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BMO Capital downgraded K12, Inc.’s stock (NYSE: LRN) yesterday, on account of slowing enrollments. Shares of the stock tumbled on the news, down 25 percent at the start of trading this morning and down 35 percent as this story was posted 40 minutes after the market opened.

K12, Inc. is a Virginia-based for-profit company that runs online schools in 32 states and attributes nearly 85 percent of its income to public dollars.

The company has been trying to break into the North Carolina market by opening a virtual charter school, but their bid thus far has been unsuccessful.

K12 has run into numerous problems recently, with school districts dropping their partnerships with the company, news of teachers lacking certification, and instances of very low graduation rates.

Just last week, news surfaced of a K12 school outsourcing the grading of student essays to workers in Bangalore, India.

In a press release, K12 explained the slowed enrollment growth:

We believe the increase in Managed Public School enrollments fell short of internal expectations due to several factors, which include, among others:

–The Companys inability to convert the increased volume of student applications into enrollments at a level achieved during previous years due to performance in its enrollment centers and, to a lesser extent;

–The delayed start of the open enrollment period for certain schools.

Managed Public School first quarter enrollments were 5.7 percent over enrollment numbers this time last year, short of expectations.

Revenue is projected to come in between $905 million and $925 million, below the anticipated target of $988.5 million.

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K12, Inc., the for-profit online virtual school company that made a bid to open up a statewide school in North Carolina, plans on settling claims that it misled investors.

The proposed settlement would not require the company to admitting wrongdoing, butK12a would pay investors $6.75 million, according to a preliminary settlement draft in federal court records and obtained by Education Week.

Education Week reports that the lawsuit’s claims about academics and quality would be dismissed and the settlement would stick to allegations about how the company disclosed information about student enrollment and retention.

The investor lawsuit came after a series of negative attention and press accounts questioning whether K12, Inc. (NYSE: LRN) was more focused on profits than educational quality. The lawsuit itself claimed that top officials of K12, Inc. misled the public and investors by downplaying questions about the schools’ educational quality. (Click here to read more about the lawsuit’s initial filing.)

The company has the largest share of the online schooling market, running public schools in 30 states where students from kindergarten through high schools take classes through programs on their home computers while parents act as “learning coaches.”

The company prides itself on offering alternatives to families seeking alternatives for their local school systems, but schools run by the company have low graduation rates and performance outcomes. In Tennessee, where legislators approved the virtual school in 2010 after concerned push from K12 lobbyists, state education officials have found only 16 percent of the 3,200 students in the K-8 program performed at grade level in math.

The company had made a push to open up a statewide virtual charter school in North Carolina in 2011 and 2012 by partnering with Cabarrus County Schools (which would get a kickback for agreeing to host the virtual school) but the State Board of Education, which authorizes charter schools in the state, did not consider its application. The matter is now held up in the appeals court.

Since then, the State Board of Education passed a more stringent application process for virtual charter schools, cutting back on the per-student reimbursement and requiring that graduation rates are within 10 percent of the state average (which is up to 80 percent).

N.C. Learns, non-profit organization put together by the company filed a letter of intent that it intended to apply to open for the 2014-15 school year, but did not submit an application by Friday’s deadline, according to a list of 70 prospective charter schools kept by the N.C. Department of Public Instruction.

(Another online company, Connections Academy, did submit an application to open up a statewide virtual school in the fall of 2014. Connections is owned by Pearson, an international education company (NYSE:PSO).)

K12 could still get a chance to educate North Carolina students (and get a slice of North Carolina public education funding). Legislation creating virtual schools could appear this year, with top state leaders like Gov. Pat McCrory expressing interest in the virtual school.

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As North Carolina faces increased interest by online virtual charter schools, it is worth noting that last week Reuters ran a special report looking into public charter schools’ selectivity during the admissions process and other practices that enable the schools to get the students they want.

Many charters were found to require of applicants lengthy personal statements, entrance exams, character references, and even in one instance requiring families to invest in the company running the school. Outside of the admissions process, other barriers to access included not offering free and subsidized lunch or transportation and requiring families to volunteer their time to the schools. Many consider these practices, known in policy circles as “creaming,” as efforts toward ensuring a school’s ability to serve up high scores and high graduation rates, which result in continued access to public dollars and, ultimately, big profits.

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In case you missed it, the Greensboro News-Record ran a moderate, common sense editorial yesterday about the need for the state to carefully review charter school applications. As it noted:

“Because student outcomes are so important, the State Board of Education must not grant a charter to any school that doesn’t submit a convincing plan showing how it will serve the needs of students. In addition to the right curriculum, it needs qualified faculty and an adequate facility. It also must make provisions for student health and safety.

So, enough time is needed to investigate applications. That’s where an endorsement by the local school board would be helpful. Ideally, charters should work in partnership with local boards….

This year, the state has received 155 letters of intent, indicating interest in submitting applications by the March 1 deadline. These are from organizations that want to open schools in 2014. If most of them do apply, the state office will be swamped. It could not evaluate so many detailed applications in time to make informed recommendations to the state board by its July meeting, as required. Children’s education is too important to rush through this process.”

You can read the entire editorial by clicking here.

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Virtual charter schools will face restrictions if they want to open up in North Carolina.

The N.C. State Board of Education voted today to adopt a policy that would require the online-based schools to adhere to a significantly lower funding formula ($3504 per student) than brick-and-mortar charter schools, maintain high graduation rates and low withdrawal rates of students. Schools will also need to keep a ratio of one teacher for every 50 students and keep graduation rates within 10 percent of the state average (80 percent), and can’t have withdrawal rates higher than 15 percent in two out of three years.

Committee leaders for the legislature’s education committee took issue late last year with the state board making policies about virtual charter schools, saying that the board didn’t have the authority to tinker with funding formulas or single out online-based schools. Bill Harrison, the chairman of the N.C. Board of Education who will faces a likely replacement from new Gov. Pat McCrory, disagreed. (Read our story about that tiff here.)

The legislature, of course, could undo the state board’s decision if they choose.

The state currently has no virtual charter schools, though the state does operate the N.C. Virtual Public School, wich allows high-school students (and some middle-school students) to take individual classes as part of their regular studies.

Virtual charter schools have shown a keen interest in North Carolina. Two national online learning companies have sent letters of intent to the N.C. Department of Public Instruction that they want to open up their doors in 2014: Connections Academy, owned by the for-profit education company Pearson and N.C. Virtual Academy, to be run by the for-profit K12, Inc.

K12, Inc., through a non-profit organization called N.C. Learns set up by K12, tried to open up in the state last year, and had their application ignored by the N.C. State Board of Education, which authorizes charter schools in the state. The matter is now tied up in the appellate courts, with N.C. Learns appealing a lower judge’s ruling affirming the state board’s denial. State Sen. Fletcher Hartsell, a prominent Republican legislator, was hired on as N.C. Learn’s attorney for the case and K12 has hired another former lawmaker, Jeff Barnhart, as a lobbyist, according to the N.C. Secretary of State’s office.

Pearson has lobbyists of its own – four were hired from Capstrat, the Raleigh-based lobbying firm.

Here’s the new policy adopted by the N.C. State Board of Education:

 

Policy for N.C. virtual charter schools by ncpolicywatch