2018
ANNUAL REPORT
NATHANIEL A. DAVIS
Chief Executive Officer and Chairman
OU R M I S S I O N
We help students reach their full
potential through inspired teaching
and personalized learning.
The K12 online and blended
learning model is an effective
option to prepare students to
succeed in today’s complex
world—and tomorrow’s.
To our fellow shareholders:
At K12, we believe that within each and every student—rich or poor, urban or
rural, thriving or falling behind—lies unique talents and a boundless potential,
ready to be inspired by a great education. We also know that while many
students thrive in traditional brick-and-mortar schools, others feel limited by
a system that simply does not fit their needs. Learning is truly personal and
must be treated that way.
As such, the snapshots of individual student and teacher success
stories featured within this year’s Annual Report are just a few examples
demonstrating K12’s commitment to helping students reach their full potential
through inspired teaching and personalized learning. The achievements of
the students we serve, as well as the enduring satisfaction of parents, is proof
positive that the K12 online and blended learning model is an effective option
to prepare students to succeed in today’s complex world—and tomorrow’s.
Parents across the nation turn to the K12-powered personalized approach to
education to be more involved in their child’s learning experience, as students
attend school from the safety of their own home. Driven by robust demand, in
fiscal 2018, we continued to execute against a strategy to build our managed
public schools business, while making selective investments in career
technical education as well as our institutional and private pay businesses.
We believe that by continuing this investment approach, we can deliver
revenue and profitability growth for our shareholders, while also providing
exceptional learning options for families across the nation through full-time
and part-time blended and online programs.
I
A COMPASSIONATE CAREER CHOICE
Thanks to Destinations Career Academy of Colorado,
rising 10th grader Sara Sangare of Denver, Colorado, is
already well on her way to being college- and career-
ready. A variety of focused electives helped her get a
clear view of her future career path, turning her passion
for helping others and her love of kids into a dream of
becoming a pediatrician in her Ivory Coast hometown.
Sara starts her Health Science pathway courses as part
of her curriculum this academic year. By the time she’s
a senior, she’ll have had opportunities to earn college
credits toward her career and be more than ready to
concentrate on making her pre-med dreams a reality.
STRENGTHENING OUR CORE
Our managed public schools remain the bedrock of our business. This July,
we surpassed a key milestone in our 18-year history—one million students
have enrolled in a K12-powered school. Over time, we expect those schools
to reach two million enrollments, or even more, as we seek to deliver on
parents’ expectations and students’ needs. I trust we’ll get there soon.
We will be led by our passion for breaking down barriers for all students and
for giving them every opportunity to succeed in their own way regardless of
zip code, personal circumstance, or background.
A critical component toward achieving our enrollment goals is student
retention, which we have prioritized for a number of years. As a result
of this focus, I’m excited to report that we’re experiencing real gains.
On a year-over-year basis, we saw thousands more students choosing
to remain in the virtual academies they currently attend. In fact, this is the
highest student retention level we have posted in eight years.
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K 1 2 2 0 1 8 A N N U A L R E P O R T
“ My school
will help me
prepare for
my future.”
Sara Sangare
Destinations Career
Academy of Colorado, 2018
The success we delivered in retaining more students comes as a result of
a portfolio of wraparound services and programs offered to our virtual and
blended school customers that focus on strong family relationships and robust
student outreach when extra help is needed, be it academic or personal.
K12’s Strong Start program facilitates a seamless onboarding experience
following enrollment. Seasoned Learning Coaches now provide mentorship
and best practices for families new to the virtual learning environment. Other
programs leverage multiple data sources, including surveys, academic data,
as well as feedback from teachers and support personnel. We use this data to
gauge student and family satisfaction, facilitate outreach when necessary, and
create customized communications to inform family re-registration decisions.
Fresh insights show K12’s wraparound support services and programs are key
drivers for favorable family reviews. Learning Coaches report having a more robust
understanding of student progress and improved partner school support. What’s
more, an independent survey in spring 2017 showed parent satisfaction now
exceeds 90 percent in the schools we support, a critical metric that standardized
testing alone can’t capture. Delving deeper into the feedback, surveys show
K–8 parents rank both academic achievement and the overall happiness of their
children as the top reasons they value the K12-powered approach.
I I I
“ K12 helped me
reach my full
potential.”
Reagan Berry
Louisiana Virtual Charter
Academy, 2018
THE SKY IS THE LIMIT
Dyslexia and dysgraphia made reading and writing
challenging for Reagan Berry. He was often overlooked
at his local brick-and-mortar school because it couldn’t
accommodate his needs. As a result, Reagan and his mom
spent hours after school each day going over what he
should’ve learned. “I felt like I was behind all the time,” says
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to Louisiana Virtual Charter Academy where Reagan’s mom
could be his full-time Learning Coach, and a curriculum
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valedictorian, and accepted a $27,000 scholarship to
study chemical engineering at McNeese State University.
“Now, I can be whatever I want to be,” Reagan says.
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K 1 2 2 0 1 8 A N N U A L R E P O R T
Student retention also continues to be a critical component of overall
academic achievement. Students in grades 3 through 8 enrolled three
or more years in K12-managed public schools achieve higher proficiency
compared to students enrolled for less than one year: 16 percent higher
in English Language Arts and 11 percent higher in Mathematics and
Reading according to the state testing data from school year 2016–2017.
The longer students stay in the programs we manage, the better they
perform academically.
Additionally, two new tools are helping students stay on track academically
while also helping to keep them engaged and enrolled. The Graduation
Planning Tool allows counselors to build customized pathways toward
graduation day to guide and support students. They can view their plans
in real-time on personal landing pages. Pathways can be redesigned at
the end of each term as needed. And, the Attendance Management Tool
assists our partner schools in tracking class participation in accordance
with state guidelines.
Going forward, enrollment growth in our managed public schools will
be fueled by expansion of existing schools and growing our footprint
across the United States. While we did see some closures this year, we
also opened new schools. We grew our existing presence in Indiana by
launching Indiana Digital Learning School. We also added a new school in
the Keystone state, Insight School of Pennsylvania Cyber Charter School.
Both academies served students in grades K through 10 in their initial year
of operation, with plans to add 11th and 12th grades respectively over the
next two years. Looking ahead, we are planning new managed schools in
Texas and Oregon for the next school year. We also will look to expand
into states like Missouri, which passed legislation this year to allow part-
time and full-time online learning options statewide. K12 is also working
with states that do not yet offer a virtual academy so that, in the future,
families will have additional online and blended learning options.
16%
11%
higher in English
Language Arts
higher in Mathematics
and Reading
V
PREPARING STUDENTS FOR THE FUTURE
According to the U.S. Chamber of Commerce1, more than two-thirds of
employers can’t find qualified talent to fill open jobs, yet young adults still
struggle to break into the workforce. As a result, we have a high degree of
confidence in Career Technical Education (CTE) as a solution to the U.S. skills
gap. Over the past year, we opened a new CTE program in Ohio, developed
three new CTE Project Based Learning courses, and now K12’s course catalog,
from which schools select courses, includes more than 180 courses across
30 career pathways. Our investment in CTE-focused schools and curriculum
will continue into the next school year when we launch Destinations Career
Academy of Oregon as well as five new programs in Michigan, Indiana, Arizona,
Arkansas, and Pennsylvania. In total, we’ll manage thirteen academies or
programs across the nation in the next school year.
Beyond portfolio expansion, we’ve begun developing the Destinations
Career Academy brand to reach students who want to gain real-world skills
but who may never have considered online schooling. This market segment
of students is an entirely separate value proposition from our mainstream
managed public schools. A recent independent survey2 shows nearly 40
percent of prospective families would be receptive to full-time and part-time
online or blended CTE programs. Thus, the Destinations Career Academies
go-to-market strategy is being reimagined to better inform families about their
students’ career-focused options. We have already commenced this effort,
including rolling out separate Destinations advertising and digital marketing
campaigns. By leveraging this approach, we believe we can expand the
number, and type, of students seeking out career pathway programs.
Additionally, we are actively seeking partnerships with corporate America,
colleges, and universities to ensure our CTE programs stay current with
workforce trends and needs. Pathways and curricula that are aligned with
today’s most in-demand jobs will empower Destinations students to make
sound decisions about their most promising career paths. Their options
include pursuing gainful employment, entering an apprenticeship, or enrolling
in a two- or four-year college.
1 U.S. Chamber of Commerce Foundation Special Report, “America Working Forward”, Fall 2017
2 CTE Research Study, conducted by Rockbridge Associates, Spring 2018
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K 1 2 2 0 1 8 A N N U A L R E P O R T
“ We bring
change; we
bring the
unexpected.”
Aaeshah Siddiqui
Michigan Virtual Charter
Academy, 2018
ADVOCACY IN ACTION
When Aaeshah Siddiqui started her freshman year at Michigan
Virtual Charter Academy, she admits she was apprehensive about
how she would make friends in an online school. But those worries
subsided when, encouraged by a teacher, she formed the Muslim
Student Association. Committed to dispelling myths about Islam
and promoting positive change in the world, this interfaith student
group meets online and in person to learn from each other and to
volunteer in their community. Over the past two years, Aaeshah has
not only found lasting friendships, she has empowered her online
peers to have a meaningful impact on the world around them.
V I I
“ Kaleb went
from hiding
under the desk
to raising his
hand in class.”
Kaleb Davis
Highpoint Virtual Academy of
Michigan, and mom Chantelle
Buckner, 2018
Rounding out our CTE initiatives is a strategic investment we’ve made in
STEM Premier. STEM Premier’s innovative and collaborative platform connects
young adults to career and college options. Students, age 13 and older as
well as adults, can build an external “virtual portfolio” designed to showcase
their career interests, academic performance, skills, extracurricular activities,
accomplishments, badges, and certifications. Where offered, they can also
discover resources and scholarships, receive guidance and coaching, and
connect with companies and colleges that can view student profiles and
recruit talent directly via internal messaging. Students from more than 19,000
different high schools are represented on STEM Premier across 50 states.
Half of the more than 350,000 users are middle school or high school
students. Importantly, participation in the platform for students is free.
Our investment in STEM Premier will prove a value-add for K12, students,
educators, and corporations alike in developing a robust pipeline of career-
oriented students armed with the skills and expertise necessary to bridge our
nation’s stubborn skills gap.
From new schools, to new marketing, to a new platform to tie it all together,
we are making meaningful steps to move our CTE strategy forward. We are
excited about the potential in our CTE business, which we believe can deliver
incremental enrollment growth beyond the current market expectations over
the next few years.
V I I I
K 1 2 2 0 1 8 A N N U A L R E P O R T
UNCOVERING SUCCESS
After almost daily calls from Kaleb’s school regarding his
behavior and lack of progress, Chantelle Buckner knew it
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A bright, highly functioning autistic 12-year-old, he struggled
with school. “Sometimes I just drifted away from doing it,” he
explains. But when he enrolled in Highpoint Virtual Academy
of Michigan, he was able to adjust his pace of learning and
study at home with fewer distractions. In a single year, he
rose from a 1st grade reading level to get back on track with
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his mom says.
BECOMING A TRUSTED ADVISOR
Turning around our Institutional business is a key strategic priority. Though this
has been a rebuilding year for Fuel Education (FuelEd), our new management
team is proactively complementing our content and services sales approach
by positioning FuelEd as a trusted software services provider delivering end-
to-end digital learning solutions.
This new go-to-market approach leverages our expertise and experience in
building and managing more than 70 online schools, to do a better job of licensing
and selling a complete set of solutions to public school districts, private schools,
religious schools, drop-out recovery schools, and other institutes of learning.
A critical step in the new approach we took this year was an investment in
Modern Teacher. Modern Teacher provides school districts with a research-
based methodology called the Digital Convergence Framework to personalize
learning at scale and ensure organizational alignment along the way. The platform
connects member district administrators, principals, and teachers with the
strategy, know-how, and metrics to effectively transition from traditional
classroom teaching to a modern learning environment. Our investment in
Modern Teacher perfectly aligns with FuelEd’s new go-to-market approach,
providing a roadmap for moving from fragmented content sales to delivering
customized, future-ready, end-to-end solutions.
I X
“ K12 made
me a better
teacher.”
Robert “Dean” Johnson
Cyber Academy of South
Carolina teacher, 2018
REACHING = TEACHING
K12’s Inaugural Teach 360 Award for Family Engagement
& Partnership was given to Dean Johnson for his excellence
in partnering with students and families to deliver a
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teaching online, and he quickly learned that strong student
relationships were essential in a virtual classroom setting.
He addressed each need by getting to know his students’
situations and meeting them where they were—even if that
meant creating tight lessons that could be delivered in
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week. “I always try to make sessions purposeful,” says Dean.
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K 1 2 2 0 1 8 A N N U A L R E P O R T
GOING GLOBAL
In our Private Pay business, we’re building partnership-focused global
opportunities. This year, we broadened our existing alliance with the Fazheng
Group’s Beijing Royal School (BRS), a kindergarten through 12th grade
international school in China, making BRS a value-added user and in-country
distributor of our proprietary digital curriculum. K12 has successfully delivered
blended learning through BRS, a premier education leader in China, for the past
three years employing the accredited, online high school courses and services of
The Keystone School. We’re now actively leveraging the BRS model to cultivate
additional partnerships and ensure that our technology platform and curriculum
are accessible to as many students as possible worldwide.
Domestically, we joined forces with C2 Education, which operates more than
180 tutoring and test-preparation locations around the nation, in order to
ensure more high school students have access to Advanced Placement® (AP®)
courses. Research shows students benefit significantly from the competitive
edge AP® courses deliver. But many students lack access to AP® courses,
either because their school doesn’t offer them or because students’ academics
don’t meet the qualifications to enroll. Our union with C2 Education marries
the online world with brick-and-mortar centers to create a blended learning
opportunity that breaks down traditional barriers to student success.
Our focus on educational excellence is powered by great technology and
constant innovation. We are actively investing in Artificial Intelligence in
multiple areas within our platform and curricula. The data we’re leveraging
is useful and powerful in increasing adaptivity and personalizing the overall
student learning experience. Importantly, a new “Help Me” feature embedded
into our courses could be a game-changer, delivering learning support
powered by our Machine Learning Adaptive algorithm, the Recommender.
Recommendations are updated every night based on data gathered from
student activities and assessments.
Our focus on educational
excellence is powered by
great technology and
constant innovation.
X I
2018 HIGHLIGHTS
REVENUE
ADJUSTED EBITDA(cid:10)(cid:872)(cid:3)(cid:11)(cid:872)(cid:3)(cid:12)(cid:872)(cid:3)(cid:14)
ADJUSTED OPERATING INCOME(cid:10)(cid:872)(cid:3)(cid:11)(cid:872)(cid:3)(cid:12)(cid:872)(cid:3)(cid:13)(cid:3)
FREE CASH FLOW8
A reconciliation of Adjusted Operating Income, Adjusted EBITDA, and Free Cash Flow metrics to GAAP results can be found on page 131.
This year, we also purchased Big Universe to deliver best-in-breed digital
literacy. The Big Universe platform includes a readymade eLibrary featuring
more than 13,000 eBooks. Big Universe is currently available to more
than 700,000 students in nearly a thousand schools. Enhancements are
being made to incorporate automated oral reading fluency capabilities into
the platform to provide student speech recognition combined with auto
scoring. This solution is being integrated into the full K12 course ecosystem,
delivering real-time student data and saving educators time on cumbersome
administrative chores so they can focus on their true passion—teaching!
3 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.
4 In the third quarter of fiscal year 2017, the Company incurred $11.4 million in charges relating to reducing real estate exposure, lowering human resource 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.
5 In the third quarter of fiscal year 2018, the Company incurred $4.3 million in charges relating to a CEO transition. Adjusted operating income and Adjusted EBITDA for
2018 are shown excluding these costs, where applicable to the calculation. Included in the $4.3 million charge is $1.4 million of stock-based compensation expense.
6 Adjusted Operating Income (Loss) is defined as income (loss) for operations as adjusted for stock-based compensation expense.
7 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 income (expense) primarily consists of interest expense for capital leases and interest income on customer receivables.
8 Free Cash Flow is defined as net cash provided by (used in) operating activities less purchases of property and equipment, capitalized software development costs, and
capitalized curriculum development costs.
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K 1 2 2 0 1 8 A N N U A L R E P O R T
To ensure families fully understand the benefits and options associated with
personalized learning, this year we rolled out a first-of-its-kind K–12 mobile
app. The K12 app guides families through the process of identifying the K12
partner school that best meets their children’s requirements. Once enrolled,
a host of resources can be accessed directly from a mobile device to support
a successful onboarding process. These resources include tips for computer
set-up, virtual tours, orientation courses, and more. The app also provides
school-specific staff contact information and streamlines the application
process, setting students up for success in the virtual classroom on day one.
FINANCIAL RESULTS
We are pleased to report that K12 ended Fiscal Year 2018 strong, posting
solid financial and operational gains. Revenue for the year was $917.7 million,
growing 3.3 percent year-over-year, driven by the strength of our Managed
Public School business and demand for full-time online school options.
Specifically, Managed Public School enrollments jumped nearly 5 percent.
We ended the year with approximately 105,000 students enrolled in our partner
programs, the highest level we have had at the end of the school year in the
past three years.
Adjusted operating income for the year, excluding charges recorded and
other items, in both fiscal ‘17 and ‘18, was $49.2 million9, an increase of more
than 6 percent year-over-year. This was a result of our ongoing commitment
to making targeted expenditures to drive academic excellence and outcomes
while simultaneously focusing on growing profitability.
With the improvement in profitability, and our current level of capital outlays,
we produced more than $60 million in free cash flow, an increase of more than
49 percent year-over-year. We ended the year with more than $233 million in
cash while making $7 million in strategic investments and repurchasing more
than 1.8 million shares of our Company’s common stock for $27.5 million.
9 In the third quarter of fiscal year 2018, the Company incurred $4.3 million in charges relating to a CEO transition. Adjusted operating income for 2018 is shown excluding
these costs. Included in the $4.3 million charge is $1.4 million of stock-based compensation expense. A reconciliation of Adjusted Operating Income to GAAP results can
be found on page 131.
X I I I
LOOKING AHEAD
We believe the future of education lies in combining innovative thinking with
technology and inspired teachers to create a personalized, boundary-free
education that brings out the very best in students.
Whether it’s providing students with rigorous academics or equipping them
with soft skills like leadership, teamwork, time-management, problem-solving,
empathy, and effective decision-making, we are steadfast in our dedication to
provide all students with a great education. Every child has the ability to learn,
and we want to give them every opportunity to succeed in their own way,
regardless of zip code, personal circumstance, or background.
We acknowledge that this approach demands a culture driven by an earned
trust, constant improvement, and creative innovation—we are up to the
challenge, and we are committed.
Thank you for your support.
Nate Davis
Chief Executive Officer and Chairman
Some of the Postsecondary Schools Where K12 Graduates Have Been Accepted*
Arizona State University
Indiana University
Texas A&M
Baylor University
Northwestern University
The Citadel Military College of SC
Brigham Young University
Pennsylvania State University
University of California – Berkeley
Colorado State University
Princeton University
University of Illinois
Cornell University
San Diego State University
University of Michigan
George Washington University
The Juilliard School
Georgia Institute of Technology
Temple University
University of Nevada –
Las Vegas
* National Student Clearinghouse Student Tracker Report School Year 2016–2017
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K 1 2 2 0 1 8 A N N U A L R E P O R T
FORM 10–K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(cid:95)
(cid:134)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2018
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 (cid:134) No (cid:95)
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 (cid:134) No (cid:95)
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 (cid:95)
No (cid:134)
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 (cid:95) No (cid:134)
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. (cid:95)
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 gr owth company” in Rule 12b-2 of the Exchange
Act.
Large accelerated filer (cid:133)(cid:133)
Non-accelerated filer (cid:133)(cid:133)
(Do not check if a smaller reporting company)
Accelerated filer (cid:95)(cid:95)
Smaller reporting company (cid:133)(cid:133)(cid:3)(cid:3)
Emerging growth company (cid:133)(cid:133)
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. (cid:133)(cid:133)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:134) No (cid:95)
The aggregate market value of the registrant’s voting and non-voting stock held by non-affiliates of the registrant as of December 31, 2017 was $415,602,150. Aggregate
market value excludes an aggregate of approximately 15,257,332 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, 2018 was 39,572,956.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant’s definitive proxy statement for its 2018 annual meeting of stockholders to be filed pursuant to R egulation 14A with the Securities and Exchange
Commission not later than 120 days after the registrant’s fiscal year ended June 30, 2018, are incorporated by reference into Part III of this Form 10-K.
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PART I
TABLE OF CONTENTS
Business
ITEM 1.
ITEM 1A. Risk Factors
ITEM 1B. Unresolved Staff Comments
ITEM 2.
ITEM 3.
ITEM 4 Mine Safety Disclosures
Properties
Legal Proceedings
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
ITEM 6.
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.
ITEM 9.
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
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
2
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:
(cid:120)
(cid:120)
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(cid:120)
(cid:120)
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(cid:120)
(cid:120)
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(cid:120)
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(cid:120)
(cid:120)
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 standards, testing programs and state accountability metrics 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;
disruptions to our Internet-based learning and delivery systems, including but not limited to our data
storage systems, resulting from cybersecurity attacks; and
3
(cid:120) misuse or unauthorized disclosure of student and personal data.
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 and regulatory 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 proprietary and third party 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. 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 turnkey 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; Institutional; and Private Pay Schools and
Other.
Managed Public School Programs
(cid:120) Virtual public schools
public
Institutional
(cid:120) Non-managed Public School
Programs
(cid:120) Blended public schools
(cid:120) Institutional software and services
Private Pay Schools and Other
(cid:120) 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) addition
of new features to our proprietary learning management platform for K-5 students; (iii) strengthening of our corporate
and school infrastructure to increase data security, protect student privacy, and ensure compliance with evolving
reporting and regulatory requirements; (iv) procurement and delivery of student computers; and (v) conversion of
interactive instructional products to enable delivery through tablets and mobile devices.
4
(cid:120) 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.
These programs offer an integrated package of systems, services, products, and professional expertise that we manage to
support an online or blended public school, including: administrative support (e.g., budget proposals, financial reporting,
student data reporting, and staff recruitment), information technology and provisioning, academic support services,
curriculum, learning systems, and instructional services. In fiscal year 2018, our Managed Public School Programs
accounted for approximately 85% 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
multi-year 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 specific aspects of the management of the schools,
including: the creation and implementation of the academic plan; monitoring academic achievement; recommendations
for teacher hires; teacher training; recommended compensation plans for school personnel; financial management;
enrollment processing; and development and procurement of curriculum, equipment and required services. The scope of
services we provide may also vary in accordance with applicable state regulations and each governing authority’s
policies. The schools receive funding on a per student basis from the state in which the public school or school district is
located. 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. In fiscal year 2017, we
adopted a metric based on the number of schools served by our Managed Public School Programs. For fiscal year 2018,
we provided these turnkey Managed Public School Programs to 75 schools in 31 states and the District of Columbia. In
addition, we report on a quarterly basis the aggregate number of enrollments and associated revenue for the Managed
Public School Programs.
(cid:120) Institutional
We work closely as a partner with school districts, individual public schools, charter schools and private
schools to provide them with educational solutions. The Institutional business includes Non-managed Public School
Programs and Institutional software and services where K12 offers curriculum and technology for full-time virtual and
blended programs. We also offer options whereby the school can contract for instruction, curriculum, supplemental
courses, marketing, enrollment and other educational services. Unlike Managed Public School Programs, the
Institutional business does not offer primary administrative support services, which remain the responsibility of the
school district or the school customer. In addition to curriculum, platforms and programs, the services we offer to
Institutional clients can also assist them in launching their own online and blended learning programs tailored to their
own requirements and may include instructional support, reporting tools and content libraries. For the 2017-18 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.
(cid:120) Private Pay Schools and Other
We operate three accredited 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 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.
5
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, and to adult learners who
are seeking to complete their high school diploma.
Our History
We were founded in 2000 to utilize advances in technology to provide children with access to a high-quality
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 and breadth of available curriculum and instruction, 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 fiscal year 2018, our customers for
Managed Public School Programs consisted of 75 schools in 31 states and the District of Columbia. We also serve
schools in all 50 states and the District of Columbia through our Institutional business.
Our Market
The U.S. market for K-12 education is large and online learning is gaining greater acceptance and broader
usage. For example:
(cid:120) According to the National Center for Education Statistics (“NCES”), a division of the U.S. Department of
Education, in 2017 over 50 million students attended K-12 public schools. Of those 50 million students, 70
percent were enrolled in pre-K through grade 8, and the remaining 30 percent were enrolled in grades 9
through 12.
(cid:120) According to a May 2018 report of the National Education Policy Center (“NEPC”) entitled “Full-Time
Virtual and Blended Schools: Enrollment, Student Characteristics, and Performance,” in 2016-17, 429 full-
time virtual schools enrolled 295,518 students, and 296 blended schools enrolled 116,716. The NEPC
report further states that 34 states had full-time virtual schools and 29 states had blended schools. Districts
are also rapidly adopting online learning to expand course offerings, provide schedule flexibility, increase
graduation rates and lower the cost of delivering education.
(cid:120)
(cid:120)
In 2016, the National Home Education Research Institute reported that there are approximately 2.3 million
home-educated students in the United States, which has grown by an estimated 2% to 8% per year over the
past few years. Many of these students took an online course and a small percentage enrolled in full-time
online public schools.
In 2017, the NCES conducted a survey which found that as of the 2016-2017 school year, 98% of public
school districts offered career and technical education (“CTE”) programs to students at the high school
level. The NCES defines a CTE program as a sequence of courses at the high school level to provide
students with the academic and technical knowledge and skills needed to prepare for further education and
careers in current or emerging professions.
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.
(cid:120) According to the National Alliance for Public Charter Schools, enrollment at public charter schools has
nearly tripled over the past 12 years, and there were approximately 7,000 public charter schools operating
nationwide during the 2016-2017 school year, with an estimated enrollment of approximately 3.0 million
students in 44 states.
6
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, including adult learners; (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 turnkey 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.
Our Business Lines
Managed Public School Programs
Our turnkey Managed Public School Programs offer an integrated package of systems, services, products, and
professional expertise that we manage to support an online or blended public school. Customers for these programs can
obtain the administrative support, information technology, academic support services, online curriculum, learning
system platforms and instructional services under the terms of a negotiated service agreement. We provide our Managed
Public School Programs to virtual and blended public charter schools and school districts. These contracts are negotiated
with and approved by the governing authorities of the customer. The duration of the Managed Public School Program
service agreements are typically 2-5 years, and most provide for automatic renewals absent a customer notification
within a negotiated time frame. During any fiscal year, the Company may enter into new Managed Public School
agreements, receive non-automatic renewal notices and negotiate replacement agreements, terminate the contract or
receive notice of termination, or transition a school between a Managed Public School Program and a Non-managed
Public School Program. The governing boards may also establish school policies and other terms and conditions over the
course of a contract, such as enrollment parameters. The authorizers who issue the charters to our Managed Public
School customers can renew, revoke, or modify those charters as well.
7
For the 2017-2018 school year, we provided our Managed Public School Programs to 75 schools in 31 states
and the District of Columbia. During this fiscal year, we entered into new contracts in four states to open Managed
Public School Programs, auto-renewed four agreements for schools in three states, and completed renewal negotiations
in four states, with varying degrees of contract modifications. At two schools, the boards elected not to seek charter
renewals from their authorizers for the upcoming 2018-19 school year, and one school board set grade enrollment
sizes. At one school, the authorizer opted not to renew the charter for the upcoming 2018-19 school year. At the
expiration of their service agreements on June 30, 2018, two schools elected not to renew their service agreements with
us. In June 2016, the California Teachers Association (“CTA”) was recognized as the exclusive representative for the
teachers employed by the California Virtual Academies (“CAVA”), and a collective bargaining agreement (“CBA”) was
ratified in May 2018 by the members of the teachers’ union and the nine independent boards of the CAVA schools,
which subscribe to our Managed Public School Programs. The CBA did not have a material impact on our financial
condition or results of operations.
Virtual Public Schools
The majority of our revenue is derived from multi-year 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 support, 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 teachers with whom they interact via email,
telephonically, in synchronous virtual classroom environments, and sometimes face-to-face. 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. Students attending
many of these schools 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, generally under the Destinations Career Academy brand name, designed to give
students a head start on their career goals by providing them with content pathways towards an industry certification,
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 Hoosier Academies Indianapolis, 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 online solutions to augment current teaching
8
practices, 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 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 supplemental 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 in traditional, blended and online learning
environments. Our FuelEd suite of offerings has grown and includes: K12 curriculum; FuelEd Online Courses; FuelEd
Anywhere Learning Systems; Middlebury Interactive Languages; Stride; and the Big Universe literacy solution. This
extensive catalog of online curricula can address specific student needs, including AP, honors programs, world
languages, English language learners, remediation, credit recovery, alternative education, CTE 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.
Private Pay Schools and Other
International and Private Pay Schools
We operate three accredited, tuition-based private schools that meet a range of student needs from individual
course credit recovery 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 2017-18 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.
The K12 International Academy is 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. Keystone offers middle and high school on a full or part-time basis, as well as adult
learning programs. Keystone also sells elementary level (K-5) courses and teacher support, which appeals to families
that seek to homeschool or need supplemental instruction. Students take 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.
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.
9
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:
Affect 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, school governing
authorities and/or 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 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, school districts, regional education organizations, and charter schools 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. Traditional school districts are becoming a
greater percentage of our customer base.
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Accelerate Institutional Business. The breadth of our FuelEd course catalog ranges from pre-K to 12th grade,
instructional services, supplemental solutions, and teacher development and 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 to facilitate personalized learning in traditional, blended and
online learning environments. We will continue to seek acquisitions of businesses that expand FuelEd’s distribution and
product portfolio, improve our technology platform, and allow us to enter new markets to serve students, teachers and
administrators who are 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, CTE, supplemental educational
products, adult learning, and individual products packaged and sold directly to consumers. We have made strategic
investments in other companies to supplement our go-to-market approach in the Institutional business with a focus on
advising school districts on their digital classroom transformation efforts.
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. In 2018, we partnered with
Southern New Hampshire University to invest in the development of degree-granting programs for online teaching.
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), states that have retained the Common Core State Standards (“CCSS”) and states that have adopted the Next
Generation Science Standards (“NGSS”). 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:
(cid:120) Provide Learning Systems To Facilitate The Delivery Of Our Products and Services. Our products and
services are largely delivered through online learning systems that facilitate the delivery of courses,
communication with teachers, synchronous and asynchronous class sessions, tracking of progress,
assessment of student performance and other key aspects of our offering.
(cid:120) 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
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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.
(cid:120) 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.
(cid:120)
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. We are exploring new
tools, such as machine learning and game-like capabilities to integrate into our curriculum to support
individualized learning.
(cid:120) 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.
(cid:120) 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.
(cid:120) 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 national and international
subject-area associations.
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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. Our
2017 K12 Annual Academic Report (“2017 Academic Report”) is available at http://k12.com/academic-report. In early
fiscal year 2019, we expect to publish the 2018 K12 Annual Academic Report which will include performance data for
Managed Public School Programs in states that publicly reported test results from the 2016-17 school year, and will be
made available on the referenced website.
By analyzing and communicating the results of our efforts to improve student outcomes, 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. We believe that none of our competitors serving virtual
public schools publishes this volume or depth of academic performance data and analytics.
With the implementation of the federal Every Student Succeeds Act (“ESSA”) for the 2017-18 school year,
each of the states in which we manage virtual public schools has been given the authority to develop a school
accountability plan within the confines of a broad federal ESSA framework based on their own conception of the best
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means to advance college and career readiness. The ESSA requires states to utilize four academic-related indicators in
their accountability plans to measure school and student performance: academic achievement, student growth in reading
and math, graduation rate, and progress in achieving English language proficiency. The states were given discretion on
the weight to give to each indicator and how to apply them. Most of the state ESSA plans submitted in 2017 to the U.S.
Department of Education use some form of summative rating method to describe school performance, such as conferring
an A-F grade or using a ranking system having a 1-10 scale. A significant new element of this education law is a
requirement for states to adopt at least one non-academic indicator in their state’s accountability system to measure
“school quality or student success”, often called the “fifth” indicator. Unlike No Child Left Behind where the only
measure of school performance was an Annual Yearly Progress (“AYP”) report, there are a wide range of non-academic
options enumerated in the ESSA that the states can adopt to advance their own “school quality or student success”
accountability objectives. The states may include measures of student engagement, educator engagement, student access
to and completion of advanced coursework, post-secondary readiness, school climate and safety, and any other indicator
a state may choose for this purpose. For example, a post-secondary readiness accountability indicator can include student
participation in and completion of a CTE program of study, or access to dual credit programs. Similarly, a student
engagement indicator may focus on teacher observations or ratings that demonstrate improvements in this area.
We share the view taken by many states that assessing a student by his or her learning growth is a more
accurate indicator of school and student performance than attaining a static proficiency score. This approach is now
reflected in the ESSA as well. 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 continue to encourage the school boards of our customers to
implement our Academic Excellence Framework, a standardized guide available to all of our 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 guidelines, schools
implement plans to collect student-level data throughout the year from three types of assessments: diagnostic, formative
interim, and summative. Baseline or readiness 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. 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 readiness, 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 that 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 that support students and families, such as Strong Start and FAST. To
monitor student learning progress during the school year, we are using multiple equivalent assessments at the lesson, unit
and semester level. This is intended to ensure that our measurement is reliable and valid. We provide more synchronous
sessions for at risk students based on data driven instruction that provides for targeted teacher intervention to assist
students with lesson challenges.
In furtherance of our goal to improve academic performance, the Academic Committee of the K12 Board of
Directors is charged with making recommendations to management to foster continuous improvement in academic
outcomes for the public and private schools served by the Company. With input and oversight from the Academic
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Committee, our K12 Educational Advisory Committee (“EAC”) consists of industry experts who provide additional
academic expertise and advice. The EAC met 5 times in fiscal year 2018. The members of the EAC were:
(cid:120) Dr. David Driscoll, former Commissioner of Education, Commonwealth of Massachusetts
(cid:120) Ms. Millie Fornell, former Chief of Staff, Miami-Dade School District
(cid:120) Ms. Ann Foster, former Senior Vice President Strategy, Business Development and Connected Learning
for Harcourt Education Group
(cid:120) Dr. Mary Futrell, retired Dean of the George Washington University School of Education and former
President of the National Education Association
(cid:120) Dr. Beverly Hutton, Deputy Executive Director of the National Association of Secondary School Principals
(cid:120) Dr. Ildiko Laczko-Kerr, Chief Academic Officer, Arizona Charter Schools Association
(cid:120) Dr. Andrew Porter, former Dean of the Graduate School of Education, University of Pennsylvania
(cid:120) Dr. Elanna Yalow, CEO of Knowledge Universe Early Learning Programs
Our Products
We continue to invest in curriculum and technology to educate students more effectively and efficiently. Much
of our investment has been in the development of improved functionality of our curriculum and systems. Areas of focus
include: (i) integration and user experience—making sure that all of our systems and solutions are easy for teachers,
administrators, students, and parents to use; (ii) mobile enabled products; (iii) personalized learning for all students we
serve; (iv) courses that are flexible enough to provide assistance to struggling students; (v) reading and oral fluency
scoring; (vi) alignment with state standards; and (vii) built-in tutoring and support functionality.
As school districts evolve and look for digital solutions in their classrooms, we believe that our products 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 with potential applicability from virtual classrooms to brick-and-mortar schools.
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 turnkey
solutions, partnerships, vendor relationships, enterprise licenses, and purchases of curriculum and services.
Curriculum
K12 has one of the largest digital curriculum portfolios for the K-12 online education industry. Our school
customers can select from hundreds of core elementary, middle, and high school courses, as well as state customized
versions of those courses, electives, lesson guides, and offline instructional kits and materials. 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 to master a lesson’s objectives.
Since our inception, we have built core courses in English Language Arts (“ELA”), 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. State standards are continually evolving and we continually invest in our
curriculum to meet these changing requirements.
Online Lessons. Our K12 online lessons are accessed by K-5 students through a proprietary learning
management platform, which we call our Online School (“OLS”). For grades 6-12, lessons are accessed through a
third-party platform, Desire2Learn. Students can also access FuelEd courses through other platforms used in school
districts. Each online lesson provides the roadmap for the entire lesson, including direction to specific online and offline
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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 that generally include 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 K-5 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:
ELA, 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 and succeed on the applicable state tests. 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, consistent with authorizer and state requirements.
We continue to invest behind our core curriculum in grades K-5 by improving the user experience, building in
additional educational tools into the courses and aligning to state standards. For example, we are introducing additional
game-based practice into the curriculum that can provide practice problems at lower skill levels and build up to the
current lesson plan. All of the courses are being designed to include a modern, mobile user experience.
High School Courses
The curriculum available to high school students offers increased flexibility in course selection including a wide
range of electives. These include courses in AP classes, a diverse selection of foreign language offerings and CTE course
pathways. Much like our K-8 offerings, we continue to invest in these courses to meet state standards and provide
additional tools that will help remediate the problems of struggling students. For example, we are introducing a “Help
Me” section that will provide additional online instruction in certain course areas at the click of the button.
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. We also offer a wide range of supplemental and credit recovery courses across most
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subject areas. These courses provide students the ability to augment their learning experience with additional online
materials to help catch up in a subject area if they have fallen behind or “make-up” for a course they were not able to
effectively complete.
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, we offer digital, supplemental English language learner (“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.
Supplemental Courses. We are completing major updates to our adaptive math, ELA, reading, and science
courses, significantly expanding the number of learning activities, and adjusting the level of content delivered to students
at points where they struggle in order to improve comprehension. In fiscal year 2018, we acquired Big Universe, a
digital library solution, that includes more than 12,000 trade books, and are making enhancements to that product,
including the integration of automated reading level scoring.
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 and adapt our curriculum to new devices and platforms while developing algorithms and
models to build an effective curriculum.
(cid:120) 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. The courses and
solutions we are producing are increasingly mobile-ready.
(cid:120)
Interactive Learning Activities and Games: We have created a growing catalog of interactive learning
activity and game templates for use throughout our courses. Our Stride offering is built around a motivating
reward system to engage students and create learning incentives.
(cid:120) 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.
(cid:120) Adaptive Learning: We have developed a proprietary adaptive learning algorithm that uses ongoing
practice activity and assessment results to offer suggestions on additional practice. This is being added to
our math and ELA courses for the 2018-19 school year. We are also launching an adaptive math engine
that uses embedded assessments to determine if students need instruction in prerequisite skills up to two
grades below level prior to learning the related concepts.
(cid:120) 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
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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, 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).
(cid:120) 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 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.
(cid:120) 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.
We use the Desire2Learn platform for grades 6-12. This platform enables lesson planning, scheduling, tracking
student progress and conducting assessments. The platform 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:
(cid:120) Lesson assessments that verify mastery of the objectives for that lesson and help determine whether further
study of the lesson is necessary.
(cid:120) 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.
(cid:120) Diagnostic assessments for placement and interim assessments to measure progress.
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.
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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, truancy management, graduation planning, communications, and learning
kit shipment tracking.
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.
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. Throughout a teacher’s employment in a
managed program, we provide tools for teacher management and evaluation. In most Managed Public School Programs,
we have an instructional coaching program, where experienced teachers provide coaching to other teachers at the schools
to help improve the quality of instruction to students.
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 with special needs, 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, may assist and facilitate the development and implementation of Individualized Education Plans for students
with special needs and for 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
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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.
For the school year 2017-18, most of the managed public schools we served implemented the complete
Students First program. 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 for students and families in the schools.
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 challenges.
Management and Technology Services
Turnkey Services. For most Managed Public School Programs, we provide a turnkey package 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 2018, 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 provide planning and implementation support for
proctored state tests. Further, as we have added new schools and expanded into new states, we continue to update our
compliance policies and procedures. We employ a 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 and legal developments. The
CSCO provides a school compliance report semi-annually to the Audit Committee, or more frequently on various
matters as requested by the Committee.
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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 digital and print curriculum developers. The digital 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 digital curriculum providers, including Khan Academy,
Duolingo, IXL Learning, Inc. and LearnZillion, Inc., offer a different pricing model which provides curriculum at a
lower cost (sometimes free) but may charge for additional products or services. We also compete with institutions such
as The Laurel Springs School (Nobel Learning Communities, Inc.) and Penn Foster Inc. for online private pay 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;
comprehensive suite of academic programs;
customer satisfaction with our curriculum, school teachers and the managed public schools we serve;
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;
integrated K-12 solutions, with components designed and built to work together;
ability to leverage our assets 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 multi-year
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 18 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 a personalized order to fulfill the
corresponding learning kits to ship to each student. 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. In order to
ensure that students in virtual and blended public schools have 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
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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 have contracted with an outside network and
information cybersecurity firm to assist us with monitoring traffic and potential threats that may target our services and
systems. We protect sensitive information through policy and control governance that is validated on a semi-annual
basis, and maintain a layered security architecture. Third party firms are engaged to test our networks, servers and
applications for vulnerabilities. We have prepared an incident response plan that is designed to escalate information
regarding material data breaches and cybersecurity attacks to the senior management of the Company. A
business-centric information security program has also been adopted that is tailored to adjust to an ever-changing IT
compliance and information security threat landscape. Although distributed denial-of-service (“DDOS”) attacks are
frequently attempted, we have not experienced a significant disruption to our business as a result of these attacks.
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 through internal development and by acquisitions as we aim
to offer more courses for new grades and expand into adjacent education markets, both in the United States and overseas.
Through acquisitions, we have also obtained 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 five U.S.-issued patents and two foreign-issued patents directed towards various
aspects of our educational products and offerings. Three of the U.S.-issued patents and one of the foreign-issued patent
encompass our system and methods of virtual schooling and online foreign language instruction. The other two U.S.-
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issued patents and other one foreign-issued patent encompass our system and method for producing, delivering and
managing educational material.
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, 2018, we had approximately 4,700 employees, including approximately 2,300 teachers.
Substantially all of these employees are located in the United States. In addition, there are approximately 2,100 teachers
who are employed by virtual or blended public schools that we manage under turnkey 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
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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.
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. State labor laws applicable to public-sector employees and their rights to organize may also apply to
virtual charter schools, such as teachers they employ. 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.
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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 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.
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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 ESSA, which took effect on August 2, 2016 and is authorized
through 2020, represents a major change in federal education law by shifting much of education policy decision making
back to the states and by providing most funding through block grants. Of particular significance to the Company is that
the states have the discretion to develop and design their own accountability systems within a broad federal framework.
In addition, states have been given the authority to adopt different types of annual accountability plans 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 ELLs 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 had until September 2017 to
submit plans to the U.S. Department of Education to demonstrate compliance with ESSA and all met that deadline, with
only six states still waiting for approval of their plans as of June 2018 (California, Florida, Nebraska, North Carolina,
Oklahoma, and Utah) and in which we provide virtual or blended public school programs. Implementation of the
accountability and reporting portions of the plans was required for the 2017-18 school year, but most state plans were
not approved in time for complete implementation in 2017-18, but should be fully implemented for the 2018-19 school
year.
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 specific disabilities that fit within any of the
disability categories 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, supplemental aids and services or a private school option 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, such as Web Content Accessibility Guidelines (“WCAG”) Level A and Level AA. 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
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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 technical standard for determining Web accessibility compliance under Section 508 and
Title II of the ADA. That rulemaking, however, was terminated in December 2017, leaving online service providers with
no uniform federal standard of compliance, although some states have adopted the standards promulgated under Section
508 while others require WCAG Level A and/or Level AA.
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
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 Children’s Online Privacy
Protection Act (“COPPA”), which imposes certain parental notice and other requirements on us that are directed to
children under 13 years of age who access the web-based schools we manage. In addition, 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, or new restrictions are 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, recessionary conditions in the economy at large, or 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.
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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:
(cid:120) 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.
(cid:120) 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 13 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 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.
(cid:120) 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.
(cid:120) 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, 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.
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. For
example, a 2016 Nevada law expanded a charter authorizer’s ability to terminate a charter based upon academic
performance or to reconstitute a school’s governing board, and a 2013 Tennessee law with academic performance
criteria applying only to virtual schools.
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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 public charter schools, including virtual and blended, 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 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 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 that can potentially affect us. For example, the Louisiana Association of Educators, an affiliate of a national
teachers union, sought to terminate funding on state constitutional grounds to certain types of charter schools through the
judicial process (including to a managed public school we serve), and while initially successful, the Louisiana Supreme
Court reversed that decision in March 2018. See Iberville Parish School Board v. Louisiana State Board of Elementary
and Secondary Education, 2018 WL 1319404 (March 13, 2018).
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; (vi) teacher certification and reporting requirements; and (vii) virtual school attendance reporting. 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. For example, in October 2017, the California Department of Education commenced an audit covering,
among other things, the average daily attendance records and associated funding provided to the California Virtual
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Academies (“CAVAs”), dependent on the proper method of counting the time-value and daily engagement of students
enrolled in independent study programs provided by non-classroom based charter schools and the regulations applicable
to such programs and schools. The CAVA schools are customers of our Managed Public School Programs and the audit
is currently pending.
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 2018, approximately 85% 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 Internal Revenue 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, many 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 2018, the Buckeye Community Hope Foundation terminated the charter
of Insight School of Ohio, and in fiscal year 2017, the State of New Jersey revoked the charter for the Newark
Preparatory Charter School.
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
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. New laws that
specifically target for-profit education companies or education management organizations from operating public charter
schools could also adversely affect our business, financial condition and results of operation.
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 that are adverse to us and to the students who attend the school programs we administer,
or they may 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 or the
students enrolled in those schools. For example, at fiscal year-end 2018, the Chicago Virtual Charter School decided to
assume self-management of the school beginning in the 2018-19 school year, thus eliminating the revenue and
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profitability derived from that school. In addition, the governing boards of the schools we serve may seek to install their
own head of school (“HoS”) as a condition for contract renewal, thereby potentially reducing the value of the programs
they purchase from us by structurally separating the HoS from regular involvement with our virtual school management
experts, internal professional development programs, and an understanding of the proprietary curriculum and
innovations we develop to improve academic performance. 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 or to improve academic outcomes 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 2018, we had contracts to provide our full range of products and services to 75 schools in 31
states and the District of Columbia 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 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, results 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 the terminal grade in a school 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 school 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 Public School Program partners are unsuccessful in marketing plans or enrollment processes for the
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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, resulting in a revised payment schedule agreement, which
accompanied a contract extension.
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 a 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. In some cases, the
governing authorities of these schools may request different enrollment policies or criteria. Our 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 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. 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.
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If student performance falls, state accountability standards are not achieved, teachers or administrators tamper with
state test scoring or modified graduation requirements, 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. For
example, at-risk students who attended the Electronic Classroom of Tomorrow (ECOT) schools in Ohio which were
closed in mid-school year 2017-18 by state regulators, and who then transferred to other public schools, including the
Ohio Virtual Academy managed by us, could negatively impact a receiving school’s overall academic performance
ratings absent a different accountability measure applicable to such students or waiver of such standards. 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 complete standardized state testing, and the
frequency and the results of this testing may have an impact on school enrollment. The significant increase of testing
undertaken at the state level has led some parents to opt out of state assessments, a parental right which is now codified
in the ESSA, 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 or graduation
standards 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.
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The transition from a federally mandated approach for curriculum standards and assessments to individual state
determinations under the ESSA may create ongoing challenges to ensure that our curriculum products align with
state requirements, thereby causing academic performance to decline and dissatisfaction by our school customers
which could limit our growth and profitability.
Under the ESSA, states will set their own curriculum standards in reading, math and science, and the federal government
is prohibited from mandating or incentivizing states to adopt any set of particular standards, such as Common Core.
States were also given the authority under the ESSA to craft their own assessment programs to measure the proficiency
of their students for college and career readiness, and also may choose to offer already available nationally recognized
assessments at the high school level, such as the SAT or ACT tests. As implementation proceeds at the state level, and
use of the assessments previously developed by the Partnership for Assessment of Readiness for College and Careers
(“PARCC”) and Smarter Balanced Assessment Consortium (“Smarter Balanced”) consortia continues to erode, a
multitude of different standards and assessments may emerge and result in temporary misalignments of our curriculum
offerings with state standards, cause academic performance to decline, create a need for additional teacher training and
product investments, all of which could adversely affect our relationship with our managed public school and school
district customers, financial condition, contract renewals and reputation.
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.
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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 and harm our business, financial condition and results of operations.
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 and divert resources from our business. 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, cause key
executives to leave the Company, adversely affect the relationships we have with our school board customers, and harm
existing and new business prospects.
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.
While historically we grew by opening new virtual public schools in new states, in recent years the pace of state
expansion has declined while opening more schools in existing states has increased. In fiscal year 2018, we served 75
managed virtual public schools and blended schools in 31 states and the District of Columbia. 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 content, technology and learning platforms, school support and marketing
approaches, with different pricing and service packages that may have greater appeal than our offerings. For example,
the Institutional business continues to face significant price pressure due to intense competition. In addition, some of our
Managed Public School Programs could seek to transition to a self-managed 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.
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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”). However, the proposed rule-making was officially withdrawn
by the Department of Justice on December 15, 2017, leaving no specific federally published technical requirements that
define how the ADA is applied to websites. In addition, Section 504 of the Rehabilitation Act of 1973 is designed to
ensure that students with disabilities have an equal opportunity to access 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, which became
effective on January 1, 2018. 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, inability to
secure new 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 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. 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 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
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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:
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our continual efforts to innovate and pilot new programs to enhance student learning and to foster college
and career opportunities, such as our Destination Career Academy schools which offer pathways for CTE,
may not receive sufficient market acceptance to be economically viable;
the ongoing transition of our curriculum from Flash to HTML, and our use of third party educational
platforms that we do not control, could create issues with customer satisfaction, 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 complicate 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 raised different operational challenges than those we face
with full-time virtual schools. Blended schools require us to lease facilities for classrooms, staff classrooms
with teachers, sometimes 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; and
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.
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.
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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 needs, 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 and course assignments 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.
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 May 2018, a
collective bargaining agreement between the California Teachers Association and the CAVA school boards was ratified
resulting, among other things, in an increase in instructional costs, limitations on work year and class size, teacher
caseload rules, and other constraints on the flexibility provided to teachers in those Managed Public School Programs,
and the ability given to charter schools generally to innovate and experiment to serve different student populations.
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
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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, Oracle-hosted, 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.
Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products,
services and brand.
Our patents, trademarks, trade secrets, copyrights, domain names and other intellectual property rights are
important assets. For example, we have been granted three U.S. patents related to our provision of virtual schooling,
including the system components for creating and administering assessment tests and our lesson progress tracker, and
two U.S. 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. If we fail to protect adequately our intellectual property through patents, trademarks and
copyrights, license agreements, employment agreements, confidentiality agreements, nondisclosure agreements or
similar agreements, our intellectual property rights may be misappropriated by others, invalidated or challenged, and our
competitors could duplicate our technology or may otherwise limit any competitive technology advantage we may have.
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.
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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.
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 disruption of our
services, misappropriation of confidential information or access to highly sensitive information, and may adversely
affect the demand for our services and products, our reputation, and financial performance.
Cyber-attacks are becoming more sophisticated and pervasive. Although we dedicate personnel and resources to
maintain multiple levels of protection to minimize the risk of a cybersecurity attack, malware intrusion or breach, such
measures cannot provide an absolute guarantee as hackers continue to become more sophisticated. Across our business
we store 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 to misappropriate such
information for potentially fraudulent purposes, and our security measures may fail to prevent such attacks or
unauthorized access. A significant attack or breach could result in a devastating impact on our reputation, financial
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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 and to market ourselves
and schools that contract with us, all of 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, state and other jurisdictional laws that
could have an impact on our business include the following:
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the COPPA, 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 and/or
require certain contractual commitments from education technology providers are applicable to virtual
schools and can significantly vary from one state to another;
federal and state laws that govern schools’ obligations to ELL students and students with disabilities; and
the European Union General Data Protection Regulation (“GDPR”) which may apply to certain aspects of
our Private Pay schools.
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.
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. Because we serve students residing in foreign countries, we may be subject to privacy
laws of other countries and regions, such as the GDPR. In addition to the possibility of penalties, remediation costs and
reputational damage, the cost of compliance with foreign laws may outweigh revenue from those countries to such an
extent that we may discontinue or restrict our offerings to certain countries.
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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 in Herndon, Virginia 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 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. In our capacity planning processes, 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
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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 key executives and skilled employees, and because our employees are located
throughout the United States, we may incur additional compliance and litigation costs that could adversely impact
our business, financial condition and our results of operations.
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 experienced executive 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.
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, leave, and other working conditions that can increase our labor costs
or subject us to liabilities to our employees. In addition, many state and local jurisdictions are adopting their own laws,
such as paid sick leave, to address conditions of employment not covered by federal law. These developments and
disparate laws could increase our costs of doing business, lead to litigation, or have a material adverse effect on our
business, financial condition and results of operations.
43
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.
We self-insure our group health insurance program for all eligible employees and their family members subject
to a stop loss insurance policy with a per person limit of $550,000 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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
44
ITEM 2. PROPERTIES
Our headquarters are located in approximately 129,000 square feet of office space in Herndon, Virginia. The
facility is under a lease that expires in May 2022. In addition, we lease approximately 361,000 square feet in multiple
locations throughout the United States under individual leases that expire between October 2018 and July 2023.
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, Master
File No. 4:16-cv-04069-PJH. 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 August 30, 2017, as a result of
a hearing on April 19, 2017, the Court granted with prejudice the Company’s motion to dismiss the allegations of false
statements regarding Scantron scores, but denied the motion on the allegations pertaining to non-disclosure of Agora’s
2012 notice of non-renewal and other statements regarding our replacement contract with Agora, and permitted the
plaintiffs to amend their complaint with respect to certain statements on the quality and effectiveness of the Company’s
programs. The plaintiffs were given until October 2, 2017 to amend. On October 2, 2017, the plaintiffs filed a second
amended complaint and elected not to pursue their claims regarding the statements pertaining to the quality and
effectiveness of our academic programs, and further dismissed two of our former officers as defendants in the case. The
Court accepted these stipulations on October 4, 2017. On November 16, 2017, the Company filed its answer denying the
allegations and asserting its affirmative defenses. Discovery with respect to this matter is proceeding. On March 1, 2018,
Plaintiffs filed a motion for class certification which was opposed by the Company on June 15, 2018. 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.
45
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, 2018, there were 26 registered holders of our common stock.
Quarter ended:
June 30, 2018
March 31, 2018
December 31, 2017
September 30, 2017
June 30, 2017
March 31, 2017
December 31, 2016
September 30, 2016
Stock Performance Graph
High
Low
$ 17.37 $ 12.72
14.01
18.27
15.07
18.34
16.35
18.79
21.18
20.67
17.84
14.41
17.16
16.16
10.17
10.67
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, 2013
and tracks it through June 30, 2018. All prices reflect closing prices on the last day of trading at the end of each calendar
quarter.
46
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 2013 - June 2018
190.00
LRN
Peer Group Index
160.00
S&P 500
Nasdaq Composite
Russell 2000
130.00
100.00
70.00
40.00
6/30/2013
6/30/2014
6/30/2015
6/30/2016
6/30/2017
6/30/2018
r
a
l
l
O
D
LRN
Peer Group Index
S&P 500
Russell 2000
Nasdaq Composite
30-Jun-13 30-Jun-14 30-Jun-15 30-Jun-16 30-Jun-17 30-Jun-18
93
160
160
161
178
60
94
143
148
155
100
100
100
100
100
98
116
117
121
115
99
141
145
140
153
52
107
138
142
143
(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.
47
Stock-based Incentive Plan Information
The following table provides certain information as of June 30, 2018, with respect to our equity compensation
plans under which common stock is authorized for issuance:
Equity Compensation Plan Information
As of June 30, 2018
Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Weighted-Average
Exercise Price of
Number of Securities
Remaining Available for
Future Issuance under
Equity Compensation
Plans (Excluding Securities
Options
Outstanding Options Reflected in First Column)
Equity compensation plans approved by security holders
1,199,307 (1) $
19.97
4,299,767 (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 May 16, 2018, the Company entered into a stock repurchase agreement pursuant to which the Company
repurchased 1,832,145 shares of its common stock in a single transaction at a purchase price of $15.00 per share,
representing aggregate consideration of $27.5 million.
48
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our selected consolidated statements of operations, balance sheets 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, 2018, and the selected consolidated balance sheet data as of June 30, 2018
and 2017, 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, 2015 and 2014 and
selected consolidated balance sheet data as of June 30, 2016, 2015 and 2014, have been derived from our audited
consolidated financial statements not included in this Annual Report. Our historical results are not necessarily indicative
of future operating results.
2018
2017
Year Ended June 30,
2016
(In thousands)
2015
2014
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 benefit (expense)
Net income (loss)
Add net loss attributable to
noncontrolling interest
Net income attributable to common
stockholders, including Series A
stockholders
$
917,734 $
888,519 $
872,700 $
948,294 $
919,553
592,495
557,316
546,510
607,756
569,219
290,446
9,248
892,189
25,545
—
305,617
12,457
875,390
13,129
—
—
965
(10,000)
1,808
26,510
910
27,420
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)
29,191
(11,075)
18,116
200
910
484
1,662
1,484
$
27,620 $
451 $
9,035 $
10,988 $
19,600
49
$
$
Net income attributable to common
stockholders, including Series A
stockholders, per share:
Basic
Diluted
Weighted average shares used in
computing per share amounts:
Basic
Diluted
Other Data:
Net cash provided by operating activities $
$
Depreciation and amortization
$
Stock-based compensation expense
EBITDA(1)
$
Capital Expenditures:
Capitalized curriculum development
costs
Purchases of property, equipment and
capitalized software development costs
New capital lease obligations(2)
Total capital expenditures
$
$
$
$
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(3)
$
$
$
$
$
$
2018
Year Ended June 30,
2016
(In thousands except share and per share data)
2015
2017
2014
0.70 $
0.68 $
0.01 $
0.01 $
0.24 $
0.23 $
0.29 $
0.29 $
0.50
0.50
39,282,674
40,637,744
38,298,581
39,500,934
37,613,782
38,850,388
37,330,569
37,625,425
38,987,470
39,230,516
103,627 $
75,260 $
20,817 $
100,805 $
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
9,927 $
19,132 $
21,627 $
18,057 $
15,411
33,276 $
17,414 $
60,617 $
29,092 $
14,469 $
62,693 $
41,273 $
10,878 $
73,778 $
43,683 $
14,654 $
76,394 $
33,958
24,132
73,501
2018
2017
As of June 30,
2016
(In thousands)
2015
2014
231,113 $
741,963 $
230,864 $
735,284 $
213,989 $
734,055 $
195,852 $
708,599 $
196,109
711,667
13,353 $
11,880 $
13,210 $
16,635 $
20,492
12,665 $
587,189 $
343,008 $
10,025 $
574,346 $
355,831 $
9,922 $
558,720 $
322,843 $
13,022 $
536,938 $
348,306 $
16,447
528,930
351,441
(1) 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.
50
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:
(cid:120)
(cid:120)
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.
(2) New capital lease obligations are primarily for student computers and related equipment.
The following table provides a reconciliation of net income attributable to common stockholders, including
Series A stockholders, to EBITDA:
2018
2017
Year Ended June 30,
2016
(In thousands)
2015
2014
Net income attributable to
common stockholders, including
Series A stockholders
Interest (income) expense, net
Impairment of investment in Web
International Education Group,
Ltd.
Income tax (benefit) expense
Depreciation and amortization(4)
Noncontrolling interest
EBITDA
$ 27,620 $
451 $ 9,035 $ 10,988 $ 19,600
69
617
91
(1,808)
(965)
—
(910)
75,260
(200)
—
11,075
86,267
(1,484)
$ 100,805 $ 87,409 $ 82,139 $ 102,228 $ 115,527
—
4,746
68,225
(484)
10,000
5,396
74,280
(910)
3,200
5,810
83,801
(1,662)
(3) Working capital is calculated by subtracting current liabilities from current assets.
(4) 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.
51
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:
(cid:120) Executive Summary—a general description of our business and key highlights of the year ended
June 30, 2018.
(cid:120) Key Aspects and Trends of Our Operations—a discussion of items and trends that may impact our business
in the upcoming year.
(cid:120) Critical Accounting Policies and Estimates—a discussion of critical accounting policies requiring critical
judgments and estimates.
(cid:120) Results of Operations—an analysis of our results of operations in our consolidated financial statements.
(cid:120) 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 proprietary and third party 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
Programs; Institutional; and Private Pay Schools and Other.
to
three
lines of business: Managed Public School
Managed Public School Programs accounted for approximately 85% of our revenues in the year ended
June 30, 2018. The Managed Public School Programs offer an integrated package of systems, services, products, and
professional expertise that we manage to support an online or blended public school, including: administrative support
(e.g., budget proposals, financial reporting, student data reporting, and staff recruitment), information technology and
provisioning, academic support services, curriculum, learning systems, and instructional services. We provide our
Managed Public School Programs to virtual and blended public charter schools and school districts. These contracts are
negotiated with and approved by the governing authorities of the customer. The duration of the Managed Public School
Program service agreements are typically 2-5 years, and most provide for automatic renewals absent a customer
notification within a negotiated time frame. During any fiscal year, the Company may enter into new Managed Public
School agreements, receive non-automatic renewal notices and negotiate replacement agreements, terminate the contract
52
or receive notice of termination, or transition a school between a Managed Public School Program and a Non-managed
Public School Program. The governing boards may also establish school policies and other terms and conditions over the
course of a contract, such as enrollment parameters. The authorizers who issue the charters to our Managed Public
School customers can renew, revoke, or modify those charters as well.
For the 2017-2018 school year, we provided our Managed Public School Programs to 75 schools in 31 states
and the District of Columbia. During this fiscal year, we entered into new contracts in four states to open Managed
Public School Programs, auto-renewed four agreements for schools in three states, and completed renewal negotiations
in four states, with varying degrees of contract modifications. At two schools, the boards elected not to seek charter
renewals from their authorizers for the upcoming 2018-19 school year, and one school board set grade enrollment
sizes. At one school, the authorizer opted not to renew the charter for the upcoming 2018-19 school year. At the
expiration of their service agreements on June 30, 2018, two schools elected not to renew their service agreements with
us. In June 2016, the California Teachers Association (“CTA”) was recognized as the exclusive representative for the
teachers employed by the California Virtual Academies (“CAVA”), and a collective bargaining agreement (“CBA”) was
ratified in May 2018 by the members of the teachers’ union and the nine independent boards of the CAVA schools,
which subscribe to our Managed Public School Programs. The CBA did not have a material impact on our financial
condition or results of operations.
Our Institutional business consists of both Non-managed Public School Programs and Institutional Software
and Services. Unlike Managed Public School Programs, the Institutional business does not offer primary administrative
support services, which remain the responsibility of the school district or the school customer. Rather, the Institutional
business offers options whereby the school can contract for instruction, curriculum, supplemental courses, marketing,
enrollment and other educational services. The Institutional Software and Services offerings provide school districts,
individual public schools, charter schools and private schools with educational solutions. In addition to curriculum,
systems and programs, the services we offer to Institutional customers can also assist them in launching their own online
and blended learning programs tailored to their own requirements and may include instructional support, reporting tools
and content libraries. For the 2017-18 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.
Our Private Pay Schools and Other include three accredited, tuition-based private schools that meet a range of
student needs from individual course credit recovery to college preparatory programs. 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.
For the year ended June 30, 2018, revenues increased to $917.7 million from $888.5 million for the year ended
June 30, 2017, an increase of 3.3% primarily due to our Managed Public School Programs. Over the same period,
operating income increased to $25.5 million from $13.1 million for the year ended June 30, 2017, an increase of 94.7%;
net income attributable to common stockholders increased to $27.6 million from $0.5 million in the year ended
June 30, 2017; and EBITDA, a non-GAAP measure (see reconciliation of net income to EBITDA in “Item 6—Selected
Financial Data”), increased to $100.8 million from $87.4 million in the year ended June 30, 2017, an increase of 15.3%.
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 turnkey management services. Approximately
53
85% of our revenues were derived from this source in the year ended June 30, 2018. 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 stabilize, then increase over time 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, 2018. Our success in 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)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
the number of enrollments;
the mix of enrollments across grades and states;
management services and curriculum sales provided to the schools and school districts;
state or district per student funding levels and attendance requirements;
prices for our products and services;
growth in our other customer types; and
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
Managed 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:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
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
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(cid:120)
retention of students through successive grade levels.
In fiscal year 2018, total average student enrollments in Managed Public School Programs increased by 5,046
or 4.9%, to 108,740 as compared to total average student enrollments of 103,694 in fiscal year 2017. 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 2018 and 2017, the growth rate of our revenues exceeded the growth in our managed school
average student enrollments primarily due to increases in the per-pupil achieved funding, 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 years ended June 30, 2018 and 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 focus on 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.
Institutional
While Managed Public School Programs constitute the majority of our revenues, there is increasing potential
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 provides 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 Non-managed Public School Programs to individual course sales and
supplemental options that can be used in traditional classrooms to differentiate instruction. The Institutional business
course catalog is extensive and addresses specific student needs, including Advanced Placement (“AP”), honors
programs, world languages, English language learners, adaptive math, 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.
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:
(cid:120) 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.
(cid:120) 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.
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(cid:120) 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.
(cid:120) 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.
(cid:120)
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.
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 accredited 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 that enable us to distribute our products and services to our international
school partners who use our courses to provide electives offerings and dual diploma programs.
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
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
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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 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.
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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 under ASC 605-25, Multiple-Element Arrangements (“ASC 605-25”)
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:
(cid:120) 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.
(cid:120) 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.
(cid:120)
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.
(cid:120) Management, Technology and Educational Services. Under most of our statewide virtual public and
blended school contracts, we provide the boards of managed schools with turnkey 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, 2018, 2017 and 2016 our aggregate
funding estimates differed from actual reimbursements impacting total reported revenues by approximately (0.3)%,
(0.1)% and 0.4%, 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
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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 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, 2018, 2017
and 2016, our revenues included a reduction for these school operating losses of $66.7 million, $61.0 million, and
$57.1 million, respectively.
A school operating loss may result from a combination of cost increases or funding reductions attributable to
the following:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
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.
The products and services delivered to our Institutional customers include curriculum and technology for full-
time virtual and blended programs, as well as instruction, curriculum and associated materials, supplemental courses,
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and other educational services. Each of these elements qualifies as separate unit of accounting under ASC 605-25.
Revenues related to instruction, curriculum and supplemental courses are recognized ratably over the period services are
performed, while revenues from services and materials are recognized upon delivery.
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 as 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 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.
We calculate revenues at the school level, rather than at the student level; therefore, we are unable to determine
the revenues and profitability by student. 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”). 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. 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.
Capitalized Software Costs
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
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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. Capitalized costs are recorded in
capitalized software costs and are generally amortized over three years.
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. There was no such impairment charge for the year ended June 30, 2018.
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 $4.5 million and $7.2 million as of June 30, 2018
and 2017, respectively, for the amount that will likely 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 2018, 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 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 the purchase price over the fair value of the identifiable net assets acquired.
Finite-lived intangible assets acquired in business combinations subject to amortization are recorded at their fair value.
Finite-lived intangible assets include 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
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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, based on one reporting unit.
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 proprietary and third party 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; and Private Pay Schools and Other.
Managed Public School Programs
(cid:120) Virtual public schools
Institutional
(cid:120) Non-managed
Programs
Public
School
(cid:120) Blended public schools
(cid:120) Institutional software and services
Private Pay Schools and Other
(cid:120) 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. In December 2016, we consummated the acquisition of the remaining 40%
noncontrolling interest of MIL and in January 2018, we consummated the acquisition of the remaining 49% of
LearnBop. 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
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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 support services. 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. If the mix of enrollments changes, our revenues will be impacted to the
extent the average revenues per enrollments are significantly different.
Year Ended June 30,
2017
2018
2018 / 2017
2017 / 2016
Change Change % Change Change %
2016
(In thousands, except percentages)
Managed Public School Programs
(1)(2)
Non-managed Public School Programs
(1)
108.7
103.7
102.9
5.0
4.8%
0.8
0.8%
23.9
28.9
27.0
(5.0)
(17.3%)
1.9
7.0%
(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).
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:
Managed Public School Programs
Institutional
Non-managed Public School
Programs
Institutional Software & Services
Total Institutional
Private Pay Schools and Other
Total
2018
Year Ended June 30,
2017
Change 2018 / 2017
%
(In thousands, except percentages)
2016
$
Change 2017 / 2016
%
$
$ 780,797 $ 733,690 $ 717,059 $ 47,107
6.4% $ 16,631
2.3%
56,784
43,852
100,636
36,301
65,362
53,709
119,071
35,758
55,601
52,990
108,591
47,050
543
$ 917,734 $ 888,519 $ 872,700 $ 29,215
(8,578) (13.1%)
(9,857) (18.4%)
(18,435) (15.5%)
1.5%
3.3% $ 15,819
9,761 17.6%
1.4%
9.7%
(11,292) (24.0%)
1.8%
719
10,480
63
Financial Information
The following table sets forth statements of operations data and the amounts as a percentage of revenues for
each of the periods indicated:
Year Ended June 30,
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 benefit (expense)
Net income (loss)
Add net loss attributable to
noncontrolling interest
Net income attributable to common
stockholders
2018
2017
(In thousands, except percentages)
$ 917,734 100.0 % $ 888,519 100.0 % $ 872,700 100.0 %
2016
592,495
64.6
557,316
62.7
546,510
62.6
290,446
9,248
892,189
25,545
31.6
1.0
97.2
2.8
305,617
12,457
875,390
13,129
—
965
—
0.1
(10,000)
1,808
26,510
910
27,420
200
2.9
0.1
3.0
0.0
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
910
0.1
484
0.1
27,620
3.0 %
451
0.1 %
9,035
1.1 %
Comparison of the Years Ended June 30, 2018 and 2017
Revenues. Our revenues for the year ended June 30, 2018 were $917.7 million, representing an increase of
$29.2 million, or 3.3%, from $888.5 million for the year ended June 30, 2017. Managed Public School Program revenues
increased $47.1 million, or 6.4%, year over year. The increase in Managed Public School Program revenues was
primarily due to the 4.8% increase in enrollments in both new and existing schools and increases in the per-pupil
achieved funding, school mix (distribution of enrollments by school), and other factors.
Total Institutional revenues decreased $18.4 million, or 15.5%, primarily due to a 17.3% decrease in
enrollments in our Non-managed Public Schools Programs, as well as a decline in software sales. Private Pay Schools
and Other revenues increased $0.5 million, or 1.5%, over the prior year period.
Instructional costs and services expenses. Instructional costs and services expenses for year ended
June 30, 2018 were $592.5 million, representing an increase of $35.2 million, or 6.3%, from $557.3 million for the year
ended June 30, 2017. This increase in expense was primarily due to the incremental personnel and related benefit costs
associated with supporting higher enrollments. Instructional costs and services expenses were 64.6% of revenues during
the year ended June 30, 2018, an increase from 62.7% for the year ended June 30, 2017.
Selling, administrative, and other operating expenses. Selling, administrative, and other operating expenses for
the year ended June 30, 2018 were $290.4 million, representing a decrease of $15.2 million, or 5.0% from $305.6
million for the year ended June 30, 2017. This decrease was primarily due to decreases in professional services and
capitalized labor expense, along with decreases in salaries and wages associated with reductions in headcount. Selling,
administrative, and other operating expenses were 31.6% of revenues during the year ended June 30, 2018, a decrease
from 34.4% for the year ended June 30, 2017.
Product development expenses. Product development expenses for the year ended June 30, 2018 were
$9.2 million, representing a decrease of $3.3 million, or 26.4%, from $12.5 million for the year ended June 30, 2017.
The decrease was primarily due to decreases in salaries, severance, benefits, and professional fees. As a percentage of
revenues, product development expenses decreased to 1.0% for the year ended June 30, 2018, as compared to 1.4% for
64
the year ended June 30, 2017.
Interest income (expense), net. Net interest income for the year ended June 30, 2018 was $1.0 million as
compared to $1.8 million in the year ended June 30, 2017. The decrease in net interest income was primarily due to
lower interest income on certain accounts receivable and higher interest expense associated with capital leases during the
year ended June 30, 2018, as compared to the year ended June 30, 2017.
Impairment of investment in Web International Education Group, Ltd. We recorded a $10.0 million impairment
on our investment in Web International Education Group, Ltd. (“Web”) for the year ended June 30, 2017 resulting in a
zero book value. 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 benefit (expense). We had an income tax benefit of $0.9 million for the year ended June 30, 2018,
or (3.4)% of income before taxes, as compared to expense of $5.4 million, or 109.3% of income before taxes for the year
ended June 30, 2017.
On December 22, 2017, the Tax Cuts and Job Act (the “Tax Act”) was enacted into law, which among other
provisions, reduced the U.S. statutory federal income tax rate from 35% to 21%. The Company has included the amount
for the impact of the re-measurement of the Company’s net U.S. deferred tax liabilities and the transition tax on the
Company’s accumulated unremitted foreign earnings in the Company’s financial statements.
The decrease in the effective tax rate for the year ended June 30, 2018 was primarily due to the impact of the
Tax Act, the tax impact of the adoption of Accounting Standards Update 2016-09, Compensation – Stock Compensation
(“ASU 2016-09”) related to stock compensation, and the prior year impact of the Web impairment.
Net income (loss). Net income was $27.4 million for the year ended June 30, 2018, compared to a net loss of
$(0.5) million for the year ended June 30, 2017, representing an increase of $27.9 million.
Noncontrolling interest loss. Net loss attributable to noncontrolling interest for the year ended June 30, 2018
was $0.2 million as compared to $0.9 million for the year ended June 30, 2017. The decrease is primarily due to the
purchase of the remaining noncontrolling interest of LearnBop, Inc. in January 2018. 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, 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 Programs revenues was
primarily due to the 0.8% increase in enrollments in both new and existing schools and increases in the per-pupil
achieved funding, school mix (distribution of enrollments by school), and other factors.
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.
Instructional costs and services expenses. Instructional costs and services expenses for the 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 was primarily due to the incremental personnel and related benefit costs associated
with supporting higher enrollments. Instructional costs and service 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
65
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 for the year ended June 30, 2016. The increase in net interest income was primarily due to
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. We recorded a $10.0 million impairment
on our investment in Web International Education Group, Ltd. (“Web”) for the year ended June 30, 2017 resulting in a
zero book value. 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 benefit (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 income tax expense of $4.7 million, or 35.7% of our 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, a decrease of $9.1 million, primarily due to the Web impairment.
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.
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.
66
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, 2018, we had net working capital, or current assets minus current liabilities, of $343.0 million.
Our working capital includes cash and cash equivalents of $231.1 million and accounts receivable of $176.3 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, 2018.
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%, 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, 2018, we were in compliance with these covenants and we had no borrowings
outstanding on the line of credit.
We incur capital lease obligations for student computers under a lease line of credit with PNC Equipment
Finance, LLC. As of June 30, 2018 and 2017, the outstanding balance of capital leases under the current and former
lease lines of credit was $26.0 million and $21.9 million, respectively, with lease interest rates ranging from 1.95% to
3.12%. 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. We have pledged the assets financed to secure the outstanding leases.
We had $14.4 million and $31.9 million of remaining availability under our lease line of credit as June 30, 2018
and 2017, respectively. Interest on unpaid principal under the lease line of credit accrues at a fluctuating rate of LIBOR
plus 1.2%.
On May 16, 2018, the Company entered into a stock repurchase agreement pursuant to which the Company
repurchased 1,832,145 shares of its common stock in a single transaction at a purchase price of $15.00 per share,
representing aggregate consideration of $27.5 million.
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, 2018, 2017 and 2016 was $103.6 million,
$88.7 million and $121.8 million, respectively.
Net cash provided by operating activities for the year ended June 30, 2018 was $103.6 million compared to
$88.7 million for the year ended June 30, 2017. The $14.9 million increase in cash provided by operations between
periods was primarily due to an increase in net income, partially offset by a decrease in other assets and liabilities of $5.3
million. The decrease in other assets and liabilities was primarily due to decreases in payables, deferred revenue and
other liabilities, partially offset by an increase in accrued compensation and benefits.
67
Net cash provided by operating activities for the year ended June 30, 2017 was $88.7 million compared to
$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 other assets and liabilities of $42.0 million. The changes in other assets and
liabilities were primarily due to an increase in accounts receivable from the timing of collections and revenue growth.
The increase in other assets and liabilities was partially offset by an increase of $8.9 million in non-cash adjustments
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 other assets and liabilities 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 other assets and liabilities 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.
Investing Activities
Net cash used in investing activities for the years ended June 30, 2018, 2017 and 2016 was $50.5 million,
$57.2 million and $82.9 million, respectively.
Net cash used in investing activities for the year ended June 30, 2018 decreased $6.7 million from the year
ended June 30, 2017. This decrease was due primarily to the $9.1 million payment to Middlebury College in the year
ended June 30, 2017 for the remaining 40% interest in Middlebury Interactive Languages and the $11.6 million decrease
in capitalized software and curriculum development expenses as a result of lower unit costs of producing curriculum,
partially offset by the $6.5 million increase in the purchase of property and equipment. We also made $7.3 million of
investments during the year ended June 30, 2018.
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.
Financing Activities
Net cash used in financing activities for the years ended June 30, 2018, 2017 and 2016 was $50.9 million,
$14.6 million and $20.8 million, respectively.
For the year ended June 30, 2018, our cash used in financing activities consisted primarily of the purchase of
treasury stock totaling $27.5 million, payments on capital lease obligations incurred for the acquisition of student
computers totaling $13.3 million and for the purchase of restricted stock from employees for income tax withholdings
upon vesting of $10.3 million.
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.
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, 2018, which decreased
from $62.3 million as of June 30, 2017:
Contractual Obligations—Payments due by period
Total
< 1 year
1 - 3 years
(In thousands)
3 - 5 years
> 5 years
Contractual obligations at June 30, 2018
Capital leases(1)
Operating leases
Total
(1) Includes interest expense.
$ 26,880 $ 13,891 $ 12,989 $
8,889
29,752
14,683
— $
6,172
$ 56,632 $ 22,780 $ 27,672 $ 6,172 $
—
8
8
For the schools to which we provide turnkey 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, 2018, we provided guarantees of approximately $2.0 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, 2018. 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
Accounting Standards Adopted
In March 2016, the Financial Accounting Standards Board (“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 standard:
(cid:120) Excess tax benefits or deficiencies arising from share-based awards will be reflected in the consolidated
statements of operations as income tax expense rather than within stockholders’ equity. The adoption of
69
this standard may result in volatility within a company’s results of operations, primarily due to changes in
the stock price.
(cid:120) Excess tax benefits will be presented as an operating activity on the statement of cash flows rather than as a
financing activity.
(cid:120) A forfeiture election will be made to either estimate forfeitures (similar to today’s requirement) or
recognize 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.
(cid:120) 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 adopted this standard during the first quarter of fiscal year 2018. As part of our adoption of ASU 2016-09,
we made 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 year 2018, we 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 change in accounting policy resulted in
an adjustment to decrease retained earnings and increase additional paid-in capital as of July 1, 2017 by $0.1 million.
We have adopted the remaining provisions as follows:
(cid:120) Excess tax benefits arising from share-based awards are reflected within the consolidated statements of
operations as income tax expense; adopted prospectively;
(cid:120) Excess tax benefits are presented as an operating activity on the statement of cash flows; adopted
prospectively; and
(cid:120) Employees are now permitted to elect to withhold shares beyond the minimum statutory tax withholding
requirements at the time the award is settled; adopted prospectively.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows – Restricted Cash (“ASU 2016-
18”). The amendments in this update require that a statement of cash flows explain the change during the period in the
total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents.
Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash
and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement
of cash flows. Adoption is required on a retrospective basis for all periods presented. We early adopted this standard
during the fourth quarter of fiscal year 2018 with no impact on any prior periods.
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 our next fiscal year beginning
July 1, 2018, 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).
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. The majority of our business is based on contracts where annual revenue is recognized
within each fiscal year, mirroring the school year. We expect that revenue recognition will remain largely unchanged
under the new standard on a full year basis, however, there may be some shifting of revenue between quarters.
We will adopt this standard during the first quarter of fiscal year 2019 using the modified retrospective
approach with an adjustment to retained earnings as of July 1, 2018. We are in the process of quantifying the impact.
70
The key impacts of this new standard to us will be as follows:
(cid:120) All revenues from our lines of businesses schools will be recognized over the service period, including:
o Revenues that had been previously recognized over a 10-month school year;
o Revenues from materials, supplies and professional services that had been previously recognized upon
delivery; and
o Revenues in which the Company is the primary obligor, and were recognized when expenses were
incurred.
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 standard, as well as the effect on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326)
(“ASU 2016-13”) related to the methodology for recognizing credit losses. The new standard revises the accounting
requirements related to the measurement of credit losses and will require organizations to measure all expected credit
losses for financial assets based on historical experience, current conditions and reasonable and supportable forecasts
about collectability. Assets must be presented in the financial statements at the net amount expected to be collected. This
ASU will be effective for us in the first quarter of fiscal year 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 year 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
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 standard, 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, 2018 and 2017, we had cash and cash equivalents totaling $231.1 million and $230.9 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, 2018, a 1% gross increase in
interest rates earned on cash would result in a $2.3 million annualized increase in interest income.
71
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, 2018, 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. 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 operations 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.
72
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, 2018 and 2017
Consolidated Statements of Operations for the years ended June 30, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Income for the years ended June 30, 2018, 2017 and 2016
Consolidated Statements of Stockholders’ Equity for the years ended June 30, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the years ended June 30, 2018, 2017 and 2016
Notes to Consolidated Financial Statements
Schedule II—Valuation and Qualifying Accounts
Page
74
75
76
77
78
79
80
114
73
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
K12 Inc.
Herndon, Virginia
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of K12 Inc. and subsidiaries (the “Company”)
as of June 30, 2018 and 2017, 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, 2018, and the related notes and financial
statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”).
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of K12
Inc. and subsidiaries at June 30, 2018 and 2017, and the results of their operations and their cash flows for each of the
three years in the period ended June 30, 2018, in conformity with accounting principles generally accepted in the United
States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (“PCAOB”), the Company's internal control over financial reporting as of June 30, 2018, 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 8, 2018 expressed an unqualified
opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a
public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated
financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that
our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company’s auditor since 2005.
McLean, Virginia
August 8, 2018
74
K12 INC.
CONSOLIDATED BALANCE SHEETS
Current assets
ASSETS
Cash and cash equivalents
Accounts receivable, net of allowance of $12,384 and $14,791 at June 30, 2018 and
2017, 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
Total assets
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; 44,902,567 and
44,325,772 shares issued, and 39,567,824 and 40,823,174 shares outstanding at
June 30, 2018 and 2017, respectively
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Treasury stock of 5,334,743 and 3,502,598 shares at cost at June 30, 2018 and 2017,
respectively
Total stockholders’ equity
Total liabilities, redeemable noncontrolling interest and stockholders' equity
June 30,
2018
2017
(In thousands except share and
per share data)
$
231,113
$
230,864
$
$
176,319
31,134
10,278
10,388
459,232
28,868
55,488
53,558
17,951
90,197
36,669
741,963
13,353
29,362
14,345
36,050
23,114
116,224
12,665
3,270
12,577
10,038
154,774
—
—
$
$
192,205
30,503
8,006
12,004
473,582
26,297
62,695
59,213
20,226
87,214
6,057
735,284
11,880
30,052
21,622
29,367
24,830
117,751
10,025
4,157
16,726
11,579
160,238
—
700
4
703,351
(252)
(13,432)
4
690,488
(170)
(40,976)
(102,482)
587,189
741,963
$
$
(75,000)
574,346
735,284
See accompanying notes to consolidated financial statements.
75
K12 INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30,
2017
(In thousands except share and per share data)
2016
2018
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 benefit (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:
Basic
Diluted
$
917,734 $
888,519 $
872,700
592,495
290,446
9,248
892,189
25,545
557,316
305,617
12,457
875,390
13,129
—
965
26,510
910
27,420
200
27,620 $
(10,000)
1,808
4,937
(5,396)
(459)
910
451 $
546,510
302,205
10,071
858,786
13,914
—
(617)
13,297
(4,746)
8,551
484
9,035
0.70 $
0.68 $
0.01
0.01 $
0.24
0.23
$
$
$
39,282,674
40,637,744
38,298,581
39,500,934
37,613,782
38,850,388
See accompanying notes to consolidated financial statements.
76
K12 INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income (loss)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment
Total other comprehensive income (loss), net of tax
Comprehensive loss attributable to noncontrolling interest
2018
Year Ended June 30,
2017
(In thousands)
2016
$ 27,420 $
(459) $ 8,551
(82)
27,338
200
123
(336)
910
772
9,323
484
Comprehensive income attributable to common stockholders
$ 27,538 $
574 $ 9,807
See accompanying notes to consolidated financial statements.
77
K12 INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands except share data)
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
Repurchase of restricted stock for tax withholding
Balance, June 30, 2016
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
Repurchase of restricted stock for tax withholding
Balance, June 30, 2017
Adjustment related to new stock-based compensation
guidance
Net income(1)
Foreign currency translation adjustment
Stock-based compensation expense
Purchase of treasury stock
Exercise of stock options
Vesting of performance share units, net of tax withholding
Issuance of restricted stock awards
Forfeiture of restricted stock awards
Repurchase of restricted stock for tax withholding
Balance, June 30, 2018
K12 Inc. Stockholders' Equity
Accumulated
Additiona
l
Common Stock
Paid-in
Other
Comprehensiv
e
Accumulate
d
Treasury Stock
Shares
Amoun
t
Capital
Loss
Deficit
Shares
Amount
Total
41,837,894 $
4 $
(50,462) (3,502,598) $ (75,000) $
—
—
—
1,000
—
1,704,843
(95,980)
—
—
—
—
—
—
—
663,461 $
—
—
18,616
14
(4,876)
—
—
—
(263,689)
—
—
1,615
(3,394)
—
—
—
425,180
—
1,268,311
(175,008)
—
—
—
—
—
—
—
675,436 $
—
—
22,598
6,953
(5,063)
—
—
—
(376,779)
—
—
(3,245)
(6,191)
(1,065) $
—
772
—
—
—
—
—
—
—
(293) $
—
123
—
—
—
—
—
—
—
9,035
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
451
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
536,938
9,035
772
18,616
14
(4,876)
—
—
1,615
(3,394)
558,720
451
123
22,598
6,953
(5,063)
—
—
(3,245)
(6,191)
43,184,068 $
4 $
(41,427) (3,502,598) $ (75,000) $
44,325,772 $
4 $
690,488 $
(170) $
(40,976)
(3,502,598) $ (75,000) $
574,346
—
—
—
—
—
14,600
199,769
1,210,502
(335,150)
(512,926)
—
—
—
—
—
—
—
—
—
—
112
—
—
22,869
—
196
—
—
—
(10,314)
—
—
(82)
—
—
—
—
—
—
—
(76)
27,620
—
—
—
—
—
—
—
—
—
—
36
27,620
(82)
22,869
—
—
—
—
—
—
(1,832,145)
—
—
—
—
—
(27,482)
—
—
—
—
—
(27,482)
196
—
—
—
(10,314)
44,902,567 $
4 $
703,351 $
(252) $
(13,432)
(5,334,743) $(102,482) $
587,189
(1) Net income excludes $0.2 million, $0.9 million and $0.5 million for the years ended June 30, 2018, 2017 and 2016, respectively, due
to the redeemable noncontrolling interest related to Middlebury Interactive Languages and LearnBop, which is reported outside of
permanent equity in the accompanying consolidated balance sheets (See Note 10, “Redeemable Noncontrolling Interest”).
See accompanying notes to consolidated financial statements.
78
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
Deferred income taxes
Provision for doubtful accounts
Impairment of investment in Web International Education Group, Ltd.
Other
Changes in assets and liabilities:
Accounts receivable
Inventories, prepaid expenses and 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
Acquisitions and investments
Sale of trade name
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
2018
Year Ended June 30,
2017
(In thousands)
2016
$
27,420 $
(459) $
8,551
75,260
20,817
(4,015)
4,089
—
4,822
11,987
(3,801)
(24,690)
(2,336)
(8,092)
6,672
(2,077)
(2,429)
103,627
(8,743)
(24,533)
(9,927)
(7,274)
—
(50,477)
74,280
22,598
(7,065)
4,512
10,000
4,286
(27,745)
1,323
10,020
5,317
(4,963)
(1,674)
(1,135)
(567)
88,728
(2,174)
(26,918)
(19,132)
(9,063)
89
(57,198)
68,225
18,616
(3,818)
4,610
—
3,051
14,463
2,939
(8,910)
(3,900)
15,497
4,255
636
(2,437)
121,778
(5,008)
(36,265)
(21,627)
(19,953)
—
(82,853)
(13,301)
(27,482)
196
—
(10,314)
(50,901)
—
2,249
230,864
233,113 $
(17,402)
(15,697)
—
—
14
6,953
6
291
(3,394)
(6,191)
(20,776)
(14,644)
(12)
(11)
18,137
16,875
213,989
195,852
230,864 $ 213,989
Net cash used in financing activities
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash
Net change in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash, beginning of period
Cash, cash equivalents and restricted cash, end of period
$
Reconciliation of cash, cash equivalents and restricted cash to balance sheet:
Cash and cash equivalents
Deposits and other assets (restricted cash)
Total cash, cash equivalents and restricted cash
$ 231,113 $ 230,864 $ 213,989
—
$ 233,113 $ 230,864 $ 213,989
2,000
—
See accompanying notes to consolidated financial statements.
79
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 proprietary and third party 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 75 managed public schools in 31 states and the District of Columbia); 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 proprietary and third party 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 the 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 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 recommendations and hiring, teacher training, compensation of school personnel, financial
80
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
management, enrollment processing, and development and procurement of curriculum, equipment and required services.
The schools receive funding on a per student basis from the state in which the public school or school district is located.
Shipments of materials for schools that occur in the fourth fiscal quarter and for the upcoming school year are recorded
in deferred revenue.
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 or from other sources 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, 2018, 2017 and 2016, were $314.8 million,
$292.0 million and $294.7 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 typically include:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
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
(cid:120) 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 under ASC 605-25, Multiple-Element Arrangements (“ASC 605-25”). 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, 2017, 2016 and 2015, the Company’s aggregate funding estimates
differed from actual reimbursements impacting total reported revenue by approximately (0.3)%, (0.1)%, and 0.4%,
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
81
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
represent the excess of costs incurred over revenues earned by the virtual or blended public school as reflected on its
respective financial statements, including Company charges to the schools. To the extent a school does not receive
funding for each student enrolled in the school, the school would still incur costs associated with serving the unfunded
enrollment. If losses due to unfunded enrollments result in a net operating loss for the year that loss is reflected as a
reduction in the revenues and net receivables that the Company collects from the school. A school net operating loss in
one year does not necessarily mean the Company anticipates losing money on the entire contract with the school.
However, a school operating loss may reduce the Company’s ability to collect its management fees in full and
recognized revenues are reduced accordingly to reflect the expected cash collections from such schools. The Company
amortizes the estimated school operating loss against revenues based upon the percentage of actual revenues in the
period to total estimated revenues for the fiscal year.
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, 2018, 2017 and 2016, the Company’s revenues included a reduction for these school operating losses of
$66.7 million, $61.0 million, and $57.1 million, respectively.
The products and services delivered to the Company’s Institutional customers include curriculum and
technology for full-time virtual and blended programs, as well as instruction, curriculum and associated materials,
supplemental courses, and other educational services. Each of these elements qualifies as separate unit of accounting
under ASC 605-25. Revenues related to instruction, curriculum and supplemental courses are recognized ratably over the
period services are performed, while revenues from services and materials are recognized upon delivery.
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.
82
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
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, 2018, 2017 and 2016, approximately 85%, 83% and 82%, respectively, of the
Company’s revenues were recognized from schools that contracted with the Company for Managed Public School
Programs. During the years ended June 30, 2018 and 2017, the Company had no contracts that represented greater than
10% of total revenues. During the year ended June 30, 2016, the Company had one contract that represented greater than
10% of total revenues.
On June 9, 2016, Agora signed a new service agreement that extended through 2019 and included additional
services including curriculum and certain technology services while the school board retained daily operational
responsibilities. The agreement also called 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.
On May 17, 2018, the Company and Agora entered into a settlement and release agreement which called for
payment terms of its outstanding receivable of $28.7 million at June 30, 2018 to be paid over a four-year period. In
addition, the term of the service agreement was extended through June 30, 2022. The Company reclassified the long-
term portion of $23.2 million to deposits and other assets on the consolidated balance sheets.
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, Cash Equivalents and Restricted Cash
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.
Restricted cash consists of amounts held in escrow related to the Company’s settlement agreement with Agora.
The restricted cash is included in deposits and other assets on the consolidated balance sheet.
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.
83
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
Inventories
Inventories consist primarily of textbooks and curriculum materials, a majority of which are supplied to virtual
public schools and blended public schools and utilized directly by students. Inventories represent items that are
purchased and held for sale and are recorded at the lower of cost (first-in, first-out method) or net realizable value. The
provision for excess and obsolete inventory is established based upon the evaluation of the quantity on hand relative to
demand.
During the years ended June 30, 2018 and 2016, the Company increased the provision for excess and obsolete
inventory by $1.2 million and $0.7 million, respectively, 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 million. The excess and obsolete inventory reserve was $3.5 million and $2.3 million at
June 30, 2018 and 2017, respectively.
Other Current Assets
Other current assets consist primarily of textbooks, curriculum materials and other supplies which are expected
to be returned upon the completion of the school year. Materials not returned are expensed as part of instructional costs
and services.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and
amortization expense is calculated using the straight-line method over the estimated useful life of the asset (or the lesser
of the term of the lease and the estimated useful life of the asset under 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.
Property and equipment are depreciated over the following useful lives:
Student and state testing computers
Computer hardware
Computer software
Web site development
Office equipment
Furniture and fixtures
Leasehold improvements
Useful Life
3 - 5 years
3 years
3 - 5 years
3 years
5 years
7 years
3 - 12 years
The Company makes an estimate of unreturned student computers based on an analysis of recent trends of
returns. In addition, during fiscal year 2017, the Company accelerated depreciation on property and equipment
associated with the operating leases that were exited during that period (see Note 12, “Restructuring”). The Company
recorded accelerated depreciation of $2.1 million, $3.5 million and $2.8 million for the years ended June 30, 2018, 2017
and 2016, respectively, related to the leases exited and unreturned student computers.
The Company fully expenses computer peripheral equipment (e.g. keyboards, mouses) upon shipment as
recovery has been determined to be uneconomical. These expenses totaled $3.4 million, $3.5 million and $2.6 million
for the years ended June 30, 2018, 2017 and 2016, respectively, and are recorded as instructional costs and services.
84
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
Capitalized Software Costs
The Company develops software for internal use. Software development costs incurred during the application
development stage are capitalized in accordance with ASC 350, Intangibles – Goodwill and Other (“ASC 350”). The
Company amortizes these costs over the estimated useful life of the software, which is generally three years. Capitalized
software development costs are stated at cost less accumulated amortization.
Capitalized software additions totaled $24.5 million, $26.9 million and $36.3 million for the years ended
June 30, 2018, 2017 and 2016, respectively. The Company wrote down approximately $0.5 million of capitalized
software projects for the year ended June 30, 2016 after determining the assets either had no future use or are being
sunset. This write-down was included in selling, administrative and other operating expenses. There were no material
write-downs of capitalized software projects for the years ended June 30, 2018 and 2017.
During the three months ended September 30, 2017, the Company recorded an out of period adjustment related
to the capitalization of software and curriculum development. The adjustment increased capitalized software
development costs and capitalized curriculum development costs by $2.3 million and $0.6 million, respectively, and
increased net income by $1.4 million for the year. The Company assessed the materiality of these errors on its prior
quarterly and annual financial statements, assessing materiality both quantitatively and qualitatively, in accordance with
the SEC’s Staff Accounting Bulletin (“SAB”) No. 99 and SAB No. 108 and concluded that the errors were not material
to any of its previously issued financial statements.
Capitalized Curriculum Development Costs
The Company internally develops curriculum, which is primarily provided as online content and accessed via
the Internet. The Company also creates textbooks and other materials that are complementary to online content.
The Company capitalizes curriculum development costs incurred during the application development stage in
accordance with ASC 350. The Company capitalizes curriculum development costs during the design and deployment
phases of the project. As a result, a significant portion of the Company’s courseware development costs qualify for
capitalization due to the concentration of its development efforts on the content of the courseware. Capitalization ends
when a course is available for general release to its customers, at which time amortization of the capitalized costs begins.
The period of time over which these development costs are amortized is generally five years.
Total capitalized curriculum development additions were $9.9 million, $19.1 million and $21.6 million for the
years ended June 30, 2018, 2017 and 2016, respectively. These amounts are recorded on the accompanying consolidated
balance sheets, net of amortization charges. There were no material write-downs of capitalized curriculum development
costs for the years ended June 30, 2018, 2017 and 2016.
As mentioned above, capitalized curriculum development additions included an out of period adjustment of
$0.6 million.
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.
85
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
Goodwill and Intangible Assets
The Company records as goodwill the excess of the purchase price over the fair value of the identifiable net
assets acquired. Finite-lived intangible assets acquired in business combinations subject to amortization are recorded at
their fair value. Finite-lived intangible assets include trade names, acquired customers and 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, 2018, 2017 and 2016 was $3.0 million, $2.9 million and $2.7 million, respectively. Future
amortization of intangible assets is expected to be $3.0 million, $2.9 million, $2.4 million, $2.2 million and $2.0 million
in the fiscal years ending June 30, 2019 through June 30, 2023, respectively and $5.2 million thereafter. As of
June 30, 2018 and 2017, the goodwill balance was $90.2 million and $87.2 million, respectively. The increase in
goodwill was the result of the acquisition of Big Universe, Inc.
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, 2018.
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 intangible assets with indefinite
lives, which is performed annually, as well as when an event triggering impairment may have occurred based on one
reporting unit. ASC 350 also allows preparers to qualitatively assess goodwill impairment through a screening process
which would permit companies to forgo Step 1 of their annual goodwill impairment process. This qualitative screening
process will hereinafter be referred to as “Step 0”. The Company performs its annual assessment on May 31st. 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 the 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.
During the year ended June 30, 2018, the Company performed “Step 0” of the impairment test and determined
that there were no facts or 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.
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.” On October 2, 2017, the Company
acquired 100% interest in Big Universe, Inc. for $3.3 million in cash and contingent consideration.
The following table represents goodwill additions/reductions resulting from the acquisitions mentioned above
during the years ended June 30, 2018, 2017 and 2016:
($ in millions)
Goodwill
Amount
86
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
Balance as of June 30, 2015
Acquisition of LTS
Balance as of June 30, 2016
Adjustment to purchase price of LTS
Balance as of June 30, 2017
Acquisition of Big Universe, Inc.
Balance as of June 30, 2018
$ 66.2
21.1
$ 87.3
(0.1)
$ 87.2
3.0
$ 90.2
The following table represents the balance of the Company’s intangible assets as of June 30, 2018 and 2017:
June 30, 2018
June 30, 2017
($ in millions)
Trade names
Customer and distributor relationships
Developed technology
Other
Total
Impairment of Long-Lived Assets
Gross
Carrying
Amount
$ 17.6 $
20.5
3.2
1.4
$ 42.7 $
Accumulated
Amortization
Net
Carrying
Value
Gross
Carrying
Amount
Accumulated
Amortization
(8.5) $
(13.4)
(2.2)
(0.6)
9.1 $ 17.6 $
7.1
1.0
0.8
(24.7) $ 18.0 $ 42.0 $
20.1
2.9
1.4
Net
Carrying
Value
(7.6) $ 10.0
8.1
1.2
0.9
(21.8) $ 20.2
(12.0)
(1.7)
(0.5)
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 year ended
June 30, 2018.
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.
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,
87
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
the Company’s common stock price, expected stock price volatility over the expected life of awards, and actual and
projected exercise behavior. As part of its adoption of Accounting Standards Update (“ASU”) 2016-09, Compensation -
Stock Compensation (Topic 718) (“ASU 2016-09”) as of July 1, 2017, the Company made an accounting policy election
to 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.
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 $37.5 million, $36.8
million and $31.2 million for the years ended June 30, 2018, 2017 and 2016, 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 as income tax expense when the stock options become deductible for income tax purposes are all
assumed to be used to repurchase shares of the Company’s common stock. Stock options and restricted stock awards are
not included in the computation of diluted net income (loss) per share when they are antidilutive. Common stock
outstanding reflected in the Company’s consolidated balance sheets includes restricted stock awards outstanding.
Securities that may participate in undistributed net income with common stock are considered participating securities.
The following schedule presents the calculation of basic and diluted net income per share:
Year Ended June 30,
2017
(In thousands except share and per share data)
2016
2018
Basic net income per share computation:
Net income attributable to common stockholders
Weighted average common shares — basic
Basic net income per share
Diluted net income per share computation:
$
27,620 $
451 $
39,282,674
38,298,581
$
0.70 $
0.01 $
9,035
37,613,782
0.24
Net income attributable to common stockholders
$
27,620 $
451 $
9,035
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
39,282,674
1,355,070
40,637,744
38,298,581
1,202,353
39,500,934
$
0.68 $
0.01 $
37,613,782
1,236,606
38,850,388
0.23
For the years ended June 30, 2018, 2017 and 2016, shares issuable in connection with stock options and
restricted stock of 1,026,472, 1,965,283 and 2,548,762 respectively, were excluded from the diluted income per common
88
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
share calculation because the effect would have been antidilutive. As of June 30, 2018, the Company had 44,902,567
shares of common stock issued and 39,567,824 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 consolidated balance sheets for cash and cash equivalents,
receivables, and short and long term debt approximate their fair values.
The held for sale asset and contingent consideration is discussed in more detail in Note 14, “Acquisitions and
Investments.” The lease exit liability is discussed in more detail in Note 12, “Restructuring.”
The following table summarizes certain fair value information at June 30, 2018 for assets and liabilities
measured at fair value on a nonrecurring basis.
Description
Lease exit liability
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)
Fair Value
$
2,758 $
(In thousands)
— $
—
$
2,758
The following table summarizes certain fair value information at June 30, 2017 for assets and liabilities
measured at fair value on a nonrecurring basis.
Description
Held for sale asset
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)
Fair Value
$
1,200 $
(In thousands)
— $
—
$
1,200
89
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
Lease exit liability
4,841
—
—
4,841
The following table summarizes certain fair value information at June 30, 2018 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)
Contingent consideration associated with acquisitions
$
1,345 $
(In thousands)
— $
—
$
1,345
The following table summarizes certain fair value information at June 30, 2017 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)
Contingent consideration associated with acquisitions
$
2,806 $
(In thousands)
— $
—
$
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, 2018.
Year Ended June 30, 2018
Description
Fair Value
Fair Value
June 30, 2017 and Settlements Gains (Losses) June 30, 2018
Unrealized
Purchases,
Issuances,
Contingent consideration associated with acquisitions
$
2,806 $
(1,319) $
(142) $
1,345
(In thousands)
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.
Year Ended June 30, 2017
Description
Fair Value
Fair Value
June 30, 2016 and Settlements Gains (Losses) June 30, 2017
Unrealized
Purchases,
Issuances,
Redeemable noncontrolling interest in Middlebury
Interactive Learning
Contingent consideration associated with acquisitions
Total
$
$
6,801 $
2,947
9,748 $
(9,134) $
—
(9,134) $
2,333
(141)
2,192
$
$
—
2,806
2,806
(In thousands)
90
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
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.
Year Ended June 30, 2016
Description
Fair Value
Fair Value
June 30, 2015 and Settlements Gains (Losses) June 30, 2016
Unrealized
Purchases,
Issuances,
Redeemable noncontrolling interest in Middlebury
Interactive Learning
Contingent consideration associated with acquisitions
Total
$
$
6,801 $
—
6,801 $
— $
2,942
2,942 $
—
5
5
$
$
6,801
2,947
9,748
(In thousands)
The redeemable noncontrolling interest includes the Company’s joint venture with Middlebury College to form
Middlebury Interactive Languages (“MIL”). Under the agreement, Middlebury College had an irrevocable election to
sell all of its membership interest to the Company (put right). Middlebury College exercised its put right on May 4, 2015
and a transaction to acquire the remaining 40% noncontrolling interest for $9.1 million in cash was consummated on
December 27, 2016.
Reclassification
Certain previous year amounts have been reclassified to conform with current year presentations, as related to
the statement of cash flows.
Recent Accounting Pronouncements
Accounting Standards Adopted
In March 2016, the Financial Accounting Standards Board (“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 standard:
(cid:120) Excess tax benefits or deficiencies arising from share-based awards will be reflected in the consolidated
statements of operations as income tax expense rather than within stockholders’ equity. The adoption of
this standard may result in volatility within a company’s results of operations, primarily due to changes in
the stock price.
(cid:120) Excess tax benefits will be presented as an operating activity on the statement of cash flows rather than as a
financing activity.
(cid:120) A forfeiture election will be made to either estimate forfeitures (similar to today’s requirement) or
recognize 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.
(cid:120) 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 adopted this standard during the first quarter of fiscal year 2018. As part of its adoption of
ASU 2016-09, the Company made 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 year 2018, the Company recognizes
forfeitures of share-based awards as they occur in the period of forfeiture rather than estimating the number of awards
91
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
expected to be forfeited at the grant date and subsequently adjusting the estimate when awards are actually forfeited. The
change in accounting policy resulted in an adjustment to decrease retained earnings and increase additional paid-in
capital as of July 1, 2017 by $0.1 million.
The Company has adopted the remaining provisions as follows:
(cid:120) Excess tax benefits arising from share-based awards are reflected within the consolidated statements of
operations as income tax expense; adopted prospectively;
(cid:120) Excess tax benefits are presented as an operating activity on the statement of cash flows; adopted
prospectively; and
(cid:120) Employees are now permitted to elect to withhold shares beyond the minimum statutory tax withholding
requirements at the time the award is settled; adopted prospectively.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows – Restricted Cash (“ASU 2016-
18”). The amendments in this update require that a statement of cash flows explain the change during the period in the
total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents.
Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash
and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement
of cash flows. Adoption is required on a retrospective basis for all periods presented. The Company early adopted this
standard during the fourth quarter of fiscal year 2018 with no impact on any prior periods. A reconciliation of cash, cash
equivalents and restricted cash as presented on the statement of cash flows, to the balance sheet line items can be found
at the bottom of the consolidated statements of cash flows.
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 the Company’s next fiscal year
beginning July 1, 2018, 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).
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 majority of the Company’s business is based on contracts where annual revenue
is recognized within each fiscal year, mirroring the school year. The Company expects revenue recognition will remain
largely unchanged under the new standard on a full year basis, however, there may be some shifting of revenue between
quarters.
The Company will adopt this standard during the first quarter of fiscal year 2019 using the modified
retrospective approach with an adjustment to retained earnings as of July 1, 2018. The Company is in the process of
quantifying the impact. The key impacts of this new standard to the Company will be as follows:
(cid:120) All revenues from the Company’s lines of businesses will be recognized over the service period, including:
o Revenues that had been previously recognized over a 10-month school year;
o Revenues from materials, supplies and professional services that had been previously recognized upon
delivery; and
o Revenues in which the Company is the primary obligor, and were recognized when expenses were
incurred.
92
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 standard, as well as the effect on its consolidated financial
statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326)
(“ASU 2016-13”) related to the methodology for recognizing credit losses. The new standard revises the accounting
requirements related to the measurement of credit losses and will require organizations to measure all expected credit
losses for financial assets based on historical experience, current conditions and reasonable and supportable forecasts
about collectability. Assets must be presented in the financial statements at the net amount expected to be collected. This
ASU will be effective for the Company in the first quarter of fiscal year 2021, and early adoption is permitted. The
Company is currently evaluating the impact of this ASU on its 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 year 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 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 standard, as well as the effect on its
consolidated financial statements.
93
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
4. Property and Equipment and Capitalized Software and Curriculum
Property and equipment consists of the following at:
Student computers
Computer software
Computer hardware
Leasehold improvements
State testing computers
Furniture and fixtures
Office equipment
Web site development costs
Less accumulated depreciation and amortization
June 30,
2018
2017
(In thousands)
$ 35,375
15,313
12,889
11,779
6,816
4,127
1,476
—
87,775
(58,907)
$ 28,868
$ 32,867
26,314
15,927
10,094
6,274
4,533
1,488
263
97,760
(71,463)
$ 26,297
The Company recorded depreciation expense related to property and equipment reflected in selling,
administrative and other operating expenses of $5.1 million, $6.7 million and $6.4 million during the years ended
June 30, 2018, 2017 and 2016, respectively. Depreciation expense of $12.4 million, $11.2 million and $12.6 million
related to computers leased to students is reflected in instructional costs and services during the years ended
June 30, 2018, 2017 and 2016, respectively. There were no material write-downs of capitalized curriculum development
costs for the years ended June 30, 2018, 2017 and 2016. Amortization expense of $0.5 million, $0.6 million and
$0.5 million related to student software costs is reflected in instructional costs and services during the years ended
June 30, 2018, 2017 and 2016, respectively.
In the course of its normal operations, the Company incurs maintenance and repair expenses, which are
expensed as incurred and totaled $12.1 million, $11.7 million and $11.6 million for the years ended June 30, 2018, 2017
and 2016, respectively.
Capitalized software consists of the following at:
Capitalized software
Less accumulated depreciation and amortization
June 30,
2018
2017
(In thousands)
$ 201,348
(145,860)
55,488
$
$ 193,252
(130,557)
62,695
$
The Company recorded amortization expense of $25.8 million, $25.1 million and $23.4 million related to
capitalized software reflected in instructional costs and services and $9.1 million, $7.9 million and $5.5 million reflected
in selling, administrative and other operating expenses during the years ended June 30, 2018, 2017 and 2016,
respectively.
94
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
Capitalized curriculum development costs consists of the following at:
Capitalized curriculum development costs
Less accumulated depreciation and amortization
June 30,
2018
2017
(In thousands)
$ 185,520
(131,962)
53,558
$
$ 171,736
(112,523)
59,213
$
The Company recorded amortization expense of $19.4 million, $19.9 million and $17.0 million related to
capitalized curriculum development cost reflected in instructional costs and services during the years ended
June 30, 2018, 2017 and 2016, 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.
On December 22, 2017, the Tax Cuts and Job Act (the “Tax Act”) was enacted into law which, among other
provisions, reduced the U.S. statutory federal income tax rate from 35% to 21%. The Company has included the amount
for the impact of the re-measurement of the Company’s net U.S. deferred tax liabilities and the transition tax on the
Company’s accumulated unremitted foreign earnings in the Company’s consolidated financial statements for the year
ended June 30, 2018.
The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to allow the registrant to record
provisional amounts during a measurement period not to extend beyond one year of the enactment date. The Company
has included in its taxable income the provisional impact related to the one-time transition tax and the revaluation of
deferred tax balances and included these estimates in its consolidated financial statements for the year ended June 30,
2018. The Company believes the analysis of the various provisions of the Act has been substantially completed, but the
ultimate impact may differ from these provisional amounts due to, among other things, additional analysis, changes in
interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions
the Company may take as a result of the Act. The Company expects to complete its analysis within the measurement
period in accordance with SAB 118.
95
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,
2018
2017
(In thousands)
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
Capitalized curriculum development
Capitalized software and website development costs
Property and equipment
Returned materials
Purchased intangibles
Total deferred tax liabilities
Net deferred tax liability before valuation allowance
Valuation allowance
Net deferred tax liability
Reported as:
Long-term deferred tax liabilities
$
5,047 $
4,618
3,156
8,293
1,289
1,502
673
20
431
25,029
8,033
7,400
10,695
11,449
1,720
3,299
401
20
390
43,407
(9,890)
(13,734)
(2,573)
(2,452)
(4,498)
(33,147)
(8,118)
(4,459)
(15,323)
(23,288)
(2,649)
(4,559)
(7,161)
(52,980)
(9,573)
(7,153)
$ (12,577) $ (16,726)
$ (12,577) $ (16,726)
The Company maintained a valuation allowance on net noncurrent deferred tax assets of $4.5 million and $7.2
million as of June 30, 2018 and 2017, respectively, predominantly related to foreign income tax net operating losses
("NOL") and operating losses related to its tax non-consolidating entity. The decrease in the valuation allowance is due
to the acquisition of the non-controlling interest of the tax non-consolidating entity which enabled the Company to
utilize a portion of the tax non-consolidating entity’s NOLs.
At June 30, 2018, the Company had available federal and state NOL carryforwards of $0.2 million and $0.4
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, 2018 and 2017, 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.
96
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
The components of the income tax (benefit) expense for the years ended June 30, 2018, 2017 and 2016 were as
follows:
Current:
Federal
State
Foreign
Total current
Deferred:
Federal
State
Foreign
Total deferred
Total income tax (benefit) expense
Year Ended June 30,
2018
2017
(In thousands)
2016
$
887
774
1,444
3,105
$ 8,756
3,153
552
12,461
$ 4,651
1,152
2,761
8,564
(4,769)
754
—
(4,015)
$
(6,505)
(560)
—
(7,065)
(910) $ 5,396
(1,648)
(97)
(2,073)
(3,818)
$ 4,746
The (benefit) 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 (1)
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
Impact of federal tax rate reduction
Repatriation transition tax
Stock-based compensation
(Benefit) provision for income taxes
Year Ended June 30,
2017
2016
2018
28.0 %
0.9
1.2
3.1
-
(0.1)
(7.2)
-
0.9
0.4
(3.9)
(25.4)
6.4
(7.7)
(3.4) %
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 %
(1) The corporate tax rate was lowered from 35% to 21%, effective as of January 1, 2018. Under IRC §15 which governs
rate changes, fiscal year taxpayers are subject to a “blended” tax rate for tax years that include January 1, 2018. Using
the weighted average calculation, the company’s blended federal tax rate for the year ended June 30, 2018 is 28%.
The decrease in the effective income tax rate for the year ended June 30, 2018 was predominantly impacted by
the Tax Act as well as the adoption of ASU 2016-09 related to stock compensation.
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
97
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
the tax position is warranted and recognition should be at the highest amount which would be expected to be realized
upon ultimate settlement related to unrecognized tax benefits.
The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax
expense. As of June 30, 2018, 2017 and 2016, the Company had $0.2 million, $0.1 million and $0.1 million in accrued
interest and penalties, respectively.
The unrecognized tax benefits for the years ended June 30, 2018, 2017 and 2016 were as follows:
Balance at beginning of the year
Additions for prior year tax positions
Additions for current year tax positions
Reductions for prior year tax positions
Balance at end of the year
Year Ended June 30,
2018
2017
(In thousands)
2016
$ 2,260 $ 2,224
951
241
(1,156)
$ 2,392 $ 2,260
585
8
(461)
$ 3,558
351
290
(1,975)
$ 2,224
If recognized, all of the $2.4 million balance of unrecognized tax benefits as of June 30, 2018 would affect the
effective tax rate. The Company does 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, 2014. 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, 2012.
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, 2018 and 2017, the outstanding balance of capital leases under the
current and former lease lines of credit (as discussed in more detail below) was $26.0 million and $21.9 million,
respectively, with lease interest rates ranging from 1.95% to 3.12%. 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, 2018 and 2017 was $42.2 million and $39.1 million, respectively. The accumulated depreciation of leased
student computers as of June 30, 2018 and 2017 was $26.0 million and $25.1 million, respectively.
The Company had $14.4 million and $31.9 million of remaining availability under its lease line of credit as of
June 30, 2018 and 2017, respectively. Interest on unpaid principal under the lease line of credit accrues at a fluctuating
rate of LIBOR plus 1.2%.
98
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
The following is a summary as of June 30, 2018 of the present value of the net minimum lease payments on
capital leases under the Company’s commitments:
As of June 30,
2019
2020
2021
Total minimum payments
Less amount representing interest (imputed weighted average capital lease
interest rate of 2.80%)
Net minimum payments
Less current portion
Present value of minimum payments, less current portion
Capital Leases
(in thousands)
$
$
13,891
8,449
4,540
26,880
(862)
26,018
(13,353)
12,665
Operating Leases
The Company has fixed non-cancelable operating leases with terms expiring through 2024 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 $6.8 million, $6.3 million and $7.8 million for the years ended June 30, 2018, 2017 and
2016, respectively.
Future minimum lease payments, net of sublease income, under non-cancelable operating leases with initial
terms of one year or more are as follows:
($ in thousands)
2019
2020
2021
2022
2023
Thereafter
Total future minimum lease payments
7. Line of Credit
Year Ended
June 30,
$
$
8,889
7,626
7,057
5,914
258
8
29,752
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%, 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, 2018 and 2017, the Company was in compliance with these
covenants. During the years ended June 30, 2018 and 2017, 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, 2018 and 2017.
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
99
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
restricted in senior credit facilities.
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, 2018 or 2017.
Common Stock Repurchases
On May 16, 2018, the Company entered into a stock repurchase agreement pursuant to which the Company
repurchased 1,832,145 shares of its common stock in a single transaction at a purchase price of $15.00 per share,
representing aggregate consideration of $27.5 million.
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 attract, retain and motivate employees who make important contributions to
the Company by providing such individuals with equity ownership opportunities. 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:
(cid:120)
(cid:120)
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, 2018, the remaining aggregate number of shares of the Company’s common
stock authorized for future issuance under the Plan was 4,299,767. At June 30, 2018, there were 3,585,193 shares of the
Company’s common stock that remain outstanding or nonvested 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 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.
100
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:
Dividend yield
Expected volatility
Risk-free interest rate
Expected life of the option term (in years)
Forfeiture rate
Year Ended
June 30,
2016
0.00%
54.5%
1.00%
5.11
12%
There were no grants of stock options during the years ended June 30, 2018 and 2017. The fair value of the
options granted during the year ended June 30, 2016 was $3.2 million. 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.
101
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
Stock option activity including stand-alone agreements during the years ended June 30, 2018, 2017 and 2016
was as follows:
Weighted
Weighted Average
Average
Exercise
Price
Remaining
Contractual
Life (Years)
Aggregate
Intrinsic
Value
Shares
Outstanding, June 30, 2015
Granted
Exercised
Forfeited or canceled
Outstanding, June 30, 2016
Granted
Exercised
Forfeited or canceled
Outstanding, June 30, 2017
Granted
Exercised
Forfeited or canceled
Outstanding, June 30, 2018
Stock options exercisable at June 30, 2018
243,112
(1,000)
(806,530)
2,914,593 $ 20.33
13.43
13.66
18.55
2,350,175 $ 20.20
—
—
16.35
(425,180)
23.12
(568,467)
1,356,528 $ 20.19
—
—
13.45
(14,600)
22.71
(142,621)
1,199,307 $ 19.97
1,091,801 $ 20.52
3.55 $ 788,277
3.41 $ 549,397
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, 2018. 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, 2018, 2017 and 2016 was
$0.0 million, $1.3 million, and $0.0 million, respectively.
As of June 30, 2018, there was $0.6 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 1.0 years. During the
years ended June 30, 2018, 2017 and 2016, the Company recognized $1.2 million, $2.0 million and $3.7 million,
respectively, of stock-based compensation expense related to stock options.
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.
102
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
Restricted stock award activity during the years ended June 30, 2018, 2017 and 2016 was as follows:
Nonvested, June 30, 2015
Granted
Vested
Canceled
Nonvested, June 30, 2016
Granted
Vested
Canceled
Nonvested, June 30, 2017
Granted
Vested
Canceled
Nonvested, June 30, 2018
Shares
Weighted-
Average
Grant-Date
Fair Value
1,245,504 $ 22.30
10.13
1,704,843
22.24
(722,577)
20.25
(95,980)
2,131,790 $ 12.46
12.70
1,268,311
12.94
(1,084,046)
(175,008)
12.69
2,141,047 $ 12.34
16.68
1,210,502
12.29
(1,339,492)
(335,150)
14.31
1,676,907 $ 15.12
Performance Based Restricted Stock Awards (included above)
During the year ended June 30, 2018, 557,189 new performance based restricted stock awards were granted and
632,888 remain nonvested at June 30, 2018. During the year ended June 30, 2018, 275,135 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.
Included above are 46,845 performance based restricted stock awards that were granted to Company executives
with a weighted average grant date fair value of $17.40 per share. These awards were granted pursuant to the Plan and
are subject to the achievement of a target free cash flow metric in fiscal year 2018 and will be adjusted upwards or
downwards based on the Company’s relative total shareholder return for fiscal year 2018 ranked against other companies
in the Russell 2000 Index. If the performance goals are achieved, 20% of the shares granted vest immediately, and the
remaining 80% vest ratably in semi-annual intervals until the three year anniversary from grant date.
Equity Incentive Market Based Restricted Stock Awards (included above)
During fiscal year 2017, the Company granted equity incentive market based restricted stock awards which
were subject to the attainment of an average stock price of $14.35 for 30 consecutive days after the date of the
Company’s earnings release for the fourth quarter and fiscal year ended June 30, 2017. During the year ended
June 30, 2018, 18,400 of these equity incentive market based restricted stock awards vested. Additionally, during fiscal
year 2017, the Company granted equity incentive market based restricted stock awards to its Executive Chairman and
Chief Executive Officer which were subject to the attainment of average prices of $13, $16 and $19 per share. These
targets were achieved during fiscal year 2017. During the year ended June 30, 2018, 257,075 of these equity incentive
market based restricted stock awards vested. As of June 30, 2018, 25,200 equity incentive market based restricted stock
awards remain nonvested.
Service Based Restricted Stock Awards (included above)
During the year ended June 30, 2018, 653,313 new service based restricted stock awards were granted and
1,018,819 remain nonvested at June 30, 2018. During the year ended June 30, 2018, 788,882 service based restricted
stock awards vested.
103
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
Summary of All Restricted Stock Awards
As of June 30, 2018, there was $15.8 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 1.3 years. The fair value
of restricted stock awards granted for the years ended June 30, 2018 and 2017 was $20.2 million and $16.0 million,
respectively. The total fair value of shares vested for the years ended June 30, 2018 and 2017 was $22.1 million and
$17.5 million, respectively. During the years ended June 30, 2018, 2017 and 2016, the Company recognized
$15.7 million, $16.8 million and $14.8 million, respectively, of stock-based compensation expense related to restricted
stock awards.
Performance Share Units (“PSU”)
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 is classified as an equity award in accordance with ASC 718.
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 was believed to be probable at the highest level which equals 150% of the target
award. Therefore, the Company recorded $3.8 million of expense for the period of grant date (September 2015) through
June 2017. On August 2, 2017, the Compensation Committee of the Company’s Board of Directors certified that as of
August 1, 2017, 97% of the MPS schools were not in academic jeopardy, as determined by the independent members of
the Academic Committee of the Board of Directors on that date, and that the Academic Metric for Tranche #1 of the
LTIP was achieved at the Outperform level. This resulted in 446,221 PSUs (including 138,241 additional PSUs due to
the Outperform level) earned by the participants, consisting of 90,000 PSUs for Mr. Davis and 70,021 PSUs for Mr.
Udell.
For the year ended June 30, 2018, the Company determined the achievement of one performance condition was
probable on Tranche #2. Tranche #2 is comprised of two performance measures, an academic measure (similar to
Tranche #1) and a lifetime value measure. The Company believes that achievement is probable only as it relates to the
academic measure and is currently expected to meet the target level. Therefore, the Company recorded $3.9 million of
expense for the period of grant date (September 2015) through June 2018. For the year ended June 30, 2018, the
Company determined the achievement of the performance conditions associated with the lifetime value measure of
Tranche #2 was not probable and therefore no expense was recorded. If actual performance was deemed to be met at
threshold for the lifetime value measure of Tranche #2 on the measurement date, then additional expense of $2.4 million
of expense would be incurred in fiscal year 2019.
As of June 30, 2018, there was $0.3 million of total unrecognized compensation expense related to nonvested
PSUs for Tranches #1 and #2. During the years ended June 30, 2018, 2017 and 2016, the Company recognized
$5.9 million, $3.8 million and zero, respectively, of stock-based compensation expense related to PSUs.
104
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
Performance share unit activity during the years ended June 30, 2018, 2017 and 2016 was as follows:
Weighted-
Average
Grant-Date
Nonvested, June 30, 2015
Granted
Vested
Canceled
Nonvested, June 30, 2016
Granted
Vested
Canceled
Nonvested, June 30, 2017
Granted
Vested
Canceled
Nonvested, June 30, 2018
10. Redeemable Noncontrolling Interest
Investment in LearnBop, Inc.
Shares
— $
1,154,602
—
(65,000)
Fair Value
—
12.92
—
13.45
1,089,602 $ 12.91
18.97
—
13.45
1,043,602 $ 13.16
12.81
138,241
12.62
(320,340)
14.00
(152,524)
708,979 $ 13.15
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 minority shareholders have a non-transferable put right, which was exercisable between July 31, 2018 and December
31, 2018 for the remaining minority interest. In January 2018, prior to the commencement of the exercise period, the
Company and the minority shareholders entered into a stock purchase agreement to purchase the remaining 49% interest
for $0.5 million. As a result, LearnBop became a wholly-owned subsidiary of the Company.
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 created and distributed
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.
105
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
The following is a summary of the activity of the redeemable noncontrolling interest at June 30, 2018 and 2017:
(In thousands)
Balance of redeemable noncontrolling interest at June 30, 2016
Net loss
Adjustment to redemption value
Purchase of noncontrolling interest
Balance of redeemable noncontrolling interest at June 30, 2017
Net loss
Purchase of noncontrolling interest
Balance of redeemable noncontrolling interest at June 30, 2018
11. Commitments and Contingencies
Litigation
Value
$ 7,502
(910)
3,245
(9,137)
700
(200)
(500)
—
$
$
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”). 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
106
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
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, Master
File No. 4:16-cv-04069-PJH. 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. On August 30, 2017, as a result of a hearing on April 19, 2017, the Court granted with prejudice the
Company’s motion to dismiss the allegations of false statements regarding Scantron scores, but denied the motion on the
allegations pertaining to non-disclosure of Agora’s 2012 notice of non-renewal and other statements regarding the
Company’s replacement contract with Agora, and permitted the plaintiffs to amend their complaint with respect to
certain statements on the quality and effectiveness of the Company’s programs. The plaintiffs were given until October
2, 2017 to amend. On October 2, 2017, the plaintiffs filed a second amended complaint and elected not to pursue their
claims regarding the statements pertaining to the quality and effectiveness of the Company’s academic programs, and
further dismissed two of the Company’s former officers as defendants in the case. The Court accepted these stipulations
on October 4, 2017. On November 16, 2017, the Company filed its answer denying the allegations and asserting its
affirmative defenses. Discovery with respect to this matter is proceeding. On March 1, 2018, Plaintiffs filed a motion for
class certification which was opposed by the Company on June 15, 2018. The Company intends to continue to defend
vigorously against each and every allegation and claim set forth in the second 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
agreement with the Company’s Chairman and Chief Executive Officer with an amended extended term to September 30,
2019, 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.
Off-Balance Sheet Arrangements
As of June 30, 2018, the Company provided guarantees of approximately $2.0 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”).
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.
107
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
12. Restructuring
In the third and fourth quarters of fiscal year 2017, the Company exited three facilities (which included the
subleased facility above) that were no longer being utilized and entered into a lease buyout agreement (discussed above),
which were subject to operating leases.
The present value of the remaining lease payments was calculated using a credit adjusted risk-free rate and
estimated sublease rentals for each lease. In aggregate, during fiscal year 2017, the Company recorded an impairment of
$5.4 million for the three leases. The current portion of the liability of $1.7 million, was included in accrued liabilities
and the long-term portion of $3.7 million, was included in other long-term liabilities on the consolidated balance sheet as
of March 31, 2017. 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 $4.9 million net impact of these actions was recorded in selling, administrative, and other operating
expenses in the consolidated statements of operations. Additionally, the lease buyout was $0.7 million and was included
in instructional costs and services in the consolidated statements of operations. There were no similar charges recorded
during the years ended June 30, 2018 or 2016.
The following table summarizes the activity during the year ended June 30, 2018:
Description
Initial Value
Balance at
Payments, net of
June 30, 2017 sublease income
Accretion
Expense
Adjustments
Balance at
June 30, 2018
Lease #1
Lease #2
Lease #3
Total
$
$
1,652
1,311
2,443
5,406
$
$
1,421 $
1,138
2,282
4,841 $
(In thousands)
(364) $
(729)
(677)
(1,770) $
35 $
19
54
108 $
— $
47
(468)
(421) $
1,092
475
1,191
2,758
13. Severance
During the year ended June 30, 2018, the Company reduced its workforce, as well as provided severance to its
former CEO pursuant to his employment agreement in the form of compensation and an acceleration of certain equity
awards resulting in severance of $6.3 million. During the years ended June 30, 2017 and 2016, the Company reduced its
workforce and recorded severance of $4.4 million and $2.5 million, respectively. Included in the expense for the years
ended June 30, 2018, 2017 and 2016, is $2.4 million, $1.0 million and $0.8 million associated with accelerated vesting
of equity awards to former executives and other employees.
14. 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. 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. The Company reclassified this $10.0 million investment, recording it in other current assets. During the
fourth quarter of fiscal year 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.
108
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
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.
In the third quarter of fiscal year 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. 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
March 31, 2018, the property had been classified as a held for sale asset for greater than one year. As such, the Company
reclassified the property as a held and used asset, subject to depreciation, and is included in property and equipment, net
on the consolidated balance sheet.
During the year ended June 30, 2016, 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.
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 aimed 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 had estimated lives of seven and four years, respectively; while the other
intangible assets had estimated lives ranging from two to five years. The goodwill was 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.
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.
109
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
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
Identifiable assets acquired and liabilities assumed:
Customer relationships
Developed technology
Other intangible assets
Goodwill
Deferred tax
Other net assets
June 30, 2017
20.2
$
2.9
23.1
$
$
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.
15. Related Party Transactions
At June 30, 2018 and 2017, 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 14, “Acquisitions and Investments – Investment in
School Mortgage.”
During the years ended June 30, 2018, 2017 and 2016, the Company contributed $0.3 million, $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.
16. 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 $1.4 million, $1.6 million and $1.5
million during the years ended June 30, 2018, 2017 and 2016, respectively, under the 401(k) Plan.
110
K12 Inc.
Notes to Consolidated Financial Statements (Continued)
17. Supplemental Disclosure of Cash Flow Information
Cash paid for interest
Cash paid for taxes
Year Ended June 30,
2017
2018
2016
$
778
$
750
$
790
$ 12,210
$
8,052
$
1,125
Supplemental disclosure of non-cash financing activities:
Property and equipment financed by capital lease obligations, including student
peripherals
$ 17,414
$ 14,469 $ 10,878
Supplemental disclosure of non-cash investing activities:
Stock-based compensation expense capitalized on software development
Stock-based compensation expense capitalized on curriculum development
$ 1,083
969
$
Business combinations:
Current assets
Intangible assets
Goodwill
Assumed liabilities
Deferred revenue
$
209
695
2,983
(734)
(361)
$
$
$
— $
— $
—
—
— $
—
—
—
—
419
4,600
21,054
(5,780)
(400)
111
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
Interest income, net
Income (loss) before income taxes and
noncontrolling interest
Income tax benefit (expense)
Net income (loss)
Add net loss attributable to noncontrolling
interest
Net income (loss) attributable to common
stockholders
Net income (loss) attributable to common
stockholders per share:
Jun 30,
2018
Fiscal Year 2018
Mar 31,
2018
Dec 31,
2017
(In thousands)
Sep 30,
2017
$
238,874 $
232,864 $
217,211
$
228,785
157,087
148,878
139,163
147,367
69,939
1,972
228,998
9,876
430
10,306
(959)
9,347
62,267
2,002
213,147
19,717
261
19,978
(6,935)
13,043
61,958
2,376
203,497
13,714
39
13,753
(564)
13,189
96,282
2,898
246,547
(17,762)
235
(17,527)
9,368
(8,159)
—
27
70
103
$
9,347 $
13,070 $
13,259
$
(8,056)
Basic
Diluted
$
$
0.24 $
0.23 $
0.33 $
0.32 $
0.34
0.33
$
$
(0.21)
(0.21)
Weighted average shares used in computing
per share amounts:
Basic
Diluted
39,031,207
39,976,593
39,644,074
40,766,203
39,347,244
40,685,667
39,108,172
39,108,172
112
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
Impairment of investment in Web
International Education Group, Ltd.
Interest income, 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:
Basic
Diluted
Jun 30,
2017
Fiscal Year 2017
Mar 31,
2017
Dec 31,
2016
(In thousands)
Sep 30,
2016
$
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)
38,757,312
38,757,312
38,376,984
39,328,127
38,104,909
39,007,276
37,938,705
37,938,705
113
SCHEDULE II
K12 INC.
VALUATION AND QUALIFYING ACCOUNTS
Years Ending June 30, 2018, 2017 and 2016
1. ALLOWANCE FOR DOUBTFUL ACCOUNTS
June 30, 2018
June 30, 2017
June 30, 2016
2. INVENTORY RESERVES
June 30, 2018
June 30, 2017
June 30, 2016
3. COMPUTER RESERVE (1)
June 30, 2018
June 30, 2017
June 30, 2016
Balance at
Beginning
of Period
Additions
Charged to
Cost and
Expenses
$ 14,791,171 4,088,592
$ 10,813,394 4,512,899
$ 9,657,092 4,609,720
Balance at
Deductions
from
Allowance
End of Period
6,495,484 $ 12,384,279
535,122 $ 14,791,171
3,453,418 $ 10,813,394
Balance at
Beginning
of Period
Charged to Deductions,
Cost and
Expenses
Shrinkage and Balance at
Obsolescence
$ 2,310,309 1,314,225
475,218
$ 2,642,547
691,407
$ 2,192,234
End of Period
132,879 $ 3,491,655
807,456 $ 2,310,309
241,094 $ 2,642,547
Balance at
Beginning
of Period
819,042
$
$
573,444
$ 1,032,253
Additions
Charged to
Cost and
Expenses
550,142
595,876
89,064
Deductions,
Shrinkage and Balance at
Obsolescence
469,530 $
350,278 $
547,873 $
End of Period
899,654
819,042
573,444
(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 2018, 2017 and 2016,
certain computers were written off against the reserve.
4. INCOME TAX VALUATION ALLOWANCE
Additions to Deductions in
Net Deferred Net Deferred
Tax Asset
Allowance
Balance at
Beginning
of Period
$ 7,152,860
$ 4,338,653 3,296,617
$ 2,791,033 1,594,174
Balance at
End of Period
22,388 2,716,731 $ 4,458,517
482,410 $ 7,152,860
46,554 $ 4,338,653
Tax Asset
Allowance
June 30, 2018
June 30, 2017
June 30, 2016
114
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:
(cid:120)
(cid:120)
(cid:120)
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, 2018
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
115
control over financial reporting, management concluded that as of June 30, 2018, our internal control over financial
reporting was effective. The effectiveness of our internal control over financial reporting as of June 30, 2018 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.
116
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
K12 Inc.
Herndon, Virginia
Opinion on Internal Control over Financial Reporting
We have audited K12 Inc. and subsidiaries’ (the “Company’s”) internal control over financial reporting as of
June 30, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of June 30, 2018, based on the
COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (“PCAOB”), the consolidated balance sheets of the Company and subsidiaries as of June 30, 2018 and
2017, 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, 2018, and the related notes and financial statement schedule listed in
the accompanying index and our report dated August 8, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s 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 are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the
PCAOB. 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.
Definition and Limitations of Internal Control over Financial Reporting
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.
117
/s/ BDO USA, LLP
McLean, Virginia
August 8, 2018
118
ITEM 9B. OTHER INFORMATION
None.
PART III
We will file a definitive Proxy Statement for our 2018 Annual Meeting of Stockholders (the 2018 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 2018 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 2018 Proxy Statement under the
captions “Proposal 1: Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance.”
We have adopted a Code of Business Conduct and Ethics that applies to all directors, officers and employees.
The Code of Business Conduct and Ethics is available on our website at www.k12.com under the Investor Relations –
Governance section. We intend to satisfy the disclosure requirements under the Exchange Act regarding any amendment
to, or waiver from a material provision of our Code of Business Conduct and Ethics involving our principal executive,
financial or accounting officer or controller by posting such information on our website.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is hereby incorporated by reference to our 2018 Proxy Statement under the
captions “Compensation Discussion and Analysis” and “Director Compensation for Fiscal 2018.”
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 2018 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 2018 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 2018 Proxy Statement under the
caption “Fees Paid to Independent Registered Public Accounting Firm.”
119
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.
120
Exhibit Index
Exhibit No.
4.1
3.2
3.1
4.4*
4.3*
4.2*
4.6*
4.5*
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 (incorporated by reference to
Exhibit 4.2 to the Registrant’s Annual Report on Form 10-K for the year ended June 30, 2017, filed with
the SEC on August 9, 2017, File No. 001-33883).
Form of Restricted Stock Award Agreement under the 2016 Incentive Award Plan (incorporated by
reference to Exhibit 4.3 to the Registrant’s Annual Report on Form 10-K for the year ended June 30,
2017, filed with the SEC on August 9, 2017, File No. 001-33883).
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).
10.6 * 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).
4.8
4.7
10.8 * Form of Performance Share Unit Agreement under the 2016 Incentive Award Plan (incorporated by
reference to Exhibit 10.8 to the Registrant’s Annual Report on Form 10-K for the year ended June 30,
2017, filed with the SEC on August 9, 2017, File No. 001-33883).
10.9 * 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).
10.1*
10.2*
10.3*
10.4*
10.5*
10.10*
10.11*
121
Exhibit No.
10.12*
10.13*
10.14
10.15
10.16
10.17
10.18*
10.19*
10.20*
21.1
23.1
24.1
31.1
31.2
32.1
32.2
99.1†
Description of Exhibit
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).
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).
First Amendment to the Second Amended and Restated Employment Agreement of Nathaniel A.
Davis, dated April 20, 2018. (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly
Report on Form 10-Q for the quarter ended March 31, 2018, filed with the SEC on April 25, 2018,
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
(incorporated by reference to Exhibit 99.1 to the Registrant’s Annual Report on Form 10-K for the
year ended June 30, 2017, filed with the SEC on August 9, 2017, File No. 001-33883).
101.INS#
101.SCH#
101.CAL#
101.LAB#
101.PRE#
101.DEF#
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.
122
# 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.
123
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 8, 2018
K12 INC.
By: /s/ NATHANIEL A. DAVIS
Name: Nathaniel A. Davis
Title: Chairman and Chief Executive Officer
August 8, 2018
POWER OF ATTORNEY
Know all persons by these presents, that each person whose signature appears below constitutes and appoints
Nathaniel A. Davis, 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
Date
/s/ NATHANIEL A. DAVIS
Nathaniel A. Davis
Chairman and Chief Executive Officer (Principal
August 8, 2018
Executive Officer)
/s/ JAMES J. RHYU
James J. Rhyu
/s/ AIDA M. ALVAREZ
Aida M. Alvarez
/s/ CRAIG R. BARRETT
Craig R. Barrett
/s/ GUILLERMO BRON
Guillermo Bron
/s/ JOHN M. ENGLER
John M. Engler
/s/ STEVEN B. FINK
Steven B. Fink
/s/ ROBERT E. KNOWLING, JR.
Robert E. Knowling, Jr.
/s/ LIZA McFADDEN
Liza McFadden
Chief Financial Officer (Principal Financial Officer and
August 8, 2018
Principal Accounting Officer)
August 8, 2018
August 8, 2018
August 8, 2018
August 8, 2018
August 8, 2018
August 8, 2018
August 8, 2018
Director
Director
Director
Director
Director
Director
Director
124
Subsidiaries of Registrant
Name
K12 Management Inc.
K12 Services Inc.
K12 International Holdings B.V.
LearnBop, Inc.
Subsidiaries of K12 Management Inc.
Name
Disguise the Learning, Inc.
K12 Virtual Schools L.L.C
K12 Classroom L.L.C
K12 Classroom Delaware LLC
K12 California L.L.C
K12 Florida L.L.C
K12 Washington L.L.C
Big Universe, Inc.
Middlebury Interactive Languages LLC
Fuel Education LLC
K12 Delaware RE LLC
Subsidiaries of K12 International Holdings B.V.
Name
K12 International Ltd.
K12 International GmbH
K12 Education (UK) Ltd.
Exhibit 21.1
Jurisdiction
Delaware
Delaware
Netherlands
Delaware
Jurisdiction
Tennessee
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Virginia
Delaware
Delaware
Delaware
Jurisdiction
Cayman Islands
Switzerland
United Kingdom
125
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-
213033, No. 333-148436, No. 333-198608 and No. 333-206083) of K12 Inc. and subsidiaries of our reports dated
August 8, 2018, 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 8, 2018
126
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICERS
I, Nathaniel A. Davis, 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 8, 2018
/s/ NATHANIEL A. DAVIS
Nathaniel A. Davis
Chairman and Chief Executive Officer
(Principal Executive Officer)
127
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 8, 2018
/s/ JAMES J. RHYU
James J. Rhyu
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
128
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, 2018 (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 8, 2018
/s/ NATHANIEL A. DAVIS
Nathaniel A. Davis
Chairman and Chief Executive Officer
(Principal Executive Officer)
129
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, 2018 (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 8, 2018
/s/ JAMES J. RHYU
James J. Rhyu
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
130
ADJUSTED OPERATING INCOME, ADJUSTED EBITDA, AND FREE CASH FLOW
(cid:51)(cid:82)(cid:89)(cid:101)(cid:99)(cid:100)(cid:83)(cid:82)(cid:3)(cid:66)(cid:96)(cid:83)(cid:98)(cid:78)(cid:100)(cid:88)(cid:94)(cid:86)(cid:3)(cid:60)(cid:94)(cid:81)(cid:95)(cid:93)(cid:83)(cid:3)(cid:78)(cid:94)(cid:82)(cid:3)(cid:51)(cid:82)(cid:89)(cid:101)(cid:99)(cid:100)(cid:83)(cid:82)(cid:3)(cid:55)(cid:52)(cid:60)(cid:71)(cid:54)(cid:51)(cid:3)(cid:84)(cid:95)(cid:98)(cid:3)(cid:366)(cid:99)(cid:81)(cid:78)(cid:91)(cid:3)(cid:9)(cid:6)(cid:8)(cid:12)(cid:911)(cid:9)(cid:6)(cid:8)(cid:15)(cid:3)(cid:78)(cid:98)(cid:83)(cid:3)(cid:99)(cid:87)(cid:95)(cid:103)(cid:94)(cid:3)(cid:83)(cid:104)(cid:81)(cid:91)(cid:101)(cid:82)(cid:88)(cid:94)(cid:86)(cid:3)(cid:100)(cid:87)(cid:83)(cid:99)(cid:83)(cid:3)(cid:81)(cid:87)(cid:78)(cid:98)(cid:86)(cid:83)(cid:99)(cid:872)(cid:3)
(cid:103)(cid:87)(cid:83)(cid:98)(cid:83)(cid:3)(cid:78)(cid:96)(cid:96)(cid:91)(cid:88)(cid:81)(cid:78)(cid:80)(cid:91)(cid:83)(cid:872)(cid:3)(cid:100)(cid:95)(cid:3)(cid:100)(cid:87)(cid:83)(cid:3)(cid:81)(cid:78)(cid:91)(cid:81)(cid:101)(cid:91)(cid:78)(cid:100)(cid:88)(cid:95)(cid:94)(cid:869)(cid:3)(cid:51)(cid:3)(cid:98)(cid:83)(cid:81)(cid:95)(cid:94)(cid:81)(cid:88)(cid:91)(cid:88)(cid:78)(cid:100)(cid:88)(cid:95)(cid:94)(cid:3)(cid:95)(cid:84)(cid:3)(cid:57)(cid:51)(cid:51)(cid:67)(cid:3)(cid:65)(cid:83)(cid:100)(cid:3)(cid:60)(cid:94)(cid:81)(cid:95)(cid:93)(cid:83)(cid:3)(cid:100)(cid:95)(cid:3)(cid:100)(cid:87)(cid:83)(cid:3)(cid:51)(cid:82)(cid:89)(cid:101)(cid:99)(cid:100)(cid:83)(cid:82)(cid:3)(cid:66)(cid:96)(cid:83)(cid:98)(cid:78)(cid:100)(cid:88)(cid:94)(cid:86)(cid:3)(cid:60)(cid:94)(cid:81)(cid:95)(cid:93)(cid:83)(cid:872)(cid:3)
(cid:78)(cid:94)(cid:82)(cid:3)(cid:51)(cid:82)(cid:89)(cid:101)(cid:99)(cid:100)(cid:83)(cid:82)(cid:3)(cid:55)(cid:52)(cid:60)(cid:71)(cid:54)(cid:51)(cid:3)(cid:96)(cid:98)(cid:83)(cid:99)(cid:83)(cid:94)(cid:100)(cid:83)(cid:82)(cid:3)(cid:95)(cid:94)(cid:3)(cid:96)(cid:78)(cid:86)(cid:83)(cid:3)(cid:75)(cid:60)(cid:60)(cid:3)(cid:88)(cid:94)(cid:81)(cid:91)(cid:101)(cid:99)(cid:88)(cid:102)(cid:83)(cid:3)(cid:95)(cid:84)(cid:3)(cid:100)(cid:87)(cid:83)(cid:3)(cid:78)(cid:84)(cid:95)(cid:98)(cid:83)(cid:93)(cid:83)(cid:94)(cid:100)(cid:88)(cid:95)(cid:94)(cid:83)(cid:82)(cid:3)(cid:81)(cid:87)(cid:78)(cid:98)(cid:86)(cid:83)(cid:99)(cid:872)(cid:3)(cid:88)(cid:99)(cid:3)(cid:78)(cid:99)(cid:3)(cid:84)(cid:95)(cid:91)(cid:91)(cid:95)(cid:103)(cid:99)(cid:871)
($ 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
$9.0
0.6
-
4.8
(0.5)
18.6
7.1
39.6
68.2
107.8
2017
2018
0.5
(1.8)
10.0
5.4
(0.9)
22.6
10.6
46.4
72.9
27.6
(1.0)
-
(0.9)
(0.2)
20.8
2.9
49.2
75.3
119.3
124.5
(cid:51)(cid:3)(cid:98)(cid:83)(cid:81)(cid:95)(cid:94)(cid:81)(cid:88)(cid:91)(cid:88)(cid:78)(cid:100)(cid:88)(cid:95)(cid:94)(cid:3)(cid:95)(cid:84)(cid:3)(cid:57)(cid:51)(cid:51)(cid:67)(cid:3)(cid:65)(cid:83)(cid:100)(cid:3)(cid:53)(cid:78)(cid:99)(cid:87)(cid:3)(cid:67)(cid:98)(cid:95)(cid:102)(cid:88)(cid:82)(cid:83)(cid:82)(cid:3)(cid:80)(cid:105)(cid:3)(cid:66)(cid:96)(cid:83)(cid:98)(cid:78)(cid:100)(cid:88)(cid:94)(cid:86)(cid:3)(cid:51)(cid:81)(cid:100)(cid:88)(cid:102)(cid:88)(cid:100)(cid:88)(cid:83)(cid:99)(cid:3)(cid:100)(cid:95)(cid:3)(cid:56)(cid:98)(cid:83)(cid:83)(cid:3)(cid:53)(cid:78)(cid:99)(cid:87)(cid:3)(cid:56)(cid:91)(cid:95)(cid:103)(cid:3)(cid:96)(cid:98)(cid:83)(cid:99)(cid:83)(cid:94)(cid:100)(cid:83)(cid:82)(cid:3)(cid:95)(cid:94)(cid:3)
(cid:96)(cid:78)(cid:86)(cid:83)(cid:3)
(cid:60)(cid:60)(cid:3)(cid:88)(cid:99)(cid:3)(cid:78)(cid:99)(cid:3)(cid:84)(cid:95)(cid:91)(cid:91)(cid:95)(cid:103)(cid:99)(cid:871)
(cid:75)
($ million)
Net cash provided by operating activities
Purchases of property and equipment
Capitalized software development costs
Capitalized curriculum development costs
Free Cash Flow
2015
120.1
(9.9)
(33.8)
(18.1)
58.3
2016
121.8
(5.0)
(36.3)
(21.6)
58.9
2017
88.7
(2.2)
(26.9)
(19.1)
40.5
2018
103.6
(8.8)
(24.5)
(9.9)
60.4
1 3 1
Executive Management*
Board of Directors
Company Directory
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
Washington, DC 20004
on Friday, December 14, 2018,
at 10 AM (ET).
Investor Inquiries
Michael S. Kraft
Senior Vice President,
Corporate Communications
571.353.7778
mkraft@K12.com
Online Information
For corporate reports and
company news, visit K12.com.
Nathaniel A. Davis
Chief Executive Officer
and Chairman
Kevin Chavous
President of Academics,
Policy and Schools
Dr. Shaun McAlmont
Executive Vice President,
Career Technical Education
Nathaniel A. Davis
Chief Executive Officer and
Chairman, K12 Inc.
Honorable Aida M. Alvarez
Former Clinton Cabinet Member,
Small Business Administration
Craig R. Barrett
Retired Chairman and CEO,
Intel Corporation
James J. Rhyu
Chief Financial Officer and
President, Product and Technology
Guillermo Bron
Managing Director,
Pine Brook Road Partners, LLC
John M. Engler
Former Governor of Michigan
Steven B. Fink
Co-Chairman,
Heron International
Robert E. Knowling, Jr.
Chairman,
Eagles Landing Partners
Liza McFadden
President,
Liza & Partners LLC
Vincent Mathis
Executive Vice President,
General Counsel, and Secretary
Howard D. Polsky
Executive Vice President,
Special Counsel
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
Todd Goldthwaite
Senior Vice President
and Chief Marketing Officer
Valerie A. Maddy
Senior Vice President,
Human Resources
Douglas McCollum
Senior Vice President,
Products
Jeanna Pignatiello
Senior Vice President,
School Services
Sean P. Ryan
Senior Vice President and General
Manager, Institutional Business
Peter G. Stewart
Senior Vice President,
School Development
*Executive management team as of October 1, 2018
Personalized education.
Limitless learning.
VISIT US: K12.COM
TALK WITH US: 866.968.7512