not antagonistic. This "tried and true" philosophy allows us to benefit from both decades of research about learning and over a century of published analysis of effective methods of teaching.

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Employ Technology Appropriately for Learning.  All of our courses are delivered primarily through an online platform and generally include a significant amount of online content. We employ technology where we feel it is appropriate and can enhance the learning process, with the offline:online ratio changing appropriately for advancing developmental levels in students. In addition to online content, our curriculum includes a rich mix of course materials, including engaging textbooks and hands-on materials such as instructional kits, scientific and musical instruments, art supplies and science specimens. Furthermore, our teachers utilize telephonic contact as well as email and virtual electronic classrooms. We believe our balanced use of technology and more traditional approaches helps to maximize the effectiveness of our learning systems.

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Base Learning Objectives on "Big Ideas".  We use the expression "big ideas" for the key, subconscious frameworks that serve as the foundation to a student's future understanding of a subject matter. For example, an understanding of waves is fundamental to a physicist's understanding of quantum mechanics; for that reason, we teach 1st graders the fundamentals of waves in an age-appropriate form. We use "big ideas" in every subject area to organize the explicit learning objectives for each course we develop.

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Assess Every Objective to Ensure Mastery.  Ongoing assessments are the most effective way to evaluate a student's mastery of a lesson or concept. To facilitate effective assessment, our curriculum states clear objectives for each lesson. Throughout a course, every student's progress is assessed at a point when each objective is expected to be mastered, providing direction for appropriate pacing. These periodic and well-timed assessments reinforce learning and promote mastery of a topic before a student moves to the next lesson or course.

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Individualized Learning.  We seek to create engaging curriculum content to capture a student's attention to make learning more interesting and effective. It is our fundamental belief that each student learns in a highly individualized manner. Our instructional system allows students to learn from a curriculum that caters to their unique learning style and offers a high degree of program flexibility. Certain adaptive learning features being integrated into some curricular products can individualize lessons based on the level of student comprehension.

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Prioritize Important, Rigorous Objectives.  Our content experts have developed a clear understanding of those subjects and concepts that are difficult for students, from both historical and cognitive points of view (that is, from both the "tried" and the "true" perspective described earlier). Greater instructional effort is focused on the most important concepts (the biggest ideas) and on the most challenging concepts and skills (as revealed by experience and research). We use existing research, feedback from parents and students, and experienced teacher judgments to determine these priorities, and to modify our learning systems to guide the allocation of each student's time and effort.

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Facilitate Flexibility to Accommodate Variations in Ability.  We believe that each student should be challenged appropriately, where "challenge" is both a matter of the difficulty inherent in the subject matter, and also the pace at which the subject matter is presented. Generally, adequate progress for most students is to complete one academic year's curriculum within a nine-month school year. Each individual student may take greater or fewer instructional hours and make more or less effort than the average student to achieve this progress. Our learning systems are designed to facilitate this flexibility in order to ensure that the appropriate amount of time and effort is allocated to each lesson.

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Ensure Fundamental Content Soundness.  Our highly credentialed subject matter experts or "Content Specialists" bring their own scholarly and teaching backgrounds to course design and

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development and are required to maintain relationships with and awareness of guidelines from nearly 40 national and international subject-area associations.

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Integrate Curriculum, Teachers and Technology to Maximize Student Learning.  We believe students learn better not just with great curriculum, but also great teachers and technology that allows them to access the content and teachers in a way that makes learning more engaging and effective.

Academic Performance

Our fundamental goal for every child who enrolls in an onlinea virtual public or private school managed by the Company,us, or a program offered through a school district or a Non‑managed school, is to improve his or her academic performance. In 2014,fiscal year 2017, we published an academic report that examines achievement in our managed public schools measured against both2016 K12 Annual Academic Report (“2016 Academic Report”) which is available at http://k12.com/academic-report. The 2016 Academic Report was expanded to include all Managed Public School Programs with reported state tests (which vary widely) and a nationally normed adaptive test which provides a common measure of achievement across all of the managed schools we serve.results as well as additional results from key high school assessments.  By analyzing and communicating the results of our efforts, we aim to provide data for school boards and guidanceparents as they exercise school choice options, and to help educators working to improve academic achievement for every child in our increasingly diverse schools and for parents as they exercise school choice options.schools. The 2014 Annualtest results included in our 2016 Academic Report ("2014 Academic Report"), canthat were aligned to new state standards and based on different definitions of proficiency cannot be found onlinecompared to scores on state tests from previous years. To provide a more meaningful report, we only included year-over-year results for schools that had not experienced a testing program change over the prior year, we organized our analyses into groups according to test type

and we reported data in context by comparing performance at http://k12marketing.http.internapcdn.net/K12marketing/docs/K12-Academic-Report-2014-051614.pdf.

        A significant challenge we face with respect toschool and state levels.  We believe that none of our competitors serving virtual public schools publishes this volume or depth of academic performance is that eachdata and analytics.

Each of the 33 states and the District of Columbiajurisdictions in which we manage virtual public schools measures academic performance using different state accountability methods. A number of states have adopted the Common Core State Standards for curriculum content and one of the two online assessment methods aligned to those standards, the Smarter Balanced Assessment Consortium (“SBAC”) or the Partnership for Assessment of Readiness for College and Careers (“PARCC”). However, as of school year 2016-17, a majority of the states in which we operate rely on their own state‑developed standards and assessments or commercially available assessments. Some states set proficiencyuse a combination of a state‑developed test and either the PARCC or SBAC test, while other states in which we operate never adopted the CCSS, including Virginia and Texas.

In the 2014‑2015 school year, many states changed their required assessments. Across all K12 public school programs, only eight states did not change their state required tests in 2014‑2015: Iowa, Minnesota, Oklahoma, Tennessee, Texas, Utah, Virginia, and Wyoming. The changes in state tests were in part a consequence of the Common Core State Standards, initially released in 2010. In that year, most states began the process of adopting the Common Core standards, which measure minimum levels of comprehension by grade level for certain subjects (e.g., typically math and reading) that are discerned through year-end testing. These static proficiency measures are generally used to assess Adequate Yearly Progress ("AYP") under the No Child Left Behind Act ("NCLB").

        According to a November 2012 reportencouraged by the Center for Education Policy, nearly half offederal grant program called Race to the nation's public schools (48%) did not achieve AYP in 2011, with some states exceedingTop, which favored applicants that AYP failure rateagreed to adopt Common Core. The new content standards required new assessments, so to develop assessments aligned to the Common Core, the federal government funded two testing consortia, the PARCC and others falling below. Recognizing the limitations in the NCLB approach for measuring academic performance, as of July 2014, 42SBAC. At one time, 24 states and the District of Columbia have obtained NCLB waiverswere signed on to administer the PARCC assessments. However, in the 2014‑2015 school year, only the District of Columbia and 10 states fully administered the PARCC assessments. The Education Commission of the States notes that in 2015‑2016, only six states and the District of Columbia used the PARCC assessments. While the SBAC consortium has experienced fewer withdrawals, its members decreased to 15 states that administered the full SBAC assessment in the 2015‑2016 school year. For the 2016-17 school year, 7 states administered the PARCC assessment and 14 states administered the SBAC assessment. Fewer states changed their state-developed assessments from the U.S. Department of Education and eight school districts in California have obtained waivers after the California state application was denied. Iowa and Wyoming are pursuing NCLB waivers, and four states are not seeking waivers (Montana, Nebraska, North Dakota and Vermont). A waiver previously granted2015-16 to Washington has been revoked. In connection with these waivers, most states have moved beyond AYP as a measure of academic performance and are using alternative accountability measures, including various "growth models." While these growth models can have different assumptions, methodologies and analytics from state-to-state, their primary purpose is to determine how much a student learns over the course of a2016-17 school year by measuring actual learning gains and growth. For example, a growth model may reveal that a student who enrolls two years behind grade level in math could realize a full year of improvement but may still fall below a static proficiency model target used with AYP measures.than the previous year.

We share the view taken by the many states granted AYP waivers that assessing a student'sstudent’s academic performance by his or her learning growth is a more accurate measure of a school's effectiveness. Therefore, in addition to state accountability models, we also measure academic performance usingschool’s effectiveness than attaining a nationally normed computer adaptive testing program provided by Scantron, an independent provider of web-based K-12 assessments. With the Scantron testing, we can obtain reliable and comparable pre- and post-test results to assess the efficacystatic proficiency score. Most of our programsschools administer nationally‑recognized interim and/or benchmark assessments to measure student growth during the school year, to prepare students for state assessments and to guide instruction. To ensure all schools are utilizing best practices learned from the successful schools we manage and from other high performing schools across the country, we have implemented a standardized academic framework across all of the Managed Public School Programs that have been implemented across multiple states with different standardsaddresses teacher preparation, delivery of instruction, and accountability systems. The Scantron testing also gives usstudent assessment. Effective instruction is informed by and evaluated based on student‑level data. As part of the academic framework, schools implement plans to collect student‑level data throughout the year from three types of assessments: diagnostic, formative interim, and summative. Baseline assessments are used to determine a better understanding ofstudent’s academic growth for every student, whether below, at or above grade level. As an adaptive test, Scantron also adjusts in real time in response to a student's answers,strengths and thus more accurately reveals the student's level of mastery.

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        The Scantron adaptive assessment testsweaknesses and are taken by virtual school students from their homesadministered at the beginning of the school year or when a student enrolls. Formative interim assessments are administered throughout the year to assess student mastery of the state standards and objectives. Summative assessments measure student learning at culminating points in a student’s academic career, such as the end of the school year. Approximately 87% of the students enrolled in our managed public schools during the 2012-13 school year completed the Scantron tests at the beginning andsemester or the end of the school year. While we recognize that students may be unsupervised while taking Scantron tests, the score trends from such tests relative to scores fromIn most cases, state tests (which in mostserve as the summative assessment for schools. We provide recommendations for benchmark and interim formative assessments based on state standards and state assessments. In several cases are closely proctored, including for the students in the managed public schools we serve) are similar, suggesting that the un-proctored approach for the Scantron test does not affect the accuracy of the Scantron results. In addition, the Scantron test results for an individual student are used to measure hischarter authorizers, district partners or her performance over the school year, and thus are given twice each year in the early fall and late spring. Teachers and staff use the test results to develop an education plan for each student, where appropriate, and to guide teachers to tailor their instructions to the student's needs and relative strengths. The test results are not used to grade or "place" students relative to their age group, and thus students and their parents have no incentive to cheat or seek outside help on an un-proctored test. More fundamentally, the Scantron tests are adaptive and proactive. That is, if the program senses that the student is answering questions too rapidly or is answering questions of increasing difficulty well beyond his or her grade level, the program will report the test results as "spoiled" to the teacher assigned to that student, and the test will be administered again with different questions. For these reasons, K12 believes the Scantron test results are a reliable indicator of the student's progress in proficiency in reading and mathematics over the course of a school year.

        As we reported in our 2014 Academic Report, pre- and post-test data from the Scantron Performance Series adaptive assessment system showed that, in aggregate, students in the managed public schools we serve achieved greater academic growth than the norm group in both mathematics and reading for the 2012-2013 school year. In addition to measuring a student's academic growth over the course of the school year, the Scantron testing results provide teachers, families and curriculum developers with insights on areas to improve a student's academic growth during a school year.

        We recognize that as state-specific growth models using different assessments emerge in the coming years, the virtual public schools we manage in those states will be measured for academic performance against those standards, which may yield different results than the Scantron nationally normed tests. Our 2014 Annual Academic Report contains school proficiency data under each state's accountability standards based upon testing results for K12 managed public schools representing more than 72% of our total enrollment in these schools. State proficiency results are typically available for each of our managed public schools through state departmentdepartments of education websites as well.require specific assessments.

In addition to the complexities involved in measuring academic performance of students, we believe the statewide virtual public schools we serve face unique challenges impacting academic success not necessarily encountered to the same extent by traditional brick and mortar schools. These challenges include high percentages of students who enter behind grade level or under‑credited, high student mobility, high enrollment growth rates, lack of control over the student learning environment and higher than average percentages of students in student populations eligible for free or reduced-price lunch.

        Forreduced‑price lunch in many states. With rare exceptions, the data shows that students identified as eligible for free lunch had lower percentages at or above proficiency levels than students eligible for reduced‑price lunch, and both groups usually underperformed students identified as not eligible for subsidized meals. In addition, for decades, educational research has shown that persistence—remaining and proceeding at pace in the same school setting—can benefit academic performance, while mobility—moving from one school setting to another—can have a destabilizing influence, causing students to struggle and lapse in academic performance. In our experience, the longer a student persists with our K¹² curriculum in our managed public schools, the greater the likelihood of a better academic outcome for that student as explained further in our 2014 Annual Academic Report. The following table reflects the number (and percentages of

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the total number) of students enrolled in K12-managed public schools and the length of time those students have been enrolled, based on a snapshot of current enrollment data as of May 31, 2014:

While measuring academic performance is necessary, taking meaningful steps to improve student outcomes is an integral part of our mission. Accordingly, we continually strive to achieve that objective by undertaking new initiatives and piloting new programs, such as our Family Academic Support Teams (described below under "Our Products"), while continuing to study and refineimproving existing programs, such as Strong Start our National Math Lab and our Mark¹² remedial reading program.FAST. To monitor student learning progress during the school

year, we are addingusing multiple equivalent assessments at the lesson, unit and semester level to ensure that our measurement of mastery is reliable and valid. We are also piloting a diagnostic assessment toolvalid, introducing more synchronous sessions for at risk students, and using data driven instruction that provides for targeted teacher intervention to be ableassist students with lesson challenges.

In furtherance of our goal to develop individualized learning plans for new students who often start school before theirimprove academic records are provided to us from their previous school.

        Inperformance, in fiscal year 2014 we established an Academic Committee of the K12 Board of Directors comprised of three members. The primary role of the Academic Committee is to make recommendations and assist management in discharging its responsibility to ensure continuous improvement in academic outcomes for the public and private schools served by the K12.

With input and oversight from the Academic Committee, the education experts who are members of our K12 Educational Advisory Committee ("EAC"(“EAC”), formed in 2013, will further improve our focus on academic achievement and growth goals as well as advising us on specific tactics to be successful in these areas. The EAC met 3 times in fiscal year 2017. The members of our EAC are:

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Dr. Andrew Porter, Dean of the Graduate School of Education, University of Pennsylvania



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Dr. Elanna Yalow, CEO of Knowledge Universe Early Learning Programs



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Dr. Beverly Hutton, Executive Director of the National Association of Secondary School Principals



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Dr. David Driscoll, former Commissioner of Education, Commonwealth of Massachusetts



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Ms. Ann Foster, former Senior Vice President Strategy, Business Development and Connected Learning for Harcourt Education Group

Our Products

Our mission remainsproduct approach is to investcontinue investing in systemscurriculum and technology to educate students more effectively and efficiently. By keeping abreast of industry trends and innovative technologies, including adaptive learning solutions and mobile and tablet accessibility, it is our expectation that these investments will help states, districts and schools improve the education of their students.

Much of our investment has been in the development of K-12K‑12 online courses and management systems. We are planning specialized courses and programs designed to remediate the rapidly increasing

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number of students who are enrolling in schools behind grade level. Specifically, we are making, licensing or acquiring more individualized learning programs for students using adaptive learning technology, which requires a significant financial commitment to license or acquire, integrate and develop a specialized curriculum and a complex database.

As school districts confront the same issues that we are experiencing in the managed public schools, we believe that our solutionsproducts could gain widespread acceptance. During the past few fiscal years, we builthave applicability across a broader range of schools. We are continuing to develop new K-6 math curriculum, K-3 English language arts curriculum,courses and materials aimed at engaging a remedial reading course, all based on the latest educational research and pedagogical methods. broad spectrum of learners.

In addition, our PEAK system provides school districts and administrators a better way to manage their online education programs and content. In 2014, we entered into an agreement to transition our high school learning management system (“LMS”) to Desire2Learn, a pioneer in next-generationnext‑generation digital education systems. During school year 2015‑16, we migrated the virtual high schools we manage to this new platform, and it is anticipated that the migration for middle school will be completed in time for school year 2017-2018. The Desire2Learn platform is used by over 100 K-12 organizations,new online high school and provides an industry-leading studentmiddle school LMS was designed to empower, engage, and help students achieve better academic results.  The new user experience which shouldincludes planning features that help us improve student engagement, retentionstudents advance through their schoolwork, as well as course management tools that allow teachers to tailor a curriculum that best meets the unique needs of their students, and outcomes for our managed schools. It is expected to also significantly advance our efforts to deliver a more mobile-ready curriculum becausehost of its mobile-ready capabilities which exceed the capabilities of our current systems. We expect to complete our transition to the Desire2Learn platform by the fall of 2015.other features.

Just as we pioneered the development of virtual schools, we are resolved to address the most challenging educational needs facing schools and districts. Our goal is to assist teachers, schools and districts in implementing individualized education programs to better serve their students. This can take a variety of forms including turn-keyturn‑key solutions, partnerships, vendor relationships, enterprise licenses, and purchases of curriculum and services.

        Our investment strategy is not limited, however, to curriculum and systems. We are also making substantial investments in our service offerings to improve student outcomes. For example, as part

Curriculum

K12 has one of the largest digital curriculum portfolios for the K-12K‑12 online education industry. The K¹²K12 curriculum consists of a variety of online lessons and resources, offline instructional kits and materials and lesson guides. We offer an extensive catalog of proprietary courses designed to teach concepts to students from pre-kindergarten through 12th grade. A single year-long K¹²year‑long K12 course generally consists of 120 to 180 unique instructional lessons. Each lesson is designed to last approximately 45 to 60 minutes, although students are able to work at their own pace. We have more than 700a broad‑based curriculum that includes courses across kindergarten, elementary, middle and high school, including world languages. This combined portfolio contains over 107,000 hours of instructional content and over one million visual, audio and interactive instructional elements in our asset repository.

Since our inception, we have built core courses in English language arts, mathematics, science and history on a foundation of rigorous standards, following the guidance and recommendations of leading educational organizations at the national and state levels. For this reason, our K¹²K12 curriculum was well positioned to satisfy the requirements of the CCSS when they were published in June 2010. Since then, we have been in the process of fully aligning our existing and new courses to the CCSS. As the CCSS landscape is continually changing, we will monitor the decisions that states are making with regard to CCSS adoption and the associated assessments of the CCSS or other standards the states may adopt, which

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in turn may require further adjustments. We have and will continue to invest in and update our curriculum to stay current with emerging and developing standards like CCSS.

Online Lessons.  Our K¹²For school year 2016-17, our K12 online lessons or curricula arewere accessed by K‑5 students through a proprietary learning management platform, which we call our Online School ("OLS"(“OLS”) for K-8 students and the eCollege. Lessons are accessed through a third‑party platform forby high school students, as well as a number of other common industry platforms for students who access our FuelEd Online Courses and our FuelEd ALS.Courses. Each online lesson provides the roadmap for the entire lesson, including direction to specific online and offline materials, summaries of major objectives for the lesson and the actual lesson content with assessments. Digital versions of documents, readings, labs and other activities may also be included. Lessons utilize a combination of innovative technologies, including animations, demonstrations, audio, video and other graphic/digital interactivity, educational games and individualized feedback, all coordinated with offline textbooks and hands-onhands‑on materials, to create an engaging, responsive and highly-effectivehighly‑effective curriculum. The formative and periodic summative, online assessments help ensure that students have mastered the material and are ready to proceed to the next lesson, allowing them to work at their own pace. Pronunciation guides for key words and references to suggested additional resources, specific to each lesson and each student'sstudent’s assignments and assessments, are also included.

Learning Kits.  Many of our courses utilize learning kits in conjunction with the online lessons to maximize the effectiveness of our learning systems. In addition to receiving access to our online lessons through the Internet, each K-8K‑8 student receives a shipment of materials, including award-winning textbooks, art supplies, laboratory supplies (e.g., microscopes, scales, science specimens) and other reference materials which are referred to and incorporated in instruction throughout our curriculum. This approach is consistent with our guiding principle to utilize technology where appropriate for our learning systems, and combine it with other effective instructional methods. Most of the textbooks we use are proprietary, written by K12 to be verbally engaging and visually appealing to students, with careful control of reading levels, and to complement the online experience. Through fiscal year 2014, weWe have also created and/or converted additional K¹²K12 textbooks and resources used across our courses into an electronic format, enabling us to offer options to enhance the student experience without physical books. We believe that our ability to effectively combine online lessons and materials—to develop, deliver and implement them together for instruction—is a competitive advantage.

Lesson Guides.  Our courses are generally paired with a lesson guide. Lesson guidesguide and/or teacher resources. These resources are designed to work in coordination with the online lessons and include the following: overview information for learning coaches, lesson objectives, lesson outlines and activities, answer keys to student exercises and suggestions for explaining difficult concepts to students.

Pre‑K and K‑8 Courses

Pre-K and K-8 Courses

From pre-kindergartenpre‑kindergarten through 8th grade, our courses are generally categorized into seven major subject areas: English language arts, mathematics, science, history, art, music and world languages. Our proprietaryonline curriculum includes all of the courses that students need to complete their core kindergarten through 8th grade education; our pre-Kpre‑K offering, which we refer to as EmbarK12, introduces students to core subjects through cross-curricularcross‑curricular thematic units, building initial and fundamental relationships among concepts. Courses focus on developing fundamental skills and teaching the key knowledge building blocks or schemas-the "big ideas"schemas—the “big ideas” that each student will need to master the major subject areas, meet state standards, including those formulated as the CCSS, and complete more advanced coursework. Unlike a traditional classroom education, and in conjunction with school teachers and counselors, our learning systems offer the flexibility for each student to take courses at different grade levels in a single academic year, providing flexibility for students to progress at their own level and pace within each subject area.

Our K¹² second generationK12 elementary language arts program is designed to deliver increased interactivity and make instruction even more engaging and efficient while integrating rewards, interactive

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practice and a virtual world. Our Fundamentals of Geometry and Algebra course completes our proprietary K-8 math offering. These courses support students at various skill levels via targeted, timely remediation, embody CCSS and include significant media integration. In addition, the flexibility of our learning systems allows us to tailor our curriculum to state specific requirements. For example, we have developed almost 70a large catalog of courses specifically created for the public school standards in 1320 states; we are aligning our courses to the CCSS and the Common Core Assessments; and in addition to the ongoing evolution of our K-5K‑5 Math+ program, we have also created over 80 custom Math+ sequences to serve specific state needs.

High School Courses

The curriculum available to high school students is much broader and varies from student to student, largely as a result of the increased flexibility in course selection available to high school students. Students also are able to select from a wide range of electives. We have augmented our lab program for lab science courses with the creation of alternate kit-freekit‑free science labs as an augmentation or alternative for our formerly kit-basedkit‑based high school science labs in order to provide a more flexible and robust lab program across our physical science, earth science, biology, chemistry and physics courses. Our overall lab program now includes traditional kit-basedkit‑based labs based on either shipped-inshipped‑in or household materials, virtual labs, video-basedvideo‑based labs, data-collectiondata‑collection and data-manipulationdata‑manipulation labs, and field studies. This array provides schools with additional materials flexibility, and integrates diverse modalities directly into our science curriculum to promote conceptual mastery. Across all subject areas, the K¹²K12 proprietary core curriculum accounts for approximately 90%more than three quarters of our high school course enrollments. We are aligningAs standards change, we align our courses to the CCSS and the Common Core Assessments.Assessments as well as various evolving state standards. We have already released over 40 new courses to help support our focus on career and technical education, and we are planning to launch another 46 courses for school year 2017-2018.

FuelEd Online Courses.  We also offer curriculum to schools and school districts marketed as our FuelEd Online Courses product line. Most FuelEd Online Courses are aligned to state and national standards, including many to the CCSS, and include more than 180a large number of courses for middle and high school students, featuring core, AP, elective and credit recovery courses. FuelEd'sFuelEd’s Online Courses are developed by subject matter experts, designed by multimedia teams and deliveredmay be taught by highly qualified high school instructors.Company‑provided instructors at the customers’ option. FuelEd classes are primarily delivered over the Internet in a classroom or virtual setting, and use a variety of interactive elements to keep students engaged throughout.engaged. A deep understanding of K-12K‑12 pedagogy, as well as the human factors associated with online technology, is integrated into FuelEd'sFuelEd’s courses. New to the FuelEd offerings this year are adaptive credit recovery courses in math, English, physical education, health, and world languages.

        FuelEd Anywhere Learning System ("ALS").    Our FuelEd ALS courseware is currently in use in over 5,000 public and private K-12 schools, public charter schools, colleges, correctional institutions, centers of adult literacy, military education programs and after-school learning centers. FuelEd ALS provides an integrated offering of instructional software and assessment for reading, mathematics, language arts, science, writing, history, government, economics and geography for grade levels K-12. In addition, we also provide assessment testing and instructional content for the General Educational Development ("GED") test. These products are designed to provide for LAN, WAN and Internet delivery in schools and support Windows and Macintosh platforms. Spanish-language versions are available for mathematics and language arts in grade levels 1-6.

Middlebury Interactive Languages.  We offer digital world language courses and residential summer language academies through MIL, which became a wholly-owned subsidiary in FY 2017 through our MILpurchase of Middlebury College’s interest in the joint venture. This venture offersAs part of that transaction, we retained the right to use the MIL name in its products through April 2028. In addition, we secured the right to use the MIL name in marketing materials through December 2019. These offerings include immersive language courses for K-12K‑12 students based on Middlebury College'sCollege’s pedagogy to help students gain a stronger base of comprehension and accelerate language acquisition. The age-appropriateage‑appropriate language courses, which can be implemented fully online, in a blended learning environment or as supplemental material, use instructional tools such as animation, music, videos and other authentic materials to immerse students in the language and culture of study. We offer Chinese, French, German Spanish and ArabicSpanish courses for elementary, middle and high school students. In addition, MIL has developed a summer English language learner (“ELL”) curriculum and new, digital, supplemental ELL courses for middle and high school students are now available, and additional courses areto be used in development to create a comprehensive suite of world language offerings. The joint ventureblended environment. MIL also operates summer residential

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language academies, an immersive program for middle and high school students. Academy students live in language by taking the Language Pledge, a promise to communicate solely in their language of study for four weeks. Instruction is offered in Arabic, Chinese, French, German and Spanish at multiple college campuses in the United StatesVermont, as well as in France, Spain and China in Beijing, China.their respective local languages.

Innovative Learning Applications

In order to continue to enhance the user experience and instructional methods of our learning systems, we strive to developleverage new technologies and learning applications andto adapt our curriculum to new technology devices and platforms.

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Mobile Learning:  We have created a number of mobile toolsplatforms while developing algorithms and applications. Thirty new mobile applications were delivered in fiscal year 2014 for a total of 48 applications now available for download. As of June 30, 2014, these "apps" have been downloaded over 0.8 million times since 2012. We continuemodels to deploy innovative educational tools for the mobile environment. With the increase in the use of mobile devices, we expect our mobile applications will create the ability for a student to learn "on-the-go," allowing for more continuous learning, engagement and mastery of content. We offer certain applications for both phones and tablets available via Apple, Google Play and the Amazon marketplace, adapting many of our award-winning curriculum features for the mobile application space. In addition, we are rolling out our first fully mobile-enabled courseware in the fall of 2014. Nine courses at the middle school level will be available for use utilizing the Blackboard Mobile Learn app. These courses will feature more than 9,000 mobile friendly interactives.



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Interactive Games:  An active educational games initiative is delivering new methods for engagement, practice and review of K-12 concepts, including: narrative/immersive styles, rewards, persistent data, and complex algorithms. These games make use of extensive research and educational best practices and address targeted learning objectives. We have delivered a total of nine interactive games andbuild an innovative review and practice portal called Noodleverse. Noodleverse includes approximately 3,000 activities and is designed for K-3 students in conjunction with the K¹² language arts program.



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Virtual Labs:  We have delivered alternatives for our educational partners who desire materials-freeadaptive curriculum. This includes converting over 60 existing materials-based high school science labs into highly interactive virtual labs and video lab simulations that meet state standards and still maintain teaching the original learning objectives. For example, in high school chemistry we have developed a virtual laboratory on chromatography, in which students separate a number of inks into their component pigments. This laboratory is performed at a virtual lab bench with all the materials and with the same procedures high school students would use in a physical chemistry laboratory.



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eBook and Digital Book Distribution:  Through fiscal year 2014, we have created or converted additional K¹² textbooks (now totaling 65) used across our courses into an electronic format, including textbooks, reference guides, literature readers and lab manuals. This digital delivery ability enables us to offer options to our customers via interactive online books that enhance the student's reading experience, reinforce the student's learning approach and create a new method for delivering book and print materials. Each offline book is converted into an electronic book format with a custom user interface to be viewed via a standard web browser or a commercially available electronic reader (e.g. Kindle, Nook). Web accessibility features for disabled students are made use of where currently possible.



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Adaptive Learning:  We have learning management systems and can now build courses that are adaptive, which enable individualized learning experiences as the course "adapts" at key points to student behavior and input. Based on assessment results or individual activity, these courses can automatically route students to an alternate explanation, additional practice or remediation on a

prerequisite skill or crucial concept. In addition to remediation, the capability allows students to accelerate past previously mastered concepts, giving skillful students time for more challenging work. Our MARK¹² reading remediation product captures individual students' successes and challenges as they practice phonemic awareness, alphabetic principles, accuracy and fluency, vocabulary and comprehension. The program serves the individual student more exercises, practice and review in areas of difficulty. Adaptation in this way tailors the instruction automatically for each student, making learning experiences more efficient and effective by building into the course the logic an expert teacher or tutor uses to differentiate instruction.

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National Math Lab:  The National Math Lab program has been designed to address students' math needs and to help them develop the necessary skills to succeed in math. The program works with students in grades 5 through 10 across all of the K12 network schools, who experience challenges in math and need supplemental support. National Math Lab provides nearly twice the usual amount of math instruction to students and in addition to their regular online math coursework, students attend targeted synchronous mathematical instruction sessions provided by highly-trained math teachers four days per week.

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Engaging Videos:  We continue to explore opportunities to enhance student engagement through strategic use of relevant multimedia. Multimedia is specifically used as appropriate for the subject matter. For example, our video on photosynthesis for high school biology allows students to witness the setup, procedure and data in a classic experiment in which an aquatic plant is exposed to light and produces oxygen bubbles. The high definition video and the presentation to the student of real data (which they then use in their analysis) make this video lab a multimedia experience that is coupled with a scientific method. Transcripts and captioning enhance accessibility where currently feasible.

Online School Platform-LearningLearning Management SystemSystems

For our K¹²K12 curriculum users in grades K-8,K‑5 in school year 2016-17, we provideprovided a proprietary learning management system, our OLS platform. The OLS platform is a significant part of our ongoing effort to provide the most engaging anda productive learning experience for students. The OLS platform is an adaptive, intuitive, web-baseda web‑based software platform that provides access to our online lessons, our lesson planning and scheduling tools, and our progress tracking tool which serves a key role in assisting parents and teachers in managing each student'sstudent’s progress. The OLS platform is also the central system through which students, parents, teachers and administrators interact using Kmailan integrated email solution and Class Connect (our integrated synchronous session scheduler).

In fiscal year 2014, we completed nine major releasesentered into a strategic license agreement with Desire2Learn, a pioneer in next‑generation digital education systems and learning platforms. At the beginning of ourschool year 2015‑16, we implemented this new virtual learning platform intendedat the high schools we serve and we extended the platform to enhance the capabilities availablemiddle schools we serve in school year 2016-17. Similar to our learning coaches, increase teacher efficiency and drive overall academic achievement. We license a third-party learning management system for use in our high school program.

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Lesson Planning and Scheduling Tools.  During a school year, a typical student will complete between 800 and 1,200 lessons across six or more subject areas. OurOLS platform, this new platform enables lesson planning, scheduling, tracking student progress and scheduling tools enable teachersconducting assessments. The platform is used by over 50 K‑12 organizations, and parents to establishprovides an individualized plan for eachindustry‑leading student to complete his or her lessons. These tools are designed to dynamically update the lesson plan as aexperience which should help us improve student progresses through each lessonengagement, retention and course, allowing flexibility to increase or decrease the pace at which the student advances through the curriculum while ensuring that the student progresses towards completion in the desired time frame. For example, the schedule can easily be adapted to accommodate a student who desires to attend school six days a week, a student who is interested in studying more during the winter holidays to take time off during the spring, or a student who chooses to complete two math lessons a dayoutcomes for the first month of the school yearManaged Public School Programs we serve.

The new platform helps us deliver a more personalized experience to our students and delay art lessons until the second month of the school year. Moreover, changes can be made to the schedule at any point during the school year and the remainder of the student's schedule will automatically be adjusted in the OLS. Unlike a traditional classroom education, our learning systems offer the flexibility for each student to take courses at different grade levels in a single academic year,

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providing flexibility forteachers. The intuitive experience enables students to progress at their own level and pace within each subject area. The curriculumaccess pertinent information more easily. This platform also includes assessments built into every lesson to guide and tailor the pace of progress to each child's needs.

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Progress Tracking Tools.  Once a schedule has been established, the OLS delivers lessons based upon the specified parameters of the school and the teacher. Each day, a student is initially directed to a home page listing the schedule for that particular day and begins the school day by selecting one of the listed lessons. As each lesson is completed, the student returns to the day's schedule to proceed to the next subject. If a student does not complete a lesson by the end of the day on which it was originally scheduled, the lesson will be rescheduled to the next day and will resume at the point where the student left off. Our progressan assessment tracking tool allows students, parents, learning coaches andthat enables teachers to monitor student progress. In addition, information collected by our progress tracking tool regarding student performance, attendance and other data are transferred to our proprietary Student Administration Management System ("SAMS") for use in providing administrative support services. This instructional program includes several processes and educational techniques that embrace proactive intervention. As a result, we can provide high quality instruction and intervention equal to student needs.



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Assessment Tracking Tools:  Meaningful assessments and feedback are critical to efficient and successful learning. Assessments embedded into our lessons help the parent, teacher, and student verify that the student is achieving important learning objectives. A student does not progress to the next lesson in a course until he has mastered the assessment at the end of the previous lesson. Teachers can easily view assessment data for their students in the OLS so that they can proactively provide additional instruction to students whenas needed. Our assessment tools also help us improve the programlearning programs by providing information on the effectiveness of specific instructional activities and the curriculum.

        Our Furthermore, our learning systemsprograms make use of a variety of formative and summative assessment instruments:

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Lesson assessments are used

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Lesson assessments that verify mastery of the objectives for that lesson and help determine whether further study of the lesson is necessary.

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Unit assessments that show whether or not the student has retained key learning objectives for the unit, and identify specific objectives students may need to review before progressing.

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Semester assessments that verify student mastery of key learning objectives for the semester.

The platform also provides additional tools and reports that enable teachers to verify mastery of the objectives for that lessonhave better insights into students’ progress and enable students to determine whether further study of the lesson is necessary.



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Unit assessments show whether or not the student has retained key learning objectives for the unit, and identify specific objectives students may need to review before progressing.



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Semester assessments verify student mastery of key learning objectives for the semester.

        Independent third-party assessments are used in most of our managed schools to pinpoint specific individual student strengths and weaknesses relative to state standards. These results enable the teacher to develop a highly individualized learning plan for each student. Students are tested via an online, adaptive test at the beginning and end of the school year to provide a measure of individual student growth demonstrating the value-added gains of the school program.manage their day more effectively.

School Management SystemsTotalView

        SAMSTotalView is our proprietary student information system. SAMSTotalView is integrated with the OLS, the Desire2Learn system, and several other proprietary systems including our online enrollment system that allows parents to complete school enrollment forms online and our Order Management System that generates orders for learning kits and computers to be delivered to students. SAMSTotalView stores student-specificstudent specific data and is used for a variety of functions, including enrolling students in courses, assigning progress marks and grades, tracking student demographic data, and generating student transcripts. Our systems also includeThe TotalView a suite of online applications that provides administrators, teachers, parents and students a unified view of student progress, attendance, communications, and learning kit shipment tracking. TotalView includes a sophisticated means of documenting student engagement in required classroom activities, identification of those students struggling with grade level state content standards, and previous year's performance on

state tests. TotalView also includes Kmail, our internal communications system. Through Kmail, administrators and teachers can communicate electronically with learning coaches and students. TotalView also includes an enrollment processing and tracking tool that allows us to closely monitor and manage the enrollment process for new students. Over the past several years, we have enhanced TotalView with additional functionality to better support the operation of the virtual and blended public schools.

PEAK

        In fiscal year 2012, we launchedInstitutional business offers an innovative online learning solutionplatform called PEAK. This solutionPEAK and the PEAK Library. PEAK is a proprietary software system designed to simplifycentrally manage in a district's management ofsingle‑user interface multiple, independent online learning by consolidating multiple solutions on a single platform. It allows administratorsschool‑based functions. Schools can enroll and activate students, assign courses and teachers, and then manage the learning experience with easy to manage enrollments, programsuse reporting and performance tracking, alerts and reporting across multiple online solutions from a single solution.analytics on student progress. In addition, through the PEAK library, districtsLibrary, teachers can quicklybuild and easily search, build, provisionmodify assignments, assessments and publish content or course modifications or new coursecourses and can augment classroom instruction and develop lessons for sharing across the school district. PEAK also has the capability to support other third‑party solutions, using various online learning assets.open educational resources and district and teacher‑created content. In fiscal year 2014,2017, PEAK served nearly 900 school districts and school partners and more than 200,000nearly 400,000 students. As more districts adopt online learning, they are demanding more control and flexibility in runningmanaging their programs. PEAK provides unparalleledextensive capabilities for districts wanting to operate multiple solutions or catalogs from a single application and offers rich personalization features that can be managed at the district, school or teacher level.

Our Services

We offer a comprehensive suite of services to students and their families as well as directly to virtual and blended public schools, traditional schools and school districts. Our services can be categorized broadly intointo: academic support servicesservices; and management and technology services.

Academic Support Services

Teachers and Related Services.  Teachers are critical to students'students’ educational success. TeachersMany teachers in the virtual and blended public schools that we manage are typically employed by the school, with the ultimate authority over these teachers residing with the school'sschool’s governing body. Underbody, including final hiring and termination decisions. As part of our service agreements, we oftentypically are engaged to recruit, train and provide management support for these school‑employed teachers. Historically, we have seen significant demand for teaching positions in the virtual and blended public schools that we manage. For our Institutional Salesbusiness customers, we provide instructors as needed using our staff of highly qualified and state-certifiedstate‑certified teachers and trainers.

We use a rigorous evaluation process for making teacher hiring recommendations to the schools we manage. We generally recruit teachers who, at a minimum, are state certified and meet each state'sstate’s requirements for designation as a "Highly“Highly Qualified Teacher," and generally have at least three years of teaching experience.Teacher.” We also seek to recruit teachers who have the skill set necessary to be successful in a virtual environment. Teaching in a virtual or blended public school is characterized by enhanced one-on-one student-teacherone‑on‑one student‑teacher and parent-teacherparent‑teacher interaction, so these teachers must have strong interpersonal communications skills. Additionally, a virtual or blended public school teacher must be creative in finding ways to effectively connect with their students and integrate themselves into the daily lives of the students'students’ families. We assess these teacher characteristics usingby requiring teachers to deliver and record a customizedsample lesson on our online assessmentplatform and answer questions both via video and essay as part of the hiring screening process. Throughout a teacher’s employment in a managed program, we provide tools for teacher management and evaluation.  In most managed public schools, we are also piloting an instructional coaching program, where experienced teachers provide coaching to other teachers to help improve the quality of instruction in the schools.

New teachers participate in our comprehensive training program during which, among other things, they are introduced to our educational philosophy, our curriculum and our OLS and other technology applications, and are provided strategies for communicating and connecting with students and their families in a virtual environment. We also provide ongoing professional development opportunities for teachers so that they may stay abreast of changing educational standards, key learning trends, and sound pedagogical strategies which we believe enhance their teaching abilities and effectiveness.

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        In addition to our compliance with state-mandated testing programs, we have instituted a student progress testing program in cooperation with Scantron, a third-party provider of standardized testing services. The results of this testing helps us manage the quality of our academic programs using widely recognized services from an industry-leading third party.

Advanced and Special Education Services.  We believe that our learning systems are ablecan be appropriate to effectively address the educational needs of both advanced and special education students because they employ flexible teaching methods and students can use them at their own pace. For students requiring special attention, we employ a national director who is an expert on the delivery of special education services in a virtual or blended public school environment and who overseessupports the special education programs at the schools we serve. We directWhile compliance with federal and state special education laws resides primarily with our managed public school customers, we periodically review and, in cooperation with the schools,

may assist and facilitate the development and implementation of "individualized education plans"Individualized Education Plans for students with special needs and each school'sfor English Language Learners (“ELL”). Each student with special education program is designed to be compliant with the federal Individuals with Disabilities Education Act and all state special education requirements. Each special needs student is assigned a certified special education teacher and the school arranges for any required ancillary services, including speech and occupational therapy, and any required assistive technologies, such as special computer displays or speech recognition software. We support advanced and talented students through our advanced learner program. Advanced learners are able to participate in a wide variety of enrichment seminars, clubs, and mentoring opportunities. Advanced students are connected to each other across state boundaries through learning circles, book clubs, and other special-interest activities.

Supporting Academically At-RiskAt‑Risk Learners.  Our objective is to narrow the achievement gap for those students who enter our virtual or blended public schools behind their same-agesame‑age peers. To that end, we conductstudents are given both formative and summative assessments during the course of the school year in order to identify those students needing specific remedial support as well asand measure the effectiveness of the support. We also offer the Passport schoola program which is designed for academically at-riskat‑risk students, particularly those who have previously dropped out of high school, and which includes more counseling and support services.

Student Support Services.  We provide students attending virtual or blended public schools that we manage and their families with a variety of support services as a means to ensure that we effectivelyhelp them meet their educational needs and goals. We offer supportgoals, and to address any questions or concerns that students and their parents have during the course of their education. We plan and coordinate social events to offer students opportunities to meet and socialize with their school peers.peers where practical. Finally, in connection with our high school offering, each student is assigned a homeroom teacher, and/or an advisor and a guidance counselor who assists them with academic issues, college and career planning and other support as needed.

During school year 2016-17, we completed our two-year nationwide rollout of Students First. Students First is a series of programs that encompass the entire student experience, from on-boarding to personalized outreach to academic and support services for struggling students and surveys for gauging satisfaction and adapting support services.

We are also making substantial investments in our service offerings to improve student outcomes. For example, as part of our Strong Start student onboarding program, we offered a diagnostic assessment tool that a number of Managed Public School Programs have utilized to develop targeted instructional plans for new students who often start school with us before their academic records arrive. In addition, we offer the FAST program in many of the Managed Public School Programs. The purpose of FAST is to help students prepare for their online learning experience by assisting them with non-academic barriers.

Management and Technology Services

        Turn-keyTurn‑key Services.  For most of our managed statewide virtual and blended public schools,Managed Public School Programs, we provide turn-key management services. In these circumstances,a turn‑key suite of services whereby we take responsibility for all aspects of the management of the schools, including the provision of online curriculum and lesson materials, monitoring academic achievement, teacher hiring recommendations and training, compensation of school personnel, financial management and regulatory compliance, marketing and enrollment processingsupport, and provision of curriculum, equipmentcomputers and other required products and services.

Accreditation.  In 2013, AdvancED renewed the Company'sour corporate accreditation for another five years. AdvancED is a non‑profit organization that serves more than 30,000 public and private schools and districts across the United States and isStates. It was created by the parent companymerger of the preK‑12 divisions of the North Central Accreditation Association Commission on Accreditation and School Improvement Northwest Accreditation Commission and the Southern Association of Colleges and Schools CommissionCouncil on Accreditation and School Improvement. TheImprovement, and the subsequent addition of the Northwest Accreditation Commission. Many of the schools we manage also maintain school accreditation through AdvancED and also through regional accreditations with other accrediting associations.

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Compliance and Tracking Services.  Operating a virtual or blended public school entails many of the compliance and regulatory requirements of a traditional public school, as well as an applicable charter schoolprovisions or other requirements specifically adopted for online public schools. We have developed management systems and processes designed to track compliance with those requirements, including tracking appropriate student information and meeting various state and federal reporting, record keeping and privacy requirements for the schools we serve. For example, we collect enrollment related information, monitor attendance and administer proctored state tests. Further, as we have expanded into new states, our processes have grown increasingly robust. In fiscal year 2014, we hired acreated the position of Chief School Compliance Officer ("CSCO"(“CSCO”) to supplement and oversee school compliance. Among other responsibilities, our CSCO complements our corporate compliance and ethics function and reviews and advises our managed public schools on applicable regulatory

policies, practices and procedures. The CSCO reports semi-annuallyprovides a school compliance report semi‑annually to the Audit Committee, and annually toor more frequently on various matters as requested by the Board of Directors.Committee.

Financial Management Services.  For the schools we manage, we oversee the preparation of the annual budget and coordinate with the school'sschool’s governing body to determine its annual objectives. In addition, we implement an internal control framework, develop policies and procedures, provide accounting services and payroll administration, oversee all federal entitlement programs, and arrange for external audits and ensure allsupport state and local financial compliance reporting is met.by the schools.

Facility, Operations and Technology Support Services.  We generally operate administrative offices and all other facilities on behalf of the schools we manage. We provide these schools with a complete technology infrastructure. In addition, we provide a comprehensive help desk solution for students and school staff to address their computer or other technical issues.

Human Resources Support Services.  We are actively involved in recruiting virtual and blended public school administrators, teachers and staff, through a thorough interview and orientation process. To better facilitate the hiring process, we review and analyze the profiles of teachers that have been highly effective in our managed public and blended schools learning systems to identify the attributes desired in future new hires. While many schools employ teachers directly, we also help negotiate and secure employment benefits and payroll services for school staff on behalf of the schools and administer employee benefit plans for school employees. Additionally, we assist the schools we serve in drafting and implementing administrative policies and procedures.

Competition

As a general matter, we face varying degrees of competition from a variety of education companies because the scope of our offerings and the customers we serve encompass many separate and distinct segments of the education business. We compete primarily with companies that provide online curriculum and school support services to K-12K‑12 virtual and blended public schools, and school districts. These companies include Pearson PLC (Connections Academy and Advanced Academics), White Hat Management, LLC,Lincoln Learning Solutions, Inspire Charter Schools, and National Network of DigitalCharter Schools Management Foundation Inc.,USA, among others. We also face competition from online and print curriculum developers. The online curriculum providers include Apex Learning Inc., Compass Learning Inc.,Curriculum Associates, Achieve 3000, Edgenuity Inc., Glynlyon, Inc., Edmentum Inc., Renaissance Learning, Inc., Rosetta Stone Inc. and traditional textbook publishers including Houghton Mifflin Harcourt, McGraw-HillMcGraw‑Hill Companies and Pearson PLC. Other competing online curriculum providers, including Khan Academy, Duolingo, IXL Learning, Inc. and LearnZillion, Inc., offer a “freemium” model which provides curriculum at no charge but charges for additional products or services and certain other providers. We also compete with institutions such as The Laurel Springs School (Nobel Learning Communities, Inc.) and Penn Foster Inc. for online private school students. Additionally, we compete with state-administeredstate‑administered online programs such as Florida Virtual School.

We believe that the primary factors on which we compete are:

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extensive experience in, and understanding of, K-12 virtual schooling;



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track record of student academic gains and customer satisfaction;

quality of curriculum and online delivery platform;

Broadly speaking, we participate in the market for K-12K‑12 education. In states where we enter into long-termlong‑term service agreements to manage virtual and blended public schools, we believe that we generally serve less than 1% of the public school students in that state. The customers for Institutional Salesbusiness are schools and school districts seeking individual courses to supplement their course catalogs or school districts seeking to offer an online education program to serve the needs of a small subset of their overall student population. Defining a more precise relevant market upon which to base a share estimate would not be meaningful due to significant limitations on the comparability of data among jurisdictions. For example, some providers to K-12K‑12 virtual public schools serve only high school students; others serve the elementary and middle school students, and a fewsome serve both. There are also providers of online virtual K-12K‑12 education that operate solely within individual states or geographic regions rather than globally as we do. Furthermore, some school districts offer their own virtual programs with which we compete. Parents in search of an alternative to their local public school have a number of alternatives beyond virtual and blended public schools, including private schools, public charter schools and home schooling. In our International and Private Pay schools, we compete for students seeking an English-based K-12English‑based K‑12 education worldwide, and we currently draw students from more than 100countries. In addition, our integrated learning systems consist of components that face competition from many different types of education companies, such as traditional textbook publishers, test and assessment firms and private education management companies. Finally, our learning systems are designed to operate domestically and internationally over the Internet, and thus the geographic market for many of our products and services is global and indeterminate in size.

Key Functional Areas

Public Affairs, School Development, Student Recruitment and Marketing

We seek to increase public awareness of the educational and fiscal benefits of individualizedour online learning options through full-time onlinefull‑time virtual and blended instructional models as well as supplementary course options. We receive numerous inquiries from school districts, legislators, public charter school boards, community leaders, state departments of education, educators and parents who express the desire to have a choice in public school options. Our public affairs and school development teams work together with these interested parties to identify and pursue opportunities to expand the use of our products and services in new and existing jurisdictions.

Our student recruitment and marketing team is responsiblefocused on promoting the K-12 online education category and generating enrollments for promoting our corporate brand, generating new student enrollments, managing the consumer sales business, conductingCompany’s virtual school customers within that category.  This is achieved by creating awareness among families with K-12 students through integrated marketing campaigns that include offline and digital media, as well as web assets. These campaigns are continuously optimized using data analytics and market and customer research, defining, packaging and pricing our product offerings to customers, andresearch. In addition, the marketing team assists in enhancing the onboarding experience of new students enrolled in the schools we serve through the development and operation of student clubs and parent support opportunities. This team employs a variety of strategies designed to better understand and address the requirements of our target markets.

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Operations

The physical learning kits that accompany our online lessons are an essential component of many of our courses. A student enrolling in one of our courses may receive multiple textbooks, art supplies, laboratory supplies (e.g. microscopes and scales) and other reference materials designed to enhance the learning experience. We package these books and materials into course-specificcourse‑specific learning kits. Because each student'sstudent’s curriculum is customized, the combination of kits for each student must also be customized. In fiscal year 2014, we assembled approximately 6.7 million items into more than 675,000 kits.

Over our 1417 years of operation, we believe that we have gained significant experience in the sourcing, assembly and delivery of school supplies and materials. We have developed strong relationships with partners allowing us to source goods at favorable price, quality and service levels. Our fulfillment partner stores our inventory, assembles our learning kits and ships the kits to students. We have invested in systems, including our Order Management System, to automatically translate the curriculum selected by each enrolled student into an order to build the corresponding individualized learning kit. As a result, we believe we have an end-to-endend‑to‑end warehousing and fulfillment operation that will cost-effectivelycost‑effectively scale as the business grows in scope and complexity.

For many of our virtual and blended public school customers, we attempt to reclaim any materials that could be cost-effectively re-utilizedcost‑effectively re‑utilized in the next school year. These items, once returned to our fulfillment centers, are refurbished and included in future learning kits. This reclamation process allows us to maintain lower materials costs. Our fulfillment activities are highly seasonal, and are centered on the start of school in August or September. Accordingly, approximately 65%

77% of our annual materials inventory is received between March and MayJune and approximately 65%73% of shipments to customers occur between June and September. In order to ensure that students in virtual and blended public schools have access to our OLS, we often provide students with a computer, where applicable or required and all necessary support. We source computers and ship them to students when they enroll and reclaim the computers at the end of a school year or upon termination of their enrollment or withdrawal from the school in which they are enrolled.

Technology

Our online learning systems, along with our back office support systems, are built on our proprietary Service Oriented Architecture ("SOA"(“SOA”) to ensure high availability and redundancy. The flexibility and security enabled by our SOA are the core principles of our systems'systems’ foundation.

Service Oriented Architecture.  All of our systems leverage our SOA that is built on top of proven Enterprise Java.Technologies. The SOA allows us to develop iterative solutions expeditiously to meet both present and future market needs. Our high availability and scalability are also facilitated by this architecture. The SOA also enables seamless integration with third-partythird‑party solutions in our platform with ease and efficiency.

Availability and Redundancy.  Our SOA allows for primary and secondary equipment to be utilized at all network and application tiers. Each application layer is load balanced across multiple servers, which, along with our sophisticated network management capabilities, allows for additional hardware to be inserted into our network providing us with optimal scalability and availability as evidenced by our typically greater than 99% uptime over a growing user base. We regularly backup critical data and store this backup data at an offsite location.

        Security.Cybersecurity.Our securitycybersecurity measures and policies include dividing application layers into multiple zones controlled by firewall technology. Sensitive communications are encrypted between client and server and our server-to-serverserver‑to‑server accessibility is strictly controlled and monitored. We also have engaged an outside firm to manage unwantedassist with traffic that may target our services and systems. We protect sensitive information and meet regulatory and contractual commitments through policy and control governance that is validated on a semi‑annual basis. We maintain a layered security architecture and regularly retain third parties to test our networks, servers and applications for vulnerabilities. We manage a business‑centric information security program that is tailored for our constantly changing IT compliance and information security threat landscape.

Physical Infrastructure.  We utilize leading vendors to provide a foundation for our SOA. Our systems are housed offsite in data centers that provide a robust, redundant network backbone, power and

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geographically separated disaster recovery. Our second data center, geographically separated from our primary center, operates as a ready business continuity site with secured, near-realnear‑real time data replication from our primary data center. We vigilantlyroutinely monitor our physical infrastructure for security, availability and performance.

Other Information

Intellectual Property

We continue to invest in our intellectual property as we develop more courses for new grades and expand into adjacent education markets, both in the United States and overseas. Through acquisitions, we have also acquired curriculum, patents and trademarks that expand our portfolio of educational products and services. We continue to add features and tools to our proprietary learning platform and support systems to assist teachers and students and improve educational outcomes, such as adaptive learning technologies. These intellectual property assets are critical to our success and we avail ourselves of the full protections provided under the patent, copyright, trademark and trade secrets laws. We also routinely utilize confidentiality and licensing agreements with our employees, the virtual and blended public schools, traditional schools, school districts and private schools that we serve, individual consumers, contractors and other businesses and persons with which we have commercial relationships.

Our patent portfolio includes issued patents and pending applications directed towards various aspects of our educational products and offerings. In particular, the first family of patent applications we filed in the U.S. and in foreign countries was directed towards the first generation of our system and method of virtual schooling and includes two issued patents. Further, two U.S. patents were issued for our systems and methods of online foreign language instruction. We

have submitted patent applicationsbeen issued patents in the United States and in a foreign countriescountry for aspects of the second generation of our virtual school application, and one U.S. patent has been issued.application.

We own and register the copyrightcopyrights to the lessons contained in the courses that comprise our proprietary curriculum and we continue to register this growing lesson portfolio with the U.S. Copyright Office.curriculum. We also have obtained federal and state registrations for numerous trademarks that are related to our offerings and we have applied to the U.S. Patent and Trademark Office to register certain new trademarks. As a result of the acquisitions we have made, we also own U.S. and foreign trademarks and a portfolio of domain names.

We grant licenses to individuals to use our software in order toand access our online learning systems. Similarly, schools are granted a licenselicenses to useutilize our online learning systems in orderand to access SAMSTotalView and our other systems. These licenses are intended to protect our ownership and the confidentiality of the embedded information and technology contained in our software and systems. We also own many of the trademarks and service marks that we use as part of the student recruitment and branding services we provide to schools. Those marks are licensed to the schools for use during the term of the products and services agreements.

Our employees, contractors and other parties with access to our confidential information sign agreements that prohibit the unauthorized use or disclosure of our proprietary rights, information and technology.

Employees

As of June 30, 2014,2017, we had approximately 4,2004,750 employees, including approximately 2,2002,500 teachers. A majoritySubstantially all of these employees are located in the United States. In addition, there are approximately 3,0002,200 teachers who are employed by virtual or blended public schools that we manage under turn-keyturn‑key solution contracts with those schools but are not direct employees of K12. None of our employees are represented by a labor union or covered by a collective bargaining agreement; however, certain managed public schools we serve employ unionized teachers. We believe that our employee relations are good.

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Corporate Information

Our principal executive office is located at 2300 Corporate Park Drive, Herndon, Virginia 20171 and our telephone number is (703) 483-7000.483‑7000. Our website address is www.K12.com.

Available Information

We make available, free of charge through our website, our annual reports on Form 10-K,10‑K, quarterly reports on Form 10-Q,10‑Q, current reports on Form 8-K,8‑K, and amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"“Exchange Act”), promptly after they are electronically filed with the Securities and Exchange Commission (the "SEC"“SEC”). Our earnings conference calls are web cast live via our website. In addition to visiting our website, you may read and copy public reports we file with the SEC at the SEC'sSEC’s Public Reference Room at 100 F Street, N.E., Washington D.C. 20549, or at www.sec.gov. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.1‑800‑SEC‑0330. Information contained on our website is expressly not incorporated by reference into this Annual Report.

REGULATION

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REGULATION

We and the virtual and blended public schools that we serve are subject to regulation by and laws of each of the states in which we operate. The state laws and regulations that impact our business are primarily those that authorize or restrict our ability to operate these schools, as well as the applicable funding mechanisms.mechanisms for the schools. To the extent these schools receive federal funds, such as through a grant program or financial support dedicated for the education of low-incomelow‑income families, these schools also become subject to additional federal regulation.

State Laws Authorizing or Restricting Virtual and Blended Public Schools.  The authority to operate a virtual or blended public school is dependent on the laws and regulations of each state. Laws and regulations vary significantly from one state to the next and are constantly evolving. In states that have implemented specific legislation to support virtual and blended public schools, the schools are able to operate under these statutes. Other states provide for virtual and blended public schools under existing public charter school legislation or provide that school districts and/or state education agencies may authorize them. Some states do not currently have legislation that provides for virtual and blended public

schools or have requirements that effectively prohibit such schools and, as a result, may require new legislation before virtual and blended public schools can open in the state. We currently serve

Obtaining new legislation in the remaining states where we do not have virtual and blended public schools or school district-led programs in 33 states plus the District of Columbia.

        Obtaining new legislation in these remaining states can be a protracted and uncertain process. When determining whether to pursue expansion into new states in which the laws are ambiguous, we research the relevant legislation and politicalpolicy climate and then make an assessment of the perceived likelihood of success before deciding to commit resources. Specifically, we take into account numerous factors including, but not limited to, the regulations of the state educational authorities, whether the overall politicalpolicy environment is amenable to school choice, whether current funding levels for virtual school and blended schools enrollments are adequate and accessible, and the presence of non-profitnon‑profit and for-profitfor‑profit competitors in the state.

State Laws and Regulations Applicable to Virtual and Blended Public Schools.  Virtual and blended public schools that purchase our curriculum and management services are often governed and overseen by a non-profitnon‑profit or a local or state education agency, such as an independent public charter school board, local school district or state education authority. We generally receive funds for products and services rendered to operate virtual public schools or blended schools under detailed service agreements with that governing authority. Virtual and blended public schools are typically funded by state or local governments on a per student basis. A virtual or blended public school that fails to comply with the state laws and regulations applicable to it may be required to repay these funds and could become ineligible for receipt of future state funds.

To be eligible for state funding, some states require that virtual and blended public schools be organized under not-for-profitas not‑for‑profit charters exempt from taxation under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the "Code"“Code”). The schools must then be operatedorganized exclusively for charitable educational purposes, and not for the benefit of private, for-profitfor‑profit management companies. The board or governing authority of the not-for-profitnot‑for‑profit virtual or blended public school must retain ultimate accountability and control for the school'sschool’s operations to retain its tax-exempttax‑exempt status. It may not delegate its responsibility and accountability for the school'sschool’s operations. Our service agreements with these virtual and blended public schools are therefore structured to ensure the full independence of the not-for-profitnot‑for‑profit board and preserve its arms-lengtharms‑length ability to exercise its fiduciary obligations to operate a virtual or blended public school.

Laws and regulations affect many aspects of operating a virtual or blended public school. They can dictate the content and sequence of the curriculum, the methods for counting student enrollments for funding purposes, graduation requirements, to earn a diploma, use of approved textbooks, the length of the school year and the school day, the accessibility of curriculum and technology to students with disabilities, teacher:teacher to student ratios, specific credentialing of teachers and administrators, the assessment of student performance and any

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accountability requirements. In addition, a virtual or blended public school may be obligated to comply with states'states’ requirements to offer programs for specific populations, such as students at risk of dropping out of school, advanced and talented students, non-Englishnon‑English speaking students, pre-kindergartenpre‑kindergarten students and students with disabilities. Tutoring services and the use of technology may also be regulated. Other state laws and regulations may affect the school'sschool’s compulsory attendance requirements, treatment of absences and make-upmake‑up work, and access by parents to student records and teaching and testing materials. Additionally, states have various requirements concerning

In addition to federal laws protecting the privacy and reporting of extensivestudent education records, a growing number of states are enacting laws to protect the privacy of student data that may applyand to guard against its misuse. As a general matter these laws are designed to prevent third‑party vendors to schools from using student data for non‑educational purposes and ensuring the school. Asecurity of personally identifiable information. In addition, virtual or blended public schoolschools may have to comply with state requirements that school campuses report various types of data as performance indicators of the success of the program.

States have laws and regulations concerning certification, training, experience and continued professional development of teachers and staff with which a virtual or blended public school may be required to comply. There are also numerous laws pertaining to employee salaries and benefits, statewide teacher retirement systems, workers'workers’ compensation, unemployment benefits and matters related to employment agreements and procedures for termination of school employees. A virtual or blended public school must also comply with requirements for performing criminal background checks on school staff, reporting criminal activity by school staff and reporting suspected child abuse.

As with any public school, virtual and blended public schools must comply with state laws and regulations applicable to governmental entities, such as open meetings or sunshine laws, which may require the board of trustees of a virtual or blended public school to provide advance public notice of and hold its meetings open to the public unless an

exception in the law allows an executive session. Failure to comply with these requirements may lead to personal civil and/or criminal penalties for board members or officers or the invalidation of actions taken during meetings that were not properly noticed and open to the public. Virtual and blended public schools must also comply with public information or open records laws, which require them to make school records available for public inspection, review and copying unless a specific exemption in the law applies. Additionally, laws pertaining to records privacy and retention and to standards for maintenance of records apply to virtual and blended public schools.

Other types of regulation applicable to virtual and blended public schools include restrictions on the use of public funds, the types of investments made with public funds, the collection of and use of student fees, and controlling accounting and financial management, and marketing practices.

There remains uncertainty about the extent to which virtual and blended public schools we serve may be required to comply with state laws and regulations applicable to traditional public schools because the concept of virtual and blended public schools is still relatively new.evolving, especially as technology advances. Although we receive state funds indirectly, according to the terms of each service agreement with the local public school entity, our receipt of state funds subjects us to extensive state regulation and scrutiny. States routinely conduct audits of these schools, to verify enrollment, attendance, information technology security, fiscal accountability, special education services and other regulatory issues. While we may believe that a virtual public school or blended school we serve is compliant with state law, an agency'sagency’s different interpretation of law in a particular state, or the application of facts to such law, could result in findings of non-compliance,non‑compliance, potentially affecting future funding or repayment of past funding.

Regulations Restricting Virtual and Blended Public School Growth and Funding.  As a public schooling alternative, some state and regulatory authorities have elected to proceed cautiously with virtual and blended public schools while providing opportunities for taxpayer families seeking this alternative. RegulationsStatutes, regulations or policies that control the growth of virtual and blended public schools range from setting caps on statewide student enrollments, to prescribing the number of schools in a state, to limiting the percentage of time students may receive instruction online. Funding regulations can also have this effect.

        RegulationsStatutes or regulations that hinder our ability to serve certain jurisdictions include: restrictions on student eligibility, such as mandating attendance at a traditional public school prior to enrolling in a virtual or blended public school; caps on the total number of students in a virtual or blended public school;

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restrictions on grade levels served; geographic limitations on enrollments; fixing the percentage of per pupil funding that must be paid to teachers; state-specificstate‑specific curriculum requirements; and limits on the number of charters that can be granted in a state.

Funding regulations for virtual public schools and blended schools can take a variety of forms. These regulations include: (i) attendance—some state daily attendance rules were designed for traditional classroom procedures, and applying them to track daily attendance and truancy in an online setting can cause disputes to arise over interpretation and funding; (ii) enrollment eligibility—some states place restrictions on the students seeking to enroll in virtual and blended public schools, resulting in lower aggregate funding levels; and (iii) teacher contact time—some states have regulations that specify minimum levels of teacher-student face-to-face time.teacher‑student face‑to‑face time; and (iv) completion of course work. These regulations can create logistical challenges for statewide virtual and blended public schools, reduce funding and eliminate some of the economic, academic and technological advantages of virtual learning.

Federal and State Grants.  We have worked with some entities to secure public and grant funding that flows to virtual and blended public schools that we serve. These grants are awarded to the not-for-profitnot‑for‑profit entity that holds the charter of the virtual or blended public school on a competitive basis in some instances and on an entitlement basis in other instances. Grants awarded to public schools and programs—whether by a federal or state agency or nongovernmental organization—often include reporting requirements, procedures and obligations.

Foreign Laws and Regulations.  Schools we operate in other countries are subject to local laws and regulations. We oversee and rely on the administrators in each school on a continuous basis and seek the advice of local legal and regulatory experts as-needed.as‑needed.

Federal Laws Applicable to Virtual Public Schools and Blended Schools

Five primary federal laws are directly applicable to the day-to-dayday‑to‑day provision of educational services we provide to virtual and blended public schools:

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No Child Left BehindEvery Student Succeeds Act ("NCLB"(“ESSA”).  The Every Student Succeeds Act, which took effect on August 2, 2016  and NCLB Waivers.  Throughis authorized through 2020, represents a major change in federal education law by shifting education policy decision making back to the states and by providing most funding ofthrough block grants. Of particular significance to the Title I programs for disadvantaged students underCompany is that the Elementary and Secondary Education Act ("ESEA"), as amended by NCLB,states will now have the federal government requires public schoolsdiscretion to develop a stateand design their own accountability system based on academic standards and assessments developed bysystems. In addition, states have been given the state. Each state must determine a proficiency levelauthority to adopt different types of academic achievement based on the state assessments, and must determine what constitutes adequate yearly progress ("AYP") toward that goal. NCLB set a deadline to ensure that no later than the 2013-14 school year, 100% of students, including those in all identified subgroups (such as economically disadvantaged, limited English proficient and minority students), must meet or exceed the state proficient level of academic achievement on state assessments. If a Title I school does not make adequate yearly progress as defined in the state's plan, the local education agency ("LEA") is required to identify the school as needing school improvement, which triggers a series of mandated consequencesannual accountability frameworks for school improvement, such as an optionperformance, including proficiency and growth standards for all students to transfer to another public school served by the LEA, which may include a virtual or blended public school. If the school does not make adequate yearly progress in subsequent years, other corrective action must be taken including, but not limited to, providing supplemental education services to the students who remain in the school, replacing school staff, implementing a new curriculum, extending the school year or the school day, reopening the school as a public charter school with a private management company or turning over the operation of the school to the state educational agency.

        Beginning in 2011, it becameand subgroups. The ESSA makes clear that the NCLB goal of 100% of students reaching proficiency by 2014 was unrealistic, among other learned shortcomings in the law, and the U.S. Department of Education ("DOE") announcedhas a policymore limited role to impose federal mandates, direction or control over the authority given to the states. Finally, there are provisions that would allowprovide significant grants to support the start-up of new charter schools with priority to states that serve at‑risk students through dropout prevention and recovery and other grants to applysupport language instruction for waivers of certain NCLB requirements, including the key accountability provisions,English language learners and immigrant students.  Notwithstanding these federal limitations, states are still required under ESSA to test students in exchange for agreeing to new principled-based reforms. To

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qualify for an NCLB waiver, a state must: (i) adopt college and career-ready standards for reading or language arts and math (with assessment standards that measure student achievement growth), (ii) establish annual measurable objectives ("AMOs") that can include different target achievement levels for different districts, schools or student groups, (iii) developannually in grades 3-8 and implement teacheronce in grades 10-12, and principal evaluation and support systems, and (iv) evaluate and remove duplicative and burdensome state reporting requirements.

        As of July 2014, 42 states plus the District of Columbia have obtained NCLB waivers, as well as eight school districts in California after their state application was denied. Only four states have not applied for waivers and waivers are pending for two states. Of the 33 states and the District of Columbia where we currently serve studentsscience once in Managed Public Schools, 29 states and the District of Columbia have received waivers from the DOE. Of the remaining four jurisdictions where we manage schools, Wyoming and Iowa are pursuing waivers. California has chosen not to continue pursuing a waiver, and Washington had its waiver revoked in April 2014.

        Another provisioneach of the NCLB requires public school programsfollowing grade spans: 3-5, 6-9 and 10-12. States have until September 2017 to ensure that all teachers are highly qualified in core subjects. A highly qualified teacher means one who has: (i) obtained full state certification or licensure as a teacher and who has not had certification or licensure requirements waived on an emergency, temporary or provisional basis; (ii) obtained a bachelor's degree; and (iii) demonstrated competence insubmit plans to the academic subject the teacher teaches. All teacher aides working in a school supportedU.S. Department of Education to demonstrate compliance with Title I funds must be highly qualified which means the person must have a high school diploma or its equivalent and one of the following: completed at least two years of study in an institution of higher education, obtained an associate's or higher degree, or met a rigorous standard of quality demonstrated through a formal state or local assessment. Virtual and blended public schools using our products and services may be required to meet these requirements for any persons who perform instructional services.ESSA.

        Under NCLB, even schools that do not receive Title I funding must provide certain notices to parents. For example, schools may be required to provide a school report card and identify whether any school has been identified as needing improvement and for how long. Parents also must be provided data that will be used to determine adequate yearly progress. Virtual and blended public schools may be contacted by military recruiters who have the right to access the names, addresses and telephone numbers of secondary school students for military recruiting purposes. Additionally, virtual public schools and blended schools may be required to notify parents that they have the option to request that this information not be released to military recruiters or to institutions of higher education.

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Individuals with Disabilities Education Act ("IDEA"(“IDEA”).  The IDEA is implemented through regulations governing every aspect of the special education of a child with one or more of the specific disabilities listed in the Act. The IDEA created a responsibility on the part of a school to identify students who may qualify under the IDEA and to perform periodic assessments to determine the students'students’ needs for services. A student who qualifies for services under the IDEA must have in place an individual education plan, which must be updated at least annually, created by a team consisting of school personnel, the student, and the parent. This plan must be implemented in a setting where the child with a disability is educated with non-disablednon‑disabled peers to the maximum extent appropriate. The Act provides the student and parents with numerous due process rights relating to the student'sstudent’s program and education, including the right to seek mediation of disputes and make complaints to the state education agency. The schools we manage are responsible for ensuring the requirements of this Act are met. The virtual public schools and blended schools could beare required to comply with certain requirements in the Act concerning teacher certification and training. We, the virtual public school or the blended school could be required to provide additional staff, related services and supplemental aids and services at our own cost to comply with the requirement to provide a free appropriate public education to each child covered under the IDEA. If we fail to meet this requirement, we, the virtual public school or blended school could lose federal funding and could be liable for compensatory educational services,

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reimbursement to the parent for educational service the parent provided and payment of the parent's attorney'sparent’s attorney’s fees.

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Section 504 of theThe Rehabilitation Act of 1973.1973 and the Americans with Disabilities Act.  A virtual public school or blended school receiving federal funds is subject to Section 504 of the Rehabilitation Act of 1973 ("(“Section 504"504”) insofar as the regulations implementing the Act govern the education of students with disabilities as well as personnel and parents. Section 504 prohibits discrimination against a person on the basis of disability in any program receiving federal financial assistance if the person is otherwise qualified to participate in or receive benefit from the program. Students with disabilities not specifically listed in the IDEA may be entitled to specialized instruction or related services pursuant to Section 504 if their disability substantially limits a major life activity. Beginning in 2011, the Office of Civil Rights ("OCR"(“OCR”) of the United States Department of Education interpreted both Section 504 and Title II of the Americans with Disabilities Act to apply to elementary and secondary schools and to require that students with disabilities be afforded substantially equivalent ease of use as students without disabilities. As applied to online public schools, such "web accessibility"“web accessibility” requires technical capabilities similar to those applied to procurements of information technology by the federal government under Section 508 of the Rehabilitation Act orof 1973 (“Section 508”) or standards adopted by the world-wideworld‑wide web consortium. If a school fails to comply with the requirements and the procedural safeguards of Section 504, it may lose federal funds even though these funds flow indirectly to the school through a local board. In the case of bad faith or intentional wrongdoing, some courts have awarded monetary damages to prevailing parties in Section 504 lawsuits. In May 2016, the U.S. Department of Justice issued a supplemental notice of proposed rulemaking soliciting additional public comments on the appropriate standard for determining Web accessibility compliance under Section 508 and Title II of the ADA and allowed two years for covered entities to come into full compliance after issuance of its final rules.





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Family Educational Rights and Privacy Act.  Virtual public schools and blended schools are also subject to the Family Educational Rights and Privacy Act ("FERPA"(“FERPA”) which protects the privacy of a student'sstudent’s educational records and generally prohibits a school from disclosing a student'sstudent’s records to a third party without the parent'sparent’s prior consent. The law also gives parents certain procedural rights with respect to their minor children'schildren’s education records. A school'sschool’s failure to comply with this law may result in termination of its eligibility to receive federal education funds.

        If we fail to comply with otherOther Federal Laws.  Other federal laws including federal civil rights laws not specificalso apply to virtual managed schools, in some cases depending on the demographics associated with a school. For example, Title VI of the Civil Rights Act of 1964 has been deemed to apply to ELL Students, as further defined in the joint guidance issued by the U.S. Departments of Justice and Education in January 2015. Title IX of the Education Amendments of 1972 also applies, which prohibits discrimination on the basis of gender in education programs, we could be determined ineligibleactivities and employment, applies to all schools that receive funds from federal programs or face criminal or civil penalties. Finally, therefunds. There are also other federal laws and regulations that affect other aspects of our business such as the identify theft rules adopted by the Federal Trade Commission and for which we have adopted policies to ensure compliance.

The Children’s Internet Protection Act requires that school districts that receive certain types of federal funding must ensure that they have technology which blocks or filters certain material from being accessed through the Internet. We have developed procedures by which computers that we ship to students meet this requirement. If we fail to comply with these and other federal laws, we could be determined ineligible to receive funds from federal programs or face penalties.

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ITEM 1A.  RISK FACTORS

Risks Related to Government Funding and Regulation of Public Education

MostThe majority of our revenues come from Managed Public School Programs and depend on per pupil funding amounts and payment formulas remaining near the levels existing at the time we execute service agreements with the Managed Public Schoolsmanaged public schools we serve. If those funding levels or formulas are materially reduced or modified due to economic conditions or political opposition, new restrictions adopted or payments delayed, our business, financial condition, results of operations and cash flows could be adversely affected.

The public schools we contract with are financed with government funding from federal, state and local taxpayers.Our business is primarily dependent upon those funds. Budget appropriations for education at all levels of government are determined through the politicala legislative process, which may also be affected by negative views of for‑profit education companies or conditions in the economy at large, such as the recessionary climate in the United States which led to budgetary pressures on state and local governments from 2008-20132008‑13 and significant declines in public school funding. The results of federal and state elections can also result in shifts in education policy and the amount of funding available for various education programs. 

The political process and potential variability in general economic conditions create a number of risks that could have an adverse effect on our business including the following:

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Legislative proposals can and have resulted in budget or program cuts for public education, including the virtual and blended public schools and school districts we serve, and therefore have reduced and could potentially limit or eliminate the products and services those schools purchase from us, causing our revenues to decline. From time to time, proposals are introduced in state legislatures that single out virtual and blended public schools for disparate treatment.



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Economic conditions could reduce state education funding for all public schools, and could be disproportionate for the Managed Public Schools we serve. Our annual revenue growth is impacted by changes in federal, state and district per pupil funding levels. For example, due to the budgetary problems arising from the recession, many states reduced per pupil funding for public education affecting many of the public schools we serve, including even abrupt mid-year cuts in certain states, which in some cases were retroactively applied to the start of the school year as a result of formulaic adjustments. In addition, as we enter into service agreements with multiple Managed Public Schools in a single state, the aggregate impact of funding reductions applicable to those schools could be material. We have service agreements with 15 schools in California, for example, and while each school is independent with its own governing authority and no single Managed Public School accounts for more than ten percent of our revenue, regulatory actions that affect the level or timing of payments for all similarly situated schools in that state could adversely affect our financial condition. At this time, many states still have budget issues. The specific level of federal, state and district funding for the coming years is not yet known and, taken as a whole, it is reasonable to believe that a number of the public schools we serve could experience lower per pupil enrollment funding, while others may increase funding as the economic conditions improve.



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As a public company, we are required to file periodic financial and other disclosure reports with the SEC. This information may be referenced in the legislative process, including budgetary considerations, related to the funding of alternative public school options, including virtual public schools and blended schools. The disclosure of this information by a for-profit education company, regardless of parent satisfaction and student performance, may nonetheless be used by opponents of virtual and blended public schools to propose funding reductions or restrictions.



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From time to time, government funding to schools is not provided when due, which sometimes causes the affected schools to delay payments to us for our products and services. These payment delays have occurred in the past and can deprive us of significant working capital until the matter is resolved, which could hinder our ability to implement our growth strategies and conduct our business. For example, in fiscal year 2012, due to shortfalls in its general revenue funds, California

announced that it would be deferring its per-student attendance paymentsFailure to all public schools until early fiscal year 2013, which significantly increased our accounts receivable balance.

Thecomply with regulatory requirements, poor academic performance, or misconduct by us or operators of other virtual public schools, public school district virtual learning programs or blended schools could tarnish the reputation of all the school operators in our industry, which could have a negative impact on our business.business or lead to punitive legislation.

As a non-traditionalnon‑traditional form of public education, online public school operators will be subject to scrutiny, perhaps even greater than that applied to traditional brick and mortar public schools or public charter schools. Not all virtual public school, school district virtual learning program or blended school operatorsschools will have successful academic programs or operate efficiently, and new entrants may not perform well either. Such underperformance could create the impression that virtual schooling is not an effective way to educate students, whether or not our learning systems achieve satisfactory performance. Consistently poor academic performance, or the perception of poor performance, could also lead to termination of an approved provider status in some jurisdictions. jurisdictions, or to passage of legislation empowering the state to restructure or close low-performing schools, such as legislation enacted in Tennessee in 2013 with academic performance criteria applying only to virtual schools.

Beyond academic performance issues, some virtual school operators, including us, have been subject to governmental investigations alleging, among other things, false attendance reporting, the misuse of public funds or financial irregularities.failures in regulatory compliance. These allegations have attracted significant adverse media coverage and have prompted legislative hearings and regulatory responses.  Although these investigationsInvestigations have focused on specific companies and individuals, or even entire industries, such as the industry‑wide investigation of for‑profit virtual schools initiated by the Attorney General of California in the case of for-profit higher education companies, they may negatively impact public perceptions of virtual public schools, public school district virtual learning programs or blended school providers generally, including us.2015. The precise impact of these negative public perceptionsgovernmental investigations on our current and future business is difficult to discern, in part because of the number of states in which we operate, and the range of particularpurported malfeasance or performance issues involved. We have incurred significant costs in several states advocating against harmful legislation which, in our opinion, was aggravatedinvolved, or interest by negative media coverage about us or other operators.state regulatory authorities. If these few situations, or any additional alleged misconduct, cause all virtual public school, school district virtual learning program and blended school providersschools to be viewed by the public and/or policymakers unfavorably, we may find it difficult to expand into new states or enter into or renew our contracts to operate virtual or blendedmanage these schools. In addition, this perception could serve as the impetus for more restrictive legislation, which could limit our future business opportunities, such as the recent restrictions enacted in Tennessee which cap enrollment growth in schools with weak academic performance.

Opponents of virtual and blended public charter schools have sought to challenge the establishment and expansion of such schools through the judicial process. If these interests prevail, it could damage our ability to sustain or grow our current business or expand in certain jurisdictions.

We have been, and will likely continue to be, subject to public policy lawsuits filed against virtual and blended charter schools by those who do not share our belief in the value of this form of public education.education or the involvement of

for-profit education management companies. Whether or not we are a named party to these lawsuits, legal claims have involved challenges to the constitutionality of authorizing statutes, methods of instructional delivery, funding provisions and the respective roles of parents and teachers. ForAlthough stayed by court order in 2017, for example, in 2014, the New Jersey EducationLouisiana Association of Educators, the state affiliate of a national teachers union, successfully challenged the grantconstitutionality of astate funding to certain types of charter to the Newark Preparatory Charter School that was contracting with us for educational products and services. The court denied the union's challenge and sustained the grant of the charter.In the Matter of the Grant of a Charter to the Merit Preparatory Charter Sch. and in the Matter of the Grant of a Charter to the Newark Preparatory Charter Sch., 435 N.J. Super. 273 (App Div. 2014)

Actual or alleged misconduct by our senior management and directors or officials could make it more difficult for us to enter into new contracts or renew existing contracts.

If we or any of our current or former directors, officers, key employees or officials are accused or found to be guilty of serious crimes or civil violations, including the mismanagement or improper accounting of public funds, or violations of the federal securities laws, the schools we serve could be barred or discouraged from entering into or renewing service agreements with us. As a result, our business and revenues would be adversely affected.

New laws or regulations not currently applicable to for-profitfor‑profit education companies in the K-12K‑12 sector could be enacted and negatively impact our operations and financial results.

As the provision of online K-12K‑12 public education matures, novelpolicy or business practice issues may arise that could lead to the enactment of new laws or regulations similar to, or in addition to, laws or regulations applicable to other areas of education and education at different levels.industry sectors. For example, for-profitfor‑profit education companies that own and operate post-secondarypost‑secondary colleges depend in significant respect on student loans provided by the federal government to cover tuition expenses, and federal laws prohibit incentive compensation for success in securing enrollments or financial aid to any person engaged in student recruiting or admission activities. In contrast, while students in virtual or blended public K-12K‑12 schools are entitled to a free public education with no federal or state loans necessary for tuition, laws could be enacted that make for-profitfor‑profit management companies serving such schools subject to similar recruitment or other restrictions.

Risks Related to Our Business and Our Industry

The schools we contract with and serve are governed by independent governing bodies that may shift their priorities or change objectives in ways adverse to us, or react negatively to acquisitions or other transactions.

We contract with and provide a majority of our products and services to virtual and blended public schools governed by independent boards or similar governing bodies. While we typically share a common objective at the outset of our business relationship, over time our interests could diverge resulting in changes adverse to our business. For example, in fiscal year 2013, in connection with a one-year charter renewal of2014, the Colorado Virtual Academy ("COVA") by its school district authorizer, our interests diverged significantly with the COVA governing authority, whichAgora Cyber Charter School expressed its intention to assume management of the school afterbeginning in the 2013-142014‑15 school year while continuing to purchase curriculum and other services from us. IfIn late fiscal year 2016, the Agora board determined to reinstate portions of the management contract it had outsourced to other vendors the prior year. As these independent boards of the schools or school districts we serve subsequently shift their priorities or change objectives, and as a result reduce or modify the scope of services and products we provide, or terminate their relationship with us, our ability to generate revenues consistently over time would be adversely affected.

Our contracts with the Managed Public Schoolsmanaged public schools we serve are subject to periodic renewal, and each year severalsome of these agreements are set to expire. If we are unable to renew several such contracts or if a single significant contract expires during a given year, our business, financial condition, results of operations and cash flow could be adversely affected.

In fiscal year 20142017, we had contracts with 73 Managed Public Schools to provide our full range of products and services in 33 states andto 77 schools throughout the DistrictUnited States under our Managed Public School Programs. A portion of Columbia. Some of these Managed Public School contracts are scheduled to expire in any given year and may not be renewed or may be renewed on terms much less favorable to us. Due toMost of these contracts include auto renewal provisions having significant advance notice deadlines.  The advance notice provisions or on the request of a school's charter authority, we usually beginare intended to allow sufficient time to engage in renewal negotiations before and during the final year of these contracts and anycontracts. A renewed contract could involve a restructuring of our services and management arrangements that could lower our revenue or even change how revenue and expenses are recognized. For example, in fiscal year 2014,When the Agora Cyber Charter School ("Agora") electedcustomer prefers the existing contract terms to use a request for proposal process forbe extended, it can elect to disregard the servicesadvance notice provision and products required to operatehave the school for the 2015-16 school year in connection with its charter renewal application. Agora accounted for 13% of the Company's revenue in fiscal year 2014.contract automatically renew. If we

Because families have alternative choices both within and outside the public school system for educating their children, it is typical during each school year that some students withdraw from schools using our online education services and switch to their traditional local public schools, other charter school alternatives or private schools. While themany of our Managed Public Schools we serveSchool Programs also accept new student enrollment throughout the year where permitted, generally our average student enrollment declines as the school year progresses such that we serve on average fewer students at the end of any given school year than at the beginning of the year. If theour Managed Public Schools we serveSchool Programs experience higher withdrawal rates during the year and/or enroll fewer new students as the year progresses than we have experienced in the past, our revenues, result of operations and financial conditionscondition would be adversely affected.

Similarly, at the start of each new school year students who had remained enrolled through the end of the previous year may have graduated from eighth or twelfth grade or have left our Managed Public SchoolsSchool Programs for any number of reasons. To the extent our Managed Public Schools we serveSchool Programs do not retain previously enrolled students from the prior year, they must attract new students at the start of the year to sustain their average student enrollment year over year, as well as to grow their enrollment each year, based upon enrollment objectives determined by the governing authority of those schools. If the schools we serve in the aggregate are able only to sustain prior year enrollment levels, our revenues may not grow from the prior year, absent improved revenue capture or the addition of new schools. More fundamentally, if average student enrollment at the schools we serve declines from one year to the next, our revenues, results of operations and financial condition will be adversely affected.

We also contract with Managed Public Schoolsvirtual public schools and schools districts to provide marketing and enrollment services, to the schools, and we provide similar services directly to our international and private pay schools. However, many of our customers with Non‑managed Public School Programs are responsible for their own marketing and enrollment activities. Efforts on our part to sustain or increase enrollments in the face of higher student withdrawals or fewer returning students at the start of a school year may lead to higher costs for us, and may adversely affect our operating margin. If we or our Non‑managed Program partners are unsuccessful in our marketing planplans or enrollment processes for the schools, the average student enrollment at the schools may not grow as anticipated or could even decline, and adversely affect our revenues, results of operations and financial condition.

The student demographicsBecause the independent governing authorities of our customers may shift priorities or incur new obligations which have financial consequences, we may be exposed to the risk of loss resulting from the nonpayment or nonperformance by our customers and our financial condition, results of operations and cash flows could suffer. 

If our customers were to cause or be subjected to situations that lead to a weakened financial condition, dispute our invoices, withhold payments, or file for bankruptcy, we could experience difficulty and prolonged delays in collecting receivables, if at all. Any nonpayment or nonperformance by our customers could adversely affect our business, financial condition, results of operations and cash flows. For example, in fiscal year 2017, as the Agora Cyber Charter School continued to operate as a self-managed charter school, it delayed its payments to us and our accounts receivable from the school have grown significantly.

As we continue to refine our marketing efforts, and support the enrollment activities for our Managed Public School Programs, changes in our marketing efforts and enrollment activities could lead to decline in overall enrollment at the schools we serve.

As parents evaluate public school choices for their children, we are segmenting our marketing efforts to better attract students who are most likely to benefit from and succeed in virtual education programs and who are likely to remain enrolled with a virtual school over several years. Our research leads us to believe that students with parents who are active and regularly engaged in their education are more likely to be successful in a virtual school, although there is no formula that can predict the success of any particular student. Our more segmented marketing efforts, therefore, may not be wholly successful, and could lead to an overall decline in enrollment for our Managed Public School Programs, thus adversely affecting our revenue and results of operations.

The student demographics of the schools we serve have been changing, which can lead to higher costs and affect our ability to sustain or grow our operating income.

The schools we serve are publicly funded and are generally obligated to accept all students meeting state or district criteria for enrollment. Because an online education environment may offer a better educational opportunity for students falling behind grade level, theour Managed Public Schools we serveSchool Programs have experienced in recent years a higher at-risk

academically at‑risk student population, requiring supplemental student and family support services and closer one-on-oneone‑on‑one involvement by teachers and school personnel, leading to higher costs to us in providing full management and curriculum services to the schools. We consider students academically at‑risk if they were not proficient on the previous year’s state assessment, are credit‑deficient, have previously dropped out, have failed courses, or score lower than average on diagnostic or benchmark assessments. Some states have additional or different indicators to determine students who are at risk. These factors are used by the state to identify at‑risk students in several states and have been found through research to impact future student performance. Recent studies have documented that full‑time online charter school students are eligible for free/reduced lunch at higher rates than traditional charter schools and students in online charter schools scored lower on state assessments prior to enrolling in the online school. The schools we serve also enroll a significant percentage of special needs students with learning and/or physical disabilities, which also add to ourthe total costs.costs incurred by the schools.

Education of high school students is generally more costly than K-8K‑8 as more teachers with subject matter expertise (e.g. chemistry, calculus) must be hired to support an expansive curriculum, electives, and

The transition to Common Core State Standardschanging nature of state curriculum standards and Common Core Assessmentsnew state assessments could result in a decline in state test scores that might adversely affect our enrollment and financial conditions.condition, and cause academic performance to decline.

        ManyA number of states have adopted the CCSS priorin math and English Language Arts, but are not choosing to selectinguse the Common Core Assessments usedassessments developed by two national testing consortia that align with the CCSS. Instead, these states are electing to use existing or new state‑developed or commercially‑available assessments to evaluate student performance under those new CCSS standards.performance. As a result, it has been reportedteachers are teaching to new standards and students are tested with new assessments which may make initial test results lower than in many states that students learning under the CCSS but continuing to be tested under the existing state proficiency tests have experienced sharp declines in test results.previous years and require additional investments. As the fully-managedmanaged public schools we serve undertake this transition,these transitions, and given the growing number of at-riskat‑risk students enrolling in these schools, academic performance could temporarily or permanently suffer such that these schools may become a less attractive alternative, enrollments could decline, and our financial condition and results of operations could be negatively impacted.

Mergers, acquisitions and joint ventures present many risks, and we may not realize the financial and strategic goals that formed the basis for the transaction.

When strategic opportunities arise to expand our business, we may acquire or invest in other companies using cash, stock, debt, asset contributions or any combination thereof. We may face risks in connection with these or other future transactions, including the possibility that we may not realize the anticipated cost and revenue synergies or further the strategic purpose of any acquisition if our forecasts do not materialize. The pursuit of acquisitions may divert the resources that could otherwise be used to support and grow our existing lines of business. Acquisitions may also create multiple and overlapping product lines that are offered, priced and supported differently, which could cause customer confusion and delays in service. Customers may decline to renew their contracts or the contracts of acquired businesses might not allow us to recognize revenues on the same basis. These transactions may also divert our management'smanagement’s attention and our ongoing business may be disrupted by acquisition, transition or integration activities. In addition, we may have difficulty separating, transitioning and integrating an acquired company'scompany’s systems and the associated costs in doing so may be higher than we anticipate.

There may also be other adverse effects on our business, operating results or financial condition associated with the expansion of our business through acquisitions. We may fail to identify or assess the magnitude of certain liabilities, shortcomings or other circumstances prior to acquiring a company or technology, which could result in unexpected operating expenses, unexpected accounting treatment, unexpected increases in taxes due or a loss of anticipated tax benefits. Our use of cash to pay for acquisitions may limit other potential uses of our cash, including investment in other areas of our business, stock repurchases, dividend payments and retirement of outstanding indebtedness. If we issue a significant amount of equity for future acquisitions, existing stockholders may be diluted and earnings per share may decrease. We may pay more than the acquired company or assets are ultimately worth and we may have underestimated our costs in continuing the support and development of an acquired company'scompany’s products. Our operating results may be adversely impacted by liabilities resulting from a stock or asset acquisition, which may be costly, disruptive to our business, or lead to litigation.

We may be unable to obtain required approvals from governmental authorities on a timely basis, if it all, which could, among other things, delay or prevent us from completing a transaction, otherwise restrict our ability to realize the expected financial or strategic goals of an acquisition or have other adverse effects on our current business and operations. We may face contingencies related to intellectual property, financial disclosures, and accounting practices or internal controls. Finally, we may not be able to retain key executives of an acquired company.

The occurrence of any of these risks could have a material adverse effect on our business, results of operations, financial condition or cash flows, particularly in the case of a larger acquisition or several concurrent acquisitions.

Our business could be negatively affected as a result of actions by activist stockholders, and such activism could impact the trading value of our securities.

Responding to actions by activist stockholders can be costly and time-consuming, disrupting our operations and diverting the attention of management and our employees. If activist stockholders were to emerge, their activities could interfere with our ability to execute our strategic plan. In addition, a proxy contest for the election of directors at our annual meeting would require us to incur significant legal fees and proxy solicitation expenses and require significant time and attention of management and our Board of Directors. Any perceived uncertainties as to our future direction also could affect the market price and volatility of our securities.

If market demand for increasedonline options in public schooling does not increase or continue or if additional states do not authorize or adequately fund virtual or blended public schools, our business, financial condition and results of operations could be adversely affected.

Over the previous five fiscal years, we entered into service agreements for fully-managedmanaged virtual public schools and blended schools in many new states bringing our total to 33 states and the District of Columbia for the 2013-14 school year. Inserved 77 schools in fiscal year 2014, Maine was added to2017 under our Managed Public School Programs throughout the list of states that now permit virtual public schools, although we do not currently operate in that state.United States. Without adding additional states, our Managed Public School Program revenues may become increasingincreasingly dependent on serving more virtual schools in existing states. We also may not be able to fill available enrollment slots as forecasted. If the market demand for virtual and blended public schools does not increase or declines, if the remaining states are hesitant to authorize virtual or blended public schools, if enrollment caps are not removed or raised, or if the funding of such schools is inadequate, our opportunities for growth and our ability to sustain our revenues, results fromof operations and financial conditionscondition would be adversely affected.

Increasing competition in the education industry sectors that we serve could lead to pricing pressures, reduced operating margins, loss of market share, departure of key employees and increased capital expenditures.

As a general matter, we face varying degrees of competition from a variety of education providers because our learning systems integrate all the elements of the education development and delivery process, including curriculum development, textbook publishing, teacher training and support, lesson planning, testing and assessment and school performance and compliance management. In both our Managed Public SchoolsSchool Programs and Institutional Sales businesses, we compete with companies that provide online curriculum and support services. We also compete with public school districts and state departments of education that offer K-12K‑12 online programs of their own or in partnership with other online curriculum vendors. We anticipate intensifying competition from such competitors and by new entrants. Our competitors may adopt similarsuperior curriculum delivery, school support and marketing approaches, with different pricing and service packages that may have greater appeal than our offerings. For example, price competition in the Institutional Sales business has intensified.is vigorous. In addition, some of our Managed Public SchoolsSchool Programs could seek to transition to a self-administeredself‑administered school by seekinginviting competitive alternatives to portions of the products and services now provided entirely by us under our integrated fully managed service agreements. As an example of that type of transition, we recently negotiated a new four-year service agreement with Hawaii Technology Academy that transitioned the school from a fully-managed to a partially-managed program starting in FY 2015. If we are unable to successfully compete for new business, win and renew contracts, including fully managed public school contracts, or students fail to realize sufficient gains in academic performance, our revenues, opportunities for growth and operating margins may decline. Price competition from our current and future competitors could also result in reduced revenues, reduced margins or the failure of our product and service offerings to achieve or maintain more widespread market acceptance.

We may also face competition from publishers of traditional educational materials that are substantially larger than we are and have significantly greater financial, technical and marketing resources, and may enter the field through acquisitions and mergers. Many of these traditional publishers have developed their own online curriculum products and teaching materials that compete directly with our Institutional business products. As a result, they may be able to devote more resources and move quickly to develop products and services that are superior to our platform and technologies. We may not have the resources necessary to acquire or compete with technologies being developed by our competitors, which may render our online delivery format less competitive or obsolete. These new and well-fundedwell‑funded entrants may also seek to attract our key executives as employees based on their acquired expertise in virtual education where such specialized skills are not widely available.

Our future success will depend in large part on our ability to maintain a competitive position with our curriculum and our technology, as well as our ability to increase capital expenditures to sustain the competitive position of our product and retain our talent base. We cannot assure that we will have the financial resources, technical expertise, marketing, distribution or support capabilities to compete effectively.

regulations to require greater accessibility than we willcurrently provide, we may have to modify our curriculum offerings to satisfy those requirements.   For example,In May 2016, the U.S. Department of Justice issued a supplemental notice of proposed rulemaking soliciting additional public comments on the appropriate standard for determining Web accessibility compliance under Title II of the Americans With Disabilities Act (“ADA”) and extended by two years the deadline for covered entities to come into full compliance after issuance of its final rules, which it anticipated adopting in March 2014,2018. In addition, Section 504 of the OCR entered into an agreement with the South Carolina Charter School District ("District")Rehabilitation Act of 1973 is designed to ensure that the seven internet-based public charter schools in the state provide students with disabilities have an equal opportunity to access each school'sschool’s website and online learning environment by December 31, 2015, in compliance with Section 504 and Title II of the Americans with Disabilities Act. In addition, toenvironment. To the extent that we enter into federal government contracts, or Section 508different standards are adopted by regulators, similar requirementsof compliance could be imposed on us under Section 508 of the Rehabilitation Act, of 1974. If requirements or technology evolves in such a way asby states who apply these federal standards under Section 508 to accelerate or altereducation providers, which standards also recently changed under the need to make all curriculums accessible, we could incurSection 508 refresh process.  Beyond the significant product development costs on an accelerated basis. Aassociated with these evolving regulations, a failure to meet required accessibility needssuch requirements could also result in loss or termination of significantmaterial contracts or in potential legal liability.

We generate significant revenues from two virtual public schools, and the termination, revocation, expiration or modification of our contracts with these virtual public schools could adversely affect our business, financial condition and results of operation.

        In fiscal year 2014, we derived approximately 10% and 13% of our revenues, respectively, from the Ohio Virtual Academy and the Agora Cyber Charter School in Pennsylvania. As noted above, the Agora School recently commenced a RFP process for the services and products required to operate the school for the 2015-16 school year in connection with its charter renewal application. If our contracts with either of these virtual public schools are terminated, the charters to operate either of these schools are not renewed or are revoked, enrollments decline substantially, funding is reduced, or more restrictive legislation is enacted, our business, financial condition and results of operations could be adversely affected.

Our Managed Public School Programs business revenues are based in part on our estimate of the total funds each school will receive in a particular school year and our estimate of the full year expenses to be incurred by each school. As a result, differences between our quarterly estimates and the actual funds received and expenses incurred could have an adverse impact on our results of operations and cash flows.

We recognize revenues ratably from certain of our fees charged to Managed Public SchoolsSchool Programs over the course of our fiscal year. To determine the pro rata amount of revenues to recognize in a fiscal quarter, we estimate the total funds each school will receive in a particular school year. Additionally, we take responsibility for any operating deficits incurred at most of the Managed Public SchoolsSchool Programs we serve. Because this may impair our ability to collect the full amount invoiced in a period and therefore collection cannot reasonably be assured, we reduce revenues by the estimated pro rata amount of the school'sschool’s operating loss. We review our estimates of total funds and operating expenses periodically, and we revise as necessary, amortizing any adjustments over the remaining portion of the fiscal year. Actual school funding received and school operating expenses incurred may vary from our estimates or revisions and could adversely impact our revenues, results of operations and cash flows.

Risks Related to Our Operations

We plan to continue to create new products, expand distribution channels and pilot innovative educational programs to enhance academic performance. If we are unable to effectively manage these initiatives or they fail to gain acceptance, our business, financial condition, results of operations and cash flows would be adversely affected.

As we create and acquire new products, expand our existing customer base and pilot new educational programs, we expect to face challenges distinct from those we currently encounter, including:

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our continued development of public blended schools and individualized learning centers (also known as Flex schools) which has produced different operational challenges than those we previously encountered. In addition to the online component, these schools sometimes require us to lease facilities for classrooms, staff classrooms with teachers, provide meals and kitchen facilities, adhere to local safety and fire codes, purchase additional insurance and fulfill many other responsibilities;



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the acquisition or opening of additional managed public schools in states where we already have a contract with such schools can potentially create customer dissatisfaction, confuse prospective parents in the school selection process, and present marketing differentiation challenges depending on the facts and circumstances in that state;



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our operation of traditional or brick and mortar schools, as well as Flex schools used on a full-time basis by students accessing our curriculum online under the supervision of certified teachers and supporting instructors, has necessitated different management skills and presented additional risks compared to those in our core Managed Public Schools business;



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our efforts to integrate adaptive learning technologies and solutions into our learning management system, which may require significant investment of resources to develop or acquire to continue to improve our educational programs and student outcomes;

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operating in international markets may require us to conduct our business differently than we do in the United States or in existing countries. Additionally, we may have difficulty training and retaining qualified teachers or generating sufficient demand for our products and services in international markets. International opportunities will also present us with different legal, operational, tax and currency challenges;



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the use of our curriculum in classrooms will produce challenges with respect to adapting our curriculum for effective use in a traditional classroom setting;



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our online private school business is dependent on a tuition-based financial model and may not be able to enroll a sufficient number of students over time to achieve long-run profitability or deliver a high level of customer satisfaction;



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our participation in summer foreign language instruction camps through MIL, our joint venture with Middlebury College, could generate new legal liabilities and financial consequences associated with our responsibility for students housed on leased college campuses on a 24-hour basis over the duration of the camp; and



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our continual efforts to innovate and pilot new programs to enhance student learning may not always succeed or may encounter unanticipated opposition.

Our failure to manage these business expansion programs, or any new business expansion program or new distribution channel we pursue, may have an adverse effect on our business, financial condition, results of operations and cash flows.

High quality teachers are critical to the success of our learning systems. If we are not able to continue to recruit, train and retain quality certified teachers, our curriculum might not be effectively delivered to students, compromising their academic performance and our reputation. As a result, our brand, business and operating results may be adversely affected.

High quality teachers are critical to maintaining the worthvalue of our learning systems and assisting students with their daily lessons. In addition, teachers in the public schools we manage or who provide instruction in connection with the online programs we offer to school districts, must be state certified (with limited exceptions or temporary waiver provisions in various states), and we must implement effective internal controls in each jurisdiction to ensure valid teacher certifications, as well as the proper matching of certifications with student grade levels and subjects to be taught. Teachers must also possess strong interpersonal communications skills to be able to effectively instruct students in a virtual school setting, and the technical skills to use our technology-basedtechnology‑based learning systems. There is a limited pool of teachers with these

specialized attributes and the Managed Public Schoolsmanaged public schools and school districts we serve must provide competitive compensationbenefits packages to attract and retain such qualified teachers.

The teachers in most Managed Public Schoolsmany managed public schools we serve are not our employees and the ultimate authority relating to those teachers resides with an independent not-for-profit thenot‑for‑profit governing body, which oversees the schools. However, under many of our service agreements with virtual and blended public schools, we have responsibility to recruit, train and manage these teachers. The teacher recruitment and student assignment procedures and processes for bothour Managed Public Schools and the Institutional Sales businessesSchool Programs must also ensure full compliancecomply with individual state certification and reporting requirements. We must also provide continuous training to virtual and blended public school teachers so they can stay abreast of changes in student demands, academic standards and other key trends necessary to teach online effectively, including measures of effectiveness. We may not be able to recruit, train and retain enough qualified teachers to keep pace with our growthschool demand while maintaining consistent teaching quality in the various Managed Schoolsmanaged public schools we serve. Shortages of qualified teachers, failures to ensure proper teacher certifications in each state, or decreases in the quality of our instruction, whether actual or perceived, could have an adverse effect on our Managed Public SchoolsSchool Programs and Institutional Sales businesses.

 Our revenues and operating results normally fluctuate as a result of seasonal variations in our business, principally due to the number of months in a fiscal quarter that our school customers are fully operational and serving students. In the typical academic year, our first and fourth fiscal quarters have fewer than three full months of operations, whereas our second and third fiscal quarters will have three complete months of operations. We ship learning kits to students in the beginning of the school year, our first fiscal quarter, generally resulting in higher learning kit revenues and margins in the first fiscal quarter relative to the other quarters. In aggregate, the seasonality of our revenues has generally produced higher revenues in the first quarter of our fiscal year.

Any perceived or actual unauthorized disclosure of personally identifiable information, whether through breach of our network by an unauthorized party, employee theft, misuse or error or otherwise, could impact our ability to generate revenues and damageharm our reputation, limitingimpair our ability to attract and retain students.our customers, or subject us to claims or litigation arising from damages suffered by individuals. Failure to adequately protect personally identifiable information could potentially lead to penalties, significant remediation costs, reputational damage, the cancellation of existing contracts and difficulty in competing for future business. In addition, we could incur significant costs in complying with relevant laws and regulations regarding the unauthorized disclosure of personal information, which may be affected by any changes to data privacy legislation at both the federal and state levels.

        The performance and reliability of our technology infrastructure is critical to our reputation and ability to attract and retain virtual public schools, blended schools, school district customers, parents and students. Any sustained system error or failure, or a denial of service ("DNS") attack, could limit our users' access to our online learning systems, and therefore, damage our ability to generate revenues or provide sufficient documentation to comply with state laws requiring proof that students completed the required number of hours of instruction. Our technology infrastructure could be vulnerable to interruption or malfunction due to events beyond our control, including natural disasters, terrorist activities and telecommunications failures.

We utilize a single logistics vendor at two locations for the management, receiving, assembly and shipping of all of our learning kits and printed educational materials. In addition, we utilize the same vendor at a thirdsecond location for the reclamation and redeployment of our student computers. This partnership depends upon execution on the part of us and the vendor. Any material failure to execute properly for any reason, including damage or disruption to any of the vendor'svendor’s facilities would have an adverse effect on our business, financial condition and results of operations.

Substantially all of the inventory for our learning kits and printed materials is located in twoone warehouse facilities, both offacility, which areis operated by a third-partythird‑party logistics vendor whichthat handles receipt, assembly and shipping of all physical learning materials. If this logistics vendor were to fail to meet its obligations to deliver learning materials to students in a timely manner, or if a material number of such shipments are incomplete or contain assembly errors, our business and results of operations could be adversely affected. In addition, we provide computers for a substantial number of our students. Execution or merger integration failures which interfere with the reclamation or redeployment of computers may result in additional costs. Furthermore, a natural disaster, fire, power interruption, work stoppage or other unanticipated catastrophic event, especially during the period from April through June when we are awaiting receipt of most of the curriculum materials for the school year and have not yet shipped such

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materials to students, could significantly disrupt our ability to deliver our products and operate our business. If any of our material inventory items were to experience any significant damage, we would be unable to meet our contractual obligations and our business would suffer.

Any significant interruption in the operation of our data centers could cause a loss of data and disrupt our ability to manage our network hardware and software and technological infrastructure.

We host our products and serve all of our students from third-partythird‑party data center facilities. As part of our risk mitigation plan, we opened a second data center in a different geographic location. Even with such redundancy, we may not be able to prevent a significant interruption in the operation of these facilities or the loss of school and operational data due to a natural disaster, fire, power interruption, act of terrorism or other unanticipated catastrophic event. Any significant interruption in the operation of these facilities, including an interruption caused by our failure to successfully expand or upgrade our systems or manage our transition to utilizing the expansions or upgrades, could reduce our ability to manage our network and technological infrastructure, which could result in lost sales, enrollment terminations and impact our brand reputation.

Additionally, we do not control the operation of these facilities and must rely on another party to provide the physical security, facilities management and communications infrastructure services related to our data centers. Although we believe we would be able to enter into a similar relationship with another party should this relationship fail or terminate for any reason,centers and our reliance on a single vendor exposes us to risks outside of our control. If this vendor encounters financial difficulty such as

bankruptcy or other events beyond our control that causes it to fail to secure adequately and maintain its hosting facilities or provide the required data communications capacity, students of the schools we serve may experience interruptions in our service or the loss or theft of important customer data.

Any significant interruption in the operation of our enrollment centers could disrupt our ability to recommend educational options to parents, respond to service requests and process enrollments.

Our primary enrollment center operations are housed in our corporate headquarters and in a facility located in Knoxville, Tennessee. We are able to reroute calls to the other facility if one facility is unable to temporarily service calls. Rerouting of calls may not be able to prevent a significant interruption in the operation of any of the facilities due to natural disasters, accidents, failures of our fulfillment provider. Any significant interruption in the operation of any primary facility, including an interruption caused by our failure to successfully expand or upgrade our systems or to manage these expansions or upgrades, could reduce our ability to respond to service requests, receive and process orders and provide products and services, which could result in lost and cancelled sales, and damage to our brand reputation.

Capacity limits on some of our technology, transaction processing systems and network hardware and software may be difficult to project and we may not be able to expand and upgrade our systems in a timely manner to meet significant unexpected increased demand.

As the number of schools we serve increases and our student base grows, the traffic on our transaction processing systems and network hardware and software will rise. We may be unable to accurately project the rate of increase in the use of our transaction processing systems and network hardware and software. In addition, we may not be able to expand and upgrade our systems and network hardware and software capabilities to accommodate significant unexpected increased or peak use. If we are unable to appropriately upgrade our systems and network hardware and software in a timely manner, our operations and processes may be temporarily disrupted.

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Our efforts to expand capacity may not produce the operational and financial results for which those investments were intended.

As we have grown to serve more schools, students and families in an increasing number of states and countries, we have invested in infrastructure systems and technology to keep pace such as new telephonycommunication systems, enterprise hardware and software systems, and enrollment centers. In the absence of compatible business processes, adequate employee training, integration with other dependent systems, and sufficient staffing, this expanded capacity alone may not result in improved performance or outcomes.

We may be unable to keep pace with changes in our industry and advancements in technology as our business and market strategy evolves.

As changes in our industry occur or macroeconomic conditions fluctuate we may need to adjust our business strategies or find it necessary to restructure our operations or businesses, which could lead to changes in our cost structure, the need to write down the value of assets, or impact our profitability. We also make investments in existing or new businesses, including investments in technology and expansion of our business lines. These investments may have short‑term returns that are negative or less than expected and the ultimate business prospects of the business may be uncertain.

As our business and market strategy evolves, we also will need to respond to technological advances and emerging industry standards in a cost-effectivecost‑effective and timely manner in order to remain competitive, such as the adventubiquitous use of tablets for public school applications, adaptive learning technologies, and web accessibility standards. The need to respond to technological changes may require us to make substantial, unanticipated expenditures. There can be no assurance that we will be able to respond successfully to technological change.

Pursuant to our joint venture agreement with Middlebury College, there is a risk that Middlebury College might exercise its right to require us to purchase its ownership interest in our joint venture at fair market value which could adversely affect our financial condition.

        A key provision in our joint venture agreement with Middlebury College is its right beginning on April 14, 2015 and upon 180 days advance notice, to require us to purchase all, but not a portion of, its ownership interest in our joint venture at fair market value and based on an independent appraisal. We have the right to pay the redemption cost in cash, stock or a combination thereof, at our option. It is uncertain when or whether Middlebury College would elect to exercise this right and therefore, we cannot at this time determine the form of the redemption payment and therefore the exact impact to our financial condition or dilution to stockholders.

We may be unable to attract and retain skilled employees.

Our success depends in large part on continued employment of senior management and key personnel who can effectively operate our business, which is necessary in the highly regulated public education sector involving a publicly-traded for-profitpublicly‑traded for‑profit company. This complexity requires us to attract and retain management and employees with specialized skills and knowledge across many disciplines. If any of these employees leave weus and we fail to effectively

manage a transition to new personnel, or if we fail to attract and retain qualified and experienced professionals on acceptable terms, our business, financial conditionscondition and results of operations could be adversely affected.

Our success also depends on our having highly trained financial, technical, recruiting, sales and marketing personnel. We will need to continue to hire additional personnel as our business grows. A shortage in the number of people with these skills or our failure to attract them to our Company could impede our ability to increase revenues from our existing products and services, ensure full compliance with federal and state regulations, launch new product offerings, and would have an adverse effect on our business and financial results.

In addition, we are subject to the Fair Labor Standards Act and other state and federal employment laws. These laws govern such matters as minimum wage, overtime and other working conditions that can increase our labor costs or subject us to liabilities to our employees. Regulatory changes that increase the number of workers eligible for overtime based on salary levels and other labor costs may increase in the future which could have a material adverse effect on our business, financial condition and results of operations.

Healthcare reform legislation could have a negative impact on our business, financial condition and results of operations.

The Patient Protection and Affordable Care Act, which was adopted in 2010, may significantly affect the provision of both healthcare services and benefits in the U.S. and its current status is in flux. We continually monitor the impact on our business and the steps necessary to mitigate such impact, including potential further modifications to our current benefit plans and operational changes to minimize the effect of the legislation on our cost structure. If we cannot effectively modify our programs and operations in response to these mandates, our business, financial condition and results of operations may be adversely impacted.

We partially self‑insure our group health insurance program and actual claims may differ from our estimates, which could materially impact our results of operations.

Effective January 1, 2016, we modified our group health insurance program and now self‑insure all eligible employees and their family members subject to a stop loss insurance policy with a per person limit of $500,000 ($550,000 as of January 1, 2017) and an aggregate limit of 125% of expected claims based on a formulaic determination of the expected claims. Liabilities associated with the risks that are retained by the Company are estimated, in part, by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions. Our results could be materially impacted by claims and other expenses related to our group health insurance program if future occurrences and claims differ from these assumptions and historical trends and exceed the limitations of liability under the stop loss insurance policy.

We may need additional capital in the future, but there is no assurance that funds will be available on acceptable terms.

We may need to raise additional funds in order to achieve growth or fund other business initiatives. This financing may not be available in sufficient amounts or on terms acceptable to us and may be dilutive to existing stockholders. Additionally, any securities issued to raise funds may have rights, preferences or privileges senior to those of existing stockholders. If adequate funds are not available or are not available

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on acceptable terms, our ability to expand, develop or enhance services or products, or respond to competitive pressures will be limited.

Our curriculum and approach to instruction may not achieve widespread acceptance,satisfy certain state standards, which would limit our growth and profitability.

        The curriculum offerings and approach to individualized learning are based onWith the structured delivery, clarification, verification and practicepassage of lesson subject matter. While we believe our curriculum is aligned withthe ESSA, each state standards in the jurisdictions where we manage virtual and blended public schools and these schools offer accredited diplomas, this approach is not accepted by all academics and educators, who may favor less formalistic methods andwill have the abilityauthority to negatively influence the market for our products and services. In addition,adopt its own assessments tied to its curriculum standards. As a result, the acceptance and adoption of the CCSS grade level requirements and proposed common assessments of those standards by individual states is uncertain, and continues to change at the state and district level. As a result, the standardsassessments for measuring student achievementperformance also could vary from state to state, and even from district to district, and therefore,state. At this time we cannot anticipate at this timepredict the impact of these varying standards, which may have in terms of requiringrequire us to make additional investment, on our part, or oncould impede our ability to sustain or expand our operating margins.product offerings into new states in an expeditious manner.  In addition, changes to existing state curriculum standards, or our inability to meet existing or new state curriculum standards, could materially and adversely affect our growth, business and results of operations.

ITEM 1B.  UNRESOLVED STAFF COMMENTS

None.

ITEM 2.  PROPERTIES

Our headquarters are located in approximately 176,000129,000 square feet of office space in Herndon, Virginia. The facilities are under leases that expire between August 2019 andin May 2022. In addition, we lease approximately 131,000317,000 square feet in multiple locations throughout the United States under individual leases that expire between July 20142017 and October 2019.2022.

ITEM 3.  LEGAL PROCEEDINGS

In the ordinary conduct of our business, we are subject to lawsuits, arbitrations and administrative proceedings from time to time. We expensevigorously defend these claims; however, no assurances can be given as to the outcome of any pending legal costs as incurred.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.

IpLearnOn July 20, 2016, a securities class action lawsuit captioned

Babulal Tarapara v. K12 Inc. On October 26, 2011, IpLearn, LLC ("IpLearn")et al was filed a complaint for patent infringement against usthe Company, two of its officers and one of its former officers in the United States District Court for the Northern District of Delaware,IpLearn, LLC v. K12 Inc.,California, Case No. 1:11-1026-RGA, which it subsequently amended on November 18, 2011. IpLearn is a privately-held technology development and licensing company for web and computer-based learning technologies. In its complaint, IpLearn alleges that we have infringed three of its patents for various computer-aided learning methods and systems and it is primarily seeking an injunction enjoining us from any continued infringement as well as an award of unspecified monetary damages. On July 2, 2012, the court granted our motion to dismiss IpLearn's allegations of indirect patent infringement and allowed IpLearn's allegations of direct patent infringement to proceed. On January 15, 2013, the court approved a stay of IpLearn's claims alleging infringement of one of the three patents in the case involving technology licensed to us by a third party and on June 12, 2014, the court approved a stipulation by IpLearn that K12's technology does not infringe the second of the three patents. The Company filed its motion for summary judgment regarding the remaining allegation of infringement on June 25, 2014.

Oklahoma Firefighters Complaint

        On January 30, 2014, a securities class-action lawsuit captionedOklahoma Firefighters Pension & Retirement System v. K12 Inc., et al., was filed against us, four of our officers and directors, and a former officer, in the United States District Court for the Eastern District of Virginia,In re K12 Inc. Securities Litigation, Case No. 1:14-CV-108-AJT-JFA. On April 24, 2014 the Court appointed the Oklahoma Firefighters Pension and Retirement System as lead plaintiff, and on May 23, 2014 the lead plaintiff filed an amended class action complaint ("Amended Complaint"3:16-cv-04069 (“Tarapara Case”).  The plaintiff purports to represent a class of persons who purchased or otherwise acquired ourthe Company’s common stock between February 5,November 7, 2013 and October 8, 2013,27, 2015, inclusive, and alleges violations by the Company and the individual defendants of SectionsSection 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated under the Exchange Act, and violations by the individual defendants of Section 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder.Act. The Amended Complaint alleges, among other things, that the defendants made false or misleading statements of material fact, or failed to disclose material facts, about (i) our enrollment and revenue growth prospects for fiscal 2014, and (ii) our compliance with state regulations governing enrollment. The plaintiff seekscomplaint sought unspecified monetary damages and other relief.  We intendAdditionally, on September 15, 2016, a second securities class action lawsuit captioned Gil Tuinenburg v. K12 Inc. et al was filed against the Company, two of its officers and one of its former officers in the United States District Court for the Northern District of California, Case No. 3:16-cv-05305 (“Tuinenburg Case”). On October 6, 2016, the Court consolidated the Tarapara Case and the Tuinenburg Case, appointed Babul Tarapara and Mark Beadle as lead plaintiffs, and recaptioned the matter as In Re K12 Inc. Securities Litigation. On December 2, 2016, the lead plaintiffs filed an amended complaint against us. The amended complaint named an additional former officer as a defendant and specified a class period start date of October 10, 2013. The amended complaint alleges materially false or misleading statements and omissions regarding the decision of the Agora Cyber Charter School not to renew its managed public school agreement with us, student academic and Scantron results, and other statements regarding student academic performance and K12’s academic services and offerings. On January 30, 2017, the Company filed its motion to dismiss the amended complaint.  The lead plaintiffs filed an opposition to the motion to dismiss the amended complaint on March 1, 2017. On March 31, 2017, the Company filed its response to the lead plaintiffs’ opposition to the motion to dismiss. A hearing on the motion to dismiss the amended complaint was held on April 19, 2017 and a decision is pending. The Company intends to continue to defend vigorously against the claims assertedeach and every allegation and claim set forth in the Amended Complaint, and filed a motion to dismiss the Amended Complaint on June 20, 2014. The parties have completed briefing the motion to dismiss and the Court heard oral arguments on the motion on August 8, 2014.amended complaint.

ITEM 4.  MINE SAFETY DISCLOSURES

        Not applicable.

Not applicable.

PART II

PART II

ITEM 5.  MARKET FOR REGISTRANT'SREGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock, par value $0.0001 per share, is traded on the New York Stock Exchange (the "NYSE"“NYSE”) under the symbol "LRN."“LRN.” Set forth below are the high and low sales prices for our common stock, as reported on the NYSE. As of August 11, 2014,July 31, 2017, there were 4131 registered holders of our common stock.