Company’s closing stock price on the last day of the year and the exercise price, multiplied by the number of
in-the-money options) that would have been received by the option holders had all option holders exercised their options
on June 30, 2017. The amount of aggregate intrinsic value will change based on the fair market value of the Company’s
stock. The total intrinsic value of options exercised for the years ended June 30, 2017, 2016 and 2015 was $1.3
million, zero and $0.3 million, respectively.
As of June 30, 2017, there was $2.1 million of total unrecognized compensation expense related to nonvested
stock options granted. The cost is expected to be recognized over a weighted average period of 1.7 years. During the years
ended June 30, 2017, 2016 and 2015, the Company recognized $2.0 million, $3.7 million and $5.5 million, respectively,
of stock-based compensation expense related to stock options. Included in expense for the years ended June 30, 2017,
2016 and 2015 is zero, $0.4 million and zero, respectively, associated with accelerated vesting of option awards for
executives and other employees.
Restricted Stock Awards
The Company has approved grants of restricted stock awards (“RSA”) pursuant to the Plan and Prior Plan. Under
the Plan and Prior Plan, employees, outside directors and independent contractors are able to participate in the Company’s
future performance through the awards of restricted stock. Each RSA vests pursuant to the vesting schedule set forth in
the restricted stock agreement granting such RSAs, generally over three years. Under the Plan and Prior Plan, there have
been no awards of restricted stock to independent contractors.
101
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
Restricted stock award activity during the years ended June 30, 2017, 2016 and 2015 was as follows:
Weighted-
Average
Grant-Date
Shares
Fair Value
979,595 $ 22.97
Nonvested, June 30, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17.54
822,698
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15.63
(490,309)
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22.46
(66,480)
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,245,504 $ 22.30
Nonvested, June 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.13
1,704,843
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22.24
(722,577)
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20.25
(95,980)
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,131,790 $ 12.46
Nonvested, June 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12.70
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,268,311
12.94
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,084,046)
(175,008)
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12.69
2,141,047 $ 12.34
Nonvested, June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Performance Based Restricted Stock Awards (included above)
During the year ended June 30, 2017, 333,489 new performance based restricted stock awards were granted and
467,131 remain nonvested at June 30, 2017. During the year ended June 30, 2017, 99,155 performance based restricted
stock awards vested. Vesting of the performance based restricted stock awards is contingent on the achievement of certain
financial performance goals and service vesting conditions.
Equity Incentive Market Based Restricted Stock Awards (included above)
During the year ended June 30, 2017, 58,000 new equity incentive market based restricted stock awards were
granted with a weighted average grant date fair value of $4.99 per share. The awards were granted pursuant to the Prior
Plan and 20% of the shares granted vest immediately upon achievement of specified average closing prices of the
Company’s stock for 30 consecutive days following the public release of fiscal year 2017 earnings and the remaining 80%
vest ratably in semi-annual intervals until the three year anniversary from grant date. Additionally, vesting is dependent
upon continuing service by the grantee as an employee of the Company at each vest date, unless the grantee is eligible for
earlier vesting. The fair value was determined using a Monte Carlo simulation model incorporating the following factors:
stock price on the grant date of $11.50, risk free rate of return of 0.6%, and expected volatility of approximately 50%.
During the year ended June 30, 2017, 71,796, 118,750, and 144,738 of previously issued market based awards
vested upon on the attainment of the average stock price performance target of $13, $16 and $19 per share, respectively,
for 30 consecutive days. As of June 30, 2017, 307,075 equity incentive market based restricted stock awards remain
nonvested.
Service Based Restricted Stock Awards (included above)
During the year ended June 30, 2017, 876,822 new service based restricted stock awards were granted and
1,366,841 remain nonvested at June 30, 2017. During the year ended June 30, 2017, 649,607 service based restricted stock
awards vested.
102
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
Summary of All Restricted Stock Awards
As of June 30, 2017, there was $13.8 million of total unrecognized compensation expense related to nonvested
restricted stock awards. The cost is expected to be recognized over a weighted average period of 1.4 years. The fair value
of restricted stock awards granted for the years ended June 30, 2017 and 2016 was $16.0 million and $14.5 million,
respectively. The total fair value of shares vested for the years ended June 30, 2017 and 2016 was $17.5 million and
$8.2 million, respectively. During the years ended June 30, 2017, 2016 and 2015, the Company recognized $16.8 million,
$14.8 million and $15.8 million, respectively, of stock-based compensation expense related to restricted stock awards.
Included in the expense for the years ended June 30, 2017, 2016 and 2015, is $1.0 million, $0.4 million and $2.5 million
associated with accelerated vesting of equity awards to executives and other employees.
Performance Share Units (“PSU”)
During the years ended June 30, 2017 and 2016, the Company granted 52,000 and 1,154,602 PSUs, respectively
to certain senior executives, having a weighted average grant date fair value of $18.97 and $12.92 per share, respectively.
The PSUs vest upon achievement of certain performance criteria associated with a Board-approved Long Term Incentive
Plan (“LTIP”) and continuation of employee service over a two to three year period. The level of performance will
determine the number of PSUs earned as measured against threshold, target and stretch achievement levels of the LTIP.
Each PSU represents the right to receive one share of the Company’s common stock, or at the option of the Company, an
equivalent amount of cash, and are classified as an equity award in accordance with ASC 718. If actual performance
exceeds the target criteria for a full award, then additional PSUs up to 521,801 could be earned by the participants.
In addition to the LTIP performance conditions, there is a service vesting condition which stipulates that thirty
percent of the earned award (“Tranche #1) will vest quarterly beginning November 15, 2017 and seventy percent of the
earned award (“Tranche #2) will vest on August 15, 2018, in both cases dependent upon continuing service by the grantee
as an employee of the Company, unless the grantee is eligible for earlier vesting upon a change in control and qualifying
termination, as defined by the PSU agreement. For equity performance awards, including the PSUs, subject to graduated
vesting schedules for which vesting is based on achievement of a performance metric in addition to grantee service, stock-
based compensation expense is recognized on an accelerated basis by treating each vesting tranche as if it was a separate
grant. For the year ended June 30, 2017, the Company determined the achievement of the performance condition was
probable on Tranche #1. Achievement is believed to be probable at the highest level which equals 150% of the target
award. Therefore, during the fourth quarter of fiscal 2017, the Company recorded $3.8 million of expense for the period
of grant date (September 2015) through June 2017. The Company determined the achievement of the performance
conditions associated with Tranche #2 was not probable, therefore no expense was recorded during the year ended June
30, 2017. As of June 30, 2017, there was $1.6 million of total unrecognized compensation expense related to nonvested
PSUs for which probable achievement is assumed. During the years ended June 30, 2017, 2016 and 2015, the Company
recognized $3.8 million, zero and zero, respectively, of stock-based compensation expense related to PSUs.
103
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
Performance share unit activity during the years ended June 30, 2017 and 2016 was as follows:
Nonvested, June 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonvested, June 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonvested, June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10. Redeemable Noncontrolling Interest
Investment in LearnBop, Inc.
Shares
— $
1,154,602
—
(65,000)
Weighted-
Average
Grant-Date
Fair Value
—
12.92
—
13.45
1,089,602 $ 12.91
18.97
—
13.45
1,043,602 $ 13.16
52,000
—
(98,000)
On July 31, 2014, the Company acquired a majority interest in LearnBop, Inc. (“LearnBop”), for $6.5 million in
cash in return for a 51% interest in LearnBop. The purpose of the acquisition was to complement the Company’s K-12
math curriculum as LearnBop has developed an adaptive math curriculum learning software. As part of this transaction,
the non-controlling shareholders have a non-transferable put right, which is exercisable between July 31, 2018 and
December 31, 2018 for the remaining minority interest. The price of the put right will be determined based on the trailing
twelve month revenue and contribution margin as defined in the Stockholders’ Agreement between the Company and
LearnBop. Additionally, the Company has a non-transferable call option for the remaining minority interest at a price of
$3.0 million, which becomes exercisable January 1, 2019 or thereafter. Acquisition costs incurred by the Company related
to this transaction included in selling, administrative and other operating expenses were $0.1 million during the year ended
June 30, 2015.
The purchase price of $6.5 million was allocated to the underlying assets and liabilities based on their estimated
fair value at the date of acquisition. The Company recorded goodwill of $8.1 million, which will be non-deductible for tax
purposes. Recognition of goodwill is largely attributed to the value paid for LearnBop’s capabilities in providing adaptive
learning software for math curriculum to K-12 students. The Company has not disclosed current period or pro-forma
revenue and earnings attributable to LearnBop as they are immaterial.
The Company finalized its allocation of the purchase price of LearnBop as of June 30, 2015. The purchase price
was allocated as follows:
LearnBop (in millions):
Amount
As of July 31, 2014
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.1
0.9
Capitalized software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8.1
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.1)
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redeemable noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2.5)
Fair value of total consideration transferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6.5
Given the provision of the put rights, the redeemable noncontrolling interests are redeemable outside of the
Company’s control and are recorded outside of permanent equity at their redemption value in accordance with
104
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
ASC 480-10-S99, Accounting for Redeemable Equity Instruments. The Company will adjust the redeemable
noncontrolling interests to redemption value on each balance sheet date with changes in redemption value recognized as
an adjustment to retained earnings, or in the absence of retained earnings, by adjustment to additional paid-in-capital.
The noncontrolling interest is redeemable at other than fair value as the redemption value is determined based on
a specified formula. The noncontrolling interest becomes redeemable after the passage of time, and therefore the Company
records the carrying amount of the noncontrolling interest at the greater of (i) the initial carrying amount, increased or
decreased for the noncontrolling interest’s share of net income or loss, or (ii) the redemption value.
According to ASC 480-10-S99, to the extent that the noncontrolling interest holder has the contractual right to
receive an amount upon share redemption that is other than fair value of such shares, only the portion of the periodic
adjustment to the instrument’s carrying amount that reflects redemption in excess of fair value is treated like a dividend
for earnings per share computation purposes. No adjustment to the earnings per share computation was necessary as
estimated fair value of the noncontrolling interest is greater than the redemption value.
Middlebury College Joint Venture
In May 2010, the Company entered into an agreement to establish a joint venture with Middlebury College
(“Middlebury”) to form Middlebury Interactive Languages LLC (“MIL”). The venture creates and distributes innovative,
online language courses under the trademark Middlebury and other marks. The joint venture agreement provided
Middlebury with the right at any time after the fifth (5th) anniversary of forming the joint venture, to irrevocably elect to
sell all of its membership interest to the Company (put right) at the fair market value of Middlebury’s membership interest.
Additionally, Middlebury had an option to repurchase the camp programs at fair market value along with other contractual
rights as certain milestones associated with its Language Academy summer camp programs were not met. On May 4,
2015, Middlebury exercised its right to require the Company to purchase all of its ownership interest in the joint venture,
and on December 27, 2016, the Company consummated the acquisition of the remaining 40% noncontrolling interest for
$9.1 million in cash.
The following is a summary of the activity of the redeemable noncontrolling interest at June 30, 2017 and 2016:
(In thousands)
Balance of redeemable noncontrolling interest at June 30, 2015 . . . . . . . . . . . . . . . . . $ 9,601
(484)
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustment to redemption value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,615)
Balance of redeemable noncontrolling interest at June 30, 2016 . . . . . . . . . . . . . . . . . $ 7,502
(910)
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,245
Adjustment to redemption value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(9,137)
Purchase of noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
700
Balance of redeemable noncontrolling interest at June 30, 2017 . . . . . . . . . . . . . . . . . $
Value
11. Commitments and Contingencies
Litigation
In the ordinary conduct of the Company’s business, the Company is subject to lawsuits, arbitrations and
administrative proceedings from time to time. The Company believes that the outcome of any existing or known threatened
proceedings, even if determined adversely, should not have a material adverse effect on the Company’s business, financial
condition, liquidity or results of operations.
On September 24, 2015, in connection with an industry-wide investigation styled “In the Matter of the
Investigation of For-Profit Virtual Schools,” the Company received a civil investigative subpoena for specified documents
and responses to interrogatories from the Attorney General of the State of California, Bureau of Children’s Justice (“BCJ”).
105
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
On July 8, 2016, K12 and the California Virtual Academy (“CAVA”) charter schools (“CAVA Schools”) entered into:
(i) a Settlement Agreement and Release of a previously sealed Qui Tam lawsuit alleging false attendance reporting; (ii) a
Stipulation for Entry of Final Judgment (“Stipulation”) in connection with the BCJ’s investigation as it pertained to us;
and (iii) a Final Judgment enjoining us from engaging in certain business practices in California, and requiring that the
Company and CAVA Schools undertake certain Conduct Provisions. The Settlement Agreement and Release provides for
us to pay the State of California $2.5 million, and the Qui Tam plaintiff $0.1 million to settle the attendance reporting
claims and in which we and the CAVA Schools deny any and all liability and wrongdoing. The Stipulation specifies that
the Attorney General, the Company and the CAVA Schools have concluded the BCJ investigation and agreed to implement
the Conduct Provisions of the Final Judgment “without admissions of findings of fact or law or wrongdoing, misconduct
or illegal acts by K12 or the CAVA Schools, or any facts alleged in the [Attorney General’s] Complaint.” The Final
Judgement provides for the Company to pay the State of California $6.0 million “to defray the costs of this action and to
fund the investigation and prosecution of enforcement cases to protect the rights of children,” and further includes a release
of all legal claims that could be brought by the Attorney General involving the covered conduct. The Conduct Provisions
of the Final Judgment require the Company to continue to improve its business practices and compliance programs as they
generally relate to the operations and promotional activities of K12 and the CAVA Schools. The proceeding settlement
costs were offset by insurance reimbursable administrative costs of approximately $1.5 million reflected in selling,
administrative and other operating expenses. The resulting charge of $7.1 million was recorded in selling, administrative
and other operating expenses for the year ended June 30, 2016.
On July 20, 2016, a securities class action lawsuit captioned Babulal Tarapara v. K12 Inc. et al was filed against
the Company, two of its officers and one of its former officers in the United States District Court for the Northern District
of California, Case No. 3:16-cv-04069 (“Tarapara Case”). The plaintiff purports to represent a class of persons who
purchased or otherwise acquired the Company’s common stock between November 7, 2013 and October 27, 2015,
inclusive, and alleges violations by the Company and the individual defendants of Section 10(b) of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated under the Exchange Act, and violations by
the individual defendants of Section 20(a) of the Exchange Act. The complaint sought unspecified monetary damages and
other relief. Additionally, on September 15, 2016, a second securities class action lawsuit captioned Gil Tuinenburg v.
K12 Inc. et al was filed against the Company, two of its officers and one of its former officers in the United States District
Court for the Northern District of California, Case No. 3:16-cv-05305 (“Tuinenburg Case”). On October 6, 2016, the Court
consolidated the Tarapara Case and the Tuinenburg Case, appointed Babul Tarapara and Mark Beadle as lead plaintiffs,
and recaptioned the matter as In Re K12 Inc. Securities Litigation. On December 2, 2016, the lead plaintiffs filed an
amended complaint against the Company. The amended complaint named an additional former officer as a defendant and
specified a class period start date of October 10, 2013. The amended complaint alleges materially false or misleading
statements and omissions regarding the decision of the Agora Cyber Charter School not to renew its managed public school
agreement with the Company, student academic and Scantron results, and other statements regarding student academic
performance and K12’s academic services and offerings. On January 30, 2017, the Company filed its motion to dismiss
the amended complaint. The lead plaintiffs filed an opposition to the motion to dismiss the amended complaint on March
1, 2017. On March 31, 2017, the Company filed its response to the lead plaintiffs’ opposition to the motion to dismiss. A
hearing on the motion to dismiss the amended complaint was held on April 19, 2017 and a decision is pending. The
Company intends to continue to defend vigorously against each and every allegation and claim set forth in the amended
complaint.
Employment Agreements
The Company has entered into employment agreements with certain executive officers that provide for severance
payments and, in some cases other benefits, upon certain terminations of employment. Except for the agreements with the
Company’s Executive Chairman and Chief Executive Officer that have two and three year terms, respectively, all other
agreements provide for employment on an “at-will” basis. If the employee resigns for “good reason” or is terminated
without cause, the employee is entitled to salary continuation, and in some cases benefit continuation, for varying periods
depending on the agreement.
106
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
Off-Balance Sheet Arrangements
As of June 30, 2017, the Company provided guarantees of approximately $0.9 million related to lease
commitments on the buildings for certain of the Company’s schools. Previously, the Company had guaranteed two leases
which are excluded from the number above, and discussed in more detail below. During the year ended June 30, 2017, the
lessee on one of the leases in which the Company served as guarantor defaulted, and under the terms of the guarantee, the
obligation was assigned to the Company. Since the default occurred, the Company has taken steps to exit this facility and
entered into an agreement to sublet the space. Additionally, during the year ended June 30, 2017, the Company entered
into a lease buyout agreement with the landlord on another guaranteed space to exit the lease early under the terms of the
original lease (see Note 12, “Restructuring and Severance”).
In addition, the Company contractually guarantees that certain schools under the Company’s management will
not have annual operating deficits and the Company’s management fees from these schools may be reduced accordingly
to cover any school operating deficits.
Other than these lease and operating deficit guarantees, the Company did not have any off-balance sheet
arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition,
changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital
resources.
12. Restructuring and Severance
In the third and fourth quarters of fiscal year 2017, the Company exited three facilities (which included the
subleased facility above) that are currently under an operating lease, entered into a lease buyout agreement (discussed
above) and reduced its workforce through involuntary terminations. The Company consolidated its corporate workforce
by exiting its space in a building as well as two other facilities that were no longer being utilized. The workforce reduction
was executed after an internal management review of resources required to meet the future business plans of the Company.
The present value of the remaining lease payments was calculated using a credit adjusted risk-free rate and
estimated sublease rentals for each lease. The Company recorded an impairment of $5.3 million for the three leases. The
current portion of the liability of $1.6 million, is included in accrued liabilities and the long-term portion of $3.7 million,
is included in other long-term liabilities on the consolidated balance sheet. In addition to the lease impairment, the
Company accelerated the useful life of each lease’s property and equipment to the cease-use date and recorded accelerated
depreciation of $1.4 million. The Company also wrote off the deferred rent and the liability for tenant improvements
associated with each lease which resulted in income of $1.9 million. The $4.8 million net impact of these actions is
recorded in selling, administrative, and other operating expenses in the consolidated statements of operations. Additionally,
the lease buyout was $0.7 million and is included in instructional costs and services in the consolidated statements of
operations. There were no similar charges recorded during the years ended June 30, 2016 or 2015.
The Company reduced its workforce during the year ended June 30, 2017 and recorded salary-related severance
of $3.4 million. During the years ended June 30, 2016 and 2015, the Company recorded salary-related severance of
$1.7 million and $1.5 million, respectively.
13. Acquisitions and Investments
Investment in Web International Education Group Ltd. (“Web”)
In January 2011, the Company invested $10.0 million to obtain a 20% minority interest in Web International
Education Group, Ltd. (“Web”), a provider of English language learning centers in cities throughout China. The
Company’s option to purchase no less than 51% of Web expired on March 31, 2013 and on May 6, 2013, the Company
exercised its right to put its investment back to Web for return of its original $10.0 million investment plus interest of 8%,
which Web was contractually required to pay by May 31, 2014, as amended. The Company reclassified this $10.0 million
investment, recording it in other current assets.
107
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
The Company accrued interest up through December 31, 2014. Given the difficulties in expatriating money from
China, the Company discontinued the accrual of interest and wrote off the interest accrued during fiscal year 2015. During
the fourth quarter of fiscal 2017, the Company entered into a contract with a third-party investor to sell its investment in
Web, however, the agreement was terminated subsequent to year end due to nonperformance. Accordingly, at June 30,
2017, the Company recorded an impairment of $10.0 million in the consolidated statement of operations. The Company
continues to work with Web, and to the extent it collects in a subsequent period, the Company will record the amount
collected in other income in the period received.
Investment in School Mortgage
On September 11, 2013, the Company issued a mortgage note (“Mortgage”) lending $2.1 million to a managed
school partner (“Partner”). The note bore interest at a fixed rate of 5.25% per year with a five year maturity and it was
secured by the underlying property. During fiscal year 2016, the borrower defaulted on the loan payment, and in March
2017, the Company received the deed of ownership to the property.
As of March 31, 2017, the Company decided to dispose of the property and classified it as an asset held for sale,
and included it in other current assets on the consolidated balance sheet. During the third quarter of fiscal year 2017,
management approved a plan to sell, and began actively marketing the property. The Company reduced the property’s
estimated carrying value to $1.2 million, resulting in an impairment loss of $0.6 million, which was included in selling,
administrative and other operating expenses on the consolidated statements of operations. As of June 30, 2017, the
Company continues to market the property and determined that there had been no change to its estimated carrying value.
During the years ended June 30, 2016 and 2015, the Company conducted an appraisal of the property to assess
its market value. At June 30, 2016, the estimated market value had declined below the note’s carrying value, resulting in
an impairment loss of $0.2 million. There was no impairment loss during the year ended June 30, 2015.
Acquisition of LearnBop, Inc.
On July 31, 2014, the Company acquired a majority interest in LearnBop, Inc., for $6.5 million in cash in return
for a 51% interest in LearnBop. The purpose of the acquisition is to complement the Company’s K-12 math curriculum as
LearnBop has developed an adaptive math curriculum learning software. As part of this transaction, the non-controlling
shareholders have a non-transferable put right, which is exercisable between July 31, 2018 and December 31, 2018 for the
remaining minority interest. The price of the put right will be determined based on the trailing twelve month revenue and
contribution margin as defined in the Stockholders’ Agreement between the Company and LearnBop. Additionally, the
Company has a non-transferable call option for the remaining minority interest at a price of $3.0 million, which becomes
exercisable January 1, 2019 or thereafter. Acquisition costs incurred by the Company related to this transaction included
in selling, administrative and other operating expenses were $0.1 million.
Acquisition of LTS Education Systems
On April 21, 2016, the Company completed its acquisition of Disguise the Learning, Inc. dba LTS Education
Systems (“LTS”), a provider of personalized, digital game–based online learning solutions. With its acquisition of LTS,
the Company aims to expand its online courses offerings in math, reading, english language arts, science and history.
The total purchase price consideration for this acquisition was $23.1 million, which consisted primarily of cash
of $20.2 million and $2.9 million of contingent consideration (earn–out liability), of which $21.0 million was allocated to
goodwill, $4.6 million to acquired intangible assets and $2.5 million to net liabilities assumed. The customer relationships
and developed technology have estimated lives of seven and four years, respectively; while the other intangible assets have
estimated lives ranging from two to five years. The goodwill is not deductible for income tax purposes. Acquisition costs
incurred by the Company related to this transaction included in selling, administrative and other operating expenses were
$0.4 million. The acquisition of LTS was not significant to the Company’s results of operations.
108
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
During the year ended June 30, 2017, the Company made its final adjustments to the purchase price of LTS which
included a $0.1 million escrow refund resulting from the final working capital adjustment which was recorded as a
reduction to goodwill.
The following table summarizes the fair values of considerations paid and identifiable assets acquired and
liabilities assumed for LTS as of the date of acquisition, after the Company’s final purchase price adjustments (in millions):
Acquisition consideration:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Fair value of contingent consideration (earn-out liability) . . . . . . . . . . . . . . . . . . . .
Total consideration transferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
June 30, 2017
20.2
2.9
23.1
Identifiable assets acquired and liabilities assumed:
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Developed technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.9
1.7
1.0
21.0
(2.6)
0.1
The contingent consideration included in the table above represents the fair value of additional consideration
payable to the seller, estimated using a discounted cash flow method. Consideration is to be distributed on the eighteen
month and thirty month anniversaries of the closing date, and is contingent on the future performance of two key contracts.
Each contract is to be assessed independently with an aggregate potential payment of $3.0 million. Performance metrics
are based on the year-over-year maintenance of a total aggregate contract value in excess of 51%, with a greater than 90%
success rate ensuring full payment.
14. Related Party Transactions
At June 30, 2017 and 2016, the Company had loaned a total of $4.0 million to MIL in accordance with the terms
of the original joint venture agreement. The loan was repayable under terms and conditions specified in the loan agreement.
The loan balance and related interest are eliminated since MIL is consolidated in the Company’s financial statements.
On September 11, 2013, the Company issued a mortgage note (“Mortgage”) lending $2.1 million to a managed
school partner. The note bore interest at a fixed rate of 5.25% per year with a five year maturity date and it was secured
by the underlying property. During fiscal year 2016, the borrower defaulted on the loan payment, and in March 2017, the
Company received the deed of ownership to the property. See Note 13, “Acquisitions and Investments – Investment in
School Mortgage.”
During the years ended June 30, 2017 and 2016, the Company contributed $0.5 million and $0.7 million,
respectively to The Foundation for Blended and Online Learning (“Foundation”). The Foundation is a related party as an
executive officer of the Company serves on the Board of the Foundation. No contributions were made during the year
ended June 30, 2015.
15. Employee Benefits
The Company maintains a 401(k) salary deferral plan (the “401(k) Plan”) for its employees. Employees who have
been employed for at least 30 days may voluntarily contribute to the 401(k) Plan on a pretax basis, up to the maximum
allowed by the Internal Revenue Service. The 401(k) Plan provides for a matching Company contribution of 25% of the
first 4% of each participant’s compensation. The Company expensed $1.6 million, $1.5 million and $1.8 million during
the years ended June 30, 2017, 2016 and 2015, respectively under the 401(k) Plan.
109
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
16. Supplemental Disclosure of Cash Flow Information
Year Ended June 30,
2016
2015
2017
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
750
$
790
$
1,051
Cash paid for taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,052
$ 1,125
$ 19,390
Supplemental disclosure of non-cash financing activities:
Property and equipment financed by capital lease obligations, including student
peripherals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,469 $ 10,878 $ 14,654
Business combinations:
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized software development costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assumed liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17. Common Stock Repurchases
419 $
— $
—
—
—
—
—
4,600
—
21,054
(5,780)
(400)
27
—
940
8,101
(50)
(23)
On November 4, 2013, the Board of Directors authorized the repurchase of up to $75.0 million of the Company’s
outstanding common stock over a two year period. Any purchases under the buyback are dependent upon business and
market conditions and other factors. The stock purchases are made from time to time and may be made through a variety
of methods including open market purchases and trading plans that may be adopted in accordance with the Rule 10b-18
of the Exchange Act. There were no stock repurchases during the years ended June 30, 2017 and 2016.
110
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
18. Quarterly Results of Operations (Unaudited)
The unaudited consolidated interim financial information presented should be read in conjunction with other
information included in the Company’s consolidated financial statements. The following unaudited consolidated financial
information reflects all adjustments necessary for the fair presentation of the results of interim periods. The following
tables set forth selected unaudited quarterly financial information for each of the Company’s last eight quarters.
Consolidated Quarterly Statements of
Operations
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cost and expenses
Instructional costs and services . . . . . . . . . . . . .
Selling, administrative and other operating
expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Product development expenses . . . . . . . . . . . . .
Total costs and expenses . . . . . . . . . . . . . . . . . . .
Income (loss) from operations . . . . . . . . . . . . . .
Impairment of investment in Web
International Education Group, Ltd. . . . . . . . .
Interest income (expense), net . . . . . . . . . . . . . .
Income (loss) before income taxes and
noncontrolling interest . . . . . . . . . . . . . . . . . . . .
Income tax benefit (expense) . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . .
Add net (income) loss attributable to
noncontrolling interest . . . . . . . . . . . . . . . . . . . .
Net income (loss) attributable to common
stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net income (loss) attributable to common
stockholders per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted average shares used in computing
per share amounts:
Fiscal 2017
Jun 30,
2017 (1)
Mar 31,
2017
Dec 31,
2016
Sep 30,
2016
(In thousands)
215,758 $
222,533 $
221,090 $
229,138
139,244
136,431
137,542
144,099
68,791
3,011
211,046
4,712
(10,000)
561
(4,727)
(1,876)
(6,603)
69,828
3,511
209,770
12,763
—
641
13,404
(4,522)
8,882
62,352
2,873
202,767
18,323
—
264
18,587
(7,688)
10,899
104,646
3,062
251,807
(22,669)
—
342
(22,327)
8,690
(13,637)
120
233
753
(196)
(6,483) $
9,115 $
11,652 $
(13,833)
(0.17) $
(0.17) $
0.24 $
0.23 $
0.31 $
0.30 $
(0.36)
(0.36)
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
38,757,312
38,757,312
38,376,984
39,328,127
38,104,909
39,007,276
37,938,705
37,938,705
111
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
Consolidated Quarterly Statements of
Operations
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cost and expenses
Instructional costs and services . . . . . . . . . . . . .
Selling, administrative and other operating
expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Product development expenses . . . . . . . . . . . . .
Total costs and expenses . . . . . . . . . . . . . . . . . . .
Income (loss) from operations . . . . . . . . . . . . . .
Interest income (expense), net . . . . . . . . . . . . . .
Income (loss) before income taxes and
noncontrolling interest . . . . . . . . . . . . . . . . . .
Income tax benefit (expense) . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . .
Add net (income) loss attributable to
noncontrolling interest . . . . . . . . . . . . . . . . . .
Net income (loss) attributable to common
Jun 30,
2016
Fiscal 2016
Mar 31,
2016
Dec 31,
2015
(In thousands)
Sep 30,
2015
221,319 $
221,340 $
208,811 $
221,230
143,136
134,755
129,616
139,003
76,606
1,067
220,809
510
(21)
489
(822)
(333)
(649)
64,888
2,563
202,206
19,134
(101)
19,033
(5,368)
13,665
61,440
3,028
194,084
14,727
(190)
14,537
(6,653)
7,884
99,270
3,413
241,686
(20,456)
(305)
(20,761)
8,097
(12,664)
608
654
(129)
stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(982) $
14,273 $
8,538 $
(12,793)
Net income (loss) attributable to common
stockholders per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted average shares used in computing
per share amounts:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.03) $
(0.03) $
0.38 $
0.37 $
0.23 $
0.23 $
(0.34)
(0.34)
37,768,812
37,768,812
37,692,826
38,999,871
37,559,999
37,680,876
37,433,493
37,433,493
112
SCHEDULE II
K12 INC.
VALUATION AND QUALIFYING ACCOUNTS
Years Ending June 30, 2017, 2016 and 2015
1. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Allowance End of Period
June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,813,394 4,512,899
535,122 $ 14,791,171
June 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,657,092 4,609,720 3,453,418 $ 10,813,394
June 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,459,928 9,299,766 3,102,602 $ 9,657,092
Additions
Charged to Deductions
Balance at
Beginning
of Period
Cost and
Expenses
from
Balance at
2. INVENTORY RESERVES
Balance at
Beginning
of Period
475,218
June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,642,547
June 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,192,234
691,407
June 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,056,142 1,405,988
3. COMPUTER RESERVE (1)
Charged to Deductions,
Cost and
Expenses
Shrinkage and Balance at
Obsolescence
End of Period
807,456 $ 2,310,309
241,094 $ 2,642,547
8,269,896 $ 2,192,234
June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 573,444
June 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,032,253
June 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,462,424
595,876
89,064
379,030
Balance at
Beginning
of Period
Additions
Charged to
Cost and
Expenses
Deductions,
Shrinkage and Balance at
Obsolescence
End of Period
819,042
350,278 $
547,873 $
573,444
809,201 $ 1,032,253
(1) A reserve account is maintained against potential obsolescence of, and damage beyond economic repair to, computers
provided to the Company’s students. The reserve is calculated based upon several factors including historical
percentages, the net book value and the remaining useful life. During fiscal years 2017, 2016 and 2015, certain
computers were written off against the reserve.
4. INCOME TAX VALUATION ALLOWANCE
Balance at
Beginning
of Period
Additions to Deductions in
Net Deferred Net Deferred
Tax Asset
Allowance
Tax Asset
Allowance
Balance at
End of Period
482,410 $ 7,152,860
46,554 $ 4,338,653
529,680 $ 2,791,033
June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,338,653 3,296,617
June 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,791,033 1,594,174
June 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,968,482 1,352,231
113
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As required by Rules 13a-15(d) under the Securities Exchange Act of 1934, as amended) (the “Exchange Act”)
management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the
effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Disclosure
controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed
in the reports the Company files or submits under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls
and procedures include, without limitation, controls and procedures designed to ensure that information required to be
disclosed by us in our reports that the Company files or submits under the Exchange Act is accumulated and communicated
to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding our required disclosure. In designing and evaluating our disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives, and management necessarily applies its judgment in evaluating and
implementing possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of
June 30, 2017, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure
controls and procedures were effective.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting refers to a process designed by, or under the supervision of, our Chief
Executive Officer and Chief Financial Officer and effected by our board of directors, management and other personnel, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles and includes those policies and procedures
that:
•
•
•
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions
and dispositions of our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that our receipts and
expenditures are being made only in accordance with authorizations of our management and members of
our board of directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of our assets that could have a material effect on our financial statements.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting
objectives because of inherent limitations. Internal control over financial reporting is a process that involves human
diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal
control over financial reporting also can be circumvented by collusion or improper override. Because of such limitations,
there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over
financial reporting. However, these inherent limitations are known features of the financial reporting process, and it is
possible to design into the process safeguards to reduce, though not eliminate, this risk.
Management evaluated the effectiveness of our internal control over financial reporting as of June 30, 2017 using
the framework set forth in the report of the Treadway Commission’s Committee of Sponsoring Organizations (COSO),
“Internal Control—Integrated Framework (2013).” As a result of management’s evaluation of our internal control over
114
financial reporting, management concluded that as of June 30, 2017, our internal control over financial reporting was
effective. The effectiveness of our internal control over financial reporting as of June 30, 2017 has been audited by BDO
USA, LLP, an independent registered public accounting firm, as stated in its report which appears on the subsequent page
of this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting:
In addition, management carried out an evaluation, as required by Rule 13a-15(d) of the Exchange Act, under
supervision of the Chief Executive Officer and Chief Financial Officer, of changes in the Company’s internal control over
financial reporting. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that there
were no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter that
have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial
reporting.
115
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
K12 Inc.
Herndon, Virginia
We have audited K12 Inc. and subsidiaries’ (the Company) internal control over financial reporting as of June
30, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria). K12 Inc. and subsidiaries’ management is
responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying “Item 9A, Management’s Report on Internal
Control Over Financial Reporting”. Our responsibility is to express an opinion on the company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
In our opinion, K12 Inc. and subsidiaries maintained, in all material respects, effective internal control over
financial reporting as of June 30, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of K12 Inc. and subsidiaries as of June 30, 2017 and 2016, and the related
consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three
years in the period ended June 30, 2017 and our report dated August 9, 2017, expressed an unqualified opinion thereon.
McLean, Virginia
August 9, 2017
/s/ BDO USA, LLP
116
ITEM 9B. OTHER INFORMATION
None.
PART III
We will file a definitive Proxy Statement for our 2017 Annual Meeting of Stockholders (the 2017 Proxy
Statement”) with the SEC, pursuant to Regulation 14A of the Exchange Act, not later than 120 days after the end of our
fiscal year. Accordingly, certain information required by Part III has been omitted under General Instruction G(3) to
Form 10-K. Only those sections of the 2017 Proxy Statement that specifically address the items set forth herein are
incorporated by reference.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 is hereby incorporated by reference to our 2017 Proxy Statement under the
captions “Proposal 1: Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance.”
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is hereby incorporated by reference to our 2017 Proxy Statement under the
captions “Compensation Discussion and Analysis” and “Director Compensation for Fiscal 2017.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by Item 12 is hereby incorporated by reference to our 2017 Proxy Statement under the
caption “Security Ownership of Certain Beneficial Owners and Management.”
ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by Item 13 is hereby incorporated by reference to our 2017 Proxy Statement under the
captions “Certain Relationships and Related-Party Transactions” and “Director Independence.”
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 is hereby incorporated by reference to our 2017 Proxy Statement under the
caption “Fees Paid to Independent Registered Public Accounting Firm.”
117
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements.
PART IV
The information required by this item is incorporated herein by reference to the financial statements and notes
thereto listed in Item 8 of Part II and included in this Annual Report.
(a)(2) Financial Statement Schedules.
Except for Schedule II which was presented separately, all financial statement schedules are omitted because the
required information is included in the financial statements and notes thereto listed in Item 8 of Part II and included in this
Annual Report.
(c) Exhibits.
The following exhibits are incorporated by reference or filed herewith.
See Exhibit Index
ITEM 16. 10-K SUMMARY
None.
118
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
August 9, 2017
K12 INC.
By: /s/ STUART J. UDELL
Name: Stuart J. Udell
Title: Chief Executive Officer
August 9, 2017
POWER OF ATTORNEY
Know all persons by these presents, that each person whose signature appears below constitutes and appoints
Stuart J. Udell, James J. Rhyu and Howard D. Polsky, and each of them severally, his or her true and lawful attorney-in-fact
with power of substitution and resubstitution to sign in his or her name, place and stead, in any and all capacities, to do
any and all things and execute any and all instruments that such attorney may deem necessary or advisable under the
Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the U.S. Securities and
Exchange Commission in connection with the Annual Report on Form 10-K and any and all amendments hereto, as fully
for all intents and purposes as he or she might or could do in person, and hereby ratifies and confirms all said
attorneys-in-fact and agents, each acting alone, and his or her substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
/s/ STUART J. UDELL
Stuart J. Udell
Chief Executive Officer (Principal Executive Officer)
/s/ JAMES J. RHYU
James J. Rhyu
Chief Financial Officer (Principal Financial Officer and
Principal Accounting Officer)
/s/ NATHANIEL A. DAVIS
Nathaniel A. Davis
Executive Chairman of the Board of Directors
/s/ AIDA M. ALVAREZ
Aida M. Alvarez
/s/ CRAIG R. BARRETT
Craig R. Barrett
/s/ GUILLERMO BRON
Guillermo Bron
Director
Director
Director
/s/ KEVIN P. CHAVOUS
Kevin P. Chavous
Director
/s/ JOHN M. ENGLER
John M. Engler
/s/ STEVEN B. FINK
Steven B. Fink
/s/ LIZA McFADDEN
Liza McFadden
/s/ JON Q. REYNOLDS
Jon Q. Reynolds
/s/ ANDREW H. TISCH
Andrew H. Tisch
Director
Director
Director
Director
Director
119
Date
August 9, 2017
August 9, 2017
August 9, 2017
August 9, 2017
August 9, 2017
August 9, 2017
August 9, 2017
August 9, 2017
August 9, 2017
August 9, 2017
August 9, 2017
August 9, 2017
Exhibit Index
Exhibit No.
3.1
3.2
4.1
4.2*
4.3*
4.4*
4.5*
4.6*
4.7
4.8
10.1*
10.2*
10.3*
10.4*
10.5
10.6
10.8
10.9
10.10*
10.11*
10.12*
Description of Exhibit
Fourth Amended and Restated Certificate of Incorporation of K12 Inc. (incorporated by reference to
Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2016,
filed with the SEC on January 27, 2017, File No. 001-33883).
Second Amended and Restated Bylaws of K12 Inc. (incorporated by reference to Exhibit 3.1 to the
Registrant’s Current Report on Form 8-K, filed with the SEC on February 9, 2016, File No. 001-33883).
Form of stock certificate of common stock (incorporated by reference to Exhibit 4.1 to the Registrant’s
Amendment No. 4 to Registration Statement on Form S-1, filed with the SEC on November 8, 2007, File
No. 333-144894).
Form of Stock Option Agreement under the 2016 Incentive Award Plan.
Form of Restricted Stock Award Agreement under the 2016 Incentive Award Plan.
K12 Inc. 2016 Incentive Award Plan (incorporated by reference to Exhibit 4.2 to the Registrant’s Post-
Effective Amendment to Form S-8, filed on March 22, 2017, File No. 333-213033.
K12 Inc. 2007 Equity Incentive Award Plan, as amended (incorporated by reference to Appendix A to the
Registrant’s Definitive Proxy Statement on Schedule 14A, filed on October 28, 2015, File
No. 001-33883).
Form of Indemnification Agreement for Non-Management Directors and for Officers of K12 Inc.
(incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2008, filed with the SEC on November 14, 2008, File No. 001-33883).
Form of Director’s Indemnification Agreement (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed with the SEC on October 22, 2008, File No. 001-33883).
Form of Second Amended and Restated Stockholders Agreement (incorporated by reference to
Exhibit 4.5 to the Registrant’s Registration Statement on Form S-1, filed with the SEC on July 27, 2007,
File No. 333-144894).
Amendment to Amended and Restated Stock Option Agreement, dated December 23, 2010 (incorporated
by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
December 31, 2010, filed with the SEC on February 9, 2011, File No. 001-33883).
Employment Agreement for Nathaniel A. Davis, effective January 7, 2013 (incorporated by reference to
Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2012,
filed with the SEC on February 5, 2013, File No. 001-33883).
First Amendment to Employment Agreement for Nathaniel A. Davis, effective January 7, 2013
(incorporated by reference to Exhibit 10.28 to the Registrant’s Annual Report on Form 10-K for the year
ended June 30, 2013, filed with the SEC on August 29, 2013, File No. 001-33883).
Amended and Restated Employment Agreement for Nathaniel A. Davis, effective March 10, 2014
(incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2014, filed with the SEC on April 29, 2014, File No. 001-33883).
Second Amended and Restated Employment Agreement of Nathaniel A. Davis, dated January 27, 2016.
(incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended December 31, 2015, filed with the SEC on January 28, 2016, File No. 001-33883).
Employment Agreement of Stuart J. Udell (“Agreement”), dated January 7, 2016. (incorporated by
reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
December 31, 2015, filed with the SEC on January 28, 2016, File No. 001-33883).
Form of Performance Share Unit Agreement under the 2016 Incentive Award Plan.
Form of Performance Share Unit Agreement under the 2007 Equity Incentive Award Plan, as amended
(incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2015, filed with the SEC on October 27, 2015, File No. 001-33883).
Employment Agreement of James J. Rhyu, dated May 1, 2013 (incorporated by reference to Exhibit 10.29
to the Registrant’s Annual Report on Form 10-K for the year ended June 30, 2013, filed with the SEC on
August 29, 2013, File No. 001-33883).
Employment Agreement of Howard D. Polsky, dated June 1, 2004 (incorporated by reference to
Exhibit 10.16 to the Registrant’s Amendment No. 1 to Registration Statement on Form S-1, filed with the
SEC on September 26, 2007, File No. 333-144894).
First Amendment to Employment Agreement of Howard D. Polsky, dated July 1, 2007 (incorporated by
reference to Exhibit 10.18 to the Registrant’s Amendment No. 4 to Registration Statement on Form S-1,
filed with the SEC on November 8, 2007, File No. 333-144894).
120
Exhibit No.
10.13*
10.14
10.15
10.16
10.17
10.18*
10.19*
21.1
23.1
24.1
31.1
31.2
32.1
32.2
99.1†
101.INS#
101.SCH#
101.CAL#
101.LAB#
101.PRE#
101.DEF#
Description of Exhibit
Form of Executive Change in Control Severance Agreement (incorporated by reference to Exhibit
10.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on October 31, 2016, File
No. 001-33883).
Deed of Lease by and between ACP/2300 Corporate Park Drive, LLC and K12 Inc., dated
December 7, 2005 (incorporated by reference to Exhibit 10.13 to the Registrant’s Amendment No. 1
to Registration Statement on Form S-1, filed with the SEC on September 26, 2007, File
No. 333-144894).
First Amendment to Deed of Lease by and between ACP/2300 Corporate Park Owner, LLC and
K12 Inc., dated November 30, 2006 (incorporated by reference to Exhibit 10.21 to the Registrant’s
Annual Report on Form 10-K for the year ended June 30, 2008, filed with the SEC on September 26,
2008, File No. 001-33883).
Second Amendment to Deed of Lease by and between ACP/2300 Corporate Park Owner, LLC and
K12 Inc., dated March 26, 2007 (incorporated by reference to Exhibit 10.22 to the Registrant’s
Annual Report on Form 10-K for the year ended June 30, 2008, filed with the SEC on September 26,
2008, File No. 001-33883).
Credit Agreement, dated January 31, 2014, by and among K12 Inc., certain of K12’s subsidiaries,
Bank of America, N.A., and the other lenders party thereto (incorporated by reference to Exhibit 10.2
to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2013, filed
with the SEC on February 4, 2014, File No. 001-33883).
Form of Stock Option Agreement under the 2007 Equity Incentive Award Plan, as amended
(incorporated by reference to Exhibit 10.18 to the Registrant’s Annual Report on Form 10-K for the
year ended June 30, 2015, filed with the SEC on August 4, 2015, File No. 001-33883).
Form of Restricted Stock Award Agreement under the 2007 Equity Incentive Award Plan, as
amended (incorporated by reference to Exhibit 10.19 to the Registrant’s Annual Report on
Form 10-K for the year ended June 30, 2015, filed with the SEC on August 4, 2015, File
No. 001-33883).
Subsidiaries of K12 Inc.
Consent of BDO USA, LLP.
Power of Attorney (included in signature pages).
Certification of Principal Executive Officer Required Under Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended.
Certification of Principal Financial Officer Required Under Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended.
Certification of Principal Executive Officer Required Under Rule 13a-14(b) of the Securities
Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350.
Certification of Principal Financial Officer Required Under Rule 13a-14(b) of the Securities
Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350.
Third Amended and Restated Educational Products and Administrative, and Technology Services
Agreement between the Ohio Virtual Academy and K12 Virtual Schools L.L.C., dated July 1, 2017.
XBRL Instance Document
XBRL Taxonomy Extension Schema
XBRL Taxonomy Extension Calculation
XBRL Taxonomy Extension Labels
XBRL Taxonomy Extension Presentation
XBRL Taxonomy Extension Definition
* Denotes management compensation plan or arrangement.
# Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files included in Exhibit 101 hereto are deemed not
filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933,
as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and
otherwise are not subject to liability under those Sections.
† Confidential treatment requested with the Securities and Exchange Commission as to certain portions. Confidential
materials omitted and filed separately with the Securities and Exchange Commission.
121
Exhibit 21.1
Subsidiaries of Registrant
Name
K12 Management Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
K12 Services Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Power-Glide Language Courses, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
K12 International Holdings B.V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LearnBop, Inc. (51%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Jurisdiction
Delaware
Delaware
Utah
Netherlands
Delaware
Subsidiaries of K12 Management Inc.
Name
Disguise the Learning, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
K12 Virtual Schools LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
K12 Classroom LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
K12 Classroom Delaware LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
K12 California LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
K12 Florida LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
K12 Washington LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Jurisdiction
Tennessee
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Subsidiary of Power-Glide Language Courses, Inc.
Name
Middlebury Interactive Languages LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Jurisdiction
Delaware
Subsidiaries of K12 International Holdings B.V.
Name
K12 International Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
K12 International GmbH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
K12 Education (UK) Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Jurisdiction
Cayman Islands
Switzerland
United Kingdom
122
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
K12 Inc.
Herndon, Virginia
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-148436,
No. 333-198608 and No. 333-206083) of K12 Inc. and subsidiaries of our reports dated August 9, 2017, relating to the
consolidated financial statements, financial statement schedule, and the effectiveness of K12 Inc. and subsidiaries’ internal
control over financial reporting, which appear in this Annual Report on Form 10-K.
/s/ BDO USA, LLP
McLean, Virginia
August 9, 2017
123
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICERS
I, Stuart J.Udell, certify that:
(1)
(2)
(3)
(4)
I have reviewed this Annual Report on Form 10-K of K12 Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
(5)
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Dated: August 9, 2017
/s/ STUART J.UDELL
Stuart J.Udell
Chief Executive Officer (Principal Executive Officer)
124
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, James J. Rhyu, certify that:
(1)
(2)
(3)
(4)
I have reviewed this Annual Report on Form 10-K of K12 Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
(5)
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Dated: August 9, 2017
/s/ JAMES J. RHYU
James J. Rhyu
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
125
Exhibit 32.1
The following certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350 and
in accordance with SEC Release No. 33-8238. This certification shall not be deemed “filed” for purposes of Section 18 of
the Securities Exchange Act of 1934, as amended, nor shall it be incorporated by reference in any filing of the Company
under the Securities Act of 1933, as amended, whether made before or after the date hereof, regardless of any general
incorporation language in such filing.
Section 906 Certification
Pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the
undersigned officer of K12 Inc., a Delaware corporation (the “Company”), hereby certifies, to such officer’s knowledge,
that:
(1)
(2)
the accompanying Annual Report of the Company on Form 10-K for the fiscal year ended June 30, 2017
(the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of
the Securities Exchange Act of 1934, as amended; and
the information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
Dated: August 9, 2017
/s/ STUART J. UDELL
Stuart J. Udell
Chief Executive Officer (Principal Executive Officer)
126
Exhibit 32.2
The following certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350 and
in accordance with SEC Release No. 33-8238. This certification shall not be deemed “filed” for purposes of Section 18 of
the Securities Exchange Act of 1934, as amended, nor shall it be incorporated by reference in any filing of the Company
under the Securities Act of 1933, as amended, whether made before or after the date hereof, regardless of any general
incorporation language in such filing.
Section 906 Certification
Pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the
undersigned officer of K12 Inc., a Delaware corporation (the “Company”), hereby certifies, to such officer’s knowledge,
that:
(1)
(2)
the accompanying Annual Report of the Company on Form 10-K for the fiscal year ended June 30, 2017
(the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of
the Securities Exchange Act of 1934, as amended; and
the information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
Dated: August 9, 2017
/s/ JAMES J. RHYU
James J. Rhyu
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
127
ADJUSTED OPERATING INCOME, ADJUSTED EBITDA, AND FREE CASH FLOW
From fiscal 2015–2017, K12 incurred various charges, including:
•
In fiscal 2015, the Company incurred charges related to end-of-life products, software and inventory,
reserves, and severance costs that totaled $28.4 million. The $28.4 million charge includes $2.8 million
of stock-based compensation and $3.2 million of impairment on our investment in Web International.
•
In the fourth quarter of fiscal year 2016, K12 announced that it had reached a settlement with the State
of California resolving all claims related to an Attorney General inquiry with no admission of liability or
wrongdoing, and no fines or penalties. K12 took a net charge related to this settlement of $7.1 million.
•
In the third quarter of fiscal year 2017, the Company incurred $11.4 million in charges relating to reducing
real estate exposure, lowering human resources costs, and recording additional reserves for receivables.
Included in the $11.4 million charge is $0.8 million of stock-based compensation expense.
Adjusted Operating Income and Adjusted EBITDA for fiscal 2015–2017 are shown excluding these charges,
where applicable to the calculation. A reconciliation of GAAP Net Income to the Adjusted Operating
Income, and Adjusted EBITDA presented on page VII inclusive of the aforementioned charges, is as follows:
($ million)
Net income (loss) attributable to common
stockholders (as reported)
Interest (income) expense, net
Impairment of investment in Web International
Education Group, Ltd.
Income tax (benefit) expense
Noncontrolling interest
Stock-based compensation expense
Impact to Adjusted Operating Income
of aforementioned charges
Adjusted Operating Income (loss) (as presented)
Depreciation and amortization
Adjusted EBITDA (as presented)
2015
11.0
0.1
3.2
5.8
(1.7)
21.3
22.4
62.1
70.0
132.1
2016
$9.0
0.6
-
4.8
(0.5)
18.6
7.1
39.6
68.2
107.8
2017
0.5
(1.8)
10.0
5.4
(0.9)
22.6
10.6
46.4
72.9
119.3
A reconciliation of GAAP Net Cash Provided by Operating Activities to Free Cash Flow presented on page VII
is as follows:
($ million)
Net Cash Provided by Operating Activities
Purchases of property and equipment
Capitalized software development costs
Capitalized curriculum development costs
Free Cash Flow
2016
121.8
(5.0)
(36.3)
(21.6)
58.9
2017
88.7
(2.2)
(26.9)
(19.1)
40.5
2015
120.1
(9.9)
(33.8)
(18.1)
58.3
1 2 8
Executive Management
Board of Directors
Company Directory
Nathaniel A. Davis
Executive Chairman,
K12 Inc.
Honorable Aida M. Alvarez
Former Clinton Cabinet Member,
Small Business Administration
Craig R. Barrett
Retired Chairman and CEO,
Intel Corporation
Guillermo Bron
Managing Director,
Pine Brook Road Partners, LLC
Kevin P. Chavous
Founder and CEO,
The Chavous Group
John M. Engler
Former Governor of Michigan
Steven B. Fink
Deputy Chairman,
Heron International
Liza McFadden
President and CEO,
Barbara Bush Foundation
for Family Literacy
Andrew H. Tisch
Co-Chairman of the Board and
Chairman of Executive Committee,
Loews Corporation
Stuart J. Udell
Chief Executive Officer,
K12 Inc.
Transfer Agent
Computershare
P.O. Box 30170
College Station, TX 77842
800.368.5948
Corporate website:
us.computershare.com
Independent Auditor
BDO USA, LLP
Bethesda, MD
Legal Counsel
Latham & Watkins LLP
Washington, DC
Stock Exchange Listing
Listed on the New York Stock
Exchange under the symbol LRN
Annual Meeting
The annual meeting of K12 Inc.
stockholders will be held at the
offices of Latham & Watkins LLP
555 Eleventh Street, NW, Suite 1000
Washington, DC 20004
on Thursday, December 14, 2017
at 10 AM (ET).
Investor Inquiries
Michael S. Kraft
Vice President, Finance
571.353.7778
mkraft@K12.com
Online Information
For corporate reports and
company news, visit K12.com.
Nathaniel A. Davis
Executive Chairman
Stuart J. Udell
Chief Executive Officer
James J. Rhyu
Executive Vice President
and Chief Financial Officer
Howard D. Polsky
Executive Vice President,
General Counsel and Secretary
Allison B. Cleveland
Executive Vice President,
School Management and Services
Joseph P. Zarella
Executive Vice President,
Business Operations
Robert W. Banwarth
Senior Vice President
and Chief Information Officer
Bryan W. Flood
Senior Vice President,
Public Affairs
Mary F. Gifford
Senior Vice President,
Academic Policy
and External Relations
Sameer S. Kasargod
Senior Vice President
and Chief Marketing Officer
Valerie A. Maddy
Senior Vice President,
Human Resources
Douglas McCollum
Senior Vice President,
Products
Sean P. Ryan
Senior Vice President and General
Manager, Institutional Business
Peter G. Stewart
Senior Vice President,
School Development
VISIT US: K12.com
TALK WITH US: 866.968.7512
Copyright © 2017 K12 Inc. All rights reserved. K12 is a registered trademark of K12 Inc. The K12 logo and other marks referenced herein are trademarks of K12 Inc. and its subsidiaries,
and other marks are owned by third parties.
COR1709B59