UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended ~~September 30, 2017~~March 31, 2019



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

For the transition period from________________to________________

Commission File Number: 001-34272

~~BRIDGEPOINT EDUCATION, INC.~~ZOVIO INC

(Exact name of registrant as specified in its charter)



Delaware (State or other jurisdiction of incorporation or organization)	59-3551629 (I.R.S. Employer Identification No.)

8620 Spectrum Center Blvd.

San Diego, CA 92123

(Address, including zip code, of principal executive offices)

(858) 668-2586

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

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



	Large accelerated filer ☐	Accelerated filer ☒
	Non-accelerated filer ☐ ~~(Do not check if a~~ ~~smaller reporting company)~~	Smaller reporting company ☐☒
		Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	ZVO	The Nasdaq Stock Market LLC

The total number of shares of common stock outstanding as of ~~October 20, 2017~~,May 3, 2019, was ~~29,176,487.~~30,217,370.

~~BRIDGEPOINT EDUCATION, INC.~~ZOVIO INC

FORM 10-Q

INDEX




PART I—FINANCIAL INFORMATION		3
Item 1. Financial Statements		3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Income (Loss)	4
	Condensed Consolidated Statements of ~~Comprehensive Income (Loss)~~	5
	~~Condensed Consolidated Statements of~~ Stockholders’ Equity	65
	Condensed Consolidated Statements of Cash Flows	76
	Notes to Condensed Consolidated Financial Statements	87
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		2529
Item 3. Quantitative and Qualitative Disclosures About Market Risk		3540
Item 4. Controls and Procedures		3641
PART II—OTHER INFORMATION		3743
Item 1. Legal Proceedings		3743
Item 1A. Risk Factors		3743
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		3844
Item 3. Defaults Upon Senior Securities		3844
Item 4. Mine Safety Disclosures		3844
Item 5. Other Information		3844
Item 6. Exhibits		3945
SIGNATURES		4046

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

~~BRIDGEPOINT EDUCATION, INC.~~ZOVIO INC

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except par value)


	As of September 30, 2017			As of December 31, 2016			As of March 31, 2019			As of December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	165,176		$	307,802		$	141,837		$	166,307
Restricted cash	19,921			24,533			19,252			18,619
Investments	26,965			49,434			2,236			2,068
Accounts receivable, net	34,303			26,457			32,069			27,015
Prepaid expenses and other current assets	24,548			23,467			19,796			18,255
Total current assets	270,913			431,693			215,190			232,264
Property and equipment, net	10,894			12,218			18,778			16,860
Operating lease assets							21,189			—
Goodwill and intangibles, net	15,237			17,419			12,050			12,441
Other long-term assets	5,209			2,046			7,968			7,927
Total assets	$	302,253		$	463,376		$	275,175		$	269,492
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	69,840		$	77,866		$	83,898		$	62,792
Deferred revenue and student deposits	61,715			74,666			55,943			63,834
Total current liabilities	131,555			152,532			139,841			126,626
Rent liability	8,125			16,508			9,842			3,183
Lease financing obligation							—			8,634
Other long-term liabilities	12,632			13,630			3,509			3,435
Total liabilities	152,312			182,670			153,192			141,878
Commitments and contingencies (see Note 13)
Commitments and contingencies (see Note 14)
Stockholders' equity:
Preferred stock, $0.01 par value:
20,000 shares authorized; zero shares issued and outstanding at both September 30, 2017, and December 31, 2016	—			—
20,000 shares authorized; zero shares issued and outstanding at both March 31, 2019, and December 31, 2018							—			—
Common stock, $0.01 par value:
300,000 shares authorized; 64,794 issued and 29,165 outstanding at September 30, 2017; 64,035 issued and 46,478 outstanding at December 31, 2016	648			641
300,000 shares authorized; 65,579 and 65,289 issued, and 27,458 and 27,168 outstanding, at March 31, 2019 and December 31, 2018, respectively							656			653
Additional paid-in capital	200,859			195,854			206,165			205,157
Retained earnings	437,503			421,281			423,350			429,992
Accumulated other comprehensive income (loss)	—			(1		)
Treasury stock, 35,629 and 17,557 shares at cost at September 30, 2017, and December 31, 2016, respectively	(489,069		)	(337,069		)
Treasury stock, 38,121 shares at cost at March 31, 2019, and December 31, 2018, respectively							(508,188		)	(508,188		)
Total stockholders' equity	149,941			280,706			121,983			127,614
Total liabilities and stockholders' equity	$	302,253		$	463,376		$	275,175		$	269,492

The accompanying notes are an integral part of these condensed consolidated financial statements.

~~BRIDGEPOINT EDUCATION, INC.~~ZOVIO INC

Condensed Consolidated Statements of Income (Loss)

(Unaudited)

(In thousands, except per share amounts)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2017			2016			2017			2016			2019			2018
Revenue	$	119,367		$	136,583		$	373,438		$	407,555		$	109,764		$	116,777
Costs and expenses:
Instructional costs and services	57,756			64,095			181,943			200,129			51,938			56,614
Admissions advisory and marketing	43,669			52,590			132,133			156,798			49,072			48,194
General and administrative	11,441			11,604			37,019			36,709			15,920			12,748
Legal settlement expense	—			16,752			—			32,918
Restructuring and impairment charges	8,004			365			8,004			2,766
Restructuring and impairment expense (credit)													29			(159		)
Total costs and expenses	120,870			145,406			359,099			429,320			116,959			117,397
Operating income (loss)	(1,503		)	(8,823		)	14,339			(21,765		)
Operating loss													(7,195		)	(620		)
Other income, net	381			557			1,165			1,892			599			250
Income (loss) before income taxes	(1,122		)	(8,266		)	15,504			(19,873		)
Loss before income taxes													(6,596		)	(370		)
Income tax expense (benefit)	(1,161		)	1,211			(718		)	(3,622		)	46			(1,680		)
Net income (loss)	$	39		$	(9,477	)	$	16,222		$	(16,251	)	$	(6,642	)	$	1,310
Income (loss) per share:
Basic	$	0.00		$	(0.20	)	$	0.49		$	(0.35	)	$	(0.24	)	$	0.05
Diluted	$	0.00		$	(0.20	)	$	0.47		$	(0.35	)	$	(0.24	)	$	0.05
Weighted average number of common shares outstanding used in computing income (loss) per share:
Basic	29,123			46,315			33,333			46,180			27,180			27,164
Diluted	29,671			46,315			34,193			46,180			27,180			27,564

The accompanying notes are an integral part of these condensed consolidated financial statements.

~~BRIDGEPOINT EDUCATION, INC.~~ZOVIO INC

Condensed Consolidated Statements of ~~Comprehensive Income (Loss)~~Stockholders’ Equity

(Unaudited)

(In thousands)

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Net income (loss) $ 39
$ (9,477 ) $ 16,222
$ (16,251 )
Other comprehensive income, net of tax:
Unrealized gains (losses) on investments —
(46 ) 1
148
Comprehensive income (loss) $ 39
$ (9,523 ) $ 16,223
$ (16,103 )



	Common Stock			Additional Paid-in Capital			Retained Earnings			Treasury Stock
	Shares	Par Value		Additional Paid-in Capital			Retained Earnings			Treasury Stock			Total
Balance at December 31, 2017	64,887	$	649	$	201,755		$	426,356		$	(505,764	)	$	122,996
Adoption of accounting standards (Note 2)	—	—		—			(1,000		)	—			(1,000		)
Stock-based compensation	—	—		1,165			—			—			1,165
Stock issued under stock incentive plan, net of shares held for taxes	186	2		(707		)	—			—			(705		)
Net income	—	—		—			1,310			—			1,310
Balance at March 31, 2018	65,073	$	651	$	202,213		$	426,666		$	(505,764	)	$	123,766



	Common Stock			Additional Paid-in Capital			Retained Earnings			Treasury Stock
	Shares	Par Value		Additional Paid-in Capital			Retained Earnings			Treasury Stock			Total
Balance at December 31, 2018	65,289	$	653	$	205,157		$	429,992		$	(508,188	)	$	127,614
Stock-based compensation	—	—		1,706			—			—			1,706
Exercise of stock options	6	1		59			—			—			60
Stock issued under stock incentive plan, net of shares held for taxes	284	2		(757		)	—			—			(755		)
Net loss	—	—		—			(6,642		)	—			(6,642		)
Balance at March 31, 2019	65,579	$	656	$	206,165		$	423,350		$	(508,188	)	$	121,983

The accompanying notes are an integral part of these condensed consolidated financial statements.

~~BRIDGEPOINT EDUCATION, INC.~~ZOVIO INC

Condensed Consolidated Statements of ~~Stockholders’ Equity~~Cash Flows

(Unaudited)

(In thousands)

Common Stock
Additional
Paid-in
Capital

Retained
Earnings

Accumulated Other
Comprehensive (Loss) Income

Treasury
Stock

Shares Par Value Total
Balance at December 31, 2015 63,407
$ 634
$ 188,863
$ 451,321
$ (99 ) $ (337,069 ) $ 303,650
Stock-based compensation —
—
5,679
—
—
—
5,679
Exercise of stock options 185
2
140
—
—
—
142
Stock issued under employee stock purchase plan 16
1
111
—
—
—
112
Stock issued under stock incentive plan, net of shares held for taxes 275
2
(1,843 ) —
—
—
(1,841 )
Net loss —
—
—
(16,251 ) —
—
(16,251 )
Unrealized gains on investments, net of tax —
—
—
—
148
—
148
Balance at September 30, 2016 63,883
$ 639
$ 192,950
$ 435,070
$ 49
$ (337,069 ) $ 291,639

Common Stock
Additional
Paid-in
Capital

Retained
Earnings

Accumulated Other
Comprehensive (Loss) Income

Treasury
Stock

Shares Par Value Total
Balance at December 31, 2016 64,035
$ 641
$ 195,854
$ 421,281
$ (1 ) $ (337,069 ) $ 280,706
Stock-based compensation —
—
2,834
—
—
—
2,834
Exercise of stock options 479
4
3,795
—
—
—
3,799
Stock issued under employee stock purchase plan 15
—
141
—
—
—
141
Stock issued under stock incentive plan, net of shares held for taxes 265
3
(1,765 ) —
—
—
(1,762 )
Stock repurchase —
—
—
—
—
(152,000 ) (152,000 )
Net income —
—
—
16,222
—
—
16,222
Unrealized gains on investments, net of tax —
—
—
—
1
—
1
Balance at September 30, 2017 64,794
$ 648
$ 200,859
$ 437,503
$ —
$ (489,069 ) $ 149,941



	Three Months Ended March 31,
	2019			2018
Cash flows from operating activities:
Net income (loss)	$	(6,642	)	$	1,310
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Provision for bad debts	3,608			6,398
Depreciation and amortization	1,498			1,759
Deferred income taxes	115			4
Stock-based compensation	1,706			1,165
Noncash lease expense	4,299			—
Net gain on marketable securities	(146		)	(14		)
Reassessment of lease charges	29			(506		)
Loss on disposal or impairment of fixed assets	—			9
Changes in operating assets and liabilities:
Accounts receivable	(8,662		)	(15,331		)
Prepaid expenses and other current assets	(3,286		)	977
Other long-term assets	(5		)	297
Accounts payable and accrued liabilities	4,591			(4,332		)
Deferred revenue and student deposits	(7,890		)	(6,238		)
Operating lease liabilities	(5,599		)	—
Other liabilities	(42		)	(567		)
Net cash used in operating activities	(16,426		)	(15,069		)
Cash flows from investing activities:
Capital expenditures	(6,495		)	(809		)
Purchases of investments	(22		)	(747		)
Capitalized costs for intangible assets	(163		)	(265		)
Sale of investments	—			704
Net cash used in investing activities	(6,680		)	(1,117		)
Cash flows from financing activities:
Proceeds from exercise of stock options	60			—
Tax withholdings on issuance of stock awards	(755		)	(705		)
Net cash used in financing activities	(695		)	(705		)
Net decrease in cash, cash equivalents and restricted cash	(23,801		)	(16,891		)
Cash, cash equivalents and restricted cash at beginning of period	190,584			205,526
Cash, cash equivalents and restricted cash at end of period	$	166,783		$	188,635

Supplemental disclosure of non-cash transactions:
Purchase of equipment included in accounts payable and accrued liabilities	$	5,026		$	235
Issuance of common stock for vested restricted stock units	$	2,488		$	1,957

Reconciliation of cash, cash equivalents, and restricted cash:
Cash and cash equivalents	$	141,837		$	171,178
Restricted cash	19,252			17,457
Long-term restricted cash	5,694			—
Total cash, cash equivalents and restricted cash	$	166,783		$	188,635

The accompanying notes are an integral part of these condensed consolidated financial statements.

~~BRIDGEPOINT EDUCATION, INC.~~

~~Condensed Consolidated Statements of Cash Flows~~

~~(Unaudited)~~

~~(In thousands)~~

Nine Months Ended September 30,
2017 2016
Cash flows from operating activities:
Net income (loss) $ 16,222
$ (16,251 )
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Provision for bad debts 24,440
23,565
Depreciation and amortization 6,821
10,068
Amortization of premium/discount 20
38
Deferred income taxes 25
—
Stock-based compensation 2,834
5,679
Write-off or impairment of student loans receivable —
7,542
Net gain on marketable securities (193 ) (103 )
Loss on termination of leased space 5,829
—
Loss on disposal or impairment of fixed assets 66
809
Changes in operating assets and liabilities:
Accounts receivable (32,286 ) (29,929 )
Prepaid expenses and other current assets (1,081 ) (2,802 )
Student loans receivable —
876
Other long-term assets (3,164 ) 2,607
Accounts payable and accrued liabilities (13,920 ) 5,508
Deferred revenue and student deposits (12,952 ) (13,049 )
Other liabilities (9,405 ) (7,490 )
   Net cash used in operating activities (16,744 ) (12,932 )
Cash flows from investing activities:
Capital expenditures (2,876 ) (1,562 )
Purchases of investments (83 ) (20,237 )
Capitalized costs for intangible assets (438 ) (649 )
Maturities of investments 22,725
14,714
   Net cash provided by (used in) investing activities 19,328
(7,734 )
Cash flows from financing activities:
Proceeds from exercise of stock options 3,799
142
Proceeds from the issuance of stock under employee stock purchase plan 141
112
Tax withholdings on issuance of stock awards (1,762 ) (1,841 )
Repurchase of common stock (152,000 ) —
   Net cash used in financing activities (149,822 ) (1,587 )
Net decrease in cash, cash equivalents and restricted cash (147,238 ) (22,253 )
Cash, cash equivalents and restricted cash at beginning of period 332,335
306,830
Cash, cash equivalents and restricted cash at end of period $ 185,097
$ 284,577

Supplemental disclosure of non-cash transactions:
Purchase of equipment included in accounts payable and accrued liabilities $ 67
$ —
Issuance of common stock for vested restricted stock units $ 4,520
$ 4,696

~~The accompanying notes are an integral part of these condensed consolidated financial statements.~~

~~BRIDGEPOINT EDUCATION, INC.~~ZOVIO INC

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Nature of Business

Zovio Inc (the “Company”), formerly known as Bridgepoint Education, Inc. ~~(together with its subsidiaries, the “Company”)~~, ~~incorporated in 1999,~~ is a ~~provider of postsecondary~~Delaware corporation, and is an education ~~services.~~technology services company that partners with higher education institutions and employers to deliver innovative, personalized solutions to help learners and leaders achieve their aspirations. Its ~~wholly-owned subsidiaries,~~wholly owned subsidiary, Ashford University^® ~~and University of the Rockies~~^SM, ~~are~~is a regionally accredited academic ~~institutions,~~institution, which ~~deliver~~delivers programs primarily online. Ashford University offers associate’s, bachelor’s, ~~and master’s programs, and University of the Rockies offers~~ master’s and doctoral programs.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The condensed consolidated financial statements include the accounts of ~~Bridgepoint Education, Inc.~~the Company and its wholly owned subsidiaries. Intercompany transactions have been eliminated in consolidation.

Unaudited Interim Financial Information

The condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these financial statements do not include all of the information and footnotes required by GAAP for complete annual financial statements and should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016~~,2018, which was filed with the Securities and Exchange Commission ~~(the “SEC”~~(“SEC”) on March ~~7, 2017~~.12, 2019. In the opinion of management, the condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, considered necessary to present a fair statement of the Company’s condensed consolidated financial position, results of operations and cash flows as of and for the periods presented.

Operating results for any interim period are not necessarily indicative of the results that may be expected for the full year. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP for complete annual financial statements.

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the condensed consolidated financial statements. Actual results could differ from those estimates.

~~Reclassifications~~Restatement of Previously Issued Condensed Consolidated Financial Statements

~~Certain reclassifications have been made~~Subsequent to the ~~prior~~issuance of the Company’s unaudited condensed consolidated financial statements as of and for the three months ended March 31, 2018, the Company determined that such financial statements had errors related to: (i) revenue for the Corporate Full Tuition Grant (“FTG”) program portion of our student contracts which was misstated due to ~~conform~~allowances that had not been properly determined and computational errors, which also resulted in misstatements in accounts receivable and its provision for bad debts, deferred revenue and student deposits, and the related income tax impact; and (ii) a misstatement in the adjustment to beginning retained earnings as of January 1, 2018 as a result of the incorrect adoption of ASU 2014-09, Revenue from Contracts with Customers, or Accounting Standards Codification Topic 606 (“ASC 606”) as it relates to the ~~current year presentation. During 2016,~~FTG program, resulting in a decrease of $2.2 million from the amount previously reported of $3.2 million to $1.0 million, as restated. As a result, the Company ~~adopted Accounting Standards Update (“ASU”) 2016-18,~~ ~~Statement of Cash Flows (Topic 230)~~ ~~and reclassified certain restricted cash amounts~~has restated the accompanying condensed consolidated financial statements for the ~~period~~three months ended ~~September 30, 2016 within~~March 31, 2018 from amounts previously reported to correct these matters. Management considers the restatement to be immaterial.

ZOVIO INC

Notes to Condensed Consolidated Financial Statements (Unaudited)

The following tables present a summary of the impact of the restatement corrections and other immaterial adjustments on the condensed consolidated ~~statements~~statement of income (loss), the condensed consolidated statement of cash ~~flows. These reclassifications had no effect on previously reported results~~flows and the condensed consolidated statement of ~~operations or retained earnings.~~stockholders’ equity for the three months ended March 31, 2018. The following ~~table provides a reconciliation~~tables are presented in thousands, except per share data:



	As Reported			As Restated
	Three Months Ended
Condensed consolidated statement of income (loss) data:	March 31, 2018
Revenue	$	118,031		$	116,777
Instructional costs and services	$	56,862		$	56,614
Total costs and expenses	$	117,645		$	117,397
Operating income (loss)	$	386		$	(620	)
Income (loss) before income taxes	$	636		$	(370	)
Income tax benefit	$	(1,661	)	$	(1,680	)
Net income	$	2,297		$	1,310
Basic income per share	$	0.08		$	0.05
Diluted income per share	$	0.08		$	0.05



	As Reported			As Restated
	Three Months Ended
Condensed consolidated statement of cash flow data:	March 31, 2018
Net income	$	2,297		$	1,310
Provision for bad debts	$	6,646		$	6,398
Accounts receivable	$	(15,849	)	$	(15,331	)
Prepaid expenses and other current assets	$	995		$	977
Deferred revenue and student deposits	$	(6,973	)	$	(6,238	)
Cash flows used in operating activities	$	(15,069	)	$	(15,069	)



	As Reported		As Restated
Condensed consolidated statement of stockholders’ equity data:	March 31, 2018
Retained earnings	$	430,964	$	426,666
Total stockholders’ equity	$	128,064	$	123,766

Comprehensive Income

The Company has no components of ~~cash~~other comprehensive income, and ~~cash equivalents,~~therefore, comprehensive income equals net income.

Leases

In general, leases are evaluated and ~~restricted cash reported within~~classified as either operating or finance leases. The Company does not have any finance leases. The Company’s operating leases are included in operating lease assets, accounts payable and accrued liabilities, and noncurrent lease liabilities on the condensed consolidated balance ~~sheets to~~sheets. Operating lease assets and operating lease liabilities are recognized based on the ~~amounts shown~~present value of the future minimum lease payments over the lease term at commencement date. As most of the Company’s leases do not provide an implicit rate, the Company uses its estimated incremental borrowing rate based on information available at the date of adoption in calculating the ~~condensed consolidated statements~~present value of ~~cash flows.~~

As of
September 30, 2017 As of
December 31, 2016
Cash and cash equivalents $ 165,176
$ 307,802
Restricted cash 19,921
24,533
Total cash, cash equivalents and restricted cash $ 185,097
$ 332,335
its existing

~~BRIDGEPOINT EDUCATION, INC.~~ZOVIO INC

Notes to Condensed Consolidated Financial Statements (Unaudited) ~~(Continued)~~

lease payments. The incremental borrowing rate is determined using the U.S. Treasury rate adjusted to account for the Company’s credit rating and the collateralized nature of operating leases. The operating lease asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line method over the term of the lease.

Leased property and equipment meeting certain criteria are capitalized as finance lease assets, and the present value of the related lease payments is recognized as a finance lease liability on the condensed consolidated balance sheets. Amortization of capitalized leased assets is computed on the straight-line method over the term of the lease or the life of the related asset, whichever is shorter.

Recent Accounting Pronouncements

In ~~May 2014,~~August 2018, the Financial Accounting Standards Board ~~(the “FASB”~~(“FASB”) issued Accounting Standard Update 2018-15 (“ASU ~~2014-09,~~2018-15”), ~~Revenue from Contracts with Customers (Topic 606)~~Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which ~~supersedes~~amends ASC 350-40 to address a customer’s accounting for implementation costs incurred in a cloud computing arrangement (“CCA”) that is a service contract. The amendments in ASU 2018-15 align the ~~revenue~~requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Specifically, ASU 2018-15 amends ASC 350 to include in its scope implementation costs of a CCA that is a service contract and clarifies that a customer should apply ASC 350-40 to determine which implementation costs should be capitalized in a CCA that is considered a service contract and which costs to expense. This guidance is effective for public companies for fiscal years, and interim fiscal periods within those fiscal years, beginning after December 15, 2019; early adoption is permitted. Entities are permitted to apply a retrospective or a prospective transition approach to adopt the guidance. The Company has early adopted ASU 2018-15 for the period ended March 31, 2019, on a prospective basis.

The Company adopted ASU 2016-02, Leases (ASC 842) (“ASC 842”), as of January 1, 2019, using the modified retrospective approach. The Company elected the ‘comparatives under ASC 840 option’ as a transitional practical expedient, which allows the Company to initially apply the new lease requirements at the effective date and recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. It also allows the Company to report comparative periods in the financial statements under previous GAAP under ASC 840, Leases (“ASC 840”). The Company also elected the ‘package of practical expedients’ permitted under the transition guidance, which allowed the Company to (i) carry forward the historical lease classification, (ii) forgo reassessment of whether any expired or existing contracts contain leases, and (iii) forgo reassessment of whether any previously unamortized initial direct costs continue to meet the definition of initial direct costs under ASC 842. The Company did not, however, elect the ‘hindsight’ practical expedient to reassess the lease term for existing leases. Additionally, the Company does not have land easements, therefore, practical expedients pertaining to land easements is not applicable to the Company.

For the accounting policy practical expedients, the Company elected the short-term lease exemption, under which any lease less than 12 months is excluded from recognition ~~requirements in Accounting Standards Codification (“ASC”) Topic 605,~~ ~~Revenue Recognition. This literature is based~~ on the ~~principle~~balance sheet. The Company elected not to recognize right of use assets and lease liabilities for short term leases, which has a lease term of 12 months or less and does not include an option to purchase the underlying asset that ~~revenue~~the Company is reasonably certain to exercise. Additionally, the Company elected the non-separation of lease and non-lease components, and as a result, the Company does not need to account for lease components (e.g., fixed payments including rent) separately from the non-lease components (e.g., common-area maintenance costs).

Upon adoption of ASC 842, the Company recorded right-of-use assets of approximately $25.2 million, with corresponding operating lease liabilities of approximately $31.8 million, respectively, with an offset to accounts payable and accrued liabilities and other long-term liabilities of approximately $8.4 million to eliminate accrued rent and an offset to prepaid and other current assets of $1.7 million on the consolidated balance sheet as of January 1, 2019. The Company also derecognized an existing construction-in-process of approximately $8.6 million, with a corresponding debt obligation of the same amount for an asset under construction in build-to-suit lease arrangements. Upon completion of the related build-to-suit construction, the Company expects to recognize a new right-of-use asset and lease liability on its balance sheet for the associated lease.

ZOVIO INC

Notes to Condensed Consolidated Financial Statements (Unaudited)

There was no adjustment to the opening balance of retained earnings upon adoption of the new standard given the nature of the impacts and the other transition practical expedients elected by the Company. Adoption of the standard impacted the Company’s previously reported results on January 1, 2019, as follows (in thousands):



	Closing balance at December 31, 2018		Adjustments due to ASC 842			Opening balance at January 1, 2019
Assets
Prepaid and other current assets	$	18,255	$	(1,745	)	$	16,510
Property and equipment, net	$	16,860	$	(8,634	)	$	8,226
Operating lease assets ^{(1) (2)}	$	—	$	25,165		$	25,165
Liabilities and stockholder’s equity
Accounts payable and accrued liabilities	$	62,792	$	13,177		$	75,969
Noncurrent operating lease liabilities ⁽³⁾	$	3,183	$	10,243		$	13,426
Lease financing obligation	$	8,634	$	(8,634	)	$	—


⁽¹⁾	Represents the reclassification of prepaid rent to operating lease assets


⁽²⁾	Represents capitalization of operating lease assets


⁽³⁾	Represents recognition of operating lease liabilities; Previously disclosed as rent liability for the portion related to accrued rent.

The standard did not materially impact the Company’s consolidated net earnings and had no material impact on the condensed consolidated statement of cash flows. For further information regarding leases, refer to Note 9, “Leases Obligations” to the condensed consolidated financial statements.

3. Revenue Recognition

Revenues are recognized ~~to depict~~when control of the ~~transfer of~~promised goods or services are transferred to the Company’s customers in an amount that reflects the consideration ~~to which~~ the ~~entity~~Company expects to be entitled in exchange for those goods or services. ~~The accounting guidance also requires additional disclosure regarding~~Determining whether a valid customer contract exists includes an assessment of whether amounts due under the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 can be adopted using one of two retrospective application methods. In August 2015, the FASB issued ASU 2015-14, ~~Deferral of the Effective Date,~~ ~~which deferred the effective date of ASU 2014-09 by one year, to fiscal years beginning after December 15, 2017. The FASB subsequently issued various updates affecting the guidance in ASU 2014-09,~~ ~~Revenue from Contracts with Customers (Topic 606). The effective dates and transition requirements for each of the following updates~~contract are ~~the same as those described for ASU 2014-09 noted above.~~collectible. The Company plans to adopt ASU 2014-09 and all its related topics in the first quarter of 2018 and currently expects to use the modified retrospective application method. During the first three quarters of 2017, the Company continued to progress in its evaluation of the impact on accounting policies and internal processes and controls the new standard may have on its revenue streams. During the current quarter, the Company neared completion of its technical accounting analysis for all contracts. Further, it commenced efforts in quantifying the impact of anticipated model changes, drafting enhanced disclosures, and designing the related changes in processes and internal controls. Under Topic 605, tuition revenues are recognized pro-rata over the applicable period of instruction, which the Company believes is consistent with the revenue recognition method required by the new standard. Also under Topic 605, the Company recognizes revenue upon the receipt of cash in situations where collectibility is not reasonably assured. This accounting treatment is not allowed under Topic 606 and will require changes to be made. Further, the Company will be required to expand its current disclosures to be in compliance with Topic 606. As the Company completes its evaluation, additional impacts may be identified. The Company has not finalized its quantification efforts, however, the transition to Topic 606 could have a material impact on the Company’s condensed consolidated financial statements.

~~In February 2016, the FASB issued ASU 2016-02,~~ ~~Leases (Topic 842).~~ ~~Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases)~~performs this assessment at the lease commencement date: (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. The new lease guidance simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing. Public companies should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of ~~the earliest comparative period presented~~every contract and subsequently thereafter if new information indicates there has been a significant change in facts and circumstances.

The Company’s contracts with customers generally include multiple performance obligations, which it identifies by assessing whether each good and service promised in the ~~financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before~~contract is distinct. For each performance obligation, the ~~earliest comparative period presented. Lessees~~Company allocates the transaction price, including fixed and ~~lessors may not apply a full retrospective transition approach. The Company continues to evaluate the impact the adoption of ASU 2016-02 will have~~variable consideration, on the ~~Company’s condensed consolidated financial statements.~~

~~In March 2016, the FASB issued ASU 2016-09,~~ ~~Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The update includes multiple provisions intended to simplify various aspects~~basis of the ~~accounting for share-based payments.~~ relative standalone selling prices of each good and service in the contract, which is determined using observable prices.

The ~~update was aimed at reducing~~following table presents the cost and complexity of the accounting for share-based payments. ASU 2016-09 became effective for public companies for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company adopted this update as of January 1, 2017. The adoption of ASU 2016-09 did not have a material impactCompany’s net revenue disaggregated based on the ~~Company’s condensed consolidated financial statements.~~revenue source (in thousands):

~~In January 2017, the FASB issued ASU 2017-04,~~ ~~Intangibles - Goodwill~~



	Three Months Ended March 31,
	2019		2018
Tuition revenue, net	$	98,957	$	107,206
Digital materials revenue, net	6,857		6,028
Technology fee revenue, net	3,431		3,027
Other revenue, net⁽¹⁾	519		516
Total revenue, net	$	109,764	$	116,777

(1) Primarily consists of revenues generated from services such as graduation fees, transcript fees, and ~~Other (Topic 350): Simplifying the Test for Goodwill Impairment~~. The update simplifies the measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The annual or interim goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds theother miscellaneous services.

910

~~BRIDGEPOINT EDUCATION, INC.~~ZOVIO INC

Notes to Condensed Consolidated Financial Statements (Unaudited) ~~(Continued)~~

~~reporting unit’s fair value.~~

The ~~update also eliminates~~following table presents the ~~requirements~~Company’s net revenue disaggregated based on the timing of revenue recognition (in thousands):



	Three Months Ended March 31,
	2019		2018
Over time, over period of instruction	$	90,714	$	102,301
Over time, full tuition grant ⁽¹⁾	12,422		8,325
Point in time ⁽²⁾	6,628		6,151
Total revenue, net	$	109,764	$	116,777


(1)	Represents revenue generated from the FTG program.


(2)	Represents revenue generated from digital textbooks and other miscellaneous fees.

The Company operates under one reportable segment. The Company generates the majority of its revenue from tuition, technology fees, and digital materials related to students whose primary funding source is governmental funding. Tuition represents amounts charged for ~~any reporting unit~~course instruction, and technology fees represent amounts charged for the students’ use of the technology platform on which course instruction is delivered. Digital materials fees represent amounts charged for the digital textbooks that accompany the majority of courses taught at Ashford University. With the exception of students attending courses within the three-week conditional admission, the majority of tuition and technology fees are recognized as revenue as control of the services is transferred to the student, which occurs over the applicable period of instruction. Similarly, the majority of digital materials fees are recognized as revenue when control of the product has been transferred to the student, which occurs when the student is granted unrestricted access to the digital textbook, generally, on the first day of the course. Revenue generated from students within the conditional admission period is deferred and recognized when the student matriculates into Ashford University, which occurs in the fourth week of the course.

Ashford University’s online students generally enroll in a program that encompasses a series of five to six-week courses that are taken consecutively over the length of the program. With the exception of those students under conditional admission and students enrolled under the FTG program, online students are billed on a payment period basis on the first day of a course. Students under conditional admission are billed for the payment period upon matriculation.

If a student's attendance in a class precedes the receipt of cash from the student's source of funding, the Company establishes an account receivable and corresponding deferred revenue in the amount of the tuition due for that payment period. Cash received either directly from the student or from the student's source of funding reduces the balance of accounts receivable due from the student. Financial aid from sources such as the federal government's Title IV programs pertains to the online student's award year and is generally divided into two disbursement periods. As such, each disbursement period may contain funding for up to four courses. Financial aid disbursements are typically received during the online student's attendance in the first or second course. Since the majority of disbursements cover more courses than for which a student is currently enrolled, the amount received in excess effectively represents a prepayment from the online student for up to four courses. At the end of each accounting period, the deferred revenue and related account receivable balances are reduced to present amounts attributable to the current course.

In certain cases, Ashford University provides scholarships to students who qualify under various programs. These scholarships are recognized as direct reductions of revenue consistent with the timing of recognition associated with the related performance obligations. Also, for some customers, we do not expect to collect 100% of the consideration to which we are contractually entitled and, as a result, those customers may receive discounts or price adjustments that, based on historical Company practice, represent implied price concessions and are accounted for as variable consideration. The majority of these price concessions relate to amounts charged to students for goods and services, which management has determined will not be covered by the student’s primary funding source (generally, government aid) and, as a result, the student will become directly financially responsible for them. The reduction in the transaction price that results from this estimate of variable consideration reflects the amount the Company does not expect to be entitled to in exchange for the goods and services it will transfer to the students, as determined using historical experience and current factors, and includes performing a constraint analysis. These

ZOVIO INC

Notes to Condensed Consolidated Financial Statements (Unaudited)

estimates of variable consideration are recorded as direct reductions of revenue consistent with the timing of recognition associated with the related performance obligation.

A portion of tuition revenue, technology fee revenue, and digital materials revenue is generated from contracts with students enrolled under the FTG program, which is a 12-month grant that, when combined with a ~~zero~~corporate partner’s annual tuition assistance program, enables eligible students to earn their degree without incurring student loan debt. Students enrolled under this program are eligible to take up to ten undergraduate or ~~negative carrying amount to perform a qualitative assessment~~eight graduate courses per 12-month grant period and ~~if it fails that qualitative test, to perform Step 2~~must first utilize 100% of the ~~goodwill impairment test. An entity still has~~funds awarded under their employer’s annual tuition assistance program before they can be awarded the ~~option to perform~~FTG grant. The grants awarded by Ashford University under the ~~qualitative assessment~~FTG program are considered a material right, and, as such, the Company records a contract liability for a ~~reporting unit to determine if~~portion of the ~~quantitative impairment test~~consideration received or due under these contracts. The contract liability is ~~necessary. The update should be applied on a prospective basis. For public companies, the update is effective for any annual or interim goodwill impairment tests~~recorded in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company early adopted ASU 2017-04 as of January 1, 2017,deferred revenue and ~~there was no impact~~student deposits on the Company’s condensed consolidated ~~financial statements.~~

~~In May 2017,~~balance sheets, and further discussed in the ~~FASB issued ASU 2017-09,~~ ~~Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting~~.deferred revenue section below. The ~~update provides clarity and reduces diversity in practice regarding the modification~~standalone selling price of the ~~terms~~material right is determined based on the observable standalone selling price of the courses. The transaction price in each FTG contract is allocated to this material right on a relative standalone selling price basis. The contract liability is recognized as revenue at the earlier of satisfaction of the future obligation or its expiration. Billing of products and ~~conditions~~services transferred under a FTG student contract generally occurs after the conclusion of a ~~share-based~~course. There are no material differences between the timing of the products and services transferred and the payment ~~award. The amendments~~terms.

Deferred Revenue

Deferred revenue consists of cash payments that are received or due in ~~ASU 2017-09~~advance of the Company’s performance as well as deferrals associated with certain contracts that include guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. The amendments are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company does not believe that the adoption of ASU 2017-09 will have a material ~~impact~~right. Below are the opening and closing balances of deferred revenue from the Company’s contracts with customers (in thousands):



	Three Months Ended March 31,
	2019		2018
Deferred revenue opening balance, January 1	$	21,768	$	22,001
Deferred revenue closing balance, March 31	22,308		25,796
Increase (Decrease)	$	540	$	3,795

For further information on deferred revenue and student deposits, refer to Note 7, “Other Significant Balance Sheet Accounts - Deferred Revenue and Student Deposits” and for further information on receivables, refer to Note 6, “Accounts Receivable, Net” within the ~~Company’s~~ condensed consolidated financial statements.

~~3. Restructuring and Impairment Charges~~

~~The Company has implemented various restructuring plans to better align its resources with its business strategy and~~For the related charges are recorded in the restructuring and impairment charges line item on the Company’s condensed consolidated statements of income (loss). During each of the three and nine months ended September 30, 2017, the Company recognized $8.0 million, respectively, as restructuring charges, whereas for the three and nine months ended September 30, 2016 these charges were $0.4 million and $2.8 million, respectively.

~~During the third quarter of 2017, the Company executed a strategic reorganization resulting in reductions in force. The reorganization event was part~~majority of the Company’s ~~overall reassessment~~customers, payment for products and services is due at the beginning of ~~resources based upon benchmarking activities with competitors in~~each course. Under special circumstances, some customers may be offered non-interest bearing payment plan arrangements that can extend for up to a maximum of three years. These payment plan arrangements give rise to significant financing components. However, since the Company historically collects substantially all of the consideration to which it expects to be entitled under such payment plans within one year or less, the impact of these significant financing components is not material to any period presented.

The difference between the opening and closing balances of deferred revenue primarily results from the timing difference between the Company’s ~~industry. As a result, for~~performance and the ~~three and nine months ended September 30, 2017, the Company recognized $2.2 million as restructuring charges relating to severance costs for wages and benefits. There were no such charges during~~customer’s payment. For the three months ended ~~September 30, 2016. During the nine months ended September 30, 2016,~~March 31, 2019, the Company recognized ~~$2.2~~$19.6 million of revenue that was included in the deferred revenue balance as of January 1, 2019. For the three months ended March 31, 2018, the Company recognized $20.6 million of revenue that was included in the deferred revenue balance as of January 1, 2018. Amounts reported in the closing balance of deferred revenue are expected to be recognized as revenue within the next 12 months.

ZOVIO INC

Notes to Condensed Consolidated Financial Statements (Unaudited)

4. Restructuring and Impairment Expense (Credit)

During the three months ended March 31, 2019 and 2018, the Company recognized approximately $29,000 and reversed $0.2 million, respectively, of restructuring ~~charges relating to severance costs for wages~~ and ~~benefits. The Company anticipates these costs will be paid out by the end~~impairment expense (credit), which were comprised of the ~~fourth quarter of 2017 from existing cash on hand.~~components described below.

The Company had previously vacated or consolidated properties in San Diego and Denver, and subsequently reassessed its obligations on non-cancelable leases. The fair value estimate of these non-cancelable leases is based on the contractual lease costs over the remaining term, partially offset by estimated future sublease rental income. The estimated rental income considers subleases the Company has executed or expects to execute, current commercial real estate market data and conditions, and comparable transaction data and qualitative factors specific to the related facilities. As of September 30, 2017, the Company was unable to secure subleases for certain of its San Diego properties. As such, the Company concluded that the amount of expected future cash flows from sublease income associated with pre-existing restructuring liabilities have changed. As a result ~~the Company recorded an incremental restructuring charge. During each~~ of these reassessments, during the three ~~and nine~~ months ended ~~September 30, 2017,~~March 31, 2019 the Company recognized ~~$5.8~~expense of approximately $29,000. During the three months ended March 31, 2018, the Company recognized a credit of $0.5 million as a reversal of the original estimated charge, which decreased restructuring charges relating to lease exit ~~costs. During~~costs during that period.

There were no reorganization charges during the three ~~and nine~~ months ended ~~September 30, 2016,~~March 31, 2019. For the three months ended March 31, 2018, the Company ~~recorded $0.5~~recognized $0.3 million ~~and $0.7 million, respectively,~~ as restructuring ~~charges~~and impairment expense relating to ~~lease exit~~severance costs for wages and ~~other costs,~~benefits, due to the Company’s execution of a strategic reorganization resulting in reductions in force. The reorganization was part of the Company’s overall reassessment of ~~estimates relating to~~resources based upon benchmarking activities with competitors in the ~~closure~~Company’s industry.

The following table summarizes the amounts recorded in the restructuring and impairment charges line item on the Company’s condensed consolidated statements of income (loss) for each of the ~~Ashford Clinton Campus.~~

The Company closed Ashford University’s residential campus in Clinton, Iowa during the second half of 2016. With this closure, ground-based Ashford University students were provided opportunities to continue to pursue their degrees as reflected in their respective student transfer agreements. The Company previously recorded restructuring charges relating to future cash expenditures for student transfer agreements. For the three and nine months ended September 30, 2017, no amounts were added to the amount previously recorded.

periods presented (in thousands):

~~BRIDGEPOINT EDUCATION, INC.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)~~



	Three Months Ended March 31,
	2019		2018
Severance costs	$	—	$	347
Lease exit and other costs (credits)	29		(506		)
Total restructuring and impairment expense (credit)	$	29	$	(159	)

The following table summarizes the changes in the Company's restructuring and impairment liability by type during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 (in thousands):

Student Transfer Agreement Costs Severance Costs Lease Exit and Other Costs Total
Balance at December 31, 2016 $ 1,592
$ 567
$ 18,457
$ 20,616
Restructuring and impairment charges —
2,175
5,829
8,004
Payments (867 ) (1,457 ) (9,856 ) (12,180 )
Balance at September 30, 2017 $ 725
$ 1,285
$ 14,430
$ 16,440



	Student Transfer Agreement Costs			Severance Costs			Lease Exit and Other Costs			Total
Balance at December 31, 2018	$	1,503		$	267		$	2,864		$	4,634
Restructuring and impairment expense	—			—			29			29
Payments and adjustments	(12		)	(159		)	(2,482		)	(2,653		)
Balance at March 31, 2019	$	1,491		$	108		$	411		$	2,010

The restructuring liability amounts are recorded within either the (i) accounts payable and accrued liabilities account, (ii) ~~rent~~lease liability account or (iii) other long-term liabilities account on the condensed consolidated balance sheets.

ZOVIO INC

Notes to Condensed Consolidated Financial Statements (Unaudited)

5. Investments

The following tables summarize the fair value information for investments as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, respectively (in thousands):

As of September 30, 2017
Level 1 Level 2 Level 3 Total
Mutual funds $ 1,965
$ —
$ —
$ 1,965
Certificates of deposit —
25,000
—
25,000
Total $ 1,965
$ 25,000
$ —
$ 26,965



	As of March 31, 2019
	Level 1		Level 2		Level 3		Total
Mutual funds	$	2,236	$	—	$	—	$	2,236

As of December 31, 2016
Level 1 Level 2 Level 3 Total
Mutual funds $ 1,688
$ —
$ —
$ 1,688
Corporate notes and bonds —
22,746
—
22,746
Certificates of deposit —
25,000
—
25,000
Total $ 1,688
$ 47,746
$ —
$ 49,434



	As of December 31, 2018
	Level 1		Level 2		Level 3		Total
Mutual funds	$	2,068	$	—	$	—	$	2,068

The mutual funds in the tables above, ~~include mutual funds,~~represent the deferred compensation asset balances, which are considered ~~Level 1 investments and consist of investments relating~~ to the Company’s deferred compensation plan. The tables above also include amounts related to investments classified as other investments, such as certificates of deposit, which are carried at amortized cost. The amortized cost of such other investments approximated fair value at each balance sheet date. The assumptions used in these fair value estimates are considered other observable inputs and therefore these investments are categorized as Level 2 investments under the accounting guidance. The Company’s Level 2 investments are valued using readily available pricing sources that utilize market observable inputs, including the current interest rate for similar types of instruments.be trading securities. There were no transfers between level categories for ~~our~~ investments during the periods presented. The ~~Company also holds~~Company’s money market securities ~~which~~ are recorded in the cash and cash equivalents line item on the Company’s condensed consolidated balance sheets, ~~that~~and are classified as Level 1 securities.

~~BRIDGEPOINT EDUCATION, INC.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)~~

~~The following tables summarize if there are any~~There were no differences between amortized cost and fair value of investments as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016, respectively (in thousands):~~

September 30, 2017
Gross unrealized
Maturities Amortized Cost Gain Loss Fair Value
Short-term
Certificates of deposit 1 year or less $ 25,000
$ —
$ —
$ 25,000
Total $ 25,000
$ —
$ —
$ 25,000

~~The above table does not include the $2.0 million of mutual funds as of September 30, 2017, which are recorded as trading securities.~~

December 31, 2016
Gross unrealized
Maturities Amortized Cost Gain Loss Fair Value
Short-term
Corporate notes and bonds 1 year or less $ 22,747
$ 2
$ (3 ) $ 22,746
Certificates of deposit 1 year or less 25,000
—
—
25,000
Total $ 47,747
$ 2
$ (3 ) $ 47,746

~~The above table does not include the $1.7 million of mutual funds as of December 31, 2016, which are recorded as trading securities.~~

The Company records changes in unrealized gains and losses on its investments during the period in the accumulated other comprehensive income (loss) line item on the Company’s condensed consolidated balance sheets. There were no net unrealized gains for the three months ended September 30, 2017. For the three months ended September 30, 2016, the Company recorded net unrealized losses of $46,000 in accumulated other comprehensive income (loss). For the nine months ended September 30, 2017 and 2016, the Company recorded net unrealized gains of $1,000 and $148,000, respectively, in accumulated other comprehensive income (loss).

2018, respectively. There were no reclassifications out of accumulated other comprehensive income ~~(loss)~~ during either the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016.~~2018.

5.6. Accounts Receivable, Net

Accounts receivable, net, consists of the following (in thousands):


	As of September 30, 2017			As of December 31, 2016			As of March 31, 2019		As of December 31, 2018
Accounts receivable	$	52,356		$	42,611		$	41,655	$	39,195
Less allowance for doubtful accounts	(18,053		)	(16,154		)	9,586		12,180
Accounts receivable, net	$	34,303		$	26,457		$	32,069	$	27,015

~~As of~~ ~~September 30, 2017~~ ~~and~~ ~~December 31, 2016, there was~~There is an immaterial amount of accounts receivable, net, at each balance sheet date with a payment due date of greater than one year.

~~BRIDGEPOINT EDUCATION, INC.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)~~

The following table presents the changes in the allowance for doubtful accounts for accounts receivable for the periods indicated (in thousands):

Beginning
Balance

Charged to
Expense
Deductions(1)
Ending
Balance
Allowance for doubtful accounts receivable:
For the nine months ended September 30, 2017 $ (16,154 ) $ 24,440
$ (22,541 ) $ (18,053 )
For the nine months ended September 30, 2016 $ (10,114 ) $ 23,406
$ (19,395 ) $ (14,125 )



	Beginning Balance		Charged to Expense		Deductions (1)			Ending Balance
Allowance for doubtful accounts receivable:
For the three months ended March 31, 2019	$	12,180	$	3,608	$	(1,014	)	$	9,586
For the three months ended March 31, 2018	$	15,189	$	6,398	$	(2,258	)	$	11,049


(1)	Deductions represent accounts written off, net of recoveries.

ZOVIO INC

Notes to Condensed Consolidated Financial Statements (Unaudited)

7. Other Significant Balance Sheet Accounts

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consists of the following (in thousands):


	As of September 30, 2017		As of December 31, 2016		As of March 31, 2019		As of December 31, 2018
Prepaid expenses	$	6,225	$	7,160	$	4,217	$	5,445
Prepaid licenses	5,764		5,183		7,336		5,840
Income tax receivable	8,448		7,432		5,068		5,044
Prepaid insurance	1,420		1,291		2,366		1,077
Insurance recoverable	1,159		1,027		758		723
Other current assets	1,532		1,374		51		126
Total prepaid expenses and other current assets	$	24,548	$	23,467	$	19,796	$	18,255

Property and Equipment, Net

Property and equipment, net, consists of the following (in thousands):


	As of September 30, 2017			As of December 31, 2016			As of March 31, 2019			As of December 31, 2018
Buildings, build-to-suit							$	—		$	10,434
Furniture and office equipment	$	42,977		$	41,528		35,987			31,227
Software	12,049			11,979			8,357			7,517
Leasehold improvements	5,238			4,332			11,127			3,430
Vehicles	22			22			22			22
Total property and equipment	60,286			57,861			55,493			52,630
Less accumulated depreciation	(49,392		)	(45,643		)
Less accumulated depreciation and amortization							(36,715		)	(35,770		)
Total property and equipment, net	$	10,894		$	12,218		$	18,778		$	16,860

For the three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016,~~2018, depreciation and amortization expense related to property and equipment was ~~$1.3~~$0.9 million and ~~$2.0 million, respectively. For the nine months ended September 30, 2017 and 2016, depreciation expense was $4.2 million and $6.5~~$1.1 million, respectively.

1315

~~BRIDGEPOINT EDUCATION, INC.~~ZOVIO INC

Notes to Condensed Consolidated Financial Statements (Unaudited) ~~(Continued)~~

Goodwill and Intangibles, Net

Goodwill and intangibles, net, consists of the following (in thousands):


	September 30, 2017							March 31, 2019
Definite-lived intangible assets:	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Capitalized curriculum costs	$	21,348	$	(18,849	)	$	2,499	$	21,239	$	(19,583	)	$	1,656
Purchased intangible assets	15,850		(5,679		)	10,171		15,850		(7,528		)	8,322
Total definite-lived intangible assets	$	37,198	$	(24,528	)	$	12,670	$	37,089	$	(27,111	)	$	9,978
Goodwill and indefinite-lived intangibles						2,567							2,072
Total goodwill and intangibles, net						$	15,237						$	12,050

	December 31, 2016							December 31, 2018
Definite-lived intangible assets:	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Capitalized curriculum costs	$	21,153	$	(17,397	)	$	3,756	$	21,076	$	(19,338	)	$	1,738
Purchased intangible assets	15,850		(4,754		)	11,096		15,850		(7,219		)	8,631
Total definite-lived intangible assets	$	37,003	$	(22,151	)	$	14,852	$	36,926	$	(26,557	)	$	10,369
Goodwill and indefinite-lived intangibles						2,567							2,072
Total goodwill and intangibles, net						$	17,419						$	12,441

For the three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016,~~2018, amortization expense was $~~0.8~~0.6 million and $~~1.1~~0.7 million, ~~respectively. For the nine months ended September 30, 2017 and September 30, 2016, amortization expense was $2.6 million and $3.6 million,~~ respectively.

The following table summarizes the estimated remaining amortization expense as of each fiscal year ended below (in thousands):


Year Ended December 31,
Remainder of 2017		$	758
2018		2,481
2019		1,758
Remainder of 2019				Remainder of 2019	$	1,518
2020	2020	1,461		2020	1,844
2021	2021	1,277		2021	1,603
2022				2022	1,304
2023				2023	1,236
Thereafter	Thereafter	4,935		Thereafter	2,473
Total future amortization expense	Total future amortization expense	$	12,670	Total future amortization expense	$	9,978

1416

~~BRIDGEPOINT EDUCATION, INC.~~ZOVIO INC

Notes to Condensed Consolidated Financial Statements (Unaudited) ~~(Continued)~~

Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consists of the following (in thousands):


	As of September 30, 2017		As of December 31, 2016		As of March 31, 2019		As of December 31, 2018
Accounts payable	$	1,496	$	4,519	$	6,146	$	5,313
Accrued salaries and wages	6,738		8,967		5,653		7,807
Accrued bonus	6,507		5,087		4,172		8,147
Accrued vacation	9,546		9,313		6,318		7,929
Accrued litigation and fees	8,041		13,946		8,041		8,041
Accrued expenses	17,737		15,793		34,176		17,692
Rent liability	16,766		17,232
Current leases payable					17,314		5,768
Accrued insurance liability	3,009		3,009		2,078		2,095
Total accounts payable and accrued liabilities	$	69,840	$	77,866	$	83,898	$	62,792

Deferred Revenue and Student Deposits

Deferred revenue and student deposits consists of the following (in thousands):


	As of September 30, 2017		As of December 31, 2016		As of March 31, 2019		As of December 31, 2018
Deferred revenue	$	22,143	$	21,733	$	22,307	$	21,768
Student deposits	39,572		52,933		33,636		42,066
Total deferred revenue and student deposits	$	61,715	$	74,666	$	55,943	$	63,834

Other Long-Term Liabilities

Other long-term liabilities consists of the following (in thousands):


	As of September 30, 2017		As of December 31, 2016		As of March 31, 2019		As of December 31, 2018
Uncertain tax positions	$	8,290	$	8,216	$	869	$	865
Student transfer agreement costs	81		630
Other long-term liabilities	4,261		4,784		2,640		2,570
Total other long-term liabilities	$	12,632	$	13,630	$	3,509	$	3,435

78. Credit Facilities

The Company has issued letters of credit that are collateralized with cash (held in restricted cash) in the aggregate amount of ~~$8.3~~$16.4 million ~~which~~as of March 31, 2019. Included in this balance is ~~included in~~$5.6 million of letters of credit recorded as long-term restricted cash as of ~~September 30, 2017.~~March 31, 2019.

As part of its normal business operations, the Company is required to provide surety bonds in certain states in which the Company does business. The Company has entered into a surety bond facility with an insurance company to provide such bonds when required. As of ~~September 30, 2017~~March 31, 2019, the Company’s total available surety bond facility was ~~$3.5~~$8.5 million and the surety had issued bonds totaling ~~$3.3~~$8.1 million on the Company’s behalf under such facility.

1517

~~BRIDGEPOINT EDUCATION, INC.~~ZOVIO INC

Notes to Condensed Consolidated Financial Statements (Unaudited) ~~(Continued)~~

8.9. Lease Obligations

Operating Leases

The Company leases ~~certain~~various office facilities in Arizona, California, Colorado, Iowa and ~~office equipment under non-cancelable lease arrangements that~~Washington D.C, which expire at various dates through 2023. These facilities are used for academic operations, corporate functions, enrollment services and student support services. The Company does not have any leases other than its office facilities. All of the leases ~~contain certain renewal options. Rent expense under non-cancelable~~were classified as operating ~~lease arrangements is accounted for on a straight-line basis and totaled $11.3 million and $17.4 million~~leases for the ~~nine~~period ended March 31, 2019, and the Company does not have any finance leases. All of the leases, other than those that may qualify for the short-term scope exception of 12 months or less, are recorded on the Company’s condensed consolidated balance sheets.

During 2018, the Company entered into a lease agreement, which commenced in April 2019, consisting of approximately 131,000 square feet of office space located in Chandler, Arizona, which extends through 2030. The Company is involved in the construction and the build-out of the space, and as such, serves as the construction agent on behalf of the landlord. Under such arrangement, the Company has obligations to fund cost over-runs in its capacity as the construction agent. The Company has determined that under the new lease accounting standard ASC 842, it does not have control during construction, and as such has derecognized the asset and financing obligation as of January 1, 2019.

As of March 31, 2019, the lease amounts on the condensed consolidated balance sheets do not include any options to extend, nor any options for early termination. The Company’s lease agreements do not include rental payments adjusted periodically for inflation. The Company’s lease agreements do not contain any residual value guarantees or restrictive covenants. The Company is not a party to any related party arrangements with respect to its lease transactions.

Some of the more significant assumptions and judgments in determining the amounts to capitalize include the determination of the discount rate, which is discussed below.

Rental expense for the three months ended ~~September 30, 2017~~March 31, 2019 was $4.4 million, calculated in accordance with ASC 842, and ~~2016,~~rental expense for the three months ended March 31, 2018 was $3.9 million, calculated in accordance with ASC 840.

The Company has agreements to sublease certain portions of its office facilities, with three active subleases and two subleases that have not yet commenced as of March 31, 2019. The Company’s subleases do not include any options to extend, nor any options for early termination. The Company’s subleases do not contain any residual value guarantees or restrictive covenants. All of the subleases were classified as operating leases for the period ended March 31, 2019. The Company is subleasing approximately 28,400 square feet of office space in San Diego, California with a commitment to lease for 13 months and net lease payments of $0.8 million. In addition, the Company is subleasing approximately 72,000 square feet of office space in Denver, Colorado with a commitment to lease for 29 months and net lease payments of $2.7 million. Additionally, the Company has entered into a sublease agreement of approximately 21,000 square feet of office space in Denver, Colorado with a commitment to lease for 47 months and net lease payments of $2.3 million which is expected to commence on April 1, 2019. The Company has entered into a sublease agreement of approximately 20,800 square feet of office space in Denver, Colorado with a commitment to lease for 47 months and net lease payments of $1.8 million which is expected to commence on May 1, 2019. Sublease income for the three months ended March 31, 2019 and 2018 was $0.7 million (in accordance with ASC 842) and $0.7 million (in accordance with ASC 840), respectively. ~~Rent expense in certain periods also includes~~

The following tables represent the ~~restructuring~~classification and ~~impairment charges~~amounts recorded on the condensed consolidated balance sheets as of March 31, 2019 (in thousands):



Operating lease assets:
Arizona	$	121
California	10,696
Colorado	10,119
Iowa	253
Total	$	21,189

ZOVIO INC

Notes to Condensed Consolidated Financial Statements (Unaudited)



Operating lease liabilities:
Accounts payable and accrued liabilities	$	17,168
Noncurrent operating lease liabilities	9,842
Total	$	27,010

The following table represents the classification and ~~therefore, may differ significantly from cash payments. For additional information, refer to Note 3, “Restructuring and Impairment Charges.”~~amounts recorded on the condensed consolidated statements of income (loss) for the three months ended March 31, 2019 (in thousands):



Operating lease costs	$	4,299
Short-term lease cost	25
Variable lease costs ⁽¹⁾	111
Less: Sub-lease income	(723		)
Total net lease costs	$	3,712


(1)	Variable components of the lease payments such as utilities, taxes and insurance, parking and maintenance costs.

The following table represents the maturities of lease liabilities as of March 31, 2019 (in thousands):



Remainder of 2019	$	14,524
2020	8,117
2021	4,245
2022	1,653
2023 and thereafter	415
Total minimum payments	$	28,954
Less: Interest ⁽²⁾	(1,944		)
Total net lease liabilities ⁽¹⁾	$	27,010


(1)	Operating lease payments do not include the lease arrangement in Chandler, Arizona of approximately $26.4 million, which has not commenced as of March 31, 2019; The lease is expected to commence in April 2019.


₍₂₎	Calculated using an appropriate interest rate for each individual lease.

The following table summarizes the future minimum rental payments under non-cancelable operating lease arrangements in effect at ~~September 30, 2017~~December 31, 2018 (in thousands):


Year Ended December 31,
Remainder of 2017		$	9,080
2018		31,400
2019	2019	20,833		2019	$	20,382
2020	2020	9,504		2020	9,936
2021	2021	5,112		2021	6,460
2022				2022	3,826
2023				2023	2,726
Thereafter	Thereafter	1,949		Thereafter	17,710
Total minimum payments	Total minimum payments	$	77,878	Total minimum payments	$	61,040

ZOVIO INC

Notes to Condensed Consolidated Financial Statements (Unaudited)

The following table represents the lease term and discount rate used in the calculations as of March 31, 2019:



Weighted-average remaining lease term (in years):
Operating leases	2.0 years
Weighted-average discount rate:
Operating leases	6.3	%

The following table represents the cash flow information of operating leases for the three months ended March 31, 2019 (in thousands):



Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	5,599

9.10. Income (Loss) Per Share

Basic income (loss) per share is calculated by dividing net income (loss) available to common stockholders for the period by the weighted average number of common shares outstanding for the period.

Diluted income (loss) per share is calculated by dividing net income (loss) available to common stockholders for the period by the sum of (i) the weighted average number of common shares outstanding for the period, plus (ii) potentially dilutive securities outstanding during the period, if the effect is dilutive. Potentially dilutive securities for the periods presented include stock options, unvested restricted stock units (“RSUs”) and unvested performance stock units (“PSUs”).

The following table sets forth the computation of basic and diluted income (loss) per share for the periods indicated (in thousands, except per share data):


	Three Months Ended September 30,					Nine Months Ended September 30,					Three Months Ended March 31,
	2017		2016			2017		2016			2019			2018
Numerator:
Net income (loss)	$	39	$	(9,477	)	$	16,222	$	(16,251	)	$	(6,642	)	$	1,310
Denominator:
Weighted average number of common shares outstanding	29,123		46,315			33,333		46,180			27,180			27,164
Effect of dilutive options and stock units	548		—			860		—			—			400
Diluted weighted average number of common shares outstanding	29,671		46,315			34,193		46,180			27,180			27,564
Income (loss) per share:
Basic	$	0.00	$	(0.20	)	$	0.49	$	(0.35	)	$	(0.24	)	$	0.05
Diluted	$	0.00	$	(0.20	)	$	0.47	$	(0.35	)	$	(0.24	)	$	0.05

~~BRIDGEPOINT EDUCATION, INC.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)~~

~~During periods in which the Company reports a net loss, basic and diluted loss per share are the same.~~ The following table sets forth the number of stock options, RSUs and PSUs, excluded from the computation of diluted income (loss) per share for the periods indicated below because their effect was anti-dilutive (in thousands):


	Three Months Ended September 30,		Nine Months Ended September 30,		Three Months Ended March 31,
	2017	2016	2017	2016	2019	2018
Stock options	2,625	4,258	1,858	4,468	1,957	2,870
RSUs and PSUs	19	588	9	991	528	11

During the nine months ended September 30, 2017, the Company repurchased approximately 18.1 million shares of the Company’s common stock for an aggregate purchase price of approximately $150.0 million.

~~10.~~

ZOVIO INC

Notes to Condensed Consolidated Financial Statements (Unaudited)

11. Stock-Based Compensation

The Company recorded $~~1.1~~1.7 million and $~~1.4~~1.2 million of stock-based compensation expense for the three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018, ~~respectively, and $2.8 million and $5.7 million of stock-based compensation expense for the nine months ended September 30, 2017 and 2016,~~ respectively.

The related income tax benefit was $0.4 million and ~~$0.5~~$0.3 million for the three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018, ~~respectively, and $1.1 million and $2.1 million for the nine months ended September 30, 2017 and 2016,~~ respectively.

During the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2019, the Company granted ~~0.5~~1.1 million RSUs at a grant date fair value of ~~$10.48~~$6.19 and 0.4 million RSUs vested. During the ~~nine~~three months ended ~~September 30, 2016,~~March 31, 2018, the Company granted ~~0.5~~0.7 million RSUs at a grant date fair value of ~~$10.18~~$6.74 and ~~0.5~~0.3 million RSUs vested.

During the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019, 0.4 million market-based PSUs were granted at a grant date fair value of $8.24 and ~~2016, the Company did not grant any~~no performance-based or market-based PSUs vested. During the three months ended March 31, 2018, no performance-based or market-based PSUs were granted and no performance-based or market-based PSUs vested.

During the ~~nine~~three months ended ~~September 30, 2017, the Company granted 0.3 million stock options at a grant date fair value of $4.76~~March 31, 2019 and ~~0.5 million~~2018, no stock options were ~~exercised. During the nine months ended September 30, 2016, the Company~~ granted ~~0.4 million stock options at a grant date fair value of $3.28~~ and ~~0.2 million~~no stock options were exercised.

As of ~~September 30, 2017~~March 31, 2019, there was unrecognized compensation cost of $~~6.8~~17.9 million related to unvested stock options, RSUs and PSUs.

~~11.~~12. Income Taxes

The Company uses the asset-liability method to account for taxes. Under this method, deferred income tax assets and liabilities result from temporary differences between the tax basis of assets and liabilities and their reported amounts in the condensed consolidated financial statements that will result in income and deductions in future years.

The Company recognizes deferred tax assets if realization of such assets is more-likely-than-not. In order to make this determination, the Company evaluates a number of factors including the ability to generate future taxable income from reversing taxable temporary differences, forecasts of financial and taxable income or loss, and the ability to carryback certain operating losses to refund taxes paid in prior years. The cumulative loss incurred over the three-year period ended ~~September 30, 2017~~March 31, 2019 constituted significant negative objective evidence against the Company’s ability to realize a benefit from its federal deferred tax assets. Such objective evidence limited the ability of the Company to consider in its evaluation certain subjective evidence such as the Company’s projections for future growth. On the basis of its evaluation, the Company determined that its deferred tax assets were not more-likely-than-not to be realized and that a valuation allowance against its deferred tax assets should continue to be maintained as of ~~September 30, 2017.~~March 31, 2019.

The Company determines the interim income tax provision by applying the estimated effective income tax rate expected to be applicable for the full fiscal year to income before income taxes for the period. In determining the full year estimate, the

~~BRIDGEPOINT EDUCATION, INC.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)~~

Company does not include the estimated impact of unusual and/or infrequent items, which may cause significant variations in the customary relationship between income tax expense and income before income taxes.

The Company’s current effective income tax rate that has been applied to normal, recurring operations for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 was ~~1.8%~~(1.8)%. The Company’s actual effective income tax rate after discrete items was ~~(4.6)~~(0.7)% for the ~~nine~~three months ended September 30, 2017, which includes a discrete tax benefit associated with return to provision adjustments related prior years as well as a discrete tax expense associated with unrecognized tax benefit for the nine months ended September 30, 2017.March 31, 2019.

~~At September 30, 2017,~~As of March 31, 2019 and December 31, 2018, the Company had ~~$18.8~~$0.9 million of gross unrecognized tax benefits, of which ~~$12.3~~$0.7 million would impact the effective income tax rate if recognized. At December 31, 2016, the Company had $20.2 million of gross unrecognized tax benefits, of which $13.2 million, would impact the effective income tax rate if recognized. It is reasonably possible that the total amount of the unrecognized tax benefit could change during the next 12 months. Although the Company cannot predict the timing of resolution with taxing authorities, if any, the Company believes it is reasonably possible that the total of the unrecognized tax benefits could change in the next twelve months due to settlement with tax authorities or expiration of the applicable statute of limitations. ~~These unrecognized tax benefits primarily relate to apportionment of on-line service revenues for corporate income tax purposes.~~ Although the Company believes the tax accruals provided are reasonable, the final determination of tax returns under review or returns that may be reviewed in the future and any related litigation could result in tax liabilities that materially differ from ~~our~~the Company’s historical income tax provisions and accruals.

ZOVIO INC

Notes to Condensed Consolidated Financial Statements (Unaudited)

The Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The tax years 2001 through 2017 are open to examination by major taxing jurisdictions to which the Company is subject.

The Company is currently under Internal Revenue Service audit examinations of the Company’s income and payroll tax returns for the years 2013 through ~~2015.~~2016.

The Company’s income tax returns for the tax years ended December 31, 2013 through 2015 are ~~being audited~~under examination by the California Franchise Tax ~~Board for~~Board. The audit examination is currently on hold until the years 2008 through 2015. The Company was notified by the Franchise Tax Board in March 2017 that they are continuing to challenge the Company’s filing position. The Company continues to work toward resolution, and based on all available information the CompanyInternal Revenue Service audit examination has ~~accrued for any uncertain tax positions that may be addressed in the audit.~~

The Company’s income tax returns are being audited by the Oregon Department of Revenue for the years 2012 through 2014. In January 2017, the Oregon Department of Revenue issued Notices of Deficiencies, which were appealed by the Company.been completed.

~~12.~~13. Regulatory

The Company is subject to extensive regulation by federal and state governmental agencies and accrediting bodies. In particular, the Higher Education Act of 1965, as amended ~~(the “Higher~~(“Higher Education Act”), and the regulations promulgated thereunder by the U.S. Department of Education ~~(the “Department”~~(“Department”) subject the Company to significant regulatory scrutiny on the basis of numerous standards that institutions of higher education must satisfy in order to participate in the various federal student financial aid programs under Title IV of the Higher Education ~~Act.~~

Act (“Title IV programs”). Ashford University is regionally accredited by ~~WASC~~Western Association of Schools and Colleges Senior College and University Commission (“WSCUC”~~) and University of the Rockies is regionally accredited by the Higher Learning Commission (“HLC”~~).

Department of Education Open Program Review of Ashford University

On July 7, 2016, Ashford University was notified by the Department that an off-site program review had been scheduled to assess ~~Ashford’s~~Ashford University’s administration of the Title IV programs in which it participates. The off-site program review commenced on July 25, 2016 and covered students identified in the 2009-2012 calendar year data previously provided by Ashford University to the Department in response to a request for information received from the Multi-Regional and Foreign School Participation Division of the Department’s Office of Federal Student Aid ~~(the “FSA”~~(“FSA”) on December 10, 2015, but may be expanded if the Department deems such expansion appropriate.

On December 9, 2016, the Department informed Ashford University that it intended to continue the program review on-site at ~~Ashford.~~Ashford University. The on-site program review commenced on January 23, 2017 and initially ~~covers~~covered the 2015-2016 and 2016-2017 award years, but may be expanded if the Department deems such expansion appropriate.

~~BRIDGEPOINT EDUCATION, INC.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)~~

To date, the Company has not received a draft report from the Department.

Program Participation Agreement for Ashford University

On ~~October 20, 2017,~~April 23, 2018, Ashford University received an updated Program Participation Agreement from the ~~U.S. Department of Education (“Department”).~~Department. Based on the updated Program Participation Agreement, Ashford University is provisionally certified to participate in Federal Student Financial Aid Programs until ~~December~~March 31, 2018. Ashford University was previously eligible to participate on a month-to-month basis while its reapplication for certification was pending with the Department. As a result of the updated Program Participation Agreement, Ashford University’s pending educational programs have been approved and2021. Ashford University is required to submit its reapplication for continued certification by ~~September 30, 2018.~~December 31, 2020.

WSCUC Accreditation of Ashford University

In July 2013, WSCUC granted Initial Accreditation to Ashford University for five years, until July 15, 2018. In December 2013, Ashford University effected its transition to WSCUC accreditation and designated its San Diego, California facilities as its main campus and its Clinton, Iowa campus as an additional location. As part of a continuing monitoring process, Ashford University hosted a visiting team from WSCUC inon a special visit in April 2015. In July 2015, Ashford University received an Action Letter from WSCUC outlining the findings arising out of its visiting team's special visit. The Action Letter stated that the WSCUC visiting team found evidence that Ashford University continues to make progress in all six areas recommended by WSCUC in 2013. As part of its institutional review process, WSCUC ~~will conduct a~~commenced its comprehensive review of Ashford ~~scheduled to commence~~University with an off-site review in ~~spring~~March 2018. Ashford University was notified on June 8, 2018 ~~followed by an on-site review in~~that the Ashford University Accreditation Visit originally scheduled for fall ~~2018.~~

~~Substantial Misrepresentation~~

2018 had been rescheduled to April 3-5, 2019. The ~~Higher Education Act prohibits an institution participating in Title IV programs from engaging in substantial misrepresentation regarding~~visit took place as scheduled and the ~~nature of its educational programs, its financial charges or the employability of its graduates. Under the Department’s rules,~~WSCUC evaluation team will provide a “misrepresentation” is any false, erroneous or misleading statement an institution, one of its representatives or any ineligible institution, organization or person with whom the institution has an agreement to provide educational programs or marketing, advertising, recruiting, or admissions services makes directly or indirectly to a student, prospective student or any memberreport of the public, or to an accrediting agency, a state agency or the Department. The Department’s rules define a “substantial misrepresentation” as any misrepresentation on which the person to whom it was made could reasonably be expected to rely, or has reasonably relied, to that person’s detriment. For-profit educational institutions are also subject to the general deceptive practices jurisdiction of the Federal Trade Commission and the Consumer Financial Protection Bureau (the “CFPB”).

~~On December 10, 2015,~~visit. Ashford University ~~received~~will then prepare a request for information from the Multi-Regional and Foreign School Participation Division of the FSA for (i) advertising and marketing materials provided to prospective students regarding the transferability of certain credits, (ii) documents produced in response to the August 10, 2015 Civil Investigative Demand from the CFPB related to the CFPB’s investigation to determine whether for-profit postsecondary education companies or other unnamed persons have engaged in or are engaging in unlawful acts or practices related to the advertising, marketing or origination of private student loans, (iii) certain documents produced in response to subpoenas and interrogatories issued by the Attorney General of the State of California (the “CA Attorney General”) and (iv) records created between 2009 and 2012 related to the disbursement of certain Title IV funds. The FSA is reviewing representations made by Ashford University to potential and enrolled students, and has asked the Company and Ashford to assist in its assessment of Ashford’s compliance with the prohibition on substantial misrepresentations. The Company and Ashford University are cooperating fully with the FSA with a view toward demonstrating the compliant nature of their practices.

As discussed above, the Department is currently conducting a program review to assess Ashford University’s administration of the Title IV programs in which it participates, which covers in part students identified in the 2009-2012 calendar year data provided by Ashford to the Department in response to the FSA’s December 10, 2015 request for information.

If the Department determines that one of the Company’s institutions has engaged in substantial misrepresentation, the Department may (i) revoke the institution’s program participation agreement, if the institution is provisionally certified, (ii) impose limitations on the institution’s participation in Title IV programs, if the institution is provisionally certified, (iii) deny participation applications made on behalf of the institution or (iv) initiate proceedings to fine the institution or to limit, suspend

1922

~~BRIDGEPOINT EDUCATION, INC.~~ZOVIO INC

Notes to Condensed Consolidated Financial Statements (Unaudited) ~~(Continued)~~

~~or terminate~~report. The team report and Ashford University’s response are currently scheduled to be considered at the ~~participation~~June 26-28, 2019 WSCUC Commission meeting.

WSCUC also visited Ashford University on May 1, 2019 to conduct its federally mandated, six month post-implementation review, due to the merger of University of the ~~institution in Title IV programs. Because~~Rockies with and into Ashford University on October 31, 2018.

Additionally, Ashford University submitted a change in control application to WSCUC seeking approval to convert Ashford University to a not-for-profit California public benefit corporation. On March 6, 2019, WSCUC notified Ashford University that, pending the receipt and review of additional documents, WSCUC is ~~provisionally certified, if~~deferring any action on the ~~Department determined that~~change of control application filed by Ashford ~~has engaged in substantial misrepresentation,~~University. WSCUC also scheduled a video conference visit for June 5, 2019, related to the ~~Department may take~~conversion transaction. As part of the ~~actions set forth in clauses (i) and (ii) above in addition to any other actions taken by~~conversion transaction, Ashford University will separate from the ~~Department.~~Company.

GI Bill Benefits

On May 20, 2016, the Company received a letter from the Iowa Department of Education ~~(the “Iowa~~(“Iowa DOE”) indicating that, as a result of the planned closure of ~~Ashford University’s residential campus in~~the Clinton ~~Iowa,~~Campus, the Iowa State Approving Agency ~~(the “ISAA”~~(“ISAA”) would no longer continue to approve ~~Ashford’s~~Ashford University’s programs for benefits under the GI Bill ~~benefits~~ after June 30, 2016, and recommending Ashford University seek approval through the State Approving Agency of jurisdiction for any location that meets the definition of a “main campus” or “branch ~~campus”.~~campus.” Ashford University began the process of applying for approval through the State Approving Agency in California (“CSAAVE”), and the Company subsequently disclosed that on June 20, 2016 it received a second letter from the Iowa DOE indicating that the Iowa DOE had issued a stay of the ISAA’s withdrawal of approval of ~~Ashford’s~~Ashford University’s programs for GI Bill benefits effective immediately until the earlier of (i) 90 days from June 20, 2016 or (ii) the date on which CSAAVE completed its review and issued a decision regarding the approval of Ashford University in California. Ashford University received communication from CSAAVE indicating that additional information and documentation would be required before ~~Ashford’s~~Ashford University’s application could be considered for CSAAVE approval. Ashford University subsequently withdrew the CSAAVE application and continued working with the U.S. Department of Veterans Affairs (“VA”), the Iowa DOE and the ISAA to obtain continued approval of ~~Ashford’s~~Ashford University’s programs for GI Bill benefits and to prevent any disruption of educational benefits to ~~Ashford’s~~Ashford University’s veteran students.

On September 15, 2016, in response to a Petition for Declaratory and Injunctive Relief ~~(the “Petition”~~(“Petition”) filed by Ashford University, the Iowa District Court for Polk County entered a written order ~~(the “Order”~~(“Order”) staying the Iowa DOE’s announced intention to withdraw the approval of Ashford University as a GI Bill eligible institution until the entry of a final and appealable order and judgment in the action. On June 23, 2017, the Iowa District Court held a hearing on ~~Ashford’s~~Ashford University’s Petition and on July 17, 2017, the Court ruled in favor of the Iowa DOE and denied the petition. Ashford University filed a motion for reconsideration of this ruling, which was denied on August 17, 2017. On August 23, 2017, Ashford University filed a Petition to Vacate or Modify the Iowa District Court’s July 17, 2017 ruling, based on material evidence, newly discovered, which could not with reasonable diligence have been previously discovered by Ashford ~~(the “Petition~~University (“First Petition to Vacate”). ~~The Petition to Vacate is pending.~~ On September 18, 2017, Ashford University appealed, inter alia, the July 17, 2017 ruling to the Iowa Supreme Court and posted an appeal bond, which ~~stays~~stayed this matter pending resolution of ~~Ashford’s appeal, and as~~Ashford University’s appeal. As a result, ~~Ashford’s~~Ashford University’s approval was not withdrawn, and ~~Ashford’s~~Ashford University’s programs remain approved for GI Bill purposes. The Assistant Attorney General handling this matter on behalf of the Iowa DOE also advised Ashford University that the Iowa DOE would take no action pending the post-ruling motions and appeal. On October 12, 2017, Judge Eliza Ovrom, the Iowa District Court ~~judge that~~Judge who issued the July 17, 2017 ruling, filed a Disclosure Statement revealing family ties to the Iowa Attorney General’s ~~Office, and following a motion~~Office. Following motions by Ashford University for her recusal, ~~the judge~~Judge Ovrom recused herself from all further ~~proceedings concerning the Petition to Vacate on October 20, 2017.~~proceedings. On October 24, 2017, Ashford ~~moved~~University filed with the Iowa Supreme Court a Petition to ~~vacate~~Vacate or, in the Alternative, for Limited Remand (“Second Petition to Vacate”), in which Ashford University argued that the July 17, 2017 ruling and all other material orders entered by Judge Ovrom should be vacated due to her previously undisclosed conflict of interest. On January 8, 2018, the ~~judge, or~~Iowa Supreme Court remanded the Second Petition to Vacate to the District Court, where all proceedings in this matter were consolidated before Judge Michael Huppert. On April 26, 2018, Judge Huppert granted the ~~alternative, for~~Second Petition to Vacate and vacated all material rulings by Judge Ovrom, including the July 17, 2017 ruling, thus on June 21, 2018, the Iowa Supreme Court issued a ~~limited remand~~Procedendo stating that the appeal was concluded. Judge Huppert’s decision mooted the First Petition to Vacate and Ashford’s appeal of, ~~this matter. This motion~~inter alia, the July 17, 2017 ruling. The case is ~~pending.~~ now proceeding on the merits de novo before a new judge.

ZOVIO INC

Notes to Condensed Consolidated Financial Statements (Unaudited)

On July 6, 2017, Ashford University received approval from the Arizona State Approving Agency (“ASAA”) to provide GI Bill benefits to its students. On September 13, 2017, the VA accepted the ~~Arizona State Approving Agency’s~~ASAA’s approval, subject to ~~Ashford's continued~~Ashford University's compliance with the approval requirements, ~~which~~and the University subsequently received a facility code from the VA. On November 9, 2017, the VA informed Ashford University that the ASAA had not provided sufficient evidence to establish that it has jurisdictional authority over Ashford University’s online programs. The VA stated that it intends to suspend payment of educational assistance and approval of new student enrollments and student re-enrollments for Ashford University’s online programs in 60 days unless corrective action was taken.

On November 17, 2017, Ashford University filed a petition for review in the ~~final step needed~~United States Court of Appeals for the Federal Circuit challenging the VA’s actions. In response to that petition, the VA agreed to stay the actions with respect to the suspension and reenrollment it had announced on November 9, 2017 through the entry of judgment in the Federal Circuit case, on the condition that Ashford University request and submit an application for approval to CSAAVE on or before January 8, 2018. Ashford University submitted an application to CSAAVE for approval on January 5, 2018. On February 21, 2018, CSAAVE provided notice of its intention not to act on Ashford University’s initial application for approval for the training of veterans and other eligible persons. The notice directed Ashford University to ~~continue~~request approval of its application by the VA. Ashford University continues to ~~certify eligible students~~work in good faith with the VA while its petition for ~~GI Bill benefits.~~review remains pending with the Federal Circuit. In keeping with this commitment, Ashford University agreed, at the VA’s request, to submit another application to CSAAVE. Ashford University filed that additional application on November 19, 2018. On December 14, 2018, however, CSAAVE again informed Ashford University that it did not intend to act on Ashford University’s application, and again indicated that Ashford University could request approval of its application directly from the VA.

The parties completed all briefing for the petition for review on May 3, 2019 and the Court may schedule the matter for oral argument.

~~BRIDGEPOINT EDUCATION, INC.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)~~

~~13.~~14. Commitments and Contingencies

Litigation

From time to time, the Company is a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. When the Company becomes aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. In accordance with GAAP, the Company records loss contingencies in its financial statements only for matters in which losses are probable and can be reasonably estimated. Where a range of loss can be reasonably estimated, the best estimate within that range should be accrued. If no estimate is better than another, the Company records the minimum estimated liability in the range. If the loss is not probable or the amount of the loss cannot be reasonably estimated, the Company discloses the nature of the specific claim if the likelihood of a potential loss is reasonably possible and the amount involved could be material. The Company continuously assesses the potential liability related to the Company’s pending litigation and revises its estimates when additional information becomes available. Below is a list of material legal proceedings to which the Company or its subsidiaries is a party.

~~Compliance Audit by the Department’s Office of the Inspector General~~

In January 2011, Ashford University received a final audit report from the Department’s Office of Inspector General (the “OIG”) regarding the compliance audit commenced in May 2008 and covering the period July 1, 2006 through June 30, 2007. The audit covered Ashford University’s administration of Title IV program funds, including compliance with regulations governing institutional and student eligibility, awards and disbursements of Title IV program funds, verification of awards and returns of unearned funds during that period, and compensation of financial aid and recruiting personnel during the period May 10, 2005 through June 30, 2009.

The final audit report contained audit findings, in each case for the period July 1, 2006 through June 30, 2007, which are applicable to award year 2006-2007. Each finding was accompanied by one or more recommendations to the FSA. Ashford University provided the FSA a detailed response to the OIG’s final audit report in February 2011. In June 2011, in connection with two of the six findings, the FSA requested that Ashford University conduct a file review of the return to Title IV fund calculations for all Title IV recipients who withdrew from distance education programs during the 2006-2007 award year. The institution cooperated with the request and supplied the information within the time frame required.

Ashford University received a final audit determination on February 22, 2017 from the Department that was dated February 14, 2017. The determination maintained that Ashford University owed the Department $0.3 million as a result of incorrect refund calculations and refunds that were not made or were made late, and that Ashford ensure it properly enforces its policies and is in compliance with regulations related to disbursement of Title IV funds. The Department closed or required no further action on all other prior OIG findings. Ashford University made the required payment to the Department during the first quarter of 2017 and the matter is now concluded.

~~New York Attorney General Investigation of Bridgepoint Education, Inc.~~

In May 2011, the Company received from the Attorney General of the State of New York (the “NY Attorney General”) a subpoena relating to the NY Attorney General’s investigation of whether the Company and its academic institutions have complied with certain New York state consumer protection, securities and finance laws. Pursuant to the subpoena, the NY Attorney General requested from the Company and its academic institutions documents and detailed information for the time period March 17, 2005 to present. The Company cooperated with this request and cannot predict the eventual scope, duration or outcome of the investigation at this time.

~~North Carolina Attorney General Investigation of Ashford University~~

In September 2011, Ashford University received from the Attorney General of the State of North Carolina (the “NC Attorney General”) an Investigative Demand relating to the NC Attorney General’s investigation of whether the university’s business practices complied with North Carolina consumer protection laws. Pursuant to the Investigative Demand, the NC Attorney General requested from Ashford University documents and detailed information for the time period January 1, 2008 to present. Ashford University cooperated with this request and cannot predict the eventual scope, duration or outcome of the investigation at this time.

~~BRIDGEPOINT EDUCATION, INC.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)~~

California Attorney General Investigation of For-Profit Educational Institutions

In January 2013, the Company received from the Attorney General of the State of California ~~(the “CA~~(“CA Attorney General”) an Investigative Subpoena relating to the CA Attorney General’s investigation of for-profit educational institutions. Pursuant to the Investigative Subpoena, the CA Attorney General requested documents and detailed information for the time period March 1, 2009 to ~~present.~~the date of the Investigative Subpoena. On July 24, 2013, the CA Attorney General filed a petition to enforce certain categories of the Investigative Subpoena related to recorded calls and electronic marketing data. On September 25, 2013, the Company reached an agreement with the CA Attorney General to produce certain categories of the documents requested in the petition and stipulated to continue the hearing on the petition to enforce from October 3, 2013 to January 9, 2014. On January 13, 2014 and June 19, 2014, the Company received additional Investigative Subpoenas from the CA Attorney General, each requesting additional documents and information for the time period March 1, 2009 through ~~the current~~each such date.

Representatives from the Company met with representatives from the CA Attorney General’s office on several occasions to discuss the status of the investigation, additional information requests, and specific concerns related to possible unfair business practices in connection with the Company’s recruitment of students and debt collection practices.

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Notes to Condensed Consolidated Financial Statements (Unaudited)

The parties ~~continue to discuss~~also discussed a potential resolution involving injunctive relief, other non-monetary remedies and a payment to the CA Attorney ~~General. The~~General and in the third quarter of 2016, the Company ~~currently estimates that a reasonable range of loss for this matter is between $8.0 million and $20.0 million. The Company has accrued~~recorded an expense of $8.0 million related to the cost of resolving this matter.

The parties did not reach a resolution and on November 29, 2017, the CA Attorney General filed suit against Ashford University and Bridgepoint Education.

The Company intends to vigorously defend this case and emphatically denies the allegations made by the CA Attorney General that it ever deliberately misled its students, falsely advertised its programs, or in any way was not fully accurate in its statements to investors. However, the outcome of this ~~matter.~~legal proceeding is uncertain at this point because of the many questions of fact and law that may arise. At present, the Company cannot reasonably estimate any updated range of loss for this action based on currently available information and as such, the prior accrual of $8.0 million remains.

Massachusetts Attorney General Investigation of Bridgepoint Education, Inc. and Ashford University

On July 21, 2014, the Company and Ashford University received from the Attorney General of the State of Massachusetts ~~(the “MA~~(“MA Attorney General”) a Civil Investigative Demand ~~(the “MA~~(“MA CID”) relating to the MA Attorney General’s investigation of for-profit educational institutions and whether the university’s business practices complied with Massachusetts consumer protection laws. Pursuant to the MA CID, the MA Attorney General has requested from the Company and Ashford University documents and information for the time period January 1, 2006 to present. The Company is cooperating with the investigation and cannot predict the eventual scope, duration or outcome of the investigation at this time.

~~Consumer Financial Protection Bureau Subpoena of Bridgepoint Education, Inc. and Ashford University~~

On August 10, 2015, the Company and Ashford University received from the CFPB Civil Investigative Demands related to the CFPB’s investigation to determine whether for-profit postsecondary education companies or other unnamed persons have engaged in or are engaging in unlawful acts or practices related to the advertising, marketing or origination of private student loans. The Company ~~and Ashford University provided documents and other information to the CFPB and the CFPB attended several meetings~~has not accrued any liability associated with representatives from the Company and the CA Attorney General’s office to discuss the status of both investigations, additional information requests, and specific concerns related to possible unfair business practices in connection with the Company’s recruitment of students and debt collection practices.

All of the parties met again in the spring of 2016 to discuss the status of the investigations and explore a potential joint resolution involving injunctive relief, other non-monetary remedies and a payment to the CA Attorney General and the CFPB. On September 7, 2016, the Company consented to the issuance of a Consent Order (the “Consent Order”) by the CFPB in full resolution of the CFPB’s allegations stemming from the Civil Investigative Demands. The Consent Order includes payment by the Company of $8.0 million in penalties to the CFPB and approximately $5.0 million to be used for restitution to students who incurred debt from student loans made by the Company’s institutions, and forgiveness by the Company of approximately $18.6 million of outstanding institutional loan debt. The Consent Order also outlines certain compliance actions the Company must undertake, including that the Company must require certain students to utilize the CFPB’s Electronic Financial Impact Platform before enrolling in one of the Company’s institutions, the Company must implement a compliance plan designed to ensure its institutional loan program complies with the terms of the Consent Order, and the Company must submit reports describing its compliance with the Consent Order to the CFPB at designated times and upon request by the CFPB. The institutional loan programs were discontinued by the Company’s institutions before the CFPB investigation began. As of the end of the first quarter of 2017, the amount accrued related to this ~~matter was paid in full.~~

~~BRIDGEPOINT EDUCATION, INC.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)~~

action.

Department of Justice Civil Investigative Demand

On July 7, 2016, the Company received from the U.S. Department of Justice ~~(the “DOJ”~~(“DOJ”) a Civil Investigative Demand ~~(the “DOJ~~(“DOJ CID”) related to the DOJ's investigation concerning allegations that the Company may have misstated Title IV refund revenue or overstated revenue associated with private secondary loan programs and thereby misrepresented its compliance with the 90/10 rule of the Higher Education Act. Pursuant to the DOJ CID, the DOJ has requested from the Company documents and information for fiscal years ~~2011-2014.~~2011 to 2015. The Company is cooperating with the DOJ and cannot predict the eventual scope, duration or outcome of the investigation at this time. ~~The Company has not accrued any liability associated with this action.~~

~~Securities Class Action~~

~~Zamir v. Bridgepoint Education, Inc., et al.~~

On February 24, 2015, a securities class action complaint was filed in the U.S. District Court for the Southern District of California by Nelda Zamir naming the Company, Andrew Clark and Daniel Devine as defendants. The complaint asserts violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder, claiming that the defendants made false and materially misleading statements and failed to disclose material adverse facts regarding the Company’s business, operations and prospects, specifically regarding the Company’s improper application of revenue recognition methodology to assess collectability of funds owed by students. The complaint asserts a putative class period stemming from August 7, 2012 to May 30, 2014 and seeks unspecified monetary relief, interest and attorneys’ fees. On July 15, 2015, the Court granted plaintiff’s motion for appointment as lead plaintiff and for appointment of lead counsel.

On September 18, 2015, the plaintiff filed a substantially similar amended complaint that asserts a putative class period stemming from March 12, 2013 to May 30, 2014. The amended complaint also names Patrick Hackett, Adarsh Sarma, Warburg Pincus & Co., Warburg Pincus LLC, Warburg Pincus Partners LLC, and Warburg Pincus Private Equity VIII, L.P. as additional defendants. On November 24, 2015, all defendants filed motions to dismiss. On July 25, 2016, the Court granted the motions to dismiss and granted plaintiff leave to file an amended complaint within 30 days. Plaintiffs subsequently filed a second amended complaint and the Company filed a second motion to dismiss on October 24, 2016, which was granted by the Court with leave to amend. Plaintiffs filed a third amended complaint on April 19, 2017 and the defendants filed a third motion to dismiss, which is currently pending with the court. The outcome of this legal proceeding is uncertain at this point because of the many questions of fact and law that may arise. The Company has not accrued any liability associated with this action.

Shareholder Derivative Actions

In re Bridgepoint, Inc. Shareholder Derivative Action

On July 24, 2012, a shareholder derivative complaint was filed in California Superior Court by Alonzo Martinez. In the complaint, the plaintiff asserts a derivative claim on the Company’s behalf against certain of its current and former officers and directors. The complaint is captioned Martinez v. Clark, et al. and generally alleges that the individual defendants breached their fiduciary duties of candor, good faith and loyalty, wasted corporate assets and were unjustly enriched. The lawsuit seeks unspecified monetary relief and disgorgement on behalf of the Company, as well as other equitable relief and attorneys’ fees. On September 28, 2012, a substantially similar shareholder derivative complaint was filed in California Superior Court by David Adolph-Laroche. In the complaint, the plaintiff asserts a derivative claim on the Company’s behalf against certain of its current and former officers and directors. The complaint is captioned Adolph-Laroche v. Clark, et al. and generally alleges that the individual defendants breached their fiduciary duties of candor, good faith and loyalty, wasted corporate assets and were unjustly enriched.

On October 11, 2012, the Adolph-Laroche action was consolidated with the Martinez action and the case is now captioned In re Bridgepoint, Inc. Shareholder Derivative Action. A consolidated complaint was filed on December 18, 2012 and the defendants filed a motion to stay the case while the underlying securities class action is pending. The motion was granted by the Court on April 11, 2013. A status conference was held on October 10, 2013, during which the Court ordered the stay continued for the duration of discovery in the underlying securities class action, but permitted the plaintiff to receive copies of any discovery responses served in the underlying securities class action. The stay was lifted following the settlement of the

~~BRIDGEPOINT EDUCATION, INC.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)~~

underlying securities class action and all defendants filed demurrers on October 3, 2016, which were granted with leave to amend on October 6, 2017. On October 17, 2017, the plaintiff submitted a litigation demand to the Company's Board of

ZOVIO INC

Notes to Condensed Consolidated Financial Statements (Unaudited)

Directors, which appointed a working group to evaluate the demand. The Board refused the demand and the Plaintiff filed a Second Amended Complaint on October 3, 2018. All defendants filed demurrers on December 21, 2018, which are currently under submission with the Court. Based on information available to the Company at present, it cannot reasonably estimate a range of loss and accordingly has not accrued any liability associated with this action.

Reardon v. Clark, et al.

On March 18, 2015, a shareholder derivative complaint was filed in the Superior Court of the State of California in San Diego. The complaint asserts derivative claims on the Company’s behalf against certain of its current and former officers and directors. The complaint is captioned Reardon v. Clark, et al. and generally alleges that the individual defendants breached their fiduciary duties of candor, good faith and loyalty, wasted corporate assets and were unjustly enriched. The lawsuit seeks unspecified monetary relief and disgorgement, as well as other equitable relief and attorneys’ fees. ~~Pursuant~~Following the dismissal of the underlying Zamir securities class action and pursuant to a stipulation among the parties, on May ~~27, 2015,~~10, 2018, the Court ordered the case stayed ~~during discovery in~~while the ~~underlying~~ ~~Zamir~~ ~~securities class action, but permitted~~Company’s Board of Directors evaluates a litigation demand submitted by the ~~plaintiff~~plaintiff. Based on information available to ~~receive copies~~the Company at present, it cannot reasonably estimate a range of loss and accordingly has not accrued any ~~discovery conducted in the underlying~~ ~~Zamir~~ ~~securities class~~liability associated with this action.

Larson v. Hackett, et al.

On January 19, 2017, a shareholder derivative complaint was filed in the Superior Court of the State of California in San Diego. The complaint asserts derivative claims on the Company's behalf against certain of its current and former officers and directors. The complaint is captioned Larson v. Hackett, et al. and generally alleges that the individual defendants breached their fiduciary duties of candor, good faith and loyalty, wasted corporate assets and were unjustly enriched. The lawsuit seeks unspecified monetary relief and disgorgement, as well as other equitable relief and attorneys’ fees. ~~The parties have not yet responded to~~Following the ~~complaint, but will most likely seek to have the case dismissed or stayed during discovery in~~dismissal of the underlying Zamirsecurities class ~~action.~~

~~Nieder v. Ashford University, LLC~~

~~On October 4, 2016, Dustin Nieder filed~~action and pursuant to a ~~purported class action against Ashford University in~~stipulation among the ~~Superior~~parties, on May 10, 2018, the Court ~~of the State of California in San Diego. The complaint is captioned~~ ~~Dustin Nieder v. Ashford University, LLC~~ and generally alleges various wage and hour claims under California law for failure to pay overtime, failure to pay minimum wages and failure to provide rest and meal breaks. The lawsuit seeks back pay, the cost of benefits, penalties and interest on behalf of the putative class members, as well as other equitable relief and attorneys' fees. The Company filed an answer denying the claims andordered the case ~~is currently in discovery. The outcome~~stayed while the Company’s Board of ~~this legal proceeding is uncertain at this point because of~~Directors evaluates a litigation demand submitted by the ~~many questions of fact and law that may arise.~~plaintiff. Based on information available to the Company at present, it cannot reasonably estimate a range of loss ~~for this action. Accordingly, the Company~~and accordingly has not accrued any liability associated with this action.

Stein Securities Class Action

On March 8, 2019, a securities class action complaint (the “Stein Complaint”) was filed in the U.S. District Court for the Southern District of California by Shiva Stein naming the Company, Andrew Clark, Kevin Royal, and Joseph D’Amico as defendants (the “Defendants”). The Stein Complaint alleges that Defendants made false and materially misleading statements and failed to disclose material adverse facts regarding the Company's business, operations and prospects, specifically that the Company had applied an improper revenue recognition methodology to students enrolled in the FTG program. The Stein Complaint asserts a putative class period stemming from March 8, 2016 to March 7, 2019. The Stein Complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The Stein Complaint has not yet been served.

The Company is evaluating the Stein Complaint and intends to vigorously defend against the Stein Complaint. However, because of the many questions of fact and law that may arise, the outcome of the legal proceeding is uncertain at this point. Based on information available to the Company at present, the Company cannot reasonably estimate a range of loss and accordingly has not accrued any liability associated with this action the Stein Complaint.

SEC Informal Inquiry

On March 27, 2019, the Company received notice that the SEC Division of Enforcement began an informal inquiry regarding the Company, requesting various documents relating to the Company’s accounting practices, including FTG revenue recognition, receivables and other matters relating to the Company’s previously disclosed intention to restate its condensed financial statements for the three and nine months ended September 30, 2018.

Based on these requests, the eventual scope, duration and outcome of the inquiry cannot be predicted at this time. We are cooperating fully with the SEC in connection with the inquiry.

2426

ZOVIO INC

Notes to Condensed Consolidated Financial Statements (Unaudited)

15. Subsequent Events

Acquisition of FullStack Academy

On April 1, 2019, the Company completed its acquisition (the “Fullstack Acquisition”) of Fullstack Academy, Inc. (“Fullstack”), a coding academy headquartered in New York, New York, pursuant to an Agreement and Plan of Reorganization (the “Fullstack Merger Agreement”). As of March 31, 2019, Fullstack had a carrying value of approximately $6.9 million of assets, excluding goodwill. The Company is currently in the process of evaluating the business combination accounting considerations, including the consideration transferred and the initial purchase price allocation.

At the closing of the Fullstack Acquisition, the equityholders of Fullstack received consideration consisting of $17.5 million in cash, less purchase price adjustments of approximately $1.1 million (the “Closing Cash Consideration”), and an aggregate of approximately 2,443,260 shares of the Company’s common stock, subject to escrow adjustments. If, as and when payable under the Fullstack Merger Agreement, the equityholders of Fullstack will be entitled to receive up to 2,250,000 shares of the Company’s common stock (the “Contingent Consideration”). The Contingent Consideration will become issuable, subject to the terms and conditions of the Fullstack Merger Agreement, upon the final determination of the achievement of certain employee retention, revenue and performance milestones in 2019 and 2020. The Fullstack Merger Agreement contains an employee incentive retention pool of up to $5.0 million in cash, payable at times over a two-year period.

The assets and liabilities of Fullstack will be recorded on the Company’s condensed consolidated balance sheets at their preliminary estimated fair values as of April 1, 2019, the acquisition date, and Fullstack’s results of operations will be included in the Company’s condensed consolidated statements of income (loss) from that date. For the three months ended March 31, 2019, the Company recorded acquisition-related expenses of $0.6 million in general and administrative on the condensed consolidated statement of income (loss), associated with the Fullstack Acquisition. The Company accounts for business combinations using the acquisition method of accounting. The initial accounting and determination of the fair values of the assets and liabilities resulting from the Fullstack Acquisition was incomplete at the time of this filing due to the timing of the closing of the Fullstack Acquisition in relation to the Company’s required filing deadline for this Quarterly Report on Form 10-Q (this “Form 10-Q”).

Acquisition of TutorMe

On April 3, 2019, the Company completed its acquisition (the “TutorMe Acquisition”) of TutorMe.com, Inc. (“TutorMe”), a provider of on-demand tutoring and online courses, headquartered in Los Angeles, California, pursuant to an Agreement and Plan of Reorganization (the “TutorMe Merger Agreement”). As of March 31, 2019, TutorMe had a carrying value of approximately $0.7 million of assets, excluding goodwill. The Company is currently in the process of evaluating the business combination accounting considerations, including the consideration transferred and the initial purchase price allocation.

At the closing of the TutorMe acquisition, in exchange for all outstanding shares of TutorMe capital stock and other rights to acquire or receive capital stock of TutorMe, the Company (i) paid a total of approximately $2.8 million in cash, subject to certain purchase price adjustments, (ii) issued a total of 309,852 shares of the Company’s common stock, and (iii) assumed all issued and outstanding options of TutorMe (the “Assumed Options”), of which a total of 231,406 shares of the Company’s common stock are underlying the Assumed Options that are subject to certain time-based vesting requirements and a total of 79,199 shares of the Company’s common stock are underlying the Assumed Options that are subject to certain performance-based vesting requirements. In addition, as part of the transactions contemplated by the TutorMe Merger Agreement, the Company (x) paid a total of approximately $1.1 million in cash to certain service providers of TutorMe as a transaction bonus and (y) issued a total of 293,621 PSUs to certain continuing service providers of TutorMe pursuant to the Company’s 2009 Stock Incentive Plan (as amended) and a form restricted stock unit agreement.

The assets and liabilities of TutorMe will be recorded on the Company’s condensed consolidated balance sheets at their preliminary estimated fair values as of April 1, 2019, the acquisition date, and TutorMe’s results of operations will be included in the Company’s condensed consolidated statements of income (loss) from that date. For the three months ended March 31, 2019, the Company recorded acquisition-related expenses of $0.3 million in general and administrative on the condensed consolidated statement of income (loss), associated with the TutorMe Acquisition. The Company accounts for business combinations using the acquisition method of accounting. The initial accounting and determination of the fair values of the

ZOVIO INC

Notes to Condensed Consolidated Financial Statements (Unaudited)

assets and liabilities resulting from the TutorMe Acquisition was incomplete at the time of this filing due to the timing of the closing of the acquisition in relation to the Company’s required filing deadline for this Form 10-Q.

The Company evaluated events occurring between the end of its most recent fiscal year and the date of filing, noting no additional subsequent events.

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

The following Management’s Discussions and Analysis of Financial Condition and Results of Operations should be read in conjunction with our condensed consolidated financial statements and related notes thereto included in Part I, Item 1 of this ~~report.~~report and reflects the effects of the restatement discussed in Note 2 to the condensed consolidated financial statements. For additional information regarding our financial condition and results of operations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, ~~2016 (the “Form~~2018 (“Form 10-K”), filed with the Securities and Exchange Commission ~~(the “SEC”~~(“SEC”) on March ~~7, 2017,~~12, 2019, as well as our consolidated financial statements and related notes thereto included in Part II, Item 8 of the Form 10-K.

Unless the context indicates otherwise, in this report the terms ~~“Bridgepoint,~~“Zovio,” “the Company,” “we,” “us” and “our” refer to ~~Bridgepoint Education, Inc.,~~Zovio Inc, a Delaware corporation, and its wholly owned and indirect subsidiaries.

Forward-Looking Statements

This Quarterly Report on Form 10-Q (the “Form 10-Q”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended ~~(the “Exchange~~(“Exchange Act”). All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements may include, among others, statements regarding future events, future financial and operating results, strategies, expectations, the competitive environment, regulation and the availability of financial resources, including, without limitation, statements regarding:

our ability to successfully convert Ashford ~~University’s~~University to a not-for-profit university;

Ashford University's ability to continue to operate as an accredited institution subject to the requirements of the State of California, Department of Consumer Affairs, Bureau for Private Postsecondary ~~Education;~~Education (the “BPPE”);

our ability to comply with the extensive and continually evolving regulatory framework applicable to us and ~~our institutions,~~Ashford University, including Title IV of the Higher Education Act of 1965, as amended ~~(the “Higher~~(“Higher Education Act”), and its implementing regulations, the gainful employment rules and regulations, the “defense to repayment” regulations, state laws and regulatory requirements, and accrediting agency requirements;

projections, predictions and expectations regarding our business, financial position, results of operations and liquidity, and enrollment trends at ~~our institutions;~~

~~expectations regarding the effect of the closure of~~ Ashford ~~University’s residential campus in Clinton, Iowa on our business;~~University;

our ability to obtain continued approval of Ashford’s programs for GI Bill benefits through the Iowa State Approving Agency ~~(the “ISAA”~~(“ISAA”), or the Arizona State Approving Agency (“ASAA”), or the California State Approving Agency for Veteran's Education (“CSAAVE”), and to prevent any disruption of educational benefits to Ashford’s veteran students;

~~new~~ the ability of Ashford to continue participating in the U.S. Department of Defense Tuition Assistance Program for active duty military personnel and to prevent any disruption of educational benefits to Ashford’s active duty military students;

the outcome of various lawsuits, claims and legal proceedings;

initiatives focused on student success, retention and academic quality;

~~changes in our student fee structure;~~

expectations regarding the adequacy of our cash and cash equivalents and other sources of liquidity for ongoing operations;

expectations regarding ~~investment in online and other advertising and~~ capital expenditures;

our anticipated seasonal fluctuations in ~~results of operations;~~operational results;

~~management’s~~management's goals and objectives; and

other similar matters that are not historical facts.

Forward-looking statements may generally be identified by the use of words such as “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates” and similar expressions, as well as statements in the future tense.

Forward-looking statements should not be interpreted as a guarantee of future performance or results and will not necessarily be accurate indications of the times at or by which such performance or results will be achieved. Forward-looking statements are based on information available at the time such statements are made and the current good faith beliefs,

expectations and assumptions of management regarding future events. Such statements are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. For a discussion of some of these risks and uncertainties, see Part II, Item 1A, “Risk Factors” as well as the discussion of such risks and uncertainties contained in our other filings with the SEC, including the Form 10-K.

All forward-looking statements in this report are qualified in their entirety by the cautionary statements included in this report, and you should not place undue reliance on any forward-looking statements. These forward-looking statements speak only as of the date of this report. We assume no obligation to update or revise any forward-looking statements contained herein to reflect actual results or any changes in our assumptions or expectations or any other factors affecting such forward-looking statements, except to the extent required by applicable securities laws. If we do update or revise one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

Overview

Zovio Inc is an education technology services company that partners with higher education institutions and employers to deliver innovative, personalized solutions to help learners and leaders achieve their aspirations. We ~~are~~were formerly known as Bridgepoint Education, Inc., and was a provider of postsecondary education ~~services through our~~services. Our wholly-owned subsidiary, Ashford University^®is a regionally accredited academic ~~institutions, Ashford University~~^® ~~and University of the Rockies~~^SM.institution, which delivers programs primarily online. Ashford University offers associate’s, bachelor’s, ~~and master’s programs, and University of the Rockies offers~~ master’s and doctoral ~~programs.~~programs primarily online. As of ~~September 30, 2017~~March 31, 2019, ~~our academic institutions~~Ashford University offered approximately ~~1,140~~1,250 courses and approximately 8090 degree programs. ~~We are also focused on providing innovative technologies to enhance the student experience and support faculty and student engagement.~~

Key operating data

In evaluating our operating performance, management focuses in large part on our (i) revenue, ~~and~~(ii) operating income ~~(loss)~~ and (iii) period-end enrollment at ~~our academic institutions.~~Ashford University. The following table, which should be read in conjunction with our condensed consolidated financial statements included in Part I, Item I1 of this report, presents our key operating data for each of the periods presented (in thousands, except for enrollment data):

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Consolidated Statement of Income (Loss) Data:
Revenue $ 119,367
$ 136,583
$ 373,438
$ 407,555
Operating income (loss) $ (1,503 ) $ (8,823 ) $ 14,339
$ (21,765 )

Consolidated Other Data:
Period-end enrollment (1)

Online 42,065
47,733
42,065
47,733
Campus-based 67
98
67
98
Total 42,132
47,831
42,132
47,831



	Three Months Ended March 31,
	2019			2018
Consolidated Statement of Income Data:
Revenue	$	109,764		$	116,777
Operating loss	$	(7,195	)	$	(620	)

Consolidated Other Data:
Period-end enrollment (1)	39,095			41,523

(1)

We define period-end enrollment as the number of active students on the last day of the financial reporting period. A student is considered active if the student has attended a class within the prior 15 days or is on an institutionally-approved break not to exceed 45 days, unless the student has graduated or provided notice of ~~withdrawal.~~withdrawal, or for new students who have completed their third week of attendance, and posted attendance in the fourth week.

Key enrollment trends

Enrollment at ~~our academic institutions~~Ashford University decreased ~~11.9%~~5.8% to ~~42,132~~39,095 students at ~~September 30, 2017~~March 31, 2019 as compared to ~~47,831~~41,523 students at ~~September 30, 2016.~~March 31, 2018. Enrollment ~~decreased~~increased by ~~6.6%~~2.5% since the end of the preceding fiscal year, from ~~45,087~~38,153 students at December 31, ~~2016~~2018 to ~~42,132~~39,095 students at ~~September~~ March 31, 2019. As described below, we generally experience a seasonal increase in

30 ~~2017.~~

new enrollments during the first quarter of each year, subsequent to holiday break.

We believe the decline in enrollment ~~over the past few years~~ is partially attributable to a general strengthening of the economy which drives lower unemployment and increased competition, as well as a general weakening in the overall education industry due in large part to increased regulatory ~~scrutiny, and has~~scrutiny.

We also ~~been caused by the initiatives our institutions have put in place to help ensure student preparedness, raise academic quality and improve student outcomes. In addition, we~~ believe ~~total~~new enrollment has ~~also~~ been impacted by the ~~recent~~deliberate changes in our marketing ~~strategy. This change~~strategy in which we significantly reduced our spending in the affiliate channel and reinvested some of those savings in other channels. We have been implementing this updated marketing strategy

that reflects a shift in our advertising mix, in an effort to attract prospective students who have a higher probability of being academically successful, ~~while concurrently~~with the goal of making meaningful improvements to the efficiency of our advertising, admissions and marketing spend.

We continue to focus our efforts on first stabilizing and then restarting enrollment growth. ~~We recently received approval from~~Expanding the ~~Department of Education on 16~~course offerings with new programs will be one factor that we believe will contribute to our goal of stabilizing enrollment and ~~are looking forward to offering these programs to students. We plan to launch a number of these new program offerings throughout 2018 and beyond to help achieve this goal relating to restarting~~then achieving new enrollment growth, and over time ~~growing~~ total ~~enrollments.~~ enrollment growth.

One ~~other~~ area in which we ~~continue to experience~~are experiencing positive enrollment trends is within ~~our Educational~~the Education Partnerships programs with various employers. These ~~corporate partnership~~ programs ~~provide~~include the Corporate Full Tuition Grant (“FTG”) program, which provides companies with the opportunity to ~~allow~~offer their employees a way to pursue and complete a college degree without incurring any student debt. Enrollments ~~through these~~in the Education Partnerships programs ~~remains relatively small compared to~~account for approximately 25% of our total enrollment ~~but are growing~~ as ~~a percentage year over year.~~of March 31, 2019. Revenue derived from Education Partnerships is cash pay, and is therefore not considered federal student aid for purposes of calculations under the 90/10 rule.

Trends and uncertainties regarding revenue and continuing operations

Acquisition of FullStack Academy

On April 1, 2019, the Company acquired Fullstack Academy, Inc. (“Fullstack”), a Delaware corporation, pursuant to an Agreement and Plan of Reorganization (the “Fullstack Merger Agreement”) entered into by the parties on March 12, 2019 (the “Fullstack Acquisition”). Following the Fullstack Acquisition, Fullstack became a wholly-owned subsidiary of the Company.

Under the terms and subject to the conditions set forth in the Fullstack Merger Agreement, (i) at the closing of the Fullstack Acquisition, the equityholders of Fullstack received consideration consisting of $17.5 million in cash, less purchase price adjustments of approximately $1.1 million (the “Closing Cash Consideration”), and an aggregate of approximately 2,443,260 shares of our common stock (the “Closing Stock Consideration” and together with the Closing Cash Consideration, the “Closing Consideration”), subject to escrow adjustments, and (ii) if, as and when payable under the Fullstack Merger Agreement, the equityholders of Fullstack will be entitled to receive up to 2,250,000 shares of our common stock (the “Contingent Consideration” and together with the Closing Consideration, the “Merger Consideration”). The Contingent Consideration will become issuable, subject to the terms and conditions of the Fullstack Merger Agreement, upon the final determination of the achievement of certain employee retention, revenue and performance milestones in 2019 and 2020. The Merger Consideration is payable in a mix of cash and shares of our common stock, with (i) holders of Fullstack capital stock and other rights to acquire or receive capital stock of Fullstack (“Fullstack Securityholders”) who are not accredited investors receiving 100% of their consideration in cash and (ii) Fullstack Securityholders who are accredited investors receiving their consideration in a mix of cash and shares of our common stock.

Subject to the terms and conditions of the Fullstack Merger Agreement, the Closing Cash Consideration is subject to customary adjustments following the closing of the Fullstack Acquisition, including a working capital adjustment to the extent such amount is greater or less than the estimated net working capital amount determined at the closing of the Fullstack Acquisition. The Fullstack Merger Agreement contains an employee incentive retention pool of up to $5.0 million in cash, payable at times over a two-year period.

Certain portions of the Merger Consideration (both cash and shares of Company Common Stock) will be held in escrow to secure potential adjustments to the Closing Cash Consideration and the indemnification obligations of certain Fullstack Securityholders. The issuance of shares of our common stock pursuant to the Fullstack Merger Agreement will be made solely to accredited investors and thus in reliance on one or more exemptions or exclusions from the registration requirements of the Securities Act, including Regulation D promulgated under the Securities Act and the exemption from qualification under applicable state securities laws.

The Fullstack Merger Agreement contains customary representations, warranties and covenants of Fullstack and the Company, and the Fullstack Acquisition is subject to customary closing conditions.

A copy of the Fullstack Merger Agreement is filed as Exhibit 10.1 to this Form 10-Q.

Acquisition of TutorMe

On April 3, 2019, the Company, acquired TutorMe.com, Inc., a California corporation (“TutorMe”) pursuant to an Agreement and Plan of Reorganization (the “TutorMe Merger Agreement”) entered into by the parties on April 3, 2019 (“TutorMe Acquisition”). TutorMe is an online education platform that provides on-demand tutoring and online courses. Following the TutorMe Acquisition, TutorMe became a wholly-owned subsidiary of the Company.

Under the terms of the TutorMe Merger Agreement, in exchange for all outstanding shares of TutorMe capital stock and other rights to acquire or receive capital stock of TutorMe, the Company (i) paid a total of approximately $2.8 million in cash, subject to certain purchase price adjustments, (ii) issued a total of 309,852 shares of our common stock, and (iii) assumed all issued and outstanding options of TutorMe (the “Assumed Options”), of which a total of 231,406 shares of our common stock are underlying the Assumed Options that are subject to certain time-based vesting requirements and a total of 79,199 shares of our common stock are underlying the Assumed Options that are subject to certain performance-based vesting requirements. In addition, as part of the transactions contemplated by the TutorMe Merger Agreement, the Company (x) paid a total of approximately $1.1 million in cash to certain service providers of TutorMe as a transaction bonus and (y) issued a total of 293,621 performance-based restricted stock units to certain continuing service providers of TutorMe pursuant to the Company’s 2009 Stock Incentive Plan (as amended) and a form restricted stock unit agreement.

A portion of the total cash merger consideration was retained by the Company as partial security for the indemnification obligations of the TutorMe shareholders under the TutorMe Merger Agreement. The issuance of shares of Company Common Stock pursuant to the TutorMe Merger Agreement has been made solely to accredited investors and thus in reliance on one or more exemptions or exclusions from the registration requirements of the Securities Act, including Regulation D promulgated under the Securities Act and the exemption from qualification under applicable state securities laws. The TutorMe Merger Agreement contains customary representations, warranties and covenants of TutorMe and the Company.

A copy of the TutorMe Merger Agreement is filed as Exhibit 10.2 to this Form 10-Q.

Proposed conversion transactions

Ashford University submitted a change in control application to the Western Association of Schools and Colleges Senior College and University Commission (“WSCUC”) seeking approval to convert Ashford University to a not-for-profit California public benefit corporation. On March 6, 2019, WSCUC notified Ashford University that, pending the receipt and review of additional documents, WSCUC is deferring any action on the change of control application filed by Ashford University. WSCUC is also scheduling a video conference visit for June 5, 2019, related to the conversion transaction. As part of the conversion transaction, Ashford University will separate from the Company. Following the proposed conversion and separation of Ashford University, the Company plans to operate as a technology services provider that would provide certain services to the nonprofit entity and potentially, in the future, to other customers. The transactions described above are collectively hereinafter referred to as the “Proposed Transaction.”

The Company and Ashford University are continuing to finalize the terms of the Proposed Transaction and review various federal, state and other regulatory requirements that could impact the viability and timing of the Proposed Transaction. The Company and Ashford University's board of trustees are taking steps to protect Ashford University's independence in considering the Proposed Transaction in order to enable Ashford University to act in the best interests of Ashford University and its students.

Restructuring and impairment charges

We have implemented various restructuring plans to better align our resources with our business strategy and the related charges are recorded in the restructuring and impairment ~~charges~~expense line item on our condensed consolidated statements of income (loss). The restructuring and impairment charges are primarily comprised of (i) severance costs related to headcount reductions, (ii) estimated lease costs related to facilities vacated or consolidated, (iii) charges related to the write-off of certain fixed assets and assets abandoned and (iv) student transfer agreement costs for Ashford University ground-based students. As required by GAAP, the estimated lease losses include sublease assumptions. Changes to these estimates could have a material impact on the Company’s condensed consolidated financial statements. For information regarding the restructuring and impairment charges recorded, refer to Note 3,4, “Restructuring and Impairment ~~Charges”~~Expense” to our condensed consolidated financial statements included in Part I, Item 1 of this ~~report.~~Form 10-Q.

Valuation allowance

We recognize deferred tax assets if realization of such assets is more-likely-than-not. In order to make this determination, we evaluate factors including the ability to generate future taxable income from reversing taxable temporary differences, forecasts of financial and taxable income or ~~loss, and the ability to carryback certain operating losses to refund taxes paid in prior years.~~loss. The cumulative loss incurred over the three-year period ended ~~September 30, 2017~~March 31, 2019 constituted significant negative objective evidence against our ability to realize a benefit from our federal deferred tax assets. Such objective evidence limited our ability to consider in our evaluation of other subjective evidence such as our projections for future growth. On the basis of our evaluation, we determined that our deferred tax assets were not more-likely-than-not to be realized and that a valuation allowance against our deferred tax assets should continue to be maintained as of ~~September 30, 2017.~~March 31, 2019.

Recent Regulatory Developments

Negotiated Rulemaking and Other Executive Action

On ~~December 16, 2016,~~July 31, 2018, the U.S. Department ~~released final~~of Education (“Department”) published a notice in the Federal Register announcing its intention to establish a negotiated rulemaking committee (the “Rulemaking Committee”) to prepare proposed regulations ~~to clarify state authorization requirements~~ for ~~postsecondary institutions offering distance education that participate in federal student loan~~the Federal Student Aid programs ~~as required by~~authorized under title IV of the Higher Education ~~Act. Among other things,~~Act of 1965, as amended. In September 2018, interested parties commented at three public hearings on the ~~final~~topics suggested by the Department in the notice, and suggested additional topics for consideration for action by the Rulemaking Committee.

The Rulemaking Committee met from January through March of 2019 on topics related to accreditation, competency-based education, state approval of online programs, and distance learning. The Rulemaking Committee reached consensus on all topics and the Department may issue proposed regulations ~~(i) require institutions offering distance education or correspondence courses~~based on that consensus by November 1, 2019 to be authorized by each state in which they enroll students, if such authorization is required by the state, (ii) require institutions to document the state process for resolving student complaints regarding distance education programs, (iii) require public and individualized disclosures to enrolled and prospective students in distance education programs, including disclosures regarding adverse actions taken against the institution, the institution’s refund policies and whether each of the institution’s programs meet applicable state licensure or certification requirements, and (iv) require institutions to explain to students the consequences of moving to a state where the school is not authorized, which could include loss of eligibility for federal student aid. The final regulations recognize authorization through participation in a state authorization reciprocity agreement, as long as the agreement does not prevent a state from enforcing its own consumer laws. The final regulations are scheduled to take effecteffective on July 1, ~~2018.~~2020.

For additional information regarding negotiated rulemaking, see also the “Gainful Employment” and “Defense to Repayment” sections below.

Gainful Employment

OnIn October ~~31,~~ 2014, the Department published gainful employment regulations impacting programs required to prepare

graduates for gainful employment in a recognized occupation. Almost all academic programs offered by Title IV-participating private sector institutions of higher education must prepare students for gainful employment in a recognized occupation. The gainful employment regulations became effective July 1, 2015, with certain institutional disclosure requirements ~~that~~which became effective in early 2017. The gainful employment regulations have a framework with three components:

Certification: Institutions must certify that each of their gainful employment programs meet state and federal licensure, certification and accreditation requirements.

Accountability Measures: To maintain Title IV eligibility, gainful employment programs will be required to meet minimum standards for the debt burden versus the earnings of their graduates.


◦	Pass: Programs whose graduates have annual loan payments less than 8% of total earnings or less than 20% of discretionary earnings.


◦	Zone: Programs whose graduates have annual loan payments between 8% and 12% of total earnings or between 20% and 30% of discretionary earnings.


◦	Fail: Programs whose graduates have annual loan payments greater than 12% of total earnings and greater than 30% of discretionary earnings.

Programs that fail in two out of any three consecutive years or are in the ~~Zone~~zone for four consecutive years will be disqualified from participation in the Title IV programs.

Transparency: Institutions will be required to make public disclosures regarding the performance and outcomes of their gainful employment programs. The disclosures will include information such as costs, earnings, debt and completion rates.

The accountability measures will typically weigh a calculated debt burden from graduates who completed their studies three and four years prior to the measuring academic year and earnings from the most recent calendar year prior to the conclusion of the measuring academic year. Thus, for the 2014-2015 academic year, the two-year cohort will include graduates from the 2010-2011 and 2011-2012 academic years and earnings for ~~these~~those graduates from calendar year 2014.

On October 20, 2016, we received draft debt-to-earnings rates and certain underlying data from the Department for the first gainful employment measurement ~~year, and on~~year. On January 8, 2017, we received ~~our institutions’~~Ashford University’s final debt-to-earnings rates for the first gainful employment measurement year. Based on the final rates, none of ~~our~~Ashford University’s programs were determined to fail. Two of our current programs, ~~including~~ the Associate of Arts in Early Childhood Education and the Bachelor of Arts in Early Childhood Education/Administration, were determined to be in the zone. ~~At September 30, 2017,~~As of March 31, 2019, approximately 3%3.2% of ~~our institutions'~~Ashford University’s students were enrolled in the Associate of Arts in Early Childhood Education and approximately 8%8.4% of ~~our institutions'~~Ashford University’s students were enrolled in the Bachelor of Arts in Early Childhood Education/Administration. During the three months ended ~~September 30, 2017,~~March 31, 2019, we derived revenue of approximately ~~$3.8~~$4.4 million from the Associate of Arts in Early Childhood Education and approximately ~~$11.3~~$11.9 million from the Bachelor of Arts in Early Childhood Education/Administration. ~~The Company is currently working to determine what, if any, measures it might implement in order to bring these programs into the “pass” category.~~

The fact that none of our programs were determined to fail and only two of our current programs were determined to be in the zone is significant given the framework discussed above, as a program would be disqualified from participation in Title IV programs only if it were to fail for two out of three consecutive years, or either fail or be in the zone for three out of four consecutive years. The gainful employment regulations contemplate a transition period in the first several years to afford institutions the opportunity to make changes to their programs and retain Title IV eligibility.

On June 15, 2017, the Department announced its intention to conduct additional negotiated rulemaking on certain issues related to gainful employment. Because the negotiated rulemaking committee did not reach consensus, the Department planned to publish a proposed regulation through a Notice of Proposed Rulemaking (“NPRM”), take public comment, and issue final regulations by November 1, 2018, with the final regulations effective July 1, 2019. This did not occur.

On June 30, 2017, the Department ~~also~~ granted institutions until July 1, 2018 to comply with disclosure provisions related to promotional materials and prospective students, and extended the deadline for all programs to file alternate earnings ~~appeals to a soon to be announced date.~~appeals. The Department did not change a July 1, 2017 deadline requiring institutions to provide a completed disclosure template, or a link thereto, on gainful employment program ~~Web~~web pages and our schools ~~have~~complied with this requirement. In January 2018, the Department announced the release of the 2018 gainful employment template. While the aesthetic of the template remained the same, the Department removed certain data points. This included the amount for off-campus room and board, the percentage of students who borrow money to pay for the degree program, and the typical annual earnings after leaving the program.

On March 16, 2018, the Department announced it would release a new draft gainful employment completers list in late spring. On April 27, 2018, the Department announced that it would send institutions their completers lists on April 30, 2018. Schools had until June 13, 2018 to review, correct, and submit the lists back to the Department. The Department has not announced when schools can expect the next round of draft debt-to-earnings rates.

On June 18, 2018, the Department announced it will allow additional time, until July 1, 2019, for institutions to comply with the requirements of the gainful employment regulations in 34 CFR 668.412 (d) and (e) that include the disclosure template, or a link thereto, in their gainful employment program promotional materials; and directly distribute the disclosure template to prospective students. Because the Department intends to develop proposed regulations that would replace the gainful employment regulations, and as part of that rulemaking process, the Department continues to evaluate the efficacy of these disclosures to students and the implementation of these requirements. Institutions must continue to comply with the requirements in 34 CFR 668.412(a), (b), and (c) to post disclosures on their gainful employment program web pages using the approved disclosure template provided by the Department. The deadline for these actions was April 6, 2018 and, as discussed above, Ashford University has complied with this requirement.

On August 14, 2018, the Department proposed to rescind the gainful employment regulations and update the College Scorecard, a web-based tool, to provide program-level outcomes for all higher education programs at all institutions that participate in Title IV.

On August 24, 2018, the Department announced that it would still require institutions to comply with the October 1, 2018 reporting requirement. Schools were to submit gainful employment program data for the 2017-18 Award Year to the National Student Loan Data System by October 1, 2018. Ashford University submitted this reporting timely.

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On February 13, 2019, the Department published a draft of the newly proposed gainful employment disclosure template (“GEDT”). The comment period on the draft GEDT ended on March 15, 2019. Institutions are still awaiting an announcement regarding when they will be required to use the new template.

On April 5, 2019, the Department distributed final GE Completers Lists. These lists are the final versions of those released by the Department on April 30, 2018. However, since the Memorandum of Understanding under which the Social Security Administration shared earnings data with the Department has expired, the Department is unable to calculate new rates.

We continue to review the information provided by the Department to understand the potential impact of the gainful employment regulations on ~~our programs, and we~~Ashford University’s programs. We will also continue to evaluate options related to new programs or adjustments to current programs that could help mitigate the potential adverse consequences of the regulations. We will also continue to monitor changes to the existing regulations.

Defense to Repayment

On June 8,18, 2015, the Department announced processes that will be established to assist students ~~who may have been the victims of fraud~~ in gaining relief under the “defense to repayment” provisions of the ~~William D. Ford Federal~~ Direct Loan Program regulations. ~~Rarely used in the past, the~~The defense to repayment provisions ~~currently~~then in effect ~~allow~~allowed a student to assert as a defense against repayment of federal direct loans any commission of fraud or other violation of applicable state law by the school related to such loans or the educational services for which the loans were provided.

On June 16, 2016, the Department published proposed regulations regarding borrower defense to repayment and related matters, and on October 28, 2016, the Department published its final regulations with an effective date of July 1, 2017.

On June 14, 2017, the Department announced a postponement of the 2016 defense to repayment regulations and its intention to resubmit the regulations through the negotiated rulemaking process. The Department announced an additional postponement on October 24, 2017. On February 14, 2018, the Department announced that it was postponing the effective date of this rule until July 1, 2019 so that it could complete the negotiated rulemaking process and develop the new regulations. Because the negotiated rulemaking committee did not reach consensus, the Department published a proposed regulation through an NPRM, took public comment, and planned to issue final regulations by November 1, 2018, effective July 1, 2019. This did not occur.

In September and October of 2018, the U.S. District Court for the District of Columbia issued a series of orders and opinions holding these procedural delays by the Department to be improper. The Court reinstated the 2016 repayment regulations as of October 16, 2018.

The 2016 regulations allow a borrower to assert a defense to repayment on the basis of a substantial misrepresentation, any other misrepresentation in cases where certain other factors are present, a breach of contract or a favorable nondefault contested judgment against a school for its act or omission relating to the making of the borrower’s loan or the provision of educational services for which the loan was provided. In addition, the financial responsibility standards contained in the new regulations establish the conditions or events that trigger the requirement for an institution to provide the Department with financial protection in the form of a letter of credit or other security against potential institutional liabilities. Triggering conditions or events include, among others, certain state, federal or accrediting agency actions or investigations, and in the case of publicly traded companies, receipt of certain warnings from the SEC or the applicable stock exchange, or the failure to timely file a required annual or quarterly report with the SEC. The new regulations also prohibit schools from requiring that students agree to settle future disputes through arbitration.

On ~~June 14, 2017,~~March 15, 2019, the Department ~~announced a postponement~~issued guidance for the implementation of parts of the ~~defense~~regulations. The guidance covers an institution's responsibility in regard to reporting mandatory and discretionary triggers as part of the financial responsibility standards, class action bans and pre-dispute arbitration agreements, submission of arbitral and judicial records, and repayment regulations and its intention to resubmit the regulations through the negotiated rulemaking process. The Department announced an additional postponement on October 24, 2017. While rulemaking occurs, the Departmentrates. We will continue to ~~process claims under~~monitor guidance on or changes to the ~~current borrower defense rules.~~existing regulations.

Cohort Default Rate

For each federal fiscal year, the Department calculates a rate of student defaults over a three-year measuring period for each educational institution, which is known as a “cohort default rate.” An institution may lose its eligibility to participate in the Direct Loan Program and the Federal Pell Grant Program if, for each of the three most recent federal fiscal years, 30% or

more of its students who became subject to a repayment obligation in that federal fiscal year defaulted on such obligation by the end of the following federal fiscal year.

The most recent official three-year cohort default rates for Ashford University for the 2015, 2014 ~~2013~~ and ~~2012~~2013 federal fiscal years were ~~14.9%~~13.5%, ~~14.5%~~14.9% and ~~15.3%~~14.5%, respectively. The ~~most recent official~~draft three-year cohort default ~~rates~~rate for Ashford University ~~of the Rockies~~ for the ~~2014, 2013 and 2012~~2016 federal fiscal ~~years were 5.5%, 3.8% and 4.3%, respectively.~~year is 13.7%.

For additional information regarding the regulatory environment and related risks, see Part I, Item 1, “Business” and Part I, Item 1A, “Risk Factors” of the Form 10-K.

Seasonality

Our operations are generally subject to seasonal trends. We generally experience a seasonal increase in new enrollments during the first quarter of each year, subsequent to holiday break, as well as during the third quarter each year, when most other colleges and universities begin their fall semesters. While we enroll students throughout the year, our fourth quarter revenue generally is lower than other quarters due to the holiday break in December, with an increase in the first quarter of each year.

Critical Accounting Policies and Use of Estimates

The critical accounting policies and estimates used in the preparation of our consolidated financial statements are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Use of Estimates” included in Part II, Item 7 of the Form 10-K.

On January 1, 2019, the Company adopted ASU 2016-02, Leases (ASC 842), using the modified retrospective method. For information regarding the impact of this recent accounting pronouncements, refer to Note 2, “Summary of Significant Accounting Policies - Recent Accounting Pronouncements” as well as Note 9, “Lease Obligations” to our condensed consolidated financial statements included elsewhere in this report. There were no other material changes to these critical accounting policies and estimates during the ~~nine~~three months ended~~September 30, 2017~~. March 31, 2019.

~~The Iran Threat Reduction and Syria Human Rights Act of 2012~~

During the three months ended September 30, 2017, Santander Asset Management Investment Holdings Limited (“SAMIH”) engaged in certain activities that are subject to disclosure pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 and Section 13(r) of the Exchange Act. These activities are disclosed in Exhibit 99.1 to this report. Affiliates of Warburg Pincus, LLC (i) beneficially own more than 10% of our outstanding common stock and are members of our board of directors and (ii) beneficially own more than 10% of the equity interests of and have the right to designate members of the board of directors of SAMIH. We will be required to separately file with the SEC, concurrently with this report, a notice that such activities have been disclosed in this report, which notice must also contain the information required by Section 13(r) of the Exchange Act.

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Results of Operations

The following table sets forth our condensed consolidated statements of income ~~(loss)~~ data as a percentage of revenue for each of the periods indicated:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2017		2016		2017		2016		2019		2018
Revenue	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%
Costs and expenses:
Instructional costs and services	48.4		46.9		48.7		49.1		47.3		48.5
Admissions advisory and marketing	36.6		38.5		35.4		38.5		44.7		41.3
General and administrative	9.6		8.5		9.9		9.0		14.5		10.9
Legal settlement expense	—		12.3		—		8.1
Restructuring and impairment charges	6.7		0.3		2.1		0.7
Restructuring and impairment expense (credit)									0.0		(0.1	)
Total costs and expenses	101.3		106.5		96.1		105.4		106.5		100.6
Operating income (loss)	(1.3	)	(6.5	)	3.9		(5.4	)
Operating loss									(6.5	)	(0.6	)
Other income, net	0.3		0.4		0.3		0.5		0.5		0.2
Income (loss) before income taxes	(1.0	)	(6.1	)	4.2		(4.9	)
Loss before income taxes									(6.0	)	(0.4	)
Income tax expense (benefit)	(1.0	)	0.9		(0.2	)	(0.9	)	0.0		(1.5	)
Net income (loss)	—	%	(7.0	)%	4.4	%	(4.0	)%	(6.1	)%	1.1	%

Three Months Ended ~~September 30, 2017~~March 31, 2019 Compared to Three Months Ended ~~September 30, 2016~~March 31, 2018

Revenue. Our revenue for the three months ended ~~September 30, 2017~~March 31, 2019 and 2018, was ~~$119.4~~$109.8 million and $116.8 million, respectively, representing a decrease of ~~$17.2~~$7.0 million, or ~~12.6%, as compared to revenue of $136.6 million for the three months ended September 30, 2016.~~6.0%. The decrease between periods was primarily due to a decrease of ~~11.3%~~7.0% in average weekly enrollment ~~at our academic institutions,~~ from ~~47,657~~41,376 students for the three ~~months~~month period ended ~~September 30, 2016~~March 31, 2018 to ~~42,280~~38,488 students for the three ~~months~~month period ended ~~September 30, 2017. Tuition~~March 31, 2019. As a result of the decrease in enrollments, tuition revenue decreased by approximately ~~$15.4 million, which is primarily due to the decrease in average weekly enrollment, partially offset by the approximate 2.0% tuition increase on April 1, 2017.~~$2.1 million. The decrease in revenue between periods was also due to higher scholarships for the period, an increase of ~~$0.6 million,~~$5.1 million. The overall revenue decrease was partially offset by a tuition increase, effective January 1, 2019, as well as ~~a decrease~~an increase in net revenue generated from course digital materials of approximately ~~$0.5~~$0.9 million.

Instructional costs and services. Our instructional costs and services for the three months ended ~~September 30, 2017~~March 31, 2019 and 2018, were ~~$57.8~~$51.9 million and $56.6 million, respectively, representing a decrease of ~~$6.3~~$4.7 million, or ~~9.9%, as compared to instructional costs and services of $64.1 million for the three months ended September 30, 2016.~~8.3%. In addition to the decline in enrollment, specific decreases between periods primarily include ~~decreases in~~bad debt of $2.8 million, direct compensation (including financial aid processing fees) of ~~$2.2~~$1.2 million, corporate support services of ~~$2.1~~$1.1 million, and instructor fees of ~~$1.0~~$0.5 million, ~~license fees~~partially offset by an increase in instructional supplies of $1.0 ~~million,~~million. Instructional costs and services, as a percentage of revenue, for the three months ended March 31, 2019 and 2018, were 47.3% and 48.5%, respectively, representing a decrease of 1.2%. This decrease primarily included decreases in bad debt of 2.2%, corporate support services of 0.4%, and facilities costs of ~~$0.8 million,~~0.2%, partially offset by an increase in information technology costs of $0.6 million. Instructional costs and services increased as a percentage of revenue to 48.4% for the three months ended September 30, 2017, as compared to 46.9% for the three months ended September 30, 2016. The increase of 1.5% as a percentage of revenue primarily included increases in information technology costs of 1.0% and ~~bad debt~~instructional supplies of ~~0.7%~~0.9%. As a percentage of revenue, bad debt expense was ~~6.3%~~3.3% for the three months ended ~~September 30, 2017,~~March 31, 2019, compared to ~~5.6%~~5.5% for three months ended ~~September 30, 2016.~~March 31, 2018.

Admissions advisory and marketing. Our admissions advisory and marketing expenses for the three months ended ~~September 30, 2017~~March 31, 2019 and 2018, were ~~$43.7~~$49.1 million and $48.2 million, respectively, representing ~~a decrease~~an increase of ~~$8.9~~$0.9 million, or ~~17.0%, as compared~~1.8%. Specific factors contributing to ~~admissions~~the overall increase between periods were increases in advertising costs of $1.4 million, transaction costs of $0.4 million, professional fees of $0.4 million, license fees of $0.3 million, information technology costs of $0.2 million and corporate support services of $0.2 million, primarily offset by decreases in compensation of $1.8 million and facilities costs of $0.3 million. Admissions advisory and marketing, ~~expenses~~as a percentage of ~~$52.6 million~~revenue, for the three months ended ~~September 30, 2016. As a result~~March 31, 2019 and 2018, were 44.7% and 41.3%, respectively, representing an increase of ~~our change in marketing strategy and the shift~~3.4%. This increase primarily included increases in advertising ~~mix, specific factors contributing to the overall~~costs of 2.5%, professional fees of 0.4%, license fees of 0.4%, transaction costs of 0.3%, and information technology costs of 0.3%, partially offset by a decrease ~~between periods were decreases~~ in compensation of $5.4 million, advertising costs of $2.4 million and facilities costs of $1.7 million, partially offset by an increase in corporate support services of $1.1 million. As a percentage of revenue, our admissions advisory and marketing expenses decreased to 36.6% for the three months ended September 30, 2017, as compared to 38.5% for the three months ended0.5%.

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~~September 30, 2016. The decrease of 1.9% as a percentage of revenue was primarily due to a decrease in compensation of 2.0%.~~

General and administrative. Our general and administrative expenses for the three months ended ~~September 30, 2017~~March 31, 2019 and 2018, were ~~$11.4~~$15.9 million and $12.7 million, respectively, representing ~~a decrease~~an increase of ~~$0.2~~$3.2 million, or ~~1.4%, as compared to general and administrative expenses of $11.6 million for the three months ended September 30, 2016.~~24.9%. The ~~decrease~~increase between periods was primarily due to ~~decreases in facilities costs of $0.5 million and administrative compensation of $0.5 million, offset by~~ increases in corporate support services of ~~$1.0~~$0.9 million, administrative compensation of $0.7 million, transaction costs of $0.7 million, information technology costs of $0.3 million, and other administrative costs (which include acquisition costs) of $0.2 million. ~~Our general~~General and administrative expenses, ~~increased~~ as a percentage of revenue, ~~to 9.6%~~ for the three months ended ~~September 30, 2017, as compared to 8.5% for the three months ended September 30, 2016. The~~March 31, 2019 and 2018, were 14.5% and 10.9%, respectively, representing an increase of ~~1.1% as a percentage of revenue~~3.6%. This increase was primarily due to increases in administrative compensation of 1.1%, transaction costs of 0.7%, other administrative costs of 0.5%, information technology costs of 0.4%, and ~~professional fees~~corporate support services of 0.4%.

~~Legal settlement expense.~~ For the three months ended September 30, 2017, we had no expenses relating to legal settlements. The expenses for the cost of resolution of the previously disclosed civil investigative demands from the Consumer Financial Protection Bureau and the Attorney General of the State of California for the three months ended September 30, 2016 were $16.8 million.

Restructuring and impairment charges. We ~~had $8.0 million~~recorded a charge of approximately $29,000 to restructuring and impairment ~~charges~~ for the three months ended ~~September 30, 2017,~~March 31, 2019, comprised primarily of revised estimates of lease ~~charges as well as severance costs resulting from a reduction in force.~~charges. For the three months ended ~~September 30, 2016,~~March 31, 2018, we recorded a credit of $0.2 million of restructuring and impairment charges, ~~were $0.4~~comprised of a credit of $0.5 million ~~comprised primarily~~as a reversal of previously recorded estimated lease charges, offset by a charge of $0.3 million relating to severance costs ~~resulting from a reduction in force.~~for wages and benefits.

Other income, net. Our other income, net, was ~~$0.4 million for the three months ended September 30, 2017 and~~approximately $0.6 million for the three months ended ~~September 30, 2016.~~March 31, 2019 and approximately $0.3 million for the three months ended March 31, 2018. The ~~decrease~~increase between periods was primarily due to ~~decreased~~increased interest income on average cash balances.

Income tax expense (benefit). We recognized an income tax ~~benefit~~expense of ~~$1.2 million~~approximately $46,000 and an income tax ~~expense~~benefit of ~~$1.2~~$1.7 million, at effective tax rates of (0.7)% and 454.1% for the three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016, at effective tax rates of 103.4% and (14.7)%, respectively.~~

~~Net income.~~ Our net income was $39,000 for the three months ended September 30, 2017, compared to net loss of $9.5 million for the three months ended September 30, 2016, which represents a $9.5 million increase in net income as a result of the factors discussed above.

~~Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016~~

~~Revenue.~~ Our revenue for the nine months ended September 30, 2017 was $373.4 million, representing a decrease of $34.2 million, or 8.4%, as compared to revenue of $407.6 million for the nine months ended September 30, 2016. The decrease between periods was primarily due to a decrease of 9.6% in average weekly enrollment at our academic institutions, from 49,204 students during the nine months ended September 30, 2016 to 44,469 students during the nine months ended September 30, 2017. Tuition revenue decreased by approximately $33.8 million, which is primarily due to the decrease in average weekly enrollment, partially offset by the approximate 2.0% tuition increase on April 1, 2017. The decrease in revenue between periods was also due to a decrease in net revenue generated from course digital materials of approximately $1.5 million.

~~Instructional costs and services.~~ Our instructional costs and services for the nine months ended September 30, 2017 were $181.9 million, representing a decrease of $18.2 million, or 9.1%, as compared to instructional costs and services of $200.1 million for the nine months ended September 30, 2016. In addition to the decline in enrollment, specific decreases between periods include direct compensation costs of $5.8 million, corporate support services of $4.9 million, instructor fees of $3.5 million, facilities costs of $3.0 million, and license fees of $1.7 million, partially offset by an increase in information technology costs of $1.2 million. Instructional costs and services decreased as a percentage of revenue to 48.7% for the nine months ended September 30, 2017, as compared to 49.1% for the nine months ended September 30, 2016. The decrease of 0.4% as a percentage of revenue primarily included decreases in corporate support services of 0.6% and facilities costs of 0.5%, partially offset by an increase in bad debt expense of 0.8%. As a percentage of revenue, bad debt expense was 6.5% for the nine months ended September 30, 2017, compared to 5.8% for the nine months ended September 30, 2016.

~~Admissions advisory and marketing.~~ ~~Our admissions advisory and marketing expenses for the nine months ended September 30, 2017 were $132.1 million, representing a decrease of $24.7 million, or 15.7%, as compared to admissions~~

advisory and marketing expenses of $156.8 million for the nine months ended September 30, 2016. As a result of our change in marketing strategy and the shift in advertising mix, specific factors contributing to the overall decrease between periods include decreases in compensation of $14.9 million, advertising costs of $7.7 million, facilities costs of $5.5 million and information technology costs of $2.6 million. These decreases were partially offset by increases in corporate support services of $5.1 million and professional fees of $0.5 million. As a percentage of revenue, our admissions advisory and marketing expenses decreased to 35.4% for the nine months ended September 30, 2017 as compared to 38.5% for the nine months ended September 30, 2016. The decrease of 3.1% as a percentage of revenue was primarily due to decreases in compensation of 2.3%, facilities costs of 1.2%, and advertising costs of 0.6%, partially offset by an increase in corporate support services of 1.1%.

~~General and administrative.~~ Our general and administrative expenses for the nine months ended September 30, 2017 were $37.0 million, representing an increase of $0.3 million, or 0.8%, as compared to general and administrative expenses of $36.7 million for the nine months ended September 30, 2016. The increase between periods was primarily due to an increase in professional fees of $3.6 million, partially offset by decreases in other administrative costs of $1.4 million, administrative compensation of $1.1 million, and facilities costs of $1.1 million. Our general and administrative expenses increased as a percentage of revenue to 9.9% for the nine months ended September 30, 2017, compared to 9.0% for the nine months ended September 30, 2016. The increase of 0.9% as a percentage of revenue was primarily due to an increase in professional fees of 1.2% and administrative compensation of 0.4%, partially offset by a decrease in corporate support services of 0.5%.

~~Legal settlement expense.~~ For the nine months ended September 30, 2017, we had no expenses relating to legal settlements. The expenses for the cost of resolution of the previously disclosed civil investigative demands from the Consumer Financial Protection Bureau and the Attorney General of the State of California for the nine months ended September 30, 2016 were $32.9 million.

~~Restructuring and impairment charges.~~ We had $8.0 million restructuring and impairment charges for the nine months ended September 30, 2017, comprised primarily of revised estimates of lease charges as well as severance costs resulting from a reduction in force. For the nine months ended September 30, 2016, restructuring and impairment charges were $2.8 million, comprised primarily of severance costs resulting from a reduction in force.

~~Other income, net.~~ Our other income, net, was $1.2 million for the nine months ended September 30, 2017, as compared to $1.9 million for the nine months ended September 30, 2016, representing a decrease of $0.7 million. The decrease between periods was primarily due to decreased interest income on average cash balances.

~~Income tax expense (benefit).~~ ~~We recognized an income tax benefit of $0.7 million and $3.6 million for the nine months ended September 30, 2017 and 2016, at effective tax rates of (4.6)% and 18.2%,~~2018, respectively.

Net income (loss). Our net ~~income~~loss was ~~$16.2~~$6.6 million for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019, compared to net ~~loss~~income of ~~$16.3~~$1.3 million for the ~~nine~~three months ended ~~September 30, 2016,~~March 31, 2018, a ~~$32.5~~$7.9 million ~~change~~decrease in net income as a result of the factors discussed above.

Liquidity and Capital Resources

We finance our operating activities and capital expenditures primarily through cash on hand and through cash provided by operating activities. At ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, our cash and cash equivalents were ~~$165.2~~$141.8 million and ~~$307.8~~$166.3 million, respectively. At ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, we had total restricted cash of ~~$19.9~~$24.9 million and ~~$24.5~~$24.3 million, which included long-term restricted cash of $5.7 million and $5.7 million, respectively, and investments of $~~27.0~~2.2 million and ~~$49.4~~$2.1 million,, respectively. At ~~September 30, 2017,~~March 31, 2019, we had no long-term debt.

We manage our excess cash pursuant to the quantitative and qualitative operational guidelines of our cash investment policy. Our cash investment policy, which is managed by our Chief Financial Officer, has the following primary objectives: (i) preserving principal, (ii) meeting our liquidity needs, (iii) minimizing market and credit risk, and (iv) providing after-tax returns. Under the policy’s guidelines, we invest our excess cash exclusively in high-quality, U.S. dollar-denominated financial instruments. For a discussion of the measures we use to mitigate the exposure of our cash investments to market risk, credit risk and interest rate risk, see Part I, Item 3, “Quantitative and Qualitative Disclosures About Market ~~Risk.”~~Risk” in this Form 10-Q.

There was a slight increase in the fair value of our investments at ~~September 30, 2017~~March 31, 2019 as compared to December 31, ~~2016~~2018. We believe that any fluctuations we have recently experienced are temporary in nature and that while some of our

securities are classified as available-for-sale, we have the ability and intent to hold them until maturity, if necessary, to recover their full value.

Title IV and other governmental funding

~~Our institutions derive~~Ashford University derives the substantial majority of ~~their~~its respective revenues from students who enroll and are eligible for various federal student financial assistance programs authorized under Title IV of the Higher Education Act. ~~Our institutions are~~Ashford University is subject to significant regulatory scrutiny as a result of numerous standards that must be satisfied in order to participate in Title IV programs. For additional information regarding Title IV programs and the regulation thereof, see “Business—Regulation” included in Part I, Item 1 of the Form 10-K. The balance of revenues derived by ~~our institutions~~Ashford University is from government tuition assistance programs for military personnel, including veterans, payments made in cash by individuals, reimbursement from corporate affiliates and private loans.

If we were to become ineligible to receive Title IV funding or other governmental funding, our liquidity would be significantly impacted. The timing of disbursements under Title IV programs is based on federal regulations and our ability to

successfully and timely arrange financial aid for ~~our institutions’~~Ashford University’s students. Title IV funds are generally provided in multiple disbursements before we earn a significant portion of tuition and fees and incur related expenses over the period of instruction. Students must apply for new loans and grants each academic year. These factors, together with the timing at which ~~our institutions’~~Ashford University’s students begin their programs, affect our revenues and operating cash flow.

Stock repurchase programs

The Company's board of directors may authorize us to repurchase outstanding shares of its common stock from time to time in the open market through block trades or otherwise depending on market conditions and other considerations, pursuant to the applicable rules of the SEC. The Company's policy is to retain these repurchased shares as treasury shares and not to retire them. The amount and timing of future share repurchases, if any, will be made as market and business conditions warrant. The timing and extent of any repurchases will depend upon market conditions, the trading price of our shares and other factors, and subject to the restrictions relating to volume, price and timing under applicable law. We may commence or suspend share repurchases at any time or from time to time.

Operating activities

Net cash used in operating activities was ~~$16.7~~$16.4 million for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2019, compared to net cash used in operating activities of ~~$12.9~~$15.1 million for the ~~nine~~three months ended ~~September 30, 2016,~~March 31, 2018, an overall increase between periods in net cash used in operating activities of ~~$3.8~~$1.4 million. This increase in cash used in operating activities ~~was~~is primarily attributable to the $8.0 million decrease in net income between periods, changes in prepaid expenses and other current assets due to timing of prepaids, lower net bad debt than in prior year, and a decrease in deferred revenue to do lower average enrollments. These changes were partially offset by an increase in the accounts payable and accrued liabilities ~~loss on impairment~~balance at year end, due to the implementation of ~~student loan receivables~~ASC 842, and a smaller decrease in the accounts receivable balances in current year versus prior year ~~and changes in other long-term assets. This change was partially offset by the $32.5 million increase in net income between periods. Despite the cash used in operating activities during the~~ period ~~we expect to generate cash from our operating activities for the foreseeable future.~~end.

Investing activities

Net cash ~~provided by~~used in investing activities was ~~$19.3~~$6.7 million for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2019, compared to net cash used in investing activities of ~~$7.7~~$1.1 million for the ~~nine~~three months ended ~~September 30, 2016.~~March 31, 2018. During the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2019, we had ~~maturities~~capitalized costs for intangibles of ~~investments of $22.7~~$0.2 million, purchases of investments of ~~$0.1 million~~approximately $22,000, and no sales of investments. This is compared to capitalized costs for intangibles of $0.3 million, purchases of investments of ~~$20.2~~$0.7 million, noand sales of investments ~~and $14.7~~of $0.7 million ~~maturities of investments~~ for the ~~nine~~three months ended ~~September 30, 2016.~~March 31, 2018. Capital expenditures for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 were $~~2.9~~6.5 million, compared to $~~1.6~~0.8 million for the ~~nine~~three months ended ~~September 30, 2016~~March 31, 2018. We expect our capital expenditures to be approximately ~~$5.8~~$30.0 million for the year ending December 31, ~~2017.~~2019.

Financing activities

Net cash used in financing activities was ~~$149.8~~$0.7 million for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2019, compared to net cash used in financing activities of ~~$1.6~~$0.7 million for the ~~nine~~three months ended ~~September 30, 2016. During the~~ ~~nine months ended~~ ~~September 30, 2017, we repurchased approximately 18.1 million shares of our common stock for an aggregate purchase price of $150.0 million and $2.0 million of related fees.~~March 31, 2018. During each of the ~~nine~~three months ended~~September 30, 2017~~ March 31, 2019 and ~~2016,~~2018, net cash used ~~in financing activities~~ included tax withholdings related to the issuance of ~~shares upon the vesting of~~ restricted stock units vesting. During the three months ended March 31, 2019, the cash used was partially offset by the cash provided by stock option exercises.

Based on our current level of operations, we believe that our future cash flows from operating activities and our existing cash and cash equivalents will provide adequate funds for ongoing operations, planned capital expenditures and working capital requirements for at least the next 12 months. However, changes could occur that would consume our available capital resources before that time. Our capital requirements depend on numerous factors, including our ability to continue to generate revenue. There can be no assurance that additional funding, if necessary, will be available to us on favorable terms, if at all.

Off-Balance Sheet Arrangements ~~and Significant Contractual Obligations~~

As part of our normal business operations, we are required to provide surety bonds in certain states where we do business. In May 2009, we entered into a surety bond facility with an insurance company to provide such bonds when required. As of ~~September 30, 2017,~~March 31, 2019, our total available surety bond facility was ~~$3.5~~$8.5 million and the surety had issued bonds totaling ~~$3.3~~$8.1 million on our behalf under such facility.

Significant Contractual Obligations

The following table sets forth, as of ~~September 30, 2017,~~March 31, 2019, certain significant cash and contractual obligations that will affect our future liquidity:


	Payments Due by Period														Payments Due by Period
(In thousands)	Total		2017		2018		2019		2020		2021		Thereafter		Total		2019		2020		2021		2022		2023		Thereafter
Operating lease obligations	$	77,878	$	9,080	$	31,400	$	20,833	$	9,504	$	5,112	$	1,949	$	54,919	$	14,558	$	9,749	$	6,351	$	3,826	$	2,726	$	17,709
Other contractual obligations	49,332		4,229		12,535		10,592		8,549		3,427		10,000		47,315		13,196		12,596		6,580		5,014		4,929		5,000
Uncertain tax positions	8,290		—		8,290		—		—		—		—		869		—		869		—		—		—		—
Total	$	135,500	$	13,309	$	52,225	$	31,425	$	18,053	$	8,539	$	11,949	$	103,103	$	27,754	$	23,214	$	12,931	$	8,840	$	7,655	$	22,709

Recent Accounting Pronouncements

For information regarding recent accounting pronouncements, refer to Note 2, “Summary of Significant Accounting Policies” to our condensed consolidated financial statements included in Part I, Item 1 of this ~~report.~~Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Market and Credit Risk

Pursuant to our cash investment policy, we attempt to mitigate the exposure of our cash and investments to market and credit risk by (i) diversifying concentration to ensure we are not overly concentrated in a limited number of financial institutions, (ii) monitoring and managing the risks associated with the national banking and credit markets, (iii) investing in U.S. dollar-denominated assets and instruments only, (iv) diversifying account structures so that we maintain a decentralized account portfolio with numerous stable, highly rated and liquid financial institutions and (v) ensuring that our investment procedures maintain a defined and specific scope such that we will not invest in higher-risk investment accounts, including financial swaps or derivative and corporate equities. Accordingly, pursuant to the guidelines established by our cash investment policy, we invest our excess cash exclusively in high-quality, U.S. dollar-denominated financial instruments.

Despite the investment risk mitigation strategies we employ, we may incur investment losses as a result of unusual and unpredictable market developments, and we may experience reduced investment earnings if the yields on investments that are deemed to be low risk remain low or decline further in this time of economic uncertainty. Unusual and unpredictable market developments may also create liquidity challenges for certain of the assets in our investment portfolio.

We have no derivative financial instruments or derivative commodity instruments.

Interest Rate Risk

To the extent we borrow funds, we would be subject to fluctuations in interest rates. As of ~~September 30, 2017~~March 31, 2019, we had no outstanding borrowings.

Our future investment income may fall short of expectations due to changes in interest rates. At ~~September 30, 2017~~March 31, 2019, a hypothetical 10% increase or decrease in interest rates would not have a material impact on our future earnings, fair value or cash flows related to interest earned on our cash, cash equivalents or investments.

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Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act, that are designed to provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of any possible controls and procedures.

Under the supervision and with the participation of our management, including our ~~chief executive officer~~Chief Executive Officer and our ~~principal financial officer,~~Principal Financial Officer, we carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) and Rule 15d-15(b) of the Exchange Act. Based on this evaluation, our ~~chief executive officer~~Chief Executive Officer and our ~~principal financial officer~~Principal Financial Officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of March 31, 2019.

Material weaknesses in internal control over financial reporting

Management has concluded that there were matters that constituted material weaknesses in our internal control over financial reporting. These material weaknesses relate to (i) control design in the accounting of the student contracts for the FTG program whereby revenue was misstated due to allowances that had not been properly determined and contained computational errors, which also resulted in misstatements in accounts receivable and its provision for bad debts and deferred revenue and student deposits; and (ii) operating effectiveness of review controls in the determination of the accounting for nonrecurring transactions and new accounting standards. Specifically, our controls were not effective as management misapplied accounting guidance and did not arrive at the proper accounting conclusions, resulting in misstatement of restricted cash and other long-term assets as of September 30, ~~2017.~~2018 related to a long-term letter of credit issued as collateral for the build-to-suit lease; and management incorrectly applied ASC 606 upon adoption on January 1, 2018 as it relates to the FTG program, specifically the period of time for which to recognize revenue in the fiscal year 2018 related to FTG students that become inactive. These material weaknesses resulted in the restatement of the Company’s financial statements. Accordingly, management has determined that the Company's internal control over financial reporting was not effective as of March 31, 2019 due to material weaknesses.

Management's Remediation Efforts

We are committed to remediating the material weaknesses by implementing changes to our internal control over financial reporting. Our Principal Financial Officer is responsible for implementing changes and improvements in internal control over financial reporting and for remediating the control deficiencies that gave rise to the material weaknesses.

Throughout the first quarter of 2019, we have implemented measures to remediate the underlying causes of the control deficiencies. These measures include (i) improving the internal communication procedures between operations and accounting personnel; (ii) enhancing our controls over the FTG accounting models, including more detailed steps to evaluate and revise critical assumptions and estimates to be more precise; (iii) implementing enhanced analytical controls to compensate for the manual processes; (iv) technical accounting training for key financial management; and (v) engaging external consultants, as needed, to provide support related to more complex applications of GAAP related to nonrecurring transactions and new accounting standards.

We believe these measures will remediate the underlying control deficiencies that gave rise to the material weaknesses. We are committed to continuing to improve our internal control processes and will continue to review, optimize and enhance our financial reporting controls and procedures. As we continue to evaluate and work to improve our internal control over financial reporting, we may take additional measures to address control deficiencies, or we may modify, or in appropriate circumstances not complete, certain of the remediation measures described above. These material weaknesses will not be

considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

Changes in Internal Control Over Financial Reporting

We continually assess the adequacy of our internal control over financial reporting and make improvements as deemed appropriate. ~~There have been~~As discussed above, during the three months ended March 31, 2019, management began to implement certain remediation measures to improve our internal control over financial reporting and to remediate the previously identified material weaknesses. Aside from the above, there were no changes ~~to our~~in internal control over financial reporting, during the three months ended ~~September 30, 2017~~March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

For information regarding our legal proceedings, refer to Note ~~13,~~14, “Commitments and Contingencies” to our condensed consolidated financial statements included in Part I, Item 1 of this report, which note is incorporated by reference into this Part II, Item 1.

Item 1A. Risk Factors.

Investing in our common stock involves risk. Before making an investment in our common stock, you should carefully consider the risk factors discussed in Part I, Item 1A, “Risk Factors” of the Form 10-K. The risks described in the Form 10-K are those which we believe are the material risks we face, and such risks could materially adversely affect our business, prospects, financial condition, cash flows and results of operations. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may impact us. Except as set forth below, there have been no material changes in our risk factors from those previously disclosed in the Form 10-K.

~~Our institutions~~If we fail to effectively identify, pursue and consummate acquisitions, either in the U.S. or outside of the U.S., our ability to grow could ~~lose eligibility~~be impacted and our profitability may be adversely affected.

Acquisitions are one component of our overall long-term growth strategy. The successful implementation of this strategy depends upon the Company’s ability to ~~participate in Title IV programs~~identify suitable domestic and international acquisition candidates, acquire such businesses on acceptable terms and finance such acquisitions. There can be no assurance that such candidates will be available or, ~~face other sanctions~~ if ~~they derive more than 90% of their respective revenues from these programs.~~

~~Under~~such candidates are available, that the ~~Higher Education Act, a proprietary institution loses eligibility~~price will be attractive or that the Company will be able to participate in Title IV programs if the institution derives more than 90% of its revenues (calculated in accordance with Department regulations) from Title IV program funds for two consecutive fiscal years. This rule is commonly referred to as the “90/10 rule.” Any institution that violates the 90/10 rule for two consecutive fiscal years becomes ineligible to participate in Title IV programs for at least two fiscal years.identify, acquire or finance such businesses successfully. In addition, ~~an institution whose rate exceeds 90%~~in pursuing such acquisition opportunities, the Company may compete with other entities with similar growth strategies; these competitors may be larger and have greater financial and other resources than the Company. Competition for ~~any single fiscal year~~these acquisition targets could also result in increased prices of acquisition targets and/or a diminished pool of companies available for acquisition. There may be particular difficulties and complexities (regulatory or otherwise) associated with our expansion into international markets, and our strategies may not succeed beyond our current markets. If we are unable to effectively address these challenges, our ability to execute this component of our long-term strategy will be placed on provisional certification and may be subject to other enforcement measures. In the fiscal years ended December 31, 2016, 2015 and 2014, Ashford University derived 81.2%, 80.9% and 83.4%, respectively, and University of the Rockies derived 86.5%, 86.6% and 88.3%, respectively, of their respective revenues from Title IV program funds. Ashford University and University of the Rockies continue to monitor their respective 90/10 rule calculations and their compliance with the 90/10 rule.

Revenue derived from government tuition assistance for military personnel, including veterans, is not considered federal student aid for purposes of calculations under the 90/10 rule, and accordingly helps our institutions satisfy the 90/10 rule. As of December 31, 2016, approximately 25.6% of our institutions' students were affiliated with the military, some of whom are eligible to receive government tuition assistance that may be used to pursue postsecondary degrees. If there were a reduction in funding of government tuition assistance for military personnel, including veterans, or if our revenue derived from such funding were otherwise to decrease, it could be significantly more difficult for our institutions to satisfy the 90/10 rule. On May 20, 2016, the Company received a letter from the Iowa Department of Education (the “Iowa DOE”) indicating that, as a result of the planned closure of the Clinton Campus, the ISAA would no longer continue to approve Ashford’s programs for GI Bill benefits after June 30, 2016. The Iowa DOE subsequently issued a stay of the ISAA’s withdrawal of approval of Ashford’s programs for GI Bill benefits until 90 days from June 20, 2016. On September 15, 2016, in response to a Petition for Declaratory and Injunctive Relief filed by Ashford University, the Iowa District Court for Polk County entered a written order (the “Order”) staying the Iowa DOE’s announced intention to withdraw the approval of Ashford as a GI Bill eligible institution until the entry of a final and appealable order and judgment in the action. On June 23, 2017, the Iowa District Court held a hearing on Ashford’s Petition and on July 17, 2017, the Court ruled in favor of the Iowa DOE and denied the petition. Ashford University is evaluating a variety of options to ensure the continued approval of Ashford’s programs for GI Bill benefits, including filing of a motion for reconsideration and a potential appeal. The Iowa DOE has indicated that it will continue to approve Ashford’s programs for GI Bill benefits and take no further action, at least through the deadline to appeal,impaired, which is 30 days following a final decision by the Iowa District Court. In addition, on July 25, 2017, Ashford University received approval from the state of Arizona to provide GI Bill benefits to its students, and is currently awaiting the assignment of a facilities code from the U.S. Department of Veterans Affairs. The Company intends to continue to pursue its options in Iowa as well. At this time, we cannot predict the eventual outcome of this litigation, and any potential delays or gaps in coverage for GI Bill benefits could have ~~a material~~an adverse effect on ~~current~~our ability to grow and ~~future military student enrollment~~our profitability.

The acquisition, integration and growth of acquired businesses may present challenges that could harm our business.

The successful integration and profitable operation of an acquired institution or business, including the realization of anticipated cost savings and additional revenue opportunities, can present challenges, and the ~~Company’s revenues,~~failure to overcome these challenges can have an adverse effect on our business, financial condition, cash flows and results of operations. Some of these challenges include:

the inability to maintain uniform standards, controls, policies and procedures;

distraction of management's attention from normal business operations during the integration process;

the inability to attract and/or retain key management personnel to operate the acquired entity;

the inability to obtain, or delay in obtaining, regulatory or other approvals necessary to operate the business;

the inability to correctly estimate the size of a target market or accurately assess market dynamics;

the inability to retain the clients of the acquired entity;

the lingering effects of poor client relations or service performance by the acquired entity, which also may negatively affect the Company’s existing business;

the inability to fully realize the desired efficiencies and ~~could make it significantly more difficult for our institutions to satisfy~~economies of scale;

expenses associated with the ~~90/10 rule.~~

~~Changes in federal law that increase Title IV grant~~integration efforts; and ~~loan limits may result in an increase in the revenues we receive from Title IV programs and make it more difficult for our institutions to satisfy the 90/10 rule. In addition, Congress could~~

3743

~~propose~~unidentified issues not discovered in the due diligence process, including legal contingencies.

An acquisition related to an institution or other educational business often requires one or multiple regulatory approvals. If we are unable to obtain such approvals, or we obtain them on unfavorable terms, our ability to consummate a transaction may be impaired or we may be unable to operate the acquired entity in a manner that is favorable to us. If we fail to properly evaluate an acquisition, we may be required to incur costs in excess of what we anticipated, and ~~adopt legislation that amends~~we may not achieve the 90/10 rule in ways that make it more difficult for our institutions to satisfy the 90/10 rule. Failure to satisfy the 90/10 rule could result in our institutions losing eligibility to participate in Title IV programs, which would have a material adverse effect on enrollments and our revenues, financial condition, cash flows and resultsanticipated benefits of ~~operations.~~such acquisition.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

None.

3844

Item 6. Exhibits.



Exhibit			Description
3.1			Zovio Amended and Restated Certificate of Incorporation, as Amended
3.2			Third Amended and Restated Bylaws of Zovio Inc (Incorporated by reference to Form 8-K, Exhibit 3.2, filed April 2, 2019).
10.1			Agreement and Plan of Reorganization by and among Bridgepoint Education, Inc and Fullstack Academy, Inc.*
10.2			Agreement and Plan of Reorganization by and among Zovio Inc (formerly known as Bridgepoint Education, Inc) and Toucan Merger Sub, Inc.
31.1			Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2			Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1			Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Andrew S. Clark, President and Chief Executive Officer, and ~~Joseph D’Amico, Interim~~Kevin Royal, Chief Financial Officer.
~~99.1~~			~~Disclosure required pursuant to Section 13(r) of the Securities Exchange Act of 1934.~~
101			The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2017,~~March 31, 2019, filed with the SEC on ~~October 25, 2017,~~May 9, 2019, formatted in Extensible Business Reporting Language (“XBRL”): (i) the Condensed Consolidated Balance Sheets as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016;~~2018; (ii) the Condensed Consolidated Statements of Income (Loss) for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~2016;~~2018; (iii) the Condensed Consolidated Statements of Comprehensive Income ~~(Loss)~~ for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~2016;~~2018; (iv) the Condensed Consolidated Statements of Stockholders’ Equity for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016;~~2018; (v) the Condensed Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016;~~2018; and (vi) the Notes to Condensed Consolidated Financial Statements.

*Certain confidential portions of this exhibit have been omitted

3945

SIGNATURES

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



	~~BRIDGEPOINT EDUCATION, INC.~~ZOVIO INC

~~October 25, 2017~~May 9, 2019	/s/ ~~JOSEPH D’AMICO~~KEVIN ROYAL
	~~Joseph D’Amico~~Kevin Royal ~~Interim~~ Chief Financial Officer (Principal financial officer and duly authorized to sign on behalf of the registrant)

4046



	As of September 30, 2017
	Level 1		Level 2		Level 3		Total
Mutual funds	$	1,965	$	—	$	—	$	1,965
Certificates of deposit	—		25,000		—		25,000
Total	$	1,965	$	25,000	$	—	$	26,965



	As of December 31, 2016
	Level 1		Level 2		Level 3		Total
Mutual funds	$	1,688	$	—	$	—	$	1,688
Corporate notes and bonds	—		22,746		—		22,746
Certificates of deposit	—		25,000		—		25,000
Total	$	1,688	$	47,746	$	—	$	49,434



	September 30, 2017
				Gross unrealized
	Maturities	Amortized Cost		Gain		Loss		Fair Value
Short-term
Certificates of deposit	1 year or less	$	25,000	$	—	$	—	$	25,000
Total		$	25,000	$	—	$	—	$	25,000



	Beginning Balance			Charged to Expense		Deductions(1)			Ending Balance
Allowance for doubtful accounts receivable:
For the nine months ended September 30, 2017	$	(16,154	)	$	24,440	$	(22,541	)	$	(18,053	)
For the nine months ended September 30, 2016	$	(10,114	)	$	23,406	$	(19,395	)	$	(14,125	)