0001104659-16-114723.txt : 20160427 0001104659-16-114723.hdr.sgml : 20160427 20160427165501 ACCESSION NUMBER: 0001104659-16-114723 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 67 CONFORMED PERIOD OF REPORT: 20160331 FILED AS OF DATE: 20160427 DATE AS OF CHANGE: 20160427 FILER: COMPANY DATA: COMPANY CONFORMED NAME: K12 INC CENTRAL INDEX KEY: 0001157408 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EDUCATIONAL SERVICES [8200] IRS NUMBER: 954774688 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-33883 FILM NUMBER: 161596040 BUSINESS ADDRESS: STREET 1: 2300 CORPORATE PARK DRIVE STREET 2: SUITE 200 CITY: HERNDON STATE: VA ZIP: 20171 BUSINESS PHONE: 7034837000 MAIL ADDRESS: STREET 1: 2300 CORPORATE PARK DRIVE STREET 2: SUITE 200 CITY: HERNDON STATE: VA ZIP: 20171 10-Q 1 a16-6328_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2016

 

OR

 

o         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

 

95-4774688

(State or other jurisdiction of
incorporation or organization)

 

(IRS Employer
Identification No.)

 

 

 

2300 Corporate Park Drive
Herndon, VA
(Address of principal executive offices)

 

20171
(Zip Code)

 

(703) 483-7000

(Registrant’s telephone number, including area code)

 

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 x     No o

 

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 x     No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer x

Non-accelerated filer o (Do not check if a smaller reporting company)

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No x

 

As of April 22, 2016 the Registrant had 39,084,254 shares of common stock, $0.0001 par value per share outstanding.

 

 

 




Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1.  Financial Statements (Unaudited).

 

K12 INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

March 31,

 

June 30,

 

 

 

2016

 

2015

 

 

 

(In thousands, except share and per
share data)

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

199,508

 

$

195,852

 

Accounts receivable, net of allowance of $9,949 and $9,657 at March 31, 2016 and June 30, 2015, respectively

 

222,884

 

188,246

 

Inventories, net

 

16,146

 

29,571

 

Deferred tax asset

 

8,406

 

8,989

 

Prepaid expenses

 

16,837

 

11,428

 

Other current assets

 

24,797

 

24,877

 

Total current assets

 

488,578

 

458,963

 

Property and equipment, net

 

26,717

 

34,407

 

Capitalized software, net

 

67,710

 

62,683

 

Capitalized curriculum development costs, net

 

58,345

 

58,696

 

Intangible assets, net

 

19,347

 

21,195

 

Goodwill

 

66,160

 

66,160

 

Deposits and other assets

 

7,049

 

6,495

 

Total assets

 

$

733,906

 

$

708,599

 

LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY

 

 

 

 

 

Current liabilities

 

 

 

 

 

Current portion of capital lease obligations

 

$

13,453

 

$

16,635

 

Accounts payable

 

15,745

 

29,819

 

Accrued liabilities

 

14,209

 

12,486

 

Accrued compensation and benefits

 

26,898

 

26,790

 

Deferred revenue

 

50,898

 

24,927

 

Total current liabilities

 

121,203

 

110,657

 

Capital lease obligations, net of current portion

 

9,660

 

13,022

 

Deferred rent, net of current portion

 

6,958

 

7,692

 

Deferred tax liability

 

27,654

 

22,456

 

Other long-term liabilities

 

6,475

 

8,233

 

Total liabilities

 

171,950

 

162,060

 

Commitments and contingencies

 

 

 

Redeemable noncontrolling interest

 

9,801

 

9,601

 

Stockholders’ equity

 

 

 

 

 

Common stock, par value $0.0001; 100,000,000 shares authorized; 42,593,095 and 41,837,894 shares issued and 39,090,497 and 38,335,296 shares outstanding at March 31, 2016 and June 30, 2015, respectively

 

4

 

4

 

Additional paid-in capital

 

668,238

 

663,461

 

Accumulated other comprehensive loss

 

(643

)

(1,065

)

Accumulated deficit

 

(40,444

)

(50,462

)

Treasury stock of 3,502,598 shares at cost at March 31, 2016 and June 30, 2015

 

(75,000

)

(75,000

)

Total stockholders’ equity

 

552,155

 

536,938

 

Total liabilities, redeemable noncontrolling interest and equity

 

$

733,906

 

$

708,599

 

 

See accompanying summary of accounting policies and notes to unaudited condensed consolidated financial statements.

 

3



Table of Contents

 

K12 INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(In thousands, except share and per share
data)

 

Revenues

 

$

221,340

 

$

244,623

 

$

651,381

 

$

712,640

 

Cost and expenses

 

 

 

 

 

 

 

 

 

Instructional costs and services

 

134,755

 

148,985

 

403,374

 

440,857

 

Selling, administrative, and other operating expenses

 

64,888

 

64,871

 

225,598

 

226,972

 

Product development expenses

 

2,563

 

3,337

 

9,004

 

10,065

 

Total costs and expenses

 

202,206

 

217,193

 

637,976

 

677,894

 

Income from operations

 

19,134

 

27,430

 

13,405

 

34,746

 

Interest expense, net

 

(101

)

(315

)

(596

)

(134

)

Income before income tax expense and noncontrolling interest

 

19,033

 

27,115

 

12,809

 

34,612

 

Income tax expense

 

(5,368

)

(10,586

)

(3,924

)

(12,711

)

Net income

 

13,665

 

16,529

 

8,885

 

21,901

 

Adjust net loss attributable to noncontrolling interest

 

608

 

484

 

1,133

 

667

 

Net income attributable to common stockholders

 

$

14,273

 

$

17,013

 

$

10,018

 

$

22,568

 

Net income attributable to common stockholders per share

 

 

 

 

 

 

 

 

 

Basic

 

$

0.38

 

$

0.46

 

$

0.27

 

$

0.60

 

Diluted

 

$

0.37

 

$

0.45

 

$

0.26

 

$

0.60

 

Weighted average shares used in computing per share amounts:

 

 

 

 

 

 

 

 

 

Basic

 

37,692,826

 

37,211,634

 

37,562,106

 

37,334,598

 

Diluted

 

38,999,871

 

37,408,911

 

38,559,204

 

37,574,665

 

 

See accompanying summary of accounting policies and notes to unaudited condensed consolidated financial statements.

 

4



Table of Contents

 

K12 INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(In thousands)

 

Net income

 

$

13,665

 

$

16,529

 

$

8,885

 

$

21,901

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

148

 

275

 

422

 

(840

)

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income, net of tax

 

13,813

 

16,804

 

9,307

 

21,061

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss attributable to noncontrolling interest

 

608

 

484

 

1,133

 

667

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to common stockholders

 

$

14,421

 

$

17,288

 

$

10,440

 

$

21,728

 

 

See accompanying summary of accounting policies and notes to unaudited condensed consolidated financial statements.

 

5



Table of Contents

 

K12 INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF EQUITY

 

(In thousands, except share and

 

Common Stock

 

Additional Paid-
in

 

Other Accumulated
Comprehensive

 

Accumulated

 

Treasury Stock

 

 

 

per share data)

 

Shares

 

Amount

 

Capital

 

Income (Loss)

 

Deficit

 

Shares

 

Amount

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2015

 

41,837,894

 

$

4

 

$

663,461

 

$

(1,065

)

$

(50,462

)

(3,502,598

)

$

(75,000

)

$

536,938

 

Net income (1)

 

 

 

 

 

 

10,018

 

 

 

10,018

 

Foreign currency translation adjustment

 

 

 

 

422

 

 

 

 

422

 

Stock-based compensation expense

 

 

 

13,759

 

 

 

 

 

13,759

 

Exercise of stock options

 

1,000

 

 

14

 

 

 

 

 

14

 

Excess tax from stock-based compensation

 

 

 

(4,606

)

 

 

 

 

(4,606

)

Issuance of restricted stock awards

 

1,072,484

 

 

 

 

 

 

 

 

Forfeiture of restricted stock awards

 

(83,370

)

 

 

 

 

 

 

 

Accretion of redeemable noncontrolling interests to estimated redemption value

 

 

 

(1,334

)

 

 

 

 

(1,334

)

Retirement of restricted stock for tax withholding

 

(234,913

)

 

(3,056

)

 

 

 

 

(3,056

)

Balance, March 31, 2016

 

42,593,095

 

$

4

 

$

668,238

 

$

(643

)

$

(40,444

)

(3,502,598

)

$

(75,000

)

$

552,155

 

 


(1)                  Net income excludes $1.1 million due to the redeemable noncontrolling interests related to Middlebury Interactive Languages and LearnBop, which are reported outside of permanent equity in the accompanying unaudited condensed consolidated balance sheets.

 

See accompanying summary of accounting policies and notes to unaudited condensed consolidated financial statements.

 

6



Table of Contents

 

K12 INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Nine Months Ended March 31,

 

 

 

2016

 

2015

 

 

 

(In thousands)

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

8,885

 

$

21,901

 

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

 

 

 

 

 

Depreciation and amortization expense

 

50,622

 

52,273

 

Stock-based compensation expense

 

13,759

 

13,471

 

Excess tax benefit from stock-based compensation

 

(6

)

(8

)

Deferred income taxes

 

(552

)

4,128

 

Provision for doubtful accounts

 

2,895

 

1,442

 

Provision for excess and obsolete inventory

 

543

 

541

 

Benefit for student computer shrinkage and obsolescence

 

(422

)

(262

)

Expensed leased computer peripherals

 

2,532

 

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(37,521

)

(81,421

)

Inventories

 

12,882

 

15,532

 

Prepaid expenses

 

(5,409

)

(4,226

)

Other current assets

 

79

 

(3,719

)

Deposits and other assets

 

(159

)

(425

)

Accounts payable

 

(14,074

)

(10,979

)

Accrued liabilities

 

3,483

 

(1,974

)

Accrued compensation and benefits

 

110

 

4,619

 

Deferred revenue

 

25,971

 

32,336

 

Deferred rent and other liabilities

 

(2,496

)

2,510

 

Net cash provided by operating activities

 

61,122

 

45,739

 

Cash flows from investing activities

 

 

 

 

 

Purchase of property and equipment

 

(2,458

)

(7,656

)

Capitalized software development costs

 

(26,321

)

(25,430

)

Capitalized curriculum development costs

 

(12,206

)

(12,194

)

Investment in LearnBop, Inc.

 

 

(6,512

)

Net cash used in investing activities

 

(40,985

)

(51,792

)

Cash flows from financing activities

 

 

 

 

 

Repayments on capital lease obligations

 

(13,428

)

(16,743

)

Purchase of treasury stock

 

 

(26,452

)

Proceeds from exercise of stock options

 

14

 

513

 

Excess tax benefit from stock-based compensation

 

6

 

8

 

Retirement of restricted stock for income tax withholding

 

(3,056

)

(2,388

)

Net cash used in financing activities

 

(16,464

)

(45,062

)

Effect of foreign exchange rate changes on cash and cash equivalents

 

(17

)

(2,144

)

Net change in cash and cash equivalents

 

3,656

 

(53,259

)

Cash and cash equivalents, beginning of period

 

195,852

 

196,109

 

Cash and cash equivalents, end of period

 

$

199,508

 

$

142,850

 

 

See accompanying summary of accounting policies and notes to unaudited condensed consolidated financial statements.

 

7



Table of Contents

 

K12 INC.

NOTES TO UNAUDITED CONDENSED 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 curriculum, software systems and educational services designed to facilitate individualized learning for students primarily in kindergarten through 12th grade (“K-12”). The Company’s mission is to maximize a child’s potential by providing access to an engaging and effective education, regardless of geographic location or socio-economic background. 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 unique set of products and services are provided primarily to three lines of business: Managed Public School Programs (curriculum and services sold to managed public schools in 33 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 partners with a growing number of 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 course and supplemental solutions. In addition to curriculum, systems and programs, the Company provides teacher training, teaching services and other support services.

 

2.  Basis of Presentation

 

The accompanying condensed consolidated balance sheet as of March 31, 2016, the condensed consolidated statements of operations and comprehensive income for the three and nine months ended March 31, 2016 and 2015, the condensed consolidated statements of cash flows for the nine months ended March 31, 2016 and 2015, and the condensed consolidated statement of equity for the nine months ended March 31, 2016 are unaudited. The unaudited interim financial statements have been prepared on the same basis as the annual financial statements and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position and results of operations for the periods presented. The results for the nine months ended March 31, 2016 are not necessarily indicative of the results to be expected for the year ending June 30, 2016, or for any other interim period or future fiscal year. The condensed consolidated balance sheet as of June 30, 2015 has been derived from the audited consolidated financial statements at that date.

 

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Accordingly, the Company does not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, these statements reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position and results of operations for the periods presented. Preparation of the Company’s financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and footnotes. Actual results could differ from those estimates. This quarterly report on Form 10-Q should be read in conjunction with the financial statements and the notes thereto included in the Company’s latest annual report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on August 4, 2015, which contains the Company’s audited financial statements for the fiscal year ended June 30, 2015.

 

The Company operates in one operating and reportable business segment as a technology-based education company providing proprietary 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 only on consolidated results.

 

8



Table of Contents

 

3.  Summary of Significant Accounting Policies

 

Revenue Recognition

 

Revenues are principally earned from long-term contractual agreements to provide online curriculum, books, materials, computers and management services to virtual and blended public schools, traditional schools, school districts, virtual charter schools, and private schools. In addition to providing the curriculum, books and materials, under most contracts, the Company provides management services and technology to virtual and blended public schools, including monitoring academic achievement, teacher hiring and training, compensation of school personnel, financial management, enrollment processing and development and procurement of curriculum, equipment and required services. The schools receive funding 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 revenues.

 

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 revenue received by the school from its state funding school district up to the expenses incurred in accordance with Accounting Standards Codification (“ASC”) 605, Revenue Recognition. As a result of being the primary obligor, amounts recorded as revenues and school operating expenses for the three months ended March 31, 2016 and 2015 were $76.3 million and $89.1 million, respectively, and for the nine months ended March 31, 2016 and 2015, were $210.9 million and $241.9 million, respectively.  For contracts where the Company is not the primary obligor, the Company records revenue based on its net fees earned under the contractual agreement.

 

The Company generates revenues under turnkey management contracts with virtual and blended public schools which include multiple elements. These elements include:

 

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

·                  offline learning kits, which include books and materials to supplement the online lessons, where required;

·                  the use of a personal computer and associated reclamation services, where required;

·                  internet access and technology support services;

·                  instruction by a state-certified teacher, where required; and

·                  management and technology services necessary to operate a virtual public or blended school. In certain managed school contracts, revenue is determined directly by per enrollment funding.

 

The Company has determined that the elements of its contracts are valuable to schools in combination, but do not have standalone value. As a result, the elements within the Company’s multiple-element contracts do not qualify as separate units of accounting. Accordingly, the Company accounts for revenues under multiple element arrangements as a single unit of accounting and recognizes the entire arrangement based upon the approximate rate at which it incurs the costs associated with each element. Revenue from certain managed schools is 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 reported three and nine months ended March 31, 2016 and 2015.

 

9



Table of Contents

 

Under the contracts where the Company provides turnkey management services to schools, the Company has generally agreed to absorb any operating losses of the schools in a given school year. These school operating losses represent the excess of costs incurred over revenues earned by the virtual or blended public school as reflected on its respective financial statements, including Company charges to the schools. To the extent a school does not receive funding 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 revenue 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 revenue service contracts, 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 revenue, net of its estimated portion of school operating losses, to reflect the expected cash collections from such schools. Revenue is 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 expense 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. The estimates the Company makes each period on a school-by-school basis takes into account the latest information available to it and considers material relevant information at the time of the estimate.

 

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 three months ended March 31, 2016 and 2015, the Company’s revenue included a reduction for these school operating losses of $13.2 million and $12.5 million, respectively, and were $39.7 million and $45.2 million for the nine months ended March 31, 2016 and 2015.

 

The Company provides certain online curriculum and services to schools and school districts under subscription and perpetual license agreements. Revenue under these agreements is recognized in accordance with the ASC 605 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. Revenue from the licensing of curriculum under subscription arrangements is recognized on a ratable basis over the subscription period. Revenue from the licensing of curriculum under non-cancelable perpetual arrangements is recognized when all revenue recognition criteria have been met. Revenue from professional consulting, training and support services are deferred and recognized ratably over the service period.

 

10



Table of Contents

 

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.

 

During the three and nine months ended March 31, 2016, the Company had a contract with one school that represented approximately 10% of revenue.  During the three and nine months ended March 31, 2015, the Company had a contract with a different school that represented approximately 14% and 13% of revenue, respectively.  Approximately 4% and 10% of accounts receivable was attributable to the respective customer at March 31, 2016 and June 30, 2015.

 

In fiscal year 2015, the Agora Cyber Charter School (“Agora”) renegotiated its service agreement and entered into a three-year contract with the Company to purchase the Company’s curriculum and certain technology services and the school board assumed daily operational responsibilities, including its charter renewal process and marketing and enrollment activities. The net impact of this contract change on revenues for the three and nine months ended March 31, 2016 resulted in an approximate decrease of $30.0 million and $80.7 million, respectively, as compared to the prior year.

 

Reclassifications

 

The Company has reclassified certain prior year income tax accounts on the unaudited condensed consolidated statements of cash flows to conform to the current year presentation. There was no effect on related income tax assets or liabilities, or the income statement from such reclassification. The reclassification had no effect on net cash flows.

 

Consolidation

 

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

 

Inventories

 

Inventories consist primarily of textbooks and curriculum materials, a majority of which are supplied to virtual public schools and blended public schools and utilized directly by students. Inventories represent items that are purchased and held for sale, and are recorded at the lower of cost (first-in, first-out method) or market value. Excess and obsolete inventory reserves are established based upon the evaluation of the quantity on hand relative to demand. The excess and obsolete inventory reserves were $2.5 million and $2.2 million at March 31, 2016 and June 30, 2015, respectively.

 

Other Current Assets

 

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

 

Property and Equipment

 

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation expense is calculated using the straight-line method over the estimated useful life of the asset (or the lesser of the term of the lease and the estimated useful life of the asset under capital lease). Amortization of assets capitalized under capital lease arrangements is included in depreciation expense. Leasehold improvements are amortized over the lesser of the lease term or the estimated useful life of the asset. The Company determines the lease term in accordance with ASC 840, Leases, 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. Depreciation expense for the three months ended March 31, 2016 and 2015 was $4.7 million and $6.9 million, respectively, and $14.8 million and $21.6 million for the nine months ended March 31, 2016 and 2015, respectively. Additionally, beginning in fiscal 2016, the Company no longer recovers peripheral equipment as it was determined to be uneconomical. Accordingly, the Company fully expenses peripherals upon shipment and the impact was immaterial.

 

11



Table of Contents

 

Property and equipment are depreciated over the following useful lives:

 

 

 

Useful Life

 

Student computers

 

3 years

 

Computer hardware

 

3 years

 

Computer software

 

3-5 years

 

Web site development costs

 

3 years

 

Office equipment

 

5 years

 

Furniture and fixtures

 

7 years

 

Leasehold improvements

 

3-12 years

 

 

The Company updates its estimate of unreturned computers based on an analysis of recent trends of returns and utilization rates. During the three and nine months ended March 31, 2016, the Company wrote off $0.6 million and $2.1 million, respectively, related to the estimate which was recorded in depreciation expense.  During the three and nine months ended March 31, 2015, the Company wrote off $1.2 million and $3.9 million, respectively, related to the estimate which was recorded in depreciation expense.

 

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. The Company amortizes these costs over the estimated useful life of the software, which is generally three years. Capitalized software development costs are stated at cost less accumulated amortization.

 

Capitalized software development additions totaled $26.3 million and $25.4 million for the nine months ended March 31, 2016 and 2015, respectively. Amortization expense for the three months ended March 31, 2016 and 2015 was $8.0 million and $5.6 million, respectively, and $21.3 million and $15.8 million for the nine months ended March 31, 2016 and 2015, respectively.

 

Capitalized Curriculum Development Costs

 

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

 

The Company capitalizes curriculum development costs incurred during the application development stage in accordance with ASC 350. The Company capitalizes curriculum development costs during the design and deployment phases of the project. Many of the Company’s new courses leverage off of proven delivery platforms and are primarily content, which has no technological hurdles. As a result, a significant portion of the Company’s courseware development costs qualify for capitalization due to the concentration of its development efforts on the content of the courseware. Capitalization ends when a course is available for general release to its customers, at which time amortization of the capitalized costs begins. The period of time over which these development costs will be amortized is generally five years.

 

Total capitalized curriculum development additions were $12.2 million for the nine months ended March 31, 2016 and 2015. These amounts are recorded on the accompanying condensed consolidated balance sheets net of amortization charges. Amortization is recorded in product development expenses on the accompanying condensed consolidated statements of operations. Amortization expense for the three months ended March 31, 2016 and 2015 was $4.3 million and $4.5 million, respectively, and $12.6 million and $13.0 million for the nine months ended March 31, 2016 and 2015, respectively.

 

12



Table of Contents

 

Income Taxes

 

The Company accounts for income taxes in accordance with ASC 740, Income Taxes. 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.

 

Redeemable Noncontrolling Interests

 

Earnings or losses attributable to other stockholders of a consolidated affiliated company are classified separately as “noncontrolling interest” in the Company’s condensed 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. However, if the redemption amount is other than fair value (e.g. fixed or variable), the redeemable noncontrolling interest is accounted for at the fixed or variable redeemable value. The redeemable noncontrolling interests are adjusted to their redeemable value at each balance sheet date. The resulting increases or decreases in the estimated redemption amount are affected by corresponding charges against retained earnings, or in the absence of retained earnings, additional paid-in-capital.

 

Goodwill and Intangible Assets

 

The Company records as goodwill the excess of purchase price over the fair value of the identifiable net assets acquired. Finite-lived intangible assets acquired in business combinations subject to amortization are recorded at their fair value. Finite-lived intangible assets include trade names, acquired customers and non-compete agreements. Such intangible assets are amortized on a straight-line basis over their estimated useful lives. Amortization expense for the three and nine months ended March 31, 2016 and 2015 was $0.6 million, and $1.9 million, respectively. Future amortization of intangible assets is $0.6 million, $1.9 million, $1.9 million, $1.9 million and $1.9 million in the fiscal years ending June 30, 2016 through June 30, 2020, respectively, and $10.7 million thereafter. At both March 31, 2016 and June 30, 2015, the goodwill balance was $66.2 million.

 

At March 31, 2016, the Company’s stock market capitalization was below its net book value. However the Company continues to operate profitably and generate cash flow from operations, which is anticipated to continue in 2016 and beyond. At March 31, 2016, given the totality of circumstances, we determined that the decline in market value did not precipitate a triggering event. We will continue to monitor the market capitalization and assess the potential of a triggering event to the extent the decline is not other than temporary.

 

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. ASC 350 also allows the Company 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”. 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. The Company has elected to perform its annual assessment on May 31st. The Step 0 analysis focuses on a number of events and circumstances that may be considered when making this qualitative assessment.

 

On July 31, 2014, the Company acquired a 51% majority interest in LearnBop Inc. (“LearnBop”), for $6.5 million in cash (see Note 11). The purchase price allocation for the acquisition was finalized in fiscal year 2015.

 

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.

 

13



Table of Contents

 

The following table represents the balance of intangible assets as of March 31, 2016 and June 30, 2015:

 

Intangible Assets:

 

 

 

March 31, 2016

 

June 30, 2015

 

($ in millions)

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Value

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Value

 

Trade names

 

$

17.5

 

$

(6.5

)

$

11.0

 

$

17.5

 

$

(5.7

)

$

11.8

 

Customer and distributor relationships

 

18.2

 

(10.2

)

8.0

 

18.2

 

(9.1

)

9.1

 

Developed technology

 

1.2

 

(1.2

)

 

1.2

 

(1.2

)

 

Other

 

0.5

 

(0.2

)

0.3

 

0.5

 

(0.2

)

0.3

 

 

 

$

37.4

 

$

(18.1

)

$

19.3

 

$

37.4

 

$

(16.2

)

$

21.2

 

 

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, 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 three and nine months ended March 31, 2016 and 2015.

 

Fair Value Measurements

 

ASC 820, Fair Value Measurements and Disclosures, 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 instruments valuation.

 

The carrying values reflected in the accompanying condensed consolidated balance sheets for cash and cash equivalents, receivables and short and long term debt approximate their fair values.

 

The redeemable noncontrolling interest includes the Company’s joint venture with Middlebury College to form Middlebury Interactive Languages (“MIL”). Under the agreement, Middlebury College has an irrevocable election to sell all of its membership interest to the Company (put right). The fair value of the redeemable noncontrolling interest reflects management’s best estimate of the redemption value of the put right.  As discussed below, Middlebury College exercised its put right on May 4, 2015.

 

14



Table of Contents

 

The following table summarizes certain fair value information at March 31, 2016 and June 30, 2015 for assets and liabilities measured at fair value on a recurring basis:

 

 

 

Fair Value Measurements Using:

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

in Active

 

Significant

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

 

 

 

 

Assets

 

Input

 

Inputs

 

Description

 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

(In thousands)

 

Redeemable Noncontrolling Interest in Middlebury Joint Venture

 

$

6,801

 

$

 

$

 

$

6,801

 

Total

 

$

6,801

 

$

 

$

 

$

6,801

 

 

The following table summarizes the activity during the nine months ended March 31, 2016 for assets and liabilities measured at fair value on a recurring basis:

 

 

 

Nine Months Ended March 31, 2016

 

 

 

 

 

Purchases,

 

 

 

Fair Value

 

 

 

Fair Value

 

Issuances,

 

Unrealized

 

March 31,

 

Description

 

June 30, 2015

 

and Settlements

 

Gains/(Losses)

 

2016

 

 

 

(In thousands)

 

Redeemable Noncontrolling Interest in Middlebury Joint Venture

 

$

6,801

 

$

 

$

 

$

6,801

 

Total

 

$

6,801

 

$

 

$

 

$

6,801

 

 

The fair value of the redeemable noncontrolling interest in the Middlebury Joint Venture was accounted for in accordance with ASC 480-10-S99, Accounting for Redeemable Equity Instruments. The redeemable noncontrolling interests are redeemable outside of the Company’s control and are recorded outside of permanent equity. The fair value of the Middlebury Joint Venture was based upon a valuation from a third-party valuation firm as of June 30, 2015. In determining the fair value, the valuation incorporated a number of assumptions and estimates including an income-based valuation approach. As of June 30, 2015, the fair value of the redeemable noncontrolling interest in the Middlebury Joint Venture was estimated at $6.8 million. As of March 31, 2016, the Company performed an internal analysis and determined there was no underlying change in the estimated fair value of the redeemable noncontrolling interest in the Middlebury Joint Venture.

 

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 at a mutually agreed upon fair market value or for a value to be determined by an independent valuation. At March 31, 2016, the Company was still in discussions with Middlebury to settle the terms under the put option. There has been no change in the fair value of the noncontrolling interest since June 30, 2015. The Company has the right to pay the redemption cost in cash, stock or a combination thereof, at the Company’s option, which form of consideration has not yet been determined.

 

Net Income Per Common Share

 

The Company calculates net income per share in accordance with ASC 260, Earnings Per Share. Under ASC 260, basic net income per common share is calculated by dividing net income 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 per share (“EPS”) reflect the potential dilution that could occur assuming conversion or exercise of all dilutive unexercised stock options. The dilutive effect of stock options and restricted stock awards was determined using the treasury stock method. Under the treasury stock method, the proceeds received from the exercise of stock options and restricted stock awards, the amount of compensation cost for future service not yet recognized by the Company and the amount of tax benefits that would be recorded in additional paid-in capital when the stock options become deductible for income tax purposes are all assumed to be used to repurchase shares of the Company’s common stock. Stock options and restricted stock awards are not included in the computation of diluted net income per share when they are antidilutive. Common stock outstanding reflected in the Company’s condensed consolidated balance sheets include restricted stock awards outstanding. Securities that may participate in undistributed net income with common stock are considered participating securities.

 

15



Table of Contents

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(In thousands except shares and

 

(In thousands except shares and

 

 

 

per share data)

 

per share data)

 

Basic and dilutive income per share:

 

 

 

 

 

 

 

 

 

Net income attributable to common stockholders

 

$

14,273

 

$

17,013

 

$

10,018

 

$

22,568

 

Weighted average common shares — basic

 

37,692,826

 

37,211,634

 

37,562,106

 

37,334,598

 

Weighted average common shares — diluted

 

38,999,871

 

37,408,911

 

38,559,204

 

37,574,665

 

Basic and Diluted net income per share

 

$

0.38

 

$

0.46

 

$

0.27

 

$

0.60

 

Diluted net income per share

 

$

0.37

 

$

0.45

 

$

0.26

 

$

0.60

 

 

For the three months ended March 31, 2016 and 2015, the dilutive shares totaled 1,307,045 and 197,277, respectively.  For the nine months ended March 31, 2016 and the 2015, the dilutive shares totaled 997,098 and 240,067, respectively.  At March 31, 2016, the Company excluded 4,123,699 equity awards convertible to shares because they were antidilutive. At March 31, 2016, the Company had 42,593,095 shares issued and 38,090,497 shares outstanding.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which supersedes most existing revenue recognition guidance under US 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 U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). On July 9, 2015, the FASB voted to defer the effective date of the new revenue recognition standard by one year. Based on the Board’s decision, public organizations would apply the new revenue standard to annual reporting periods beginning after December 15, 2017. The Company is currently evaluating the impact of the pending adoption of ASU 2014-09 on its consolidated financial statements and has not yet determined the method by which the Company will adopt the standard.

 

In April 2015, the FASB issued ASU 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. ASU 2015-05 provides guidance regarding whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the entity should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the entity should account for the arrangement as a service contract. ASU 2015-05 does not change the accounting for service contracts. ASU 2015-05 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The Company is currently evaluating this guidance, as well as the effect on our consolidated financial statements.

 

16



Table of Contents

 

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which requires all deferred tax assets and liabilities to be classified as noncurrent on the balance sheet. The guidance in ASU 2015-17 is effective for the fiscal year, and interim periods within that fiscal year, beginning after December 15, 2016, with early adoption permitted.  ASU 2015-17 is not expected to have a material effect on the Company’s consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months.  Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.  The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available.  The Company is currently evaluating this guidance, as well as the effect on our consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718). 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, the classification of those excess tax benefits on the statement of cash flows, an accounting policy election for forfeitures, the amount an employer can withhold to cover income taxes and still qualify for equity classification and the classification of those taxes paid on the statement of cash flows. This update is effective for annual and interim periods beginning after December 15, 2016, which will require us to adopt these provisions in the first quarter of fiscal 2018. This guidance will be applied either prospectively, retrospectively or using a modified retrospective transition method, depending on the area covered in this update. Early adoption is permitted. We have not yet selected a transition date nor have we determined the effect of the standard on our ongoing financial reporting.

 

4.  Income Taxes

 

Income tax expense is based on income reported in the condensed 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 period. For the three months ended March 31, 2016 and 2015, the Company’s effective income tax rate was 28.2% and 39.0%, respectively. For the nine months ended March 31, 2016 and 2015, the Company’s effective income tax rate was 30.6% and 36.7%, respectively. The effective income tax rate differs from the statutory federal income tax rate primarily due to the effects of foreign operations, state taxes, tax credits, non-controlling interests, and current year permanent differences between book and tax treatment.

 

5.  Long-term Obligations

 

Capital Leases

 

The Company incurs capital lease obligations for student computers under a separate lease line of credit with PNC Equipment Finance, LLC with annual borrowing limits. The Company had annual borrowing availability under the lease line of credit of $35.0 million as of March 31, 2016 and June 30, 2015, respectively. As of March 31, 2016 and June 30, 2015, the outstanding balance under the lease line of credit was $23.1 million and $29.7 million, respectively, with lease interest rates ranging from 2.49% to 2.88%. Individual leases under the lease line of credit include 36-month payment terms with a $1 purchase option at the end of each lease term. The Company has pledged the assets financed to secure the outstanding leases. The gross carrying value of leased student computers as of March 31, 2016 and June 30, 2015 was $38.3 million and $43.6 million, respectively.  The net carrying value of leased student computers as of March 31, 2016 and June 30, 2015 was $10.6 million and $12.9 million, respectively.

 

17



Table of Contents

 

The Company incurs capital lease obligations for student computers under a lease line of credit with PNC Equipment Finance, LLC with annual lease availability limits. The Company had $35.0 million of availability for new leasing during the second quarter of fiscal year 2016. Interest rates in July 2015 on the new borrowings were based upon an initial rate of 2.34% modified by changes in the three year interest rate swaps rate as published in the Federal Reserve Statistical Release H.15, “Selected Interest Rates,” between June 25, 2014 and the Lease Commencement Date, as defined in the lease line of credit. This availability originally expired in July 2015, but was extended to July 2016. Interest rates on the new borrowings beginning in August 2015 under the extended agreement are based upon an initial rate of 1.88% modified by changes in the three year interest rate swaps rate as published in the Federal Reserve Statistical Release H.15, “Selected Interest Rates,” between April 29, 2015 and the Lease Commencement Date, as defined in the lease line of credit.

 

The following is a summary as of March 31, 2016 of the present value of the net minimum payments due on outstanding capital leases under the Company’s commitments:

 

 

 

Capital

 

June 30,

 

Leases

 

 

 

($ in thousands)

 

 

 

 

 

2016

 

$

4,191

 

2017

 

12,092

 

2018

 

5,873

 

2019

 

1,472

 

Total minimum payments

 

23,628

 

Less amount representing interest (imputed weighted average capital lease interest rate of 2.61%)

 

(515

)

 

 

 

 

Net minimum payments

 

23,113

 

Less current portion

 

(13,453

)

 

 

 

 

Present value of minimum payments, less current portion

 

$

9,660

 

 

6.  Line of Credit

 

On January 31, 2014, the Company executed a $100.0 million unsecured line of credit to be used for general corporate operating purposes with Bank of America, N.A. (“BOA”). The line has a five-year term, bears interest at the higher of the Bank’s prime rate plus 0.25%, or the Federal Funds Rates plus 0.75%, or the LIBOR rate 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 March 31, 2016 and June 30, 2015, the Company was in compliance with these covenants. During the nine months ended March 31, 2016, there was no borrowing activity on this line of credit, and the Company had no borrowings outstanding on the line of credit as of March 31, 2016.

 

The BOA credit agreement contains a number of financial and other covenants that, among other things; restrict the Company and its subsidiaries’ ability to incur additional indebtedness, grant liens or other security interests, make certain investments, make specified restricted payments including dividends, dispose of assets or stock including the stock of its subsidiaries, make capital expenditures above specified limits and engage in other matters customarily restricted in senior credit facilities.

 

7.  Equity Transactions

 

Our 2007 Equity Incentive Award Plan (the “Plan”) was designed to attract, retain and motivate key employees. Awards granted under the Plan may be settled in shares of the Company’s common stock or cash, in the case of performance share units (“PSUs”). At the beginning of each year, the Plan provides that the number of shares available for issuance automatically increases subject to the Board of Directors approval. During the nine months ended March 31, 2016, the Company’s Board of Directors authorized 1,533,412 additional shares for issuance pursuant to the 2007 Plan’s evergreen provision. Through March 31, 2016, the remaining aggregate number of shares of the Company’s common stock authorized for future issuance under the Plan was 2,864,567. Through March 31, 2016, there were 5,721,230 shares of the Company’s common stock that were issuable and remain outstanding as a result of equity awards granted under the Plan.

 

18



Table of Contents

 

Stock Options

 

Stock option activity during the nine months ended March 31, 2016 was as follows:

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Weighted-

 

Average

 

Aggregate

 

 

 

 

 

Average

 

Remaining

 

Intrinsic

 

 

 

 

 

Exercise

 

Contractual

 

Value

 

 

 

Shares

 

Price

 

Life (Years)

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Outstanding, June 30, 2015

 

2,914,593

 

$

20.33

 

4.05

 

$

88

 

Granted

 

243,112

 

13.43

 

 

 

 

 

Exercised

 

(1,000

)

13.66

 

 

 

 

 

Forfeited or canceled

 

(749,967

)

18.70

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding, March 31, 2016

 

2,406,738

 

$

20.12

 

4.29

 

$

 

 

 

 

 

 

 

 

 

 

 

Stock options exercisable at March 31, 2016

 

1,638,800

 

$

21.76

 

3.13

 

$

 

 

The aggregate intrinsic value of options exercised during the nine months ended March 31, 2016 and 2015 was zero and $0.5 million, respectively. The weighted-average grant date fair value of options granted during the nine months ended March 31, 2016 and 2015 was $6.18 and $7.20, respectively.

 

As of March 31, 2016, there was $4.8 million of total unrecognized compensation expense related to unvested stock options granted. The cost is expected to be recognized over a weighted average period of 2.8 years. During the three months ended March 31, 2016 and 2015, the Company recognized $1.0 million of stock-based compensation expense related to stock options. During the nine months ended March 31, 2016 and 2015, the Company recognized $3.0 million and $3.1 million, respectively, of stock-based compensation expense related to stock options.

 

Restricted Stock Awards

 

Restricted stock award activity during the nine months ended March 31, 2016 was as follows:

 

 

 

 

 

Weighted Average

 

 

 

 

 

Grant Date

 

 

 

Shares

 

Fair Value

 

 

 

 

 

 

 

Nonvested, June 30, 2015

 

1,245,504

 

$

22.30

 

Granted

 

1,072,484

 

10.09

 

Vested

 

(637,087

)

22.89

 

Forfeited or canceled

 

(83,370

)

20.97

 

 

 

 

 

 

 

Nonvested, March 31, 2016

 

1,597,531

 

$

12.69

 

 

During the nine months ended March 31, 2016, 111,690 new performance-based restricted stock awards were granted and 231,332 were nonvested at March 31, 2016. During the nine months ended March 31, 2016, 131,104 performance-based awards vested. Vesting of the performance-based restricted stock awards is contingent on the achievement of certain financial performance goals and service vesting conditions. The remaining 960,794 awards granted during the nine months ended March 31, 2016 were straight service-based awards.  The remaining 1,366,199 nonvested awards as of March 31, 2016 were straight service-based awards.  During the nine months ended March 31, 2016, 505,983 of these service-based awards vested.

 

As of March 31, 2016, there was $18.4 million of total unrecognized compensation expense related to unvested restricted stock awards granted. The cost is expected to be recognized over a weighted average period of 2.0 years. The total fair value of shares vested during the nine months ended March 31, 2016 and 2015 was $7.4 million and $7.0 million, respectively. During the three months ended March 31, 2016 and 2015, the Company recognized $2.9 million and $3.4 million, respectively, of stock-based compensation expense related to restricted stock awards. During the nine months ended March 31, 2016 and 2015, the Company recognized $10.5 million and $10.3 million, respectively, of stock-based compensation expense related to restricted stock awards.

 

19



Table of Contents

 

Performance Share Units

 

During the nine months ended March 31, 2016, the Company granted a total of 1,154,602 PSUs to certain senior executives, having a weighted average grant date fair value of $12.92 per share. The PSUs were granted pursuant to the terms of the Plan and vest upon achievement of certain performance criteria associated with a Board-approved Long Term Incentive Plan (“LTIP”) and continuation of employee service over a two to three-year period. The level of performance will determine the number of PSUs earned as measured against threshold, target and stretch achievement levels of the LTIP. Each PSU represents the right to receive one share of the Company’s common stock, or at the option of the Company, an equivalent amount of cash, and are classified as an equity award in accordance with Accounting Standards Codification 718 — Stock Compensation. If actual performance exceeds the target criteria for a full award, then additional PSU’s up to 562,301 could be earned by the participants.

 

In addition to the LTIP performance conditions, there is a service vesting condition which stipulates that thirty percent of the earned award will vest quarterly beginning November 15, 2017 and seventy percent of the earned award 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 PSU’s, 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.

 

Performance Share Unit activity during the nine months ended March 31, 2016 was as follows:

 

 

 

 

 

Weighted Average

 

 

 

 

 

Grant Date

 

 

 

Shares

 

Fair Value

 

 

 

 

 

 

 

Nonvested, June 30, 2015

 

 

 

 

Granted

 

1,154,602

 

$

12.92

 

Vested

 

 

 

Forfeited or canceled

 

(30,000

)

13.45

 

 

 

 

 

 

 

Nonvested, March 31, 2016

 

1,124,602

 

$

12.56

 

 

As of March 31, 2016, there was $12.8 million of total unrecognized compensation expense related to unvested performance share units granted.

 

Equity Incentive Market Based Awards

 

During the three and nine months ended March 31, 2016, the Company granted the opportunity to earn 592,359 restricted stock awards, having a weighted average grant date value of $5.30 per share, to our new Chief Executive Officer and Executive Chairman.   During the three and nine months ended March 31, 2016, the Company recognized $0.3 million of stock-based compensation expense related to the awards.  As of March 31, 2016, there was unrecognized compensation expense of $2.8 million, which is expected to be recognized on an accelerated basis over the requisite service period, or an estimated remaining weighted average life of 1.6 years.

 

The awards were granted pursuant to the Plan and 50% of shares granted vest immediately upon achievement of specified average closing prices of the Company’s stock for any period of 30 consecutive days and the remaining 50% vesting ratably in semi-annual intervals until the applicable two or three year anniversary from grant date.  Additionally, vesting is dependent upon continuing service by the grantee as an employee of the Company at each vest date, unless the grantee is eligible for earlier vesting. The fair value was determined using a Monte Carlo simulation model incorporating the following factors: stock price on the grant date of $9.64, risk free rate of return of 0.75 percent, and expected volatility of approximately 50 percent.

 

20



Table of Contents

 

8. Related Party Transactions

 

At March 31, 2016 and June 30, 2015, the Company had loaned a total of $4.0 million to its 60% owned joint venture Middlebury Interactive Languages LLC (“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; however, repayment of the loan is dependent on the continued liquidity of MIL.

 

On September 11, 2013, the Company issued a mortgage note (“Mortgage”) lending $2.1 million to a managed school partner. The note bears interest at a fixed rate of 5.25% per year and has a term of five years. Monthly principal and interest payments began in October 2013 with a final balloon payment of $1.8 million at the term of the loan. The Mortgage is primarily secured by the underlying property. The borrower has defaulted on the loan payment and we are in the foreclosure process. Also see Note 10.

 

For the three and nine months ended March 31, 2016, the Company contributed $0.7 million to The Foundation for Online and Blended Learning (“Foundation”).  The Foundation is a related party as an executive officer of the Company serves on the Board of the Foundation.  No contributions were made during the three and nine months ended March 31, 2015.

 

9.  Commitments and Contingencies

 

Litigation

 

In the ordinary conduct of the Company’s business, the Company is subject to lawsuits, arbitrations and administrative proceedings from time to time. The Company believes that the outcome of any existing or known threatened proceedings, even if determined adversely, should not have a material adverse effect on the Company’s business, financial condition, liquidity or results of operations. The Company expenses legal costs as incurred.

 

On September 24, 2015, the Company, in connection with an industry-wide investigation styled “In the Matter of the Investigation of For-Profit Virtual Schools,” 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. The Company is cooperating with the investigation and responding to the subpoena. At this stage, the Company is not aware of any material adverse effect this industry-wide investigation would have on the results of its operations and financial condition.

 

Consulting Agreement

 

On August 3, 2015, Mr. Timothy L. Murray, then President and Chief Operating Officer of the Company, notified us of his intent to resign, which became effective on September 15, 2015. The Company and Mr. Murray entered into a Consulting Agreement, effective September 16, 2015, whereby Mr. Murray provided transition and other consulting services for a term of up to six months and payment of $43,985 per month for services rendered.  The Consulting Agreement terminated on December 31, 2015.

 

Employment Agreements

 

The Company has entered into employment agreements with certain executive officers that provide for severance payments and, in some cases other benefits, upon certain terminations of employment. Except for the agreements with the Company’s CEO that has a three year term, all other agreements provide for employment on an “at-will” basis. If the employee is terminated for “good reason” or without cause, the employee is entitled to salary continuation, and in some cases benefit continuation, for varying periods depending on the agreement.

 

21



Table of Contents

 

Off-Balance Sheet Arrangements

 

The Company provided guarantees of approximately $7.6 million related to lease commitments on the buildings for certain of the Company’s Flex schools. 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.

 

10.  Investments

 

Investment in Web International Education Group, Ltd.

 

In January 2011, the Company invested $10.0 million to obtain a 20% minority interest in Web International Group, Ltd. (“Web”), a provider of English language learning centers in cities throughout China. From January 2011 through May 2013, the Company recorded its investment in Web as an available for sale debt security because of the ability to put the investment to other Web shareholders in return for the original $10.0 million investment plus interest. The Company’s option to purchase no less than 51% of Web expired on March 31, 2013 and on May 6, 2013, the Company exercised its right to put its investment back to Web for return of its original $10.0 million investment plus interest of 8%, which Web was contractually required to pay by May 31, 2014, as amended. The Company reclassified this $10.0 million investment, recording it in other current assets.

 

The receivable is due and the Company accrued interest up through December 31, 2014. However, given the difficulties in expatriating money from China, and the resulting administrative hurdles related to collecting this receivable, starting January 1, 2015, the Company discontinued the accrual of interest. Furthermore, during the fourth quarter of 2015, and upon further negotiation with Web, the Company wrote off the full amount of accrued interest totaling $3.2 million. At March 31, 2016, the Web investment was included in other current assets. The Company and Web continue to mutually work toward a mechanism for collection of the principal.

 

During the three months ended March 31, 2016 and 2015, the Company recorded interest income of zero, associated with Web. During the nine months ended March 31, 2016 and 2015, the Company recorded interest income of zero and $0.4 million, respectively, associated with Web.

 

Investment in School Mortgage

 

On September 11, 2013, the Company issued a mortgage note (“Mortgage”) lending $2.1 million to the Maurice J. Moyer Academic Institute (“Moyer”). The note bears interest at a fixed rate of 5.25% per year and has a term of five years. Monthly principal and interest payments were scheduled to be made beginning October 2013 with a final balloon payment of $1.8 million at the term of the loan. The Mortgage is primarily secured by the underlying property.

 

The Mortgage and ancillary documents include customary affirmative and financial covenants for secured transactions of this type. The Company has recorded this as a held to maturity investment and the current amounts are included in other current assets while the non-current amounts are included in deposits and other assets on the consolidated balance sheets.

 

During June 2015, the Company engaged a third party valuation firm to conduct an appraisal of the property to assess market value at June 30, 2015. The appraisal concluded a market value in excess of the note carrying value.  As of March 31, 2016, there are no indications that these factors have changed.

 

During the nine months ended March 31, 2016, Moyer defaulted on the loan agreement for non-payment of principal and interest, the school’s closure, and other contractual defaults. The Company continues to exercise its rights under the existing arrangement, including pursuing foreclosure and receivership. During the nine months ended March 31, 2016, Moyer filed a claim against the Company asserting breach of contract and alleging that the breach caused it to default on the loan agreement. The Company believes that the breach of contract claim to offset the foreclosure is without merit.

 

22



Table of Contents

 

11.  Redeemable Noncontrolling Interest

 

Investment in LearnBop Inc.

 

On July 31, 2014, the Company acquired a majority interest in LearnBop Inc. (“LearnBop”), for $6.5 million in cash in return for a 51% interest in LearnBop. The purpose of the acquisition was to complement the Company’s K-12 math curriculum as LearnBop has developed an adaptive math curriculum learning software. As part of this transaction, the non-controlling shareholders have a non-transferable put option, which is exercisable between July 31, 2018 and December 31, 2018 for the remaining minority interest. The price of the put option will be determined based on the trailing twelve month revenue and contribution margin as defined in the Stockholders’ Agreement between the Company and LearnBop. Additionally, the Company has a non-transferable call option for the remaining minority interest at a price of $3.0 million, which becomes exercisable January 1, 2019 or thereafter. Acquisition costs incurred by the Company related to this transaction included selling, administrative and other operating expenses were $0.1 million.

 

The purchase price of $6.5 million was allocated to the underlying assets and liabilities based on their estimated fair value at the date of acquisition. The Company recorded goodwill of $8.1 million, which will be non-deductible for tax purposes. Recognition of goodwill is largely attributed to the value paid for LearnBop’s capabilities in providing adaptive learning software for math curriculum to K-12 students. The Company has not disclosed current period or pro-forma revenue and earnings attributable to LearnBop as they are immaterial.

 

The Company finalized its allocation of the purchase price of LearnBop as of June 30, 2015. The purchase price was allocated as follows:

 

 

 

Amount

 

As of July 31, 2014

 

 

 

Current assets

 

$

0.1

 

Capitalized Software

 

0.9

 

Goodwill

 

8.1

 

Current liabilities

 

(0.1

)

Redeemable noncontrolling interest

 

(2.5

)

Fair value of total consideration transferred

 

$

6.5

 

 

Given the provision of the put rights, the redeemable noncontrolling interests are redeemable outside of the Company’s control and are recorded outside of permanent equity at their redemption value in accordance with ASC 480-10-S99, Accounting for Redeemable Equity Instruments. The Company will adjust the redeemable noncontrolling interests to redemption value on each balance sheet date with changes in redemption value recognized as an adjustment to retained earnings, or in the absence of retained earnings, by adjustment to additional paid-in-capital.

 

The noncontrolling interest is redeemable at other than fair value as the redemption value is determined based on a specified formula. The noncontrolling interest becomes redeemable after the passage of time, and therefore the Company records the carrying amount of the noncontrolling interest at the greater of 1) the initial carrying amount, increased or decreased for the noncontrolling interest’s share of net income or loss, or 2) the redemption value.

 

According to ASC 480-10-S99, to the extent that the noncontrolling interest holder has the contractual right to receive an amount upon share redemption that is other than fair value of such shares, only the portion of the periodic adjustment to the instrument’s carrying amount that reflects redemption in excess of fair value is treated like a dividend for earnings per share computation purposes. No adjustment to the earnings per share computation was necessary as estimated fair value of the noncontrolling interest is greater than the redemption value. At March 31, 2016, the redeemable noncontrolling interest was valued at approximately $3.0 million.

 

23



Table of Contents

 

Middlebury College Joint Venture

 

In May 2010, the Company entered into an agreement to establish a joint venture with Middlebury College (“Middlebury”) to form Middlebury Interactive Languages LLC (“MIL”). The venture creates and distributes innovative, online language courses under the trademark Middlebury and other marks. The joint venture agreement provided Middlebury with the right at any time after the fifth (5th) anniversary of forming the joint venture, to irrevocably elect to sell all of its membership interest to the Company (put right) at the fair market value of Middlebury’s membership interest. Additionally, Middlebury had an option to repurchase the camp programs at fair market value along with other contractual rights as certain milestones associated with its Language Academy summer camp programs were not met. On May 4, 2015, Middlebury exercised its right to require the Company to purchase all of its ownership interest in the joint venture but it has not exercised its option to repurchase the camps programs.

 

The redeemable noncontrolling interests are redeemable outside of the Company’s control. Because of this the Company records the redemption fair value outside of permanent equity in accordance with ASC 480-10-S99. The Company adjusts the redeemable noncontrolling interests to redemption value on each balance sheet date with changes in redemption values recognized as an adjustment to retained earnings, or in the absence of retained earnings, by adjustment to additional paid-in-capital. At March 31, 2016, the redeemable noncontrolling interest was valued at approximately $6.8 million.

 

At March 31, 2016, the Company was still in discussions with Middlebury to settle the terms under the put option; the outcome of which could result in a value different than the value of the redeemable noncontrolling interest. There has been no change in the fair value of the noncontrolling interest since June 30, 2015. The Company has the right to pay the redemption cost in cash, stock or a combination thereof, at the Company’s option, which form of consideration has not yet been determined.

 

12.  Supplemental Disclosure of Cash Flow Information

 

 

 

Nine Months Ended

 

 

 

March 31,

 

 

 

2016

 

2015

 

 

 

(In thousands)

 

 

 

 

 

 

 

Cash paid for interest

 

$

603

 

$

628

 

 

 

 

 

 

 

Cash paid for taxes

 

$

1,017

 

$

8,291

 

 

 

 

 

 

 

Supplemental disclosure of non-cash financing activities:

 

 

 

 

 

New capital lease obligations

 

$

6,884

 

$

12,098

 

Supplemental disclosure of non-cash investing activities:

 

 

 

 

 

Business Combinations:

 

 

 

 

 

— Current assets

 

$

 

$

27

 

 

 

 

 

 

 

— Property and equipment

 

$

 

$

350

 

 

 

 

 

 

 

— Intangible assets

 

$

 

$

27

 

 

 

 

 

 

 

— Goodwill

 

$

 

$

8,982

 

 

 

 

 

 

 

— Assumed liabilities

 

$

 

$

(50

)

 

 

 

 

 

 

— Deferred revenue

 

$

 

$

(23

)

 

13.  Common Stock Repurchases

 

On November 4, 2013, the Board of Directors authorized the repurchase of up to $75 million of the Company’s outstanding common stock over a two year period. The stock purchases under the buyback were dependent upon business and market conditions and other factors. The stock purchases were made from time to time as authorized and through a variety of permissible methods including open market purchases and in accordance with the SEC’s Rule 10b5-1. The Company completed the purchases under the buyback plan in September 2014, and accordingly there were no purchases during the nine months ended March 31, 2016. There were 1,307,402 shares of common stock at an average price of $20.23 per share purchased during the nine months ended March 31, 2015. As of March 31, 2016 total shares purchased under the plan were 3,502,598, at an average cost of $21.41 per share.

 

24



Table of Contents

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Certain statements in Management’s Discussion and Analysis or MD&A, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. 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 our Annual Report on Form 10-K for the fiscal year ended June 30, 2015, which we refer to as our 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 condensed consolidated financial statements and related notes included in this report, as well as the consolidated financial statements and MD&A of our Annual Report. The following overview provides a summary of the sections included in our MD&A:

 

·                  Executive Summary — a general description of our business and key highlights of the nine months ended March 31, 2016.

 

·                  Critical Accounting Policies and Estimates — a discussion of critical accounting policies requiring critical judgments and estimates.

 

·                  Results of Operations — an analysis of our results of operations in our condensed consolidated financial statements.

 

·                  Liquidity and Capital Resources — an analysis of cash flows, sources and uses of cash, commitments and contingencies, seasonality in the results of our operations and quantitative and qualitative disclosures about market risk.

 

Executive Summary

 

We are a technology-based education company. We offer proprietary curriculum, software systems and educational services designed to facilitate individualized learning for students primarily in kindergarten through 12th grade, or K-12. Our mission is to maximize a child’s potential by providing access to an engaging and effective education, regardless of geographic location or socio-economic background. Since our inception, we have invested to develop and acquire curriculum and online learning platforms that promote mastery of core concepts and skills for students of all abilities. K12 provides a continuum of technology-based educational products and solutions to virtual and blended public schools, school districts, charter schools, private schools and families as we strive to transform the educational experience into one that delivers individualized education on a highly scalable basis. These unique set of products and services are provided primarily to three lines of business: Managed Public School Programs (curriculum and services sold to managed public schools), Institutional (curriculum, technology and services provided to school districts, public schools and other educational institutions that we do not manage), and Private Pay Schools, and Other (private schools for which we charge student tuition and make direct consumer sales).

 

25



Table of Contents

 

Managed Public School Programs accounted for approximately 82% of our revenue in the nine months ended March 31, 2016. With a Managed Public School Program, K12 assumes substantially all of the administrative oversight, technology and academic support services, in addition to the provisioning of curriculum, learning systems and instructional services. These arrangements are negotiated with and approved by the school boards, which are mostly virtual and blended public charter schools. We have Managed Public School Programs in 33 states and the District of Columbia.

 

With our Institutional business, we do not assume primary management responsibilities for the schools. Rather, the Institutional business sells online curriculum programs and technology (full time and part time), courses, teacher instruction, and various support tools and platforms (see description of PEAK below) to schools and school districts.  Our Institutional business consists of both Non-managed Programs and Institutional Software and Services.  Non-managed Programs include schools where K12 provides the curriculum and technology for full-time virtual and blended programs, and the school can also contract for instruction or other educational services. Non-managed Programs do not offer primary administrative oversight. The Institutional Software and Services offerings provide an array of online educational products and services to meet the specific needs of the school or school district and its students. In addition to curriculum, systems and programs, the services we provide to these customers are designed to assist them in launching their own online learning programs tailored to their own requirements and may include teacher training programs, administrator support and our PEAK management system. PEAK (Personalize, Engage and Achieve) is a platform designed to centrally manage multiple online solutions across a school or district through one application.  With our array of services, schools and districts can offer programs that allow students to participate part-time, supplementing their education with core courses, electives, credit recovery options, remediation and supplemental content options.

 

Our International and Private Pay Schools include three accredited online private schools that we operate in which parents can enroll students on a tuition basis for a full-time online education or individual courses to supplement their children’s traditional instruction. These schools are: (1) K12 International Academy, an online private school that enables us to offer students worldwide the same full-time education programs and curriculum that we provide to the virtual and blended public schools, (2) The Keystone School, a private school that offers online and correspondence courses, and (3) the George Washington University Online High School, a school that offers college preparatory curriculum and is designed for high school students who are seeking a challenging academic experience.

 

We believe that the acceptance of online education in grades K-12 continues to grow, and anticipate that increased overall demand for virtual options in education will translate into increased demand for our Institutional business (sold under the brand names FuelEducation or FuelEd) over time.  Our Managed Public School Programs business, which serves primarily virtual and blended charter schools, is more mature and the independent governing boards of the virtual charter schools that contract with us are taking different approaches to virtual education depending upon their own charter school goals. This in turn may alter the nature of the agreements and the level of management services that we have with those boards and for new Managed Public School Programs. We continue to work with all independent governing authorities to offer the curriculum, technology and services to meet the needs of fully-managed virtual and blended schools as well as the self-managed virtual and blended schools, offering additional services to the self-managed schools as needed.

 

Overall, for all three lines of business, for the nine months ended March 31, 2016, revenues decreased to $651.4 million from $712.6 million in the same period in the prior year, a decline of 8.6%. Over the same period, operating income decreased to $13.4 million, from income of $34.7 million in the prior year period. Net income to common stockholders decreased to $10.0 million, as compared to income of $22.6 million in the prior year period.

 

26



Table of Contents

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in conformity with Generally Accepted Accounting Principles requires us to make estimates and assumptions about future events that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Future events and their effects cannot be determined with certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and any such differences may be material to our consolidated financial statements. Critical accounting policies are disclosed in our Annual Report. There have been no significant updates to our critical accounting policies disclosed in our Annual Report.

 

Results of Operations

 

We have three lines of business: Managed Public School Programs, Institutional (curriculum, technology, and services provided to school districts, public schools and other educational institutions that we do not manage), and Private Pay Schools and Other (private schools for which we charge student tuition and make direct consumer sales).

 

Managed Public School
Programs

 

Institutional (includes non-managed
schools)

 

International and Private Pay Schools

·                  Virtual public schools

 

·                  K12 curriculum and technology

 

·                  Managed private schools

·                  Blended public schools

 

·                  FuelEd Online Courses

 

—K12 International Academy

—Hybrid schools

 

·                  FuelEd Anywhere Learning System

 

—George Washington University Online HS

—Flex schools

 

·                  Middlebury Interactive Languages

 

—The Keystone School

—Passport schools

 

·                  Pre-kindergarten

 

·                  Independent course sales (Consumer)

 

Enrollment Data

 

The following table sets forth total enrollment data for students in our Managed Public School Programs and our Non-managed Programs.

 

 

 

Three Months
Ended March 31,

 

Change
2016 / 2015

 

Nine Months Ended
March 31,

 

Change
2016 / 2015

 

 

 

2016

 

2015

 

$

 

%

 

2016

 

2015

 

$

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Public School Programs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Managed Programs (1, 2)

 

104,640

 

115,330

 

(10,690

)

-9.3

%

104,229

 

116,198

 

(11,969

)

-10.3

%

Non-managed Programs (1)

 

26,816

 

20,165

 

6,651

 

33.0

%

27,326

 

20,341

 

6,985

 

34.3

%

 


(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.

 

27



Table of Contents

 

Revenue by Business Lines

 

Revenue is captured by business line based on the underlying customer contractual agreements. The following represents our revenue for these lines of business for the three and nine months ended March 31, 2016 and 2015.

 

 

 

Three Months Ended

 

Change

 

Nine Months Ended

 

Change

 

 

 

March 31,

 

2016 / 2015

 

March 31,

 

2016 / 2015

 

($ in thousands)

 

2016

 

2015

 

$

 

%

 

2016

 

2015

 

$

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Managed Public School Programs

 

$

185,832

 

$

213,230

 

$

(27,398

)

-12.8

%

$

533,633

 

$

612,344

 

$

(78,711

)

-12.9

%

Institutional

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-managed Public School Programs

 

13,145

 

9,324

 

3,821

 

41.0

%

44,441

 

31,009

 

13,432

 

43.3

%

Institutional Software & Services

 

10,645

 

10,954

 

(309

)

-2.8

%

36,134

 

35,670

 

464

 

1.3

%

Total Institutional

 

23,790

 

20,278

 

3,512

 

17.3

%

80,575

 

66,679

 

13,896

 

20.8

%

Private Pay Schools and Other

 

11,718

 

11,115

 

603

 

5.4

%

37,173

 

33,617

 

3,556

 

10.6

%

Total

 

$

221,340

 

$

244,623

 

$

(23,283

)

-9.5

%

$

651,381

 

$

712,640

 

$

(61,259

)

-8.6

%

 

Beginning in fiscal 2016, the Company will present revenue from Non-managed Programs as part of the Institutional line of business, along with the Institutional Software and Services, which together constitute total Institutional revenue.  In the prior year these revenues were presented as part of the Public School Programs line of business, which included both managed and non-managed public school programs. We believe this revised presentation clarifies and better aligns the disclosure of Non-Managed Program revenues with the Company’s operational and sales structure.

 

 

 

Three Months ended March 31,

 

Nine Months ended March 31,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

($ in thousands)

 

($ in thousands)

 

Revenues

 

$

221,340

 

100.0

%

$

244,623

 

100.0

%

$

651,381

 

100.0

%

$

712,640

 

100.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Instructional costs and services

 

134,755

 

60.9

 

148,985

 

60.9

 

403,374

 

61.9

 

440,857

 

61.9

 

Selling, administrative, and other operating expenses

 

64,888

 

29.3

 

64,871

 

26.5

 

225,598

 

34.6

 

226,972

 

31.8

 

Product development expenses

 

2,563

 

1.2

 

3,337

 

1.4

 

9,004

 

1.4

 

10,065

 

1.4

 

Total costs and expenses

 

202,206

 

91.4

 

217,193

 

88.8

 

637,976

 

97.9

 

677,894

 

95.1

 

Income from operations

 

19,134

 

8.6

 

27,430

 

11.2

 

13,405

 

2.1

 

34,746

 

4.9

 

Interest expense, net

 

(101

)

(0.0

)

(315

)

(0.1

)

(596

)

(0.1

)

(134

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income tax expense and noncontrolling interest

 

19,033

 

8.6

 

27,115

 

11.1

 

12,809

 

2.0

 

34,612

 

4.9

 

Income tax expense

 

(5,368

)

(2.4

)

(10,586

)

(4.3

)

(3,924

)

(0.6

)

(12,711

)

(1.8

)

Net income

 

13,665

 

6.2

 

16,529

 

6.8

 

8,885

 

1.4

 

21,901

 

3.1

 

Adjust net loss attributable to noncontrolling interest

 

608

 

0.2

 

484

 

0.2

 

1,133

 

0.1

 

667

 

0.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to common stockholders

 

$

14,273

 

6.4

%

$

17,013

 

7.0

%

$

10,018

 

1.5

%

$

22,568

 

3.2

%

 

Comparison of the Three Months Ended March 31, 2016 and March 31, 2015

 

Revenues.  Our revenues for the three months ended March 31, 2016 were $221.3 million, representing a decrease of $23.3 million, or 9.5%, from $244.6 million for the same period in the prior year. Managed Public School Programs revenue decreased $27.4 million, or 12.8%, year over year. The decline in Managed Public School Programs revenue was primarily attributable to the 9.3% decline in enrollments, largely resulting from the loss of the management component of the Agora contract, offset in part by increases in the per pupil rate of achieved state funding in certain states. Additionally, other factors impacting the enrollment decline include regulatory and school board decisions to limit enrollments and marketing, and other market conditions. We anticipate the full fiscal year net impact of the Agora program transition to result in an approximate decrease of $110 million of total revenue from the prior year.

 

28



Table of Contents

 

Total Institutional increased $3.5 million, or 17.3%, due primarily to the transition of the Agora contract from a managed to a non-managed program.  Private Pay Schools and Other revenue increased $0.6 million, or 5.4%, over the prior year.

 

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. As we continue to build our Institutional business and the Managed Public School Programs business continues to evolve, enrollment mix is expected to shift and may impact growth in revenues relative to the growth in enrollments.

 

Instructional costs and services expenses.  Instructional costs and services expenses for the three months ended March 31, 2016 were $134.8 million, representing a decrease of $14.2 million, or 9.5%, from $149.0 million for the three months ended March 31, 2015. This decrease in expense was primarily associated with the transition of the Agora contract from managed to non-managed.  Instructional costs and services expenses were 60.9% of revenue during the three months ended March 31 2016, consistent with the 60.9% for the three months ended March 31, 2015.

 

Selling, administrative, and other operating expenses.  Selling, administrative, and other operating expenses for the three months ended March 31, 2016 were $64.9 million, representing no change from $64.9 million for the three months ended March 31, 2015. Selling, administrative, and other operating expenses were 29.3% of revenue during the three months ended March 31, 2016, an increase from 26.5% for the three months ended March 31, 2015.

 

Product development expenses.  Product development expenses for the three months ended March 31, 2016 were $2.6 million, representing a decrease of $0.7 million, or 21.2% from $3.3 million for the three months ended March 31, 2015. As a percentage of revenues, product development expenses represented 1.2% of revenue for the three months ended March 31, 2016, a slight decrease from 1.4% for the three months ended March 31, 2015.

 

Interest expense, net.  Net interest expense for the three months ended March 31, 2016 was $0.1 million as compared to net interest expense of $0.3 million in the same period in the prior year. The decrease in expense was primarily attributable to lower average capital lease balances during the three months ended March 31, 2016 as compared to the same period in the prior year.

 

Income tax expense.  We had income tax expense of $5.4 million for the three months ended March 31, 2016, or 28.2% of income before taxes, as compared to income tax expense of $10.6 million, or 39.0% of income before taxes for the three months ended March 31, 2015. The decrease in the effective tax rate for the three months ended March 31, 2016 is due to a favorable release of certain foreign tax reserves and more favorable return to provision true-up in the current quarter offset by the impact of increased foreign losses and non-controlling interests.

 

Net income.  Net income was $13.7 million for the three months ended March 31, 2016, compared to $16.5 million for the three months ended March 31, 2015, representing a decrease of $2.8 million.

 

Adjust net loss attributable to noncontrolling interest.  The adjustment to net loss attributable to noncontrolling interest for the three months ended March 31, 2016 was $0.6 million as compared to the adjustment to net loss attributable to noncontrolling interest of $0.5 million for the same period in the prior year. Noncontrolling interest reflects the after-tax losses attributable to minority interest owners in our investments, and fluctuate in proportion to the operating results of the investments.

 

29



Table of Contents

 

Comparison of the Nine Months Ended March 31, 2016 and March 31, 2015

 

Revenues.  Our revenues for the nine months ended March 31, 2016 were $651.4 million, representing a decrease of $61.2 million, or 8.6%, from $712.6 million for the same period in the prior year. Managed Public School Programs revenue decreased $78.7 million, or 12.9%, year over year. The decline in Managed Public School Programs revenue was primarily attributable to the 10.3% decline in enrollments, largely resulting from the loss of the management component of the Agora contract, offset in part by increases in the per pupil rate of achieved state funding in certain states. Additionally, other factors impacting the enrollment decline include regulatory and school board decisions to limit enrollments and marketing, and other market conditions. We anticipate the full fiscal year net impact of the Agora program transition to result in an approximate decrease of $110 million of total revenue from the prior year.

 

Total Institutional increased $13.9 million, or 20.8%, due primarily to the transition of the Agora contract from a managed to a non-managed program.  Private Pay Schools and Other revenue increased $3.6 million, or 10.6%, over the prior year primarily due to business development activities.

 

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. As we continue to build our Institutional business and the Managed Public School Programs business continues to evolve, enrollment mix is expected to shift and may impact growth in revenues relative to the growth in enrollments.

 

Instructional costs and services expenses.  Instructional costs and services expenses for the nine months ended March 31, 2016 were $403.4 million, representing a decrease of $37.5 million, or 8.5%, from $440.9 million for the nine months ended March 31, 2015. This decrease in expense was primarily associated with the transition of the Agora contract from managed to non-managed.  Instructional costs and services expenses were 61.9% of revenue during the nine months ended March 31, 2016, consistent with the 61.9% for the nine months ended March 31, 2015.

 

Selling, administrative, and other operating expenses.  Selling, administrative, and other operating expenses for the nine months ended March 31, 2016 were $225.6 million, representing a decrease of $1.4 million, or 0.6% from $227.0 million for the nine months ended March 31, 2015. Selling, administrative, and other operating expenses were 34.6% of revenue during the nine months ended March 31, 2016, an increase from 31.8% for the nine months ended March 31, 2015. This increase was primarily attributable to a write-off of receivables which was included in selling, administrative, and other operating expenses for the nine months ended March 31, 2016.

 

Product development expenses.  Product development expenses for the nine months ended March 31, 2016 were $9.0 million, representing a decrease of $1.1 million, or 10.9% from $10.1 million for the nine months ended March 31, 2015. As a percentage of revenues, product development expenses remained consistent at 1.4% for the nine months ended March 31, 2016, compared to 1.4% for the nine months ended March 31, 2015.

 

Interest expense, net.  Net interest expense for the nine months ended March 31, 2016 was $0.6 million as compared to net interest expense of $0.1 million in the same period in the prior year. The decreased net interest expense in the prior year was primarily associated with approximately $0.6 million in interest income for the nine months ended March 31, 2015, associated primarily with our investment in Web International Education Group, Ltd., offset by interest expense on our student computer capital leases. During the year ended June 30, 2015, we placed our Web investment on non-accrual status and ceased accruing interest income given the delay in efforts to expatriate the cash. During the period ending March 31, 2016, there was $0.5 million of interest expense on our student computer capital leases.

 

Income tax expense.  We recorded income tax expense of $3.9 million for the nine months ended March 31, 2016, or 30.6% of income before taxes, as compared to income tax expense of $12.7 million, or 36.7% of income before taxes for the nine months ended March 31, 2015. The decrease in the effective tax rate for the nine months ended March 31, 2016 is due to a release of certain foreign tax reserves and more favorable return to provision true-up in the current nine months offset by the the impact of increased foreign losses and non-controlling interests.

 

30



Table of Contents

 

Net income.  Net income was $8.9 million for the nine months ended March 31, 2016, compared to net income of $21.9 million for the nine months ended March 31, 2015, representing a decrease of $13.0 million.

 

Adjust net loss attributable to noncontrolling interest.  The adjustment to net loss attributable to noncontrolling interest for the nine months ended March 31, 2016 was $1.1 million as compared to the adjustment to net loss attributable to noncontrolling interest of $0.7 million for the same period in the prior year.  Noncontrolling interest reflects the after-tax losses attributable to minority interest owners in our investments, and fluctuate in proportion to the operating results of the investments.

 

Liquidity and Capital Resources

 

As of March 31, 2016, we had net working capital, or current assets minus current liabilities, of $367.4 million. Our working capital includes cash and cash equivalents of $199.5 million, including $2.4 million associated with our two joint ventures, and accounts receivable of $222.9 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 March 31, 2016.

 

On January 31, 2014, we executed a $100.0 million unsecured line of credit to be used for general corporate operating purposes with Bank of America, N.A. (“BOA”). The line has a five-year term, bears interest at the higher of the Bank’s prime rate plus 0.25%, or the Federal Funds Rates plus 0.75%, or the LIBOR rate 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 March 31, 2016, 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 with annual lease availability limits. We had $35.0 million of availability for new leasing during fiscal year 2016. Interest rates in July 2015 on the new borrowings were based upon an initial rate of 2.34% modified by changes in the three year interest rate swaps rate as published in the Federal Reserve Statistical Release H.15, “Selected Interest Rates,” between June 25, 2014 and the Lease Commencement Date, as defined in the lease line of credit. This availability originally expired in July 2015, but was extended to July 2016. Interest rates on the new borrowings beginning in August 2015 under the extended agreement are based upon an initial rate of 1.88% modified by changes in the three year interest rate swaps rate as published in the Federal Reserve Statistical Release H.15, “Selected Interest Rates,” between April 29, 2015 and the Lease Commencement Date, as defined in the lease line of credit.

 

As of March 31, 2016, the aggregate outstanding balance under the lease lines of credit was $23.1 million. Borrowings bore interest at rates ranging from 2.49% to 2.88% and included a 36-month payment term with a $1 purchase option at the end of the term. We have pledged the assets financed to secure the outstanding leases. We may extend our lease line of credit for additional periods, or consider alternative arrangements for financing student computers.

 

On November 4, 2013, the Board of Directors authorized the repurchase of up to $75 million of our outstanding common stock over a two year period. The purchases under this buyback were dependent upon business and market conditions and other factors. The stock purchases were made from time to time and were made through a variety of methods including open market purchases and in accordance with the SEC’s Rule 10b5-1. The Company completed the purchases under the buyback plan in September 2014, and accordingly there were no purchases during the nine months ended March 31, 2016.

 

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.

 

31



Table of Contents

 

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 at a mutually agreed upon fair market value or for a value to be determined by an independent valuation. At March 31, 2016, the Company was still in discussions with Middlebury to settle the terms under the put option. There has been no change in the fair value of the noncontrolling interest since June 30, 2015. The Company has the right to pay the redemption cost in cash, stock or a combination thereof, at the Company’s option, which form of consideration has not yet been determined.

 

Operating Activities

 

Net cash provided by operating activities for the nine months ended March 31, 2016 was $61.1 million compared to $45.7 million for the nine months ended March 31, 2015. The $15.4 million increase in cash provided by operations between periods was primarily attributable to an overall increase in cash flows from changes in working capital of approximately $30.6 million, offset by a decrease of approximately $15.2 million in net income including non-cash adjustments. These changes in working capital were primarily attributable to improved collections of accounts receivable, offset by decreased deferred revenue balances, among other factors.

 

Investing Activities

 

Net cash used in investing activities for the nine months ended March 31, 2016 was $41.0 million compared to $51.8 million for the nine months ended March 31, 2015, a decrease of $10.8 million. This decrease was due primarily to the $6.5 million investment in LearnBop during fiscal 2015, as well as a $5.2 million decrease from the prior year related to capital expenditures for certain computer related hardware.

 

Financing Activities

 

Net cash used in financing activities for the nine months ended March 31, 2016 was $16.5 million compared to $45.1 million during the nine months ended March 31, 2015. Our primary use of cash in financing activities during the nine months ended March 31, 2016 was in connection with payments of capital lease obligations incurred for the acquisition of student computers. During the nine months ended March 31, 2015, the Company purchased treasury stock totaling approximately $26.5 million, which concluded the buy-back plan. The Company made no such purchases during the nine months ended March 31, 2016.

 

Off Balance Sheet Arrangements, Contractual Obligations and Commitments

 

We have provided guarantees of approximately $7.6 million related to long-term lease commitments on buildings for certain of our flex schools. We contractually guarantee that certain schools under our management will not have cumulative operating losses over the contract period and our management fees from these schools may be reduced accordingly. 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.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

 

Interest Rate Risk

 

At March 31, 2016 and June 30, 2015, we had cash and cash equivalents totaling $199.5 million and $195.9 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 March 31, 2016, a 1% gross increase in interest rates earned on cash would result in a $2.0 million annualized increase in interest income.

 

32



Table of Contents

 

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 during the nine months ended March 31, 2016, fluctuations in interest rates had no impact on our interest expense.

 

Foreign Currency Exchange Risk

 

We currently operate in several foreign countries, but we do not transact a material amount of business in a foreign currency. At March 31, 2016, a 1% change in exchange rates between the U.S. dollar and British pound would result in an approximate impact of less than $0.1 million on our financial statements.  If we enter into any material transactions in a foreign currency or establish or acquire any subsidiaries that measure and record their financial condition and results of operation in a foreign currency, we will be exposed to currency transaction risk and/or currency translation risk. Exchange rates between U.S. dollars and many foreign currencies have fluctuated significantly over the last few years and may continue to do so in the future. Accordingly, we may decide in the future to undertake hedging strategies to minimize the effect of currency fluctuations on our financial condition and results of operations.

 

Item 4.  Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as defined in Rule 13a-15(f) of the Exchange Act) that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the 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 was required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures.

 

We carried out an evaluation, required by paragraph (b) of Rule 13a-15 or Rule 15d-15 under the Exchange Act, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this review, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2016.

 

Changes to Internal Control over Financial Reporting

 

There have been no changes in our internal controls over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

Part II. Other Information

 

Item 1.  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.

 

33



Table of Contents

 

On September 24, 2015, the Company, in connection with an industry-wide investigation styled “In the Matter of the Investigation of For-Profit Virtual Schools,” 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. The Company is cooperating with the investigation and responding to the subpoena. At this stage, the Company is not aware of any material adverse effect this industry-wide investigation would have on the results of its operations and financial condition.

 

Item 1A.  Risk Factors.

 

There have been no material changes to the risk factors disclosed in “Risk Factors” in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended June 30, 2015 as filed with the SEC on August 4, 2015.

 

Item 2.  Issuer Purchases of Equity Securities.

 

On November 4, 2013, the Board of Directors authorized the repurchase of up to $75 million of the Company’s outstanding common stock over a two year period. The stock purchases under the buyback were dependent upon business and market conditions and other factors. The stock purchases were made from time to time and may be made through a variety of methods including open market purchases and in accordance with the SEC’s Rule 10b5-1. There were no shares purchased during the nine months ended March 31, 2016. There were 1,307,402 shares of common stock at an average price of $20.21 per share purchased during the nine months ended March 31, 2015. As of March 31, 2016 total shares purchased under the plan were 3,502,598, at an average cost of $21.41 per share, and there were no shares remaining to be repurchased under the plan.

 

Item 3.  Defaults Upon Senior Securities.

 

None.

 

Item 4.  Mine Safety Disclosures.

 

None.

 

Item 5.  Other Information.

 

On January 7, 2016, Mr. Stuart J. Udell entered into an Employment Agreement effective February 8, 2016, to serve as our Chief Executive Officer. On January 27, 2016, Mr. Nathaniel A. Davis, our current Chairman and Chief Executive Officer, entered into a second amended and restated Employment Agreement effective February 8, 2016 to serve as the Executive Chairman of the Board of Directors.  Additional detail on the material terms and conditions of both employment agreements are included in our Form 8-K filed on January 27, 2016.

 

34



Table of Contents

 

Item 6.  Exhibits

 

(a)         Exhibits.

 

Number

 

Description

31.1

 

Certification of Principal Executive Officer Required Under Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

31.2

 

Certification of Principal Financial Officer Required Under Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

32.1

 

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.

32.2

 

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.

101

 

The following financial statements and footnotes from the K12 Inc. Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets (unaudited), (ii) Condensed Consolidated Statements of Operations (unaudited), (iii) Condensed Consolidated Statement of Comprehensive Income, (iv) Condensed Consolidated Statement of Equity (unaudited), (v) Condensed Consolidated Statements of Cash Flows (unaudited), and (vi) Notes to Condensed Consolidated Financial Statements (unaudited).

 

35



Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

K12 Inc.

 

 

 

 

 

 

 

/s/ JAMES J. RHYU

 

Name:

 

James J. Rhyu

 

Title:

 

Chief Financial Officer, Principal Accounting Officer and Authorized Signatory

 

 

Date: April 27, 2016

 

36


EX-31.1 2 a16-6328_1ex31d1.htm EX-31.1

Exhibit 31.1

 

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

 

I, Stuart J. Udell, certify that:

 

(1)                                 I have reviewed this Quarterly Report on Form 10-Q of K12 Inc.;

 

(2)                                 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;

 

(3)                                 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;

 

(4)                                 The registrant’s other certifying officers 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.                            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;

 

b.                            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;

 

c.                             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

 

d.                            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.                            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

 

b.                            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.

 

Date: April 27, 2016

 

 

/s/ STUART J. UDELL

 

Stuart J. Udell

 

Chief Executive Officer

 

 


EX-31.2 3 a16-6328_1ex31d2.htm EX-31.2

Exhibit 31.2

 

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

 

I, James J. Rhyu, certify that:

 

(1)                                 I have reviewed this Quarterly Report on Form 10-Q of K12 Inc.;

 

(2)                                 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;

 

(3)                                 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;

 

(4)                                 The registrant’s other certifying officers 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.                            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;

 

b.                            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;

 

c.                             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

 

d.                            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.                            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

 

b.                            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.

 

Date: April 27, 2016

 

 

/s/ JAMES J. RHYU

 

James J. Rhyu

 

Chief Financial Officer

 

 


EX-32.1 4 a16-6328_1ex32d1.htm EX-32.1

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 they 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.

 

Certification of Principal Executive Officer

 

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 his knowledge, that:

 

(1)         the accompanying Quarterly Report of the Company on Form 10-Q for the period ended March 31, 2016 (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

(2)         the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

Date: April 27, 2016

 

 

/s/ STUART J. UDELL

 

 

Stuart J. Udell

 

 

Chief Executive Officer

 

 

 


EX-32.2 5 a16-6328_1ex32d2.htm EX-32.2

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 they 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.

 

Certification of Principal Financial Officer

 

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 his knowledge, that:

 

(1)         the accompanying Quarterly Report of the Company on Form 10-Q for the period ended March 31, 2016 (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

(2)         the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

Date: April 27, 2016

 

 

/s/ JAMES J. RHYU

 

 

James J. Rhyu

 

 

Chief Financial Officer

 

 

 


EX-101.INS 6 lrn-20160331.xml XBRL INSTANCE DOCUMENT 0001157408 lrn:WebInternationalEducationGroupLtdMember us-gaap:OtherCurrentAssetsMember 2013-05-06 2013-05-06 0001157408 us-gaap:MaximumMember 2013-11-04 0001157408 us-gaap:RetainedEarningsMember 2016-03-31 0001157408 us-gaap:AdditionalPaidInCapitalMember 2016-03-31 0001157408 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2016-03-31 0001157408 us-gaap:RetainedEarningsMember 2015-06-30 0001157408 us-gaap:AdditionalPaidInCapitalMember 2015-06-30 0001157408 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2015-06-30 0001157408 us-gaap:CommonStockMember 2015-07-01 2016-03-31 0001157408 us-gaap:TreasuryStockMember 2016-03-31 0001157408 us-gaap:CommonStockMember 2016-03-31 0001157408 us-gaap:TreasuryStockMember 2015-06-30 0001157408 us-gaap:CommonStockMember 2015-06-30 0001157408 lrn:EmployeeAndNonEmployeesStockOptionMember 2014-07-01 2015-06-30 0001157408 lrn:EmployeeAndNonEmployeesStockOptionMember 2015-06-30 0001157408 lrn:StockOptionPlan2007Member 2016-03-31 0001157408 lrn:StockOptionPlan2007Member 2015-07-01 2016-03-31 0001157408 us-gaap:RestrictedStockMember lrn:VestingBasedOnPerformanceAndServiceMember 2016-03-31 0001157408 us-gaap:RestrictedStockMember lrn:ServiceBasedAwardsMember 2016-03-31 0001157408 us-gaap:RestrictedStockMember 2015-06-30 0001157408 lrn:EquityIncentiveMarketBasedRestrictedStockAwardsMember lrn:NewChiefExecutiveOfficerAndExecutiveChairmanMember 2016-01-01 2016-03-31 0001157408 us-gaap:RestrictedStockMember lrn:VestingBasedOnPerformanceAndServiceMember 2015-07-01 2016-03-31 0001157408 us-gaap:RestrictedStockMember lrn:ServiceBasedAwardsMember 2015-07-01 2016-03-31 0001157408 lrn:EquityIncentiveMarketBasedRestrictedStockAwardsMember lrn:NewChiefExecutiveOfficerAndExecutiveChairmanMember 2015-07-01 2016-03-31 0001157408 us-gaap:PerformanceSharesMember 2015-07-01 2016-03-31 0001157408 us-gaap:PerformanceSharesMember lrn:QuarterlyPeriodBeginningNovember152017Member 2015-07-01 2016-03-31 0001157408 us-gaap:PerformanceSharesMember lrn:PeriodAfterAugust152018Member 2015-07-01 2016-03-31 0001157408 lrn:ProrataVestingInSemiAnnualIntervalsUntilApplicableAnniversaryOfGrantDateMember 2015-07-01 2016-03-31 0001157408 lrn:ProrataVestingImmediatelyUponAchievementOfSpecifiedAverageClosingStockPricesMember 2015-07-01 2016-03-31 0001157408 us-gaap:PerformanceSharesMember us-gaap:MinimumMember 2015-07-01 2016-03-31 0001157408 us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsRecurringMember lrn:MiddleburyInteractiveLanguagesLLCMember 2016-03-31 0001157408 us-gaap:EstimateOfFairValueFairValueDisclosureMember us-gaap:FairValueMeasurementsRecurringMember lrn:MiddleburyInteractiveLanguagesLLCMember 2016-03-31 0001157408 lrn:MiddleburyInteractiveLanguagesLLCMember 2016-03-31 0001157408 us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsRecurringMember lrn:MiddleburyInteractiveLanguagesLLCMember 2015-06-30 0001157408 us-gaap:EstimateOfFairValueFairValueDisclosureMember us-gaap:FairValueMeasurementsRecurringMember lrn:MiddleburyInteractiveLanguagesLLCMember 2015-06-30 0001157408 us-gaap:SoftwareAndSoftwareDevelopmentCostsMember us-gaap:MinimumMember 2015-07-01 2016-03-31 0001157408 us-gaap:SoftwareAndSoftwareDevelopmentCostsMember us-gaap:MaximumMember 2015-07-01 2016-03-31 0001157408 us-gaap:LeaseholdImprovementsMember us-gaap:MinimumMember 2015-07-01 2016-03-31 0001157408 us-gaap:LeaseholdImprovementsMember us-gaap:MaximumMember 2015-07-01 2016-03-31 0001157408 us-gaap:FurnitureAndFixturesMember 2015-07-01 2016-03-31 0001157408 us-gaap:ComputerEquipmentMember 2015-07-01 2016-03-31 0001157408 lrn:SoftwareDevelopmentCostsInternetDomainMember 2015-07-01 2016-03-31 0001157408 lrn:OfficeEquipmentExcludingComputersMember 2015-07-01 2016-03-31 0001157408 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2015-07-01 2016-03-31 0001157408 lrn:LineOfCredit1Member 2015-12-31 0001157408 us-gaap:LineOfCreditMember 2014-01-31 0001157408 us-gaap:LineOfCreditMember us-gaap:ComputerEquipmentMember 2016-03-31 0001157408 us-gaap:LineOfCreditMember 2016-03-31 0001157408 us-gaap:LineOfCreditMember us-gaap:ComputerEquipmentMember 2015-06-30 0001157408 lrn:WebInternationalEducationGroupLtdMember 2016-01-01 2016-03-31 0001157408 lrn:WebInternationalEducationGroupLtdMember 2015-07-01 2016-03-31 0001157408 lrn:WebInternationalEducationGroupLtdMember 2015-01-01 2015-03-31 0001157408 lrn:WebInternationalEducationGroupLtdMember 2014-07-01 2015-03-31 0001157408 us-gaap:BuildingMember 2016-03-31 0001157408 us-gaap:TradeNamesMember 2016-03-31 0001157408 us-gaap:OtherIntangibleAssetsMember 2016-03-31 0001157408 us-gaap:DevelopedTechnologyRightsMember 2016-03-31 0001157408 us-gaap:CustomerRelationshipsMember 2016-03-31 0001157408 us-gaap:TradeNamesMember 2015-06-30 0001157408 us-gaap:OtherIntangibleAssetsMember 2015-06-30 0001157408 us-gaap:DevelopedTechnologyRightsMember 2015-06-30 0001157408 us-gaap:CustomerRelationshipsMember 2015-06-30 0001157408 us-gaap:CorporateJointVentureMember 2016-03-31 0001157408 us-gaap:CorporateJointVentureMember 2015-06-30 0001157408 us-gaap:RestrictedStockMember 2016-03-31 0001157408 lrn:EmployeeAndNonEmployeesStockOptionMember 2016-03-31 0001157408 us-gaap:LineOfCreditMember 2014-01-31 2014-01-31 0001157408 lrn:LineOfCredit1Member 2015-08-31 0001157408 lrn:LineOfCredit1Member 2015-07-31 0001157408 us-gaap:LineOfCreditMember us-gaap:PrimeRateMember 2014-01-31 2014-01-31 0001157408 us-gaap:LineOfCreditMember us-gaap:LondonInterbankOfferedRateLIBORMember 2014-01-31 2014-01-31 0001157408 us-gaap:LineOfCreditMember us-gaap:BaseRateMember 2014-01-31 2014-01-31 0001157408 us-gaap:SalesRevenueServicesNetMember us-gaap:CustomerConcentrationRiskMember lrn:CustomerAMember 2016-01-01 2016-03-31 0001157408 us-gaap:AccountsReceivableMember us-gaap:CustomerConcentrationRiskMember 2016-01-01 2016-03-31 0001157408 us-gaap:SalesRevenueServicesNetMember us-gaap:CustomerConcentrationRiskMember lrn:CustomerAMember 2015-07-01 2016-03-31 0001157408 us-gaap:SalesRevenueServicesNetMember us-gaap:CustomerConcentrationRiskMember lrn:CustomerBMember 2015-01-01 2015-03-31 0001157408 us-gaap:AccountsReceivableMember us-gaap:CustomerConcentrationRiskMember 2014-07-01 2015-06-30 0001157408 us-gaap:SalesRevenueServicesNetMember us-gaap:CustomerConcentrationRiskMember lrn:CustomerBMember 2014-07-01 2015-03-31 0001157408 2015-03-31 0001157408 2014-06-30 0001157408 lrn:PNCEquipmentFinanceLLCLeaseLineOfCreditMember 2016-03-31 0001157408 us-gaap:ComputerEquipmentMember 2016-03-31 0001157408 us-gaap:ComputerEquipmentMember 2015-06-30 0001157408 us-gaap:SoftwareDevelopmentMember 2016-01-01 2016-03-31 0001157408 us-gaap:SoftwareDevelopmentMember 2015-07-01 2016-03-31 0001157408 us-gaap:SoftwareDevelopmentMember 2015-01-01 2015-03-31 0001157408 us-gaap:SoftwareDevelopmentMember 2014-07-01 2015-03-31 0001157408 lrn:LearnbopIncMember 2014-07-01 2014-07-31 0001157408 lrn:LearnbopIncMember 2014-07-31 0001157408 us-gaap:RestrictedStockMember 2016-01-01 2016-03-31 0001157408 lrn:EquityIncentiveMarketBasedRestrictedStockAwardsMember 2016-01-01 2016-03-31 0001157408 lrn:EmployeeAndNonEmployeesStockOptionMember 2016-01-01 2016-03-31 0001157408 us-gaap:RestrictedStockMember 2015-07-01 2016-03-31 0001157408 lrn:EquityIncentiveMarketBasedRestrictedStockAwardsMember 2015-07-01 2016-03-31 0001157408 lrn:EmployeeAndNonEmployeesStockOptionMember 2015-07-01 2016-03-31 0001157408 us-gaap:RestrictedStockMember 2015-01-01 2015-03-31 0001157408 lrn:EmployeeAndNonEmployeesStockOptionMember 2015-01-01 2015-03-31 0001157408 us-gaap:RestrictedStockMember 2014-07-01 2015-03-31 0001157408 lrn:EmployeeAndNonEmployeesStockOptionMember 2014-07-01 2015-03-31 0001157408 us-gaap:AdditionalPaidInCapitalMember 2015-07-01 2016-03-31 0001157408 lrn:PresidentAndChiefOperatingOfficerMember 2015-08-03 2015-08-03 0001157408 us-gaap:MaximumMember lrn:PresidentAndChiefOperatingOfficerMember 2015-08-03 2015-08-03 0001157408 2013-11-04 2013-11-04 0001157408 us-gaap:PerformanceSharesMember us-gaap:MaximumMember 2015-07-01 2016-03-31 0001157408 us-gaap:PerformanceSharesMember 2016-03-31 0001157408 us-gaap:CorporateJointVentureMember 2015-07-01 2016-03-31 0001157408 us-gaap:CorporateJointVentureMember 2014-07-01 2015-06-30 0001157408 us-gaap:RetainedEarningsMember 2015-07-01 2016-03-31 0001157408 lrn:AgoraMember 2014-07-01 2015-06-30 0001157408 lrn:WebInternationalEducationGroupLtdMember us-gaap:MinimumMember 2011-01-31 0001157408 lrn:LearnbopIncMember 2014-07-31 2014-07-31 0001157408 lrn:SchoolMortgageNoteMember 2013-09-11 0001157408 lrn:WebInternationalEducationGroupLtdMember 2011-01-31 0001157408 lrn:SchoolMortgageNoteMember 2013-09-11 2013-09-11 0001157408 lrn:WebInternationalEducationGroupLtdMember 2011-01-01 2011-01-31 0001157408 lrn:WebInternationalEducationGroupLtdMember 2016-03-31 0001157408 lrn:AgoraMember 2016-01-01 2016-03-31 0001157408 lrn:AgoraMember 2015-07-01 2016-03-31 0001157408 lrn:FoundationForOnlineAndBlendedLearningMember 2016-01-01 2016-03-31 0001157408 lrn:FoundationForOnlineAndBlendedLearningMember 2015-07-01 2016-03-31 0001157408 us-gaap:MinimumMember 2015-07-01 2016-03-31 0001157408 us-gaap:MaximumMember 2015-07-01 2016-03-31 0001157408 2016-03-31 0001157408 2015-06-30 0001157408 us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsRecurringMember 2016-03-31 0001157408 us-gaap:EstimateOfFairValueFairValueDisclosureMember us-gaap:FairValueMeasurementsRecurringMember 2016-03-31 0001157408 us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsRecurringMember 2015-06-30 0001157408 us-gaap:EstimateOfFairValueFairValueDisclosureMember us-gaap:FairValueMeasurementsRecurringMember 2015-06-30 0001157408 us-gaap:LineOfCreditMember us-gaap:ComputerEquipmentMember 2015-07-01 2016-03-31 0001157408 2016-01-01 2016-03-31 0001157408 2015-01-01 2015-03-31 0001157408 2014-07-01 2015-03-31 0001157408 us-gaap:EmploymentContractsMember 2015-07-01 2016-03-31 0001157408 lrn:StudentComputerMember 2016-01-01 2016-03-31 0001157408 lrn:StudentComputerMember 2015-07-01 2016-03-31 0001157408