BRIDGEPOINT EDUCATION, INC.ZOVIO INC
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
or after July 1, 2020, and, among other things: grants borrowers the right to assert borrower defense to repayment claims against institutions, regardless of whether the loan is in default or in collection proceedings; allows borrowers to file defense to repayment claims three years from either the student's date of graduation or withdrawal from the institution; and gives students the ability to allege a specific amount of financial harm and to obtain relief in an amount determined by the Department, which may be greater or lesser than their original claim amount. It also includes financial triggers and other factors for recalculating an institution's financial responsibility composite score that differ from those in the 2016 regulations.
13.On June 8, 2020, President Trump vetoed House Joint Resolution 56, a Congressional Review Act resolution that would block the Trump administration’s rewrite of the Obama administration borrower defense to repayment rule. On June 26, 2020, the House failed to override President Trump’s veto of a bill that would have undone the Trump administration’s borrower-defense rule. The rule went into effect on July 1, 2020 and will apply to any federal student loans made on that date or after.
The Department recently notified Ashford that they would be initiating a preliminary review of borrower defense applications from borrowers who made claims regarding Ashford. As part of the initial fact-finding process, the Department will send individual student claims to the University and allow the institution the opportunity to submit a response to the borrower’s allegations. The University has begun to receive these claims and is reviewing and compiling the individual facts of each case to submit to the Department for their review.
15. 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 currenteach 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.
The parties continue to discussalso discussed a potential resolution involving injunctive relief, other non-monetary remedies and a payment to the CA Attorney General. TheGeneral 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 accruedrecorded 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 and the Company. The Company intends to vigorously defend this case and emphatically denies the allegations made by the CA
ZOVIO INC
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 and is recorded on the accounts payable and accrued liabilities line item on the condensed consolidated balance sheets.
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 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)
Department of Justice Civil Investigative Demand
On July 7, 2016, the Company received from the U.S. Department of Justice (the “DOJ”) a Civil Investigative Demand (the “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. 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 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. The Defendants filed demurrers on December 21, 2018, which were granted by the Court on June 14, 2019. As a result, the Court entered a final order dismissing the case on July 8, 2019. Plaintiff filed a notice of appeal, but the parties subsequently filed a joint stipulation to dismiss the appeal with prejudice, which was granted by the Court. As a result, this matter is now concluded.
ReardonObrochta 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 to a stipulation among the parties, on May 27, 2015, the Court ordered the case stayed during discovery in the underlying Zamir securities class action, but permitted the plaintiff to receive copies of any discovery conducted in the underlying Zamir securities class action.
Larson v. Hackett, et al.
On January 19, 2017,February 13, 2020, 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 LarsonObrochta v. Hackett,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. The parties have not yet responded to the complaint, but will most likely seek to have the case dismissed or stayed during discovery in the underlying Zamir Stein securities class action.
Nieder v. Ashford University, LLC
ZOVIO INC
Notes to Condensed Consolidated Financial Statements (Unaudited)
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.
On October 4, 2016, Dustin Nieder1, 2019, the plaintiff filed a purported class action against Ashford University insubstantially similar amended complaint. On November 27, 2019, all defendants filed a motion to dismiss, which was granted by the Superior 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 and the case is currently in discovery.June 15, 2020. The outcome of this legal proceeding is uncertain at this point because of the many questions of fact and law that may arise. Based on information available to the Company at present, it cannot reasonably estimate a range of loss for this action. Accordingly, theThe Company has not accrued any liability associated with this action.
16. Subsequent Events
Zovio Inc, a Delaware corporation (the “Company”), through its wholly owned subsidiary, Ashford University, LLC, a California limited liability company (“AU LLC”), owns and operates Ashford University, a regionally-accredited, online university (the “University”). On August 1, 2020, the Company and AU LLC entered into a definitive Asset Purchase and Sale Agreement (the “Purchase Agreement”), by and among the Company, AU LLC, the Arizona Board of Regents, a body corporate, for and on behalf of the University of Arizona (the “University of Arizona”), and the University of Arizona Global Campus, a newly formed Arizona nonprofit corporation (“University of Arizona Global Campus”). Upon the closing of the transaction contemplated by the Purchase Agreement (the “Sale”), University of Arizona Global Campus will own and operate the University in affiliation with the University of Arizona and with a focus on expanding access to education for non-traditional adult learners. The board of directors of the Company, on behalf of the Company and AU LLC and with the support of the University’s board of trustees, has approved the Purchase Agreement and the consummation of the Sale in accordance with its terms. University of Arizona and University of Arizona Global Campus have also received all authorizations necessary to enter into the Purchase Agreement and consummate the Sale in accordance with its terms and subject to the conditions set forth therein.
Pursuant to the Purchase Agreement, at the closing of the Sale, the Company and AU LLC have agreed to transfer to University of Arizona Global Campus the tangible and intangible academic and related operations and assets comprising the University to University of Arizona Global Campus for consideration of $1.00 and University of Arizona Global Campus’s agreement to assume certain related liabilities. The transferred assets will include the University’s academic curriculum and content (subject to a license of that content back to the Company for use in its continuing business) and $16.5 million in cash working capital and, at closing, the Company will make an additional cash payment to University of Arizona Global Campus of $37.5 million. In addition, at the closing of the Sale, the University’s faculty, academic leadership and related staff will transfer their employment from AU LLC to University of Arizona Global Campus.
At this time, we are projecting cash and net assets transferred of $54.0 million and $49.0 million, respectively. The Company is still evaluating the amount, however, given the sales price of $1.00, the Company expects to incur a loss in the transaction that could be material to its consolidated financial statements.
On July 1, 2020, and in connection with the transaction recently announced, Ashford submitted to WSCUC a substantive change application for a change in ownership which requires review and approval by the Substantive Change Committee and the Structural Change Committee of the Commission. The University’s name change from Ashford University to University of Arizona Global Campus will not occur until the change of ownership receives approval from WSCUC.
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. 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 “Form2019 (“Form 10-K”), filed with the Securities and Exchange Commission (the “SEC”(“SEC”) on March 7, 2017,February 20, 2020, 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:
Ashford University’s•our ability to continueeither (i) successfully convert Ashford University® (“Ashford”) to operate an accredited institution subjecta nonprofit California public benefit corporation and for Ashford to separate from the Company, including meeting all required conditions and obtaining all required approvals, or (ii) consummate another strategic opportunity regarding Ashford;
•our ability to meet other conditions of the Department with respect to the requirementspotential conversion and separation of Ashford;
•our ability to successfully close on the asset purchase agreement with the Arizona Board of Regents, for and on behalf of the StateUniversity of California, DepartmentArizona and the University of Consumer Affairs, Bureau for Private Postsecondary Education;Arizona Global Campusregarding Ashford University;
•our ability to comply with the extensive and continually evolving regulatory framework applicable to us and our institutions,Ashford, 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 “defensedefense to repayment”repayment regulations, state authorization regulations, state laws and regulatory requirements, and accrediting agency requirements;
•projections, predictions and expectations regarding our business, financial position, results of operations, liquidity and liquidity,capital resources, and enrollment trends at Ashford;
•our institutions;anticipated seasonal fluctuations in enrollment and operating results;
expectations regarding the effect of the closure of Ashford University’s residential campus in Clinton, Iowa on our business;
•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 ArizonaCalifornia 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;
•the impact of COVID-19 on the timing of the Ashford transactions, on the economy, and the demand for our services and the collectibility of our receivables;
•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;operations, planned capital expenditures and working capital requirements;
•expectations regarding investment in onlinecapital expenditures;
•the impact of accounting standards on our financial statements;
•the reasonableness and other advertising and capital expenditures;acceptance of our tax accruals;
our anticipated seasonal fluctuations in results of operations;
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,herein, 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
We areZovio 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. Our wholly-owned subsidiary, Ashford is a provider of postsecondary education services through our regionally accredited academic institutions,institution, which delivers programs primarily online. Ashford University® and University of the RockiesSM. 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 SeptemberJune 30, 2017, our academic institutions2020, Ashford offered approximately 1,1401,100 courses and approximately 8065 degree programs. We
In April 2019, the Company acquired both Fullstack Academy, Inc (“Fullstack”) and TutorMe.com, Inc. (“TutorMe”), which each became wholly-owned subsidiaries of the Company. Fullstack is an innovative web development school offering immersive technology bootcamps, and TutorMe is an online education platform that provides 24/7 on-demand tutoring and online courses. Fullstack and TutorMe are also focused on providing innovative technologiesboth contributors to enhance the student experience and support faculty and student engagement.strategy of Zovio becoming a best-in-class education technology services company.
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. 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 June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
Consolidated Statement of Income Data: | | | | | | | |
Revenue | $ | 103,940 | | | $ | 107,495 | | | $ | 201,812 | | | $ | 217,259 | |
Operating income (loss) | $ | 5,285 | | | $ | (20,329) | | | $ | (5,210) | | | $ | (27,524) | |
| | | | | | | |
Consolidated Other Data: | | | | | | | |
Period-end enrollment (1) | 34,395 | | | 37,910 | | | 34,395 | | | 37,910 | |
|
| | | | | | | | | | | | | | | |
| 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 |
|
(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, or for new students who have completed their third week of attendance, and posted attendance in the fourth week. | |
(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. |
Key enrollment trends
Enrollment at our academic institutionsAshford decreased 11.9%9.3% to 42,13234,395 students at SeptemberJune 30, 20172020 as compared to 47,83137,910 students at SeptemberJune 30, 2016.2019. Enrollment decreased by 6.6%0.9% since the end of the preceding fiscal year, from 45,08734,722 students at December 31, 20162019 to 42,13234,395 students at SeptemberJune 30, 2017.2020.
We believe the decline in enrollment over the past few years is partially attributable to a general weakening in the overall education industry due in large part to increased regulatory scrutiny, and has 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 enrollment has also been impacted by the recent changes in our marketing strategy. This change in our marketing strategy
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 making meaningful improvements to the efficiency of our advertising, admissions and marketing spend.scrutiny.
We continue to focusmake investments in the workflow along the student lifecycle to better support our efforts on stabilizingincoming and restarting enrollment growth. We recently received approval from the Department of Education on 16 new programs and are looking forward to offering these programs tocurrent students. We plan to launch a number of these new program offerings throughout 2018 and beyond to help achieve this goal relating to restarting new enrollment growth and over time growing total enrollments. One other area in which we continue to experience positive enrollment trends is within our Educationalthe Education Partnerships programs with various employers. These corporate partnershipSome of these programs provide companies with the opportunity to allowoffer their employees a way to pursue and complete a college degree without incurring any student debt. Enrollments through thesein the Education Partnerships programs remains relatively small compared toaccount for approximately 35% of our total enrollment but are growingas of June 30, 2020. 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.
While early in the second quarter we had witnessed certain corporate partners suspending their tuition reimbursement programs in-line with large scale cost cutting programs as a percentage year over year.result of the uncertainty surrounding the COVID-19 pandemic, this trend has stabilized in recent weeks, with some partners even re-instating their programs. While this remains an important aspect of our new enrollment growth, after many quarters of substantial growth, we do anticipate the velocity of new enrollments from this contingent to moderate in coming quarters.
Trends and uncertainties regarding revenue and continuing operations
Proposed sale transaction
Zovio Inc, a Delaware corporation (the “Company”), through its wholly owned subsidiary, Ashford University, LLC, a California limited liability company (“AU LLC”), owns and operates Ashford University, a regionally-accredited, online university (the “University”). On August 1, 2020, the Company and AU LLC entered into a definitive Asset Purchase and Sale Agreement (the “Purchase Agreement”), by and among the Company, AU LLC, the Arizona Board of Regents, a body corporate, for and on behalf of the University of Arizona (the “University of Arizona”), and the University of Arizona Global Campus, a newly formed Arizona nonprofit corporation (“University of Arizona Global Campus”). Upon the closing of the transaction contemplated by the Purchase Agreement (the “Sale”), University of Arizona Global Campus will own and operate the University in affiliation with the University of Arizona and with a focus on expanding access to education for non-traditional adult learners. The board of directors of the Company, on behalf of the Company and AU LLC and with the support of the University’s board of trustees, has approved the Purchase Agreement and the consummation of the Sale in accordance
with its terms. University of Arizona and University of Arizona Global Campus have also received all authorizations necessary to enter into the Purchase Agreement and consummate the Sale in accordance with its terms and subject to the conditions set forth therein.
Pursuant to the Purchase Agreement, at the closing of the Sale, the Company and AU LLC have agreed to transfer to University of Arizona Global Campus the tangible and intangible academic and related operations and assets comprising the University to University of Arizona Global Campus for consideration of $1.00 and University of Arizona Global Campus’s agreement to assume certain related liabilities. The transferred assets will include the University’s academic curriculum and content (subject to a license of that content back to the Company for use in its continuing business) and $16.5 million in cash working capital and, at closing, the Company will make an additional cash payment to University of Arizona Global Campus of $37.5 million. In addition, at the closing of the Sale, the University’s faculty, academic leadership and related staff will transfer their employment from AU LLC to University of Arizona Global Campus.
The Purchase Agreement includes customary representations, warranties, covenants, and indemnities by the parties, including (a) covenants generally requiring the Company and AU LLC to operate the University in the ordinary course prior to the closing, and (b) covenants generally requiring the respective parties to use commercially reasonable efforts to cause the transaction to be consummated. Other than the specific liabilities assumed by University of Arizona Global Campus, the Company and AU LLC will generally remain responsible for liabilities of the University relating to periods prior to the closing.
The closing of Sale is subject to customary closing conditions for transactions in this sector, including (a) the approval of the change in ownership of the University by the WASC Senior College and University Commission, the University’s institutional accrediting body, (b) the issuance by the U.S. Department of Education (“ED”) of a pre-acquisition review notice that does not require the University or University of Arizona Global Campus to post a letter of credit in order to obtain from ED a Temporary Provisional Program Participation Agreement (“TPPPA”) or a Provisional Program Participation Agreement (“PPPA”) or require the University of Arizona to co-sign the TPPPA or PPPA (either separately or as a condition of not receiving a letter of credit in order to obtain a TPPPA or PPPA); provided, however, that this condition generally will expire and be of no force and effect and University of Arizona Global Campus and University of Arizona shall be deemed to have waived this condition for all purposes, if ED does not issue such notice prior to December 1, 2020, and (c) the expiration or early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The Company expects the transaction to close during the fourth quarter of 2020.
In connection with the closing of the Sale, the Company and University of Arizona Global Campus will enter into a long-term strategic services agreement (the “Strategic Services Agreement”) pursuant to which the Company will provide recruiting, financial aid, counseling, institutional support, information technology, and academic support services to University of Arizona Global Campus. The Strategic Services Agreement has an initial term of fifteen (15) years, subject to renewal options, although University of Arizona Global Campus has the right to terminate the agreement after seven (7) years subject to the payment of a termination fee equal to one-hundred (100%) of the services fees paid to the Company in the trailing twelve (12) month period (payable half in cash and half in an unsecured note).
In return for providing services under the Strategic Services Agreement, University of Arizona Global Campus, after covering its direct costs of operations (which may not be increased by more than 2% per year), will pay to the Company services fees equal to the Company’s direct costs to provide the services plus an additional amount equal to 19.5% of University of Arizona Global Campus’s tuition and fees revenue. If, in year seven or later, University of Arizona Global Campus’s tuition and fees revenue is $440.0 million or less, then the Company’s revenue share percentage is subject to decrease on a sliding scale to between 18.1% and 15.5%, subject to increase back up to 19.5% if, in any subsequent year, University of Arizona Global Campus’s tuition and fee revenue again exceeds $440.0 million. In addition, the parties have agreed on certain minimum profit levels to be achieved by University of Arizona Global Campus after payment of the Company’s services fees of $12.5 million in the second year of the agreement, $25.0 million in years 3-5, and $10.0 million in years 6-15; subject to certain limitations, the Company is required to adjust its fees in any year to the extent necessary for University of Arizona Global Campus to achieve such minimum levels.
After the seventh year of the Strategic Services Agreement, either party may terminate the agreement if University of Arizona Global Campus achieves tuition and fees revenue of $400.0 million or less. Each party also has certain termination rights in connection with a material breach of the agreement by the other party and upon certain other defined events.
At the closing of the Sale, the Company and University of Arizona Global Campus will also enter into a transition services agreement (the “Transition Services Agreement”) pursuant to which the Company will provide certain services to
University of Arizona Global Campus on a transition basis in return for fees equal to the Company’s direct costs to provide such services. University of Arizona Global Campus may transition any of these services at any time on six months’ advance notice, and all such services will be transitioned to University of Arizona Global Campus within three years.
On July 1, 2020, and in connection with the transaction recently announced, Ashford submitted to WSCUC a substantive change application for a change in ownership which requires review and approval by the Substantive Change Committee and the Structural Change Committee of the Commission. The university’s name change from Ashford University to University of Arizona Global Campus will not occur until the change of ownership receives approval from WSCUC.
Conversion transaction
Ashford submitted a change of control and legal status application (the “Change of Control Application”) to WSCUC seeking approval to convert to a nonprofit California public benefit corporation and separate from the Company (the “Conversion Transaction”).
On October 7, 2019, the Company announced that in connection with the Conversion Transaction, the Department has provided a response (the “Abbreviated Preacquisition Review Letter”) to the request for review made on July 15, 2019. The request for an abbreviated preacquisition review was made in accordance with Department procedures pursuant to which the Department provides information about conditions it intends to impose in connection with the continued participation in federal Title IV student financial aid programs by the applicant following a change in ownership.
In the Abbreviated Preacquisition Review Letter, along with other conditions, the Department indicated that it would require the posting of an irrevocable letter of credit with the Department within ten days of the Conversion Transaction for approximately $103 million, representing the Department’s determination of 25% of the Title IV funding in fiscal year 2018 (the “25% LOC”).
On July 7, 2020, the Department indicated it would no longer require the 25% LOC due to a proposed new transaction structure. Pursuant to the new structure, Ashford University LLC, the current owner and operator of Ashford, will become the sole member of, and will transfer the assets of Ashford to, AU NFP. Following this transfer, Ashford University, LLC will take certain steps necessary to become a nonprofit corporation and terminate the Company’s ownership interest in it. Because the legal entity that currently owns and operates Ashford will continue as the sole member of AU NFP, the Department has concluded that the historical financial statements of Ashford University, LLC will satisfy the new owner’s financial statement requirements and, accordingly, that a 25% LOC would no longer be necessary. As a result, the Company will no longer be pursuing a LOC through a senior secured term loan facility.
The Company and the trustees of Ashford and AU NFP have taken steps, including Ashford’s formation of a special independent negotiating committee, to protect Ashford’s and AU NFP’s independence in considering the Conversion Transaction in order to enable Ashford and AU NFP to act in the best interests of Ashford and its students. However, in light of the unprecedented COVID-19 pandemic and uncertain economic outlook, and other recent developments impacting our industry and business our timing for the closing of the conversion could be delayed.
On December 30, 2019, the Company and AU NFP entered into the LOI contemplating that the Company, Ashford and AU NFP would enter into an agreement and plan of conversion pursuant to which the Company, in exchange for $1.00 and entry into a Services Agreement, would cause Ashford to separate from the Company through a series of conversion and merger transactions ultimately resulting in Ashford (inclusive of all of the operations and assets constituting Ashford) being independently owned and operated by AU NFP. The Company would retain the assets and contracts related to, and continue to operate, its educational technology and services business, including all employees and assets necessary to perform the services contemplated by the Services Agreement. The parties also contemplate entering into a transition services agreement, pursuant to which the Company would provide identified services to AU NFP for a period of up to five years in exchange for which AU NFP would pay to the Company its direct cost charges incurred in providing such services.
Restructuring and impairment chargesexpense
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 chargesexpense 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 chargesexpense recorded, refer to Note 3,5, “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 SeptemberJune 30, 20172020 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 SeptemberJune 30, 2017.2020.
On March 27, 2020, the US government enacted the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). The CARES Act is an emergency economic stimulus package passed in response to the coronavirus outbreak. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss (“NOL”) carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. As of June 30, 2020, the Company has recorded an income tax benefit of $12.7 million directly related to the net operating loss carryback provisions under the CARES Act and could also benefit from the deferral of certain payroll taxes through the end of calendar year 2020.
Recent Regulatory Developments
Negotiated Rulemaking
On July 31, 2018, the Department published a notice in the Federal Register announcing its intention to establish a negotiated rulemaking committee (the “Rulemaking Committee”) to prepare proposed regulations for the Federal Student Aid programs authorized under Title IV of the Higher Education Act of 1965, as amended. In September 2018, interested parties commented at three public hearings on the topics suggested by the Department in the notice, and Other Executive Actionsuggested 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 issued proposed regulations based on that consensus on June 12, 2019. On October 31, 2019, the Department issued final regulations on accreditation and state authorization to be effective on July 1, 2020.
The new regulations, among other things to: (1) define the roles and responsibilities of accrediting agencies, States, and the Department in oversight of institutions participating in the Federal Student Aid programs authorized under Title IV of the Higher Education Act of 1965, as amended (Title IV, Higher Education Act programs); (2) establish “substantial compliance” as the standard for agency recognition; (3) modify “substantive change” requirements to provide greater flexibility to institutions to innovate and respond to the needs of students and employers, while maintaining strict agency oversight in instances of more complicated or higher risk changes in institutional mission, program mix, or level of credential offered; (4) clarify the Department’s accrediting agency recognition process, including accurate recognition of the geographic area within which an agency conducts business; and (5) modify the requirements for state authorization.
The new regulations provide for early implementation of select pieces of the state authorization component. Ashford has chosen to early implement and did so on March 20, 2020.
State Authorization for Distance Education Rules
To be eligible to participate in Title IV programs, an institution must be legally authorized to offer its educational programs by the states in which it is physically located. An institution is legally authorized by a state if, among other things, it meets one of the following sets of requirements:
• the state establishes the institution by name as an educational institution through a charter, statute, constitutional provision or other action issued by an appropriate state agency or state entity and is authorized to operate educational programs beyond secondary education, including programs leading to a degree or certificate; the institution complies with any applicable state approval or licensure requirements, except that the state may exempt the institution from any state approval or licensure requirement based on the institution's accreditation by one or more accrediting agencies recognized by the Department or based upon the institution being in operation for at least 20 years; and the state has a process to review and appropriately act on complaints concerning the institution including the enforcement of state laws;
• the institution is established by the state on the basis of an authorization to conduct business in the state or to operate as a nonprofit charitable organization; the institution, by name, is approved or licensed by the state to offer programs beyond secondary education, including programs leading to a degree or certificate; and the institution is not exempt from the state's approval or licensure requirements based on accreditation, years in operation, or other comparable exemption; and the state has a process to review and appropriately act on complaints concerning the institution including the enforcement of state laws; or
• the institution is exempt from state authorization as a religious institution under the state constitution or by state law, and the state has a process to review and appropriately act on complaints concerning the institution and to enforce applicable state laws.
The Department has stated that it will not publish a list of states that meet, or fail to meet, the above requirements, and it is unclear how the Department will interpret these requirements in each state.
The regulations also provide that if an institution is offering postsecondary education through distance or correspondence education to students in a state in which it is not physically located or in which it is otherwise subject to state jurisdiction as determined by the state, the institution must meet any state requirements to legally offer postsecondary distance or correspondence education to students in that state. Additionally, upon request by the Department, an institution must be able to document that it has the applicable state approval.
Additional Proposed Rules on Distance Education and Innovation
On December 16, 2016,April 2, 2020, the Department released final regulations to clarify state authorization requirementsproposed rules covering Distance Education and other topics which were not covered in the Departments two prior rule making packages. The proposed changes include amending definitions of “distance education” and “correspondence courses” as well as other key terminology like “clock” and “credit hour.” The proposed rule also addresses competency based education, regular and substantive interaction, incarcerated students, and foreign schools. The Department allowed for postsecondary institutions offering distance education that participate in federal student loan programs, as required by the Higher Education Act. Among other things, the final regulations (i) require institutions offering distance education or correspondence courses to be authorized by each state ina short comment period 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 effectended on July 1, 2018.May 4, 2020.
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 thatwhich became effective in early 2017. The
On July 1, 2019, the Department of Education published a final rule rescinding the Department’s 2014 gainful employment regulations. The Higher Education Act requires that regulations have a framework with three components:
Certification: Institutions must certify that each of their gainful employmentaffecting programs meet state and federal licensure, certification and accreditation requirements.
Accountability Measures: To maintainunder 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 failpublished in two out of any three consecutive years or are in the 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 yearsfinal form by November 1, prior to the measuring academicstart of the award year and earnings from(July 1) to which they become effective. This section also permits the most recent calendar year priorSecretary to designate any regulation as one that an entity subject to the conclusionregulations may choose to implement earlier, as well as conditions for early implementation. The Department designated the regulatory changes for early implementation, and an institution that early implements the rescission must document its early implementation internally. Ashford has chosen and documented early implementation.
Institutions that have early implemented the rescission 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 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 January 8, 2017 we received our institutions’ final debt-to-earnings rates for the firstrule are not required to report gainful employment measurement year. Based ondata to the final rates, none of our programs were determinedNational Student Loan Data System. Additionally, those institutions that have early implemented are not required to fail. Two of our current programs, includinginclude 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, approximately 3% of our institutions' students were enrolled in the Associate of Arts in Early Childhood Education and approximately 8% of our institutions' students were enrolled in the Bachelor of Arts in Early Childhood Education/Administration. During the three months ended September 30, 2017, we derived revenue of approximately $3.8 million from the Associate of Arts in Early Childhood Education and approximately $11.3 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. 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. The Department did not change a July 1, 2017 deadline requiring institutions to provide a completed disclosure template, or a link thereto, onin their gainful employment program Web pagespromotional materials and our schoolsdirectly distribute the disclosure template to prospective students. Institutions that have complied with this requirement.
early implemented are no longer
We continuerequired to review the information provided by the Department to understand the potential impact ofpost the gainful employment regulations on our programs,disclosure template and we will continue to evaluate options related to new programs or adjustments to current programs that could help mitigatemay remove the potential adverse consequences of the regulations.
Defense to Repayment
On June 8, 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 defense to repayment provisions currently in effect allow 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 repaymenttemplate and related matters, and on October 28, 2016, the Department published its final regulations with an effective date of July 1, 2017. The new 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 warningsgainful employment disclosures 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, the Department announced a postponement of the 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. While rulemaking occurs, the Department will continue to process claims under the current borrower defense rules.their web pages.
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 recentany federal fiscal years, 30%40% 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 2014, 20132016, 2015 and 20122014 federal fiscal years were 14.9%13.7%, 14.5%13.5% and 15.3%14.9%, respectively. The most recent officialdraft three-year cohort default ratesrate for Ashford University of the Rockies for the 2014, 2013 and 20122017 federal fiscal years were 5.5%, 3.8% and 4.3%, respectively.year is 14.7%.
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, 2020, the Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, 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 7, “Accounts Receivable” 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 ninesix months endedSeptember June 30, 2017.
2020.
29
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.
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 June 30, | | | Six Months Ended June 30, | |
| 2017 | | 2016 | | 2017 | | 2016 | | 2020 | | 2019 | | 2020 | | 2019 |
Revenue | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | Revenue | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Costs and expenses: | | | | | | | | Costs and expenses: | | | | |
Instructional costs and services | 48.4 |
| | 46.9 |
| | 48.7 |
| | 49.1 |
| Instructional costs and services | 43.2 | | | 51.3 | | | 45.2 | | | 49.3 | |
Admissions advisory and marketing | 36.6 |
| | 38.5 |
| | 35.4 |
| | 38.5 |
| Admissions advisory and marketing | 37.3 | | | 41.7 | | | 39.9 | | | 43.2 | |
General and administrative | 9.6 |
| | 8.5 |
| | 9.9 |
| | 9.0 |
| General and administrative | 13.9 | | | 21.0 | | | 15.8 | | | 17.7 | |
Legal settlement expense | — |
| | 12.3 |
| | — |
| | 8.1 |
| |
Restructuring and impairment charges | 6.7 |
| | 0.3 |
| | 2.1 |
| | 0.7 |
| |
| Restructuring and impairment expense | | Restructuring and impairment expense | 0.5 | | | 5.0 | | | 1.6 | | | 2.5 | |
Total costs and expenses | 101.3 |
| | 106.5 |
| | 96.1 |
| | 105.4 |
| Total costs and expenses | 94.9 | | | 119.0 | | | 102.5 | | | 112.7 | |
Operating income (loss) | (1.3 | ) | | (6.5 | ) | | 3.9 |
| | (5.4 | ) | Operating income (loss) | 5.1 | | | (19.0) | | | (2.5) | | | (12.7) | |
Other income, net | 0.3 |
| | 0.4 |
| | 0.3 |
| | 0.5 |
| |
Other income (expense), net | | Other income (expense), net | 0.2 | | | 0.3 | | | (0.1) | | | 0.4 | |
Income (loss) before income taxes | (1.0 | ) | | (6.1 | ) | | 4.2 |
| | (4.9 | ) | Income (loss) before income taxes | 5.3 | | | (18.7) | | | (2.6) | | | (12.3) | |
Income tax expense (benefit) | (1.0 | ) | | 0.9 |
| | (0.2 | ) | | (0.9 | ) | Income tax expense (benefit) | 0.3 | | | (2.3) | | | (6.2) | | | (1.1) | |
Net income (loss) | — | % | | (7.0 | )% | | 4.4 | % | | (4.0 | )% | Net income (loss) | 5.0 | % | | (16.4) | % | | 3.6 | % | | (11.2) | % |
Three Months Ended SeptemberJune 30, 20172020 Compared to Three Months Ended SeptemberJune 30, 20162019
Revenue. Our revenue for the three months ended SeptemberJune 30, 20172020 and 2019, was $119.4$103.9 million representingand $107.5 million, respectively, a decrease of $17.2$3.6 million, or 12.6%, as compared to revenue of $136.6 million for the three months ended September 30, 2016.3.3%. The decrease between periods was primarily due to a decrease of 11.3%8.8% in average weekly enrollment at our academic institutions, from 47,65738,304 students for the three monthsmonth period ended SeptemberJune 30, 20162019 to 42,28034,952 students for the three monthsmonth period ended SeptemberJune 30, 2017. Tuition2020. As a result of the decrease in enrollments, tuition revenue decreased by approximately $15.4$3.4 million, which is primarily due to the decrease in average weekly enrollment, partially offsetnet revenue generated from course digital materials decreased by the approximate 2.0% tuition increase on April 1, 2017.$0.5 million, and technology fee revenue decreased by $0.4 million. The decrease in revenue between periods was also due to higher scholarships for the period, an increase of $0.6$1.4 million. The overall revenue decrease was partially offset by net revenue from subsidiaries of $4.9 million, as well as a decrease in net revenue generated from course digital materials of approximately $0.5 million.tuition and fees increase, effective January 2020.
Instructional costs and services. Our instructional costs and services for the three months ended SeptemberJune 30, 20172020 and 2019, were $57.8$44.9 million representingand $55.1 million, respectively, a decrease of $6.3$10.2 million, or 9.9%, as compared to instructional18.5%. Specific decreases between periods primarily include direct compensation of $4.1 million, corporate support services of $1.3 million, other subsidiary costs of $1.3 million, facilities costs of $1.0 million, bad debt expense of $0.9 million, professional fees of $0.6 million, business related travel of $0.5 million and instructor fees of $0.4 million. Instructional costs and services, as a percentage of $64.1 millionrevenue, for the three months ended SeptemberJune 30, 2016. In addition to the decline in enrollment, specific decreases between periods2020 and 2019, were 43.2% and 51.3%, respectively, a decrease of 8.1%. This decrease primarily includeincluded decreases in direct compensation (including financial aid processing fees) of $2.2 million,3.3%, other subsidiary costs of 1.2%, corporate support services of $2.1 million, instructor fees of $1.0 million, license fees of $1.0 million, and1.0%, facilities costs of $0.8 million, 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% and0.9%, bad debt expense of 0.7%, professional fees of 0.5% and business related travel of 0.5%. As a percentage of revenue, bad debt expense was 6.3%2.9% for the three months ended SeptemberJune 30, 2017,2020, compared to 5.6%3.6% for three months ended SeptemberJune 30, 2016.2019.
Admissions advisory and marketing. Our admissions advisory and marketing expenses for the three months ended SeptemberJune 30, 20172020 and 2019, were $43.7$38.8 million representingand $44.8 million, respectively, a decrease of $8.9$6.0 million, or 17.0%, as compared to admissions advisory and marketing expenses of $52.6 million for the three months ended September 30, 2016. As a result of our change in marketing strategy and the shift in advertising mix, specific13.4%. Specific factors contributing to the overall decrease between periods were decreases in compensation of $5.4 million, advertising costs of $2.4$2.0 million, andcompensation of $1.8 million, professional fees of $0.8 million, facilities costs of $1.7$0.8 million, partially offset by an increase in corporate support servicesand other subsidiary costs of $1.1$0.5 million. AsAdmissions advisory and marketing, as a percentage of revenue, our admissions advisory and marketing expenses decreased to 36.6% for the three months ended SeptemberJune 30, 2017, as compared to 38.5% for the three months ended
September 30, 2016. The2020 and 2019, were 37.3% and 41.7%, respectively, a decrease of 1.9% as a percentage4.4%. This decrease primarily included decreases in advertising costs of revenue was primarily due to a decrease in1.4%, compensation of 2.0%1.2%, professional fees of 0.7%, facilities costs of 0.7% and other subsidiary costs of 0.5%.
General and administrative. Our general and administrative expenses for the three months ended SeptemberJune 30, 20172020 and 2019, were $11.4$14.5 million representingand $22.5 million, respectively, a decrease of $0.2$8.0 million, or 1.4%, as compared35.7%. The decrease between periods was
primarily due to generaldecreases in acquisition costs of $7.3 million and administrative compensation of $3.4 million, partially offset by an increase in other subsidiary costs of $1.9 million and transaction costs of $0.8 million. General and administrative expenses, as a percentage of $11.6revenue, for the three months ended June 30, 2020 and 2019, were 13.9% and 21.0%, respectively, a decrease of 7.1%. This decrease was primarily due to decreases in acquisition costs of 6.8% and administrative compensation of 2.9%, partially offset by increases in other subsidiary costs of 1.7% and transaction costs of 0.9%.
Restructuring and impairment expense. We recorded a charge of approximately $0.5 million to restructuring and impairment expense for the three months ended June 30, 2020, primarily from severance costs resulting from a reduction in force and revised estimates of lease charges. For the three months ended June 30, 2019, we recorded a charge of approximately $5.4 million to restructuring and impairment expense, comprised primarily of a reduction in force and revised estimates of lease charges.
Other (expense) income, net. Our other expense, net, was $0.2 million for the three months ended SeptemberJune 30, 2016.2020 and other income, net, was $0.3 million for the three months ended June 30, 2019. The decrease between periods was primarily due to decreases in facilities costs of $0.5 million and administrativea loss on deferred compensation of $0.5 million, offset by increases in corporate support services of $1.0 million. Our general and administrative expenses increased as a percentage of revenue to 9.6%investments for the three months ended SeptemberJune 30, 2017, as compared to 8.5% for the three months ended September 30, 2016. The increase2020.
Income tax expense (benefit). We recognized income tax expense of 1.1% as a percentage$0.3 million, and an income tax benefit of revenue was primarily due to increases in administrative compensation of 0.5% and professional fees 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 restructuring and impairment charges for the three 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 three months ended September 30, 2016, restructuring and impairment charges were $0.4 million, comprised primarily of severance costs resulting from a reduction in force.
Other income, net. Our other income, net, was $0.4$2.4 million for the three months ended SeptemberJune 30, 20172020 and $0.6June 30, 2019, respectively, at effective tax rates of 5.5% and 12.2%, respectively. The income tax expense for the three months ended June 30, 2020 was mainly attributable to tax refund true-ups related to the CARES Act and IRS audit examination.
Net income (loss). Our net income was $5.1 million for the three months ended SeptemberJune 30, 2016. The decrease between periods was primarily due2020, compared to decreased interest income on average cash balances.
Income tax expense (benefit). We recognized an income tax benefitnet loss of $1.2 million and an income tax expense of $1.2$17.6 million for the three months ended SeptemberJune 30, 2017 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 represents2019, a $9.5$22.7 million increase in net income as a result of the factors discussed above.
NineSix Months Ended SeptemberJune 30, 20172020 Compared to NineSix Months Ended SeptemberJune 30, 20162019
Revenue. Our revenue for the ninesix months ended SeptemberJune 30, 20172020 and 2019, was $373.4$201.8 million representingand $217.3 million, respectively, a decrease of $34.2$15.5 million, or 8.4%, as compared to revenue of $407.6 million for the nine months ended September 30, 2016.7.1%. The decrease between periods was primarily due to a decrease of 9.6%8.5% in average weekly enrollment at our academic institutions, from 49,20438,396 students duringfor the nine monthssix month period ended SeptemberJune 30, 20162019 to 44,46935,126 students duringfor the nine monthssix month period ended SeptemberJune 30, 2017. Tuition2020. As a result of the decrease in enrollments, tuition revenue decreased by approximately $33.8$13.5 million, which is primarily due to the decrease in average weekly enrollment, partially offsettechnology fee revenue decreased by the approximate 2.0% tuition increase on April 1, 2017.$1.2 million and net revenue generated from course digital materials decreased by $1.0 million. The decrease in revenue between periods was also due to ahigher scholarships for the period, an increase of $5.4 million. The overall revenue decrease inwas partially offset by net revenue generated from course digital materialssubsidiaries of approximately $1.5 million.$8.9 million, as well as a tuition and fees increase, effective January 2020.
Instructional costs and services. Our instructional costs and services for the ninesix months ended SeptemberJune 30, 20172020 and 2019, were $181.9$91.3 million representingand $107.0 million, respectively, a decrease of $18.2$15.7 million, or 9.1%, as compared to instructional costs and services of $200.1 million for the nine months ended September 30, 2016.14.7%. In addition to the decline in enrollment, specific decreases between periods include direct compensation costs of $5.8$7.6 million, corporate support services of $4.9$4.6 million, instructor feesbad debt expense of $3.5$1.1 million, facilities costsbusiness related travel of $3.0$0.7 million, and license fees of $1.7$0.7 million partially offset by an increase inand information technology costs of $1.2$0.6 million. Instructional costs and services, decreased as a percentage of revenue, to 48.7% for the ninesix months ended SeptemberJune 30, 2017, as compared to 49.1% for the nine months ended September 30, 2016. The2020 and 2019, were 45.2% and 49.3%, respectively, a decrease of 0.4% as a percentage of revenue4.1%. This decrease primarily included decreases in direct compensation costs of 2.4%, corporate support services of 0.6%1.7%, bad debt expense of 0.3% and facilities costslicense fees of 0.5%0.3%, partially offset by an increase in bad debt expenseinstructor fees of 0.8%0.5%. As a percentage of revenue, bad debt expense was 6.5%3.2% for the ninesix months ended SeptemberJune 30, 2017,2020, compared to 5.8%3.5% for the ninesix months ended SeptemberJune 30, 2016.2019.
Admissions advisory and marketing. Our admissions advisory and marketing expenses for the ninesix months ended SeptemberJune 30, 20172020 and 2019, were $132.1$80.5 million representingand $93.9 million, respectively, a decrease of $24.7$13.4 million, or 15.7%, as compared to admissions
advisory and marketing expenses of $156.8 million for the nine months ended September 30, 2016.14.2%. 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$6.1 million, facilitiescompensation of $6.0 million, professional fees of $0.9 million, and business related travel of $0.8 million. Our admissions advisory and marketing expenses, as a percentage of revenue, for the six months ended June 30, 2020 and 2019, were 39.9% and 43.2%, respectively, a decrease of 3.3%. This decrease primarily included decreases in compensation of 1.8%, advertising costs of $5.51.5%, professional fees of 0.3% and business related travel of 0.3% partially offset by an increase in other subsidiary costs of 0.6%.
General and administrative. Our general and administrative expenses for the six months ended June 30, 2020 and 2019, were $32.0 million and information technology$38.5 million, respectively, a decrease of $6.5 million, or 16.8%. The decrease between periods was
primarily due to decreases in acquisition costs of $2.6 million. These decreases were$8.2 million, professional fees of $1.2 million and other subsidiary costs of $0.9 million, partially offset by increases in corporate support services of $5.1$2.4 million, amortization of intangible assets of $0.8 million and professional feestransaction costs of $0.5 million. AsOur general and administrative expenses, as a percentage of revenue, our admissions advisory and marketing expenses decreased to 35.4% for the ninesix months ended SeptemberJune 30, 2017 as compared to 38.5% for the nine months ended September 30, 2016. The2020 and 2019, were 15.8% and 17.7%, respectively, a decrease of 3.1% as a percentage of revenue1.9%. This decrease was primarily due to decreases in compensation of 2.3%, facilitiesacquisition costs of 1.2%,3.8% and advertisingother subsidiary costs of 0.6%0.5%, partially offset by an increaseincreases in corporate support services of 1.1%.
General and administrative. Our general and0.7%, administrative expenses for the nine months ended September 30, 2017 were $37.0 million, representing an increasecompensation of $0.3 million, or 0.8%0.7%, 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,0.5%, and facilitiestransaction 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.expense. We had $8.0recognized $3.2 million of restructuring and impairment chargesexpense for the ninesix months ended SeptemberJune 30, 2017,2020, comprised primarily of revised estimates of lease charges, as well as severance costs resulting from a reduction in force. For the ninesix months ended SeptemberJune 30, 2016,2019, there were $5.4 million of similar restructuring and impairment charges were $2.8expenses.
Other (expense) income, net. Our other expense, net was $0.1 million comprised primarily of severance costs resulting from a reduction in force.
Other income, net. Ourfor the six months ended June 30, 2020, as compared to other income, net was $1.2of $0.9 million for the ninesix months ended SeptemberJune 30, 2017, as compared to $1.9 million for the nine months ended September 30, 2016, representing2019, a decrease of $0.7$1.0 million. The decrease between periods was primarily due to decreased interest income on average cash balances.balances and a loss on deferred compensation investments.
Income tax expense (benefit).benefit. We recognized an income tax benefit of $0.7$12.5 million and $3.6$2.4 million for the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively, at effective tax rates of (4.6)%234.9% and 18.2%9.0%, respectively. The income tax benefit for the six months ended June 30, 2020 was mainly attributable to the $12.7 million refund claims from the net operating loss carryback provisions of the CARES Act.
Net income (loss). Our net income was $16.2$7.2 million for the ninesix months ended SeptemberJune 30, 20172020 compared to net loss of $16.3$24.2 million for the ninesix months ended SeptemberJune 30, 2016,2019, a $32.5$31.4 million changeincrease 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.hand. At SeptemberJune 30, 20172020 and December 31, 2016,2019, our cash and cash equivalents were $165.2$75.1 million and $307.8$69.3 million, total restricted cash was $25.9 million and $23.3 million, and we had investments of $1.3 million and $2.5 million, respectively. At June 30, 2020, we had $2.8 million of long-term notes payable.
There was a slight decrease in the fair value of our investments at June 30, 2020 as compared to December 31, 2019. We believe that any fluctuations we have experienced are temporary in nature and, 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.
Our income tax receivable increased from December 31, 2019 to June 30, 2020 due to the changes in income tax law related to net operating loss utilization as a result of the CARES Act. The Company recorded tax refund in a total of $12.7 million and received $6.2 million in June 2020. We anticipate receiving the remaining refund by the end of the third quarter ending September 30, 2017 and December 31, 2016, we had restricted cash of $19.9 million and $24.5 million, respectively, and investments of $27.0 million and $49.4 million, respectively. At September 30, 2017, we had no long-term debt.2020.
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.”
There was a slight increaseRisk” in the fair value of our investments at September 30, 2017 as compared to December 31, 2016. 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.this Form 10-Q.
Title IV and other governmental funding
Our institutions deriveAshford derives the substantial majority of theirits 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 areAshford 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 institutionsAshford 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’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’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 inprovided by operating activities was $16.7$6.7 million for the ninesix months ended SeptemberJune 30, 2017,2020, compared to net cash used in operating activities of $12.9$22.1 million for the ninesix months ended SeptemberJune 30, 2016,2019, an overall increase between periods in net cash used inprovided by operating activities of $3.8$28.8 million. ThisThe increase in cash used inprovided by operating activities wasis primarily attributable to changes in accounts payable and accrued liabilities, loss on impairment of student loan receivables in prior year, and changes in other long-term assets. This change was partially offset by the $32.5$31.4 million increase in net income between periods. Despite theperiods, partially offset by a decrease in lease expense of $2.9 million, provision of bad debt of $1.1 million and changes in working capital.
Investing activities
Net cash used in operating activities during the period, we expect to generate cash from our operating activities for the foreseeable future.
Investing activities
Net cash provided by investing activities was $19.3$0.6 million for the ninesix months ended SeptemberJune 30, 2017,2020, compared to net cash used in investing activities of $7.7$37.4 million for the ninesix months ended SeptemberJune 30, 2016.2019. Capital expenditures for the six months ended June 30, 2020 were $1.6 million, compared to $17.8 million for the six months ended June 30, 2019. During the ninesix months ended SeptemberJune 30, 2017,2019, we had maturitiesused $19.3 million of investments of $22.7 million, purchases of investmentscash paid for acquisition. During the six months ended June 30, 2020 and 2019, we capitalized costs for intangibles of $0.1 million and no sales of investments. This is compared to purchases of investments of $20.2$0.3 million, no sales of investments and $14.7 million maturities of investments for the nine months ended September 30, 2016. Capital expenditures for the nine months endedSeptember 30, 2017 were $2.9 million, compared to $1.6 million for the nine months endedSeptember 30, 2016.respectively. We expect our capital expenditures to be approximately $5.8$4.6 million for the year ending December 31, 2017.2020.
Financing activities
Net cash used inprovided by financing activities was $149.8$2.3 million for the ninesix months ended SeptemberJune 30, 2017,2020, compared to net cash used in financing activities of $1.6$0.7 million for the ninesix months ended SeptemberJune 30, 2016. During2019. For the ninesix months ended September June 30, 2017, we repurchased approximately 18.1 million shares of our common stock for an aggregate purchase price of $150.0 million and $2.02020, $2.7 million of related fees.cash provided by financing activities was cash received in the current period for which it will be repaid as a function of generating future revenue. During each of the ninesix months endedSeptember June 30, 20172020 and 2016,2019, net cash used in financing activities included tax withholdings related to the issuance of shares upon the vesting of restricted stock units partially offset by the cash provided by stock option exercises.vesting.
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 SeptemberJune 30, 2017, our total available surety bond facility was $3.5 million and2020, the surety had issued $8.6 million of bonds totaling $3.3 million on our behalf under suchthis facility.
Significant Contractual Obligations
The following table sets forth, as of SeptemberJune 30, 2017,2020, 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 | (In thousands) | Total | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter |
Operating lease obligations | $ | 77,878 |
| | $ | 9,080 |
| | $ | 31,400 |
| | $ | 20,833 |
| | $ | 9,504 |
| | $ | 5,112 |
| | $ | 1,949 |
| Operating lease obligations | $ | 45,771 | | | $ | 4,147 | | | $ | 8,914 | | | $ | 5,299 | | | $ | 3,805 | | | $ | 3,538 | | | $ | 20,068 | |
Other contractual obligations | 49,332 |
| | 4,229 |
| | 12,535 |
| | 10,592 |
| | 8,549 |
| | 3,427 |
| | 10,000 |
| Other contractual obligations | 51,663 | | | 10,502 | | | 13,530 | | | 10,470 | | | 8,132 | | | 4,925 | | | 4,104 | |
Uncertain tax positions | 8,290 |
| | — |
| | 8,290 |
| | — |
| | — |
| | — |
| | — |
| Uncertain tax positions | 104 | | | — | | | — | | | 104 | | | — | | | — | | | — | |
Total | $ | 135,500 |
| | $ | 13,309 |
| | $ | 52,225 |
| | $ | 31,425 |
| | $ | 18,053 |
| | $ | 8,539 |
| | $ | 11,949 |
| Total | $ | 97,538 | | | $ | 14,649 | | | $ | 22,444 | | | $ | 15,873 | | | $ | 11,937 | | | $ | 8,463 | | | $ | 24,172 | |
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.
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.