SEC Company Response from Stride, Inc. (LRN) (CIK 0001157408) (LRN) — Mar 28, 2014
Stride, Inc. (LRN) (CIK 0001157408)
Date: March 28, 2014 · CIK: 0001157408 · Accession: 0001104659-14-024077
AI Filing Summary & Sentiment
Reasoning
File numbers found in text: 001-33883
Referenced dates: April 16, 2013, March 4, 2014
Letter
VIA EDGAR AND HAND DELIVERY Division of Corporation Finance Securities and Exchange Commission Filed August 29, 2013 Form 10-Q for the Quarter Ended December 31, 2013 Filed February 4, 2014 File No. 001-33883
Dear Mr. Spirgel:
On behalf of our client, K12 Inc. (the “Company,” “we,” “us” or “our”), this letter sets forth the Company’s responses to the comments received from the staff of the Division of Corporation Finance (the “Staff”) of the Securities and Exchange Commission (the “Commission”) by letter dated March 4, 2014, with respect to the above-referenced annual report on Form 10-K (the “Form 10-K”) and quarterly report on Form 10-Q (the “Form 10-Q”). The Staff’s comments are set forth below in bold, followed by the Company’s response to each comment. In connection with the Company’s response to each comment the Company acknowledges that:
· the Company is responsible for the adequacy and accuracy of the disclosures in its filings with the Commission;
· the Staff’s comments or changes to disclosure in response to the Staff’s comments do not foreclose the Commission from taking any action with respect to the Company’s filings; and
· the Company may not assert the Staff’s comments as a defense in any proceedings initiated by the Commission or any person under the federal securities laws of the United States.
Comment Form 10-K, Item 1. Business, page 5
Academic Performance, page 14
1. We note your disclosure regarding students at virtual public schools having trouble with “grade-level, static proficiency tests” due to high enrollment growth rates, high student mobility, and a high percentage of students who enter behind grade level. Public reports indicate that virtual public schools, including some of your schools, experience significant student attrition throughout the school year and year over year. You state in your Risk Factors, and Mr. Packard noted in your first quarter 2014 earnings call, “on average, the longer students are with us, the better they perform.” Please expand your disclosure to discuss the percentage of your students who use your learning systems for multiple years. Additionally, please expand your disclosure in Management’s Discussion and Analysis to discuss how this impacts your financial statements in terms of increased cost of enrollment and on-boarding.
Response
Based upon a snapshot of current enrollment data as of March 5, 2014, the following table reflects the number (and percentages of the total number) of students enrolled in K12-managed public schools and the length of time those students have been enrolled.
Time Enrolled
Percentage of All Enrolled Students
Number of Students
Less than One Year
15.28
%
18,828
One to Two Years
48.32
%
59,521
Two to Three Years
19.57
%
24,106
Three or More Years
16.83
%
20,726
Totals
100.00
%
123,181
In short, approximately 36.4% of the total enrolled student population at K12-managed schools are in the third or higher year of persistent enrollment under the K12-managed school program. We will update this disclosure periodically in future filings.
Please note K12’s response to prior Comment No. 2 in our letter of March 20, 2013 to the Staff comment regarding “public reports” that virtual schools experience “significant student attrition throughout the school year” www.sec.gov/Archives/edgar/data/1157408110465913022603/filename1.htm. As K12 responded last year, because student attrition (withdrawals) throughout the school year is not a significant risk and the Company reports student enrollment data quarterly, the Company respectfully submits that it is unnecessary to supplement or expand upon these matters in the Form 10-K. K12 has not experienced a change in the attrition or mid-year new enrollment patterns at its managed schools since opening its first few schools over a decade ago, and the change in total average enrollment quarter to quarter generally varies between 1% - 4%.
Accordingly, the Company does not regard attrition throughout the school year as a significant risk to its business or results of operations.
With respect to attrition year over year, whether new to or returning to a K12-managed school, each student must enroll at the start of the year. Please note that enrollment, record generation and record maintenance requirements vary significantly state to state due to differing jurisdictional requirements, and in some cases may vary between school districts in the same state. While it is correct to assume that a returning student would enroll with a performance record from the prior year at a K12-managed school, there still may be deficiencies in the student records from earlier years that would need to be addressed again in the enrollment cycle, and jurisdictions may have changed or added to the record generation requirements, including requiring additional data on family or socio-economic status and other metrics. Further, to the extent a new or returning student is commencing the year with an Individual Education Plan (IEP), preparation of the student’s IEP is required for each year. In short, K12 does not believe the difference in enrollment and onboarding costs of new vs. returning students is significant, and the Company believes that the relative difference in such costs does not have a material impact on its business or results of operations year over year.
Comment Form 10-K, Item 1. Business, page 5
Academic Performance, page 14
2. We note that your strategy for growth includes expanding into additional states and cities, removing enrollment restrictions, and increasing enrollment. It would appear your potential and current customers would take into account academic performance in deciding whether to use your services and products, and that this would directly impact your operations, operating results and achievement of your strategic goals. Therefore, please provide additional information about the academic performance of the schools you operate. For example, for each state in which K12 operates a school, please disclose a comparison of the K12 student scores in reading and math to the state averages.
Response
K12 held an Academic Day on March 20, 2014 at its corporate headquarters in Herndon, Virginia to which investors and the public were invited. The Company will release its 2014 Academic Report within the next several days, and will post the report to its website as it did a year ago for its 2013 Academic Report. We will notify and provide a copy of the 2014 Academic Report to the Staff when it is released.
K12 is expanding the amount and types of information available in its 2014 Academic Report this year. The 2014 Academic Report will include the results of Scantron Performance Series® gains in Reading, Mathematics and English Language Arts (ELA) for each K12-managed school. In addition, the 2014 Academic Report will include Reading and Mathematic proficiency based on state established scores using state-adopted tests for 23 of the K12-managed schools. These 23 schools represent approximately 75% of the total enrolled students in K12-managed schools for the 2013-2014 year. Further, the 2014 Academic Report will include an in-depth analysis of
test results and student performance at K12’s two largest schools, the Agora Cyber Charter School in Pennsylvania, and the OHVA (Ohio Virtual Academy).
Comment Form 10-K, Item 1. Business, page 5
Academic Performance, page 14
3. Furthermore, with respect to the K12 schools operating in states that have not obtained a No Child Left Behind waiver, disclose the percentage that made Adequate Yearly Progress in the most recent school year and compare this information to the AYP achievement in prior years. With respect to those schools operating in states that have obtained NCLB waivers and are using alternative accountability measures, disclose the percentage of schools that had satisfactory performance/progress under the alternative state accountability standard.
Response
As noted in our prior correspondence with the Staff dated April 16, 2013, K12 shares the view of many states that static tests of proficiency, such as state proficiency exams that are factored in AYP, are not the most accurate measure of what a child knows or can achieve. A more meaningful measure for assessing student performance is what is understood to be a “growth measure” which tracks the progress a student makes over the course of a school year that can best be captured by using adaptive testing that assesses students at two points in time during a single school year, typically in a Fall to Spring assessment cycle. The Scantron testing results to be summarized in the 2014 Academic Report for each school provide K12’s teachers, families and curriculum developers with insights on how to improve a student’s academic growth across a school year.
In that respect, as of March 2014, forty-two states plus the District of Columbia have obtained NCLB waivers from the U.S. Department of Education and eight school districts in California have obtained waivers. Only four states have not applied for waivers (Montana, Nebraska, North Dakota and Vermont), and waivers are pending for three states (Illinois, Iowa and Wyoming). As a consequence, the meeting of AYP requirements are used by states today to assess school performance with even less frequency than a year ago. As K12 noted in its April 16, 2013 letter to the Staff:
More fundamentally, in the current year and going forward, most states who have received waivers and have already moved beyond AYP as a measure of school performance will not be determining nor reporting AYP for the schools in their states. Under these circumstances, focusing investor attention on AYP results that are not available in some states and/or are no longer used in other states as critical measures of school performance would be confusing and potentially misleading. In short, disclosure of AYP results from schools in selected states that still have AYP would not alter the total mix of information already available to investors
regarding K12, its product offerings and its business model. To the contrary, disclosure of AYP in states where still available, would place undue emphasis on a single set of statistical data of much less importance than such data appeared to have had just a few years ago.
www.sec.gov/Archives/edgar/data/1157408110465913022603
As the Staff is aware, AYP outcomes for each school are binary — either the school satisfies the AYP target for each sub-group , or it fails to meet AYP overall. Because K12-managed schools tend to be larger than most public schools by virtue of enrolling students statewide from districts with significant variations in population demographics (as opposed to a local school with a more homogenous student body or economic level), the K12-managed schools tend to be assessed under more AYP targets / subgroups , such as special needs students, students for whom English is a second language, free/reduced lunch eligible students and other measures of ethnic status. The failure of one target/subgroup under AYP means the entire school fails to meet AYP. During the 2011-2012 school year, there were seventeen K12-managed schools in three states, California, Illinois and Wyoming, that did not have a waiver under NCLB. The Company’s Wyoming school does not get a separate AYP designation from its partner district. Of the remaining sixteen schools who do receive an AYP designation, 6% achieved a positive AYP outcome for that year. During the 2012-2013 school year, there were twenty-two K12-managed schools in four states, California, Illinois, Iowa and Wyoming, that did not have a waiver under NCLB, and 14% achieved a positive AYP outcome. Eighteen of these K12-managed schools are in California, two are in Illinois, one is in Iowa and the other is in Wyoming.
It is important to note that K12-managed schools are not significantly different from traditional public schools with respect to AYP outcomes in many states. For example, California reports that: “the number of elementary schools making AYP dropped from 27% in 2012 to 10% in 2013; middle schools dropped from 18% making AYP in 2012 to 6% in 2013; and high schools making AYP decreased from 28% in 2012 to 27% in 2013.” www.ed-data.k12.ca.us/Pages/Understanding the AYP.aspx. Although California did not apply for a waiver under NCLB, a substantial number of California school districts have requested waivers from static AYP testing requirements. The Company believes that data on AYP outcomes has largely been discredited as a meaningful measure of a school’s efficacy in teaching. The Staff may wish to read the statement of Secretary Arnie Duncan of the U.S. Department of Education when he announced the Obama administration would start granting waivers from strict AYP requirements, at www2.ed.gov/policy/gen/guid/secletter/110423.html.
With respect to assessments of satisfactory performance by K12-managed schools in states that do not test to AYP outcomes, each state varies in its assessment and performance metrics. Based upon K12’s internal assessments the Company believes that 46% of the K12-managed schools in the states that have been granted NCLB waivers achieved satisfactory progress during the 2012-2013 school year.
Comment Form 10-K, Item 1. Business, page 5
Academic Performance, page 14
4. Please balance your discussion of the Scantron tests and the performance of K12 students in the last paragraph on page 14 by describing any weaknesses in these tests in accurately measuring student knowledge and achievement, such as the fact that they are apparently taken in an unsupervised setting on a voluntary basis.
Response
The Scantron assessments used by K12 are web-based, norm-referenced, adaptive tests that students can take at home. In part, because state tests vary widely, K12 adopted the Scantron Performance Series® in order to provide a common measure of academic achievement across all of our K12-managed public schools. While we recognize that students may be unsupervised while taking Scantron tests, the score trends from such tests relative to scores from state tests (which in most cases are closely proctored) are similar, suggesting that the un-proctored approach for the Scantron test does not affect the accuracy of the Scantron results. Just as other public school students, the children enrolled in K12-managed schools in grades 3-8 and at various grade levels throughout 9-12, must also take state proctored exams at the end of each school year.
Please note that the Scantron tests results for an individual student are used to measure his or her performance over the school year, and thus are given twice each year in the early Fall and late Spring. (State tests are typically administered once each year.) Teachers and staff use the Scantron tests results to develop an
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CORRESP
1
filename1.htm
William P. O”Neill
555 Eleventh Street, N.W., Suite 1000
(202) 637-2275
Washington, D.C. 20004-1304
william.o’neill@lw.com
Tel: +1.202.637.2200 Fax: +1.202.637.2201
www.lw.com
FIRM / AFFILIATE OFFICES
Abu Dhabi
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Boston
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Paris
March 28, 2014
Dubai
Riyadh
Düsseldorf
Rome
Frankfurt
San Diego
VIA EDGAR AND HAND DELIVERY
Hamburg
San Francisco
Hong Kong
Shanghai
Larry Spirgel
Houston
Silicon Valley
Assistant Director
London
Singapore
Division of Corporation Finance
Los Angeles
Tokyo
Securities and Exchange Commission
Madrid
Washington, D.C.
100 F Street, N. E.
Washington, D.C. 20549
Re: K12 Inc.
Form 10-K for the Year Ended June 30, 2013
Filed August 29, 2013
Form 10-Q for the Quarter Ended December 31, 2013
Filed February 4, 2014
File No. 001-33883
Dear Mr. Spirgel:
On behalf of our client, K12 Inc. (the “Company,” “we,” “us” or “our”), this letter sets forth the Company’s responses to the comments received from the staff of the Division of Corporation Finance (the “Staff”) of the Securities and Exchange Commission (the “Commission”) by letter dated March 4, 2014, with respect to the above-referenced annual report on Form 10-K (the “Form 10-K”) and quarterly report on Form 10-Q (the “Form 10-Q”). The Staff’s comments are set forth below in bold, followed by the Company’s response to each comment. In connection with the Company’s response to each comment the Company acknowledges that:
· the Company is responsible for the adequacy and accuracy of the disclosures in its filings with the Commission;
· the Staff’s comments or changes to disclosure in response to the Staff’s comments do not foreclose the Commission from taking any action with respect to the Company’s filings; and
· the Company may not assert the Staff’s comments as a defense in any proceedings initiated by the Commission or any person under the federal securities laws of the United States.
Comment
Form 10-K, Item 1. Business, page 5
Academic Performance, page 14
1. We note your disclosure regarding students at virtual public schools having trouble with “grade-level, static proficiency tests” due to high enrollment growth rates, high student mobility, and a high percentage of students who enter behind grade level. Public reports indicate that virtual public schools, including some of your schools, experience significant student attrition throughout the school year and year over year. You state in your Risk Factors, and Mr. Packard noted in your first quarter 2014 earnings call, “on average, the longer students are with us, the better they perform.” Please expand your disclosure to discuss the percentage of your students who use your learning systems for multiple years. Additionally, please expand your disclosure in Management’s Discussion and Analysis to discuss how this impacts your financial statements in terms of increased cost of enrollment and on-boarding.
Response
Based upon a snapshot of current enrollment data as of March 5, 2014, the following table reflects the number (and percentages of the total number) of students enrolled in K12-managed public schools and the length of time those students have been enrolled.
Time Enrolled
Percentage of
All Enrolled Students
Number of
Students
Less than One Year
15.28
%
18,828
One to Two Years
48.32
%
59,521
Two to Three Years
19.57
%
24,106
Three or More Years
16.83
%
20,726
Totals
100.00
%
123,181
In short, approximately 36.4% of the total enrolled student population at K12-managed schools are in the third or higher year of persistent enrollment under the K12-managed school program. We will update this disclosure periodically in future filings.
Please note K12’s response to prior Comment No. 2 in our letter of March 20, 2013 to the Staff comment regarding “public reports” that virtual schools experience “significant student attrition throughout the school year” www.sec.gov/Archives/edgar/data/1157408110465913022603/filename1.htm. As K12 responded last year, because student attrition (withdrawals) throughout the school year is not a significant risk and the Company reports student enrollment data quarterly, the Company respectfully submits that it is unnecessary to supplement or expand upon these matters in the Form 10-K. K12 has not experienced a change in the attrition or mid-year new enrollment patterns at its managed schools since opening its first few schools over a decade ago, and the change in total average enrollment quarter to quarter generally varies between 1% - 4%.
2
Accordingly, the Company does not regard attrition throughout the school year as a significant risk to its business or results of operations.
With respect to attrition year over year, whether new to or returning to a K12-managed school, each student must enroll at the start of the year. Please note that enrollment, record generation and record maintenance requirements vary significantly state to state due to differing jurisdictional requirements, and in some cases may vary between school districts in the same state. While it is correct to assume that a returning student would enroll with a performance record from the prior year at a K12-managed school, there still may be deficiencies in the student records from earlier years that would need to be addressed again in the enrollment cycle, and jurisdictions may have changed or added to the record generation requirements, including requiring additional data on family or socio-economic status and other metrics. Further, to the extent a new or returning student is commencing the year with an Individual Education Plan (IEP), preparation of the student’s IEP is required for each year. In short, K12 does not believe the difference in enrollment and onboarding costs of new vs. returning students is significant, and the Company believes that the relative difference in such costs does not have a material impact on its business or results of operations year over year.
Comment
Form 10-K, Item 1. Business, page 5
Academic Performance, page 14
2. We note that your strategy for growth includes expanding into additional states and cities, removing enrollment restrictions, and increasing enrollment. It would appear your potential and current customers would take into account academic performance in deciding whether to use your services and products, and that this would directly impact your operations, operating results and achievement of your strategic goals. Therefore, please provide additional information about the academic performance of the schools you operate. For example, for each state in which K12 operates a school, please disclose a comparison of the K12 student scores in reading and math to the state averages.
Response
K12 held an Academic Day on March 20, 2014 at its corporate headquarters in Herndon, Virginia to which investors and the public were invited. The Company will release its 2014 Academic Report within the next several days, and will post the report to its website as it did a year ago for its 2013 Academic Report. We will notify and provide a copy of the 2014 Academic Report to the Staff when it is released.
K12 is expanding the amount and types of information available in its 2014 Academic Report this year. The 2014 Academic Report will include the results of Scantron Performance Series® gains in Reading, Mathematics and English Language Arts (ELA) for each K12-managed school. In addition, the 2014 Academic Report will include Reading and Mathematic proficiency based on state established scores using state-adopted tests for 23 of the K12-managed schools. These 23 schools represent approximately 75% of the total enrolled students in K12-managed schools for the 2013-2014 year. Further, the 2014 Academic Report will include an in-depth analysis of
3
test results and student performance at K12’s two largest schools, the Agora Cyber Charter School in Pennsylvania, and the OHVA (Ohio Virtual Academy).
Comment
Form 10-K, Item 1. Business, page 5
Academic Performance, page 14
3. Furthermore, with respect to the K12 schools operating in states that have not obtained a No Child Left Behind waiver, disclose the percentage that made Adequate Yearly Progress in the most recent school year and compare this information to the AYP achievement in prior years. With respect to those schools operating in states that have obtained NCLB waivers and are using alternative accountability measures, disclose the percentage of schools that had satisfactory performance/progress under the alternative state accountability standard.
Response
As noted in our prior correspondence with the Staff dated April 16, 2013, K12 shares the view of many states that static tests of proficiency, such as state proficiency exams that are factored in AYP, are not the most accurate measure of what a child knows or can achieve. A more meaningful measure for assessing student performance is what is understood to be a “growth measure” which tracks the progress a student makes over the course of a school year that can best be captured by using adaptive testing that assesses students at two points in time during a single school year, typically in a Fall to Spring assessment cycle. The Scantron testing results to be summarized in the 2014 Academic Report for each school provide K12’s teachers, families and curriculum developers with insights on how to improve a student’s academic growth across a school year.
In that respect, as of March 2014, forty-two states plus the District of Columbia have obtained NCLB waivers from the U.S. Department of Education and eight school districts in California have obtained waivers. Only four states have not applied for waivers (Montana, Nebraska, North Dakota and Vermont), and waivers are pending for three states (Illinois, Iowa and Wyoming). As a consequence, the meeting of AYP requirements are used by states today to assess school performance with even less frequency than a year ago. As K12 noted in its April 16, 2013 letter to the Staff:
More fundamentally, in the current year and going forward, most states who have received waivers and have already moved beyond AYP as a measure of school performance will not be determining nor reporting AYP for the schools in their states. Under these circumstances, focusing investor attention on AYP results that are not available in some states and/or are no longer used in other states as critical measures of school performance would be confusing and potentially misleading. In short, disclosure of AYP results from schools in selected states that still have AYP would not alter the total mix of information already available to investors
4
regarding K12, its product offerings and its business model. To the contrary, disclosure of AYP in states where still available, would place undue emphasis on a single set of statistical data of much less importance than such data appeared to have had just a few years ago.
www.sec.gov/Archives/edgar/data/1157408110465913022603
As the Staff is aware, AYP outcomes for each school are binary — either the school satisfies the AYP target for each sub-group , or it fails to meet AYP overall. Because K12-managed schools tend to be larger than most public schools by virtue of enrolling students statewide from districts with significant variations in population demographics (as opposed to a local school with a more homogenous student body or economic level), the K12-managed schools tend to be assessed under more AYP targets / subgroups , such as special needs students, students for whom English is a second language, free/reduced lunch eligible students and other measures of ethnic status. The failure of one target/subgroup under AYP means the entire school fails to meet AYP. During the 2011-2012 school year, there were seventeen K12-managed schools in three states, California, Illinois and Wyoming, that did not have a waiver under NCLB. The Company’s Wyoming school does not get a separate AYP designation from its partner district. Of the remaining sixteen schools who do receive an AYP designation, 6% achieved a positive AYP outcome for that year. During the 2012-2013 school year, there were twenty-two K12-managed schools in four states, California, Illinois, Iowa and Wyoming, that did not have a waiver under NCLB, and 14% achieved a positive AYP outcome. Eighteen of these K12-managed schools are in California, two are in Illinois, one is in Iowa and the other is in Wyoming.
It is important to note that K12-managed schools are not significantly different from traditional public schools with respect to AYP outcomes in many states. For example, California reports that: “the number of elementary schools making AYP dropped from 27% in 2012 to 10% in 2013; middle schools dropped from 18% making AYP in 2012 to 6% in 2013; and high schools making AYP decreased from 28% in 2012 to 27% in 2013.” www.ed-data.k12.ca.us/Pages/Understanding the AYP.aspx. Although California did not apply for a waiver under NCLB, a substantial number of California school districts have requested waivers from static AYP testing requirements. The Company believes that data on AYP outcomes has largely been discredited as a meaningful measure of a school’s efficacy in teaching. The Staff may wish to read the statement of Secretary Arnie Duncan of the U.S. Department of Education when he announced the Obama administration would start granting waivers from strict AYP requirements, at www2.ed.gov/policy/gen/guid/secletter/110423.html.
With respect to assessments of satisfactory performance by K12-managed schools in states that do not test to AYP outcomes, each state varies in its assessment and performance metrics. Based upon K12’s internal assessments the Company believes that 46% of the K12-managed schools in the states that have been granted NCLB waivers achieved satisfactory progress during the 2012-2013 school year.
5
Comment
Form 10-K, Item 1. Business, page 5
Academic Performance, page 14
4. Please balance your discussion of the Scantron tests and the performance of K12 students in the last paragraph on page 14 by describing any weaknesses in these tests in accurately measuring student knowledge and achievement, such as the fact that they are apparently taken in an unsupervised setting on a voluntary basis.
Response
The Scantron assessments used by K12 are web-based, norm-referenced, adaptive tests that students can take at home. In part, because state tests vary widely, K12 adopted the Scantron Performance Series® in order to provide a common measure of academic achievement across all of our K12-managed public schools. While we recognize that students may be unsupervised while taking Scantron tests, the score trends from such tests relative to scores from state tests (which in most cases are closely proctored) are similar, suggesting that the un-proctored approach for the Scantron test does not affect the accuracy of the Scantron results. Just as other public school students, the children enrolled in K12-managed schools in grades 3-8 and at various grade levels throughout 9-12, must also take state proctored exams at the end of each school year.
Please note that the Scantron tests results for an individual student are used to measure his or her performance over the school year, and thus are given twice each year in the early Fall and late Spring. (State tests are typically administered once each year.) Teachers and staff use the Scantron tests results to develop an